As filed with the Securities and Exchange Commission on January 14,
1997. Registration No.
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
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
Preferred Stock
Series E-6 Shares 250,000 $100 $25,000,000 $ 152
Investment Debentures,
Series II $96,500,000 $ 1 $96,500,000 $ 8,030
Installment Debentures
Series I $ 3,500,000 $ 1 $ 3,500,000 $ 667
</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 22,000 shares of
Preferred Stock, Series E-6 and 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 and 228,000 shares of Preferred Stock Series E-6
remain unsold. The registration fee is calculated on the amount being
registered hereunder.
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of
1933, 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.
PART I
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
Cross Reference Sheet
Showing Location in Prospectus of Items of the Form
Item
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........ Outside Front
Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................... Inside Front Cover
Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges and Preferred Stock
Dividends..................................... Prospectus
Summary;
Summary
Consolidated
Financial Data;
Certain Investment
Considerations
- Risk Factors
4. Use of Proceeds............................... Use of Proceeds
5. Determination of Offering Price............... *
6. Dilution...................................... *
7. Selling Security Holders...................... *
8. Plan of Distribution.......................... Plan of
Distribution
9. Description of Securities to be Registered.... Description of
Securities;
Description
of Debentures;
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;
Selected
Consolidated
Financial Data;
Management's
Discussion and
Analysis
of Financial
Condition
and Results of
Operations;
Business;
Management;
Principal
Shareholders;
Certain
Transactions;
Financial
Statements
12. Incorporation of Certain Information
by Reference.................................. Available
Information
Incorporation of
Certain Documents
By Reference
13. Disclosure of Commission Position on Indem-
nification for Securities Act Liabilities..... Indemnification
*Not applicable or negative.
SUBJECT TO COMPLETION, DATED January 14, 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-6 ($100 Per Share Offering
Price and Liquidation Preference)
The Investment Debentures, Series II and Installment Debentures,
Series I (collectively, Debentures) and the shares of Variable Rate
Cumulative Preferred Stock, Series E-6 (Preferred Stock) are being
offered separately and not as units. Investment Debentures, Series II
will pay interest monthly, quarterly, semi-annually or annually, or if
left with the issuer interest will compound semi-annually. Installment
Debentures Series I will pay equal monthly installments of principal
and interest until maturity according to an amortization schedule
selected by the owner. The Debentures are unsecured, senior in
liquidation to outstanding equity securities, subordinate to
collateralized debt, on parity with unsecured accounts payable and
accrued liabilities and on parity with all previously issued and
outstanding debentures. The Debentures will be issued in fully
registered form in fractional denominations of $0.01 or multiples
thereof at 100% of the principal amount paid. Metropolitan Mortgage &
Securities Co., Inc. (Metropolitan) reserves the right to change
prospectively the interest rates, maturities, and minimum investment
amounts on unsold Debentures. The current provisions are set forth
below. See "DESCRIPTION OF DEBENTURES".
<TABLE>
<CAPTION>
MINIMUM TERM TO ANNUAL
INVESTMENT MATURITY INTEREST RATE
__________ _____ ________________ _____________
INVESTMENT DEBENTURES, SERIES II
<S> <C> <C>
$
$
$
$
<CAPTION>
INSTALLMENT DEBENTURES, SERIES I
$
</TABLE>
PREFERRED STOCK, SERIES E-6
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 at the
redemption prices set forth herein. See "DESCRIPTION OF PREFERRED
STOCK-Redemption of Shares". In liquidation, Preferred Stock is
subordinate to all debts of Metropolitan including Metropolitan's
Investment and Installment Debentures, Series II and I, and on parity
with other preferred stock and senior to Metropolitan's common stock.
See "DESCRIPTION OF PREFERRED STOCK-Liquidation Rights".
There is no trading market for the Debentures or the Preferred Stock
and none is expected to be established in the future. See "CERTAIN
INVESTMENT CONSIDERATIONS-RISK FACTORS". A list of persons willing to
sell or purchase Metropolitan's issued and outstanding shares of
preferred stock has been maintained by Metropolitan Investment
Securities, Inc. (MIS) as a convenience to holders of Metropolitan's
preferred stock. See "DESCRIPTION OF PREFERRED STOCK-Redemption of
Shares". This offering of Debentures and Preferred Stock is subject
to withdrawal or cancellation by Metropolitan without notice. No
minimum amount of Debentures or Preferred Stock must be sold. The
Debentures and Preferred Stock offered hereby involve significant
investment considerations and risks which should be analyzed prior to
any investment decision. See "CERTAIN INVESTMENT CONSIDERATIONS-RISK
FACTORS".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR
ANY PRICING SUPPLEMENT THERETO. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE SALES PROCEEDS TO
TO PUBLIC COMMISSIONS (1) METROPOLITAN (2)
<S> <C> <C> <C>
Per
Debenture 100% 0% to 6% 100% to 94%
Total: $100,000,000 None - $6,000,000 $100,000,000-$94,000,000
Per
Preferred
Share $100 0% to 6% 100% to 94%
Total: $25,000,000 None - $1,500,000 $25,000,000-$23,500,000
</TABLE>
(1) There is no sales charge to the investor. Metropolitan will
reimburse 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
securities that must be sold. See "PLAN OF DISTRIBUTION" & "CERTAIN
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 ____________________.
INSIDE FRONT COVER PAGE OF PROSPECTUS
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
All documents filed by Metropolitan with the Commission pursuant
to the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Debentures and
Preferred Stock shall be deemed to be incorporated by reference in
this Prospectus and to be a part thereof from the date of filing of
such documents. 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 or in any other subsequently filed
document which also is or is deemed to be incorporated by reference
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.
TABLE OF CONTENTS PAGE
Available Information.........................................
Incorporation of Certain Documents by Reference...............
Prospectus Summary............................................
Summary Consolidated Financial Data..........................
Certain Investment Considerations - Risk Factors..............
Description of Securities.....................................
Description of Debentures...................................
Summary of Capital Stock....................................
Description of Common Stock.................................
Description of Preferred Stock..............................
Legal Matters.................................................
Legal Opinion...............................................
Legal Proceedings...........................................
Experts.......................................................
Plan of Distribution..........................................
Use of Proceeds...............................................
Capitalization................................................
Selected Consolidated Financial Data..........................
Management's Discussion and Analysis of
Financial Condition and Results of Operations...............
Business......................................................
Overview....................................................
Receivable Investments......................................
Real Estate Development.....................................
Life Insurance and Annuity Operations.......................
Method of Financing.........................................
Competition.................................................
Regulation..................................................
Management....................................................
Executive Compensation......................................
Indemnification...............................................
Management Ownership of Company Securities....................
Principal Shareholders........................................
Certain Transactions..........................................
Index to Consolidated Financial Statements....................
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to, and
should be read in conjunction with the detailed information and
financial statements appearing elsewhere in this Prospectus. This
offering involves certain considerations to prospective investors
which are set forth in "DESCRIPTION OF SECURITIES" & "CERTAIN
INVESTMENT CONSIDERATIONS-RISK FACTORS".
THE METROPOLITAN CONSOLIDATED GROUP OF COMPANIES
Metropolitan Mortgage & Securities Co., Inc. (Metropolitan) was
established and incorporated in the State of Washington in January,
1953. Its principal executive offices are located at 929 West Sprague
Avenue, Spokane, WA. Its mailing address is P.O. Box 2162, Spokane,
WA 99210-2162 and its telephone number is (509) 838-3111. Where
reference herein is intended to include Metropolitan and its
subsidiaries, they are jointly referred to as the "Consolidated
Group". Where reference herein is intended to refer to Metropolitan,
(e.g. the parent company) it is referred to individually as
"Metropolitan".
The Consolidated Group is engaged, nationwide, in the business of
acquiring, holding, selling, 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
(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 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-6 Preferred Stock being offered herein. Where it is not
capitalized, it refers to preferred stock of Metropolitan generally.
Receivables: Investments in cash flows, consisting of obligations
collateralized by real estate (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
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 OFFERING
DEBENTURES:
The Offering . . . . This Debenture offering consists of $3,500,000 in
principal of Installment Debentures, Series I and $96,500,000 in
principal of Investment Debentures, Series II issued at minimum
investment amounts, terms, and rates set forth on the cover page of
this Prospectus. There is no minimum amount of Debentures which must
be sold. Debentures are issued in fully registered 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 for Receivable investments, retiring maturing
debentures, preferred stock dividends, property development, other
investments (which may include investments in existing subsidiaries
and the acquisition of other companies, or the commencement of new
business ventures), and for general corporate purposes. See "USE OF
PROCEEDS" & "BUSINESS".
Principal and Interest Payments . . . . At the option of the holders
of Investment Debentures, Series II, interest is paid monthly,
quarterly, semi-annually or annually (without compounding) or if left
with Metropolitan, interest will compound semi-annually. Holders of
Installment Debentures, Series I, are paid equal monthly installments
of principal and interest pursuant to an amortization schedule
selected by the holder. The minimum investment amounts, terms and
interest rates on unissued Debentures offered hereby may be changed
from time to time by Metropolitan, but any such change shall not
affect the rate of interest of any Debentures issued prior to the
change. See "DESCRIPTION OF DEBENTURES".
PREFERRED STOCK:
Offering . . . . The Preferred Stock offering consists of 250,000
shares of Variable Rate Cumulative Preferred Stock, Series E-6 (the
Preferred Stock), offered at $100 per share, and sold in whole and
fractional shares. There is no minimum amount of Preferred Stock
which must be sold. 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 $97
per share if the redemption occurs during the first year after the
date of original issuance of the share(s) and $99 per share thereafter
plus, in each case, any declared but unpaid dividends. Metropolitan
may not redeem share(s) at the holder's request during the first three
years after the initial sale of such share(s) except in those cases
involving the death or major medical emergency of the holder or any
joint holder. Any such discretionary redemptions will also depend on
Metropolitan's financial condition, including its liquidity position.
See "DESCRIPTION OF PREFERRED STOCK-Redemption of Shares".
Metropolitan, through MIS, intends to use its best efforts to maintain
a trading list for holders of Preferred Stock. See "DESCRIPTION OF
PREFERRED STOCK-Redemption of Shares" & " CERTAIN INVESTMENT
CONSIDERATIONS-RISK FACTORS".
Voting Rights . . . . The holders of Preferred Stock have no voting
rights except (i) as expressly granted by the laws of the State of
Washington and (ii) in the event distributions payable on Preferred
Stock are in arrears in an amount equal to twenty-four or more full
monthly distributions, per share. See "DESCRIPTION OF PREFERRED STOCK-
Voting Rights".
Use of Proceeds . . . . The proceeds of this Preferred Stock offering
will provide funds for Receivable investments, retiring maturing
debentures, preferred stock dividends, property development, other
investments (which may include investments in existing subsidiaries
and the acquisition of other companies or the commencement of new
business ventures) and for general corporate purposes. See "USE OF
PROCEEDS" & "BUSINESS".
Federal Income Tax Considerations. . . . In the event the Consolidated
Group has earnings and profits for federal income tax purposes in any
future year, the distributions paid on Preferred Stock in that year
will constitute taxable income, as dividends, to the recipient to the
extent of such earnings and profits. Management is unable to predict
the future character of its distributions. Purchasers are advised to
consult their own tax advisors with respect to the federal income tax
treatment of distributions made. See "DESCRIPTION OF PREFERRED STOCK-
Federal Income Tax Consequences of Distributions".
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
The consolidated financial data shown below as of September 30, 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.
Year Ended September 30,
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands
Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA
Revenues $156,672 $138,107 $138,186 $133,113 $121,221
======== ======== ======== ======== ========
Income before minority
interest, extraordinary
item and cumulative effect
of change in accounting
principle $ 8,146 $ 6,376 $ 5,702 $ 8,558 $ 3,290
Income allocated to
minority interests (108) (73) (224) (255) (363)
-------- -------- -------- -------- --------
Income before extraordinary
item and cumulative effect
of change in accounting
for income taxes 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 8,038 6,303 5,478 4,003 3,578
Preferred stock dividends (3,868) (4,038) (3,423) (3,313) (3,399)
-------- --------- -------- -------- --------
Income (loss)
applicable to common
stockholders $ 4,170 $ 2,265 $ 2,055 $ 690 $ 179
======== ======== ======== ======== ========
Ratio of Earnings
to Fixed Charges and
Preferred Stock Dividends(4) 1.14 1.03 1.04 1.17
PER COMMON SHARE DATA (3):
Income (loss) before
extraordinary item
and cumulative effect
of change in accounting
principle $32,073 $ 17,288 $ 14,996 $ 37,239 $ (3,579)
Extraordinary item (1) - - - - 4,932
Cumulative effect of change
in accounting principle (2) - - - (32,089) -
-------- -------- -------- -------- --------
Income (loss)
applicable to common
stockholders (5) $32,073 $ 17,288 $ 14,996 $ 5,150 $ 1,353
======== ======== ======== ======== ========
Weighted Average Number of
Common Shares
Outstanding (3) 130 131 137 134 132
======== ======== ======== ======== ========
Cash Dividends Per
Common Share $ -- $ 3,800 $ 675 $ 675 $ -
======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET
DATA:
Total Assets $1,282,659 $1,078,468 $1,063,290 $1,031,958 $982,259
Debt Securities, Other
Debt Payable and Securities
Sold, Not Owned 363,427 226,864 261,500 234,497 230,814
Stockholders' Equity 46,343 40,570 32,625 32,781 28,260
</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.
CERTAIN INVESTMENT CONSIDERATIONS - RISK FACTORS
Investment in the Debentures and Preferred Stock offered hereby
involves a certain degree of risk, including the risks described
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," "Certain Investment Considerations-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. Impact of Interest Rates and General Economic Conditions:
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". A decline in
economic conditions could cause an increase in the number of
foreclosures on properties that collateralize the Receivables and a
reduction in the probable sales prices for property obtained through
such action which could adversely affect the results of operations and
financial position of the Consolidated Group. While interest rates
evidenced a 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. 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. Effect of Certain Insurance Regulations: 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 $5,567,000 as of September
30, 1996. See "BUSINESS-Regulation" & "CERTAIN 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. Use of Leverage and Related Indebtedness: 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
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. Effect of Life Insurance and Annuity Termination Rates: An
increase in the number of life insurance and annuity policy
terminations will tend to negatively impact the insurance subsidiary's
earnings (and in turn the Consolidated Group's earnings) by requiring
the expensing of unamortized deferred costs related to policy
surrenders. At September 30, 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. Investments in Receivables:
Receivables Collateralized by Real Estate: The Consolidated Group
is engaged in the purchase of Receivables and the origination of loans
collateralized by real estate. See "BUSINESS-Receivable Investments".
All such Receivable investments are subject to a risk of payment
default and loss in the event of foreclosure. The risk of default and
loss can be affected by changes in local economic conditions, property
values, changes in zoning, land use, environmental laws and other
legal restrictions, including restrictions on timing and methods of
foreclosure. There is no assurance that these Receivables will be
paid according to their terms, or that property values will be
adequate to preclude loss in the event of a foreclosure.
Metropolitan's investment underwriting procedure includes a review of
demographics, market 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: 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,
-------------------------------------
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.
6. Environmental Considerations: 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 not be incurred due to environmental
contamination.
7. 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 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".
8. Reliance on Management: The success of the Consolidated
Group's operations depends to a large degree on the business skills of
its senior management 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 its
executive officers or managers.
9. 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
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 Public Trading Market: The
Debentures offered hereby will be issued for specified terms and
should not be considered liquid investments. See "DESCRIPTION OF
DEBENTURES." Investors should be prepared to hold the Debentures until
maturity. The Debentures are not traded on any stock exchange and
there is no independent public market for the Debentures. At present,
management does not anticipate applying for a listing for such public
trading.
2. Effect of Certain Trust Indenture Provisions: The Debentures
are issued pursuant to an Indenture which does not restrict
Metropolitan's ability to issue additional debentures or to incur
other debt. The Indenture does not require Metropolitan to maintain
any specified financial ratios, minimum net worth or minimum working
capital. Debenture holders should not rely on the terms of the
Indenture for protection of their investments, but should look rather
to the creditworthiness of Metropolitan and its ability to satisfy its
obligations. Debentures will not be guaranteed or insured by any
governmental agency. 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 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. Effect of Certain Subordination and Liquidation Rights: The
offering price and liquidation preference of Preferred Stock offered
herein is $100 per share. In the event of liquidation of
Metropolitan, outstanding shares of Preferred Stock, including shares
of additional sub-series which may subsequently be authorized and
sold, are on parity with the liquidation preference of all other
outstanding series of preferred stock of Metropolitan, and are
subordinate to all outstanding debt of Metropolitan including its
Debentures. In the event of liquidation of Metropolitan, the policy
holders and creditors of Metropolitan's subsidiaries would be paid in
priority to all preferred shareholders (including holders of the
Preferred Stock offered herein) to the extent of the unencumbered
assets of the subsidiaries. Preferred Stock is preferred in
liquidation to Metropolitan's common stock. As of September 30, 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
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 "CERTAIN INVESTMENT CONSIDERATIONS-RISK FACTORS" &
"SELECTED CONSOLIDATED FINANCIAL DATA". Net income for the years 1984
through 1992 was not sufficient to meet preferred stock distribution
requirements. During 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
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. Purchasers are
advised to consult their own tax advisors with respect to the federal
income tax treatment of distributions made. See "DESCRIPTION OF
PREFERRED STOCK-Federal Income Tax Consequences of Distributions."
4. Limited Marketability of Shares: The Preferred Stock is not
expected to be traded on any National or Regional Stock Exchange and
no independent public market for Preferred Stock is anticipated. At
present, management does not anticipate applying for a listing for
such public trading. In order to provide shareholders with some
liquidity, 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: The Class A Common Stock is
the only class of Metropolitan's stock carrying voting rights. Class
A Common stockholders now hold, and upon completion of this offering
will continue to hold, effective control of Metropolitan except as
described below. The Board resolution authorizing the Preferred Stock
provides that in the event distributions payable on any shares of
preferred stock (including the Preferred Stock offered herein) are in
arrears in an amount equal to twenty-four or more full monthly
dividends per share, then the holders of Preferred Stock and all other
outstanding preferred stock shall be entitled to elect a majority of
the Board of Directors of Metropolitan. Preferred Stock shareholders
may also become entitled to certain other voting rights as required by
law. See "DESCRIPTION OF PREFERRED STOCK-Voting Rights".
6. Limitations on Redemption and Restrictions on Distributions:
Preferred Stock is designed as a long term investment in the equity of
Metropolitan, not as a short term, liquid investment. The Preferred
Stock is redeemable solely at the option of Metropolitan, and with
limited exceptions is specifically not redeemable for three years
following its purchase. In addition, Metropolitan may not purchase or
acquire any shares of Preferred Stock in the event that cumulative
dividends thereon have not been paid in full except pursuant to a
purchase or exchange offer made on the same terms to all holders of
Preferred Stock. See "DESCRIPTION OF PREFERRED STOCK-Redemption of
Shares". Metropolitan is restricted from making distributions on
Preferred Stock in the event that any distributions to which the
holders of other series of preferred stock are entitled to have not
been paid. See "DESCRIPTION OF PREFERRED STOCK-Distributions".
DESCRIPTION OF SECURITIES
DESCRIPTION OF DEBENTURES
The Debentures will be issued under an Indenture dated as of July
6, 1979 and supplements thereto dated as of October 3, 1980 (with
respect to Investment Debentures, Series II) and November 12, 1984
(with respect to Installment Debentures, Series I). The following
statements relating to the Debentures and the Indenture are summaries
and do not purport to be complete. Such summaries are subject to the
detailed provisions of the Indenture and are qualified in their
entirety by reference to the Indenture, a copy of which is filed as an
exhibit to the Registration Statement and is also available for
inspection at the office of the Trustee.
General
The Debentures will represent unsecured general obligations of
Metropolitan and will be issued in fully registered form without
coupons, in fractional denominations of $0.01 or more subject to the
stated minimum investment amount requirements. The Debentures will be
sold at 100% of the principal amount. The Debentures will have the
minimum investment amounts, maturities and interest rates set forth on
the cover page of this Prospectus. The stated interest rates,
maturities, and minimum investment amounts of unissued Debentures may
be changed at any time by Metropolitan. Any such change will have no
effect on the terms of the previously sold Debentures.
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: Holders of Investment
Debentures, Series II will be paid interest in cash under one of
several plans. The purchaser may elect to have interest paid on a
monthly, quarterly, semi-annual or annual basis, without compounding,
or the purchaser may elect to accumulate interest with compounding
semi-annually at the stated interest rate. Debentureholders may change
the interest payment election at any time by written notice to
Metropolitan. Under the compounding option, upon written notice to
Metropolitan, the Debentureholder(s) may withdraw the interest
accumulated during the last two completed semiannual compounding
periods as well as the interest accrued from the end of the last
compounding period to the date Metropolitan receives the notice.
Amounts compounded prior to the last two compounding periods are
available only at maturity.
Installment Debentures, Series I: Holders of Installment
Debentures, Series I will be paid monthly installments comprised of
principal and interest until maturity. Payments will commence on the
date specified by the purchaser, which date shall be no less than 30
days from the debenture issue date. The amount of each installment
will be determined by the amortization term designated by the
Debentureholder at the time the Debenture is purchased.
Debentureholders are notified in writing between 15 and 45 days
prior to the date their Debentures will mature. The amounts due on
maturity are placed in a separate bank trust account until paid to the
registered owner(s). Debentures do not earn interest after the
maturity date. Metropolitan will pay the principal and accumulated
interest due on matured Debentures to the registered owner(s) in cash
at Metropolitan's main office in Spokane, Washington or by check
mailed to the address designated by the registered owner.
Prepayment on Death
In the event of the death of a Debentureholder, any party
entitled to receive some or all of the proceeds of the Debenture may
elect to have his or her portion of the principal and any accrued but
unpaid interest prepaid in full in five consecutive equal monthly
installments. Interest will continue to accrue on the declining
principal balance of such portion. No interest penalty will be
assessed. Any request for prepayment shall be made to Metropolitan in
writing and shall be accompanied by evidence satisfactory to
Metropolitan of the death of the registered owner or joint registered
owner. Before prepayment, Metropolitan may require the submission of
additional documents or other material which it may consider necessary
to determine the portion of the proceeds the requesting party is
entitled to receive, or assurances which, in Metropolitan's
discretion, it considers necessary to fulfill its obligations.
Related Indebtedness
The Indenture pursuant to which the Debentures are issued does
not restrict Metropolitan's ability to issue additional debentures or
to incur other debt. The Indenture does not require Metropolitan to
maintain any specified financial ratios, minimum net worth or minimum
working capital. There is no sinking fund for the redemption of the
Debentures. Debentures will not be guaranteed or insured by any
governmental agency. The State of Washington regulates the amount of
debt securities Metropolitan may issue, its debt to equity ratio,
certain of its investments and various other aspects of its business.
See "BUSINESS-Regulation". At September 30, 1996, Metropolitan,
including obligations of subsidiaries, 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). 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.
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
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 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.
DESCRIPTION OF PREFERRED STOCK
This offering consists of 250,000 shares of Variable Rate
Cumulative Preferred Stock, Series E-6 (hereinafter referred to as
"Preferred Stock"). All of the outstanding shares of preferred stock
and the shares of Preferred Stock offered by Metropolitan hereby, when
issued and sold, will be validly issued, fully paid and nonassessable.
The relative rights and preferences of Preferred Stock have been fixed
and determined by the Board of Directors of Metropolitan and are set
forth in the Preferred Stock Authorizing Resolution (the Authorizing
Resolution). Preferred Stock is issued in book entry form.
Investments in Preferred Stock are evidenced by receipts and not by
negotiable stock certificates.
The following statements relating to the Preferred Stock are
summaries, do not purport to be complete and are qualified in their
entirety by reference to the Authorizing Resolution a copy of which is
filed with the Commission as an exhibit to the Registration Statement
and is also available for inspection at the principal office of
Metropolitan.
Distributions
Distributions on Preferred Stock are cumulative and are to be
declared monthly on the first business day of the month payable to the
shareholders of record as of the fifth calendar day of each month.
Distributions are to be paid in cash on the twentieth calendar day of
each month in an amount equal to the offering price of $100 per share
multiplied by the distribution rate divided by twelve. The
distribution rate will be the "Applicable Rate" as defined herein
subject to the authority of Metropolitan's Board of Directors to
authorize, by resolution, a higher rate.
The Applicable Rate for any monthly distribution period cannot be
less than 6% or greater than 14% per annum. The Applicable Rate for
any monthly distribution period shall be (i) the highest of the
Three-Month U.S. Treasury Bill Rate, the Ten-Year Constant Maturity
Rate and the Twenty-Year Constant Maturity Rate (each as more fully
described in the Authorizing Resolution), plus (ii) one half of one
percentage point. Each of the above rates shall be calculated as the
arithmetic average of the two most recent weekly per annum yields as
published weekly by the Federal Reserve Board during the Calendar
Period immediately prior to the ten calendar days immediately
preceding the first day of the distribution period for which the
distribution rate on the Preferred Stock is being determined. Should
Metropolitan determine in good faith that one or more of such rates
cannot be determined for any distribution period, then the Applicable
Rate of such period shall be the higher of whichever of such rates can
be so determined, plus one half of one percentage point. Should
Metropolitan determine in good faith that none of such rates can be
determined for any distribution period, then the Applicable Rate in
effect for the preceding distribution period shall be continued for
such distribution period. The distribution rate for each monthly
distribution period shall be calculated as promptly as practicable by
Metropolitan. Metropolitan will cause notice of the distribution rate
to be enclosed with the next mailed distribution payment check. In
making such calculation, the Three-Month U.S. Treasury Bill Rate,
Ten-Year Constant Maturity Rate and Twenty-Year Constant Maturity Rate
shall each be rounded to the nearest five hundredths of a percentage
point.
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)
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
ability to incur additional secured indebtedness. See
"Capitalization" & "Certain Investment Considerations-Risk Factors".
The Preferred Stock Authorizing Resolution provides that, without
limitation, the voluntary sale, lease or conveyance of all or
substantially all of Metropolitan's property or assets to, or its
consolidation or merger with any other corporation shall not be deemed
to be a liquidation, dissolution or winding up of Metropolitan. If
upon any voluntary or involuntary liquidation, dissolution or winding
up of Metropolitan, the aggregate liquidation preference payable with
respect to Preferred Stock and any other shares of stock of
Metropolitan ranking as to any such distribution on a parity with
Preferred Stock are not paid in full, the holders of Preferred Stock
and of such other shares will share ratably in any such distribution
of assets of Metropolitan in proportion to the full respective
preferential amounts to which they are entitled. After payment of the
full amount of the liquidating distribution to which they are
entitled, the holders of shares of Preferred Stock will not be
entitled to any further participation in any distribution of assets by
Metropolitan.
Redemption of Shares
Upon call by Metropolitan: Subject to regulatory restrictions
affecting redemptions during an offering, the shares of Preferred
Stock are redeemable, in whole or in part, only at the option of
Metropolitan at a redemption price of $100 per share plus declared and
unpaid dividends to the date fixed for redemption. In the event that
fewer than all of the outstanding shares of Preferred Stock are to be
redeemed, the number of shares to be redeemed shall be determined by
Metropolitan and the shares to be redeemed shall be determined by such
method as Metropolitan in its sole discretion deems to be equitable.
Discretionary Redemption Upon Request of the Holder: Preferred
Stock is not redeemable at the option of the holder. If, however,
Metropolitan receives an unsolicited written request for redemption of
a block of shares from any holder, Metropolitan may, in its sole
discretion, subject to regulatory restrictions affecting redemptions
during an offering, and subject to the limitations described below,
consider such shares for redemption. Such redemption requests, when
received, are reviewed in the order received. Any shares so tendered,
which Metropolitan in its discretion allows for redemption, shall be
redeemed by Metropolitan directly, (and not from or through a broker
dealer), at a price equal to $97 per share, plus any declared but
unpaid dividends to date if redeemed during the first year after the
date of original issuance and $99 per share plus any declared but
unpaid dividends if redeemed thereafter. Metropolitan may change such
optional redemption prices at any time with respect to unissued
shares.
There can be no assurance that Metropolitan's financial condition
will allow it to exercise its discretion to accept any particular
request for redemption of Preferred Stock. Metropolitan will not
redeem any such shares tendered for redemption if to do so would, in
the opinion of Metropolitan's management, be unsafe or unsound in
light of Metropolitan's financial condition (including its liquidity
position); if payment of interest or principal on any outstanding
instrument of indebtedness is in arrears or in default; or if payment
of any dividend on Preferred Stock or share of any stock of
Metropolitan ranking at least on a parity therewith is in arrears as
to dividends. In the event that cumulative dividends on Preferred
Stock have not been paid in full, Metropolitan may not purchase or
acquire any shares of Preferred Stock otherwise than pursuant to a
purchase or exchange offer made on the same terms to all holders of
Preferred Stock.
As provided in the Preferred Stock Authorizing Resolution, for a
period of three years from the date of initial sale of each share of
Preferred Stock, any redemption of such share, at the sole discretion
of Metropolitan, shall occur only upon the death or major medical
emergency of the holder or any joint holder of the share requested to
be redeemed. As further provided in the Authorizing Resolution, any
optional redemption of a share in any calendar year after the third
year from the date of sale of the share, not arising from the death or
medical emergency of the holder or any joint holder shall occur only
when the sum of all optional redemptions (including those arising out
of the death or medical emergency of the holder or any joint holder)
of shares of Preferred Stock during that calendar year shall not
exceed ten percent of the number of shares of Preferred Stock
outstanding at the end of the preceding calendar year. In the event
the ten percent limit is reached in any calendar year, the only
redemptions which may be considered during that calendar year shall
be those arising from the death or medical emergency of the holder or
any joint holder; provided, however, that to the extent that total
optional redemptions in any calendar year do not reach the ten percent
limit, the amount by which such optional redemptions shall fall short
of the ten percent limit may be carried over into ensuing years; and
provided further that to the extent that all redemptions, including
those involving the death or medical emergency of the holder or any
joint holder, exceed the ten percent limit in any year, the amount by
which such redemptions exceed the ten percent limit shall reduce the
limit in the succeeding year for limiting redemptions not involving
the death or medical emergency of a holder or any joint holder. In no
event, shall such optional redemptions of all types in any single
calendar year exceed 20% of the number of shares of Preferred Stock
outstanding at the end of the preceding calendar year.
The Preferred Stock is not expected to be traded on any National
or Regional Stock Exchange and no independent public market for
Preferred Stock is anticipated. Management does not anticipate
applying for a listing for such public trading. In order to provide
shareholders with some liquidity, 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 "INVESTMENT CONSIDERATIONS - 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
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.
Prospective purchasers are advised to consult their own tax
advisor with respect to the income tax treatment or any distribution
made with respect to the Preferred Stock.
Distributions paid with respect to Preferred Stock, whether
deemed to be dividends, return of capital, or capital gains for
federal income tax purposes, will result in the same federal income
tax consequences to Metropolitan as other payments of dividends. These
distributions are not deductible by Metropolitan under current tax
law. Additionally, distributions to foreign taxpayers are subject to
special rules not discussed herein.
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-6 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
</TABLE>
(1) The Redemption Price shown, is for redemption's at the request of
the shareholder. In the event of a redemption at the request of
Metropolitan, the redemption price per share for authorized shares of
Series 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.
(3) E-4, E-5 and E-6 stock are not redeemable during the first three
years after their respective issuance except for instances of death or
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.
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 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, depending on the term of the Debenture and
whether or not the transaction is a reinvestment or new purchase. A
commission in the maximum amount of 6% of the offering price will also
be paid by Metropolitan on most Preferred Stock purchases. Debentures
are offered only for cash or cash equivalents. Preferred Stock is
offered for cash or other consideration acceptable to Metropolitan as
determined by the Board of Directors. MIS will transmit such funds or
other consideration directly to Metropolitan by noon of the next
business day after receipt. Metropolitan will also pay certain other
expenses in connection with the offering. During the three fiscal
years ended September 30, 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.
There is not now and Metropolitan does not expect that there will
be a public trading market for the Debentures or Preferred Stock in
the future. MIS does not intend to make a market for the Debentures
or Preferred Stock. Metropolitan, through MIS, undertakes to maintain
a list of holders of preferred stock who wish to sell their preferred
stock and buyers who wish to purchase previously issued and
outstanding shares of preferred stock. See "Certain Investment
Consideration-Risk Factors-Limited Marketability of Shares &
Description of Preferred Stock-Redemption of Shares."
MIS may enter into selected dealer agreements with and reallow to
certain dealers, who are members of the NASD, and certain foreign
dealers who are not eligible for membership in the NASD, a commission
of up to 6% of the principal amount of Debentures and Preferred Stock
sold by such dealers. After the commencement of the offering the
commissions and reallowances, if any, may be lowered.
USE OF PROCEEDS
Debenture Proceeds . . . . If all the Debentures offered are
sold, Metropolitan expects net proceeds from this Debenture offering
of $100,000,000 to $94,000,000 before deducting other expenses
estimated at $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 funding
investments in Receivables and other investments, which may include
investments in subsidiaries and the acquisition of other companies or
the commencement of new business ventures, and development of real
estate now held or which may be acquired. The Consolidated Group
continues to evaluate possible acquisition candidates. 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 debt securities through the period
ending January 31, 1998, and for payment of general expenses, debt
service and preferred stock dividend requirements, portions of the net
proceeds of this offering may also be used for such purposes.
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 & "CERTAIN INVESTMENT CONSIDERATIONS - RISK
FACTORS".
Management anticipates that some of the proceeds of this offering
will be invested in money market funds, bank repurchase agreements,
commercial paper, U.S. Treasury Bills and similar 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.
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%
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.
</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.
Year Ended September 30,
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands
Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA
Revenues $156,672 $138,107 $138,186 $133,113 $121,221
======== ======== ======== ======== ========
Income before minority
interest, extraordinary
item and cumulative effect
of change in accounting
principle $ 8,146 $ 6,376 $ 5,702 $ 8,558 $ 3,290
Income allocated to
minority interests (108) (73) (224) (255) (363)
-------- -------- -------- -------- --------
Income before extraordinary
item and cumulative effect
of change in accounting
for income taxes 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 8,038 6,303 5,478 4,003 3,578
Preferred stock dividends (3,868) (4,038) (3,423) (3,313) (3,399)
-------- --------- -------- -------- --------
Income (loss)
applicable to common
stockholders $ 4,170 $ 2,265 $ 2,055 $ 690 $ 179
======== ======== ======== ======== ========
Ratio of Earnings
to Fixed Charges and
Preferred Stock Dividends(4) 1.14 1.03 1.04 1.17
PER COMMON SHARE DATA (3):
Income (loss) before
extraordinary item
and cumulative effect
of change in accounting
principle $32,073 $ 17,288 $ 14,996 $ 37,239 $ (3,579)
Extraordinary item (1) - - - - 4,932
Cumulative effect of change
in accounting principle (2) - - - (32,089) -
-------- -------- -------- -------- --------
Income (loss)
applicable to common
stockholders (5) $32,073 $ 17,288 $ 14,996 $ 5,150 $ 1,353
======== ======== ======== ======== ========
Weighted Average Number of
Common Shares
Outstanding (3) 130 131 137 134 132
======== ======== ======== ======== ========
Cash Dividends Per
Common Share $ -- $ 3,800 $ 675 $ 675 $ -
======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET
DATA:
Total Assets $1,282,659 $1,078,468 $1,063,290 $1,031,958 $982,259
Debt Securities, Other
Debt Payable and Securities
Sold, Not Owned 363,427 226,864 261,500 234,497 230,814
Stockholders' Equity 46,343 40,570 32,625 32,781 28,260
</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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
Consolidated Group income before income taxes and minority
interest was approximately $12.4 million for the fiscal year ended
September 30, 1996 as compared to $9.5 million for the comparable 1995
period and $8.7 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 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 increase in income before
income taxes and minority interest in 1995 over 1994 was primarily
attributable to a net increase of $1.4 million in net gains from real
estate sales, a decrease of $1.4 million in the provision for losses
on real estate assets, an increase of $1.3 million in realized net
gains from the sales of investments and Receivables, an increase of
$1.6 million in expenses capitalized as deferred costs, net of
amortization, and an improvement of $.8 million in fees, commissions,
service and other income, offset by a decline of $1.6 million in net
interest sensitive income and expense, and an increase of $4.2 million
in commissions to agents.
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.
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 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
"CERTAIN INVESTMENT CONSIDERATIONS-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 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. See
"Asset/Liability Management". 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.
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 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>
For the Fiscal Year Ended
September 30,
1996 1995 1994
(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.
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 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
"CERTAIN INVESTMENT CONSIDERATIONS-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 environment, earnings will
tend to increase. During fiscal 1997, approximately $331 million of
interest sensitive assets are expected to reprice or mature. These
assets consist of approximately $117 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
$517 million, or a ratio of interest sensitive assets to interest
sensitive liabilities of approximately 256%.
The Consolidated Group is able to manage this liability to asset
mismatch of approximately 2.6:1 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
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 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.
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 $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 imposed certain temporary limitations on
the total amount of debentures and preferred stock that Metropolitan
could have outstanding during 1994, 1995 and 1996. At September 30,
1996, Metropolitan could not have 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 is 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
limitations did not have any material adverse impact on liquidity
during 1993 through 1995, but did limit sales of securities and
resulting liquidity in 1996. Should the same or a lower limitation be
imposed during 1997, it, could have a material negative effect on
liquidity.
During 1997, anticipated principal, interest and dividend
payments on outstanding debentures, other debt payments and preferred
stock distributions are expected to be approximately $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 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 decrease in cash and cash equivalents of approximately $4.4
million resulting in a year end balance of approximately $9.4 million.
Management believes that cash flow generated from the
Consolidated Group's operating activities and financing activities
will be sufficient to conduct its business and meet its anticipated
obligations as they mature during the next fiscal year. Metropolitan
has never defaulted on any of its obligations since its founding in
1953.
BUSINESS
OVERVIEW
Metropolitan was established in 1953. Through growth and
acquisitions, it has developed into a diversified institution, with
assets exceeding one billion dollars. Its subsidiaries 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 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
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:
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 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 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 plans to expand the Receivable
acquisition staff at its home office in Spokane, which will be called
the Contract Negotiation Center. This change is intended to increase
the closing speed, and decrease acquisitions costs through, among
other things, 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:
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:
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 Recievables 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 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 $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.
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 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 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 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 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 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%
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%
GRAPH SHOWING MAP OF THE UNITED STATES AND DISTRIBUTION OF RECEIVABLE
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%
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 13,436 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
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.
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.
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%
==== ==== ====
</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.
<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
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
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.
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
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 Transactions"
Receivable Sales
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,
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
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".
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
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
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, life
insurance in force 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 about Western United including information about Old
Standard (a former subsidiary) through May 31, 1995 when Old
Standard 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
========== ======== ========
Life Insurance Premiums $ 3,355 $ 3,365 $ 3,346
Less Ceded Premiums (355) (365) (388)
---------- -------- --------
$ 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>
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
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%
========== ======== ======== ======
%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.
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
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
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
------- ------- ------- --------
$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
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.
<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
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.
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
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
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.
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:
<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
-------- ------- --------
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
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
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
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
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
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
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.
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 Summit, 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.
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
September 30, 1996.
<TABLE>
<CAPTION>
Number of
Shares
Beneficially
Name Title of Class Owned %of Class
<S> <C> <C> <C>
C. Paul Sandifur, Jr. Metropolitan Preferred
929 West Sprague Stock All Series 236 0.05%
Spokane, WA.... Metropolitan Class A
Common Stock 11.5258 8.84%
C. Paul Sandifur, Jr.
Trustee................. Metropolitan Class A
929 West Sprague Common Stock 82.4667(1) 63.24%
Spokane, WA
Summit Securities, Inc.. Metropolitan Preferred
929 West Sprague Avenue Stock, All Series 247,622(2) 5.26%
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 267,741 5.71%
Metropolitan Class A 106.2408 81.47%
<FN>
(1) C. Paul Sandifur, Jr., is trustee of the C. Paul Sandifur and J.
Evelyn Sandifur irrevocable trust and has voting and investment control over
these shares of stock. The trust beneficiaries are C. Paul Sandifur, Jr.,
Mary L. Sandifur and William F. Sandifur.
(2) Summit Securities, Inc. is a wholly owned subsidiary of National
Summit Corp., a Delaware corporation, which is wholly owned by C. Paul
Sandifur, Jr.
</TABLE>
Executive Compensation
The following table sets forth the aggregate compensation
paid by Metropolitan during the 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
General Counsel
Michael Kirk 1996 $85,000 $91,867
Senior Vice President 1995 $65,813 $38,050
-Production
Tracy Z 1996 $80,000 $78,743
Vice President-Underwriting
John Van Engelen 1996 $105,500 $19,747
President, Western United
</TABLE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to
the beneficial owners of more than five percent of Metropolitan's
voting stock as of September 30, 1996.
<TABLE>
<CAPTION>
Shares of Class A
Name and Address Common Stock % of Class
<S> <C> <C>
C. Paul Sandifur, Jr.
929 West Sprague
Spokane, Washington............. 11.5258 8.84%
C. Paul Sandifur, Jr.
Trustee...................... 82.4667 63.24%
Mary L. Sandifur
West 601 Main, Suite 714
Spokane, Washington 99201............. 8.7156 6.68%
William F. Sandifur
West 601 Main, Suite 714
Spokane, Washington 99201............ 8.9391 6.85%
Estate of
C. Paul Sandifur, Sr. and J. Evelyn Sandifur
West 601 Main, Suite 714
Spokane, Washington 99201...................... 6.5120 5.00%
Summit Securities, Inc.
929 West Sprague Avenue
Spokane, Washington....................... 9.2483 7.09%
</TABLE>
CERTAIN TRANSACTIONS
Transactions with and between Metropolitan and Subsidiaries.
In the normal course of business, Metropolitan and its
subsidiaries engage in intercompany transactions.
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.
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.
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.
Metropolitan provides Management and Receivable Acquisition
Services for a fee to Summit, Old Standard and Arizona Life. See
"BUSINESS-Receivable Investments-Management & Receivable
Acquisition Services".
Metwest provides Receivable Collection services for a fee to
Summit, Old Standard and Arizona Life. 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 is expected to become effective January 1997. See
"BUSINESS-Life Insurance and Annuity Operations-Reinsurance".
Metropolitan's property development activities are provided
by Summit Property Development. See "REAL ESTATE DEVELOPMENT".
Sale of Subsidiary to affiliates.
On September 9, 1994, the controlling interest in Summit was
acquired by National Summit Corp., a Delaware corporation
(National Summit) which is wholly owned by C. Paul Sandifur, Jr.
The change in control was made pursuant to a reorganization
wherein Summit redeemed all the common shares held by its former
parent company, Metropolitan which consisted of 100% of the
outstanding common stock of Summit. Contemporaneous with this
redemption, Summit issued 10,000 shares of common stock to
National Summit, for $100,000. In addition, various investors in
Metropolitan's common and preferred stock, including members of
Mr. Sandifur's immediate family acquired 30,224 shares of Summit's
Preferred Stock Series S-1 for $100 per share in exchange for
preferred and common shares of Metropolitan with a value of
approximately $3 million dollars. Following this sale,
Metropolitan and its subsidiaries have continued to provide, for a
fee, principally all the management services to Summit.
On January 31, 1995, Metropolitan sold Metropolitan
Investment Securities (MIS) to Summit Securities, Inc. This sale
was made pursuant to a restructuring of the Consolidated Group and
Summit. The sale price of $288,950 was determined by the net book
value for MIS at December 31, 1994. Following this sale, MIS has
continued its prior business activities as the broker/dealer
selling the securities of Metropolitan and Summit.
On January 31, 1995, Metropolitan discontinued its property
development division, which consisted of a group of employees
experienced in real estate development. On the same date, Summit
commenced the operation of a property development division
employing those same individuals who had previously been employed
by Metropolitan. Metropolitan has negotiated an agreement with
Summit Property Development to provide property development
services to Metropolitan.
On May 31, 1995, Metropolitan sold Old Standard to Summit.
The sale price was $2,722,000 plus future contingency payments
equal to 20% of statutory income prior to the accrual of income
tax for the fiscal years ending December 31, 1995, 1996 and 1997.
The price was based upon an independent appraisal of Old Standard.
See Note 1 to the Consolidated Financial Statements.
The sale of MIS and Old Standard and transfer of
Metropolitan's property development division, are all part of the
continuation of a general reorganization which was commenced in
1994, with the sale of Summit. Metropolitan considers this
reorganization to be in its best interest as it becomes a national
financial company as opposed to only regional, and due to
regulatory considerations principally arising within
Metropolitan's state of domicile. It is the opinion of management
that these regulations hampered Metropolitan in its previous
corporate structure and limited its growth potential. These
regulations include excluding subsidiary earnings from an earnings
to fixed charges ratio requirement unless those subsidiary
earnings are actually paid to Metropolitan. This effectively made
these subsidiaries non-earning assets of Metropolitan unless the
dividends were actually paid. In light of these regulations and
the expansion of Metropolitan and its subsidiaries beyond the
Northwestern United States, it is the opinion of Metropolitan's
management that this reorganization may provide it with greater
flexibility for future growth.
During fiscal 1994, the Boards of Directors for Metropolitan
and certain subsidiaries authorized a reverse split of their
stock. The effect of these reverse stock splits was to obtain the
business efficiencies available with fewer minority shareholders.
There was no change in control or significant impact on
stockholders' equity as a result of these transactions.
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
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 Flows
Notes to Consolidated Financial Statements
<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
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
ASSETS 1996 1995
-------------- --------------
Cash and cash equivalents $ 167,879,080 $ 32,798,627
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
============== ==============
<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.
<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.
<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>
<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.
<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)
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>
<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 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 (54,051,431) (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 135,080,453 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 $ 167,879,080 $ 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.
<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 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 cost basis 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.
<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 cost basis 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.
<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.
<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. 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.
<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.
<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.
<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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
RECOGNITION OF INSURANCE AND ANNUITY REVENUES
Revenues for universal life contracts and annuities are
recognized either upon assessment or over the estimated policy
term. These revenues consist primarily of mortality expenses
and surrender charges. 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.
<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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
HEDGING ACTIVITIES, CONTINUED
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.
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.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE:
Real estate contracts and mortgage notes receivable include
mortgages collateralized by property located throughout the
United States. At September 30, 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.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
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.
<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 estimated prepayment patterns, are as
follows:
Fiscal Year Ending
September 30,
------------------
1997 $100,939,000
1998 89,216,000
1999 79,191,000
2000 70,664,000
2001 63,464,000
Thereafter 277,704,147
------------
$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.
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. It is reasonably possible that actual prepayment
experience could exceed the estimated prepayment factor in the
near term, which would result in a reduction in the carrying
value of retained mortgage servicing rights.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD FOR
SALE, CONTINUED:
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.
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.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. OTHER RECEIVABLE INVESTMENTS, CONTINUED:
The following is a reconciliation of the face value of the other
receivable investments to the Company's carrying value at
September 30, 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
<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
============
<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>
<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.
<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
=========== =========== ===========
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
=========== ===========
<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>
<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.
<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.
<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
============ ============
<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:
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>
<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>
<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.
<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>
<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).
<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).
<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>
<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>
<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.
<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.
<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
<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. The
amount of estimated future guaranty fund assessment 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.
15. STATUTORY ACCOUNTING (UNAUDITED):
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. STATUTORY ACCOUNTING (UNAUDITED), CONTINUED:
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.
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>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS, CONTINUED:
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
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>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
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
<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>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
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.
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>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. RELATED-PARTY TRANSACTIONS, CONTINUED:
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.
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>
<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>
<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>
<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
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<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>
<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.
<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>
<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.
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:
Any person made a party to any civil or criminal action, suit, or
proceeding by reason of the fact that he, his testator or intestate
is, or was, a director, officer or employee of this corporation or of
any other corporation which he served as such at the request of this
corporation, shall be indemnified by the corporation against
reasonable expenses, including, without limitation, attorney's fees
and amounts paid in satisfaction of judgment or in settlement, other
than amounts paid to the Corporation by him, actually and necessarily
incurred by or imposed upon him in connection with, or resulting from
the defense of such civil or criminal action, suit or proceedings, or
in connection with or resulting from any appeal therein, except in
relation to matters as to which it shall be adjudged in such civil or
criminal action, suit or proceeding that such officer, director, or
employee is liable by reason of his willful malfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office. In the case of a criminal action, suit or
proceeding, a conviction (whether based on a plea of guilty or nolo
contendere or its equivalent, or after trial) shall not of itself be
deemed an adjudication that such officer, director, or employee is
liable for negligence or misconduct in the performance of his duties
to the corporation. Such right of indemnification shall not be
exclusive of any other right which such officers, directors, and
employees of the corporation, and the other persons above mentioned,
may have or hereafter acquire and, without limiting the generality of
such statement, any such director, officer, employee or other person
shall be entitled to any rights of indemnification under any Bylaw,
agreement, vote of stockholders, provisions of law or otherwise, as
well as their rights under this Article."
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
1(a). Selling Agreement between Metropolitan and
Metropolitan Investment Securities, Inc. dated as of
August 14, 1980 (Exhibit l(a) to Registration No.
2-70595).
1(b). Amendment to Selling Agreement between Metropolitan
and Metropolitan Investment Securities, Inc. dated as
of August 14, 1980, (Exhibit l(b) to Registration No.
2-70595).
1(c)(i). Selling Agreement between Metropolitan and
Metropolitan Investment Securities, Inc., dated as of
December 21, 1984, with respect to Installment
Debentures, Series I (Exhibit 1(c) to Registration No.
2-95146).
1(d). Amendment to Selling Agreement between Metropolitan
and Metropolitan Investment Securities, Inc. dated as
of January 10, 1989. (Exhibit 1(f) to Registration
No. 33-25700).
1(e). Selling Agreement between Metropolitan and
Metropolitan Investment Securities, Inc. dated as of
January 31, 1990. (Exhibit 1(c) to Registration No.
33-32586).
1(f)(ii). Selling Agreement between Metropolitan and
Metropolitan Investment Securities, Inc. with respect
to Preferred Stock Series E-6. (Exhibit (1(f) to
Registration No. 333-335)
*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
(Exhibit 3 to Metropolitan's Annual Report on Form
10-K for fiscal 1979).
4(b). First Supplemental Indenture, dated as of October 3,
1980, between Metropolitan and Seattle-First National
Bank, Trustee (Exhibit 4 to Metropolitan's Annual
Report on Form 10-K for fiscal 1980).
4(c). Second Supplemental Indenture, dated as of November
12, 1984, between Metropolitan and Seattle-First
National Bank, Trustee (Exhibit 4(d) to Registration
No. 2-95146).
4(d). Statement of Rights, Designations and Preferences of
variable rate cumulative Preferred Stock, Series E-6.
(Exhibit 4 (l) to Registration No. 33-51905)
*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. 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).
*27. Financial Data Schedules.
* Filed herewith.
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer,
or controlling persons of the Registrant in the
successful defense of any action, suit, or proceeding)
is asserted by such director, officer or controlling
person in connection with the securities being
registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by
controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant 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 10th day of January, 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
/S/ C. Paul Sandifur, Jr.
_____________________ President, Chief Executive
C. Paul Sandifur, Jr. Officer, Chairman of
the Board 1/10/97
/S/ Bruce J. Blohowiak
_____________________ Executive Vice President,
Bruce J. Blohowiak Chief Operating Officer,
Director 1/10/97
/S/ Steven Crooks
_____________________ Vice President
Steven Crooks (Principal Financial
Officer) 1/10/97
/S/ Reuel Swanson
_____________________ Secretary and Director 1/10/97
Reuel Swanson
/S/ Irv Marcus
_____________________ Director 1/10/97
Irv Marcus
/S/ Charles H. Stolz
_____________________ Director 1/10/97
Charles H. Stolz
FORM OF
AGREEMENT TO ACT AS "QUALIFIED INDEPENDENT UNDERWRITER"
This agreement made as of the day of ,
1997, by and between Metropolitan Mortgage & Securities Co., Inc., a
Washington corporation ("Metropolitan"), Metropolitan Investment
Securities, Inc., a Washington corporation ("MIS"), and Welco
Securities, Inc., a Nevada Corporation ("Welco").
WITNESSETH:
WHEREAS, Metropolitan intends to offer $96,500,000 in Investment
Debentures Series II and $3,500,000 in Installment Debentures, Series
I (hereinafter referred to as "Debentures"), which will be offered in
reliance on a registration statement filed on Form S-2, bearing SEC
file number 33- ; and,
WHEREAS, MIS, a wholly-owned broker/dealer and a member of the
National Association of Securities Dealers ("NASD"), will be engaged
as the sole selling agent for Metropolitan; and,
WHEREAS, pursuant to subparagraph (c) of Rule 2720 of the NASD, MIS,
as a NASD member, may participate in such underwriting only if the
yield at which the Debentures offered to the public is not lower than
the yield recommended by a "Qualified Independent Underwriter" as that
term is defined in Rule 2720 subparagraph (b)(15) of the NASD, and who
participates in the preparation of the registration statement and
prospectus relating to the offering and exercises customary standards
of due diligence, with respect thereto; and,
WHEREAS, this agreement ("Agreement") describes the terms on which
Metropolitan is retaining Welco to serve as such a "Qualified
Independent Underwriter" in connection with this offering of
Debentures;
NOW, THEREFORE, in consideration of the recitations set forth above,
and the terms, promises, conditions, and covenants herein contained,
the parties hereby contract and agree as follows:
DEFINITIONS
As hereinafter used, except as the context may otherwise require,
the term "Registration Statement" means the registration statement on
Form S-2 (including the related preliminary prospectus, financial
statements, exhibits and all other documents to be filed as a part
thereof or incorporated therein) for the registration of the offer and
sale of the debentures under the Securities Act of 1933, as amended,
and the rules and regulations thereunder (the "Act") filed with the
Securities and Exchange Commission (the "Commission"), and any
amendment thereto, and the term "Prospectus" means the prospectus
including any preliminary or final prospectus (including the form of
prospectus to be filed with the Commission pursuant to Rule 424(b)
under the Act) and any amendment or supplement thereto, to be used in
connection with the offering.
1. SCHEDULE E REQUIREMENT. Welco hereby confirms its agreement as
set forth in 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 yields below which Metropolitan's Debentures may not
be offered based on the pricing formula that is set forth in Schedules
"A" and "B," copies of which are attached hereto, and incorporated
herein by reference. It is understood and agreed by Welco that the
securities to which this Agreement relates will be offered on a
continuous, best efforts basis by MIS, as the sole selling agent of
Metropolitan pursuant to the selling agreement in effect between MIS
and Metropolitan which are filed as exhibits to the Registration
Statement referred to above. Metropolitan, through MIS, will continue
to offer the debt securities according to the terms and conditions of
said agreement, including, without limitation, Schedules "A" and B" in
accordance with this Agreement. Welco reserves the right to review
and amend its opinion upon the filing of any post-effective amendment
to this Registration Statement or upon occurrence of any material
event which may or may not require such an amendment to be filed, or
at such time as the offering under this registration shall terminate
or otherwise lapse under operation of law.
4. FEES AND EXPENSE. It is understood that Metropolitan shall
reimburse Welco for its expenses on a nonaccountable basis in the
amount of $10,000 of which $5,000 has been paid to date, and the
balance to be paid at closing. It is further agreed that Welco shall
be paid an additional amount of $27,000 at the time the pricing
opinion and pricing formula are rendered, concurrent with the closing.
Welco agrees to pay all fees and expenses to any legal counsel whom it
may employ to represent it separately in connection with or on account
of its actions contemplated herein. All mailing, telephone, travel,
hotel, meals, clerical, or other office costs incurred or to be
incurred by Welco in conjunction with Metropolitan's proposed offering
which is the subject of this Agreement shall be reimbursed to Welco by
Metropolitan at closing on an accountable basis upon receipt of an
itemization of said expenses.
5. MATERIAL FACTS. Metropolitan represents and warrants to Welco
that at the time the Registration Statement or any amendment thereto
becomes effective, the Registration Statement and, at the time the
Prospectus is filed with the Commission (including any preliminary
prospectus and the form of prospectus filed with the Commission
pursuant to Rule 424(b)) and at all times subsequent thereto, to and
including the date on which payment for, and delivery of, the
Debentures to be sold in the Offering is made by the underwriter or
underwriters, as the case may be, participating in the Offering and by
Metropolitan (such date being referred to herein as the "Closing
Date"), the Prospectus (as amended or supplemented if it shall have
been so amended or supplemented) will contain all material statements
which are required to be stated therein in accordance with the Act and
will conform to all other requirements of the federal securities laws,
and will not, on such date include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and that all
contracts and documents required by the Act to be filed or required as
exhibits to said registration statement have been filed. Metropolitan
further represents and warrants that any further filing, report,
document, release or communication which in any way refers to Welco or
to the services to be performed by Welco pursuant to this Agreement
will not contain any untrue or misleading statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
Metropolitan further warrants and represents that:
(a) All leases, contracts and agreements referred to in or filed as
exhibits to the Registration Statement to which Metropolitan or its
subsidiaries is a party or by which any of them is bound are in full
force and effect.
(b) Metropolitan and it subsidiaries have good and marketable
title, except as otherwise indicated in the Registration Statement and
Prospectus, to all of their assets and properties described therein as
being owned by them, free and clear of all liens, encumbrances and
defects except such encumbrances and defects which do not, in the
aggregate, materially affect or interfere with the use made and
proposed to be made of such properties as described in the
Registration Statement and Prospectus; and the Company and its
subsidiaries have no material leased properties except as disclosed in
the Prospectus.
(c) Metropolitan is duly organized under the laws of the State of
Washington and, as of the effective date of the Registration Statement
and at Closing Metropolitan will be validly existing and in good
standing under the laws of the State of Washington with full corporate
power and authority to own its properties and conduct its business to
the extent described in the Registration Statement and Prospectus;
Metropolitan and its subsidiaries are duly qualified to do business as
foreign corporations and in good standing in all jurisdictions in
which the nature of the business transacted by them or their ownership
of properties or assets makes their qualification necessary; the
authorized and outstanding capitalization of Metropolitan is as set
forth in the Prospectus and the description in the Prospectus of the
capital stock of Metropolitan conforms with and accurately describes
the rights set forth in the instruments defining the same;
(d) Metropolitan and its subsidiaries are not in violation of their
respective certificates of incorporation or Bylaws or in default in
the performance or observance of any material obligation, agreement,
covenant or condition contained in any bond, debenture, note, or other
evidence of indebtedness, contract or lease or in any indenture or
loan agreement to which any of them is a party or by which any of them
is bound.
(e) The execution, delivery and performance of this Agreement has
been duly authorized by all necessary corporate action on the part of
Metropolitan and MIS and performance of the foregoing agreement and
the consummation of the transactions contemplated thereby, will not
conflict with or result in a breach of any of the terms or constitute
a violation of the respective certificates of incorporation or Bylaws
of Metropolitan or MIS, or any deed of trust, lease, sublease,
indenture, mortgage, or other agreement or instrument to which
Metropolitan or MIS is a party or by which any of them or their
property is bound, or any applicable law, rule, regulation, judgment,
order or decree of any government, governmental instrumentality or
court, domestic or foreign, having jurisdiction over Metropolitan or
MIS or their properties or obligations; and no consent, approval,
authorization or order of any court or governmental agency or body is
required for the consummation of the transactions contemplated herein
and in the other agreements previously referred to in this paragraph
except as may be required under the Act or under any state securities
or Blue Sky Laws.
(f) Any certificate signed by an officer of Metropolitan and
delivered to Welco pursuant to this Agreement shall be deemed a
representation and warranty by Metropolitan to Welco, to have the same
force and effect as stated herein, as to the matters covered thereby.
(g) If any event relating to or affecting Metropolitan or any of
its subsidiaries shall occur as a result of which it is necessary, in
Welco's opinion, to amend or supplement the Prospectus in order to
make the Prospectus not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser, Metropolitan
undertakes to inform Welco of such events within a reasonable time
thereafter, and will forthwith prepare and furnish to Welco, without
expense to them, a reasonable number of copies of an amendment or
amendments or a supplement or supplements to the Prospectus (in form
and substance satisfactory to Welco) which will amend or supplement
the Prospectus so that as amended or supplemented it will not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein in light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading.
(h) Metropolitan hereby warrants and represents that it will offer
the debt securities described herein in accordance with the pricing
formula set forth in Schedules "A" and "B" which are incorporated by
reference herein.
(i) All representations, warrantees and agreements contained in
this Agreement, or contained in certificates of officers of
Metropolitan submitted pursuant hereto, shall remain operative and in
full force and effect, surviving the date of this Agreement.
6. AVAILABILITY OF INFORMATION. Metropolitan hereby agrees to
provide Welco, at its expense, with all information and documentation
with respect to its business, financial condition and other matters as
Welco may deem relevant based on the standards of reasonableness and
good faith and shall request in connection with Welco's performance
under this Agreement, including, without limitation, copies of all
correspondence with the Commission, certificates of its officers,
opinions of its counsel and comfort letters from its auditors. The
above-mentioned certificates, opinions of counsel and comfort letters
shall be provided to Welco as Welco may request on the effective date
of the Registration Statement and on the Closing Date. Metropolitan
will make reasonably available to Welco, its auditors, counsel, and
officers and directors to discuss with Welco any aspect of
Metropolitan which Welco may deem relevant. In addition,
Metropolitan, at Welco's request, will cause to be delivered to Welco
copies of all certificates, opinions, letters and reports to be
delivered to the underwriter or underwriters, as the case may be,
pursuant to any underwriting agreement executed in connection with the
Offering or otherwise, and shall cause the person issuing such
certificate, opinion, letter or report to authorize Welco to rely
thereon to the same extent as if addressed directly to Welco.
Metropolitan represents and warrants to Welco that all such
information and documentation provided pursuant to this paragraph 6
will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statement therein not
misleading. In addition, Metropolitan will promptly advise Welco of
all telephone conversations with the Commission which relate to or may
affect the Offering.
7. INDEMNIFICATION.
(a) Subject to the conditions set forth below, and in
addition to any rights of indemnification and contribution to which
Welco may be entitled pursuant to any agreement among underwriters,
underwriting agreement or otherwise, and to the extent allowed by law,
Metropolitan hereby agrees that it will indemnify and hold Welco and
each person controlling, controlled by or under common control with
Welco within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
the rules and regulations thereunder (individually, an "Indemnified
Person") harmless from and against any and all loss, claim, damage,
liability, cost or expense whatsoever to which such Indemnified Person
may become subject under the Act, the Exchange Act, or other federal
or state statutory law or regulation, at common law or otherwise,
arising out of, based upon, or in any way related or attributed to (i)
this Agreement, (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or
Prospectus or any other filing, report, document, release or
communication, whether oral or written, referred to in paragraph 5
hereof or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (iii) any application or other document
executed by Metropolitan or based upon written information furnished
by Metropolitan filed in any jurisdiction in order to qualify the
Debentures under the securities or Blue Sky laws thereof, or the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, or (iv) the breach of any representation or warranty made
by Metropolitan in this Agreement. Metropolitan further agrees that
upon demand by an Indemnified Person at any time or from time to time,
it will promptly reimburse such Indemnified Person for, or pay, any
loss, claim, damage, liability, cost or expense as to which
Metropolitan has indemnified such person pursuant hereto.
Notwithstanding the foregoing provisions of this paragraph 7, any such
payment or reimbursement by Metropolitan of fees, expenses or
disbursement incurred by an Indemnified Person in any proceeding in
which a final judgment by a court of competent jurisdiction (after all
appeals or the expiration of time to appeal) is entered against such
Indemnified Person as a direct result of such person's negligence, bad
faith or willful misfeasance will be promptly repaid to Metropolitan.
In addition, anything in this paragraph 7 to the contrary
notwithstanding, Metropolitan shall not be liable for any settlement
of any action or proceeding effected without its written consent.
(b) Promptly after receipt by an Indemnified Person under
paragraph (a) above of notice of the commencement of any action, such
Indemnified Person will, if a claim in respect thereof is to be made
against Metropolitan under paragraph (a), notify Metropolitan in
writing of the commencement thereof; but the omission to so notify
Metropolitan will not relieve Metropolitan from any liability which it
may have to any Indemnified Person otherwise than under this paragraph
7 if such omission shall not have materially prejudiced Metropolitan's
ability to investigate or to defend against such claim. In case any
such action is brought against any Indemnified Person, and such
Indemnified Person notifies Metropolitan of the commencement thereof,
Metropolitan will be entitled to participate therein and, to the
extent that it may elect by written notice delivered to the
Indemnified Person promptly after receiving the aforesaid notice from
such Indemnified Person, to assume the defense thereof with counsel
reasonably satisfactory to such Indemnified Person; provided, however,
that if the defendants in any such action include both the Indemnified
Person and Metropolitan or any corporation controlling, controlled by
or under common control with Metropolitan, or any director, officer,
employee, representative or agent of any thereof, or any other
"Qualified Independent Underwriter" retained by Metropolitan in
connection with the Offering and the Indemnified Person shall have
reasonably concluded that there may be legal defenses available to it
which are different from or additional to those available to such
other defendant, the Indemnified Person shall have the right to select
separate counsel to represent it. Upon receipt of notice from
Metropolitan to such Indemnified Person of its election so to assume
the defense of such action and approval by the Indemnified Person of
counsel, Metropolitan will not be liable to such Indemnified Person
under this paragraph 7 for any fees of counsel subsequently incurred
by such Indemnified Person in connection with the defense thereof
(other than the reasonable costs of investigation subsequently
incurred by such Indemnified Person) unless (i) the Indemnified Person
shall have employed separate counsel in accordance with the provision
of the next preceding sentence (it being understood, however, that
Metropolitan shall not be liable for the expenses of more than one
separate counsel in any one jurisdiction representing the Indemnified
Person, which counsel shall be approved by Welco), (ii) Metropolitan,
within a reasonable time after notice of commencement of the action,
shall not have employed counsel reasonably satisfactory to the
Indemnified Person to represent the Indemnified Person, or (iii)
Metropolitan shall have authorized in writing the employment of
counsel for the Indemnified Person at the expense of Metropolitan, and
except that, if clause (i) or (iii) is applicable, such liability
shall be only in respect of the counsel referred to in such clause (i)
or (iii).
(c) In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in
paragraph 7 is due in accordance with its terms but is for any reason
held by a court to be unavailable from Metropolitan to Welco on
grounds of policy or otherwise, Metropolitan and Welco shall
contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection
with investigating or defending same) to which Metropolitan and Welco
may be subject in such proportion so that Welco is responsible for
that portion represented by the percentage that its fee under this
Agreement bears to the public offering price appearing on the cover
page of the Prospectus and Metropolitan is responsible for the
balance, except as Metropolitan may otherwise agree to reallocate a
portion of such liability with respect to such balance with any other
person, including, without limitation, any other "Qualified
Independent Underwriter"; provided, however, that (i) in no case shall
Welco be responsible for any amount in excess of the fee set forth in
paragraph 4 above and (ii) no person guilty of fraudulent
misrepresentation within the meaning of Section 11(f) of the Act shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this paragraph (c), any
person controlling, controlled by or under common control with Welco,
or any partner, director, officer, employee, representative or any
agent of any thereof, shall have the same rights to contribution as
Welco and each person who controls Metropolitan within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each officer
of Metropolitan who shall have signed the Registration Statement and
each director of Metropolitan shall have the same rights to
contribution as Metropolitan, subject in each case to clause (i) of
this paragraph (c). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for
contribution may be made against the other party under this paragraph
(c), notify such party from whom contribution may be sought, but the
omission to so notify such party shall not relieve the party from whom
contribution may be sought from any other obligation it or they may
have hereunder or otherwise than under this paragraph (c). The
indemnity and contribution agreements contained in this paragraph 7
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Indemnified Person or
termination of this Agreement.
8. AUTHORIZATION BY METROPOLITAN. Metropolitan represents and
warrants to Welco that this Agreement has been duly authorized,
executed and delivered by Metropolitan and constitutes a valid and
binding obligation of Metropolitan.
9. AUTHORIZATION BY MIS. MIS represents and warrants to Welco
that this Agreement has been duly authorized, executed and delivered
by MIS and constitutes a valid and binding obligation of MIS.
10. AUTHORIZATION BY WELCO. Welco represents and warrants to
Metropolitan that this Agreement has been duly authorized, executed
and delivered by Welco and constitutes a valid and binding obligation
of Welco.
11. NOTICE. Whenever notice is required to be given pursuant to
this Agreement, such notice shall be in writing and shall be mailed by
first class mail, postage prepaid, addressed (a) if to Welco, at P.O.
Box 688, One Belmont Avenue, Suite 104, 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.
By:_________________________________________________
Kenneth S. Shapiro, President
EXHIBIT A
The opinion of Welco is conditioned upon Metropolitan's undertaking
to maintain the rates on its Debentures at least equal to an "assumed
floor." Based upon the pricing formula described below:
1. The interest rate to be paid on the Debentures shall be fixed
by Metropolitan from time to time. However, the rate shall
not be lower than the computation made per the worksheet on
Exhibit B, which is attached and incorporated by reference
herein.
2. The "assumed floor" for 6 to 11 month Debentures shall be at
least 1.25% above the lesser of the interest rate on the 6
month U.S. Treasury Bills, on a discount basis, based upon
the auction average (which is published widely in newspapers
throughout the country, normally on the day following the
auction) and composite average of the offering rates on 6
month certificates of deposit currently being offered by
banks and savings institutions in the northwestern section
of the United States. For purposes of this composite
average of certificate of deposit rates, the rates being
offered by the following institutions shall be considered
initially:
a. First Interstate
b. Great American Bank
c. U.S. Bank of Washington
d. Security Pacific
e. Seafirst
f. Washington Mutual
g. Washington Trust
Welco and Metropolitan agree to review on an ongoing basis the
group which comprises the composite average, and may
substitute another institution in the composite group from
time-to-time by mutual agreement, as the case may be.
3. The "assumed floor" for 60 to 71 month Debenture shall be
computed in like manner as that described in paragraph "2"
above, except that the latest auction average on 5 year U.S.
Treasury Notes shall be considered in place of the 6 month
U.S. Treasury Bills, and 5 year Certificates of Deposit
currently offered in the composite group shall be considered
in lieu of the 6 month rate.
4. Rates on 12 to 23 month, 24 to 35 month, 36 to 47 month and 48
to 59 month Debentures shall be at lease equal to the
interpolated differences between the computation of the
"assumed floor" of 6 to 11 month Debentures and 60 to 71
month Debentures, based upon the computation set forth in
Exhibit B.
5. Rates on 72 to 125 month Debentures shall be no lower than the
"assumed floor" for 60 to 71 month Debentures.
6. Rates on Installment Debentures, Series I, shall be no lower
than .25% below the "assumed floor" for 60 to 71 month
Debentures.
7. The computation of the "assumed floor" shall be made monthly,
as of the first Tuesday of each month, or at such other
times during any month that Metropolitan causes the offering
rates to change from those in effect on the first Tuesday of
each month ("the computation date"). Metropolitan agrees to
furnish Welco with a computation of the "assumed floor" by
completing the worksheet on Exhibit B. Should the offering
rates at the time on Metropolitan's Debentures be less than
the "assumed floor" as computed, Metropolitan agrees to
raise the rates on its Debentures to at least the "assumed
floor" within 10 calendar days of the computation date.
Should Metropolitan fail to raise its offering rates within
the 10 day period referred to above, Welco reserves the
right, in its uncontrolled discretion, to withdraw its
opinion regarding the offering rates on the Debentures.
EXHIBIT B
METROPOLITAN MORTGAGE
PRICING FORMULA
<TABLE>
<CAPTION>
C.D. RATE GOVERNMENT RATE
Average rate between a composite of 8 selected Most current of 8 selected auction rate
Banks and Savings and Loans as of the 1st Tuesday available on the 1st Tuesday of each month.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
CERTIFICATE OF DEPOSIT GOVERNMENT RATE ENTER LESSER SUMMIT'S
(CD) CALCULATION CALCULATION OF COLUMN A OR B ASSUMED FLOOR CURRENT RATE
<S> <C> <S> <C> <C> <C> <C> <C>
5 yr CD rate = ________ 5 yr Govt Rate = ________
6 mo CD Rate = ________ 6 mo Govt Rate = ________
DIFFERENCE = ________ DIFFERENCE = ________
x .20 x .20
________ ________
Differential = ________ Differential = ________
(enter in (a) (enter in (a)
below) below)
6 mo (actual) 6 mo (actual)
rate = ________ rate = ________ ____________________ + 1% ____________________
___________
(a) + (a) + 6-11
mos.
________ ________
1 year rate = ________ 1 year rate = ________ ____________________ + 1% ____________________
___________
(a) + (a) + 12-23
mos.
________ ________
2 year rate = ________ 2 year rate = ________ ____________________ + 1% ____________________
___________
(a) + (a) + 24-35
mos.
________ ________
3 year rate = ________ 3 year rate = ________ ____________________ + 1% ____________________
___________
(a) + (a) + 36-47
mos.
________ ________
4 year rate = ________ 4 year rate = ________ ____________________ + 1% ____________________
___________
(a) + (a) + 48-59
mos.
________ ________
5 - 10 year 5 year
(actual) rate ________ (actual) rate ________ ____________________ + 1% ____________________
___________
60-120
mos.
- .25
____________________
<CAPTION>
<S> <C> <C>
INSTALLMENT PAYMENTS (Floor equal to Five Yr. rate MINUS .25).........................
____________________ ___________*
Install.
* The rate for installment payment bonds is .5% less than those specified for comparable terms.
</TABLE>
FORM OF
AGREEMENT TO ACT AS "QUALIFIED INDEPENDENT UNDERWRITER"
This agreement made as of the day of
__________________, by and between Metropolitan Mortgage & Securities
Co., Inc., a Washington corporation ("Metropolitan"), Metropolitan
Investment Securities, Inc., a Washington corporation ("MIS"), and
Welco Securities, Inc., a Nevada Corporation ("Welco").
WITNESSETH:
WHEREAS, Metropolitan intends to offer 250,000 shares of
Preferred Stock, designated as "Variable Rate Cumulative Preferred
Stock, Series E-6," (hereinafter referred to as the "Preferred
Stock"), which will be offered in reliance on a post-effective
amendment to a registration statement filed on Form S-2, bearing SEC
file number 33- ;and,
WHEREAS, MIS, a broker/dealer and a member of the National
Association of Securities Dealers ("NASD"), will be engaged as the
sole selling agent for Metropolitan; and,
WHEREAS, pursuant to 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
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
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
proposed to be made of such properties as described in the
Registration Statement and Prospectus; and the Company and its
subsidiaries have no material leased properties except as disclosed in
the Prospectus.
(c) Metropolitan is duly organized under the laws of the State
of Washington and, as of the effective date of the Registration
Statement and at Closing Metropolitan will be validly existing and in
good standing under the laws of the State of Washington with full
corporate power and authority to own its properties and conduct its
business to the extent described in the Registration Statement and
Prospectus; Metropolitan and its subsidiaries are duly qualified to do
business as foreign corporations and in good standing in all
jurisdictions in which the nature of the business transacted by them
or their ownership of properties or assets makes their qualification
necessary; the authorized and outstanding capitalization of
Metropolitan is as set forth in the Prospectus and the description in
the Prospectus of the capital stock of Metropolitan conforms with and
accurately describes the rights set forth in the instruments defining
the same;
(d) Metropolitan and its subsidiaries are not in violation of
their respective certificates of incorporation or Bylaws or in default
in the performance or observance of any material obligation,
agreement, covenant or condition contained in any bond, debenture,
note, or other evidence of indebtedness, contract or lease or in any
indenture or loan agreement to which any of them is a party or by
which any of them is bound.
(e) The execution, delivery and performance of this Agreement
has been duly authorized by all necessary corporate action on the part
of Metropolitan and MIS and performance of the foregoing agreement and
the consummation of the transactions contemplated thereby, will not
conflict with or result in a breach of any of the terms or constitute
a violation of the respective certificates of incorporation or Bylaws
of Metropolitan or MIS, or any deed of trust, lease, sublease,
indenture, mortgage, or other agreement or instrument to which
Metropolitan or MIS is a party or by which any of them or their
property is bound, or any applicable law, rule, regulation, judgment,
order or decree of any government, governmental instrumentality or
court, domestic or foreign, having jurisdiction over Metropolitan or
MIS or their properties or obligations; and no consent, approval,
authorization or order of any court or governmental agency or body is
required for the consummation of the transactions contemplated herein
and in the other agreements previously referred to in this paragraph
except as may be required under the Act or under any state securities
or Blue Sky Laws.
(f) Any certificate signed by an officer of Metropolitan and
delivered to Welco pursuant to this Agreement shall be deemed a
representation and warranty by Metropolitan to Welco, to have the same
force and effect as stated herein, as to the matters covered thereby.
(g) If any event relating to or affecting Metropolitan or any of
its subsidiaries shall occur as a result of which it is necessary, in
Welco's opinion, to amend or supplement the Prospectus in order to
make the Prospectus not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser, Metropolitan
undertakes to inform Welco of such events within a reasonable time
thereafter, and will forthwith prepare and furnish to Welco, without
expense to them, a reasonable number of copies of an amendment or
amendments or a supplement or supplements to the Prospectus (in form
and substance satisfactory to Welco) which will amend or supplement
the Prospectus so that as amended or supplemented it will not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein in light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading.
(h) Metropolitan hereby warrants and represents that it will
offer the preferred stock in accordance with the pricing formula set
forth in Schedule "A" which is incorporated by reference herein.
(i) All representations, warranties and agreements contained in
this Agreement, or contained in certificates of officers of
Metropolitan submitted pursuant hereto, shall remain operative and in
full force and effect, surviving the date of this Agreement.
6. AVAILABILITY OF INFORMATION. Metropolitan hereby agrees to
provide Welco, at its expense, with all information and documentation
with respect to its business, financial condition and other matters as
Welco may deem relevant based on the standards of reasonableness and
good faith and shall request in connection with Welco's performance
under this Agreement, including, without limitation, copies of all
correspondence with the Commission, certificates of its officers,
opinions of its counsel and comfort letters from its auditors. The
above-mentioned certificates, opinions of counsel and comfort letters
shall be provided to Welco as Welco may request on the effective date
of the Registration Statement and on the Closing Date. Metropolitan
will make reasonably available to Welco, its auditors, counsel, and
officers and directors to discuss with Welco any aspect of
Metropolitan which Welco may deem relevant. In addition,
Metropolitan, at Welco's request, will cause to be delivered to Welco
copies of all certificates, opinions, letters and reports to be
delivered to the underwriter or underwriters, as the case may be,
pursuant to any underwriting agreement executed in connection with the
Offering or otherwise, and shall cause the person issuing such
certificate, opinion, letter or report to authorize Welco to rely
thereon to the same extent as if addressed directly to Welco.
Metropolitan represents and warrants to Welco that all such
information and documentation provided pursuant to this paragraph 6
will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statement therein not
misleading. In addition, Metropolitan will promptly advise Welco of
all telephone conversations with the Commission which relate to or may
affect the Offering.
7. INDEMNIFICATION.
(a) Subject to the conditions set forth below, and in
addition to any rights of indemnification and contribution to which
Welco may be entitled pursuant to any agreement among underwriters,
underwriting agreement or otherwise, and to the extent allowed by law,
Metropolitan hereby agrees that it will indemnify and hold Welco and
each person controlling, controlled by or under common control with
Welco within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
the rules and regulations thereunder (individually, an "Indemnified
Person") harmless from and against any and all loss, claim, damage,
liability, cost or expense whatsoever to which such Indemnified Person
may become subject under the Act, the Exchange Act, or other federal
or state statutory law or regulation, at common law or otherwise,
arising out of, based upon, or in any way related or attributed to (i)
this Agreement, (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or
Prospectus or any other filing, report, document, release or
communication, whether oral or written, referred to in paragraph 5
hereof or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (iii) any application or other document
executed by Metropolitan or based upon written information furnished
by Metropolitan filed in any jurisdiction in order to qualify the
Debentures under the securities or Blue Sky laws thereof, or the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, or (iv) the breach of any representation or warranty made
by Metropolitan in this Agreement. Metropolitan further agrees that
upon demand by an Indemnified Person at any time or from time to time,
it will promptly reimburse such Indemnified Person for, or pay, any
loss, claim, damage, liability, cost or expense as to which
Metropolitan has indemnified such person pursuant hereto.
Notwithstanding the foregoing provisions of this paragraph 7, any such
payment or reimbursement by Metropolitan of fees, expenses or
disbursement incurred by an Indemnified Person in any proceeding in
which a final judgment by a court of competent jurisdiction (after all
appeals or the expiration of time to appeal) is entered against such
Indemnified Person as a direct result of such person's negligence, bad
faith or willful misfeasance will be promptly repaid to Metropolitan.
In addition, anything in this paragraph 7 to the contrary
notwithstanding, Metropolitan shall not be liable for any settlement
of any action or proceeding effected without its written consent.
(b) Promptly after receipt by an Indemnified Person under
paragraph (a) above of notice of the commencement of any action, such
Indemnified Person will, if a claim in respect thereof is to be made
against Metropolitan under paragraph (a), notify Metropolitan in
writing of the commencement thereof; but the omission to so notify
Metropolitan will not relieve Metropolitan from any liability which it
may have to any Indemnified Person otherwise than under this paragraph
7 if such omission shall not have materially prejudiced Metropolitan's
ability to investigate or to defend against such claim. In case any
such action is brought against any Indemnified Person, and such
Indemnified Person notifies Metropolitan of the commencement thereof,
Metropolitan will be entitled to participate therein and, to the
extent that it may elect by written notice delivered to the
Indemnified Person promptly after receiving the aforesaid notice from
such Indemnified Person, to assume the defense thereof with counsel
reasonably satisfactory to such Indemnified Person; provided, however,
that if the defendants in any such action include both the Indemnified
Person and Metropolitan or any corporation controlling, controlled by
or under common control with Metropolitan, or any director, officer,
employee, representative or agent of any thereof, or any other
"Qualified Independent Underwriter" retained by Metropolitan in
connection with the Offering and the Indemnified Person shall have
reasonably concluded that there may be legal defenses available to it
which are different from or additional to those available to such
other defendant, the Indemnified Person shall have the right to select
separate counsel to represent it. Upon receipt of notice from
Metropolitan to such Indemnified Person of its election so to assume
the defense of such action and approval by the Indemnified Person of
counsel, Metropolitan will not be liable to such Indemnified Person
under this paragraph 7 for any fees of counsel subsequently incurred
by such Indemnified Person in connection with the defense thereof
(other than the reasonable costs of investigation subsequently
incurred by such Indemnified Person) unless (i) the Indemnified Person
shall have employed separate counsel in accordance with the provision
of the next preceding sentence (it being understood, however, that
Metropolitan shall not be liable for the expenses of more than one
separate counsel in any one jurisdiction representing the Indemnified
Person, which counsel shall be approved by Welco), (ii) Metropolitan,
within a reasonable time after notice of commencement of the action,
shall not have employed counsel reasonably satisfactory to the
Indemnified Person to represent the Indemnified Person, or (iii)
Metropolitan shall have authorized in writing the employment of
counsel for the Indemnified Person at the expense of Metropolitan, and
except that, if clause (i) or (iii) is applicable, such liability
shall be only in respect of the counsel referred to in such clause (i)
or (iii).
(c) In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in
paragraph 7 is due in accordance with its terms but is for any reason
held by a court to be unavailable from Metropolitan to Welco on
grounds of policy or otherwise, Metropolitan and Welco shall
contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection
with investigating or defending same) to which Metropolitan and Welco
may be subject in such proportion so that Welco is responsible for
that portion represented by the percentage that its fee under this
Agreement bears to the public offering price appearing on the cover
page of the Prospectus and Metropolitan is responsible for the
balance, except as Metropolitan may otherwise agree to reallocate a
portion of such liability with respect to such balance with any other
person, including, without limitation, any other "Qualified
Independent Underwriter"; provided, however, that (i) in no case shall
Welco be responsible for any amount in excess of the fee set forth in
paragraph 4 above and (ii) no person guilty of fraudulent
misrepresentation within the meaning of Section 11(f) of the Act shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this paragraph (c), any
person controlling, controlled by or under common control with Welco,
or any partner, director, officer, employee, representative or any
agent of any thereof, shall have the same rights to contribution as
Welco and each person who controls Metropolitan within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each officer
of Metropolitan who shall have signed the Registration Statement and
each director of Metropolitan shall have the same rights to
contribution as Metropolitan, subject in each case to clause (i) of
this paragraph (c). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for
contribution may be made against the other party under this paragraph
(c), notify such party from whom contribution may be sought, but the
omission to so notify such party shall not relieve the party from whom
contribution may be sought from any other obligation it or they may
have hereunder or otherwise than under this paragraph (c). The
indemnity and contribution agreements contained in this paragraph 7
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Indemnified Person or
termination of this Agreement.
8. AUTHORIZATION BY METROPOLITAN. Metropolitan represents and
warrants to Welco that this Agreement has been duly authorized,
executed and delivered by Metropolitan and constitutes a valid and
binding obligation of Metropolitan.
9. AUTHORIZATION BY MIS. MIS represents and warrants to Welco
that this Agreement has been duly authorized, executed and delivered
by MIS and constitutes a valid and binding obligation of MIS.
10. AUTHORIZATION BY WELCO. Welco represents and warrants to
Metropolitan that this Agreement has been duly authorized, executed
and delivered by Welco and constitutes a valid and binding obligation
of Welco.
11. NOTICE. Whenever notice is required to be given pursuant to
this Agreement, such notice shall be in writing and shall be mailed by
first class mail, postage prepaid, addressed (a) if to Welco, at 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
By:________________________________________
Kenneth S. Shapiro, President
SCHEDULE A
The opinion of Welco is conditioned upon Metropolitan's
undertaking to maintain the distribution rate of the Preferred
Stock in accordance with the formula set forth below:
Notwithstanding anything to the contrary herein the
Applicable Rate for any monthly distribution period shall not, in
any event, be less than 6% or greater than 14% per annum. The
Board of Directors may, however, by resolution, authorized
distributions in excess of the Applicable Rate. The Applicable
Rate for any monthly distribution period shall be the highest of
the Treasury Bill Rate, the Ten Year Constant Maturity Rate and
the Twenty Year Constant Maturity Rate (each as hereinafter
defined) plus one half of one percentage point for such dividend
period. In the event that the Company determines in good faith
that for any reason one or more of such rates cannot be determined
for any distribution period, then the Applicable Rate for such
period shall be the higher of whichever of such rates can be so
determined.
Exhibit B
VARIABLE RATE, CUMULATIVE
PREFERRED STOCK, SERIES E-2, E-3, E-4, E-5 and E-6
PRICING
For Distributions Payable
On:________________________________________
Distributions Record Date:________________________________________
Effective
Date Date Average Rate
3 Mo. Treasury Bill_____________________________ +.5%
10 Yr Constant Rate_____________________________ +.5%
20 Year _____________________________ +.5%
HIGHEST EFFECTIVE RATE: _______________________________
Add any additional Distribution
authorized by Metropolitan's
Board.
_________________
MONTHLY DISTRIBUTION PER SHARE:
_______________________
As resolved by the Board of Directors, distribution will be deemed
declared on the 1st day of each month, payable on the 20th of each
month to the holders of record on the 5th of each month.
_______________________________________________________
Authorized Signature
FORM OF
OPINION OF SUSAN A. THOMSON
_______________
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. ________).
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
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,
Susan A. Thomson
Assistant Corporate
Counsel
FORM OF
OPINION OF SUSAN A. THOMSON
_______________
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
West 929 Sprague Avenue
Spokane, WA 99204
Gentlemen:
I have acted as counsel to Metropolitan Mortgage & Securities
Co., Inc. (the "Company") in connection with the proceedings for
the authorization and issuance of 250,000 shares of Variable Rate
Cumulative Preferred Stock, Series E-6 ("Preferred Stock, Series
E") including the preparation of a Registration Statement (Form S-
2) under the Securities Act of 1933, as amended, which has been
filed with the Securities and Exchange Commission. (SEC
Registration No. ________).
I have examined the Registration Statement referred to above
and such other documents and records as I have deemed necessary
for the purpose of this opinion.
Based upon the foregoing, and subject to the Board of
Directors' adoption of Articles of Amendment to the Company's
Article of Incorporation which incorporate the Statement of
Rights, Designation and Preferences of variable Rate Cumulative
Preferred Stock, Series E-6, and the filing of same with the
Secretary of State of the State of Washington in accordance with
RCW 23B.06.020, I am of the opinion that:
(1) the Preferred Stock, Series E-6 of the Company which is
being registered, when issued and sold in the manner and
for the consideration contemplated by the Registration
Statement, will be legally issued, fully paid and non-
assessable; and
(2) in the event of dissolution, liquidation or winding up of
the affairs of the Company, whether voluntary or
involuntary, the holders of Preferred Stock, Series E-6
will be entitled to receive, on parity with all other
issued and outstanding preferred stock, before any
payment or distribution is made on the Company's Class A
or Class B Common Stock, the amount of ($100.00 per share
plus an amount equal to all accrued and unpaid dividends
thereon to the date of distribution or payment; and
(3) The liquidation preference of the preferred stock exceeds
the par value thereof. There are no restrictions upon
surplus by reason of such excess and there are no
remedies available to security holders by reason of such
excess before or after payment of any dividend that would
reduce suplus to an amount less than the amount of such
excess and which remedies arise by reason of such excess.
This opinion is furnished pursuant to the requirements of Item
601(b)(5) of Regulation S-K.
I hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to me in the
Prospectus under the caption "Legal Opinion."
Sincerely,
Susan A. Thomson
Assistant Corporate
Counsel
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS
The ratio of adjusted earnings to fixed charges and preferred
stock dividends was computed using the following tabulations to
compute adjusted earnings and the defined fixed charges and
preferred stock dividends.
<TABLE>
<CAPTION> Year Ended
September 30
(Dollars in Thousands)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income (loss) before extra-
ordinary item................ $ 8,038 $6,303 $ 5,478 $8,303 $ 2,927
Add:
Interest..................... 18,788 16,381 19,895 19,442 21,299
Taxes (benefit) on income.... 4,235 3,108 4,422 1,871 213
Adjusted Earnings............... $31,061 $25,792 $28,365 $32,167 $26,097
Preferred stock dividend require-
ments........................ $3,868 $ 4,038 $ 3,423 $ 3,313 $ 3,399
Ratio factor of income after
provision for income taxes to
income before provision for
income taxes................. 66% 67% 66% 66% 64%
Preferred stock dividend factor on
pretax basis................. 5,880 6,006 5,220 5,020 5,311
Fixed Charges
Interest..................... 18,788 16,381 19,895 19,442 21,299
Capitalized Interest......... 2,468 2,730 2,152 3,013 270
Fixed charges and preferred
stock dividends............. $27,136 $25,117 $27,267 $27,475 $26,880
Ratio of Adjusted Earnings to
Fixed Charges and Preferred
Stock Dividends.............. 1.14 1.03 1.04 1.17 .97
</TABLE>
CONSENT OF
INDEPENDENT ACCOUNTANTS
Metropolitan Mortgage & Securities Co., Inc.
Spokane, Washington
We consent to the inclusion in this Registration Statement on
Form S-2 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
sechedules 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
January 10, 1996
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
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Statement of Eligibility and Qualification Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
FIRST TRUST NATIONAL ASSOCIATION
(Exact Name of Trustee as Specified in its Charter)
91-1587893
(I.R.S Employer Identification No.)
601 Union Street, Suite 2120 98101
Seattle, WA
(Address of Principal Executive Offices) (Zip Code)
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
(Exact Name of Obligor as Specified in its Charter)
Washington 91-0609840
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
West 929 Sprague Avenue
Spokane, Washington
(509) 838-3111
(Address and telephone number
of Principal Executive Offices)
99204
(Zip Code)
Installment Debentures, Series I
and
Installment Debentures, Series II
(Title of the Indenture Securities)
1. General Information. Furnish the following information as to
the trustee:
(a) Name and address of each examining or supervising
authority to which it is subject.
Comptroller of the Currency, Washington D.C. 20521
(b) Whether it is authorized to exercise corporate trust
powers.
Yes.
2. Affiliations with Obligor and Underwriters. If the Obligor
or any underwriter for the obligor is an affiliate of the
Trustee, describe each such affiliation.
No such affiliation exists with the Trustee, First Trust
National Association.
3. Voting Securities of the Trustee. Furnish the following
information as to each class of voting securities of the
Trustee:
As of June 30, 1996
Col. A Col. B
Title of Class Amount Outstanding
Common Stock 1000 shares
4. Trusteeships Under Other Indentures. If the Trustee is a
trustee under another indenture under which any other
securities, or certificates of interest or participation in
any other securities, of the obligor are outstanding, furnish
the following information:
(a) Title of securities outstanding under each such other
indenture:
None
(b) A brief statement of the facts relied upon as a basis for
the claim that no conflicting interest within the
meaning of Section 310(b)(1) of the Act arises as a
result of the trusteeship under any such other
indenture, including a statement as to how the
indenture securities will rank as compared with the
securities used under such other indenture.
Not applicable.
5. Interlocking Directories and Similar Relationships with the
Obligor or its Officials. If the trustee or any of the
directors or executive officers of the trustee is a director,
officer, partner, employee, appointee, or representative of
the obligor, identify each such person having any such
connection and state the nature of each such connection.
None.
6. Voting Securities of the Trustee Owned by the Obligor or its
Officials. Furnish the following information as to the
voting securities of the trustee owned beneficially by the
obligor and each director, partner and executive officer of
the obligor.
As of June 30, 1996
Col. A Col. B Col. C Col. D
Name of Title Amount Owned Percentage of
Owner of Class Beneficially Voting Securities
Represented by
Amount Given
in Col. C.
- ------------------------------------------------------------------
- ---
None
7. Voting Securities of the Trustee Owned by Underwriters or
Their Officials. Furnish the following information as to the
voting securities of the Trustee owned beneficially by each
underwriter for the obligor and each director, partner and
executive officer of each such underwriter.
As of June 30, 1996
Col. A Col. B Col. C Col. D
Name of Title Amount Owned Percentage of
Owner of Class Beneficially Voting Securities
Represented by
Amount Given
in Col. C.
- ------------------------------------------------------------------
- ---
None.
8. Securities of the Obligor Owned or Held by the Trustee.
Furnish the following information as to securities of the
obligor owned beneficially or held as collateral security for
obligations in default by the Trustee:
As of June 30, 1996
Col. A Col. B Col. C Col. D
Title of Whether the Amount Owned Percent of
Class
Securities are Beneficially or Represented
by
Voting or Held as Collateral Amount Given
Nonvoting for Obligations in Col. C.
Securities in Default Trustee
- ------------------------------------------------------------------
- ---
None.
9. Securities of Underwriters owned or Held by the Trustee. If
the Trustee owns beneficially or holds as collateral security
for obligations in default any securities or an underwriter
for the obligor, furnish the following information as to each
class of securities of such underwriter any of which as so
owned or held by the Trustee.
As of June 30, 1996
Col. A Col. B Col. C Col. D
Name of Issuer Amount Amount Owned Percent of
and Title of Outstanding Beneficially Class
Represented
Class or Held as by Amount
Given
Collateral for in Col. C
Obligations in
Default by Trustee
- ------------------------------------------------------------------
- ----
None.
10. Ownership or Holdings by the Trustee of Voting Securities of
Certain Affiliates or Security Holders of the Obligor. If
the Trustee owns beneficially or holds as collateral security
for obligations in default voting securities of a person who,
to the knowledge of the trustee (1) owns 10% or more of the
voting securities of the obligor or (2) is an affiliate,
other than a subsidiary, of the obligor, furnish the
following information as to the voting securities of such
person.
As of June 30, 1996
Col. A Col. B Col. C Col. D
Name of Issuer Amount Amount Owned Percent of Class
and Title of Outstanding Beneficially Represented by
Class or Held as Amount Given
Collateral In Col. C
Security for
Obligations in
Default by Trustee
- ------------------------------------------------------------------
- ---
None.
11. Ownership or Holdings by the Trustee of any Securities of a
Person Owning 50% or More of the voting Securities of the
Obligor. If the Trustee owns beneficially or holds as
collateral security for obligations in default any Securities
of a person who, to the knowledge of the trustee, owns 50% or
more of the voting securities of the obligor, furnish the
following information as to each class of securities of such
person any of which are so owned or held by the trustee.
As of June 30, 1996
Col. A Col. B Col. C Col. D
Name of Issuer Amount Amount Owned Percent of Class
and Title of Outstanding Beneficially Represented by
Class Held as Amount Given
Collateral In Col. C
Security for
Obligations in
Default by Trustee
- ------------------------------------------------------------------
- ---
None.
12. Indebtedness of the Obligor to the Trustee. Except as noted
in the instructions, if the obligor is indebted to the
Trustee, furnish the following information:
As of June 30, 1996
Col. A Col. B Col. C
Nature of Amount Outstanding Date Due
Indebtedness
- ------------------------------------------------------------------
- ----
None.
13. Defaults by the Obligor.
(a) State whether there is or has been a default with respect
to the securities under this indenture. Explain the
nature of any such default.
Not applicable.
(b) If the trustee is a trustee under another indenture under
which any other securities, or certificates of interest
or participation in any other securities, of the
obligor are outstanding, or is trustee for more than
one outstanding series of securities under the
indenture, state whether there has been a default under
any such indenture or series, identify the indenture or
series affected, and explain the nature of any such
default.
Not applicable
14. Affiliations with the Underwriters. If any underwriter is an
affiliate of the trustee, describe each such affiliation.
None.
15. Foreign Trustee. Identify the order or rule pursuant to
which the foreign trustee is authorized to act as sole
trustee under indentures qualified or to be qualified under
the Act.
Not applicable.
16. List of Exhibits. List below all exhibits filed as part of
this statement of eligibility and qualification.
1. Articles of association of First Trust National
Association. (Attached)
2. Certificate of Authority of First Trust National
Association to Commence Business.
3. Authorization of the Trustee to exercise corporate trust
powers.
4. Bylaws of First Trust National Association. (Attached)
5. Not Applicable.
6. Consents of First Trust National Association required by
Section 321(b) of the Act. (Attached)
7. Latest Report of Condition of First Trust National
Association. (Attached)
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939,
the trustee, First Trust National Association, a national banking
association organized under the laws of the United States, has
duly caused this statement of eligibility and qualification to be
signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Seattle, and State of Washington,
on the 16th day of December, 1996.
FIRST TRUST NATIONAL ASSOCIATION
/S/ M. Bator
By____________________________________
Exhibit 6 (to Form T-1)
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust
Indenture Act of 1939 in connection with the proposed issuance by
Metropolitan Mortgage & Securities Co., Inc. of Installment
Debentures, Series I and Investment Debentures, Series II, we
hereby consent that reports of examinations by federal, state,
territorial and district authorities may be furnished by such
authorities to the Securities and Exchange Commission upon its
request therefor.
FIRST TRUST NATIONAL ASSOCIATION
/S/ M. Bator
By__________________________________
Dated: December 16, 1996
<TABLE> <S> <C>
<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>
