SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1996.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 2-63708.
METROPOLITAN MORTGAGE & SECURITIES CO., INC
(Exact name of registrant as specified in its charter)
WASHINGTON 91-0609840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WEST 929 SPRAGUE AVENUE, SPOKANE, WASHINGTON 99204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (509)838-3111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock Series:
C 438,343 shares E-3 107,874 shares
D 673,915 shares E-4 62,978 shares
E-1 728,698 shares E-5 13,744 shares
E-2 45,579 shares E-6 80,689 shares
______________________________________________________________________
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this Chapter) is not contained
herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /x/
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of September 30, 1996.
Class A Common Stock: 130
Documents incorporated by reference: None
PART I
ITEM 1. BUSINESS:
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".
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%
<TABLE>
<CAPTION>
The following tables present certain statistical information about the
Consolidated Group's Receivable investment activity during the three fiscal years
ended September 30, 1996.
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>
(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.
</TABLE>
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.
<TABLE>
<CAPTION>
The following table outlines the Consolidated Group's changes in the allowance
for losses on real estate assets:
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.
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
- ----------------- ------------ ------------ ------------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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>
Available Held To Total
For Sale Maturity
Portfolio Portfolio
---------- ---------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
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>
Debenture Other Preferred
Fiscal Year Ending Bonds Debt Stock
September 30, Payable Dividends Total
- ------------------ ---------- ----------- ----------- ---------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
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 38,004 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. 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>
<TABLE>
<CAPTION>
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.
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.
PART I (cont.)
ITEM 2. PROPERTIES.
See "Business - General; Business - Receivable Investments;
Business - Real Estate Development" under Item 1 and Notes 2 and
3, Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
N/A
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
(a) There is no market for the registrant's common stock.
(b) There were 8 Class A Common stockholders
(c) See "Item 6. Selected Financial Data."
ITEM 6. SELECTED FINANCIAL DATA.
<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
(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.
</TABLE>
ITEM 7. 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>
<CAPTION>
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.
ITEM 8. Financial Statements and Supplementary Data
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
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.
Spokane, Washington
December 6, 1996
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
============== ==============
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.
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.
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>
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.
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>
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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
============
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>
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.
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
=========== ===========
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>
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.
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.
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
============ ============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INVESTMENTS, CONTINUED:
Amortized Estimated
Cost Market Value
------------ ------------
Held-to-maturity debt securities:
Due in one year or less $ 7,654,667 $ 7,612,538
Due after one year through
five years 18,557,157 18,137,785
Due after five years through
ten years 50,591,766 46,658,714
Due after ten years 248,149 255,994
------------ ------------
77,051,739 72,665,031
Mortgage- and asset-backed
bonds 47,696,751 46,535,053
------------ ------------
$ 124,748,490 $ 119,200,084
============ ============
The Company intends to maintain an available-for-sale portfolio
which may be shifted between investments of differing types and
maturities to attempt to maximize market returns without assuming
unacceptable levels of credit risk. Future purchases assigned to
the held-to-maturity portfolio will be to replace maturing
investments, or increase the overall size of the portfolio (while
maintaining its overall composition).
9. DEBT PAYABLE, CONTINUED:
At September 30, 1996 and 1995, debt payable consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Reverse repurchase agreements with various
securities brokers, interest at 5.0% to
5.8% per annum; due on October 1, 1996;
collateralized by $17,700,000 in U.S.
government-backed bonds $ 16,834,750
Reverse repurchase agreements with Paine-
Webber, interest at 5.38% per annum; due
on October 4, 1996; collateralized by
$20,000,000 in U.S. Treasury bonds 18,650,000
Reverse repurchase agreements with various
securities brokers, interest at 6.1% to
6.75% per annum; due on October 2, 1995;
collateralized by $25,000,000 in U.S.
Treasury bonds $ 24,131,625
</TABLE>
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>
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.
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>
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).
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).
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>
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>
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.
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.
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
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.
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>
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>
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.
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>
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>
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>
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>
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>
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Real estate held for sale 27,915,041
Allowance for losses on
real estate assets 1,107,129
Land, building and equipment,
net 15,518
Other assets 1,911,314
Accounts receivable 2,963,966
Debt payable 13,948
Accounts payable and accrued
expenses 2,759,214
Investments in and advances to
subsidiaries 58,978,502
</TABLE>
Accounting policies followed in the preparation of the preceding
condensed financial statements of Metropolitan (parent company
only) are the same as those policies described in the
consolidated financial statements except that the equity method
was used in accounting for the investments in and net income
from subsidiaries.
At September 30, 1996 and 1995, Metropolitan's debt payable
consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Reverse repurchase agreement with a securities
broker, interest at 5.8% per annum, due
October 1, 1996; collateralized by
$2,700,000 in U.S. government-backed bonds $ 2,678,500
Reverse repurchase agreement with a securities
broker, interest at 6.75% per annum, due
October 2, 1995; collateralized by
$5,000,000 in U.S. Treasury bonds $ 4,606,625
Real estate contracts and mortgage notes
payable, interest rates ranging from 3% to
10.9%, due in installments through 2016;
collateralized by senior liens on certain
of the Company's real estate contracts,
mortgage notes and real estate held for
sale 10,456,496 1,016,616
Accrued interest payable 20,338 22,169
----------- -----------
$ 13,155,334 $ 5,645,410
=========== ===========
</TABLE>
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.
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>
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
N/A.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
See "Management" under Item 1.
ITEM 11. EXECUTIVE COMPENSATION.
See "Executive Compensation" under Item 1.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
See "Ownership of Management" and "Principal
Shareholders" under Item 1.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See "Certain Transactions" under Item 1.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) 1. FINANCIAL STATEMENTS
Included in Part II, Item 8 of this report:
Report of Independent Accountants
Consolidated Balance Sheets at September 30, 1996, and 1995.
Consolidated Statements of Income for the Years Ended
September 30, 1996, 1995, and l994
Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1995, and l994.
Notes to Consolidated Financial Statements
(b) 2. FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report:
Report of Independent Accountants on Financial Statement
Schedules.
Schedules Required by Article 7.
Schedule I -- Summary of Investments other than
Investments in Related Parties
Schedule III -- Supplementary Insurance Information
Schedule IV -- Supplementary Reinsurance Information
Schedules Required by Article 5.
Schedule II -- Valuation and Qualifying Accounts and
Reserves
Schedule IV -- Loans on Real Estate
Other schedules are omitted because of the absence of
conditions under which they are required or because the
required information is given in the financial statements
or notes thereto.
(c) 3. Exhibits
3(a). Restated Articles of Incorporation, as amended, dated
November 30, 1987. (Exhibit 3(a) to Metropolitan's
Annual Report on Form 10-K for fiscal 1987).
3(b). Amendment to Articles of Incorporation dated November
5, 1991. (Exhibit 3(c) to Registration No.
33-40220.)
3(c). Amendment to Articles of Incorporation dated
September 20, 1992. (Exhibit 3(c) to Metropolitan's
Annual Report on Form 10-K for fiscal 1992.)
3(d). Bylaws as amended to October 31, 1988. (Exhibit 3(b)
to Metropolitan's Annual Report on Form 10-K for
fiscal 1988.)
3.(e).Restated Bylaws as amended to December 26, 1995.
(Exhibit 3(e) to Form 10-K for Period Ending
September 30, 1995.
4(a). Indenture, dated as of July 6, 1979, between
Metropolitan and Seattle-First National Bank, Trustee
(Exhibit 3 to Metropolitan's Annual Report on Form
10-K for fiscal 1979).
4(b). First Supplemental Indenture, dated as of October 3,
1980, between Metropolitan and Seattle-First
NationalBank, Trustee (Exhibit 4 to Metropolitan's
Annual Report on Form 10-K for fiscal 1980).
4(c). Second Supplemental Indenture, dated as of November
12, 1984, between Metropolitan and Seattle-First
National Bank, Trustee (Exhibit 4(d) to Registration
No. 2-95146).
4(d). Amended Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
C (Exhibit 4(g) to Registration No. 33-2699).
4(e). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series D (Exhibit 4(a)
to Registration No. 33-25702).
4(f). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series E-1, (Exhibit
4(a) to Registration No. 33-19238).
4(g). Amended Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
E-2 (Exhibit 4(a) to Registration No. 33-25702).
4(h). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series E-3 (Exhibit
4(a) to Registration No. 33-32586).
4(i). Statement of Rights, Designations and Preference of
Variable Rate Cumulative Preferred Stock, Series E-4
(Exhibit 4(h) to Registration No. 33-40221).
4(j). Form of Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
E-5. (Exhibit 4(i) to Registration No. 33-57396.)
4(k). Form of Statement of Rights, Designations and
Preferences of variable rate cumulative Preferred
Stock, Series E-6.
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 Re computation of ratios.
*21. Subsidiaries of Registrant
*27. Financial Data Schedule
(b) Reports on Form 8-K.
No Form 8-K filings were made during the last quarter of the
period covered by this report. A Form 8-K was filed December
10, 1996, subsequent to the period covered by this report
which disclosed the sale through a securitization of
approximately 115.47 million in first lien residential
mortgages, as more fully described in such Form 8-K.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
Our report on the consolidated financial statements of Metropolitan
Mortgage & Securities Co., Inc. and subsidiaries is included in Item 8
herein. In connection with our audits of such financial statements,
we have also audited the related financial statement schedules listed
in Item 14 of this Form 10-K.
In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as
a whole, present fairly, in all material respects, the information
required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Spokane, Washington
December 6, 1996
Schedule I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
September 30, 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D
Amount At
Which Shown
Amortized Market On Balance
Cost Value Sheet
TYPE OF INVESTMENTS
<S> <C> <C> <C>
FIXED MATURITIES
Investments:
U.S. Government and Government
Agencies and Authorities $ 71,938,231 $ 67,466,222 $ 71,460,561
Corporate Bonds 32,287,052 31,649,223 31,851,940
Utility Bonds 7,992,386 7,766,837 7,956,489
Mortgage and Asset Backed Bonds
and pass through certificates 52,030,232 50,868,534 52,030,232
------------ ------------ ------------
TOTAL FIXED MATURITIES $164,247,901 $157,750,816 $163,299,222
============ ============ ============
Equity Securities $ 1,592 $ 3,766 $ 3,766
============ ============ ============
Real Estate Contracts and
Mortgage Notes
Receivables $650,933,330 $650,933,330
Real Estate Held for Sale and
Development (Including
$36,158,099 Acquired in
Satisfaction of Debt) 84,333,288 84,333,288
------------ ------------
Total Real Estate Assets 735,266,618 735,266,618
Less Allowances for Losses on
Real Estate Assets (10,192,584) (10,192,584)
------------ ------------
NET REAL ESTATE ASSETS $725,074,034 $725,074,034
============ ============
OTHER RECEIVABLE INVESTMENTS $107,494,150 $107,494,150
=========== ===========
OTHER ASSETS - POLICY LOANS $ 15,379,159 $ 15,379,159
=========== ===========
TOTAL INVESTMENTS $1,012,196,836 $1,011,250,331
============ ============
</TABLE>
Schedule III
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Future
Policy
Benefits Other
Deferred Losses, Policy
Policy Claims Claims and
Acquisition and Loss Unearned Benefits
Cost Expenses Premiums Payable
<S> <C> <C> <C> <C>
September 30, 1996
Life Insurance
and Annuities $71,932,884 $837,366,108 $ --- $ ---
=========== ============ ========= ========
September 30, 1995
Life Insurance
and Annuities $71,131,059 $781,716,153 $ --- $ ---
=========== ============ ========= ========
September 30, 1994
Life Insurance
and Annuities $71,074,642 $744,644,625 $ --- $ ---
=========== ============ ========= ========
</TABLE>
Schedule III
METROPOLITAN MORTGAGE & SECURITIES CO., INC AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Benefits Amortization
Claims of Deferred
Net Losses and Policy Other
Premium Investment Settlement Acquisition Operating
Revenue Income Expenses Costs Expenses
========= ========== ========== =========== =========
<S> <C> <C> <C> <C> <C>
September 30, 1996
Life Insurance
and Annuities $3,000,000 $65,560,704 $48,301,010 $ 9,140,559 $4,352,018
========== =========== =========== =========== ==========
September 30, 1995
Life Insurance
and Annuities $3,000,000 $64,970,470 $45,483,802 $10,300,547 $3,164,390
========== =========== =========== ========== ==========
September 30, 1994
Life Insurance
and Annuities $2,958,000 $65,944,437 $41,918,907 $7,015,570 $2,866,794
========== =========== =========== ========== ==========
</TABLE>
Schedule IV
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
SUPPLEMENTARY REINSURANCE INFORMATION
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other From Other Net Assumed
Amount Companies Companies Amount to Net
Year Ended
<S> <C> <C> <C> <C> <C>
September 30, 1996
Life Insurance
in Force....... $354,371,000 $58,679,000 $ -- $295,692,000 --
============ ============ ======= ============ ======
Premiums
Life Insurance.. $ 3,354,830 $ 354,830 $ -- $ 3,000,000 --
============ ============ ======= ============ ======
September 30, 1995
Life Insurance
in Force $373,573,000 $62,906,000 $ --- $310,667,000 ---
============ =========== ======= ============ =====
Premiums
Life Insurance $ 3,364,553 $ 364,553 $ --- $ 3,000,000 ---
============ =========== ======= ============ =====
September 30, 1994
Life Insurance
in Force $395,837,000 $69,311,000 $ --- $326,526,000 ---
============ =========== ======= ============ =====
Premiums
Life Insurance $ 3,345,503 $ 387,503 $ --- $ 2,958,000 ---
============ =========== ======= ============ =====
</TABLE>
Schedule II
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additions
(Reductions) Deductions
Balance at charged to and
beginning costs and accounts Balance at
Description of year expenses written off end of year
<S> <C> <C> <C> <C>
Allowance for probable
losses on
real estate contracts
and mortgage notes
deducted from real estate
assets in balance sheet
1996 $6,276,183 $3,295,694 $1,626,316 $7,945,561
1995 7,199,984 (190,470) 733,331 6,276,183
1994 5,738,188 1,040,913 (420,883) 7,199,984
Allowance for probable
losses on
real estate held
for sale deducted
from real estate
assets in balance
sheet
1996 $1,839,882 $3,064,378 $2,657,237 $2,247,023
1995 1,908,399 4,365,114 4,433,631 1,839,882
1994 4,860,303 4,492,280 7,444,184 1,908,399
Allowance for losses
on accounts and
notes receivable
deducted from
other assets in
balance sheet
1996 $ 77,039 $ 70,500 $ (33,415) $ 180,954
1995 193,497 (35,657) 80,801 77,039
1994 172,843 204,650 183,996 193,497
</TABLE>
Schedule IV
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1996
Real estate contracts and mortgage notes receivable include mortgages
collateralized by property located throughout the United States. At
September 30, 1996, the Consolidated Group held first position liens
associated with contracts and mortgage notes receivable with a face value
of approximately $675 million (99%) and second or lower position liens of
approximately $6 million (1%). Approximately 23% of the face value of the
Company's real estate contracts and mortgage notes receivable are
collateralized by property located in the Pacific Northwest (Washington,
Alaska, Idaho, Montana and Oregon), approximately 20% by property located
in the Pacific Southwest (California, Arizona and Nevada), approximately
10% in the Southeast (Florida, Georgia, North Carolina and South Carolina)
, approximately 10% in Atlantic Northeast (New York, Pennsylvania, New
Jersey, Connecticut and Maryland) and approximately 16% by property
located in the Southwest (Texas and New Mexico). The face value of the
real estate contracts and mortgage notes receivable range principally from
$15,000 to $300,000 with 52 receivables, aggregating approximately $29.4
million in excess of this range. No individual contract or note is in
excess of 0.4% of the total carrying value of real estate contracts and
mortgage notes receivables, and less than 3% of the contracts are subject
to variable interest rates. Contractual interest rates principally range
from 6% to 13% per annum with approximately 91% of the face value of these
receivables within this range. The weighted average contractual interest
rate on these receivables at September 30, 1996 is approximately 9.4%.
Maturity dates range from 1996 to 2026.
<TABLE>
<CAPTION>
Number Carrying Delinquent
of Interest Amount of Principal
Description Receivables Rates Receivables Amount
RESIDENTIAL Principally
<S> <C> <C> <C> <C>
First Mortgage >$100,000 738 6%-13% $108,873,697 $ 5,687,601
First Mortgage > $50,000 2,500 6%-13% 161,285,463 7,443,607
First Mortgage < $50,000 13,568 6%-13% 261,018,755 9,129,035
Second or Lower>$100,000 1 7.5% 243,213 --
Second or Lower> $50,000 6 9%-10% 384,654 --
Second or Lower< $50,000 358 6%-13% 3,487,974 191,504
COMMERCIAL
First Mortgage >$100,000 248 6%-13% 52,072,095 1,248,896
First Mortgage > $50,000 252 6%-13% 18,218,639 500,571
First Mortgage < $50,000 447 6%-13% 11,837,475 107,111
Second or Lower>$100,000 4 9%-10.5% 1,564,708 --
Second or Lower> $50,000 3 8%-9.5% 204,917 --
Second or Lower< $50,000 9 8%-11% 192,717 --
FARM, LAND AND OTHER
First Mortgage >$100,000 67 8%-12% 14,551,734 1,101,876
First Mortgage > $50,000 151 6%-13% 9,697,972 220,731
First Mortgage < $50,000 2178 6%-13% 36,929,717 841,020
Second or Lower>$100,000 1 14% 100,000 --
Second or Lower> $50,000 2 9%-10% 164,743 --
Second or Lower< $50,000 40 9%-12% 349,674 28,048
Unrealized discounts, net
of unamortized acquisition
costs, on receivables
purchased at a discount (38,607,376)
Accrued Interest Receivable 8,362,559
------------ -----------
CARRYING VALUE $650,933,330 $26,500,000
============= ===========
</TABLE>
<TABLE>
<CAPTION>
The contractual maturities of the aggregate amounts of Receivables (face amount) are as follows:
Residential Commercial Farm, Land, other Total
Principal Principal Principal Principal
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
October 1996 - September 1999 $ 43,589,264 $10,647,400 $10,083,453 $ 64,320,117
October 1999 - September 2001 50,673,223 10,160,940 8,005,953 68,840,116
October 2001 - September 2003 53,408,352 8,270,489 5,145,528 66,824,369
October 2003 - September 2006 62,945,018 15,076,814 10,890,593 88,912,425
October 2006 - September 2011 100,196,799 13,896,939 13,898,207 127,991,945
October 2011 - September 2016 72,017,732 7,719,548 6,273,944 86,011,224
October 2016 - Thereafter 152,463,368 18,318,421 7,496,162 178,277,951
----------- ----------- ---------- -----------
$535,293,756 $84,090,551 $61,793,840 $681,178,147
=========== =========== ========== ===========
</TABLE>
Schedule IV
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1996
The principal amounts of Receivables subject to delinquent principal or
interest is defined as being in arrears for more than three months.
<TABLE>
<CAPTION>
For the Years Ended September 30,
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of
period: $587,493,614 $567,256,298 $562,440,005
------------ ------------ ------------
Additions during period:
New Receivables - cash: 282,313,300 203,525,666 142,479,298
Loans to facilitate the sale of
real estate held - non cash: 39,102,941 34,102,247 33,461,966
Assumption of other debt payable
in conjunction with acquisition
of non receivables - non cash: 3,633,657 526,868 191,213
Increase in Accrued Interest: 2,109,831 912,348 --
------------ ------------ ------------
Total Additions: 327,159,729 239,067,129 176,132,477
------------ ------------ ------------
Deductions During Period:
Collections of Principal -
cash: 107,702,333 118,869,137 107,040,612
Cost of Receivables Sold: 141,636,670 54,387,414 18,437,363
Reduction in Net Receivables
Associated with Sale of
Subsidiary - non cash -- 32,391,856 27,267,736
Foreclosures - non cash: 14,381,010 13,181,406 17,720,145
Decrease in Accrued Interest: -- -- 850,328
------------ ------------ ------------
Total Deductions 263,720,013 218,829,813 171,316,184
------------ ------------ ------------
Balance at End of Period $650,933,330 $587,493,614 $567,256,298
============ ============ ============
</TABLE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
By /s/ C. PAUL SANDIFUR, JR.
_____________________________________________
C. Paul Sandifur, Jr., Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ C. PAUL SANDIFUR, JR. President, Director and
Chief Executive Officer January 13, 1997
________________________
C. Paul Sandifur, Jr.
/s/ Bruce J. Blohowiak Chief Operating Officer
Executive Vice President, January 13, 1997
Director
________________________
/s/ STEVEN CROOKS Controller and Vice
President January 13, 1997
________________________
Steven Crooks
/s/ REUEL SWANSON Secretary and Director January 13, 1997
________________________
Reuel Swanson
/S/ Irv Marcus Director January 13, 1997
________________________
Irv Marcus
/S/ Charles H. Stolz Director January 13, 1997
________________________
Charles H. Stolz
<TABLE>
<CAPTION>
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.
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>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
State of
Company Name Incorporation
- -----------------------------------------------------------
Metwest Mortgage Services, Inc. Washington
Tall Spruce, Inc. Alaska
Southshore Corporation Hawaii
Metropolitan Ventures, Inc. Washington
National Systems, Inc. Washington
Metropolitan Financial Services, Inc. Washington
Beacon Properties, Inc. Washington
Broadmoor Park - Factory Outlet, Inc. Washington
Metropolitan Mortgage and Securities
Company of Alaska, Inc. Alaska
Consumers Group Holding Co., Inc. Washington
M.M.S.C.I. Washington
<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>
