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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
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
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_________________________________________________________________
(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/
The voting stock of the registrant is not traded on any exchange,
therefore there is no established market value. The aggregate
market value of the stock cannot be computed by reference to the
price at which the stock was sold, or the average bid and ask
price of such stock, as of any date within 60 days prior to the
date of filing because there have been no sales of the Common
Stock within sixty days prior to the date of filing.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of March 31, 1997.
Class A Common Stock: 130
Documents incorporated by reference: None
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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-7 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
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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.
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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.
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Metropolitan is the sole owner of several additional subsidiaries
which own certain individual development properties. See
"Business - Real Estate Development".
* The remaining 3.5% of Consumers Group Holding Co., Inc. is
owned by Summit. See "CERTAIN RELATIONSHIPS & RELATED
TRANSACTIONS"
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.
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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 RELATIONSHIPS & RELATED
TRANSACTIONS". The evaluation, underwriting, and closing is
performed at Metropolitan's headquarters in Spokane, Washington.
The following information describes the Consolidated Group's
Receivable acquisition and underwriting procedures as of the date
of this prospectus. These practices may be amended, supplemented
and changed at any time at the discretion of the Consolidated
Group.
Types of Receivables:
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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 RELATIONSHIPS & RELATED
TRANSACTIONS".
Receivable Acquisition Volume:
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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
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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 Washington, which will be called the Contract
Negotiation Center. This change is being made to decrease
contract acquisition costs, as branch offices are no longer
necessary for identification of appropriate contracts to acquire
due to existing contracts with brokers; to increase the closing
speed due to the ability to centralize the acquisition decisions,
and to further decrease acquisitions costs through, the use of
technological advances including the newly developed BrokerNet
software.
2) BrokerNet software:
BrokerNet was developed by Metropolitan to enhance its
position in the private secondary mortgage market, principally
through streamlining submissions, underwriting and the closing
process. It is a menu driven software program which assists
brokers in preparing accurate and complete Receivable
submissions. It is designed to meet Metropolitan's submission
requirements. In addition, the program assists in analyzing the
characteristics of the Receivable, and provides online purchase
price quotes based upon the Receivable's characteristics and
Metropolitan's yield requirements.
This software was first available for online use by brokers
in March 1996. Current plans for enhancing the software include:
preparing the legal documents used to purchase a Receivable,
providing internet compatibility, providing submission status
tracking (expected to be available mid 1997), assist in
monitoring
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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.
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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 Receivable to
Metropolitan. Volume brokers are often efficient in the
Receivable packaging and submission, which can result in a lower
acquisition processing cost.
Private Secondary Mortgage Market Underwriting
Because Receivables in the private market are generally
seller financed transactions, these Receivables are typically
subject to terms and conditions which were negotiated to satisfy
the unique needs of the particular private buyer and seller.
Therefore, the underwriting of these loans requires careful
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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
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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
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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
<PAGE> Page 17
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
<PAGE> Page 18
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
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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
<PAGE> Page 19
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
<PAGE> Page 21
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)
<PAGE> Page 22
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%
<PAGE> Page 23
GRAPH SHOWING MAP OF THE UNITED STATES AND DISTRIBUTION OF RECEIVABL
E INVESTMENTS BY STATE:
2. This graph contains a map of the United States and indicates
the branch and headquarter offices and identifies the percent of
distribution of the principal amount of Receivable investments
(collateralized by real estate) as of September 30, 1996 by
state, for the states with 1% or more invested.
The following amounts are shown for the following states:
Washington 17.1%
Oregon 5.4%
California 10.3%
Arizona 8.4%
Idaho 2.5%
New Mexico 3.2%
Texas 11.3%
Colorado 1.1%
Michigan 2.1%
Georgia 1.6%
Florida 5.6%
New York 3.2%
Hawaii 4.8%
Minnesota 1.1%
Nevada 1.1%
<PAGE> Page 24
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1996
Real estate contracts and mortgage notes receivable include mortgages
collateralized by property located throughout the United States.
At September 30, 1996, the Consolidated Group held first position
liens associated with contracts and mortgage notes receivable with
a face value of approximately $675 million (99%) and second or
lower position liens of approximately $6 million (1%).
Approximately 23% of the face value of the Company's real estate
contracts and mortgage notes receivable are collateralized by
property located in the Pacific Northwest (Washington, Alaska,
Idaho, Montana and Oregon), approximately 20% by property located
in the Pacific Southwest (California, Arizona and Nevada),
approximately 10% in the Southeast (Florida, Georgia, North
Carolina and South Carolina) , approximately 10% in Atlantic
Northeast (New York, Pennsylvania, New Jersey, Connecticut and
Maryland) and approximately 16% by property located in the
Southwest (Texas and New Mexico). The face value of the real
estate contracts and mortgage notes receivable range principally
from $15,000 to $300,000 with 52 receivables, aggregating
approximately $29.4 million in excess of this range. No individual
contract or note is in excess of 0.4% of the total carrying value
of real estate contracts and mortgage notes receivables, and less
than 3% of the contracts are subject to variable interest rates.
Contractual interest rates principally range from 6% to 13% per
annum with approximately 91% of the face value of these receivables
within this range. The weighted average contractual interest rate
on these receivables at September 30, 1996 is approximately 9.4%.
Maturity dates range from 1996 to 2026.
<PAGE> Page 25
<TABLE>
<CAPTION>
Number of Carrying Delinquent Non Number of
Description Receivable Interest Amount of Principal Accrual Non Accrual
s Rates Receivables Amount Principal Receivables
Amount
RESIDENTIAL Principal
ly
<S> <C> <C> <C> <C> <C> <C>
First Mortgage > 738 6%-13% $108,873,69 $ 5,687,601 $ 7
$100,000 7 1,548,124
First Mortgage > 2,500 6%-13% 161,285,463 7,443,607 -- --
$50,000
First Mortgage < 13,568 6%-13% 261,018,755 9,129,035 -- --
$50,000
Second or Lower > 1 7.5% 243,213 -- -- --
$100,000
Second or Lower > 6 9%-10% 384,654 -- -- --
$50,000
Second or Lower < 358 6%-13% 3,487,974 191,504 -- --
$50,000
COMMERCIAL
First Mortgage > 248 6%-13% 52,072,095 1,248,896 -- --
$100,000
First Mortgage > 252 6%-13% 18,218,639 500,571 -- --
$50,000
First Mortgage < 447 6%-13% 11,837,475 107,111 -- --
$50,000
Second or Lower > 4 9%-10.5% 1,564,708 -- -- --
$100,000
Second or Lower> 3 8%-9.5% 204,917 -- -- --
$50,000
Second or Lower < 9 8%-11% 192,717 -- -- --
$50,000
FARM, LAND AND OTHER
First Mortgage > 67 8%-12% 14,551,734 1,101,876 1,101,876 2
$100,000
First Mortgage > 151 6%-13% 9,697,972 220,731 -- --
$50,000
First Mortgage < 2,178 6%-13% 36,929,717 841,020 -- --
$50,000
Second or Lower > 1 14% 100,000 -- -- --
$100,000
Second or Lower> 2 9%-10% 164,743 -- -- --
$50,000
Second or Lower < 40 9%-12% 349,674 28,048 -- --
$50,000
Unrealized discounts,
net of unamortized
acquisition costs, on
receivables purchased (38,607,376
at a discount )
Accrued Interest 8,362,559
Receivables ----------- ----------- --------- --------
-- - -- --
CARRYING VALUE $650,933,33 $26,500,000 $2,642,00
0 =========== 0
=========== =========
= =
<PAGE> Page 26
</TABLE>
<TABLE>
<CAPTION>
The contractual maturities of the aggregate amounts of Receivables (face
amount) are as follows:
Residential Commercial Farm, Land, Total
Principal Principal Other Principal
Principal
------------ -------------- -------------- --------------
------ ---- --
<S> <C> <C> <C> <C>
October 1996 - September $ 43,589,264 $10,647,400 $10,083,453 $ 64,320,117
1999
October 1999 - September 50,673,223 10,160,940 8,005,953 68,840,116
2001
October 2001 - September 53,408,352 8,270,489 5,145,528 66,824,369
2003
October 2003 - September 62,945,018 15,076,814 10,890,593 88,912,425
2006
October 2006 - September 100,196,799 13,896,939 13,898,207 127,991,945
2011
October 2011 - September 72,017,732 7,719,548 6,273,944 86,011,224
2016
October 2016 - Thereafter 152,463,368 18,318,421 7,496,162 178,277,951
----------- ---------- ---------- -----------
$535,293,756 $84,090,551 $61,793,840 $681,178,147
============ =========== =========== ============
</TABLE>
<PAGE> Page 27
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1995
Real estate contracts and mortgage notes receivable include mortgages
collateralized by property located throughout the United States.
At September 30, 1995, the Consolidated Group held first position
liens associated with contracts and mortgage notes receivable with
a face value of approximately $610 million (99%) and second or
lower position liens of approximately $8 million (1%).
Approximately 27% of the face value of the Company's real estate
contracts and mortgage notes receivable are collateralized by
property located in the Pacific Northwest (Washington, Alaska,
Idaho, Montana and Oregon), approximately 20% by property located
in the Pacific Southwest (California, Arizona and Nevada),
approximately 9% in the Southeast (Florida, Georgia, North Carolina
and South Carolina) and approximately 15% by property located in
the Southwest (Texas and New Mexico). The face value of the real
estate contracts and mortgage notes receivable range principally
from $15,000 to $300,000 with 41 receivables, aggregating
approximately $22.5 million in excess of this range. No individual
contract or note is in excess of 0.3% of the total carrying value
of real estate contracts and mortgage notes receivables, and less
than 4% of the contracts are subject to variable interest rates.
Contractual interest rates principally range from 7% to 14% per
annum with approximately 93% of the face value of these receivables
within this range. The weighted average contractual interest rate
on these receivables at September 30, 1995 is approximately 9.6%.
Maturity dates range from 1995 to 2025.
<PAGE> Page 28
<TABLE>
<CAPTION>
Number of Interes Maturity Carrying Delinquen Non Number of
Description Receivable t Rates Dates Amount of t Accrual Non
s Receivables Principal Principal Accrual
Amount Amount Receivable
s
RESIDENTIAL Principally
<S> <C> <C> <C> <C> <C> <C> <C>
First Mortgage > 582 7%-14% 1995- $ $2,842,17 $ 642,384 3
$100,000 2025 87,229,481 8
First Mortgage > 2,032 7%-14% 1995- 136,531,451 3,675,440 -- --
$50,000 2025
First Mortgage < 13,770 7%-14% 1995- 279,102,436 7,619,058 -- --
$50,000 2025
Second or Lower > 3 7%-11% 2005- 686,087 339,801 -- --
$100,000 2018
Second or Lower > 11 8%-12% 2002- 672,012 166,846 -- --
$50,000 2017
Second or Lower < 313 7%-14% 1995- 4,123,093 73,302 -- --
$50,000 2025
COMMERCIAL
First Mortgage > 175 7%-14% 1995- 35,889,341 741,083 -- --
$100,000 2025
First Mortgage > 194 7%-14% 1995- 13,948,069 295,408 -- --
$50,000 2025
First Mortgage < 354 7%-14% 1995- 8,967,314 131,197 -- --
$50,000 2025
Second or Lower > 3 7%-9% 2010- 852,197 -- -- --
$100,000 2025
Second or Lower> 4 8%-9% 2000- 281,043 -- -- --
$50,000 2016
Second or Lower < 5 8%-10% 1997- 63,809 -- -- --
$50,000 2000
FARM, LAND AND OTHER
First Mortgage > 54 7%-10% 1995- 12,173,717 1,026,615 226,116 1
$100,000 2025
First Mortgage > 104 8%-11% 1995- 6,865,287 -- -- --
$50,000 2025
First Mortgage < 1,948 7%-14% 1995- 29,093,311 554,713 -- --
$50,000 2025
Second or Lower > 1 6% 2009 336,544 -- -- --
$100,000
Second or Lower> 2 7%-9% 2005- 153,066 -- -- --
$50,000 2020
Second or Lower < 53 9%-12% 1996- 544,695 34,359 -- --
$50,000 2022
Unrealized discounts,
net of unamortized
acquisition costs, on
receivables purchased (37,354,378 -- -- --
at a discount )
Accrued Interest
Receivables 7,335,039 -- -- --
----------- --------- -------- ------
CARRYING VALUE $587,493,61 $17,500,0 $868,500
4 00 ========
=========== =========
= =
</TABLE>
<PAGE> Page 29
<PAGE> Page 30
The following tables present certain statistical information
about the Consolidated Group's Receivable investment activity during
the three fiscal years ended September 30, 1996.
<TABLE>
<CAPTION> Year Ended or at September 30
-----------------
- ------------
1996
1995 1994
--------------
- ---------------
(Dollars
in thousands)
<S> <C> <C>
<C>
DISCOUNTED REAL ESTATE RECEIVABLES
PURCHASED DURING PERIOD
Number..................... 4,969
4,130 2,906
Average Face Amount........ $ 52 $
45 $ 52
------- ------
- - -------
Face Amount............... $256,486
$187,305 $150,709
Unrealized Discounts, Net of
Acquisition Costs....... (24,718)
(15,338) (21,186)
Underlying Obligations
Assumed (1)............. (3,634)
(527) (191)
-------- -------
- - --------
$228,134
$171,440 $129,332
========
======== ========
DISCOUNTED REAL ESTATE RECEIVABLES
OUTSTANDING AT END OF PERIOD
Number..................... 13,358 13,4
36 13,994
-------- -------
- - --------
Face Amount................ $548,538
$505,441 $502,314
Unrealized Discounts, Net
of Unamortized Acquisition
Costs................... (38,607)
(37,354) (46,989)
-------- --------
- --------
Net Balance................ $509,931
$468,087 $455,325
========
======== ========
TOTAL REAL ESTATE RECEIVABLES
OUTSTANDING AT END OF PERIOD (2)
Number..................... 20,573
19,608 18,820
-------- -------
- - --------
Face Amount Discounted
Receivables............. $548,538
$505,441 $502,314
Face Amount Non-Discounted
Receivables............ 132,641
112,072 104,011
-------- -------
- - --------
Total Outstanding Receivables 681,179
617,513 606,325
Unrealized Discounts, Net of
Unamortized Acquisition Costs (38,607)
(37,354) (46,989)
Accrued Interest Receivable 8,361
7,335 7,920
-------- -------
- - --------
Net Balance................ $650,933
$587,494 $567,256
========
======== ========
Average Net Balance per
Receivable (Excluding
Accrued Interest) $31.2
$29.6 $29.7
Average Annual Yield on
<PAGE> Page 31
Discounted Receivables (3) 11.9% 12.
8% 13.6%
<FN>
</TABLE>
(1) Consisting of pre-existing first lien position contracts or
mortgages which remain when the Consolidated Group invests in second
lien position Receivables.
(2) Approximately 19% of the portfolio at September 30, 1996, 18% of
the portfolio at September 30, 1995 and 17% of the portfolio at
September 30, 1994 represented financing for resales of repossessed
properties and other non-discounted Receivables.
(3) Yield on Receivables represent gross interest and earned
discount revenues, net of amortized acquisition costs, prior to any
overhead allocation and losses recorded following foreclosure. The
reasons for changes in yield are (i) fluctuations in the rate of
actual prepayments; (ii) securitization and sale of Receivables;
(iii) the changing mix of Receivable purchases between those
originated from Metropolitan's network of offices and those purchased
in bulk; (iv) the amortization of the existing portfolio; and (v) the
amount of discount on Receivables purchased.
At September 30, 1996, the average contractual interest rate on
Receivables collateralized by real estate (weighted by principal
balances) was approximately 9.4%.
Servicing and Collection Procedures, and Delinquency Experience
The servicing and collection of Receivables of all types owned
by the Consolidated Group is performed by Metwest. Metwest also
services the Receivables of Summit, Old Standard, and Arizona Life,
and the Receivables sold through securitizations. Metwest uses a
flexible computer software program, Sanchez, to monitor and service
the Receivables. The Consolidated Group considers consistent and
timely collection activity to be critical to successful servicing and
minimization of foreclosure losses, for its predominantly "B/C"
Receivables portfolio.
Fees for providing servicing and collection services to
Metropolitan and Western United had no impact on the results of
operations of the Consolidated Group. Fees for providing servicing
and collection services to Summit, Old Standard and Arizona Life were
approximately $290,000 during 1996. These charges to parties outside
the Consolidated Group provide income to the Consolidated Group.
The principal amount of Receivables collateralized by real
estate, held by the Consolidated Group (as a percentage of the total
<PAGE> Page 32
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
<PAGE> Page 33
traditional appraisal of the Consolidated Group's real estate
holdings for each delinquent Receivable having a principal balance
greater than $100,000. In addition, the Consolidated Group
calculates an allowance for losses on delinquent Receivables having a
principal balance below the $100,000 threshold based upon its
historical loss experience. The Consolidated Group reviews the
results of its resales of repossessed real estate, both before and
after year end, to identify any market trends and to document the
Group's historical experience on such sales. The Consolidated Group
adjusts its allowance for losses requirement as appropriate, based
upon such observed trends in delinquencies and resales.
The Consolidated Group's current real estate valuation policy
requires annual statistical valuations or traditional appraisals on
real estate and delinquent Receivables when their values exceed a
threshold equal to 1/2% of total assets of the Consolidated Group or,
in the case of the insurance subsidiary, 5% of statutory capital and
surplus. Biannual appraisals are required for all other real estate
holdings where an investment exceeds $50,000.
The following table outlines the Consolidated Group's changes in
the allowance for losses on real estate assets:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Beginning Balance $ 8,116,065 $9,108,383 $10,598,491
Provisions 6,360,072 4,174,644 5,533,193
Charge-Offs (4,283,553) (5,166,962) (7,023,301)
---------- ---------- ----------
Ending Balance $10,192,584 $8,116,065 $ 9,108,383
========== ========== ==========
Percentage of Ending
Balance of Allowances
to Outstanding
Real Estate Assets 1.4% 1.2% 1.4%
==== ==== ====
Ratio of Net Charge-Offs
to Average Real Estate
Assets Outstanding
During the Period 0.6% 0.8% 1.1%
==== ==== ====
</TABLE>
Repossessions
<PAGE> Page 34
In the course of its Receivable investment activity, the
Consolidated Group acquires various parcels of real estate as a
result of foreclosures and/or voluntary repossessions. It is the
Consolidated Group's general policy to attempt to resell such
properties at the earliest possible time following its acquisition.
Improvements are made to certain properties for the purposes of
preservation or restoration to maximize the resale price. The
marketing status of all properties is reviewed at least monthly by a
committee which includes both sales personnel and management.
The carrying value of a repossessed property is determined as of
the date of repossession of the property and is based on a
statistical valuation, an appraisal by a licensed independent
appraiser or by one of Metropolitan's licensed staff appraisers
either at the time the Receivable was purchased or at the time the
property was repossessed in accordance with the Consolidated Group's
appraisal policy. In addition, a new appraisal is obtained not less
frequently than every two years on all real estate holdings
previously valued at $50,000 or more. Internal valuation reviews on
all repossessed properties are performed at least annually based on
management's knowledge of market conditions and comparable property
sales.
<PAGE> Page 35
<TABLE>
<CAPTION>
The following table presents specific information about the
Consolidated Group's repossessed properties with carrying values
of $100,000 or more which were held at September 30, 1996 and/or
September 30, 1995. The carrying values of certain properties
may reflect additional costs incurred, such as taxes and
improvements, when such costs are estimated to be recoverable in
the sale of the repossessed property.
<S> <C> <C> <C>
<C> <C>
Carrying Carrying Market
Year of Gross
Property Type/ Value Value Value
Fore- Monthly
State Location 9/30/95 9/30/96 9/30/96
closure Income
26.73 Commercial Acres $ 252,875 $ 238,036 $ 238,036
1983 (1)
Farm/Ranch 1,927 Acres,
Washington 285,690 285,690 329,500
1988 (2) $3,879
50,000 sq. Ft Commercial
Building, Washington 850,000 Sold A
1989
34 Acres, Washington 3,071,006 3,145,113
3,350,000 1991 (3)
Land, California 225,360 225,360 250,400
1994
K-5 Grade School,
California 202,500 202,500 225,000
1994
House, California 117,000 90,000 100,000
1994
Duplex, New Jersey 103,500 Sold B
1994
House, California 103,500 Sold C
1994
House, New Jersey 121,500 Sold D
1995
House, Michigan 116,100 Sold E
1995
House, New York 138,600 Sold F
1995
House, New York 189,000 Sold G
1995
House, California 162,000 Sold H
1995
House, California 127,800 Sold I
1995
House, Arizona 146,700 Sold J
1995
House, California 256,500 Sold K
1995
House, California 130,500 110,700 123,000
1995
House, Connecticut 187,200 114,750 127,500
1995
House, Washington 135,900 Sold L
1995
House, New York 140,400 Sold M
1995
14 Unit Apartment
Bldg., Washington 108,000 120,000
1996
House, Maryland 108,000 120,000
1996
Condo, California 137,105 152,339
1996
Multi Unit Professional
Bldg., New Jersey 162,000 180,000
1996
House, California 261,000 290,000
1996
House, Washington 126,000 140,000
1996
House, Washington 115,885 128,761
1996
House, Florida 120,706 134,118 1996
<PAGE> Page 36
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
<PAGE> Page 37
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. With the elimination of these intercompany
guarantees and yield adjustments in consolidation, the yields
recognized by the Consolidated Group are the same as though there
were no guarantee or yield adjustments.
The acquisition fees are amortized into Metropolitan's
income, over the same period and in the same amount as they are
amortized into expenses by the insurance subsidiary. During
1996, 1995 and 1994, Metropolitan charged Western United fees of
approximately $29.4 million, $14.6 million and $12.8 million,
respectively. The 1996, 1995 and 1994 charge was before loss
reserves of $12.54 million, $6.95 million and $4.75 million,
respectively. Underwriting fees charged to Summit, Old Standard
and Arizona Life are recognized as revenues when the related fees
are charged to those companies. During 1996, Metropolitan charged
Summit, Old Standard and Arizona Life fees of $310,000,
$1,032,000 and $22,000, respectively. The service agreements
with Western United has no effect upon the consolidated financial
results of the Consolidated Group. The service agreement with
companies outside the Consolidated Group, including Summit, Old
Standard and
<PAGE> Page 38
Arizona Life provided fee income to Metropolitan. See "CERTAIN
RELATIONSHIPS AND RELATED 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
<PAGE> Page 39
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
<PAGE> Page 40
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.
<PAGE> Page 41
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.
<PAGE> Page 42
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
<PAGE> Page 43
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, the face amount of life insurance policies written and
outstanding, totaled $295,692,000, net of amounts ceded to
reinsurers. As with annuities, gross profits are determined by
the difference between interest rates credited on outstanding
policies and interest earned on investment of premiums. In
addition, profitability is affected by mortality experience (i.e.
the frequency of claims resulting from deaths of policyholders).
Although Western United's mortality rates to date have been
substantially lower than expected, higher credited interest rates
and higher issuing expenses combined with low volume have
resulted in lower profits than those experienced with its annuity
products.
The following table sets forth certain key financial
information regarding the Company's insurance subsidiaries. The
information includes Western United for all periods and Old
Standard through May 31, 1995, the date on which it was sold.
<PAGE> Page 44
<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)
---------- ------
- -- --------
Net Life Insurance Premiums $ 3,000 $
3,000 $ 2,958
==========
======== ========
Net Investment Income $ 65,561 $
64,970 $ 65,944
==========
======== ========
Benefits, Claim Losses and
Settlement Expenses $ 48,301 $
45,484 $ 41,919
==========
======== ========
Deferred Policy Acquisition
Costs $ 71,933 $
71,131 $ 71,075
========== ========
========
Reserves for Future Policy
Benefits, Losses,
Claims and Loss Expenses $ 837,366 $781,716
$744,645
========== ========
========
Total Assets $1,128,237 $922,556
$924,822
========== ========
========
Capital and Surplus $ 81,606 $ 78,827
$ 77,142
========== ========
========
</TABLE>
The life insurance subsidiaries of the Consolidated Group are
required to file statutory financial statements with state
insurance regulatory authorities in their states of domicile.
Accounting principles used to prepare these statutory financial
statements differ from generally accepted accounting principles
(GAAP). A reconciliation of GAAP net income to statutory net
<PAGE> Page 44
income for the years ended September 30, 1996, 1995 and 1994,
respectively, is as follows:
1996 1995 1994
[S] [C] [C] [C]
Net Income - GAAP
$3,076,252 $2,717,89 $8,449,317
3
Adjustments to reconcile:
Deferred policy acquisition
costs (774,906) (807,667) 85,324
State insurance guaranty
fund 257,686 105,753 (313,660)
Annuity reserves and
benefits (304,688) (5,759,00 218,975
9)
Capital gains and IMR
amortization 336,258 3,790,892 (4,132,940
)
Allowance for losses
3,046,274 1,923,161 4,368,159
Federal income taxes
1,587,522 1,154,586 3,930,215
Other
(39) (458,943) (61,320)
--------- -------- --------
- -- --
Total $12,544,07
$7,224,359 $2,666,66 0
6 ==========
========== =
=========
=
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.
<PAGE> Page 46
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.
<PAGE> Page 47
The following table outlines the nature and carrying value
of securities investments held by Western United at September 30,
1996:
<TABLE>
<S> <C> <C> <C> <C>
Available Held To
Total
For Sale Maturity
Portfolio Portfolio
---------- -------- -
- ------- --------
(Dollars in Thousands)
Total Amount $ 31,209 $122,768
$153,997 100.0%
========== ========
======== ======
%Invested in:
Fixed Income $ 31,205 $122,768
$153,973 100.0%
Equities 4 --
4 0.0%
---------- -------- -
- ------- ------
$ 31,209 $122,768
$153,977 100.0%
========== ========
======== ======
% Fixed Income:
Taxable $ 31,205 $122,768
$153,973 100.0%
Non-taxable - -
- - 0.0%
---------- -------- -
- ------- ------
$ 31,205 $122,768
$153,973 100.0%
========== ========
======== ======
% Taxable:
Government/
Agency $ 8,480 $ 58,025 $
66,505 43.2%
Corporate 22,725 64,743
87,468 56.8%
---------- -------- -
- ------- ------
$ 31,205 $122,768
$153,973 100.0%
========== ========
======== =====
% Corporate Bonds:
AAA $ 709 $ 39,700 $
40,409 46.2%
AA 1,989 4,030
6,019 6.9%
A 13,817 7,494
21,311 24.4%
BBB 1,925 997
2,922 3.3%
Below Investment Grade 4,285 12,522
16,807 19.2%
---------- -------- -
- ------- ------
$ 22,725 $ 64,743 $
87,468 100.0%
========== ========
======== ======
% Corporate:
Mortgage-backed $ 4,285 $ 44,688 $
48,973 56.0%
Asset-backed -- 3,009
3,009 3.4%
Finance 8,560 9,543
18,103 20.7%
Industrial 6,913 2,514
9,427 10.8%
Utility 2,967 4,989
7,956 9.1%
---------- --------
- -------- -----
$ 22,725 $ 64,743 $
87,468 100.0%
========== ========
======== ======
<PAGE> Page 48
</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"
<PAGE> Page 49
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
<PAGE> Page 50
-------- ---------
- --------
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>
<PAGE> Page 51
<S> <C> <C> <C> <C>
Debenture Other
Preferred
Fiscal Year Ending Bonds Debt Stock
September 30, Payable Dividends
Total
- ------------------ ---------- ----------- -------
- ---- ---------
(In Thousands of
Dollars)
1997 $ 50,030 $37,023
$4,207 $ 91,260
1998 52,163 710
4,207 57,080
1999 41,335 242
4,207 45,784
2000 40,408 137
4,207 44,752
2001 5,877 187
4,207 10,271
------- ------- ------- --------
$189,813 $38,299
$21,035 $249,147
======= =======
======= ========
</TABLE>
In addition to these contractual cash flow requirements, a
certain amount of the insurance subsidiary's annuities may
reprice annually which could cause termination of such annuities
subject to a surrender charge. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS-Asset Liability Management". Management believes that
cash flows will remain adequate during the next year to satisfy
all obligations Metropolitan owes to holders of its securities.
REAL ESTATE DEVELOPMENT
Lawai Beach Resort
Description
Metropolitan is the owner and developer of Lawai Beach
Resort on the island of Kauai, Hawaii. Metropolitan also owns
other condominium units adjoining the resort and another
subsidiary, the Southshore Corporation, owns a restaurant
operating company.
Lawai Beach Resort is located on 8.7 acres of deeded ocean-
front property on the south shore of Kauai near the area known as
Poipu Beach. It consists of three four-story buildings containing
a total of 170 residential condominium units. Related amenities
include swimming pools, tennis courts, a 180 car parking garage,
modern exercise facilities and a sewage treatment plant.
Construction costs were financed entirely with Metropolitan's
internally generated funds and the property remains unencumbered
by external debt. Metropolitan's total investment (carrying
<PAGE> Page 52
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.
<PAGE> Page 53
<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
<PAGE> Page 54
rental pool operated by the resort owner's association. Net
rental revenue was $6,629 in 1996, $21,956 in 1995 and $31,454 in
fiscal 1994. The market value of the property is estimated at
$1,100,000 at September 30, 1996 based upon Metropolitan's review
of the assessed valuation of the property for tax purposes and an
analysis of prior timeshare sales.
Other Development Properties
In addition to the resort properties described above,
Metropolitan, is engaged in the development of various other
properties. These development properties were generally acquired
in the ordinary course of Metropolitan's business, generally
through repossessions. In addition, Metropolitan may acquire
property for development. These acquisitions may include
properties adjoining one already owned in order to enhance the
value of the original parcel, or the acquisition of properties
unrelated to existing holdings. The development or improvement
of properties is undertaken for the purposes of enhancing values,
to increase salability and to maximize profit potential.
Substantially all of the Development activity is performed
for Metropolitan by Summit Property Development, a subsidiary of
Summit. During 1996, Metropolitan paid Summit Property
Development fees of approximately $2.0 million.
Significant development properties, sales activities for
1996 and plans for 1997 are described below. There can be no
assurance that Metropolitan will be successful in its 1997
development and sales plans and Metropolitan may modify its plans
at its sole discretion.
* The MeadowWood Properties
Located just east of Spokane, Washington near Liberty Lake,
this land was acquired by Metropolitan between 1989 and 1991
primarily utilizing repossessed properties held for sale as
consideration. During fiscal 1996, the property included one
residential development parcel and two business parcels, each of
which is described more fully below. The area where these
parcels are located includes residential, commercial and
industrial properties including a business park.
<PAGE> Page 55
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
<PAGE> Page 56
$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.
<PAGE> Page 57
Broadmoor Park General: The remaining 344 acres is platted
for development as a business park; hotels, motels, fast food
restaurants, gas stations, a variety of stores; land for
development of both single and multi-family residential housing;
and civic uses. Two parcels were sold during fiscal 1996 for
$569,765. The carrying value as of September 30, 1996 is
$3,195,813. The appraised value was $10,800,000 as of September
30, 1996. The appraised value of substantially unimproved land
is subject to a number of assumptions. Actual results may differ
substantially from such appraisals.
* Puyallup
This property is approximately 20 acres of land zoned for
commercial and multi-family development in Puyallup, Pierce
County, Washington and is located adjacent to a major shopping
area. Sewer capacity issues are currently impacting the
marketability of this property. At September 30, 1996, the
carrying value was $1,448,929. Its appraised value was
$1,740,000 as of September 30, 1996.
* Everett
This property is a 98 acre parcel of industrial-zoned
property located adjacent to Boeing's Paine Field plant at
Everett, Washington. Studies of utility services, access
requirements and environmental issues are ongoing as are
discussions with several parties to sell and/or jointly develop
the property. At September 30, 1996, the carrying value in the
property was $4,908,806. The appraised value is $7,635,000 as of
September 30, 1996. The appraised value of unimproved land is
subject to a number of assumptions. Actual results may differ
substantially from such appraisals.
* Renton
This property is approximately 35 acres. It is
characterized by heavily vegetated terrain and is zoned
residential. The City of Renton has annexed and rezoned the
property increasing its density from just over 100 residential
units to over 200 residential units. At September 30, 1996, the
carrying value in the property was $3,145,113. The appraised
value was $3,425,000 as of September 30, 1996.
<PAGE> Page 58
Risks associated with holding these properties for
development include possible adverse changes in zoning and land
use regulations and local economic changes each of which could
preclude development or resale. Because most of the properties
are located in Washington State, which is currently experiencing
relatively stable economic conditions, a regional economic
downturn could have a material negative impact on Metropolitan's
ability to timely develop and sell a significant portion of them.
The appraised value of substantially unimproved land is
subject to a number of assumptions. Actual sales results may
differ substantially from such appraisals. There can be no
assurance that the sales prices as indicated by the appraisals
will be realized.
The total development property sales were $9,535,068 during
fiscal 1996.
The following table presents additional information about
the Consolidated Group's investments in and sales of real estate
held for sale and development:
<PAGE> Page 59
<TABLE>
<CAPTION>
Year Ended or at September 30,
-----------------------------
REAL ESTATE HELD FOR 1996 1995 1994
SALE AND DEVELOPMENT --------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Investment Property Held For
Sale and Development $48,175 $53,101 $37,729
Real Estate Acquired in
Satisfaction of Debt and
Foreclosures in Process 36,158 38,00 4 39,037
-------- -------- --------
Net Balance $84,333 $91,105 $76,766
======== ======== ========
SUMMARY OF CHANGES
Balance at Beginning of Year $91,105 $76,766 $76,269
Additions and Improvements:
Condominiums 18,795 26,276 19,563
Repossessed & Development
Real Estate 21,392 24,644 19,950
Transfer from Fixed and Other
Assets -- 1,599 259
Depreciation (3,048) (1,731) (778)
Cost of Real Estate Sold:
Condominium Units (23,531) (22,674) (17,909)
Real Estate (20,380) (13,775) (20,588)
-------- ------- --------
Balance at End of Year $84,333 $91,105 $76,766
======== ======= ========
GAIN (LOSS) ON SALE OF REAL ESTATE
Condominiums:
Sales $22,799 23,621 $17,643
Unit Costs (8,051) (7,676) (7,171)
Associated Selling Costs (15,480) (14,998) (10,738)
-------- ------- --------
Condominium - Gain (Loss) (732) 947 (266)
-------- ------- --------
Real Estate:
Sales 22,849 15,767 22,381
Equity Basis (20,380) (13,775) (20,588)
-------- ------- --------
Real Estate - Gain 2,469 1,992 1,793
-------- ------- --------
Total Gain on Sale of Real Estate $ 1,737 $ 2,939 $ 1,527
======== ======= ========
</TABLE>
COMPETITION
<PAGE> Page 59
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,
<PAGE> Page 60
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
<PAGE> Page 61
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- Liquidity and Capital
Resources".
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
<PAGE> Page 62
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
<PAGE> Page 63
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
<PAGE> Page 64
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.
<PAGE> Page 65
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
<PAGE> Page 66
1983 to 1990, he was Chief Operating Officer for Willamette Savings
and Loan. He was elected Assistant Vice President in 1994, and Vice
President in 1995.
Reuel Swanson has worked for Metropolitan since 1960 and has
been a Director since 1969. From 1972 to 1975, Mr. Swanson was
Metropolitan's Treasurer. In 1976, he became Secretary. He is also
a director and officer of most of the subsidiary companies.
John McCreary joined Metropolitan in 1993 as a Treasury Analyst
and is currently the Acting Treasurer. Mr. McCreary has six years
experience in portfolio management, financial analysis and
accounting. He has previously been employed by Electronic Data
Systems as a Financial Analyst and Public Utility District No. 2 of
Grant County as an Accountant. Mr. McCreary is a CFA, CPA and CMA
and holds a BS in Finance from Central Washington University.
John Van Engelen joined Metropolitan's insurance subsidiary,
Western United in 1984 as its underwriting manager, and shortly
thereafter was appointed Vice President-Underwriting. From 1987-
1994, he was the marketing manager. During 1994, he was appointed
President. Prior to working for Western, he had worked in the
insurance industry and in corporate and public accounting. He holds
the following certifications CPA,CFP,CLU,CHFC,FLMI.
Irv Marcus had been an officer of Metropolitan from 1974 until
his retirement in 1995. At retirement, he was Senior Vice President,
a title which he had held since 1990, and during which time he
supervised Metropolitan's Receivable investing operations. He had
previously been a loan officer with Metropolitan and has over 25
years experience in the consumer finance business. He continues as a
director following his retirement.
Charles H. Stolz has been a Director of Metropolitan since 1953.
Mr. Stolz was one of the founders of Metropolitan. He is a licensed
public accountant and has been a realtor for over 25 years. He is a
former Chairman of the Washington State Real Estate Commission and
President of the Spokane Board of Realtors.
Neil Fosseen was elected honorary director of Metropolitan in
1995. As an honorary director, he is not entitled to vote at board
meetings. Mr. Fosseen was mayor of Spokane from 1960-1967. He has
over 30 years of experience in banking and finance.
<PAGE> Page 68
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid
by Metropolitan during the fiscal years specified to its Chief
Executive Officer and other highly compensated executives. All other
officers and executives of Metropolitan received less than $100,000
in compensation during the year ended September 30, 1996. No
executive officer is a party to, or a participant in, any pension
plan, contract or other arrangement providing for cash or non-cash
forms of remuneration except Metropolitan's 401(k) qualified
retirement plan adopted as of January 1, 1992, which is available
generally to all employees of Metropolitan. The 401(k) Plan provides
for maximum annual contributions equal to 1.5% of each participant's
salary. Approximately $84,000 was paid by Metropolitan pursuant to
the 401(k) plan during the year ended September 30, 1996. As of
September 30, 1996, Metropolitan had no compensation plans or stock
option plans in effect. Directors of Metropolitan are paid $500 per
meeting.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------
- ---------(a)---------------------(b)----------------(c)---------------(d)
Name and Principal Year Salary ($) Bonus/
Position Commissions
- ------------------------------------------------------------------------
<S> <C> <C> <C>
C. Paul Sandifur, Jr. 1996 $147,145
Chief Executive Officer 1995 $128,869 $1,004
1994 $107,063
Bruce Blohowiak 1996 $105,000
Executive Vice President 1995 *
General Counsel 1994 *
Michael Kirk 1996 $85,000 $91,867
Senior Vice President 1995 $65,813 $38,050
-Production 1994 *
Tracy Z 1996 $80,000 $78,743
Vice President-Production 1995 *
1994 *
<PAGE> Page 69
John Van Engelen 1996 $105,500 $19,747
President, Western United 1995 *
1994 *
* Salaries and other compensation were less than $100,000
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Metropolitan does not have a formal compensation committee of
the board of directors. Executive officer compensation is determined
by C. Paul Sandifur, Jr., Bruce J. Blohowiak and the Human Resources
Manager (currently Nobumichi Hara, formerly Paul Chalmers). There
are no compensation committee interlocks between the above described
individuals and another entity's compensation committee. None of the
above described individuals serve as an executive officer of another
entity outside the Consolidated Group.
Mr. Sandifur is the sole
shareholder of National Summit, which in turn owns Summit, Old
Standard and Arizona Life. The Consolidated Group engages in
transactions with these companies as more fully set forth in the
following discussion.
CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS
Transactions with and between Metropolitan and Subsidiaries.
In the normal course of business, Metropolitan and its
subsidiaries engage in intercompany transactions. All subsidiaries
are wholly owned by Metropolitan except Western United, in which
Metropolitan owns 24.5% directly and 75.5% indirectly. See
"PROSPECTUS SUMMARY-Organizational Chart".
During the three year period ended September 30, 1996, Western
United purchased some of its Receivables from Metropolitan at
Metropolitan's cost. In these transactions, Western United paid
Metropolitan $9,351,600 for Receivables with aggregate outstanding
principal balances of $9,550,915. The difference represents
unrealized discounts net of acquisition costs.
Metropolitan charges Western United for Receivable acquisition
services. In 1996, 1995 and 1994, respectively, Metropolitan charged
<PAGE> Page 69
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.
<PAGE> Page 70
In the normal course of business, Metropolitan engages in
transactions with companies which were former subsidiaries and which
are currently affiliated through the common control of C. Paul
Sandifur, Jr.
Metropolitan Investment Securities (MIS), a broker-dealer and
former subsidiary of Metropolitan, sells the publicly registered
securities of Metropolitan and Summit. Metropolitan pays commissions
to MIS for the sale of its securities pursuant to the terms of
written Selling Agreements. During the fiscal years ended September
30, 1996, 1995, and 1994, Metropolitan paid commissions to MIS in the
amounts of $203,946, $1,461,033, and $1,111,044, on sales of debt
securities in the amounts of $9,125,303, $53,120,179, and
$46,414,738, respectively. During the fiscal years ended September
30, 1996, 1995, and 1994, Metropolitan paid commissions to MIS in the
amounts of $8,216, $152,427, and $17,451 on sales of preferred stock
in the amounts of $2,143,930, $4,665,720, and $1,790,100,
respectively. Additionally, in 1996, 1995, and 1994, Metropolitan
paid commissions to MIS in the amounts of $156,918, $140,555, and
$198,180 on sales of preferred stock through an in-house trading
list.
Metropolitan provides Management and Receivable Acquisition
Services for a fee to Summit, Old Standard and Arizona Life. During
1996, such fees were approximately $1.364 million. Also See
"BUSINESS-Receivable Investments-Management & Receivable Acquisition
Services".
Metwest provides Receivable Collection services for a fee to
Summit, Old Standard and Arizona Life. During 1996, such fees were
approximately $290,000. Also See "BUSINESS-Receivable Investments-
Servicing and Collection Procedure and Delinquency Experience."
Management believes that the terms of the service agreements are
at least as favorable as could have been obtained from non-affiliated
parties.
Western has negotiated a Reinsurance Agreement with Old Standard
which became effective in January 1997 for reinsurance of 75% of
specified annuity policies. As a result of this agreement,
approximately $2 to $5 million in premiums are reinsured monthly with
Old Standard. The actual amount reinsured varies depending upon
Western's annuity sales volume. The Agreement provides that Old
Standard will pay Western fees of 1% of the policy issue cost based
<PAGE> Page 71
upon the 75% reinsurance quota, and a monthly administrative fee of
.0333% of the reinsurance quota share of the total account values.
Actual fees will vary depending upon the volume reinsured. See
"BUSINESS-Life Insurance and Annuity Operations-Reinsurance".
Metropolitan's property development activities are provided by
Summit Property Development. Metropolitan paid Summit Property
Development $2.0 million in development fees during 1996. See "REAL
ESTATE DEVELOPMENT".
OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as to each
class of equity securities of Metropolitan and its subsidiaries
beneficially owned by Metropolitan officers and directors as of March
31, 1997.
<TABLE>
<CAPTION>
Number of
Shares
Beneficially
Name Title of Class Owned %of Class
<S> <C> <C> <C>
C. Paul Sandifur, Jr. Metropolitan Preferred
929 West Sprague Stock All Series 246 0.05%
Spokane, WA.... Metropolitan Class A
Common Stock 11.5258 8.84%
C. Paul Sandifur, Jr.
Trustee(1).............. Metropolitan Class A
929 West Sprague Common Stock 82.4667(1) 63.24%
Spokane, WA
Summit Securities, Inc.(2) Metropolitan Preferred
929 West Sprague Avenue Stock, All Series 248,025(2) 5.26%
Spokane, WA 99204 Metropolitan Class A
Common Stock 9.2483(2) 7.09%
Irv Marcus.............. Metropolitan
929 West Sprague Preferred Stock,
Spokane, WA All Series 406 0.01%
Metropolitan Class A
Common Stock 1.0000 0.77%
Bruce J. Blohowiak...... Metropolitan Class A
<PAGE> Page 72
929 West Sprague Common Stock 2.0000 1.53%
Spokane, WA 99208
Charles H. Stolz........ Metropolitan Preferred
929 West Sprague Stock, All Series 19,477 0.39%
Spokane, WA
All officers and
directors as a
group .. Metropolitan
Preferred Stock, All Series 268,154 5.60%
Metropolitan Class A 106.2408 81.47%
Common Stock
<FN>
(1) C. Paul Sandifur, Jr., is trustee of the C. Paul Sandifur and J. Evelyn
Sandifur irrevocable trust and has sole voting and sole investment
control over these shares of stock. The trust beneficiaries are C. Paul
Sandifur, Jr., Mary L. Sandifur and William F. Sandifur.
(2) Summit Securities, Inc. is a wholly owned subsidiary of National Summit
Corp., a Delaware corporation, which is wholly owned by C. Paul Sandifur,
Jr. As a result, Mr. Sandifur effectively has sole voting and investment
control over these shares.
</TABLE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the
beneficial owners of more than five percent of Metropolitan's voting
stock as of March 31, 1997.
<TABLE>
<CAPTION>
Shares of Class A
Name and Address Common Stock % of Class
<S> <C> <C>
C. Paul Sandifur, Jr.
929 West Sprague
Spokane, Washington................. 11.5258 8.84%
C. Paul Sandifur, Jr.
Trustee...................... 82.4667 63.24%
<PAGE> Page 73
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%
(1) C. Paul Sandifur, Jr., is trustee of the C. Paul Sandifur and J. Evelyn
Sandifur irrevocable trust and has sole voting and sole investment
control over these shares of stock. The trust beneficiaries are C. Paul
Sandifur, Jr., Mary L. Sandifur and William F. Sandifur.
</TABLE>
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
<PAGE> Page 74
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.
ITEM 2. PROPERTIES.
Metropolitan Mortgage & Securities Co., Inc. (Metropolitan) was
established and incorporated in the State of Washington in
January, 1953. Its principal executive offices are located at
929 West Sprague Avenue, Spokane, WA. Its mailing address is
P.O. Box 2162, Spokane, WA 99210-2162 and its telephone number
is (509) 838-3111.
See "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."
<PAGE> Page 76
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION> The consolidated financial data shown below as of September 30,
1996 and 1995 and for the years ended September 30, 1996, 1995, and 1994 (other
than the Ratio of Earnings to Fixed Charges and preferred stock dividends) have
been derived from, and should be read in conjunction with, Metropolitan's
consolidated financial statements, related notes, and Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing
elsewhere herein. The consolidated financial data shown as of September 30,
1994, 1993 and 1992 and for the years ended September 30, 1993 and 1992 have
been derived from audited financial statements not included herein. The
consolidated financial statements as of and for the years ended September 30,
1996, 1995, 1994 and 1993 have been audited by Coopers & Lybrand L.L.P. The
consolidated financial statements as of and for the year ended September 30,
1992 has been audited by BDO Seidman.
Six Months Ended
March 31,
(Unaudited) Year Ended September 30,
-------- --------- -----------------------------------------------
----------
1997 1996 1996 1995 1994 1993 1992
(Dollars in Thousands
Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENTS OF INCOME
DATE
Revenues $74,349 $72,079 $156,672 $138,107 $138,186 $133,113 $121,22
1
======= ======= ======== ======== ======== ======== =======
=
Income before minority
interest,
extraordinary item and
cumulative effect of
change in accounting $5,063 $1,473 $ 8,146 $ 6,376 $ 5,702 $ 8,558 $
principle 3,290
<PAGE> Page 77
Income allocated to
minority interests (62) (36) (108) (73)) (224) (255) (363)
-------- -------- -------- -------- -------- -------- -------
-
Income before
extraordinary item and
cumulative effect of
change in accounting 5,001 1,437 8,038 6,303 5,478 8,303 2,927
for income taxes
Extraordinary item (1) -- -- -- -- -- -- 651
Cumulative effect of
change in accounting
for income taxes (2) -- -- -- -- -- (4,300) --
-------- -------- -------- -------- -------- -------- -------
-
Net income 5,001 1,437 8,038 6,303 5,478 4,003 3,578
Preferred stock (2,037) (1,824) (3,868) (4,038) (3,423) (3,313) (3,399)
dividends -------- -------- -------- -------- -------- -------- -------
-
Income (loss)
applicable to common $2,964 $(387) $4,170 $2,265 $2,055 $ 690 $
stockholders ======== ======= ======== ======== ======== ======== 179
=======
=
Ratio of Earnings to
Fixed Charges 1.74 1.06 1.46 1.35 1.29 1.43 1.21
Ratio of Earnings to
Fixed Charges and
Preferred Stock 1.33 1.14 1.03 1.04 1.17
Dividends (4)
PER COMMON SHARE DATA
(3):
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting $22,801 $(2,974) $32,073 $ 17,288 $ 14,996 $ 37,239 $(3,579
principle )
Extraordinary items -- -- -- -- -- -- 4,932
(1)
Cumulative effect of
change in accounting -- -- -- -- -- (32,089) --
principle (2) -------- -------- -------- -------- -------- -------- -------
-
<PAGE> Page 78
Income (loss)
applicable to common $22,801 $(2,974) $32,073 $ 17,288 $14,996 $ 5,150 $
stockholders (5) ======== ======== ======== ======== ======== ======== 1,353
=======
=
Weighted Average
Number of Common
Shares Outstanding(3) 130 130 130 131 137 134 132
======== ======== ======== ======== ======== ======== =======
=
Cash Dividends Per
Common Share $ -- $ -- $ -- $ 3,800 $ 675 $ 675 $ -
======== ======== ======== ======== ======== ======== -
=======
=
CONSOLIDATED BALANCE
SHEET DATA:
Total Assets $1,132,8 $1,116,833 $1,282,65 $1,078,4 $1,063,2 $1,031,9 $982,25
28 9 68 90 58 9
Debt Securities, Other
Debt Payable and
Securities Sold, Not 195,365 227,323 363,427 226,864 261,500 234,497 230,814
Owned
Stockholders' Equity 51,027 40,889 46,343 40,570 32,625 32,781 28,260
</TABLE>
<PAGE> Page 79
(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
<PAGE> Page 79
outstanding. There were no common stock equivalents or
potentially dilutive securities outstanding during any year
presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
Consolidated Group net income after income taxes and
minority interest was approximately $8.0 million for the fiscal
year ended September 30, 1996 as compared to $6.3 million for the
comparable 1995 period and $5.5 million for the comparable 1994
period. The increase in 1996 over 1995 was primarily
attributable to a net increase of $7.4 million in realized gains
from the sales of investments and Receivables, an increase of
$1.3 million in net interest sensitive income and expense, being
offset by a $1.2 million decrease in gains from real estate
sales, a decrease of $1.5 million in fees, commissions, service
and other income, an increase of $2.2 million in the provision
for losses on real estate assets, a $.8 million increase in other
operating expenses, including salaries and benefits, commissions
to agents, general operating expenses and capitalized costs, net
of amortization and an increase of $1.2 million in income taxes
and income allocated to minority stockholders. The increase in
1995 over 1994 was primarily attributable to a net increase of
$1.4 million in net gains from real estate sales, a decrease of
$1.4 million in the provision for losses on real estate assets,
an increase of $1.3 million in realized net gains from the sales
of investments and Receivables, an increase of $1.6 million in
expenses capitalized as deferred costs, net of amortization, and
an improvement of $.8 million in fees, commissions, service and
other income, all which were partially offset by a decline of
$1.6 million in net interest sensitive income and expense and an
increase of $4.2 million in commissions to agents.
The Company implements its primary investment goal to
maximize its risk adjusted rate of return by investing in non-
conventional real estate Receivables. Non-conventional
Receivables are typically Receivables not originated by a
regulated financial institution and not underwritten to FNMA or
<PAGE> Page 80
FHA underwriting guidelines. Normally, either the borrower or
the collateral will not meet sufficient FNMA or FHA underwriting
guidelines to qualify for conventional financing and the seller
will be required to provide the financing to complete the sale.
These "seller financed Receivables" or "seller take-back
Receivables" are the types of non-conventional Receivables
normally acquired by the Company. Because borrowers in this
market generally have blemished credit records, the Company's
underwriting practices focus more strongly on the collateral
value as the ultimate source for repayment. In conjunction with
its investment in non-conventional Receivables, while higher
delinquency rates are expected, the Company believes this risk is
generally offset by the value of the underlying collateral and
the superior yields over conventional financing.
During the three year period ended September 30, 1996, the
Consolidated Group operated in an environment of somewhat narrow
fluctuations in interest rate levels with rates trending up in
1996 after declining in late 1995 and with a generally increasing
trend in late 1994. Over the three year period, the general
decrease in interest rate levels positively impacted earnings and
increased the fair value of the portfolio of predominantly fixed
rate investments. A portion of this improvement in value was
recognized with the realization of gains from the sale of
investment securities and Receivables of $11.9 million, $4.4
million and $3.1 million in 1996, 1995 and 1994, respectively.
The net effect of the sales was to recognize the present value of
future income from the Receivables sold and to reduce future
income to the extent that the proceeds from sales were invested
at lower rates of return. For further information concerning the
investment portfolio, See "BUSINESS-Life Insurance and Annuity
Operations" & "BUSINESS-Securities Investments". The Receivable
portfolio also experienced higher than normal prepayments during
the periods of declining rates which increased income by
triggering the recognition of unamortized discounts at an
accelerated rate.
Although the national economy has experienced moderate
growth over the past three years, the Consolidated Group's
financial results were not adversely impacted in any material way
because of: (1) the wide geographic dispersion of its
Receivables; (2) the relatively small average size of each
Receivable; (3) the primary
<PAGE> Page 81
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 RELATIONSHIPS AND RELATED TRANSACTIONS".
During 1996, construction on a major timeshare development
project in Kauai, Hawaii was completed. At completion,
approximately $21.4 million had been invested. The sales price
of each timeshare week is projected to range between $14,000 and
$18,000 with an expected sellout in approximately early 1998.
See "Business-Real Estate Development-Lawai Beach Resort".
Net income in 1996, 1995, 1994 and 1993 was sufficient to
cover fixed charges including preferred stock dividend
requirements, in contrast to shortfalls in 1992 and prior years.
After considering the effects of potentially non-recurring income
items such as gains from insurance settlements and the gains from
sales of investments, Receivables and real estate, the 1996
income would have been insufficient to cover fixed charges by
approximately $9.7 million. Additionally, the elimination of
similar items in 1995 and 1994 would have resulted in
insufficient earnings to cover fixed charges by approximately
$6.8 million and $4.2 million, respectively. See "RISK FACTORS"
& "SELECTED CONSOLIDATED FINANCIAL DATA".
Revenues and Expenses
Revenue for the Consolidated Group of $156.7 million for
1996 showed a substantial increase from the $138.1 million
reported in the prior year. Revenues of $138.1 million for the
fiscal year ended September 30, 1995 was relatively unchanged
from the $138.2 million reported for the same period in 1994. The
$18.6 million increase in 1996 was primarily attributable to an
increase of $6.5
<PAGE> Page 82
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
<PAGE> Page 83
return from interest sensitive assets and liabilities will tend
to decrease. Conversely, in a falling interest rate environment,
the net return from interest sensitive assets and liabilities
will tend to improve. As with the impact on operations from
changes in interest rates, the Company's NPV (the Net Present
Value) of financial assets and liabilities is subject to
fluctuations in interest rates. The Company continually monitors
the sensitivity of net income and NPV of its financial assets and
liabilities to changes in interest rates.
<PAGE> Page 85
The following table presents, as of September 30, 1996, the Consolidated
Group's estimate of the change in its NPV of financial assets and liabilities if
interest rate levels generally were to increase or decrease by 1% and 2%,
respectively. These calculations, which are highly subjective and technical,
may differ from actual results. See "Asset/ Liability Management".
<TABLE>
<CAPTION>
Interest Rate Change
Carrying Fair Value Decrease Decrease Increase 1% Increase
Amounts 1% 2% 2%
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $167,879 $167,879 $167,879 $167,879 $167,879 $167,879
Investments 163,303 157,755 170,612 178,393 156,442 149,990
Real estate contracts
and mortgage notes 642,571 668,373 691,541 716,159 646,543 625,954
Other receivable 107,494 109,258 114,885 120,916 104,077 99,232
investments ---------- ---------- ---------- ---------- ---------- ----------
$1,081,247 $1,103,265 $1,144,917 $1,183,347 $1,074,941 $1,043,055
========== ========== ========== ========== ========== ==========
Financial Liabilities:
Annuity reserves $837,366 $837,366 $865,487 $894,936 $810,506 $784,842
Debentures payable 189,321 191,631 193,584 195,566 189,703 187,803
Debt payable 38,450 38,486 39,822 41,266 37,141 35,895
Securities sold-not owned 132,652 132,652 137,386 142,363 128,135 123,836
---------- ---------- ---------- ---------- ---------- ----------
$1,197,789 $1,200,135 $1,236,279 $1,274,131 $1,165,485 $1,132,376
========== ========== ========== ========== ========== ==========
<PAGE> Page 86
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
<PAGE> Page 86
management services and sell timeshare units at Lawai Beach. See
"BUSINESS-Real Estate Development-Lawai Beach Resort". This
agreement provides for a fixed fee to Shell plus an incentive fee
based upon future sales after a base amount of cash flow is generated
by the property. Sales of timeshare units in 1996, 1995 and 1994
were approximately $22.8 million, $23.6 million and $17.6 million,
respectively.
Real estate sales, including timeshare unit sales, totaled $45.6
million for 1996, $39.4 million for 1995 and $40.0 million for 1994.
Sales of repossessed properties have more than kept pace with yearly
additions resulting in a total investment in repossessed real estate
of $36.2 million at September 30, 1996, $38.0 million at September
30, 1995 and $39.0 million at September 30, 1994. The aggregate
investment in real estate held for sale and development decreased to
$84.3 million at September 30, 1996, from $91.1 million at September
30, 1995, which increased from $76.8 million at September 30, 1994.
The decrease from 1995 to 1996 is attributable to the final
completion of the timeshare project in Kauai, Hawaii in October 1995
and the sale of several large commercial properties throughout 1996.
The increase of $14.3 million in 1995 over 1994 is primarily
attributable to the continuing development of the timeshare project
and the development of a factory outlet mall in Pasco, Washington.
In addition to timeshare unit development, the Consolidated Group is
in the general business of holding and developing property for sale.
The largest investments in such activities at September 30, 1996 were
a $11.6 million development located in downtown Spokane adjacent to
the central business district and a $10.5 million factory outlet mall
development located in Pasco, Washington. See "BUSINESS-Other
Development Properties".
Gains or losses on real estate sold (excluding timeshare units)
are a function of several factors. Management's experience with the
most significant of these factors during the last three fiscal years
is set forth below:
</TABLE>
<TABLE>
For the Fiscal Year Ended
September 30,
1996 1995 1994
(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
<PAGE> Page 87
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.
<PAGE> Page 88
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
<PAGE> Page 89
securities classified as "available-for-sale" may be sold at a gain
or a loss. Net losses from the sale of investments was $.8 million
in 1996 with net gains of $.03 million and $1.1 million for the
fiscal years ended September 30, 1995 and 1994, respectively. See
"BUSINESS-Securities Investments". The Consolidated Group purchases
Receivables collateralized by real estate, lottery prizes structured
settlements, and annuities. See "BUSINESS-Receivable Investments"
and Notes 2 and 4 to the Consolidated Financial Statements. Such
assets are generated through the ongoing production operations of the
Consolidated Group. At times, Receivables which have increased in
value, primarily from a decreasing interest rate environment, or
which exceed internal demand, may be remarketed either through whole
loan sales or securitizations. See "BUSINESS-Receivable Sales" and
"RISK FACTORS". Net gains from the sale of Receivables were $12.7
million, $4.4 million and $2.0 million for the fiscal years ended
September 30, 1996, 1995 and 1994, respectively.
Asset/Liability Management
The Consolidated Group is subject to interest rate risk
because most of its assets and liabilities are financial in nature.
Generally, the Consolidated Group's financial assets (primarily cash
and cash equivalents, Receivables and fixed income investments)
reprice more slowly than the Consolidated Group's financial
liabilities (primarily securities sold, not owned, debentures and
annuities). In a rising rate environment, this mismatch will tend to
reduce earnings, while in a falling rate environment, earnings will
tend to increase. During fiscal 1997, approximately $256 million of
interest sensitive assets are expected to reprice or mature. These
assets consist of approximately $42 million of Receivables, $46
million of fixed income investments and $168 million of cash and cash
equivalents. For liabilities, most of the balance of life insurance
and annuity contracts may be repriced during 1997. Management
estimates this amount at $628 million. In addition, approximately
$50 million of debentures, $37 million of other debt and $133 million
of securities sold, not owned, will mature or reprice during that
period. At September 30, 1996, these estimates result in interest
sensitive liabilities in excess of interest sensitive assets of
approximately $592 million, or a ratio of interest sensitive assets
to interest sensitive liabilities of approximately 330%.
The Consolidated Group is able to manage this liability to
asset mismatch of approximately 3.3:1 by the fact that approximately
74% of the interest sensitive liabilities are life insurance and
annuity contracts which are subject to surrender charges. These
<PAGE> Page 90
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.
<PAGE> Page 91
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. The Company does not
expect that the application of the provisions of SFAS 125 will have a
<PAGE> Page 92
material effect on the Company's financial condition, results of
operations or cash flows.
Liquidity and Capital Resources
The Consolidated Group's sources of liquidity are tied to its
ability to renew, maintain or obtain existing and additional sources
of cash. The Consolidated Group has successfully met these
requirements during the past three years and has continued to invest
funds generated by operations, financing activities, Receivables and
investments.
Cash provided from operating activities was $185.9 million in
1996, $40.8 million in 1995 and $46.0 million in 1994. Cash utilized
by the Consolidated Group in its investing activities was $54.1
million in 1996, $43.6 million in 1995 and $106.8 million in 1994.
Cash provided to the Consolidated Group from its financing activities
was $3.3 million in 1996, $6.3 million in 1995 and $17.2 million in
1994. These cash flows have resulted in year end cash and cash
equivalent balances of $167.9 million in 1996, $32.8 million in 1995
and $29.3 million in 1994. The increase in cash and cash equalivents
of $137.1 million in 1996 over 1995 was almost entirely the result of
the proceeds from the sale of securities, not owned of $132.7
million. These securities were sold "short" as an economic hedge to
protect the profits in the Receivable securitization which closed in
November 1996. In 1996, Receivable acquisitions of $382.1 million
and $28.5 million in acquisition and costs associated with real
estate held for sale and development were financed by proceeds from
Receivable sales, securitizations and principal payments of $245.9
million, $55.5 million in proceeds from maturities and sales less
purchases of investments and other cash proceeds of $53.2 million
from operating activities. Proceeds from operating activities were
primarily from net income of $8.0 million and $45.8 million from
increases in life insurance and annuity reserves. At September 30,
1996, management considers its cash and cash equivalent funds
combined with its other sources of funds to be adequate to finance
any required debt retirements or planned asset additions.
The State of Washington is responsible for regulating the total
amount of debentures and preferred stock that Metropolitan can have
outstanding. During 1994, 1995 and through September 30, 1996,
Metropolitan was authorized to have no more than an aggregate total
of approximately $202.3 million in outstanding debentures (including
accrued and compound interest) and aggregate outstanding preferred
stock (based on original sales price) of approximately $49.5 million.
Outstanding preferred stock was limited to the amount outstanding as
<PAGE> Page 93
of June 30, 1996 ($49.0 million) plus reinvested dividends ($.5
million) after that date. See "BUSINESS-Regulation". At September 30,
1996, Metropolitan had total outstanding debentures of approximately
$192.2 million and total outstanding preferred stock of approximately
$49.5 million. These regulatory limitations did not cause the
Company to incur any material adverse impact on liquidity during 1993
through 1996, however, the Company did forgo various investment
opportunities which could have been made if able to be funded by the
additional sales of debentures and preferred stock.
During 1997, anticipated principal, interest and dividend
payments on outstanding debentures, other debt payments and preferred
stock distributions are expected to be approximately $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
<PAGE> Page 94
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
<PAGE> Page 95
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.
At September 30, 1996, Metropolitan had approximately $1.6
million in construction commitments associated with its real estate
development projects. Additionally, Metropolitan had no knowledge of
any environmental liabilities associated with any of its real estate
asset investments. Metropolitan anticipates other capital
expenditures in the normal course of business of up to $1.5 million
including a new telephone system costing approximately $.6 million.
Metropolitan anticipates funding these commitments through cash
provided by operating activities or cash provided by financing
activities including potential leasing contracts.
The Company will be required to make further enhancements to its
computer software operating systems to enable recognition of the new
century. The program codes within the operating systems currently
store only a two digit character for the year in which transactions
occur. The modification of these program codes to store four digit
years will occur in the near term. The Company expects that the
costs of these modifications will not be material and all changes
will be made by existing personnel during routine program
maintenance. All expenses will be charged to operations as
incurred.
Management believes that cash flow generated from the
Consolidated Group's operating activities and financing activities
will be sufficient to conduct its business and meet its anticipated
obligations as they mature during the next fiscal year. Included in
the anticipated obligations for the Consolidated Group during the
next fiscal year is the repayment of approximately $133 million in
debt associated with the short sale of securities. With
approximately $131 million in cash and cash equivalents at September
30, 1996 restricted from general corporate use and being held for the
specific purpose of paying-off debt associated with the short sale of
securities, the Consolidated Group expects no material effect on
corporate liquidity from this obligation. Metropolitan has never
defaulted on any of its obligations since its founding in 1953.
ITEM 8. Financial Statements and Supplementary Data
<PAGE> Page 96
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 1996, 1995 and 1994
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
We have audited the accompanying consolidated balance sheets of
Metropolitan Mortgage & Securities Co., Inc. and subsidiaries as of
September 30, 1996 and 1995, and the related consolidated statements
of income, stockholders' equity and cash flows for each of the three
years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Metropolitan Mortgage & Securities Co., Inc. and subsidiaries as of
September 30, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended September 30, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 1, the Company changed its method of accounting
for impaired loans in 1996.
/s/COOPERS & LYBRAND L.L.P.
Spokane, Washington
December 6, 1996
F-1
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
ASSETS 1996 1995
-------------- --------------
Cash and cash equivalents $ 35,226,746 $ 32,798,627
Restricted cash and cash equivalents 132,652,334
Investments:
Available-for-sale securities,
at market 38,554,498 31,829,980
Held-to-maturity securities, at
amortized cost 124,748,490 188,073,542
Accrued interest on investments 1,516,390 2,372,891
-------------- --------------
Total cash and investments 332,698,458 255,075,040
-------------- --------------
Real estate contracts and mortgage
notes receivable, net, including
real estate contracts and mortgage
notes receivable held for sale of
approximately $106,575,000 in 1996 650,933,330 587,493,614
Real estate held for sale and
development, including foreclosed
real estate received in satis-
faction of debt of $36,158,099
and $38,004,011 84,333,288 91,105,003
-------------- --------------
Total real estate assets 735,266,618 678,598,617
Less allowance for losses on real
estate assets (10,192,584) (8,116,065)
-------------- --------------
Net real estate assets 725,074,034 670,482,552
-------------- --------------
Other receivable investments 107,494,150 41,591,415
-------------- --------------
Other assets:
Deferred costs 74,530,361 74,521,803
Land, buildings and equipment,
net of accumulated depreciation 8,516,598 8,148,850
Other assets including receivables
from affiliates, net of allow-
ances of $180,954 and $77,039 34,345,227 28,648,340
-------------- --------------
Total other assets 117,392,186 111,318,993
-------------- --------------
Total assets $1,282,658,828 $1,078,468,000
============== ==============
F-2
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30, 1996 and 1995
LIABILITIES AND
STOCKHOLDERS' EQUITY 1996 1995
-------------- --------------
Liabilities:
Life insurance and annuity
reserves $ 837,366,108 $ 781,716,153
Debenture bonds and accrued
interest 192,173,751 201,311,873
Debt payable 38,601,146 25,552,451
Securities sold, not owned, at
market 132,652,334
Accounts payable and accrued
expenses 18,082,782 15,558,818
Deferred income taxes 15,894,831 12,254,475
Minority interest in consolidated
subsidiaries 1,544,544 1,503,788
-------------- --------------
Total liabilities 1,236,315,496 1,037,897,558
-------------- --------------
Commitments and contingencies
(Notes 5 and 14)
Stockholders' equity:
Preferred stock, (liquidation
preference $49,495,906 and
$47,825,310) 21,518,198 21,627,106
Subordinate preferred stock, no par -- --
Common stock, $2,250 par 293,417 293,417
Additional paid-in capital 16,791,670 14,917,782
Retained earnings 8,731,070 4,561,554
Net unrealized losses on invest-
ments, net of income taxes of
$510,530 and $427,283 (991,023) (829,417)
-------------- --------------
Total stockholders' equity 46,343,332 40,570,442
-------------- --------------
Total liabilities and stock-
holders' equity $1,282,658,828 $1,078,468,000
============== ==============
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Insurance premiums $ 3,000,000 $ 3,000,000 $ 2,958,000
Interest on receivables 58,529,828 56,553,869 56,420,184
Earned discount on receivables 18,036,075 13,786,977 13,790,211
Other investment interest 15,291,496 15,039,706 16,715,517
Real estate sales 45,648,264 39,388,086 40,023,974
Gain on insurance settlement 50,922 203,691
Fees, commissions, service and other
income 4,300,381 5,847,020 4,992,505
Realized net gains (losses) on sales
of investments (821,481) 34,565 1,111,974
Realized net gains on sales of
receivables 12,687,616 4,406,338 1,969,907
----------- ----------- -----------
Total revenues 156,672,179 138,107,483 138,185,963
----------- ----------- -----------
Expenses:
Insurance policy and annuity benefits 48,301,010 45,483,802 41,918,907
Interest, net 18,787,655 16,381,004 19,895,252
Cost of real estate sold 43,910,654 36,449,309 38,496,776
Provision for losses on real estate
assets 6,360,072 4,174,644 5,533,193
Salaries and employee benefits 10,199,812 8,803,131 8,846,677
Commissions to agents 10,574,049 12,588,546 8,430,654
Other operating and underwriting 6,958,938 7,414,502 7,420,022
Less amount capitalized as deferred
costs, net of amortization (801,825) (2,671,195) (1,050,279)
----------- ----------- -----------
Total expenses 144,290,365 128,623,743 129,491,202
----------- ----------- -----------
Income before income taxes and minority
interest 12,381,814 9,483,740 8,694,761
Provision for income taxes (4,235,469) (3,107,897) (2,992,476)
----------- ----------- -----------
Income before minority interest 8,146,345 6,375,843 5,702,285
Income of consolidated subsidiaries
allocated to minority stockholders (108,681) (73,197) (224,529)
----------- ----------- -----------
Net income 8,037,664 6,302,646 5,477,756
Preferred stock dividends (3,868,148) (4,037,921) (3,423,326)
----------- ----------- -----------
Income applicable to common stockholders $ 4,169,516 $ 2,264,725 $ 2,054,430
=========== =========== ===========
Income per share applicable to common
stockholders $ 32,073 $ 17,288 $ 14,996
=========== =========== ===========
Weighted average number of shares of
common stock outstanding 130 131 137
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional Net Unrealized
Preferred Common Paid-in Gains (Losses) Retained
Stock Stock Capital on Investments Earnings
----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1993 $21,402,599 $ 310,485 $ 9,754,510 $ 535,635 $ 778,260
Net income 5,477,756
Net change in unrealized (losses) on
available-for-sale securities, net
of income taxes of $1,721,435 (3,371,012)
Cash dividends, common ($675 per share) (87,012)
Cash dividends, preferred (variable rate) (3,423,326)
Redemption and retirement of stock
(14,470 shares) (144,699) (353,743)
Redemption and retirement of stock
(6 shares) and change in minority
interest (13,864) (12,914)
Sale of variable rate preferred stock,
net (17,901 shares) 179,010 1,593,639
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1994 21,436,910 296,621 10,981,492 (2,835,377) 2,745,678
Net income 6,302,646
Net change in unrealized gains on
available-for-sale securities, net
of income taxes of $1,018,219 2,005,960
Cash dividends, common ($3,800 per share) (501,582)
Cash dividends, preferred (variable rate) (4,037,921)
Redemption and retirement of stock (2
shares) and change in minority interest (3,204) (123,551)
Redemption and retirement of stock
(27,637 shares) (276,376) 13,120
Sale of variable rate preferred stock,
net (46,657 shares) 466,572 4,046,721
Excess sales price over historical cost
basis of subsidiaries sold to related
parties 52,733
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1995 21,627,106 293,417 14,917,782 (829,417) 4,561,554
</TABLE>
F-5
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional Net Unrealized
Preferred Common Paid-in Gains (Losses) Retained
Stock Stock Capital on Investments Earnings
----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1995 21,627,106 293,417 14,917,782 (829,417) 4,561,554
Net income 8,037,664
Net change in unrealized (losses) on
available-for-sale securities, net
of income taxes of $83,247 (161,606)
Cash dividends, preferred (variable rate) (3,868,148)
Redemption and retirement of stock
(32,330 shares) (323,301) (47,433)
Sale of variable rate preferred
stock, net (21,439 shares) 214,393 1,921,321
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1996 $21,518,198 $ 293,417 $16,791,670 $ (991,023) $ 8,731,070
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,037,664 $ 6,302,646 $ 5,477,756
Adjustments to reconcile net income
to net cash provided by operating
activities:
Proceeds from sale of trading
securities 67,093,831 515,677,468 1,064,997,088
Purchase of trading securities (67,448,595) (515,570,230) (1,064,712,932)
Realized net gains on sales of
investments and receivables (11,866,135) (4,440,903) (3,081,881)
Gain on sales of real estate (1,737,610) (2,938,777) (1,527,198)
Gain on insurance settlement (50,922) (203,691)
Provision for losses on real
estate assets 6,360,072 4,174,644 5,533,193
Provision for losses (recover-
ies) on other assets 70,500 (35,657) 204,650
Depreciation and amortization 4,617,664 3,023,233 2,066,365
Minority interests 108,681 73,197 224,529
Deferred income tax provision 3,640,356 2,747,990 2,644,170
Changes in assets and liabili-
ties, net of effects from
sale of subsidiaries:
Life insurance and annuity
reserves 45,782,339 42,033,038 39,322,517
Deferred costs, net (8,558) (3,034,857) (1,349,405)
Compound and accrued
interest on bonds 4,642,760 (2,214,261) (2,096,810)
Securities sold, not owned 132,652,334
Other (6,089,670) (4,910,909) (1,537,118)
------------- ------------- -------------
Net cash provided by
operating activities 185,855,633 40,835,700 45,961,233
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sale of subsidiaries,
net of cash (1,406,873)
Change in restricted cash and cash
equivalents (132,652,334)
Principal payments on real estate
contracts and mortgage notes
receivable 107,702,333 118,869,137 107,040,612
Principal payments on other
receivable investments 6,049,097 1,664,132
Proceeds from sales of real estate
contracts and mortgage notes
receivable and other receivable
investments 182,177,259 72,914,006 20,407,270
Acquisition of real estate contracts
and mortgage notes receivable (282,313,300) (203,525,666) (142,479,298)
Acquisition of other receivable
investments (99,804,805) (56,229,758)
Proceeds from insurance settlement 50,922 203,691
Proceeds from sales of real estate 6,545,323 5,285,839 6,562,008
Proceeds from maturities of held-
to-maturity investments 2,598,081 4,696,003 8,875,268
</TABLE>
F-7
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from investing activities,
Continued:
Proceeds from maturities of
available-for-sale investments 37,496,910
Purchases of held-to-maturity
investments (12,181,445) (1,557,219) (5,263,021)
Proceeds from sales of available-
for-sale investments 31,686,315 92,779,569 367,846,050
Purchases of available-for-sale
investments (4,138,391) (34,387,059) (441,965,194)
Purchases of and costs associated
with real estate held for sale
and development (28,499,006) (41,841,982) (27,544,340)
Capital expenditures (1,369,802) (894,673) (471,097)
------------- ------------- -------------
Net cash used in
investing activities (186,703,765) (43,583,622) (106,788,051)
------------- ------------- -------------
Cash flows from financing activities:
Increase (decrease) in short-term
borrowings 11,353,125 (36,598,375) 59,730,000
Repayments of debt payable (2,060,440) (524,046) (2,468,655)
Receipts from life and annuity
products 112,894,347 145,066,891 85,332,591
Withdrawals of life and annuity
products (103,026,731) (105,469,442) (124,642,366)
Issuance of debenture bonds 9,125,303 53,120,179 56,954,423
Repayment of debenture bonds (22,906,185) (48,970,828) (55,193,403)
Issuance of preferred stock 2,135,714 4,513,293 1,772,649
Redemption and retirement of stock (370,734) (327,336) (775,742)
Cash dividends (3,868,148) (4,539,503) (3,510,338)
------------- ------------- -------------
Net cash provided by
financing activities 3,276,251 6,270,833 17,199,159
------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 2,428,119 3,522,911 (43,627,659)
Cash and cash equivalents:
Beginning of year 32,798,627 29,275,716 72,903,375
------------- ------------- -------------
End of year $ 35,226,746 $ 32,798,627 $ 29,275,716
============= ============= =============
</TABLE>
See Note 16 for supplemental cash flow information.
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES:
BUSINESS AND ORGANIZATION
Metropolitan Mortgage & Securities Co., Inc. (the Company and
Metropolitan) invests in real estate contracts and mortgage
notes receivable and other investments, including real estate
development, with proceeds from investments and securities
offerings.
On September 9, 1994, the Company sold its entire interest in
one of its subsidiaries, Summit Securities, Inc. (Summit), to
National Summit Corp., a Delaware corporation which is wholly
owned by C. Paul Sandifur, Jr., the Company's Chief Executive
Officer. The change in control was made pursuant to a
reorganization wherein Summit redeemed all the common shares
held by its former parent company. Summit redeemed the common
shares for $3,600,000 paid in cash to the Company. The sales
price was based upon Summit's estimated fair value, which
approximated the net book value of Summit at the date of
acquisition. The results of operations of Summit are included
in the consolidated financial statements for the period prior
to September 9, 1994. Also, during the year ended September 30,
1994, some of the Company's majority-owned subsidiaries had
reverse stock splits and fractional shares were redeemed and
retired for cash.
On January 31, 1995, Metropolitan and Summit consummated a
transaction whereby 100% of the common stock of Metropolitan
Investment Securities, Inc. (MIS) was sold to Summit. The cash
price was $288,950, the approximate historical net book value
of MIS at closing. MIS is a broker/dealer and the exclusive
broker/dealer for the securities sold by Metropolitan and
Summit. This sale did not materially affect the business
operations of MIS. The results of operations of MIS are
included in the consolidated financial statements for periods
prior to January 31, 1995.
Additionally, by agreement, effective January 31, 1995,
Metropolitan discontinued its property development division,
which consisted of a group of employees experienced in real
estate development. On the same date, Summit commenced the
operation of a property development subsidiary employing those
same individuals who had previously been employed by
Metropolitan. Summit Property Development Corporation, a 100%
owned subsidiary of Summit, has negotiated an agreement with
Metropolitan to provide future property development services.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
BUSINESS AND ORGANIZATION, CONTINUED
On May 31, 1995, Metropolitan and Summit consummated a
transaction whereby 100% of the common stock of Old Standard
Life Insurance Company (OSL) was sold to Summit. The cash price
was $2,722,000, the approximate historical net book value of
OSL at closing, with future contingency payments equal to 20%
of statutory income prior to the accrual of income taxes for
the fiscal years ending December 31, 1995, 1996 and 1997. The
cash sales price plus estimated future contingency payments
approximated the appraised valuation of OSL. OSL is engaged in
the business of acquiring receivables using funds derived from
the sale of annuities, investment income and receivable cash
flows. The sale of OSL decreased total assets and liabilities
by approximately $46.2 million. The results of operations of
OSL are included in the consolidated financial statements for
periods prior to May 31, 1995.
The total purchase price of MIS and OSL exceeded the historical
cost bases of the net assets of the companies by approximately
$53,000. Due to the common control of Metropolitan and Summit,
this excess purchase price was recorded as an increase to
retained earnings in the periods in which the sales occurred.
Metropolitan is effectively controlled by C. Paul Sandifur, Jr.
through his common stock ownership and voting control.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Metropolitan Mortgage & Securities Co., Inc. and its majority-
owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments
purchased with a remaining maturity of three months or less to
be cash equivalents. Cash includes all balances on hand and on
deposit in banks and financial institutions. The Company
periodically evaluates the credit quality of its depository
financial institutions. Substantially all cash and cash
equivalents are on deposit with one financial institution and
balances periodically exceed the FDIC insurance limit.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
INVESTMENTS
The Company has classified its investments in debt and equity
securities as "available-for-sale," "held-to-maturity" or
"trading." The accounting policies related to these investment
classifications are as follows:
AVAILABLE-FOR-SALE SECURITIES: Available-for-sale
securities, consisting primarily of government-backed
securities, public utility and corporate bonds, are carried
at market value. Unrealized gains and losses on these
securities are presented as a separate component of
stockholders' equity, net of related deferred income taxes.
HELD-TO-MATURITY SECURITIES: Held-to-maturity securities,
consisting primarily of public utility and corporate bonds
and mortgage- and government-backed securities having fixed
maturities, are carried at amortized cost. The Company has
the ability and intent to hold these investments until
maturity.
TRADING SECURITIES: Trading securities, consisting primarily
of government-backed securities and corporate bonds, are
bought and held principally for the purpose of selling them
in the near term and are recorded at market value. Realized
and unrealized gains and losses are included in the
consolidated statements of income.
Realized gains and losses on investments are calculated on the
specific-identification method and are recognized in the
consolidated statements of income in the period in which the
investment is sold.
For other than a temporary decline in the value of a common
stock, preferred stock or publicly traded bond below cost or
amortized cost, the investment is reduced to its net realizable
value, which becomes the new cost basis of the investment. The
amount of the reduction is reported as a loss. Any recovery of
market value in excess of the investment's new cost basis is
recognized as a realized gain only upon sale, maturity or other
disposition of the investment. Factors which the Company
evaluates in determining the existence of an other than
temporary decline in value include the length of time and
extent to which market value has been less than cost; the
financial condition and near-term prospects of the issuer; and
the intent and ability of the Company to retain its investment
for the anticipated period of recovery in market value.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE
Real estate contracts and mortgage notes receivable held for
investment purposes are carried at amortized cost. Discounts
originating at the time of purchase, net of capitalized
acquisition costs, are amortized using the level yield
(interest) method. For receivables acquired after September 30,
1992, net purchase discounts are amortized on an individual
contract basis using the level yield (interest) method over the
remaining contractual term of the receivables. For receivables
acquired before October 1, 1992, the Company accounts for its
portfolio of discounted receivables using anticipated
prepayment patterns to apply the level yield (interest) method
of amortizing discounts. Discounted receivables are pooled by
the fiscal year of purchase and by similar receivable types.
The amortization period, which is approximately 78 months,
estimates a constant prepayment rate of 10-12 percent per year
and scheduled payments, which is consistent with the Company's
prior experience with similar receivables and the Company's
expectations.
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD
FOR SALE
Real estate contracts and mortgage notes receivable held for
sale are carried at the lower of cost (outstanding principal
adjusted for net discounts and capitalized acquisition costs)
or market value, determined on an aggregate basis by major type
of loan. Gains or losses on such sales are recognized utilizing
the aggregation method for financial reporting and income tax
purposes at the time of sale. Interest on these receivables is
included in interest income. Deferred net discounts and
capitalized acquisition costs are recognized at the time the
related receivables are sold to third-party investors or
securitized through transfer to a real estate investment trust.
OTHER RECEIVABLE INVESTMENTS
Other receivables held for investment purposes are carried at
amortized cost. Discounts originating at the time of purchase,
net of capitalized acquisition costs, are amortized using the
level yield (interest) method on an individual receivable basis
over the remaining contractual term of the receivable.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE HELD FOR SALE AND DEVELOPMENT
The Company holds real estate, stated at the lower of cost or
fair value less costs to sell, for purposes of development and
resale. The Company acquires real estate through direct
purchase and foreclosure. Cost is determined by the purchase
price of the real estate or, for real estate acquired by
foreclosure, at the lower of (a) the fair value of the property
at the date of foreclosure less estimated selling costs, or (b)
cost (unpaid receivable carrying value). Periodically, the
Company reviews its carrying values of real estate held for
sale and development by obtaining new or updated appraisals and
adjusts its carrying values to the lower of cost or net
realizable value, as necessary. As a result of changes in the
real estate markets in which these properties are located, it
is reasonably possible that these carrying values could change
in the near term.
Occasionally, these real estate properties are rented, with the
revenue being included in other income and related costs are
charged to expense.
In March 1995, SFAS No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," was issued. SFAS No. 121 requires certain long-
lived assets, such as the Company's real estate assets, be
reviewed for impairment in value whenever events or
circumstances indicate that the carrying value of an asset may
not be recoverable. In performing the review, if expected
future undiscounted cash flows from the use of the asset or the
fair value, less selling costs, from the disposition of the
asset is less than its carrying value, an impairment loss is to
be recognized. The Company is required to adopt this new
standard on October 1, 1996. The Company does not anticipate
that the adoption of SFAS No. 121 will have a material effect
on the consolidated financial statements.
Profit on sales of real estate is recognized when the buyers'
initial and continuing investment is adequate to demonstrate
(1) a commitment to fulfill the terms of the transaction, (2)
that collectibility of the remaining sales price due is
reasonably assured, and (3) the Company maintains no continuing
involvement or obligation in relation to the property sold and
has transferred all the risks and rewards of ownership to the
buyer.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
ALLOWANCE FOR LOSSES ON REAL ESTATE ASSETS
The established allowances for losses on real estate assets
include amounts for estimated probable losses on both real
estate held for sale and development and real estate contracts
and mortgages receivable. Specific allowances are established,
as necessary, for delinquent receivables with net carrying
values in excess of $100,000. Additionally, the Company
establishes allowances, based on historic delinquency and loss
experience, for currently performing receivables and smaller
delinquent receivables. Allowances for losses are determined
based upon the net carrying values of the receivables,
including accrued interest, determined in accordance with the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a
Loan." The Company adopted this new standard on October 1,
1995, which did not have a material effect on the consolidated
financial statements.
The Company continues to accrue interest on delinquent loans
until foreclosure, unless the principal and accrued interest on
the receivable exceeds the fair value of the collateral, net of
the estimated selling costs. The Company obtains new or updated
appraisals on collateral for appropriate delinquent
receivables, and adjusts the allowance for losses as necessary,
such that the net carrying value does not exceed net realizable
value.
DEFERRED COSTS
Commission expense and other insurance policy, annuity and
debenture issuance costs are deferred. For debenture issuance
costs, amortization is computed over the expected term which
ranges from 6 months to 5 years, using the level yield
(interest) method. For annuities and life insurance costs, the
portion of the deferred policy acquisition cost that is
estimated not to be recoverable from surrender charges is
amortized as a constant percentage of the estimated gross
profits (both realized and unrealized) associated with the
policies in force. Changes in the amount or timing of estimated
gross profits will result in adjustments in the cumulative
amortization of these costs.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment are stated at cost. Buildings,
improvements, furniture and equipment are depreciated using
both straight-line and accelerated methods over their estimated
useful lives which, for buildings and improvements, range from
5 to 40 years, and for furniture and equipment, range from 3 to
10 years. Repairs, maintenance and minor renewals are charged
to expense as incurred. Upon sale or retirement, the costs and
related accumulated depreciation are eliminated from the
accounts and any resulting gain or loss is reflected in
operations.
COMPUTER SOFTWARE COSTS
The Company capitalizes direct costs of enhancements to
computer software operating systems acquired and modified for
internal use to the extent that the functionality of the
software is improved. 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
not be material and will be charged to operations as incurred.
INSURANCE AND ANNUITY RESERVES
Premiums for universal life contracts and annuities are
reported as life insurance and annuity reserves under the
deposit method. Reserves for life insurance and annuities are
equal to the sum of the account balances including deferred
service charges. Based on past experience, consideration is
given in actuarial calculations to the number of policyholder
and annuitant deaths that might be expected, policy lapses,
surrenders and terminations. As a result in changes in the
factors considered in the actuarial calculations, it is
reasonably possible that the reserves for insurance and
annuities could change in the near term.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
RECOGNITION OF INSURANCE AND ANNUITY REVENUES
Revenues for universal life contracts are recognized upon
assessment. Revenues for annuity contracts are recognized over
the estimated policy term. These revenues consist of charges to
policyholders primarily for mortality expenses and surrender
charges. Annuity revenues consist of the charges assessed
against the annuity account balance for services and surrender
charges. Charges for future services are assessed; however, the
related revenue is deferred and recognized in income over the
period benefitted using the same assumptions as are used to
amortize deferred policy acquisition costs.
GUARANTY FUND ASSESSMENTS
The Company's life insurance subsidiary is subject to insurance
guaranty laws in the states in which it writes business. These
laws provide for assessments against insurance companies for
the benefit of policyholders and claimants in the event of
insolvency of other life insurance companies. A portion of
these assessments can be offset against the payment of future
premium taxes. However, future changes in state laws could
decrease the amount available for offset. As of September 30,
1996 and 1995, the Company has accrued an estimated liability
for guaranty fund assessments for known insolvencies net of
estimated recoveries through premium tax offsets.
INTEREST COSTS
Interest costs associated with the development of real estate
projects are capitalized. During the years ended September 30,
1996, 1995 and 1994, the Company capitalized interest of
$2,468,411, $2,730,373 and $2,151,651, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability
method, which requires that deferred tax assets and liabilities
be determined based on the temporary differences between the
financial statement carrying amounts and tax bases of assets
and liabilities and tax attributes using enacted tax rates in
effect in the years in which the temporary differences are
expected to reverse.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES, CONTINUED
The Company files a consolidated federal income tax return with
its includable affiliates. The consolidating companies have
executed a tax allocation agreement. Under the agreement, the
Companies' income tax provisions are computed on a separate
return basis and consolidated affiliates receive a reim-
bursement to the extent that their losses and other credits
result in a reduction of the consolidated tax liability.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by deducting preferred
stock dividends from net income and dividing the result by the
weighted average number of shares of common stock outstanding.
All weighted average common shares outstanding and per share
amounts have been retroactively restated to reflect the reverse
stock split which occurred in fiscal 1994 (see Note 11). There
were no common stock equivalents or potentially dilutive
securities outstanding during any of the three years in the
period ended September 30, 1996.
HEDGING ACTIVITIES
The Company is authorized by its Board of Directors, subject to
certain limitations, to use financial futures instruments for
the purpose of hedging interest rate risk relative to the
securities portfolio and in anticipation of sales and
securitizations of real estate contracts and other receivable
investments. The insurance subsidiary sells securities "short"
(the sale of securities which are not currently in the
portfolio and therefore must be purchased to close out the sale
agreement) as another means of managing interest rate risk or
to benefit from an anticipated movement in the financial
markets.
The Company also purchases collateralized mortgage obligations
(CMOs), pass-through certificates and other asset-backed
securities for its investment portfolio. Such purchases have
been limited to tranches that perform in concert with the
underlying mortgages or assets; i.e., improving in value with
falling interest rates and declining in value with rising
interest rates. The Company has not invested in "derivative
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
HEDGING ACTIVITIES, CONTINUED
products" that have been structured to perform in a way that
magnifies the normal impact of changes in interest rates or in
a way dissimilar to the movement in value of the underlying
securities.
Unrealized gains or losses associated with financial future
contracts that meet the hedge criteria prescribed in Statement
of Financial Standards No. 80 (SFAS No. 80), "Accounting for
Futures Contracts" are deferred and recognized when the effects
of changes in interest rate on the hedged asset are recognized.
Sales of securities, not owned, are recognized as liabilities
and are adjusted to market value with the unrealized gain or
loss recognized currently in operations.
In fiscal 1996, the Company sold U.S. Treasury securities,
which it did not own, to provide an economic hedge for the
anticipated securitization of real estate contracts and
mortgage notes receivable which was completed in November 1996.
At September 30, 1996, the Company was obligated to deliver
U.S. Treasury securities with a market value of approximately
$132,652,000. During the year ended September 30, 1996, the
Company recognized a loss of approximately $820,000 associated
with this obligation. At September 30, 1996, approximately
$131,091,000 of the Company's cash and cash equivalents were
restricted until such time as these obligations are repaid.
INTEREST RATE RISK
The results of operations of the Company may be materially and
adversely affected by changes in prevailing economic
conditions, including rapid changes in interest rates. The
Company's financial assets (primarily real estate contracts and
mortgage notes receivable, other receivables and investment
securities) and liabilities (primarily annuity contracts and
investment certificates) are subject to interest rate risk. In
the year ending September 30, 1997, approximately $848,000,000
of the Company's financial liabilities will reprice or mature
as compared to approximately $256,000,000 of its financial
assets, resulting in a mismatch of approximately $592,000,000.
This structure is beneficial in periods of declining interest
rates; however, may result in declining net interest income
during periods of rising interest rates. Of the financial
liabilities scheduled to reprice or mature, approximately 74%
are annuity contracts which are subject to surrender charges.
Management is aware of the sources of interest rate risk and
endeavors to actively monitor and manage its interest rate
risk, although there can be no assurance regarding the
management of interest rate risk in future periods.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to conform with the current
year's presentation. These reclassifications had no effect on
net income or retained earnings as previously reported.
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE:
Real estate contracts and mortgage notes receivable include
mortgages collateralized by property located throughout the
United States. At September 30, 1996, the Company held first
position liens associated with real estate contracts and mortgage
notes receivable with a face value of approximately $675,000,000
(99%) and second or lower position liens of approximately
$6,000,000 (1%). The Company's real estate contracts and mortgage
notes receivable at September 30, 1996 are collateralized by
property concentrated in the following geographic areas:
Pacific Northwest (Alaska, Idaho, Montana, Oregon
and Washington) 23%
Pacific Southwest (Arizona, California and Nevada) 20
Southwest (New Mexico and Texas) 16
Atlantic Northeast (Connecticut, Maryland, New Jersey,
New York and Pennsylvania) 10
Southeast (Florida, Georgia, North Carolina and South
Carolina) 10
Other 21
---
100%
===
The value of real estate properties in these geographic regions
will be affected by changes in the economic environment of that
region. It is reasonably possible that these values could change
in the near term, which would affect the Company's estimate of
its allowance for losses associated with these receivables.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
The face value of the real estate contracts and mortgage notes
receivable range principally from $15,000 to $300,000. At
September 30, 1996, the Company had 52 receivables aggregating
approximately $29,400,000 which had face values in excess of
$300,000. No individual receivable is in excess of 0.4% of the
total carrying value of real estate contracts and mortgage notes
receivable, and less than 3% of the receivables are subject to
variable interest rates. Contractual interest rates for 91% of
the face value of receivables fall within a range from 6% to 13%
per annum. The weighted average contractual interest rate on
these receivables at September 30, 1996 is approximately 9.4%.
Maturity dates range from 1996 to 2026.
The following is a reconciliation of the face value of real
estate contracts and mortgage notes receivable to the Company's
carrying value at September 30, 1996 and 1995.
1996 1995
------------ ------------
Face value of discounted
receivables $548,537,547 $505,440,872
Face value of originated
receivables 132,640,600 112,072,081
Unrealized discounts, net of
unamortized acquisition costs (38,607,376) (37,354,378)
Accrued interest receivable 8,362,559 7,335,039
------------ ------------
Carrying value $650,933,330 $587,493,614
============ ============
The originated receivables are collateralized primarily by first
position liens and result from loans made by the Company to
facilitate the sale of its repossessed property. No unrealized
discounts are attributable to originated receivables.
The principal amount of receivables with required principal or
interest payments being in arrears for more than three months was
approximately $26,500,000 and $17,500,000 at September 30, 1996
and 1995, respectively.
Real estate contracts and mortgage notes receivable with net
carrying values of approximately $38,212,000 were sold, resulting
in gains of approximately $1,255,000, by the Company's life
insurance subsidiary to affiliated entities in fiscal 1996. Sales
of receivables with net carrying values of approximately
$54,388,000 and $18,437,000 were sold without recourse to various
financial institutions resulting in gains of approximately
$2,645,000 and $1,970,000 in fiscal 1995 and 1994, respectively.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
Aggregate amounts of receivables (face value) expected to be
received, based upon contractual payments are as follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 26,327,000
1998 28,911,000
1999 31,748,000
2000 34,865,000
2001 38,287,000
Thereafter 521,040,147
------------
$681,178,147
============
3. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD FOR
SALE:
Real estate contracts and mortgage notes receivable, held for
sale consist of a pool of receivables which are intended to be
securitized and sold without recourse in a private placement. On
November 26, 1996, the Company securitized and sold all real
estate contracts and mortgage notes receivable held for sale at
September 30, 1996, which resulted in a pretax gain of
approximately $8.9 million.
The Company entered into a securitization transaction during the
year ended September 30, 1996. The Company participates in these
securitization transactions with its subsidiaries and affiliates.
These receivables are structured in classes by credit rating and
transferred to a real estate trust, which sells pass-through
certificates to third parties. These securitizations are recorded
as sales of receivables and gains, net of transaction expenses,
are recognized in the consolidated statements of income as each
class is sold.
During the year ended September 30, 1996, proceeds from
securitization transactions were approximately $112,975,000 and
resulted in gains of approximately $7,798,000. The gain realized
included approximately $2,290,000 associated with the estimated
fair value of the mortgage servicing rights retained on the pool,
which is included in other assets in the consolidated balance
sheet. The fair value of these rights was determined based on the
estimated present value of future net servicing cash flows,
including float interest and late fees, adjusted for anticipated
prepayments. The Company evaluates possible impairment in its
mortgage servicing rights by similar type of loan, and to the
extent that carrying value for a stratum exceeds its estimated
fair value, an impairment loss is recognized. It is reasonably
possible that actual prepayment experience could exceed the
estimated prepayment factor in the near term, which would result
in a reduction in the carrying value of retained mortgage
servicing rights.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD FOR
SALE, CONTINUED:
Of the receivables securitized, the Company has retained an
investment in certain classes of the securities having a fair
value of approximately $4,333,000 at September 30, 1996. These
securities were transferred to the Company's investment portfolio
and classified as available-for-sale. These certificates are the
B-4 and residual certificate classes and are subordinate to the
other offered classes of certificates. These classes receive the
lowest priority of principal and interest distributions and thus
bear the highest credit risk. The Company provides for this risk
by reducing the interest yield on these securities and by
providing a reserve for the principal distributions due on these
subordinate classes which may not be received due to default or
loss. The weighted average constant effective yield recognized by
the Company on these securities was 13.2% at September 30, 1996.
In June 1996, Statement of Financial Accounting Standards No. 125
(SFAS 125), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued. SFAS 125
provides accounting and reporting standards based on a consistent
application of a FINANCIAL-COMPONENTS APPROACH that focuses on
control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets
it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered and
derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring
after December 31, 1996. The Company does not expect that the
application of the provisions of SFAS 125 will have a material
effect on the Company's financial condition, results of
operations or cash flows.
4. OTHER RECEIVABLE INVESTMENTS:
Other receivable investments include various cash flow
investments, primarily annuities and lottery prizes. Annuities
are general obligations of the payor, which is generally an
insurance company. Lottery prizes are general obligations of the
insurance company or other entity making the lottery prize
payments. Additionally, when the lottery prizes are from a state-
run lottery, the lottery prizes are often backed by the general
credit of the state.
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.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. OTHER RECEIVABLE INVESTMENTS, CONTINUED:
The following is a reconciliation of the face value of the other
receivable investments to the Company's carrying value at
September 30, 1996 and 1995.
1996 1995
------------ ------------
Face value of receivables $173,280,414 $ 70,965,501
Unrealized discounts, net of
unamortized acquisition costs (65,786,264) (29,374,086)
------------ ------------
Carrying value $107,494,150 $ 41,591,415
============ ============
All such receivables at September 30, 1996 were performing in
accordance with their contractual terms.
During the years ended September 30, 1996 and 1995, the Company
sold approximately $27,853,000 and $14,120,000, respectively, of
these receivables without recourse and recognized gains of
approximately $1,882,000 and $1,761,000, respectively.
The following other receivable investments, by obligor, were in
excess of ten percent of stockholders' equity at September 30,
1996 and 1995.
Aggregate
Carrying
Issuer Amount
---------------------------------------------- ------------
1996:
California State Agency $ 24,718,527
New York State Agency 15,511,891
New Jersey State Agency 10,975,661
Oregon State Agency 10,532,006
Arizona State Agency 10,223,076
Michigan State Agency 8,518,973
Colorado State Agency 4,903,971
1995:
California State Agency 8,934,296
Arizona State Agency 6,630,281
New Jersey State Agency 4,931,025
New York State Agency 4,758,062
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. OTHER RECEIVABLE INVESTMENTS, CONTINUED:
Aggregate amounts of contractual maturities of other receivable
investments (face amounts) are as follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 15,880,000
1998 15,364,000
1999 16,177,000
2000 16,973,000
2001 15,399,000
Thereafter 93,487,414
------------
$173,280,414
============
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. REAL ESTATE HELD FOR SALE AND DEVELOPMENT:
A detail of the Company's real estate held for sale and development
by state as of September 30, 1996 is as follows:
<TABLE>
<CAPTION>
Single- Multi-
Family Family
State Land Dwelling Dwelling Commercial Condominium Total
---------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alabama $ 74,500 $ 74,500
Alaska $ 51,710 $ 80,790 132,500
Arizona 550,142 410,472 $ 80,000 1,040,614
Arkansas 81,000 81,000
California 1,100,363 1,999,116 $ 14,543 370,450 546,285 4,030,757
Colorado 160,000 812,471 972,471
Connecticut 301,113 301,113
Florida 28,642 868,778 20,000 125,422 1,042,842
Georgia 47,821 47,821
Hawaii 3,825,791 18,829,598 22,655,389
Idaho 61,564 61,564
Illinois 69,082 69,082
Indiana 16,000 16,000
Iowa 110,309 110,309
Kansas 72,870 72,870
Louisiana 17,796 17,796
Maine 204,896 204,896
Maryland 307,165 307,165
Massachusetts 138,000 138,000
Michigan 259,230 90,000 349,230
Minnesota 195,085 195,085
Mississippi 28,106 58,782 86,888
Missouri 40,500 169,181 119,811 329,492
Montana 27,083 27,083
Nebraska 38,231 38,231
Nevada 62,000 62,000
New Hampshire 171,114 50,000 221,114
New Jersey 84,937 180,000 264,937
New Mexico 10,500 39,449 49,949
New York 7,633 455,070 462,703
North Carolina 10,907 10,907
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. REAL ESTATE HELD FOR SALE AND DEVELOPMENT, CONTINUED:
<TABLE>
<CAPTION>
Single- Multi-
Family Family
State Land Dwelling Dwelling Commercial Condominium Total
---------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ohio 82,400 82,400
Oklahoma 51,045 140,992 192,037
Oregon 75,659 75,659
Pennsylvania 32,400 195,715 228,115
South Carolina 71,400 91,506 30,000 192,906
Tennessee 77,650 77,650
Texas 48,649 910,960 65,000 1,024,609
Utah 26,000 26,000
Virginia 26,500 72,000 98,500
Washington 34,736,817 855,044 13,126,130 57,500 48,775,491
Wyoming 85,613 85,613
----------- ----------- ----------- ----------- ----------- -----------
Balances at
September 30,
1996 $36,884,497 $ 8,861,494 $ 84,543 $17,828,877 $20,673,877 $84,333,288
=========== =========== =========== =========== =========== ===========
Balances at
September 30,
1995 $39,084,721 $ 7,124,907 $ 0 $16,312,303 $28,583,072 $91,105,003
=========== =========== =========== =========== =========== ===========
</TABLE>
At September 30, 1996, the Company had approximately $68,930,000
invested in real estate development projects and approximately
$1,600,000 in commitments for construction associated with these
projects.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. ALLOWANCE FOR LOSSES ON REAL ESTATE ASSETS:
The following is a summary of the changes in the allowance for
losses on real estate assets for the years ended September 30,
1996, 1995 and 1994:
1996 1995 1994
----------- ----------- -----------
Beginning balance $ 8,116,065 $ 9,108,383 $10,598,491
Provisions 6,360,072 4,174,644 5,533,193
Charge-offs (4,283,553) (5,166,962) (7,023,301)
----------- ----------- -----------
Ending balance $10,192,584 $ 8,116,065 $ 9,108,383
=========== =========== ===========
At September 30, 1996, the net investment in real estate
contracts and mortgage notes receivable for which impairment has
been recognized in accordance with SFAS 114 was approximately
$2,642,000, of which approximately $118,000, representing the
amounts by which the net carrying value of the receivable exceeds
the fair value of the collateral, has been specifically included
in the allowance for losses on real estate assets.
During the year ended September 30, 1996, the average recorded
investment in impaired receivables was approximately $2,251,000.
Interest income of approximately $212,000 was recognized on these
receivables in fiscal 1996 during the period in which they were
impaired.
7. LAND, BUILDINGS AND EQUIPMENT:
Land, buildings, equipment and related accumulated depreciation
at September 30, 1996 and 1995 consisted of the following:
1996 1995
----------- -----------
Land $ 561,794 $ 561,794
Buildings and improvements 6,850,175 6,486,193
Furniture and equipment 10,365,201 9,415,754
----------- -----------
17,777,170 16,463,741
Less accumulated depreciation (9,260,572) (8,314,891)
----------- -----------
Totals $ 8,516,598 $ 8,148,850
=========== ===========
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INVESTMENTS:
A summary of carrying and estimated market values of investments
at September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market Values
Available-for-Sale Costs Gains Losses (Carrying Values)
----------------------------- ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Government-backed bonds $ 11,932,337 $ -- $ (477,670) $ 11,454,667
Corporate bonds 20,230,518 1,897 (437,009) 19,795,406
Utility bonds 3,003,075 -- (35,897) 2,967,178
Pass-through certificates 4,333,481 -- -- 4,333,481
------------ ------------ ------------ ------------
Total fixed maturities 39,499,411 1,897 (950,576) 38,550,732
Equity securities 1,592 2,174 -- 3,766
------------ ------------ ------------ ------------
Totals $ 39,501,003 $ 4,071 $ (950,576) $ 38,554,498
============ ============ ============ ============
<CAPTION>
1996
--------------------------------------------------------------
Amortized
Costs Gross Gross
(Carrying Unrealized Unrealized Estimated
Held-to-Maturity Values) Gains Losses Market Values
----------------------------- ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Government-backed bonds $ 60,005,894 $ 11,775 $ (4,006,114) $ 56,011,555
Corporate bonds 12,056,534 -- (202,717) 11,853,817
Utility bonds 4,989,311 -- (189,652) 4,799,659
Mortgage- and asset-backed
securities 47,696,751 38,062 (1,199,760) 46,535,053
------------ ------------ ------------ ------------
Totals $124,748,490 $ 49,837 $ (5,598,243) $119,200,084
============ ============ ============ ============
</TABLE>
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market Values
Available-for-Sale Costs Gains Losses (Carrying Values)
----------------------------- ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Government-backed bonds $ 15,626,072 $ -- $ (275,286) $ 15,350,786
Corporate bonds 15,627,468 12,621 (143,083) 15,497,006
Utility bonds 999,346 -- (17,158) 982,188
------------ ------------ ------------ ------------
Totals $ 32,252,886 $ 12,621 $ (435,527) $ 31,829,980
============ ============ ============ ============
<CAPTION>
1995
--------------------------------------------------------------
Amortized
Costs Gross Gross
(Carrying Unrealized Unrealized Estimated
Held-to-Maturity Values) Gains Losses Market Values
----------------------------- ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Government-backed bonds $ 71,323,272 $ 46,942 $ (3,901,292) $ 67,468,922
Corporate bonds 68,659,432 6,337 (1,084,387) 67,581,382
Utility bonds 10,653,392 -- (261,680) 10,391,712
Mortgage- and asset-backed
securities 37,437,446 -- (815,577) 36,621,869
------------ ------------ ------------ ------------
Totals $188,073,542 $ 53,279 $ (6,062,936) $182,063,885
============ ============ ============ ============
</TABLE>
All bonds and mortgage- and asset-backed securities held at
September 30, 1996 and 1995 were performing in accordance with
their terms.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INVESTMENTS, CONTINUED:
During the year ended September 30, 1995, the Company entered
into financial futures contracts to hedge its interest rate risk
on certain held-to-maturity debt securities with remaining
contractual terms of approximately eight years against a
potential increase in interest rates. Interest rates declined,
resulting in a realized loss of $1,600,000 associated with such
contracts. The hedging loss has been deferred and is being
amortized over the contractual term of the hedged debt securities
using the interest method. The remaining unamortized hedging
loss at September 30, 1996 was approximately $1,398,000. At
September 30, 1996 and 1995, the Company was not a party to any
derivative financial instruments relative to its investments in
debt or equity securities.
Net unrealized losses, net of deferred federal income taxes, of
approximately $625,000 and $279,000, respectively, on the
available-for-sale portfolio at September 30, 1996 and 1995 are
reported as a separate component of stockholders' equity. During
the year ended September 30, 1994, the Company transferred
approximately $79,000,000 of investments from the available-for-
sale portfolio to the held-to-maturity portfolio. At the date of
transfer, these investments had net unrealized losses of
approximately $1,060,000 before income taxes. These unrealized
losses are being amortized over the term of the investments
transferred using the interest method. At September 30, 1996, the
remaining unamortized loss of approximately $507,000, net of
deferred income taxes, is reported as a reduction of
stockholders' equity.
During the year ended September 30, 1996, in accordance with a
Special Report issued by the Financial Accounting Standards
Board, the Company reassessed and reclassified held-to-maturity
debt securities with a carrying value of approximately
$72,500,000 to the available-for-sale classification. At the date
of the transfer, the debt securities were valued at fair value of
approximately $72,000,000. The difference between the carrying
value and fair value of the reclassified debt securities at the
date of transfer of approximately $500,000 is being recognized
over the remaining contractual term of the securities using the
interest method.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INVESTMENTS, CONTINUED:
The following individual investments (excluding U.S. government
bonds) held by the Company at September 30, 1996 and 1995, were
in excess of ten percent of stockholders' equity.
Carrying
Issuer Amount
---------------------------------------------- ------------
1996:
Mortgage-backed securities:
Residential Funding Mortgage Securities
(four issues) $ 16,142,719
Chase Mortgage Finance Corp.
(seven issues) 10,620,875
Prudential Home Mortgage Securities
(three issues) 7,160,855
Countrywide Funding Corp. 4,852,322
1995:
Mortgage-backed securities:
Residential Funding Mortgage Securities
(three issues) 14,450,307
Chase Mortgage Finance Corp. 4,992,835
Prudential Home Mortgage Securities
(two issues) 7,350,343
Countrywide Funding Corp. 4,821,305
The amortized costs and estimated market values of held-to-
maturity and available-for-sale debt securities at September 30,
1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized Estimated
Cost Market Value
------------ ------------
Available-for-sale debt
securities:
Due in one year or less $ 10,541,669 $ 10,522,470
Due after one year through
five years 13,552,416 13,284,073
Due after five years through
ten years 11,071,845 10,410,708
------------ ------------
35,165,930 34,217,251
Pass-through certificates 4,333,481 4,333,481
------------ ------------
$ 39,499,411 $ 38,550,732
============ ============
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INVESTMENTS, CONTINUED:
Amortized Estimated
Cost Market Value
------------ ------------
Held-to-maturity debt securities:
Due in one year or less $ 7,654,667 $ 7,612,538
Due after one year through
five years 18,557,157 18,137,785
Due after five years through
ten years 50,591,766 46,658,714
Due after ten years 248,149 255,994
------------ ------------
77,051,739 72,665,031
Mortgage- and asset-backed
bonds 47,696,751 46,535,053
------------ ------------
$124,748,490 $119,200,084
============ ============
The Company intends to maintain an available-for-sale portfolio
which may be shifted between investments of differing types and
maturities to attempt to maximize market returns without assuming
unacceptable levels of credit risk. Future purchases assigned to
the held-to-maturity portfolio will be to replace maturing
investments, or increase the overall size of the portfolio (while
maintaining its overall composition).
9. DEBT PAYABLE, CONTINUED:
At September 30, 1996 and 1995, debt payable consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Reverse repurchase agreements with various
securities brokers, interest at 5.0% to
5.8% per annum; due on October 1, 1996;
collateralized by $17,700,000 in U.S.
government-backed bonds $16,834,750
Reverse repurchase agreements with Paine-
Webber, interest at 5.38% per annum; due
on October 4, 1996; collateralized by
$20,000,000 in U.S. Treasury bonds 18,650,000
Reverse repurchase agreements with various
securities brokers, interest at 6.1% to
6.75% per annum; due on October 2, 1995;
collateralized by $25,000,000 in U.S.
Treasury bonds $24,131,625
</TABLE>
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. DEBT PAYABLE, CONTINUED:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Real estate contracts and mortgage notes
payable, interest rates ranging from 3.0%
to 10.9%, due in installments through
2016; collateralized by senior liens on
certain of the Company's real estate
contracts, mortgage notes and real estate
held for sale 2,965,107 1,385,568
Accrued interest payable 151,289 35,258
----------- -----------
$38,601,146 $25,552,451
=========== ===========
</TABLE>
Aggregate amounts of principal and accrued interest payments due
on debt payable at September 30, 1996 are as follows:
Fiscal Year Ending
September 30,
------------------
1997 $37,023,000
1998 710,000
1999 242,000
2000 137,000
2001 187,000
Thereafter 302,146
-----------
$38,601,146
===========
10. DEBENTURE BONDS:
At September 30, 1996 and 1995, debenture bonds consisted of the
following:
<TABLE>
<CAPTION>
Principally
Annual Interest Rates Maturing in 1996 1995
--------------------- ------------------- ------------ ------------
<S> <C> <C> <C>
5% to 6% 1997 $ 537,000 $ 2,486,000
6% to 7% 1997, 1998 and 1999 4,979,000 6,911,000
7% to 8% 1999 and 2000 51,261,000 50,165,000
8% to 9% 1997, 1998 and 2000 84,372,000 85,258,000
9% to 10% 1997 20,136,000 30,044,000
10% to 11% 1998 and 1999 1,749,000 1,951,000
------------ ------------
163,034,000 176,815,000
Compound and accrued interest 29,139,751 24,496,873
------------ ------------
$192,173,751 $201,311,873
============ ============
</TABLE>
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. DEBENTURE BONDS, CONTINUED:
Unamortized debenture issuance costs incurred in connection with
the sale of debentures aggregated $2,597,477 and $3,390,744 at
September 30, 1996 and 1995, respectively, and are included in
deferred costs on the consolidated balance sheets.
Debenture bonds at September 30, 1996 mature as follow:
Fiscal Year Ending
September 30,
------------------
1997 $ 50,030,000
1998 52,163,000
1999 41,335,000
2000 40,408,000
2001 5,877,000
Thereafter 2,360,751
------------
$192,173,751
============
At September 30, 1996, as required by Washington State
regulation, the parent company could not have more than an
aggregate total of $202,300,000 in outstanding debentures
(including accrued and compound interest) and outstanding
preferred stock (based on original sales price) of $49,540,000.
Outstanding preferred stock is limited to the amount outstanding
June 30, 1996 ($49,000,000) plus reinvested dividends ($540,000)
after that date. At September 30, 1996, the Company had total
outstanding debentures of approximately $192,174,000 and total
outstanding preferred stock of approximately $49,496,000.
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. STOCKHOLDERS' EQUITY:
A summary of preferred and common shares at September 30, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
Issued and Outstanding Shares
-------------------------------------------------
1996 1995
----------------------- -----------------------
Authorized
Shares Shares Amount Shares Amount
---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Preferred Stock
Series A 750,000 -- $ -- -- $ --
Series B 200,000 -- -- -- --
Series C 1,000,000 438,343 4,383,432 441,794 4,417,943
Series D 1,375,000 673,915 6,739,150 682,359 6,823,587
Series E 5,000,000 1,039,562 10,395,616 1,038,558 10,385,576
---------- --------- ----------- --------- -----------
8,325,000 2,151,820 $21,518,198 2,162,711 $21,627,376
========== ========= =========== ========= ===========
Common Stock
Class A 222 130 $ 293,417 130 $ 293,417
Class B 222 -- -- -- --
---------- --------- ----------- --------- -----------
444 130 $ 293,417 130 $ 293,417
========== ========= =========== ========= ===========
Subordinate
Preferred
Stock 1,000,000 -- $ -- -- $ --
========== ========= =========== ========= ===========
</TABLE>
The Series E preferred stock has been issued in the following
sub-series:
<TABLE>
<CAPTION>
Issued and Outstanding Shares
-------------------------------------------------
1996 1995
----------------------- -----------------------
Shares Amount Shares Amount
----------------------- --------- -----------
<S> <C> <C> <C> <C>
Series E-1 728,698 $ 7,286,982 748,578 $ 7,485,783
Series E-2 45,579 455,790 45,621 456,208
Series E-3 107,874 1,078,736 108,369 1,083,685
Series E-4 62,978 629,776 62,993 629,929
Series E-5 13,744 137,443 13,747 137,475
Series E-6 80,689 806,889 59,250 592,496
--------- ----------- --------- -----------
1,039,562 $10,395,616 1,038,558 $10,385,576
========= =========== ========= ===========
</TABLE>
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. STOCKHOLDERS' EQUITY, CONTINUED:
PREFERRED STOCK
Series A preferred stock has a par value of $1 per share, is
cumulative and the holders thereof are entitled to receive
dividends at the annual rate of 8.5%. Series B preferred stock
is cumulative and the holders thereof are entitled to receive
monthly dividends at the annual rate of two percentage points
over the rate payable on six-month U.S. Treasury Bills as
determined by the Treasury Bill auction last preceding the
monthly dividend declaration. Series C, D and E-1 preferred
stock are also cumulative and the holders thereof are entitled
to receive monthly dividends at an annual rate equal to the
highest of the "Treasury Bill Rate," the "Ten Year Constant
Maturity Rate" or the "Twenty Year Constant Maturity Rate"
determined immediately prior to the declaration date. The Board
of Directors may, at its sole option, declare a higher dividend
rate; however, dividends shall be no less than 6% or greater
than 14% per annum. Series E-2, E-3, E-4, E-5 and E-6 preferred
stock are also cumulative and the holders thereof are entitled
to receive monthly dividends at an annual rate of one-half of
one percent more than the rate in effect for the E-1 series;
however, dividends shall be no less than 6% or greater than 14%
per annum.
Series B, C, D and E-1 preferred stock have a par value of $10,
were sold to the public for $10 and are callable at the sole
option of the Board of Directors at $10.50 per share reduced
proratably to $10.20 per share as of the date five years from
the date of issuance. Series E-2, E-3, E-4, E-5 and E-6
preferred stock have a par value of $10 per share, were sold to
the public at $100 per share and are callable at the sole
option of the Board of Directors at $100 per share.
All preferred stock series have liquidation preferences equal
to their issue price, are non-voting and are senior to the
common shares as to dividends. All preferred stock dividends
are based upon the original issue price.
At September 30, 1996, as required by state regulation, the
amount of the Company's aggregate total outstanding preferred
stock and debentures was limited (see Note 10).
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. STOCKHOLDERS' EQUITY, CONTINUED:
SUBORDINATE PREFERRED STOCK
Subordinate preferred shares, no par value, shall be entitled
to receive dividends as authorized by the Board of Directors,
provided that such dividend rights are subordinate and junior
to all series of preferred stock. Subordinate preferred shares
shall be entitled to distributions in liquidation in such
priority as established by the Board of Directors prior to the
issuance of any such shares. These liquidation rights shall at
all times be subordinate and junior to all series of preferred
stock. At September 30, 1996 and 1995, no subordinate preferred
stock had been issued.
COMMON STOCK
Prior to September 30, 1994, Class A and B common stock had a
par value of $1 per share. On September 30, 1994, the Company's
Board of Directors authorized a 2,250:1 reverse stock split and
changed the par value from $1 per share to $2,250 per share.
All common shares reflect the reverse stock split. Class B is
senior to Class A common stock as to liquidation up to the
amount of the original investment. Any remaining amounts are
then distributed pro rata to Class A and Class B common
stockholders. Class B common stock has no voting rights. All
series of common stock are subordinate in liquidation to all
series of preferred stock.
Dividend restrictions are imposed by regulatory authorities on
the insurance subsidiary in which the Company has a 96.5% or
greater stock ownership interest. These restrictions are
limited to the unassigned statutory surplus of the insurance
subsidiary which totaled approximately $5,567,000 at
September 30, 1996 (see Note 15).
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. INCOME TAXES:
The Company files a consolidated federal income tax return with
all of its subsidiaries.
The income tax effects of the temporary differences giving rise
to the Company's deferred tax assets and liabilities as of
September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996
-------------------------
Assets Liabilities
----------- -----------
<S> <C> <C>
Allowance for losses on real estate assets $ 2,678,016
Reserves on repossessed real estate 707,643
Deferred contract acquisition costs and
discount yield recognition $16,715,163
Office properties and equipment 1,776,499
Deferred policy acquisition costs 22,964,052
Life insurance and annuity reserves 9,018,029
Guaranty fund liability 1,353,320
Investments 636,939
Tax credit carryforwards 1,742,000
Other 959,206
Net operating loss carryforwards 9,739,608
----------- -----------
Total deferred income taxes $26,197,822 $42,092,653
=========== ===========
<CAPTION>
1995
-------------------------
Assets Liabilities
----------- -----------
<S> <C> <C>
Allowance for losses on real estate assets $ 1,325,773
Reserves on repossessed real estate 867,550
Deferred contract acquisition costs and
discount yield recognition $18,224,880
Office properties and equipment 1,529,695
Deferred policy acquisition costs 22,653,678
Life insurance and annuity reserves 6,395,750
Guaranty fund liability 1,047,320
Investments 1,377,602
Tax credit carryforwards 1,115,000
Other 863,898
Net operating loss carryforwards 19,916,089
----------- -----------
Total deferred income taxes $31,531,380 $43,785,855
=========== ===========
</TABLE>
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. INCOME TAXES, CONTINUED:
No valuation allowance has been established to reduce deferred
tax assets as it is more likely than not that these assets will
be realized due to the future reversals of existing taxable
temporary differences. Realization is dependent on the
generation of sufficient taxable income prior to expiration of
the net operating loss carryforwards. The amount of the deferred
tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the
carryforward period are reduced.
Following is a reconciliation of the provision for income taxes
to an amount as computed by applying the statutory federal income
tax rate to income before income taxes:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Federal income taxes at statutory
rate $ 4,209,817 $ 3,224,472 $ 2,956,219
State taxes and other 25,652 (116,575) 36,257
----------- ----------- -----------
Income tax provision $ 4,235,469 $ 3,107,897 $ 2,992,476
=========== =========== ===========
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current $ 595,113 $ 359,907 $ 348,306
Deferred 3,640,356 2,747,990 2,644,170
----------- ----------- -----------
$ 4,235,469 $ 3,107,897 $ 2,992,476
=========== =========== ===========
</TABLE>
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. INCOME TAXES, CONTINUED, CONTINUED:
At September 30, 1996, the Company and its subsidiaries had
unused net operating loss carryforwards, for income tax purposes,
as follows:
<TABLE>
<CAPTION>
Life
Non-Life Company
Group Net Net Net
Operating Operating Operating
Expiring in Losses Losses Losses
----------- ----------- ----------- ------------
<S> <C> <C> <C>
2004 $ 3,766,219 $ 3,766,219
2005 6,409,762 6,409,762
2006 5,612,555 5,612,555
2007 945,516 945,516
2008 $11,911,853 11,911,853
----------- ----------- -----------
$16,734,052 $11,911,853 $28,645,905
=========== =========== ===========
</TABLE>
Federal tax regulations require non-life net operating losses to
be offset first against non-life income for the tax year and then
against a maximum of 35% of taxable life income for the year, if
any.
At September 30, 1996, the Company has alternative minimum tax
credits of approximately $1,237,000 and general business tax
credit carryforwards of approximately $505,000 available to
reduce regular income taxes payable. The general business tax
credit carryforwards begin to expire in 2004.
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. DEFERRED COSTS:
An analysis of deferred costs related to policy acquisition and
debenture issuance for the years ended September 30, 1996, 1995
and 1994 is as follows:
<TABLE>
<CAPTION>
Policy Debenture
Acquisition Issuance Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance at September 30, 1993 $70,024,363 $ 3,422,308 $73,446,671
Deferred during the year:
Commissions 5,572,146 1,381,525 6,953,671
Other expenses 2,493,703 510,588 3,004,291
----------- ----------- -----------
Total deferred 78,090,212 5,314,421 83,404,633
Amortized during the year (7,015,570) (1,592,987) (8,608,557)
Reduction upon sale of subsidiary (688,559) (688,559)
----------- ----------- -----------
Balance at September 30, 1994 71,074,642 3,032,875 74,107,517
Deferred during the year:
Commissions 9,383,938 1,461,033 10,844,971
Other expenses 3,587,804 280,196 3,868,000
----------- ----------- -----------
Total deferred 84,046,384 4,774,104 88,820,488
Amortized during the year (10,300,547) (1,383,360) (11,683,907)
Reduction upon sale of subsidiary (2,614,778) (2,614,778)
----------- ----------- -----------
Balance at September 30, 1995 71,131,059 3,390,744 74,521,803
Deferred during the year:
Commissions 6,503,580 191,064 6,694,644
Other expenses 3,438,804 402,360 3,841,164
----------- ----------- -----------
Total deferred 81,073,443 3,984,168 85,057,611
Amortized during the year (9,140,559) (1,386,691) (10,527,250)
----------- ----------- -----------
Balance at September 30, 1996 $71,932,884 $ 2,597,477 $74,530,361
=========== =========== ===========
</TABLE>
The amortization of deferred policy acquisition costs, which is
based on the estimated gross profits of the underlying life and
annuity products, could be changed significantly in the near term
due to changes in the interest rate environment. As a result, the
recoverability of these costs may be adversely affected in the
near term.
F-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. LIFE INSURANCE AND ANNUITY RESERVES:
Life insurance and annuity reserves are based upon contractual
amounts due to the annuity holder, including accrued interest.
Annuity contract interest rates ranged from 4.25% to 10.65% and
4.45% to 10.65% during the years ended September 30, 1996 and
1995, respectively. Interest assumptions used to compute life
insurance reserves ranged from 5.0% to 6.5% and 5.25% to 6.5%
during the years ended September 30, 1996 and 1995, respectively.
The Company's subsidiary has ceded a portion of certain life
insurance risks and the related premiums to other companies.
These insurance transactions permit the Company to recover
defined portions of losses from claims on life insurance policies
issued by the Company. The reinsured risks are treated as though
they are risks for which the subsidiary is not liable. Life
insurance reserves, as reported in these financial statements, do
not include reserves on the ceded business. The face value of
life insurance policies ceded to other companies was
approximately $58,679,000 and $62,906,000 at September 30, 1996
and 1995, respectively. Life insurance premiums ceded were
$354,830 and $364,553 for fiscal 1996 and 1995, respectively. The
Company is contingently liable for claims on ceded life insurance
business in the event the reinsuring companies do not meet their
obligations under those reinsurance agreements.
All states in which the Company's life insurance subsidiary
operates have laws requiring solvent life insurance companies to
pay assessments to protect the interests of policyholders of
insolvent life insurance companies. Assessments are levied on all
member insurers in each state based on a proportionate share of
premiums written by member insurers in the lines of business in
which the insolvent insurer engaged. A portion of these
assessments can be offset against the payment of future premium
taxes. However, future changes in state laws could decrease the
amount available for offset.
The net amounts expensed by the Company's life insurance
subsidiary for guaranty fund assessments and amounts estimated to
be assessed for the years ended September 30, 1996, 1995 and 1994
were $900,000, $782,000 and $192,000, respectively. The Company's
estimate of these liabilities is based upon updated information
from the National Organization of Life and Health Insurance
Guaranty Associations regarding insolvencies occurring during the
years 1988 through 1994. These estimates are subject to future
revisions based upon the ultimate resolution of the insolvencies
and resultant losses. As a result of these uncertainties, the
F-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. LIFE INSURANCE AND ANNUITY RESERVES, CONTINUED:
Company's estimate of future assessments could change in the near
term. The Company does not believe that the amount of future
assessments associated with known insolvencies after 1994 will be
material to its financial condition or results of operations. At
September 30, 1996, the amount of estimated future guaranty fund
assessments of approximately $3,980,000 have been recorded, which
is net of a 8.25% discount rate applied to the estimated payment
term of approximately seven years. The remaining unamortized
discount associated with this accrual was approximately $832,000
at September 30, 1996.
15. STATUTORY ACCOUNTING:
The Company's life insurance subsidiary is required to file
statutory financial statements with state insurance regulatory
authorities. Accounting principles used to prepare these
statutory financial statements differ from generally accepted
accounting principles (GAAP). Selected statutory and the GAAP
financial statement balances for insurance subsidiaries as of and
for the years ended September 30, 1996, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
Statutory GAAP
------------ -----------
<S> <C> <C>
Stockholders' equity:
1996 $48,721,922 $81,605,742
1995 43,340,817 78,826,654
1994 48,206,960 77,142,373
Net income:
1996 $ 7,224,359 $ 3,076,252
1995 2,634,919 2,717,893
1994 12,544,070 8,449,317
Unassigned statutory surplus and retained earnings:
1996 $ 5,566,922 $38,450,742
1995 1,985,817 38,233,333
1994 6,826,960 38,559,708
</TABLE>
Due to the sale of OSL during fiscal 1995, stockholders' equity
and unassigned statutory surplus and retained earnings amounts
above do not include OSL at September 30, 1996 and 1995. Also,
the 1995 net income above only includes OSL operations through
May 31, 1995.
F-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. STATUTORY ACCOUNTING, CONTINUED:
Under applicable Washington State Insurance laws and regulations,
the Company's life insurance subsidiary is required to maintain
minimum levels of surplus, determined in accordance with
statutory accounting practices, in the aggregate amount of
$150,000. The Revised Code of Washington defines surplus as "the
excess of statutory assets over statutory liabilities, accounting
for the pear value of capital stock as a liability." At
September 30, 1996, the Company's life insurance subsidiary was
in compliance with this requirement.
The National Association of Insurance Commissioners (NAIC)
currently is in the process of codifying statutory accounting
practices, the result of which is expected to constitute the only
source of "prescribed" statutory accounting practices.
Accordingly, that project, which is expected to be completed in
1997, will likely change, to some extent, prescribed statutory
accounting practices that insurance enterprises use to prepare
their statutory financial statements. Written approval was
received from the Insurance Department of the state of Washington
to capitalize the underwriting fees charged to the life insurance
subsidiary by Metropolitan and to amortize these fees as an
adjustment of the yield on acquired receivables. Statutory
accounting practices prescribed by the state of Washington do not
describe the accounting required for this type of transaction. As
of September 30, 1996, this permitted accounting practice
increased statutory surplus by approximately $28,700,000 over
what it would have been had prescribed practices disallowed this
accounting treatment.
The regulatory authorities impose minimum risk-based capital
requirements on insurance enterprises that were developed by the
NAIC. The formulas for determining the amount of risk-based
capital (RBC) specify various weighting factors that are applied
to financial balances or various levels of activity based on
perceived degree of risk. Regulatory compliance is determined by
a ratio of the enterprise's regulatory total adjusted capital, as
defined by the NAIC, to its authorized control level, RBC, as
defined by the NAIC. Enterprises below specific trigger points or
ratios are classified within certain levels, each of which
requires specified corrective action. The RBC measure of the
insurance subsidiary at September 30, 1996 and 1995 was above the
minimum standards.
F-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS:
The following table summarizes interest costs, net of amounts
capitalized and income taxes paid during the years ended
September 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Interest, net of amounts
capitalized $12,653,377 $20,214,329 $23,541,173
Income taxes 2,503,482 1,157,155 333,154
</TABLE>
Non-cash investing and financing activities of the Company during
the years ended September 30, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Loans to facilitate the sale of
real estate held $39,102,941 $34,102,247 $33,461,966
Transfers between annuity
products 17,051,327 58,012,857 22,248,418
Transfer of investments from
available-for-sale portfolio
to held-to-maturity portfolio 79,001,795
Transfer of investment from
held-to-maturity portfolio
to available-for-sale portfolio 72,572,322
Transfer of property from land,
buildings and equipment
to real estate held for sale
and development 1,598,999 258,894
Change in net unrealized (losses)
gains on investments, net (244,853) 2,005,960 (3,371,012)
Real estate held for sale and
development acquired through
foreclosure 14,270,520 13,850,388 19,245,977
Debt assumed upon foreclosure of
real estate contracts 16,059 129,062
Assumption of other debt payable
in connection with the acqui-
sition of real estate contracts
and mortgage notes 3,633,657 526,868 191,213
</TABLE>
F-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS, CONTINUED:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Reduction in assets and liabili-
ties associated with sale of
subsidiaries:
Investment securities 9,401,577
Real estate contracts and
mortgage notes receivable 32,391,856 27,267,736
Real estate held for sale 514,889 503,000
Allowance for losses on real
estate assets 322,548 287,439
Deferred costs 2,620,571 688,559
Equipment 13,395
Other assets 186,316 22,176
Annuity reserves 44,558,959
Debenture bonds and accrued
interest 30,111,270
Debt payable 120,953
Accounts payable and accrued
expenses 1,653,970 318,574
</TABLE>
17. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined using available market
information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market
data and to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange.
The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair
value amounts.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value. Potential income tax
ramifications related to the realization of unrealized gains and
losses that would be incurred in an actual sale and/or settlement
have not been taken into consideration.
PUBLICLY TRADED INVESTMENT SECURITIES - Fair value is
determined by quoted market prices.
F-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE - For
loans, the discount rate is estimated using rates currently
offered for loans of similar characteristics that reflect the
credit and interest rate risk inherent in the loan. For
residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment
estimates. The prepayment estimates are based upon internal
historical data.
OTHER RECEIVABLE INVESTMENTS - The fair value of other
receivable investments is based on the discounted value of
contractual cash flows. The discount rate is estimated using
the rates currently offered for investments with similar credit
ratings and similar remaining maturities.
DEBENTURE BONDS AND DEBT PAYABLE - The fair value of debenture
bonds and debt payable is based on the discounted value of
contractual cash flows. The discount rate is estimated using
the rates currently offered for debt with similar remaining
maturities.
SECURITIES SOLD, NOT OWNED - Fair value is determined by quoted
market prices, including accrued interest necessary to settle
repurchase.
OTHER FINANCIAL ASSETS AND LIABILITIES - The carrying amount of
financial instruments in these classifications, including
insurance policy loans approximates fair value. Policy loans
are charged interest on a variable rate subject to current
market conditions, thus carrying amounts approximate fair
value.
The estimated fair values of the following financial
instruments as of September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996
---------------------------
Carrying
Amounts Fair Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $167,879,080 $167,879,080
Investments:
Available-for-sale securities 38,554,498 38,554,498
Held-to-maturity securities 124,748,490 119,200,084
Real estate contracts and mortgage
notes receivable 642,570,771 668,373,000
Other receivable investments 107,494,150 109,258,000
Financial liabilities:
Debenture bonds - principal and
compound interest 189,320,833 191,631,000
Debt payable - principal 38,449,857 38,486,000
Securities sold, not owned 132,652,334 132,652,334
</TABLE>
F-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
<TABLE>
<CAPTION>
1995
---------------------------
Carrying
Amounts Fair Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 32,798,627 $ 32,798,627
Investments:
Available-for-sale securities 31,829,980 31,829,980
Held-to-maturity securities 188,073,542 182,063,885
Real estate contracts and mortgage
notes receivable 580,158,575 608,775,000
Other receivable investments 41,591,415 45,446,000
Financial liabilities:
Debenture bonds - principal and
compound interest 198,286,390 205,004,000
Debt payable - principal 25,517,193 25,564,000
</TABLE>
LIMITATIONS - The fair value estimates are made at a discrete
point in time based on relevant market information and
information about the financial instruments. Because no market
exists for a significant portion of these financial
instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the
estimates. Accordingly, the estimates presented herein are not
necessarily indicative of what the Company could realize in a
current market exchange.
F-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. RELATED-PARTY TRANSACTIONS:
During the years ended September 30, 1996 and 1995, the Company
had the following related-party transactions with Summit and
other affiliates:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Real estate contracts and mortgage notes
receivable and other receivable invest-
ments sold to Summit and OSL $ 45,137,473 $ 59,578,347
Contract acquisition costs charged to Summit
and OSL on sale of real estate contracts
and mortgage notes receivable and other
receivable investments, including manage-
ment underwriting fees 1,753,206 1,967,409
Gains on real estate contract and mortgage
notes receivable and other receivable
investments purchased from Summit and OSL 335,469
Service fees paid to Summit Property
Development 2,038,202 1,250,017
Commissions and service fees paid to MIS 369,080 1,124,481
Dividends paid to Summit on preferred stock 200,256 256,991
</TABLE>
At September 30, 1996 and 1995, the Company had payables due to
affiliates of $1,205,920 and $1,962,923, respectively, related
primarily to advance payments on receivable acquisitions.
19. BUSINESS SEGMENT REPORTING:
The Company principally operates in the three industry segments
which encompass: (1) the investing in real estate contracts and
mortgage notes receivables, other receivables and investment
securities, (2) insurance and annuity operations, and (3)
property development. The insurance segment also invests a
substantial portion of the proceeds from insurance and annuity
operations in real estate contracts and mortgage notes
receivables, other receivables and investment securities.
F-49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. BUSINESS SEGMENT REPORTING, CONTINUED:
Information about the Company's separate business segments and
in total as of and for the years ended September 30, 1996, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
Property Intersgement
Investing Insurance Development Elimination Total
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
September 30, 1996:
Revenues $ 37,093,527 $ 92,893,077 $ 33,948,826 $ (7,063,061) $ 156,672,179
Income (loss) from operations 9,869,632 6,080,155 (3,567,973) 12,381,814
Identifiable assets, net 237,724,744 1,133,741,015 68,148,987 (156,955,928) 1,282,658,826
Depreciation and amortization 1,388,222 181,093 3,048,349 4,617,664
Capital expenditures 1,325,151 44,651 1,369,802
September 30, 1995:
Revenues 29,861,448 88,344,548 27,178,017 (7,276,528) 138,107,483
Income (loss) from operations 5,573,034 4,695,158 (784,452) 9,483,740
Identifiable assets, net 204,166,053 929,358,768 78,272,958 (131,329,779) 1,078,468,000
Depreciation and amortization 1,172,856 119,476 1,730,901 3,023,233
Capital expenditures 811,006 83,667 894,673
September 30, 1994:
Revenues 35,687,861 91,047,193 18,932,334 (7,481,425) 138,185,963
Income (loss) from operations (3,421,338) 13,291,685 (1,175,586) 8,694,761
Identifiable assets, net 199,843,275 935,051,736 60,678,188 (132,283,296) 1,063,289,903
Depreciation and amortization 1,203,909 84,918 777,538 2,066,365
Capital expenditures 453,842 17,255 471,097
</TABLE>
F-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. PARENT COMPANY ONLY FINANCIAL STATEMENTS:
The condensed balance sheets of Metropolitan Mortgage & Securities
Co., Inc. ("Metropolitan" or the "parent company") at September 30,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,807,147 $ 15,965,359
Investments 8,840,977 6,153,393
Real estate contracts and mortgage notes
receivable and other receivable investments 72,018,452 30,429,638
Real estate held for sale and development 69,360,885 48,574,018
Allowance for losses on real estate assets (6,297,676) (3,108,597)
Equity in subsidiary companies 97,302,358 117,281,602
Land, buildings and equipment, net 9,376,863 9,049,942
Prepaid expenses and other assets, net 12,620,101 10,243,463
Accounts and notes receivable, net 5,190,592 893,983
Receivables from affiliates 24,626,214 43,812,436
------------ ------------
Total assets $297,845,913 $279,295,237
============ ============
LIABILITIES
Debenture bonds and accrued interest $192,173,751 $201,311,873
Debt payable 13,155,334 5,645,410
Accounts payable and accrued expenses 7,463,342 2,917,769
Deferred underwriting fee income 38,710,154 28,849,743
------------ ------------
Total liabilities 251,502,581 238,724,795
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $10 par (liquidation
preference, $49,495,906 and $47,825,310,
respectively) 21,518,198 21,627,106
Subordinate preferred stock, no par -- --
Common stock, $2,250 par 293,417 293,417
Additional paid-in capital 16,791,670 14,917,782
Retained earnings 8,731,070 4,561,554
Net unrealized losses on investments (991,023) (829,417)
------------ ------------
Total stockholders' equity 46,343,332 40,570,442
------------ ------------
Total liabilities and stockholders'
equity $297,845,913 $279,295,237
============ ============
</TABLE>
F-51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Metropolitan's condensed statements of income for the years ended
September 30, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest and earned discounts $ 8,303,775 $ 8,721,451 $ 8,756,861
Fees, commissions, service and
other income 28,567,964 21,788,065 15,056,870
Real estate sales 23,499,363 4,700,560 7,607,652
Realized net gains on sales of
investments and receivables 2,357,010 1,134,510 366,409
----------- ----------- -----------
Total revenues 62,728,112 36,344,586 31,787,792
----------- ----------- -----------
Expenses:
Interest, net 15,630,068 16,205,083 17,616,074
Cost of real estate sold 22,266,024 3,719,349 7,330,073
Provision for losses on real
estate assets 4,578,315 2,316,354 737,042
Salaries and employee benefits 12,085,532 10,035,360 9,332,118
Other operating expenses 1,523,541 816,134 2,142,358
----------- ----------- -----------
Total expenses 56,083,480 33,092,280 37,157,665
----------- ----------- -----------
Income (loss) from operations
before income taxes and equity
in net income of subsidiaries 6,644,632 3,252,306 (5,369,873)
Income tax benefit (provision) (2,268,916) (1,105,581) 1,813,051
----------- ----------- -----------
Income (loss) before equity in
net income of subsidiaries 4,375,716 2,146,725 (3,556,822)
Equity in net income of
subsidiaries 3,661,948 4,155,921 9,034,578
----------- ----------- -----------
Net income $ 8,037,664 $ 6,302,646 $ 5,477,756
=========== =========== ===========
</TABLE>
F-52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Metropolitan's condensed statements of cash flows for the years
ended September 30, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 8,037,664 $ 6,302,646 $ 5,477,756
Adjustments to reconcile
net income to net cash
provided by operating
activities 12,717,338 (3,909,025) (3,679,005)
----------- ----------- -----------
Net cash provided by operating
activities 20,755,002 2,393,621 1,798,751
----------- ----------- -----------
Cash flows from investing
activities:
Principal payments on real
estate contracts and
mortgage notes receivable
and other receivable
investments 12,480,667 5,069,237 10,550,918
Proceeds from sales of real
estate contracts and
mortgage notes receivable
and other receivable
investments 24,297,171 34,946,274
Acquisition of real estate
contracts and mortgage
notes and other receiv-
able investments (32,175,162) (18,449,630) (6,520,436)
Proceeds from real estate
sales 9,221,958 1,876,900 2,915,452
Proceeds from sales of
investments 3,294,326 7,647,099 361,132
Proceeds from maturities of
investments 5,800,000
Purchase of investments (11,689,836) (12,108,637) (399,465)
Additions to real estate
held for sale and develop-
ment (17,191,856) (12,483,117) (7,945,133)
Capital expenditures (1,271,041) (803,302) (469,475)
Net change in investment
in and advances to
subsidiaries (16,293,198) (9,591,121) 6,332,550
----------- ----------- -----------
Net cash provided by
(used in) investing
activities (23,526,971) (3,896,297) 4,825,543
----------- ----------- -----------
</TABLE>
F-53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from financing
activities:
Net borrowings (repayments)
from banks and others 7,497,807 4,156,501 (3,324,722)
Issuance of debenture bonds 9,125,303 53,120,179 46,414,738
Issuance of preferred stock 2,135,714 4,513,293 1,772,649
Repayment of debenture bonds (22,906,185) (48,970,828) (51,610,174)
Cash dividends (3,868,148) (4,539,503) (3,510,338)
Redemption and retirement of
stock (370,734) (266,460) (775,742)
----------- ----------- -----------
Net cash provided by
(used in) financing
activities (8,386,243) 8,013,182 (11,033,589)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (11,158,212) 6,510,506 (4,409,295)
Cash and cash equivalents at
beginning of year 15,965,359 9,454,853 13,864,148
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 4,807,147 $15,965,359 $ 9,454,853
=========== =========== ===========
</TABLE>
Non-cash investing and financing activities not included in
Metropolitan's condensed statements of cash flows for the years
ended September 30, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Loans to facilitate the sale of
real estate $14,277,405 $ 2,823,660 $ 4,692,200
Real estate acquired through
foreclosure 198,454 1,219,983 2,166,655
Debt assumed with acquisition of
real estate contracts and
mortgage notes and debt assumed
upon foreclosure of real estate
contracts 113,876 81,530
Change in net unrealized gains
(losses) on investments (161,606) 2,005,960 (3,371,012)
Increase in assets and liabili-
ties associated with liquida-
tion of subsidiary:
Real estate contracts and
mortgage notes receivable 30,052,954
F-54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Real estate held for sale 27,915,041
Allowance for losses on
real estate assets 1,107,129
Land, building and equipment,
net 15,518
Other assets 1,911,314
Accounts receivable 2,963,966
Debt payable 13,948
Accounts payable and accrued
expenses 2,759,214
Investments in and advances to
subsidiaries 58,978,502
</TABLE>
Accounting policies followed in the preparation of the preceding
condensed financial statements of Metropolitan (parent company
only) are the same as those policies described in the
consolidated financial statements except that the equity method
was used in accounting for the investments in and net income from
subsidiaries.
At September 30, 1996 and 1995, Metropolitan's debt payable
consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Reverse repurchase agreement with a securities
broker, interest at 5.8% per annum, due
October 1, 1996; collateralized by
$2,700,000 in U.S. government-backed bonds $ 2,678,500
Reverse repurchase agreement with a securities
broker, interest at 6.75% per annum, due
October 2, 1995; collateralized by
$5,000,000 in U.S. Treasury bonds $ 4,606,625
Real estate contracts and mortgage notes
payable, interest rates ranging from 3% to
10.9%, due in installments through 2016;
collateralized by senior liens on certain
of the Company's real estate contracts,
mortgage notes and real estate held for
sale 10,456,496 1,016,616
Accrued interest payable 20,338 22,169
----------- -----------
$13,155,334 $ 5,645,410
=========== ===========
</TABLE>
F-55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Aggregate amounts of principal payments due on the parent
company's debt payable are expected to be as follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 3,040,000
1998 364,000
1999 393,000
2000 356,000
2001 374,000
Thereafter 8,628,334
------------
$ 13,155,334
============
At September 30, 1996 and 1995, Metropolitan's debenture bonds
payable consisted of the following:
<TABLE>
<CAPTION>
Principally
Annual Interest Rates Maturing in 1996 1995
--------------------- ------------------- ------------ ------------
<S> <C> <C> <C>
5% to 6% 1997 $ 537,000 $ 2,486,000
6% to 7% 1997, 1998 and 1999 4,979,000 6,911,000
7% to 8% 1999 and 2000 51,261,000 50,165,000
8% to 9% 1997, 1998 and 2000 84,372,000 85,258,000
9% to 10% 1997 20,136,000 30,044,000
10% to 11% 1998 and 1999 1,749,000 1,951,000
------------ ------------
163,034,000 176,815,000
Compound and accrued interest 29,139,751 24,496,873
------------ ------------
$192,173,751 $201,311,873
============ ============
</TABLE>
Unamortized debenture issuance costs totaled $2,597,477 at
September 30, 1996 and $3,390,744 at September 30, 1995.
F-56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Maturities of the parent company's debenture bonds are as
follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 50,030,000
1998 52,163,000
1999 41,335,000
2000 40,408,000
2001 5,877,000
Thereafter 2,360,751
------------
$192,173,751
============
Metropolitan had the following related party transactions with
its various subsidiaries and affiliated entities:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Dividends received:
Summit Securities, Inc. $ 1,422,007
Old Standard Life Insurance
Company $ 1,922,000 700,000
Metropolitan Mortgage &
Securities Co. of Alaska $ 1,243,950 225,000
Spokane Mortgage Co. 125,000 1,800,000
Western United Life Assurance
Company 441,510 288,208 2,604,875
Beacon Properties, Inc. 185,000 360,000 330,000
Consumers Group Holding Co.,
Inc. 1,880,450 723,250 6,791,358
Metropolitan Mortgage Hawaii,
Inc. 1,770,000
Metropolitan Investment
Securities, Inc. 138,950
Broadmore Park Factory Outlet,
Inc. 85,000
----------- ----------- -----------
$ 3,835,910 $ 3,557,408 $15,643,240
=========== =========== ===========
Fees, commissions, service and
other income $26,969,251 $18,829,557 $13,814,334
Interest income 1,858,521 4,152,257 3,218,813
</TABLE>
F-57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Metropolitan charged various subsidiaries and affiliated entities
for underwriting fees of $29,362,000 in 1996, $14,936,306 in 1995
and $13,248,132 in 1994 related to contracts sold to these
entities. Amounts charged to subsidiaries are deferred and
recognized as income over the estimated life of the contracts.
Amounts amortized into service fee income were $18,323,435 in
1996, $10,416,849 in 1995 and $6,596,877 in 1994.
The underwriting fees are based upon a yield requirement
established by the purchasing entity. For contracts sold to
Western United Life Assurance Co. (Western United), one of
Metropolitan's subsidiaries, the yield is guaranteed by
Metropolitan. In connection with its guarantee, Metropolitan has
holdbacks of $12,538,000 and $6,945,473 at September 30, 1996 and
1995, respectively.
F-58
<PAGE>
<PAGE>
<PAGE> Page 98
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.
See "Compensation Committee Interlocks and Insider
Participation"
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.
<PAGE> Page 99
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
<PAGE> Page 99
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).
<PAGE> Page 100
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.
<PAGE> Page 102
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
<PAGE> Page 103
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 certificates52,030,232 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
============ ============
<PAGE> Page 104
</TABLE>
<PAGE> Page 105
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>
<PAGE> Page 106
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>
<PAGE> Page 107
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>
<PAGE> Page 108
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
<PAGE> Page 109
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 >$100,000738 6%-13% $108,873,697$ 5,687,601
First Mortgage > $50,0002,500 6%-13% 161,285,463 7,443,607
First Mortgage < $50,00013,5686%-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 --
<PAGE> Page 109
Second or Lower< $50,000358 6%-13% 3,487,974 191,504
COMMERCIAL
First Mortgage >$100,000248 6%-13% 52,072,095 1,248,896
First Mortgage > $50,000252 6%-13% 18,218,639 500,571
First Mortgage < $50,000447 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 > $50,000151 6%-13% 9,697,972 220,731
First Mortgage < $50,0002178 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>
<PAGE> Page 111
<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>
<PAGE> Page 112
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
<PAGE> Page 113
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 $567,256,298
============ ============ ============
</TABLE>
<PAGE> Page 114
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed this 18th day of June 1997 on its behalf by the
undersigned, thereunto duly authorized.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
By /s/ C. PAUL SANDIFUR, JR.
_____________________________________________
C. Paul Sandifur, Jr., Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ C. PAUL SANDIFUR, JR. President, Director and
Chief Executive Officer June 18, 1997
________________________
C. Paul Sandifur, Jr.
/s/ Bruce J. Blohowiak Chief Operating Officer
Executive Vice President, June 18, 1997
Director
________________________
/s/ STEVEN CROOKS Controller and Vice
President, Principal
Financial Officer June 18, 1997
________________________
Steven Crooks
/s/ REUEL SWANSON Secretary and Director June 18, 1997
________________________
Reuel Swanson
/S/ Irv Marcus Director June 18, 1997
________________________
Irv Marcus
<PAGE> Page 115
<TABLE>
<CAPTION>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
The ratio of adjusted earnings to fixed charges and preferred
stock dividends was computed using the following tabulations to
compute adjusted earnings and the defined fixed charges and preferred
stock dividends.
Year Ended
September 30
(Dollars in Thousands)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income (loss) before extra-
ordinary item................$ 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>
