<PAGE> 1
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1997
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.
A WASHINGTON CORPORATION IRS EMPLOYER NO.: 91-0609840
929 WEST SPRAGUE AVENUE, SPOKANE, WASHINGTON 99201
(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:
Variable Rate Cumulative Preferred Stock, Series C
Variable Rate Cumulative Preferred Stock, Series D
Variable Rate Cumulative Preferred Stock, Series E-1
Variable Rate Cumulative Preferred Stock, Series E-2
Variable Rate Cumulative Preferred Stock, Series E-3
Variable Rate Cumulative Preferred Stock, Series E-4
Variable Rate Cumulative Preferred Stock, Series E-5
Variable Rate Cumulative Preferred Stock, Series E-6
Variable Rate Cumulative Preferred Stock, Series E-7
__________________________________________________________________
(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
<PAGE> 2
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 September 30, 1997.
Class A Common Stock: 130
Documents incorporated by reference: None
<PAGE> 3
PART I
ITEM 1. BUSINESS
For ease of reading, the following is a compilation of several of the
defined terms which appear regularly within this document.
Consolidated Group: This term refers to the combined businesses
consisting of Metropolitan and all of its subsidiaries.
Debentures: This term refers jointly to all Series of Debentures issued
by Metropolitan.
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: This term refers jointly to all Series of Preferred
Stock issued by Metropolitan.
Receivables: Investments in cash flows, consisting of obligations
collateralized by real estate, structured settlements, annuities, lottery
prizes and other investments.
Western United: Western United Life Assurance Company, a subsidiary of
Metropolitan.
Affiliated Companies: The following companies are affiliated with
Metropolitan through the common control of C. Paul Sandifur, Jr. Metropolitan
and its subsidiaries provide services to these companies for a fee and engage
in various business transactions with these companies. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" under Item 13.
Arizona Life: Arizona Life Insurance Company
MIS: Metropolitan Investment Securities, Inc.
Old Standard: Old Standard Life Insurance Company.
Summit: Summit Securities, Inc.
Summit PD: Summit Property Development, Inc.
<PAGE> 4
ORGANIZATIONAL CHART
(as of September 30, 1997)
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
_________________________________|________________________________
| | |
100% | 96.5%*
Metwest Mortgage | Consumers Group
Services, Inc. | Holding Co, Inc.
| |
| 100%
| Consumers Insurance
| Co., Inc.
| |
| 75.5%
24.5% -> Western United
Life Assurance Co.
The above chart lists the Consolidated Group's principal operating
subsidiaries and their ownership.
Metropolitan Mortgage & Securities Co., Inc.: Parent organization,
invests in Receivables and other investments, including real estate
development, with proceeds from Receivable investments, other 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.: Inactive 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 active
subsidiary and the largest active company within the Consolidated Group, is
engaged in investing in Receivables and other investments principally funded
by life insurance policy and annuity contract sales.
Metwest Mortgage Services, Inc.: Performs loan origination, collection
and servicing functions. It is an FHA/HUD licensed servicer and lender, and
is licensed as a Fannie Mae seller/servicer.
* The remaining 3.5% of Consumers Group Holding Co., Inc. is owned by
Summit.
<PAGE> 5
BUSINESS
OVERVIEW
Metropolitan was established in 1953. Through growth and acquisitions,
it has developed into a diversified institution, with assets exceeding $1
billion. Its principal subsidiaries are Western United, an annuity and life
insurance company, and Metwest, a Receivable servicer and loan originator.
The Consolidated Group's principal business activity is investing in
Receivables. The Receivables primarily consist of real estate contracts and
promissory notes collateralized by first 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. 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
Sources." 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 and Annuities Sources."
All Receivables are purchased at prices calculated to provide a desired
yield. Often, in order to obtain the desired yield, a Receivable will be
purchased at a discount from its face amount, or at a discount from its
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.
Metwest performs all Receivable servicing and collections for itself,
Metropolitan, Western United, and for others. See "BUSINESS-Receivable
Investments-Servicing and Collection Procedures, and Delinquency Experience" &
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" under Item 13.
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 corporate bonds, U.S. Treasury and government agency
obligations, mortgage-backed securities and other securities, including
security hedging investments and the subordinate certificates and residual
interests created out of Receivable securitizations. See
<PAGE> 6
"BUSINESS-Securities Investments" & "BUSINESS-Receivable Investments-
Receivable Sales."
The Consolidated Group has developed several funding sources. These
sources include the sale of assets including sales through securitizations;
collateralized borrowing; Receivable investment income; the issuance of
annuity and life insurance policies; the sale of debentures and preferred
stock; and 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 and
Receivable Acquisition Services," & "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" under Item 13. The evaluation, underwriting and closing is
performed at Metropolitan's headquarters in Spokane, Washington. The
following information describes the Consolidated Group's Receivable
acquisition and underwriting procedures as of the date of this prospectus.
These practices may be amended, supplemented and changed at any time at the
discretion of the Consolidated Group.
Types of Receivables
The Consolidated Group's Receivable acquisitions include two principal
types of Receivables: 1) Receivables collateralized by real estate (both the
acquisition of existing loans and the origination of loans) and 2) lottery
prizes, structured settlements, annuities, and other cash flows.
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
<PAGE> 7
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.
Receivable Acquisition Volume
Metropolitan's Receivable acquisition activities (total activities for
itself and for others), grew from approximately $259.8 million in 1995, to
$382.1 million in 1996 and $390.0 million in 1997. During 1997, the average
monthly acquisition volume was approximately $32.5 million. At the same time,
Metropolitan's median closing time decreased to approximately 14 days by
September 30, 1997, in comparison to 20 days in 1996 and 23 days in 1995.
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" 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 on
the quality of the collateral as the ultimate recourse in the event of the
borrower's default and also, to a lesser extent, the ability of the borrower
to repay.
Private Secondary Mortgage Market Sources
Historically, the majority of the Consolidated Group's Receivables are
acquired through the private secondary mortgage market. See "BUSINESS-
Receivable Investments-Current Mix of Receivable Investment Holdings."
Metropolitan's principal source for private market Receivables has been
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.
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
<PAGE> 8
ability to attract and purchase quality Receivables. In order to enhance its
position in this market, Metropolitan has implemented the following
acquisition strategies: 1) centralizing acquisition activities, 2) expanding
the use of Metropolitan's Receivable submission software, BrokerNet, 3)
flexible and strategic pricing and closing programs, and 4) designing and
implementing broker incentive programs. Metropolitan is exploring other
methods and sources for Receivable acquisitions in order to increase volume,
decrease cost, and enhance its competitive position. There can be no
assurance that any new strategies or programs developed will achieve these
goals.
Institutional Secondary Mortgage Market Sources
Approximately $47.7 million or 15% of total Receivables acquired during
fiscal 1997 were acquisitions of pools of Receivables. These portfolios of
real estate Receivables are generally acquired from banks, savings and loan
organizations, the Resolution Trust Corporation, the Federal Deposit Insurance
Corporation and other financial institutions.
An institutional seller typically offers a loan pool for sale in order
to provide liquidity, to meet regulatory requirements, to liquidate assets, or
for 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.
Institutional acquisitions are typically negotiated through direct
contact with the portfolio departments at the various selling institutions, or
acquired through bidding at an auction. The closing costs per loan for
institutional acquisitions is generally lower than private secondary mortgage
market acquisitions. However, the investment yield is also generally lower
than yields available in the private market.
Metropolitan has recently hired additional sales and support staff and
is exploring new marketing methods in an attempt to increase its institutional
pool purchase activities.
Loan Originations Sources
During the last quarter of fiscal 1996, Metropolitan's subsidiary,
Metwest, began originating first lien residential mortgage loans. Metwest is
currently licensed as a lender or is exempt from licensing in twenty-nine
states.
<PAGE> 9
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.
During the fiscal year ended September 30, 1997, Metwest originated an
average of approximately 47 loans per month. This volume was below original
projections. In an effort to increase its volume, Metwest has changed
management staff and is adding additional sales staff. Also, Metwest has
developed several new pricing programs for loan originations. Management can
give no assurance that these efforts will increase origination volume.
Correspondent Lending
During 1996, Metropolitan began acquiring loans through loan
correspondent agreements. Under these agreements, Metropolitan agrees to
acquire loans at a specified yield immediately after their origination, so
long as they comply with Metropolitan's underwriting guidelines as specified
in the agreements. In addition, loan correspondents may also submit loans
which do not meet established underwriting guidelines for individual
evaluation and pricing. Metropolitan has added staff to support growth in its
correspondent lending activities. Management can give no assurance that these
efforts will increase correspondent lending volumes.
Real Estate Receivable Underwriting and Pricing
Metropolitan's loan correspondent underwriting guidelines, and Metwest's
loan origination guidelines apply criteria which include the following:
evaluating the borrower's credit and income and debt to income ratios,
obtaining and reviewing a current appraisal of the collateral, evaluating the
property type, comparing the loan amount to the collateral value and
evaluating the economics of the region where the collateral is located. For
certain, but not all, loans with higher loan to value ratios, mortgage
insurance is required. In addition, title insurance in an amount equal to the
original loan amount is obtained. Generally, a lower credit rating would
result in a higher required down payment, higher collateral value to loan
amount and/or a higher interest rate. Unlike the Receivables purchased in the
private secondary mortgage market, the loans originated by Metwest and the
loans purchased through Metropolitan's loan correspondent program have
standardized documentation and terms.
Lotteries, Structured Settlements and Annuities Sources
<PAGE> 10
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.
Lotteries, Structured Settlements and Annuities Underwriting
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. In the case of structured settlement
annuity purchases, the underwriting guidelines of Metropolitan generally also
include a review of the settlement agreement.
In the case of lottery prizes, the underwriting guidelines generally
include a review of the documents providing proof of the prize, and a review
of the credit rating of the insurance company, or other entity, making the
lottery prize payments. Where the lottery prize is from a state run lottery,
the underwriting guidelines generally include a confirmation with the
respective lottery commission of the prize winner's right to sell the prize,
and acknowledgment from the lottery commission of their receipt of notice of
the sale. In many states, in order to sell a state lottery prize, the winner
must obtain a court order permitting the sale. In those states, Metropolitan
requires a certified copy of the court order.
Other Receivables
Metropolitan continually seeks opportunities in new Receivable markets.
Metropolitan currently has Receivable programs acquiring farm subsidies and
similar cash flows. These programs account for a minimal amount of
Metropolitan's current and projected Receivable acquisition volume. However,
if new opportunities arise for the acquisition of new types of Receivables,
Metropolitan is not limited from pursuing these opportunities.
<PAGE> 11
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.
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.
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. As a result of these
amendments, the cash flow may be maintained or accelerated, the latter of
which increases the yield realized on a Receivable purchased at a discount
from its face value.
Current Mix of Receivable Investment Holdings
The Consolidated Group's investments in Receivables is concentrated in
Receivables collateralized by first liens on single-family residential
property. Management believes that this concentration in residential real
estate presents a lower credit risk than would a portfolio predominantly
collateralized by commercial property or unimproved land, and that much of the
risk in the portfolio is further dissipated by the large numbers of
<PAGE> 12
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 the fiscal year ended September 30, 1997, the
average Receivable balance at the time of acquisition by the Consolidated
Group was approximately $51,000. See Note 3 to the Consolidated Financial
Statements under Item 8.
Management continually monitors economic and demographic conditions
throughout the country in an effort to avoid a concentration of its acquired
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 real estate Receivables as of September 30, 1997
regarding geographical distribution, type of real estate collateral and lien
position:
PIE CHARTS SHOWING BREAKDOWNS OF RECEIVABLES BY TYPE, SECURITY POSITION,
AND ASSET TYPE:
1. Distribution of Receivable By Collateral Type (September 30, 1997)
Residential 70%
Commercial 14%
Farms, Land, Other 16%
2. Distribution of Receivables (collateralized by real estate) by Security
Position (September 30, 1997)
First Lien Position 99%
Second Lien or Lower Position 1%
3. Distribution of Assets as a Percentage of Total Assets
Cash and Cash Equivalents 5%
Investments 17%
Receivables Collateralized by Real Estate 45%
Other Receivables (structured settlements,
lotteries and annuities) 15%
Real Estate Held 7%
Deferred Costs 7%
Other 4%
GRAPH SHOWING MAP OF THE UNITED STATES AND DISTRIBUTION OF
<PAGE> 13
RECEIVABLE INVESTMENTS BY STATE:
2. This graph contains a map of the United States which identifies the
percent of distribution by state of the principal amount of Receivable
investments (collateralized by real estate) as of September 30, 1997,
for the states with 1% or more invested:
The following amounts are shown for the following states:
Washington 16%
Texas 14%
California 10%
Arizona 9%
Florida 7%
New York 5%
Oregon 5%
Idaho 3%
New Mexico 3%
Hawaii 2%
Michigan 2%
Montana 2%
New Jersey 2%
Alaska 1%
Colorado 1%
Connecticut 1%
Georgia 1%
Nevada 1%
<PAGE> 14
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1997
At September 30, 1997, the Consolidated Group held first position liens
associated with contracts and mortgage notes receivable with a face value of
approximately $520.6 million (99%) and second or lower position liens of
approximately $7.6 million (1%). Approximately 28% of the face value of the
Consolidated Group's real estate Receivables 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), approximately 9% in the North
Atlantic (New York, Pennsylvania, New Jersey, Connecticut and Maryland) and
approximately 17% by property located in the Southwest (Texas and New Mexico).
The face value of the real estate Receivables range principally from $15,000 to
$300,000 with 56 real estate Receivables, aggregating approximately $34.7
million in excess of this range. No individual contract or note is in excess
of 0.5% of the total carrying value of real estate Receivables, and less than
4% of the contracts are subject to variable interest rates. Contractual
interest rates principally range from 6% to 13% per annum with approximately
89% of the face value of these receivables within this range. The weighted
average contractual interest rate on these real estate Receivables at September
30, 1997 is approximately 9.4%. Maturity dates range from 1997 to 2027.
<TABLE>
<CAPTION>
Non
Interest Carrying Delinquent Accrual Number of
Number of Rates Amount of Principal Principal Non Accrual
Description Receivables Principally Receivables Amount Amount Receivables
___________ ___________ ___________ ____________ ___________ __________ ___________
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL
First Mortgage > $100,000 509 6-13% $ 78,734,868 $ 7,535,954 $1,506,750 9
First Mortgage > $50,000 1,580 6-13% 107,372,840 6,765,551 -- --
First Mortgage < $50,000 8,687 6-13% 181,186,443 13,178,218 -- --
Second or Lower > $100,000 4 8-11% 659,050 156,878 -- --
Second or Lower > $50,000 7 7-12% 480,016 65,686 -- --
Second or Lower < $50,000 220 6-13% 3,337,545 96,903 -- --
<PAGE> 15
COMMERCIAL
First Mortgage > $100,000 209 6-13% 48,492,725 3,887,374 482,817 2
First Mortgage > $50,000 182 6-13% 13,199,135 677,704 -- --
First Mortgage < $50,000 317 6-13% 7,917,653 262,922 -- --
Second or Lower > $100,000 4 5-11% 1,559,883 -- -- --
Second or Lower > $50,000 5 7-12% 407,624 -- -- --
Second or Lower < $50,000 10 8-11% 303,122 -- -- --
FARM, LAND AND OTHER
First Mortgage > $100,000 84 8-15% 27,214,026 1,326,710 -- --
First Mortgage > $50,000 178 6-13% 11,513,233 313,881 -- --
First Mortgage < $50,000 2,487 6-13% 45,195,703 1,620,079 -- --
Second or Lower > $100,000 1 14% 100,000 100,000 -- --
Second or Lower > $50,000 3 9-10% 227,634 -- -- --
Second or Lower < $50,000 30 9-12% 306,057 12,140 -- --
Unrealized discounts, net
of unamortized
acquisition costs, on
Receivables purchased
at a discount (24,642,792)
Accrued Interest
Receivable 9,299,336
____________ ___________ __________
CARRYING VALUE $512,864,101 $36,000,000 $1,989,567
============ =========== ==========
<FN>
The principal amounts of Receivables subject to delinquent principal or
interest is defined as being in arrears for more than three months.
</TABLE>
<PAGE> 16
<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 1997 - September 2000 $ 40,400,913 $11,167,553 $22,990,756 $ 74,559,222
October 2000 - September 2002 33,771,278 9,163,174 9,742,636 52,677,088
October 2002 - September 2004 32,216,791 6,381,830 6,795,393 45,394,014
October 2004 - September 2007 46,889,093 11,374,072 12,310,724 70,573,889
October 2007 - September 2012 68,260,410 13,429,000 16,920,159 98,609,569
October 2012 - September 2017 44,494,614 5,288,840 6,384,637 56,168,091
October 2017 - Thereafter 105,737,663 15,075,673 9,412,348 130,225,684
____________ ___________ ___________ ____________
$371,770,762 $71,880,142 $84,556,653 $528,207,557
============ =========== =========== ============
</TABLE>
<PAGE> 17
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1996
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
Consolidated Group's real estate Receivables 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 Receivables range principally from $15,000 to
$300,000 with 52 real estate 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 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 real estate Receivables at September
30, 1996 is approximately 9.4%. Maturity dates range from 1996 to 2026.
<TABLE>
<CAPTION>
Non
Interest Carrying Delinquent Accrual Number of
Number of Rates Amount of Principal Principal Non Accrual
Description Receivables Principally Receivables Amount Amount Receivables
___________ ___________ ___________ ____________ ___________ __________ ___________
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL
First Mortgage > $100,000 738 6%-13% $108,873,697 $ 5,687,601 $1,548,124 7
First Mortgage > $50,000 2,500 6%-13% 161,285,463 7,443,607 -- --
First Mortgage < $50,000 13,568 6%-13% 261,018,755 9,129,035 -- --
Second or Lower > $100,000 1 7.5% 243,213 -- -- --
Second or Lower > $50,000 6 9%-10% 384,654 -- -- --
Second or Lower < $50,000 358 6%-13% 3,487,974 191,504 -- --
<PAGE> 18
COMMERCIAL
First Mortgage > $100,000 248 6%-13% 52,072,095 1,248,896 -- --
First Mortgage > $50,000 252 6%-13% 18,218,639 500,571 -- --
First Mortgage < $50,000 447 6%-13% 11,837,475 107,111 -- --
Second or Lower > $100,000 4 9%-10.5% 1,564,708 -- -- --
Second or Lower > $50,000 3 8%-9.5% 204,917 -- -- --
Second or Lower < $50,000 9 8%-11% 192,717 -- -- --
FARM, LAND AND OTHER
First Mortgage > $100,000 67 8%-12% 14,551,734 1,101,876 1,101,876 2
First Mortgage > $50,000 151 6%-13% 9,697,972 220,731 -- --
First Mortgage < $50,000 2,178 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 $2,642,000
============ =========== ==========
</TABLE>
<PAGE> 19
<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 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> 20
<TABLE>
<CAPTION>
The following tables present certain statistical information about the
Consolidated Group's Receivable investment activity during the three fiscal
years ended September 30, 1997.
Year Ended or at September 30
_____________________________________
1997 1996 1995
__________ __________ __________
(Dollars in Thousands)
<S> <C> <C> <C>
DISOUNTED REAL ESTATE RECEIVABLES
PURCHASED DURING PERIOD
Number 5,919 4,969 4,130
Average Face Amount $ 51 $ 52 $ 45
__________ __________ __________
Face Amount $ 300,450 $ 256,486 $ 187,305
Unrealized Discounts, Net of
Acquisition Costs (16,918) (24,718) (15,338)
Underlying Obligations Assumed(1) (1,810) (3,634) (527)
__________ __________ __________
$ 281,722 $ 228,134 $ 171,440
========== ========== ==========
DISCOUNTED REAL ESTATE RECEIVABLES
OUTSTANDING AT END OF PERIOD
Number 10,733 13,358 13,436
__________ __________ __________
Face Amount $ 442,958 $ 548,538 $ 505,441
Unrealized Discounts, Net of
Unamortized Acquisition Costs (24,643) (38,607) (37,354)
__________ __________ __________
Net Balance $ 418,315 $ 509,931 $ 468,087
========== ========== ==========
TOTAL REAL ESTATE RECEIVABLES
OUTSTANDING AT END OF PERIOD(2)
Number 14,517 20,573 19,608
__________ __________ __________
Face Amount Discounted Receivables $ 442,958 $ 548,538 $ 505,441
Face Amount Non-Discounted
Receivables 85,250 132,641 112,072
__________ __________ __________
Total Outstanding Receivables 528,208 681,179 617,513
Unrealized Discounts Net of
Unamortized Acquisition Costs (24,643) (38,607) (37,354)
Accrued Interest Receivable 9,299 8,361 7,335
__________ __________ __________
Net Balance $ 512,864 $ 650,933 $ 587,494
========== ========== ==========
Average Net Balance per Receivable
(Excluding Accrued Interest) $ 34.7 $ 31.2 $ 29.6
Average Annual Yield on Discounted
Receivables(3) 11.5% 11.9% 12.8%
<FN>
(1) Consisting of pre-existing first lien position Receivables which remain
when the Consolidated Group invests in second lien position Receivables.
<PAGE> 21
(2) Approximately 16% of the portfolio at September 30, 1997, 19% of the
portfolio at September 30, 1996 and 18% of the portfolio at September
30, 1995 represented financing for resales of repossessed properties and
other non-discounted Receivables.
(3) Yield on real estate 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, 1997, the average contractual interest rate on
Receivables collateralized by real estate (weighted by principal balances) was
approximately 9.4%.
<PAGE> 22
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 prior 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
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 the trusts
holding previously securitized pools and to Summit, Old Standard and Arizona
Life were approximately $341,000 during 1997. These charges to parties
outside the Consolidated Group provide income to the Consolidated Group.
The principal amount of Receivables collateralized by real estate, held
by the Consolidated Group (as a percentage of the total outstanding principal
amount of Receivables) which was in arrears for more than ninety days at the
end of the following fiscal years was:
1997 --- 6.8%
1996 --- 3.9%
1995 --- 2.8%
The real estate Receivables purchased by the Consolidated Group are
predominantly medium and lower credit Receivables. Accordingly, higher
delinquency rates are expected which Management believes are generally offset
by higher yields and 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. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Provision for Losses on Real
Estate Assets" under Item 7.
When a real estate 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
<PAGE> 23
is contacted by telephone (generally between the 10th and 15th 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, attorney fees, costs, expenses and late charges are generally
collected from the payor, or added to the Receivable balance, as a condition
of reinstatement.
When a lottery, structured settlement, or annuity becomes delinquent,
Metwest attempts to commence collection efforts within 4 days from a missed
payment. Generally, these collection efforts consist of sending a letter to
the Receivable seller and following up with telephone contact. If these steps
have not resolved the delinquency, legal action to enforce payment is
commenced within approximately two weeks from the date of delinquency.
Allowance for Losses on Real Estate Assets
The Consolidated Group establishes an allowance for expected losses on
real estate assets (both Receivables collateralized by real estate and
repossessed real estate). This allowance is based upon a statistical
valuation or traditional appraisal of the Consolidated Group's real estate
holdings for each delinquent Receivable having a principal balance greater
than $100,000. In addition, the Consolidated Group calculates an allowance
for losses on delinquent Receivables having a principal balance below the
$100,000 threshold based upon its historical loss experience. The
Consolidated Group reviews the results of its resales of repossessed real
estate, 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. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Provision for Losses on Real
Estate Assets" under Item 7.
<PAGE> 24
The following table outlines the Consolidated Group's changes in the
allowance for losses on real estate assets:
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
____________ ____________ ____________
<S> <C> <C> <C>
Beginning Balance $ 10,192,584 $ 8,116,065 $ 9,108,383
Provisions 8,131,101 6,360,072 4,174,644
Charge-Offs (5,996,587) (4,283,553) (5,166,962)
____________ ____________ ____________
Ending Balance $ 12,327,098 $ 10,192,584 $ 8,116,065
============ ============ ============
Percentage of Ending
Balance of Allowances
to Outstanding Real
Estate Assets 2.1% 1.4% 1.2%
============ ============ ============
Ratio of Net Charge-Offs to
Average Real Estate
Assets Outstanding During
the Period 0.9% 0.6% 0.8%
============ ============ ============
</TABLE>
Repossessions
In the course of its Receivable investment activity, the Consolidated
Group acquires various parcels of real estate as a result of foreclosures
and/or voluntary repossessions. It is the Consolidated Group's general policy
to attempt to resell such properties at the earliest possible time following
its acquisition. Improvements are made to certain properties for the purposes
of preservation or restoration to maximize the resale price. The marketing
status of all properties is reviewed at least monthly by a committee which
includes both sales personnel and management. Generally, repossessed
properties are resold within less than one year from their dates of
repossession.
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,
a Broker Price Opinion, 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
addition, a new appraisal is obtained not less frequently than every year on
all real estate holdings previously valued at $100,000 or more, and every two
years on real estate holdings previously valued below $100,000. 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> 25
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, 1997 and/or September 30, 1996. The carrying
values of certain properties may reflect additional costs incurred, such as
taxes and improvements, when such costs are estimated to be recoverable in the
sale of the repossessed property.
<TABLE>
<CAPTION>
Property Carrying Carrying Market Gross
Type/State Value Value Value Year of Monthly
Location 9/30/96 9/30/97 9/30/97 Foreclosure Income
________________ __________ __________ __________ ___________ __________
<S> <C> <C> <C> <C> <C>
26.73 Commercial
Acres $ 238,036 $ 244,094 $ 244,094 1983(1) $ --
Farm/Ranch 1,927
Acres, WA 285,690 SOLD A 1988 --
34 Acres, WA 3,145,113 3,182,500 3,350,000 1991(2) --
Land, CA 225,360 117,000 130,000 1994 --
K-5 Grade
School, CA 202,500 54,000 60,000 1994 --
House, CA 110,700 SOLD B 1995 --
House, CT 114,750 SOLD C 1995 --
14 Unit
Apartment
Building, WA 108,000 108,000 120,000 1996 --
House, MD 108,000 SOLD D 1996 --
Condo, CA 137,105 SOLD E 1996 --
Multi-unit
Professional
Building, NJ 162,000 SOLD F 1996 --
House, CA 261,000 SOLD G 1996 --
House, WA 126,000 SOLD H 1996 --
House, WA 115,885 SOLD I 1996 --
House, FL 120,706 SOLD J 1996 --
House, NY 100,800 SOLD K 1996 --
House, CA 113,207 SOLD L 1996 --
House, MA 124,200 SOLD M 1996 --
House, CA 270,000 300,000 1997 --
House, CA 148,647 165,163 1997 --
House, CA 133,200 148,000 1997 --
House, CA 107,260 119,178 1997 --
House, MO 151,921 168,801 1997 --
House, NJ 132,715 147,460 1997 --
House, NV 147,723 164,137 1997 --
House, NY 167,495 186,105 1997 --
House, OR 180,000 200,000 1997 --
Motel, PA 225,000 250,000 1997 --
Land, SD 468,238 520,265 1997 --
House, TX 419,679 466,310 1997 --
House, TX 134,567 149,519 1997 --
House, TX 107,100 119,000 1997 --
House, WA 114,408 127,120 1997 --
__________ __________ __________ __________
<PAGE> 26
$5,799,052 $6,613,546 $7,135,152 $ --
========== ========== ========== ==========
<FN>
The sales prices of the referenced properties were as follows:
A $375,000
B 125,000
C 127,500
D 118,500
E 125,000
F 80,000
G 210,000
H 110,000
I 180,000
J 123,400
K 39,500
L 115,000
M 138,000
(1) Located in Pasco, Washington, the commercial property is in the area of a
planned freeway interchange.
(2) See "BUSINESS-Real Estate Development-Other Development Properties-Renton."
</TABLE>
For information regarding the Consolidated Group's activity in
properties held for development, See "BUSINESS-Real Estate Development."
Management and Receivable Acquisition Services
Metropolitan provides management, and Receivable acquisition services to
its subsidiaries and to Summit, Old Standard and Arizona Life. The Receivable
acquisitions satisfy underwriting and yield requirements established by the
purchasing company. The difference between the yield requirement and the
yield which Metropolitan actually negotiates is retained by Metropolitan as
its compensation for providing acquisition services.
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 1997 on purchases of $267.4 million, including origination
expenses, net of purchase discount was $9.53 million. Metropolitan remains
liable to Western United for any losses in excess of the reserve. While this
charge has the effect
<PAGE> 27
of reducing the Receivable yield of the insurance subsidiary, there is a
corresponding positive effect on the fee earned by 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 excess yield retained by Metropolitan is 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 1997, 1996 and
1995, Metropolitan charged Western United fees of approximately $20.1 million,
$29.4 million and $14.6 million, respectively. The 1997, 1996, and 1995
charge was before loss reserves of $9.53 million, $12.54 million and $6.95
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 1997, Metropolitan charged Summit, Old Standard and
Arizona Life fees of $730,000, $2,112,000 and $577,000, respectively. The
service agreements with Western United has no effect upon the consolidated
financial results of the Consolidated Group. The service agreement with
companies outside the Consolidated Group, including Summit, Old Standard and
Arizona Life provided fee income to Metropolitan. See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS" under Item 13.
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, in addition
to the profits which may be earned, the sale of Receivables provides a number
of benefits including allowing the Consolidated Group to diversify its funding
base, provide liquidity and may provide lower cost of funds. The sale of
Receivables allows the Consolidated Group to continue to expand its investing
activities without increasing its total asset size.
Generally, a securitization involves the sale of certain specified
Receivables to a single purpose trust. The trust issues certificates which
represent an undivided ownership interest in the Receivables transferred to
the trust. The certificates consist of different classes, which include
classes of senior certificates, and a residual interest and may also include
intermediate classes of subordinated certificates. The rights of the senior
certificate holders can be enhanced through several methods which include
subordination of the rights of the subordinate and residual interests to
receive distributions, or the establishment of a reserve fund. In connection
with securitizations, the senior certificates are sold to investors,
<PAGE> 28
generally institutional investors. The companies which sell 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 may also receive an interest in any
unsold subordinate certificates, and an interest in any residual interest.
Such interests are generally apportioned based upon the respective companies
contribution of Receivables to the pool of Receivables sold to the trust.
Through September 30, 1997, the Consolidated Group (principally
Metropolitan and Western United) has participated as a co-sponsor in three
real estate Receivable securitizations with affiliates, Summit and Old
Standard. The affiliates' percentage of each securitization has been less
than approximately 10% in each transaction. In each securitization,
Metropolitan has used either futures contracts or securities "short sales" to
hedge or protect the profits for the entire transaction. The price to the
affiliates at settlement for each securitization includes their proportionate
share of hedging transactions related to each securitization. Also See Note 1
to the Consolidated Financial Statements under Item 8.
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 value such interest in their respective financial statements based
upon certain assumptions regarding 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 the Consolidated Group has participated in,
the rights of the senior certificate holders were enhanced through
subordinating the rights of subordinate and residual interests to receive
distributions with respect to the mortgage loans to such rights of senior
certificate holders. The selling companies initially retained their
respective residual interests. At September 30, 1997, the value of residual
interests held by the Consolidated Group was $18.8 million.
In addition to sales through securitizations, the Consolidated Group
sells pools of Receivables directly to purchasers. These sales are typically
without recourse, except that for a period of time the selling company is
generally required to repurchase or replace any Receivables which do not
<PAGE> 29
conform to the representations and warranties made at the time of sale.
During the year ended September 30, 1997, the Consolidated Group sold
portfolios of real estate Receivables through both direct sales and
securitizations with proceeds of approximately $382.7 million and gains of
$21.7 million. During that same period, the Consolidated Group sold other
Receivables with proceeds of approximately $7.8 million and gains of $37,000.
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.
Currently, all lottery acquisitions are purchased by Trusts which are
owned by the company interested in acquiring the corresponding Receivables.
These Trusts are designed to facilitate any potential future resale of these
assets.
LIFE INSURANCE AND ANNUITY OPERATIONS
Introduction
The Consolidated Group's principal subsidiary is Western United.
Western United was incorporated in Washington State in 1963. As of September
30, 1997, Western United owned approximately $958.4 million in assets, or
approximately 85% of the Consolidated Group's total assets. 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 1996, the most recent
year for which statistical information is available, Western United's annuity
market share was 4.2% (ranking it fifth in production) in the six states in
which approximately 85% 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
<PAGE> 30
currently has insurance license applications pending in the states of
Colorado, Indiana, Minnesota, New Mexico and Oklahoma.
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 government and investment-grade securities, but may be
invested into a variety of other areas as permitted by applicable insurance
regulations. See "BUSINESS-Securities Investments" & "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
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 real estate 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 98% of
Western United's premiums were derived from annuity sales.
Western United's annuities also qualify as investments under several of
the tax advantaged programs such as Individual Retirement Accounts and related
programs.
Western United prices its new annuity products and renewals in order to
achieve a positive spread between its annuity costs and available Receivable
investments, while also considering current annuity market rates of interest
and competitive pressures. Flexible and single premium annuities are offered
with surrender charges for periods varying from one year to ten years.
Western United is currently developing several new annuity product
types. One of the 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 investments during the current economic period of
relatively lower interest rates.
<PAGE> 31
At September 30, 1997, deferred policy acquisition costs were
approximately 8.4% of life and annuity reserves. Increasing termination rates
may have an adverse impact on Western United's earnings through 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
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>
Three Year
1996 1995 1994 Average
________ ________ ________ __________
<S> <C> <C> <C> <C>
Net Investment Earnings Rate 8.15% 8.30% 8.49% 8.31%
Average Credited Interest Rate 6.03% 6.06% 5.59% 5.89%
Spread 2.12% 2.24% 2.90% 2.42%
</TABLE>
During 1997, 1996, and 1995, amortization of deferred policy acquisition
costs was $9.4 million, $9.1 million and $10.3 million, respectively. All
calculations have been reviewed by an actuary.
Annuity lapse rates are calculated by dividing cash outflows related to
benefits and payments by average annuity reserves. For the calendar years
1996, 1995 and 1994, lapse rates were 14.7%, 18.9% and 21.5%, respectively.
Based upon results for the nine months ended September 30, 1997, lapse rates
were 16.7%.
Life Insurance
During the year ended September 30, 1997, approximately 2% of Western
United's statutory premiums were derived from the sale of interest sensitive
whole life insurance and term life insurance policies. As of September 30,
1997, the face amount of life insurance policies written and outstanding
totaled $277,877,000, 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.
<PAGE> 32
Presently, Western United is negotiating the possible reinsurance,
coinsurance, or similar transaction whereby it would effectively sell
approximately 50% to 100% of its current life business. Currently,
negotiations are at preliminary stages and it is not possible to predict the
final structure of this proposed transaction, or the likelihood that it will
occur.
The following table sets forth certain key financial information
regarding the Consolidated Group's insurance subsidiaries. The information
includes Western United for all periods and Old Standard through May 31, 1995,
the date on which it was sold.
<TABLE>
<CAPTION>
Year Ended at September 30,
_________________________________________
1997 1996 1995
___________ ___________ ___________
(Dollars in Thousands)
<S> <C> <C> <C>
Insurance In Force
Individual Life $ 330,205 $ 354,371 $ 373,573
Less Ceded to other Companies (52,328) (58,679) (62,906)
___________ ___________ ___________
$ 277,877 $ 295,692 $ 310,667
=========== =========== ===========
Life Insurance Premiums $ 3,352 $ 3,355 $ 3,365
Less Ceded Premiums (352) (355) (365)
___________ ___________ ___________
Net Life Insurance Premiums $ 3,000 $ 3,000 $ 3,000
=========== =========== ===========
Net Investment Income $ 65,760 $ 65,561 $ 64,970
=========== =========== ===========
Benefits, Claim Losses and
Settlement Expenses $ 50,455 $ 48,301 $ 45,484
=========== =========== ===========
Deferred Policy Acquisition Costs $ 69,730 $ 71,933 $ 71,131
=========== =========== ===========
Reserves for Future Policy
Benefits, Losses, Claims and
Loss Expenses $ 825,369 $ 837,366 $ 781,716
=========== =========== ===========
Total Assets $ 953,249 $ 1,128,237 $ 922,556
=========== =========== ===========
Capital and Surplus $ 86,230 $ 81,606 $ 78,827
=========== =========== ===========
</TABLE>
Reinsurance
Reinsurance is the practice whereby an insurance company enters into
agreements (termed "treaties") with other insurance companies in order to
assign some of its insured risk, for which a premium is paid, while retaining
the remaining risk. Although reinsurance treaties provide a contractual basis
for shifting a
<PAGE> 33
portion of the insured risk to other insurers, the primary liability
for payment of claims remains with the original insurer. Life insurers
commonly obtain reinsurance on a portion of their risks in the ordinary course
of business.
Annuity Reinsurance
Western United has entered into a reinsurance agreement with Old
Standard whereby Western United reinsured 75% of the risk on six different
annuity products through Old Standard. This agreement became effective
January 23, 1997 and continued through September 30, 1997, during which time
approximately $28 million in premiums were reinsured through Old Standard.
This agreement allows Western United to continue its market presence and
relationship with its insurance agents, while moderating its rate of growth.
Western United is currently negotiating a second similar reinsurance agreement
with Old Standard, which is expected to become effective early calendar year
1998. It is anticipated that approximately $3-$5 million per month will be
ceded during fiscal 1998, during the months the new agreement is effective.
Life Policy Reinsurance
Western United reinsured $52,328,000 of life insurance risk at September
30, 1997 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 $330,205,000. 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, 1997, approximately $26,683,000 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,
1997 were $352,311.
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. The amount of these reserves
required for compliance with state law are reviewed by an actuary. 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, 1997, such
reserves were $825,369,000. Reserves are recalculated each year to reflect
<PAGE> 34
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.
Insurance Accounting Practices
Western United is required to file statutory financial statements with
its state of domicile, Washington. Accounting principles used to prepare its
statutory financial statement differ from generally accepted accounting
principles (GAAP). A reconciliation of GAAP net income to statutory net
income for the years ended September 30, 1997, 1996 and 1995, respectively, is
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
__________ __________ __________
<S> <C> <C> <C>
Net Income - GAAP $4,051,900 $3,076,252 $2,717,893
Adjustments to reconcile:
Deferred policy acquisition costs 717,718 (774,906) (807,667)
State insurance guaranty fund 110,290 257,686 105,753
Annuity reserves and benefits (2,714,024) (304,688) (5,759,009)
Capital gains and IMR amortization (379,910) 336,258 3,790,892
Allowance for losses 5,166,518 3,046,274 1,923,161
Federal income taxes (140,864) 1,587,522 1,154,586
Other -- (39) (458,943)
__________ __________ __________
Net Income - Statutory $6,811,628 $7,224,359 $2,666,666
========== ========== ==========
</TABLE>
SECURITIES INVESTMENTS
At September 30, 1997, 1996 and 1995, 84.5% 94.3% and 96.8%,
respectively, of the Consolidated Group's securities investments were held by
Western United.
The following table outlines the nature and carrying value of securities
investments held by Western United at September 30, 1997:
<TABLE>
<CAPTION>
Available- Held-to-
Trading For-Sale Maturity
Portfolio Portfolio Portfolio Total
_________ ___________ _________ _________
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total Amount $ 13,474 $ 30,722 $ 111,986 $ 156,182 100.0%
========= =========== ========= ========= =====
<PAGE> 35
% Invested in:
Fixed Income $ 13,474 $ 30,716 $ 111,986 $ 156,176 100.0%
Equities -- 6 -- 6 0.0%
_________ ___________ _________ _________ _____
$ 13,474 $ 30,722 $ 111,986 $ 156,182 100.0%
========= =========== ========= ========= =====
% Fixed Income:
Taxable $ 13,474 $ 30,716 $ 111,986 $ 156,176 100.0%
Non-taxable -- -- -- -- 0.0%
_________ ___________ _________ _________ _____
$ 13,474 $ 30,716 $ 111,986 $ 156,176 100.0%
========= =========== ========= ========= =====
% Taxable:
Government/Agency $ -- $ 6,812 $ 57,459 $ 64,271 41.2%
Corporate 13,474 23,904 54,527 91,905 58.8%
_________ ___________ _________ _________ _____
$ 13,474 $ 30,716 $ 111,986 $ 156,176 100.0%
========= =========== ========= ========= =====
% Corporate Bonds:
AAA $ -- $ -- $ 34,297 $ 34,297 37.3%
AA -- -- 1,999 1,999 2.2%
A -- 12,236 5,493 17,729 19.3%
BBB -- 8,656 1,998 10,654 11.6%
Below Investment
Grade 13,474 3,012 10,740 27,226 29.6%
_________ ___________ _________ _________ _____
$ 13,474 $ 23,904 $ 54,527 $ 91,905 100.0%
========= =========== ========= ========= =====
% Corporate:
Mortgage-backed $ 13,474 $ 3,194 $ 42,687 $ 59,355 64.6%
Asset-backed -- 6,721 2,350 9,071 9.9%
Finance -- 7,015 5,493 12,508 13.6%
Industrial -- 3,980 -- 3,980 4.3%
Utility -- 2,994 3,997 6,991 7.6%
_________ ___________ _________ _________ _____
$ 13,474 $ 23,904 $ 54,527 $ 91,905 100.0%
========= =========== ========= ========= =====
</TABLE>
Investments of Western United are subject to the direction and control
of an investment committee appointed by its Board of Directors. All such
investments must comply with applicable state insurance laws and regulations.
See "BUSINESS-Regulation."
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 may be 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
<PAGE> 36
means of hedging interest rate risk, to benefit from an anticipated movement
in the financial markets. See "BUSINESS-Receivable Investments-Receivable
Sales." At September 30, 1996 there were seven open short sale positions with
a carrying value of $132,652,000, while at September 30, 1997 the Consolidated
Group had no open short sale positions.
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.
The Consolidated Group purchases collateralized mortgage obligations
(CMO's) for its investment portfolio. Such purchases have been limited to
tranches that perform in concert with the underlying mortgages, i.e.,
improving in value with falling interest rates and declining in value with
rising interest rates. The Consolidated Group has not invested in "derivative
products" that have been structured to perform in a way that magnifies the
normal impact of changes in interest rates or in a way dissimilar to the
movement in value of the underlying securities. At September 30, 1997, the
Consolidated Group was not a party to any derivative financial instruments.
At September 30, 1997, amounts in the trading portfolio on a
consolidated basis, at market, were $34.5 million. At September 30, 1997,
1996 and 1995, amounts in the available-for-sale portfolio on a consolidated
basis were $36.6 million, $38.6 million and $31.8 million, respectively. The
available-for-sale portfolio had net unrealized losses of approximately
$759,000 at September 30, 1997, $946,000 at September 30, 1996, and $423,000
at September 30, 1995, respectively. In the held-to-maturity portfolio, net
unrealized losses were approximately $1,019,000 at September 30, 1997,
$5,548,000 at September 30, 1996 and $6,010,000 at September 30, 1995,
respectively. See Note 2 to the Consolidated Financial Statements under Item
8.
METHOD OF FINANCING
The Consolidated Group finances its business operations and growth with
the proceeds from the sale and securitization of Receivables, collateralized
borrowing, Receivable cash flows, the sale of life insurance and annuity
products, the sale of debentures and preferred stock, and the sale of real
estate and
<PAGE> 37
securities portfolio earnings. Metropolitan engages in a substantially
continuous public offering of debt securities (debentures) and preferred
stock. Western United markets annuities and life insurance policies. See
"BUSINESS-Life Insurance and Annuity Operations."
The following table presents information about the debentures issued by
the Consolidated Group:
<TABLE>
<CAPTION>
As of September 30
__________________________________
1997 1996 1995
________ ________ ________
(Dollars in Thousands)
<S> <C> <C> <C>
Principal Amount Outstanding $159,169 $163,034 $176,815
Compound and Accrued Interest 26,045 29,140 24,497
________ ________ ________
TOTAL $185,214 $192,174 $201,312
======== ======== ========
Weighted Average Interest Rate 7.99% 8.18% 8.24%
======== ======== ========
Range of Interest Rates 5% - 11% 5% - 11% 5% - 11%
======== ======== ========
</TABLE>
Substantially all of the debentures outstanding at September 30, 1997
will mature during the five-year period ending September 30, 2002. 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, 1997,
approximately 50% 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 1997: $511,692,000
Fiscal 1996: $302,474,000
Fiscal 1995: $198,733,000
Proceeds of preferred stock issuances less redemptions were $1,241,000
in 1997, $1,765,000 in 1996 and $4,250,000 in 1995. The liquidation
preference of outstanding preferred stock at September 30, 1997 was
$50,729,000. Preferred shareholders are entitled to monthly distributions at
a variable rate based on U.S. Treasury obligations. The average monthly
distribution rate during fiscal 1997 was 8.1%. Preferred stock distributions
paid by Metropolitan were $4,113,000 in 1997, $3,868,000 in 1996 and
$4,038,000 in 1995.
<PAGE> 38
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,
1997, assuming no reinvestments of maturing debentures:
<TABLE>
<CAPTION>
Fiscal Year Preferred
Ending Debenture Other Debt Stock
September 30, Bonds Payable Dividends Total
_____________ _________ __________ ___________ _________
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1998 $ 62,507 $ 3,898 $ 4,351 $ 70,756
1999 51,782 377 4,351 56,510
2000 50,403 233 4,351 54,987
2001 8,331 269 4,351 12,951
2002 34,604 152 4,351 39,107
_________ __________ ___________ _________
$ 207,627 $ 4,929 $ 21,755 $ 234,311
========= ========== =========== =========
</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 OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-Asset/Liability Management" under Item 7. 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, which
owns a restaurant property adjacent to the Lawai Beach Resort.
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
<PAGE> 39
a total of 170 residential condominium units. Related amenities include
swimming pools, tennis courts, a 180 car parking garage, exercise facilities
and a sewage treatment plant. Construction costs were financed entirely with
Metropolitan's internally generated funds and the property remains
unencumbered by external debt. Metropolitan's total investment (carrying
value) in Lawai Beach Resort as of September 30, 1997 was $9,695,000.
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 $1,001,000, a four-plex condominium timeshare
building with 3 weekly intervals remaining and a carrying value of
approximately $14,000; and a restaurant site with a carrying value (land and
building) of approximately $3,644,000 as of September 30, 1997. The
restaurant is currently operated by Pacific Cafe. The restaurant rental
income was $172,000 in fiscal 1997.
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 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.
In 1997, timeshare sales totaled approximately $13.8 million for monthly
average sales of over $1.1 million. Management believes that the sales
decrease in 1997 and 1996 was primarily 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 late 1998.
Additional Information
The tables below set forth additional historical information about the
timeshare sales and revenue of Lawai Beach Resort. It is Metropolitan's
intention to sell the timeshares at favorable prices in order to convert the
inventory into cash or other interest earning assets.
<TABLE>
<CAPTION>
For the Years Ended September 30,
_____________________________________________
1997 1996 1995
_____________ _____________ _____________
<S> <C> <C> <C>
<PAGE> 40
TIMESHARE SALES
Number of Sales 909 1,441 1,485
Amount of Sales $ 13,837,687 $ 22,799,107 $ 23,120,888
Costs (3,930,281) (8,051,102) (7,353,510)
Expenses (11,116,543) (15,480,230) (14,996,260)
_____________ _____________ _____________
Profit(Loss) $ (1,209,137) $ (732,225) $ 771,118
============= ============= =============
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. On September 29, 1997, Metropolitan sold approximately $29.7 million
in time share Receivables, through a securitization. As of September 30,
1997, Metropolitan's outstanding Lawai Beach Resort timeshare Receivables
balance was approximately $6.2 million. The loan delinquency rate (based on
the principal balances of loans more than ninety days in arrears) on that date
was approximately 43%.
Skier's Edge Resort
Metropolitan, owns approximately 127 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, 1997 was $416,322. The total timeshare
use periods in the project were approximately 1,200 at September 30, 1997.
Unsold timeshares, while being held for sale, are included in a rental pool
operated by the resort owner's association. Net rental revenue was $7,093 in
1997, $6,629 in 1996 and $21,956 in 1995. The market value of the property is
estimated at $542,500 at September 30, 1997 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, the Consolidated
Group (principally Metropolitan), is engaged in the development of various
other properties. These development properties were generally acquired in the
ordinary course of
<PAGE> 41
business, generally through repossessions. In addition, the Consolidated
Group 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 the
Consolidated Group by Summit Property Development, a subsidiary of Summit.
During 1997, approximately $1.8 million in fees were paid to Summit Property
Development for property development activities.
Significant development properties, sales activities for 1997 and plans
for 1998 are described below. There can be no assurance that the Consolidated
Group will be successful in its 1998 development and sales plans and the
Consolidated Group may modify its plans at its sole discretion.
The Liberty Lake Properties
Located just east of Spokane, Washington near Liberty Lake, this land
was acquired by Metropolitan between 1989 and 1997 primarily utilizing
repossessed properties as consideration. During fiscal 1997, the property
included one residential development parcel and one business parcel, which is
described more fully below. The area where these parcels are located includes
residential, commercial and industrial properties including a business park.
Liberty Lake Center (formerly MeadowWood Business Park - Phase II):
Liberty Lake Center includes 17.12 acres of industrial-zoned property acquired
by exchange in 1990. During June 1997, Metropolitan exercised its option to
purchase 62.10 acres at $10,500 per acre. An additional 19.26 acres were
purchased from Olivetti North America in December 1996. Also, 6.40 acres of
former railroad right-of-way was purchased from Spokane County in 1996. This
brings the total land area of Liberty Lake Center (excluding subsequently
dedicated road right-of-ways) to 100.24 acres.
A Final Binding Site Plan was filed on the property in July 1997. The
first sale of 2.5 acres occurred in September 1997 to Land Rover for an auto
sales facility. The sale was for $299,475. At September 30, 1997, the
carrying value of the remaining property was $5,674,277. Installation of the
first phase of roads and landscape improvements was completed in the fall of
1997.
<PAGE> 42
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, 1997, Metropolitan's carrying value for the remaining five acres
was $146,682.
The Summit Property
This property consists of approximately 76.35 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. Demolition of several vacant buildings located on the
property began during the fall of 1997. At September 30, 1997, the carrying
value of the property was $11,844,386.
Airway Business Centre
Airway Business Centre consists of two phases of commercial/industrial-
zoned property. The property is located in the City of Airway Heights,
Washington approximately 10 miles west of downtown Spokane. The project is
part of a 440 acre parcel originally purchased in 1979.
Phase One of the Centre had a Final Binding Site Plan consisting of 13
lots with a total area of 47.24 acres, approved in 1994. The property has
approximately one-quarter mile of frontage on U.S. Highway 2, a regional
east/west transportation route. Current improvements to the property include
the extension of private streets within the western portion of the project, a
right-turn access off of Highway 2, utility extensions to serve interior
parcels, and a traffic signal at the project's main intersection.
Four lot sales have occurred in Phase One with a total sales price of
$489,400. Two other lots were traded for properties of equal value. The
carrying value of Phase One as of September 30, 1997 was $2,080,948.
Phase Two of the Centre had a Final Binding Site Plan approved in 1997.
This portion included the extension of two public streets to serve the
project. A total of 45.19 acres of the project have an approved Binding Site
Plan, while 21.23 acres await City approval of further subdivision. The
carrying value as of September 30, 1997 was $570,598.
<PAGE> 43
Also within Phase Two is a 1.61 acre lot upon which Metropolitan
constructed a new headquarters for Spokane County Fire District #10. The
facility was completed in May 1997. The total sales price for this project
was $1,270,653.
Airway Heights Residential
This site is 33 acres located adjacent to the Airway Business Centre in
the City of Airway Heights. This property is zoned residential. During 1995,
Metropolitan sold an option to purchase the property which was exercised
during 1997. The sales price was $257,000, which resulted in a gain of
$85,000.
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 commercial-zoned
land. The property was acquired in 1990 using repossessed property as
consideration. County approval for a 348,000 square foot shopping center was
received in 1991. During 1996, Metropolitan sold a 12.85 acre portion of this
parcel to Wal-Mart for $2,798,351. As part of the consideration for the sale,
Metropolitan entered into a co-development agreement to develop on-site
infrastructure at a cost to Metropolitan of approximately $900,000. An
additional 2.75 acres was sold to Toys 'R Us in June 1997. The sales price
was $1,256,860. The carrying value as of September 30, 1997 was $5,275,288.
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 interior roads.
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 95% leased as of September 30, 1997. The carrying value
of the property as of September 30, 1997 is $10,221,377. 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, approximately $695,000 during fiscal 1996, and
approximately $1,001,000 in fiscal 1997.
Broadmoor Park General: The remaining 344 acres is zoned for
development as hotels, motels, fast food restaurants, gas stations, a variety
of stores, land for development of both single
<PAGE> 44
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, 1997
is $5,474,835. 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.
Two new facilities were constructed on the property by Metropolitan in
1997. A call center for lease by Dakotah Direct, a national telemarketing
firm, was completed and occupied in April. The building was subsequently sold
to an investor for $1,200,000. The second facility was built for lease to
Broadmoor RV & Truck Center. The project was completed and opened for
business in June. Monthly lease payments are $10,000. Also, construction of
a 64 room motel began on one of the parcels previously sold. Construction is
scheduled for completion in October 1997.
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. The city of Puyallup has
indicated that the property can be fully served by city facilities by the fall
of 1999. At September 30, 1997, the carrying value was $1,377,500. 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, 1997, the carrying value in the property was
$4,988,291. The appraised value is $7,635,000 as of September 30, 1996.
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, 1997, the carrying
value in
<PAGE> 45
the property was $3,182,500. The appraised value was $3,425,000 as of
September 30, 1997.
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 $3,131,388 during fiscal 1997.
The following table presents additional information about the
Consolidated Group's investments in and sales of real estate held for sale and
development:
<TABLE>
<CAPTION>
Year Ended or at September 30,
______________________________
1997 1996 1995
________ ________ ________
(Dollars in Thousands)
<S> <C> <C> <C>
REAL ESTATE HELD FOR SALES AND DEVELOPMENT
Investment Property Held for Sale and
Development $ 47,413 $ 48,175 $ 53,101
Real Estate Acquired in Satisfaction of
Debt and Foreclosures in Process 34,389 36,158 38,000
________ ________ ________
Net Balance $ 81,802 $ 84,333 $ 91,105
======== ======== ========
SUMMARY OF CHANGES
Balance at Beginning of Year $ 84,333 $ 91,105 $ 76,766
Additions and Improvements:
Condominiums 11,664 18,795 26,276
Repossessed and Development Real Estate 22,460 21,392 24,644
Transfer from Fixed and Other Assets -- -- 1,599
Depreciation (4,986) (3,048) (1,731)
Cost of Real Estate Sold:
Condominium Units (16,028) (23,531) (22,674)
Real Estate (15,641) (20,380) (13,775)
________ ________ ________
Balance at End of Year $ 81,802 $ 84,333 $ 91,105
======== ======== ========
<PAGE> 46
GAIN (LOSS) ON SALE OF REAL ESTATE
Condominiums:
Sales $ 14,719 $ 22,799 $ 23,621
Unit Costs (4,486) (8,051) (7,676)
Associated Selling Costs (11,542) (15,480) (14,998)
________ ________ ________
Condominium-Gain (Loss) (1,309) (732) 947
________ ________ ________
Real Estate:
Sales 16,701 22,849 15,767
Equity Basis (15,641) (20,380) (13,775)
________ ________ ________
Real Estate-Gain 1,060 2,469 1,992
________ ________ ________
Total Gain(Loss) on Sale of Real Estate $ (249) $ 1,737 $ 2,939
======== ======== ========
</TABLE>
COMPETITION
The Consolidated Group competes with other financial institutions
including various real estate financing firms, real estate brokers, banks and
individual investors for the Receivables it acquires. In the private
secondary mortgage market, the largest single competitors are subsidiaries of
much larger companies while the largest number of competitors are a multitude
of individual investors. In all areas of Receivable acquisitions, the
Consolidated Group competes with financial institutions many of which are
larger, have access to more resources, and greater name recognition.
Management believes its 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 include its access to markets throughout the United
States; Metropolitan's BrokerNet software; its flexibility in structuring
Receivable acquisitions; 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, more
flexible investment policies, or other attributes that are more desirable to
Receivable sellers, they may experience a competitive advantage.
Management believes the Consolidated Group to be one of the largest
investors in such seller-financed Receivables in the United States.
Metropolitan competes with other investors in its lottery, structured
settlement and annuity acquisitions. Competitive forces have substantially
decreased the yields available on new lottery acquisitions, and may have the
same impact on structured settlements and annuities in the future.
<PAGE> 47
Metwest competes with other lending institutions in its loan origination
program and pool acquisition program. Metropolitan competes with other
lending institutions in its correspondent lending program. The lending market
is a multi-billion dollar market including competitors with vastly greater
resources, economies of scale and name recognition. Metwest and Metropolitan
believe that their flexible underwriting and pricing guidelines enhance their
ability to compete in these markets. To date, Metwest's growth in these
activities has been below projections. Management has implemented several new
programs in an effort to expand these activities. See "BUSINESS-Receivable
Investments." There can be no assurance that these programs will be
successful in expanding these activities, nor that they will be profitable if
expanded.
Metropolitan and Western United compete in the secondary market as
sellers 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 economies of
scale, and better name recognition.
Metropolitan's securities products face competition for investors from
other securities issuers many of which are much larger, and have greater name
recognition.
The life insurance and annuity business is highly competitive. Western
United competes with other financial institutions including ones with greater
resources and greater name recognition. Premium rates, annuity yields and
commissions to agents are particularly sensitive to competitive forces.
Western United's management believes that it is in an advantageous position in
this regard because of its earning capability through investments in
Receivables compared to that of most other life insurance companies. From
June, 1986 until June, 1995, Western United had been assigned a "B+ (Very
Good)" rating by A. M. Best Co., a nationally recognized insurance company
rating organization. During June, 1995, Western United's Best rating was
revised to B. Best bases its rating on a number of complex financial ratios,
the length of time a company has been in business, the nature, quality, and
liquidity of investments in its portfolio, depth and experience of management
and various other factors. Best's ratings are supplied primarily for the
benefit of policyholders and insurance agents.
REGULATION
The Consolidated Group is subject to laws of the State of Washington
which regulate "debenture companies" in part because it obtains capital for
its activities through offerings of debt
<PAGE> 48
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, 1997, Metropolitan's required net worth for this purpose was approximately
$14,361,000 while its actual net worth (stockholders' equity) was
approximately $54,113,000. 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, with certain exceptions, to 2.5% of assets; and investments in
unsecured loans to 20% of assets. Other provisions of the Act prohibit
Metropolitan from issuing more than 50% of its debentures for terms of two
years or less; prohibit transfer of control of Metropolitan without regulatory
approval; prohibit common control of another debenture company, bank or trust
company; and prohibit officers, directors and controlling shareholders from
directly or indirectly borrowing funds of Metropolitan and from participating
in certain other preferential transactions with it. Metropolitan is required
to notify its debentureholders in writing fifteen to forty-five days in
advance of the maturity dates of their investments and to provide all
debentureholders with copies of its annual financial statements. The Act also
provides for periodic examinations of the accounts, books and records of
debenture companies such as Metropolitan to ascertain compliance with the law.
Finally, the Act and other applicable laws and regulations provide the
Department with authority to take regulatory enforcement actions in the event
of a violation of such laws and regulations.
Throughout the securities offering which expired January 31, 1998,
Metropolitan's aggregate principal amount of outstanding debentures, including
accrued and compound interest, and its aggregate amount of preferred stock
outstanding were limited to $295,800,000, 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 did not restrict Metropolitan's ability to sell debentures and
preferred stock during the 12 month
<PAGE> 49
offering period ending January 31, 1998. However, lower restrictions in
prior years have limited Metropolitan's ability to sell debentures and
preferred stock. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-Liquidity and Capital Resources" under
Item 7.
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 as an FHA/HUD servicer/lender and a Fannie Mae seller/servicer; as
such, it must comply with applicable FHA, HUD, and Fannie Mae regulations and
guidelines.
Metropolitan is subject to certain federal and Hawaii state laws and
regulations governing timeshare marketing procedures, licensing requirements
and interest rates. Hawaii also requires the registration and periodic
renewal of timeshare condominium projects prior to the commencement or
continuation of sales in the state. The law also provides timeshare
purchasers with a seven-day right of rescission following execution of an
agreement to purchase.
Western United and Metropolitan are subject to the Insurance Holding
Company Act as administered by the Office of the State Insurance Commissioner
of the State of Washington. The act regulates transactions between insurance
companies and their affiliates. It requires that Metropolitan provide
notification to the Insurance Commissioner of certain transactions between the
insurance company and affiliates. In certain instances, the Commissioner's
approval is required before a transaction with an affiliate can be
consummated.
Western United is subject to extensive regulation and supervision by the
Office of the State Insurance Commissioner of the State of Washington as a
Washington domiciled insurer, and to a lesser extent by all of the other
states in which it operates. These regulations are directed toward
supervision of such things as granting and revoking licenses to transact
business on both the insurance company and agency levels, approving policy
forms, prescribing the nature and amount of permitted investments,
establishing solvency standards and conducting extensive periodic examinations
of insurance company records. Such regulation is intended to protect annuity
contractholders and policy owners, rather than investors in an insurance
company.
All states in which Western United operates have laws requiring solvent
life insurance companies to pay assessments to
<PAGE> 50
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 Western United for guaranty fund assessments
and charged to operations for the years ended September 30, 1997, 1996 and
1995 were $480,000, $900,000 and $782,000, 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 1995. Management does not believe that the amount of future
assessments associated with known insolvencies after 1995 will be material to
its financial condition or results of operations. During the year ended
September 30, 1997, Western United reduced their estimate of these losses by
$401,000 based upon updated information from the National Organization of Life
and Health Guaranty Associations. During the years ended September 30, 1996
and 1995, Western United did not make an adjustment based on updated
information. These estimates are subject to future revisions based upon the
ultimate resolution of the insolvencies and resultant losses. Management
cannot reasonably estimate the additional effects, if any, upon its future
assessments pending the resolution of the above described insolvencies. The
amount of guaranty fund assessment that was originally accrued in 1993 has
been recorded net of a 8.25% discount rate applied to the estimated payment
term of approximately seven years. The remaining unamortized discount
associated with this accrual was approximately $412,000 at September 30, 1997.
Dividend restrictions are imposed by regulatory authorities on Western
United. The unrestricted statutory surplus of Western United totaled
approximately $8,597,000 as of September 30, 1997, $5,567,000 as of September
30, 1996 and $1,986,000 as of September 30, 1995. The principal reason for
the increase during 1997 was the generation of net income.
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 December 31,
As of _____________________
September 30, 1997 1996 1995 1994
__________________ _____ _____ _____
<PAGE> 51
<S> <C> <C> <C> <C>
Capital and Surplus(Millions) $51.8 $50.1 $46.2 $43.8
Ratio of Capital and Surplus to
Admitted Assets 5.8% 5.5% 5.3% 5.5%
</TABLE>
Although the State of Washington requires only $4,000,000 in capital and
surplus to conduct insurance business, Western United has attempted to
maintain a capital and surplus ratio of at least 5% which management considers
adequate for regulatory and rating purposes.
In 1993, Washington State enacted the Risk Based Capital Model law which
requires an insurance company to maintain minimum amounts of capital and
surplus based on complex calculations of risk factors that encompass the
invested assets and business activities. Western United's capital and surplus
levels exceed the calculated minimum requirements at September 30, 1997.
<PAGE> 52
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 99201. Its mailing address is P.O. Box 2162, Spokane, WA 99210-2162 and
its telephone number is (509) 838-3111. On November 14, 1997, Metropolitan
acquired an approximately 200,000 square foot office building located at 601
West First Avenue, Spokane, Washington, approximately three blocks from the
current headquarters. Approximately 50% of the building is currently leased
by other tenants. Metropolitan anticipates moving its headquarters to this
building in late spring 1998.
See "BUSINESS-Receivable Investments" & "BUSINESS-Real Estate
Development" under Item 1.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or threatened
against Metropolitan Mortgage & Securities Co., Inc., or to which its property
is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE> 53
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
1. (a) Market Information: There is no market for the Registrant's
common stock.
(b) Holders: There were 5 Class A Common stockholders as of September
30, 1997.
(c) Dividends: There were no dividends declared on the Registrant's
single class of common equity during the last two years.
While dividends have not been paid in the recent past, the
Registrant may pay dividends in the future. At the date of this
Form 10-K, the Registrant has made no determination as to the
likelihood that it will or will not pay common dividends in the
future.
2. Recent Sales of Unregistered Securities: None.
<PAGE> 54
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
The consolidated financial data shown below as of September 30, 1997 and
1996 and for the years ended September 30, 1997, 1996 and 1995 (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,
1995, 1994 and 1993 and for the years ended September 30, 1994 and 1993 have
been derived from audited financial statements not included herein. The
consolidated financial data shown below as of September 30, 1995, 1994 and 1993
and for the years ended September 30, 1994 and 1993 have been derived from the
consolidated financial statements not included elsewhere herein.
Year Ended September 30,
________________________________________________________________________
1997 1996 1995 1994 1993
__________ __________ __________ __________ __________
(Dollars in Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA:
Revenues $ 155,135 $ 156,672 $ 138,107 $ 138,186 $ 133,113
========== ========== ========== ========== ==========
Income before minority
interest and cumulative
effect of change in
accounting principle $ 9,791 $ 8,146 $ 6,376 $ 5,702 $ 8,558
Income allocated to
minority interests (123) (108) (73) (224) (255)
__________ __________ __________ __________ __________
Income before cumulative
effect of change in
accounting for income
taxes 9,668 8,038 6,303 5,478 8,303
<PAGE> 55
Cumulative effect of
change in accounting
for income taxes(1) -- -- -- -- (4,300)
__________ __________ __________ __________ __________
Net income 9,668 8,038 6,303 5,478 4,003
Preferred stock dividends (4,113) (3,868) (4,038) (3,423) (3,313)
__________ __________ __________ __________ __________
Income applicable to
common stockholders $ 5,555 $ 4,170 $ 2,265 $ 2,055 $ 690
========== ========== ========== ========== ==========
Ratio of earnings to fixed
charges 1.77 1.46 1.35 1.29 1.43
Ratio of earnings to fixed
charges and preferred stock
dividends(3) 1.31 1.14 1.03 1.04 1.17
PER COMMON SHARE DATA(2):
Income before cumulative
effect of change in
accounting principle $ 42,733 $ 32,073 $ 17,288 $ 14,996 $ 37,239
Cumulative effect of change
in accounting principle(1) -- -- -- -- (32,089)
__________ __________ __________ __________ __________
Income applicable to
common stockholders(4) $ 42,733 $ 32,073 $ 17,288 $ 14,996 $ 5,150
========== ========== ========== ========== ==========
Weighted average number of
common shares outstanding(2) 130 130 131 137 134
========== ========== ========== ========== ==========
Cash dividends per common
share $ -- $ -- $ 3,800 $ 675 $ 675
========== ========== ========== ========== ==========
CONSOLIDATED BALANCE SHEET
DATA:
Total assets $1,112,389 $1,282,659 $1,078,468 $1,063,290 $1,031,958
Debentures, other debt
payable and securities sold,
not owned 190,131 363,427 226,864 261,500 234,497
Stockholders' equity 54,113 46,343 40,570 32,625 32,781
<FN>
(1) Change in accounting principles reflects the adoption of Statement of
Financial Accounting Standards No. 109-"Accounting for Income Taxes."
<PAGE> 56
(2) All information retroactively reflects the reverse common stock split of
2,250:1 which occurred during the fiscal year ended September 30, 1994.
(3) The consolidated ratio of earnings to fixed charges and preferred stock
dividends was 1.31, 1.14, 1.03, 1.04 and 1.17 for the years ended
September 30, 1997, 1996, 1995, 1994 and 1993, respectively.
Assuming no benefit from the earnings of its subsidiaries with the
exception of direct dividend payments, the ratio of earnings to fixed
charges and preferred dividends for Metropolitan alone was 1.01, 1.11,
1.05, 1.34 and 1.06 for the years ended September 30, 1997, 1996, 1995,
1994 and 1993, respectively.
The consolidated ratio of earnings to fixed charges excluding preferred
stock dividends was as follows for the years ended September 30, 1997 -
1.77; 1996 - 1.46; 1995 - 1.35; 1994 - 1.29; and 1993 - 1.43. 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 1.36, 1.48, 1.40, 1.36
and 1.31 for the years ended September 30, 1997, 1996, 1995, 1994 and 1993
respectively.
(4) Earnings per common share are computed by deducting preferred stock
dividends from net income and dividing the result by the weighted average
number of shares of common stock outstanding. There were no common stock
equivalents or potentially dilutive securities outstanding during any year
presented.
</TABLE>
<PAGE> 57
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 $9.7 million for the fiscal year ended September 30, 1997 as
compared to $8.0 million and $6.3 million for the comparable 1996 and 1995
periods, respectively. The increase in 1997 over 1996 was primarily
attributable to a net increase of $9.3 million in realized gains from sales of
investments and Receivables, an increase of $219,000 in net interest sensitive
income and expense, an increase of $397,000 in fees, commissions, service and
other income, being offset by a $2.0 million decrease in gains from real
estate sales, an increase of $1.8 million in the provision for losses on real
estate assets, an increase of $3.7 million in other operating expenses,
including salaries and benefits, commissions to agents, general operating
expenses and capitalized costs, net of amortization and an increase of $.8
million in income taxes and income allocated to minority stockholders. 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 Consolidated Group implements its primary investment goal to
maximize its risk-adjusted rate of return by investing in non-conventional
real estate Receivables. Non-conventional Receivables are typically
Receivables not originated by a regulated financial institution and not
underwritten to FNMA or FHA underwriting guidelines. Normally, either the
borrower or the collateral will not meet sufficient FNMA or FHA underwriting
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 Consolidated Group. Because
borrowers in this market generally have blemished credit records and the
<PAGE> 58
Consolidated Group is not able to receive income/employment information, the
Consolidated Group'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 Consolidated Group believes this risk is generally offset by
the value of the underlying collateral relative to the Consolidated Group's
investment therein and the superior yields over conventional financing.
During the three-year period ended September 30, 1997, the Consolidated
Group operated in an environment of somewhat narrow downward fluctuations in
interest rate levels with rates relatively flat in 1997 after trending up in
1996 following a declining trend in late 1995. 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
$21.2 million, $11.9 million and $4.4 million in 1997, 1996 and 1995,
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"
under Item 1. 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
materially impacted because of: (1) the wide geographic dispersion of its
Receivables; (2) the relatively small average size of each Receivable; (3) the
primary concentration of investments in residential Receivables where market
values have been more stable than in commercial properties; and (4) a
continuing strong demand for tax-advantaged products, such as annuities.
During 1995, the Consolidated Group sold two of its subsidiary operating
companies and discontinued its property development division. In January
1995, the Consolidated Group sold its broker/dealer subsidiary, MIS, to Summit
and discontinued its property development activities. Old Standard was sold
to Summit in May 1995. The financial results of these transactions were not
material to the Consolidated Group. Also, See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" under Item 13.
<PAGE> 59
During 1996, construction on a major timeshare development project in
Kauai, Hawaii was completed. At completion, approximately $21.4 million had
been invested in the final phase. The final phase consisted primarily of the
Banyan building of which approximately 1061 of the available 3050 timeshare
weeks remained unsold at September 30, 1997. The sales price of each
timeshare week is projected to range between $14,000 and $18,000 with an
expected sellout in approximately late 1998. See "BUSINESS-Real Estate
Development-Lawai Beach Resort" under Item 1.
Net income in 1997, 1996, 1995, 1994 and 1993 was sufficient to cover
fixed charges including preferred stock dividend requirements. After
considering the effects of potentially non-recurring income items such the
gains from sales of investments, Receivables and real estate, the 1997 income
would have been insufficient to cover fixed charges by approximately $13.0
million. Additionally, the elimination of similar items in 1996, 1995 and
1994 would have resulted in insufficient earnings to cover fixed charges by
approximately $9.7 million, $6.8 million and $4.2 million, respectively. See
Selected Consolidated Financial Data under Item 6.
Revenues and Expenses
Revenues for the Consolidated Group of $155.1 million for 1997 showed a
slight decrease from the $156.7 million reported in the prior year. Revenues
of $156.7 million for the fiscal year ended September 30, 1996 showed a
substantial increase from the $138.1 million reported for the same period in
1995. The slight decrease in 1997 was primarily attributable to the $9.0
million increase in gains on sales of Receivables and the $3.0 million
increase from interest related revenues being more than offset from the $14.2
million decrease in real estate sales revenues. The $18.6 million increase in
1996 revenues was primarily attributable to an increase of $6.5 million from
interest related revenues, a $6.3 million increase in real estate sales and a
$8.3 million increase in realized gains on sales of Receivables.
Expenses of operation for the Consolidated Group were $140.3 million,
$144.3 million and $128.6 million for fiscal years ended September 30, 1997,
1996 and 1995, respectively. The decrease in expenses in 1997 over 1996 was
primarily the result of a $12.2 million decrease in cost of real estate sold
being only partially offset by an increase of $2.2 million in the cost of
insurance policy and annuity benefits, an increase of $.6 million in interest
expense, an increase of $1.8 million in the provision for losses on real
estate assets, and a $3.7 million increase in other operating expenses,
including salaries and benefits, commissions
<PAGE> 60
to agents, general operating expenses and capitalized costs, net of
amortization. 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.
Interest Sensitive Income and Expense
Management monitors interest sensitive income and expense as it manages
objectives for the financial results of operations. Interest sensitive income
consists of interest on Receivables, earned discount on Receivables, insurance
revenues and other investment interest. Interest sensitive expense consists
of interest expense on borrowed money and insurance policy and annuity
benefits.
The Consolidated Group is in a "liability sensitive" position in that
its interest sensitive liabilities reprice or mature more quickly than do its
interest sensitive assets. Consequently, in a rising interest rate
environment, the net return from interest sensitive assets and liabilities
will tend to decrease. Conversely, in a falling interest rate environment,
the net return from interest sensitive assets and liabilities will tend to
improve. As with the impact on operations from changes in interest rates, the
Consolidated Group's NPV (the Net Present Value) of financial assets and
liabilities is subject to fluctuations in interest rates. The Consolidated
Group continually monitors the sensitivity of net income and NPV of its
financial assets and liabilities to changes in interest rates.
<PAGE> 61
The following table presents, as of September 30, 1997, 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 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Asset/Liability Management."
<TABLE>
<CAPTION>
Interest Rate Change
______________________________________________________
Carrying Decrease Decrease Increase Increase
Amounts Fair Value 1% 2% 1% 2%
__________ __________ __________ __________ __________ __________
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash
equivalents $ 58,925 $ 58,925 $ 58,925 $ 58,925 $ 58,925 $ 58,925
Investments 184,829 183,810 192,056 200,840 176,065 168,784
Real estate
contracts and
mortgage notes 503,565 527,952 546,776 566,793 510,230 493,527
Other receivable
investments 164,534 170,809 179,808 189,507 162,451 154,681
__________ __________ __________ __________ __________ __________
$ 911,853 $ 941,496 $ 977,565 $1,016,065 $ 907,671 $ 875,917
========== ========== ========== ========== ========== ==========
FINANCIAL
LIABILITIES:
Annuity reserves $ 825,369 $ 825,369 $ 853,087 $ 882,114 $ 798,893 $ 773,597
Debentures payable 182,546 187,110 186,715 188,629 182,968 181,134
Debt payable 4,885 4,935 4,996 5,048 4,896 4,847
__________ __________ __________ __________ __________ __________
$1,012,800 $1,017,414 $1,044,798 $1,075,791 $ 986,757 959,578
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE> 62
Net interest sensitive income was $28.0 million for the fiscal year
ended September 30, 1997. The comparable results for 1996 and 1995 were $27.8
million and $26.5 million, respectively. Interest rates for 1997 were
relatively stable with slightly increasing rates early on and declining rates
as the fiscal year closed. 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
during 1995. Also contributing to the changes in net interest sensitive
income was the capitalization of approximately $.5 million, $2.5 million and
$2.7 million for the years 1997, 1996 and 1995, 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" under Item 1.
At September 30, 1997, excluding timeshare development property,
approximately 82% 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 $14.9 million is invested in commercial developments with
approximately $39.4 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 costs exceeded real estate sales by $249,000 in 1997, while
sales exceeded cost of those sales by $1.7 million in 1996 and $2.9 million in
1995. Included in these results are sales of timeshare units with a net loss
of $1.2 million and $.7 million in 1997 and 1996, respectively, and a net gain
of $.9 million in 1995. Metropolitan has engaged an affiliate of the Shell
Group, Chicago, Illinois, Shell-Lawai ("Shell") to provide
<PAGE> 63
management services and sell timeshare units at Lawai Beach. See "BUSINESS-
Real Estate Development-Lawai Beach Resort" under Item 1. 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 1997, 1996 and 1995 were approximately $13.8 million, $22.8
million and $23.6 million, respectively.
Real estate sales, including timeshare unit sales, totaled $31.4 million
for 1997, $45.6 million for 1996 and $39.4 million for 1995. Sales of
repossessed properties have more than kept pace with yearly additions
resulting in a total investment in repossessed real estate of $34.4 million at
September 30, 1997, $36.2 million at September 30, 1996, and $38.0 million at
September 30, 1995. The aggregate investment in real estate held for sale and
development decreased to $81.8 million at September 30, 1997, from $84.3
million at September 30, 1996, which decreased from $91.1 million at September
30, 1995. The decrease from 1996 to 1997 is primarily attributable to the
unit costs for sales in the timeshare project in Kauai, Hawaii. 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. 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, 1997 were a $11.8 million development located in downtown
Spokane adjacent to the central business district and a $10.2 million factory
outlet mall development located in Pasco, Washington. See "BUSINESS-Real
Estate Development-Other Development Properties" under Item 1.
Gains or losses on real estate sold (excluding timeshare units) are a
function of several factors. Management's experience with the most
significant of these factors during the last three fiscal years is set forth
below:
<TABLE>
<CAPTION>
For the Fiscal Year Ended
September 30,
_______________________________
1997 1996 1995
________ ________ ________
(Dollars in Thousands)
<S> <C> <C> <C>
Amount of delinquencies over
three months at fiscal year
end $ 36,000 $ 26,500 $ 17,500
<PAGE> 64
Amount of foreclosures during
the fiscal year $ 14,977 $ 14,271 $ 13,834
Amount of foreclosed real
estate held for sale at
fiscal year end $ 34,389 $ 36,158 $ 38,004
Gain on sale of the
property during the fiscal
year $ 1,060 $ 2,469 $ 1,992
</TABLE>
The principal amount of Receivables in arrears for more than ninety days
as of September 30, 1997, 1996 and 1995 was 6.8%, 3.9% and 2.8%, respectively,
stated as a percentage of the total outstanding principal amount of
Receivables. See Note 3 to the Consolidated Financial Statements under Item
8. 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 delinquencies from 1996 to 1997 of approximately $9.5
million and the increase of approximately $9.0 million from 1995 to 1996 was
primarily the result of a higher delinquency rate on timeshare Receivables and
an overall increase in the general delinquency rate for all Receivables.
Additionally, as only currently performing Receivables could be sold in the
securitizations, the Consolidated Group retained Receivables that were
delinquent. The Consolidated Group believes the increased delinquency rates
were adequately reserved as the Consolidated Group has increased the allowance
for loss on real estate assets associated with Receivables from $7.9 million
in 1996 to $9.5 million in 1997.
Provision for Losses on Real Estate Assets
During the years ended September 30, 1997, 1996 and 1995, the
Consolidated Group provided $8.1 million, $6.4 million and $4.2 million,
respectively, for losses on real estate assets. At September 30, 1997, 1996
and 1995, the Consolidated Group had aggregate allowances for losses on real
estate assets of $12.3 million, $10.2 million and $8.1 million, respectively,
on real estate assets of $595 million, $735 million, and $679 million,
respectively. See Notes 3 and 6 to the Consolidated Financial Statements
under Item 8.
Non-Interest Income and Expense
Non-interest income, composed of "Fees, Commissions, Services, and Other
Income" on the income statement, was $4.7 million for the fiscal year ended
September 30, 1997, $4.3 million for the fiscal year ended September 30, 1996,
and $5.8 million for the comparable period in 1995. Income sources include
service
<PAGE> 65
fees and late charges in connection with Receivables, charges for loan
servicing and other services provided to outside affiliated companies, and
rents, commissions and other revenues primarily associated with the Lawai
Beach Resort, Kauai, Hawaii. The increase from 1996 to 1997 was primarily
attributable to additional fees associated with the retained servicing on the
Receivable securitizations. 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.
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 $30.6 million for the year ended September 30, 1997
compared to $26.9 million for the fiscal year ended September 30, 1996 and
$26.1 million for the comparable period in 1995. The increase in cost of $3.7
million in 1997 over 1996 was primarily attributable to an increase of $3.6
million in salaries and benefits and a decrease of $3.0 million in capitalized
costs, net of amortization being only partially offset by a $2.8 million
reduction in commissions to agents. 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.
Realized Net Gains (Losses) on Sales of Investments and Receivables
The Consolidated Group invests in securities and Receivables as well as
real estate investment properties. The Consolidated Group adopted SFAS No.
115 on September 30, 1993 and since that time has classified its investments
in debt and equity securities as either "trading," "available-for-sale" or
"held-to-maturity." From time to time, gains or losses are recognized on
trading positions and securities classified as "available-for-sale" may be
sold at a gain or a loss. Net losses from the sale of investments was $.5
million in 1997, $.8 million in 1996 with net gains of $.03 million for the
fiscal year ended September 30, 1995. See "BUSINESS-Securities Investments"
under Item 1. The Consolidated Group purchases Receivables collateralized by
real estate, lottery prizes structured settlements, and annuities. See
"BUSINESS-Receivable Investments" under Item 1 and Notes 3 and 7 to the
Consolidated Financial Statements under Item 8. 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
<PAGE> 66
whole loan sales or securitizations. See "BUSINESS-Receivable Investments-
Receivable Sales" under Item 1. Net gains from the sale of Receivables were
$21.7 million, $12.7 million and $4.4 million for the fiscal years ended
September 30, 1997, 1996 and 1995, 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 1998, approximately $191 million of
interest sensitive assets are expected to reprice or mature. These assets
consist of approximately $45 million of Receivables, $87 million of fixed
income investments and $59 million of cash and cash equivalents. For
liabilities, most of the balance of life insurance and annuity contracts may
be repriced during 1998. Management estimates this amount at $595 million.
In addition, approximately $58 million of debentures and $4 million of other
debt will mature or reprice during that period. At September 30, 1997, these
estimates result in interest sensitive liabilities in excess of interest
sensitive assets of approximately $466 million, or a ratio of interest
sensitive liabilities to interest sensitive assets of approximately 344%.
The Consolidated Group is able to manage this liability to asset
mismatch of approximately 3.4:1 by the fact that approximately 91% of the
interest sensitive liabilities are life insurance and annuity contracts which
are subject to surrender charges. These contracts have surrender charges
which apply for as long as nine years, but with decreasing amounts during such
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 are protected by surrender charges of approximately $17 million at
September 30, 1997. 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
<PAGE> 67
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, 1997, moderate
inflation rates have 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 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Interest Sensitive Income and
Expense." However, both interest rate levels in general and the cost of the
Consolidated Group's funds and the return on its investments are influenced by
additional factors such as the level of economic activity and competitive or
strategic product pricing issues. The net effect of the combined factors on
the earnings of the Consolidated Group has been a slight improvement over the
three-year period in the positive spread between the rate of return on
interest earning assets less the cost of interest paying liabilities.
Inflation has not had a material effect on the Consolidated Group's operating
expenses. Increases in operating expenses have resulted principally from
increased product volumes or other business considerations.
Revenues from real estate sold are influenced in part by inflation, as
historically real estate values have fluctuated with the rate of inflation.
However, management is unable to quantify the effect of inflation in this
respect with any degree of accuracy.
New Accounting Rules
In May 1993, Statement of Financial Accounting Standards No. 114 (SFAS
No. 114) "Accounting by Creditors for Impairment of a Loan" was issued. SFAS
No. 114 requires that certain impaired loans be measured based on the present
value of expected future cash flows discounted at the loans' effective
interest rate or the fair value of the collateral. The Consolidated Group
adopted this new standard on October 1, 1995. The adoption of SFAS No. 114
did not have a material effect on the consolidated financial statements. See
Note 1 to the Consolidated Financial Statements under Item 8.
<PAGE> 68
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 adopted this new standard on October 1, 1996. The adoption
of SFAS No. 121 did not 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 application of the provisions of SFAS 125 effective January 1, 1997 did
not have a material effect on the Consolidated Group's financial condition,
results of operations or cash flows.
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," (SFAS No. 128) was issued. SFAS No. 128 establishes
standards for computing and presenting earnings per share (EPS) and simplifies
the existing standards. This standard replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires the dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator
of the diluted EPS computation. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods and requires restatement of all prior-period EPS data
presented. The Consolidated Group does not believe that the application of
this standard will have a material effect on the presentation of its earnings
per share disclosures.
<PAGE> 69
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," (SFAS No. 130) was issued. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. This Statement requires that all items required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This Statement does not require a
specific format for the financial statement, but requires an enterprise to
display an amount representing total comprehensive income for the period in
the financial statement. This Statement requires an enterprise to classify
items of other comprehensive income by their nature in a financial statement
and display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
a statement of financial position. This Statement is effective for fiscal
years beginning after December 15, 1997. The Consolidated Group has not yet
determined the financial statement effect of the application of this
Statement.
In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," (SFAS No. 131) was issued. SFAS No. 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. This Statement supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," but retains the requirement
to report information about major customers. This Statement is effective for
financial statements for periods beginning after December 15, 1997. The
Consolidated Group has not yet determined the effect that the application of
this Statement will have on the disclosures of its business segments.
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 used in operating activities was $102.1 million in 1997, while cash
provided from operating activities was $185.9 million
<PAGE> 70
in 1996 and $40.8 million in 1995. Cash provided to the Consolidated Group
in its investing activities was $226.1 million in 1997, while cash utilized in
investing activities was $186.7 million in 1996 and $43.6 million in 1995.
Cash utilized by the Consolidated Group in its financing activities was $100.3
million in 1997, while cash provided by financing activities was $3.3 million
in 1996 and $6.3 million in 1995. These cash flows have resulted in year-end
cash and cash equivalent balances of $58.9 million in 1997, $35.2 million in
1996 and $32.8 million in 1995. Cash and cash equivalents increased by $23.7
million in 1997 over 1996. In 1997, Receivable acquisitions of $390.0
million, $22.8 million in acquisition and costs associated with real estate
held for sale and development and $58.6 million used to fund life and annuity
withdrawals less receipts were financed by proceeds from Receivable sales,
securitizations and principal payments of $498.9 million, $9.4 million in
proceeds from maturities and sales less purchases of investments and other
cash proceeds of $30.5 million from operating activities. Cash and cash
equivalents increased by $2.4 million in 1996 over 1995. 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
$295.9 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, 1997, 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 1997, Metropolitan was authorized to have no more than $295.8 million
in outstanding debentures (including accrued and compounded interest) and
outstanding preferred stock. See "BUSINESS-Regulation" under Item 1. At
September 30, 1997, Metropolitan had total outstanding debentures of
approximately $185.2 million and total outstanding preferred stock at
liquidation value of approximately $50.7 million. During the three previous
offerings which expired January 31, 1997, 1996 and 1995, the aggregate
debenture and preferred stock permits were approximately $251 million. These
regulatory limitations did not cause any material adverse impact on liquidity
during 1993 through 1997; however, Metropolitan did forgo various investment
opportunities which could have been made if they could have been funded by the
additional sales of debentures and preferred stock.
<PAGE> 71
During 1998, anticipated principal, interest and dividend payments on
outstanding debentures, other debt payments and preferred stock distributions
are expected to be approximately $70.8 million. During 1997, the principal
portion of the payments received on the Consolidated Group's Receivables and
proceeds from sales of real estate and Receivables was $511.7 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, 1997, cash
or cash equivalents were $58.9 million, or 5.3% of total assets. As of
September 30, 1997, the Consolidated Group had no cash or cash equivalents
restricted from general corporate use. Including trading securities,
securities that are available for sale and excluding restricted cash
equivalents, total liquidity was $130 million, $74 million and $65 million as
of September 30, 1997, 1996 and 1995, respectively, or 11.7%, 5.8% and 6.0% of
total assets, respectively.
Access to new "capital markets" through Receivable securitizations has
allowed the Consolidated Group to both increase liquidity and accelerate
earnings through the gains recorded on the securitizations. The increased
ability to raise liquidity will enable the Consolidated Group to accept
certain asset/liability mismatches which have historically been beneficial to
the Consolidated Group when they have been able to finance higher earning
longer term assets with lower cost of funds associated with shorter term
liabilities.
For statutory purposes, Western United performs cash flow testing under
seven different rate scenarios. The results of these tests are filed annually
with the Insurance Commissioner of the State of Washington. At the end of
calendar year 1996, the results of this cash flow testing process were
satisfactory.
Metropolitan alone used approximately $30.7 million in cash in
operations in 1997. Investing activities provided net cash of approximately
$27.0 million. Funds provided included $176.2 million from proceeds from
sales and principal payments of Receivables and real estate, $6.9 million from
investment maturities and $11.2 million from a reduction in investment and
advances to subsidiaries. Funds used included $139.6 million for the purchase
of Receivables, $4.1 million for the purchase of investments and $21.7 million
in additions to real estate held.
<PAGE> 72
Net cash provided by financing activities in 1997 of $5.3 million included
$38.5 million in new debenture sales, net borrowings of $11.8 million and
issuance of preferred stock, net of redemption, of $1.2 million, which were
offset by repayment of debentures of $42.4 million and $4.1 million in
preferred stock dividend payments.
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.
At September 30, 1997, Metropolitan had approximately $1.9 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. During the year
ended September 30, 1997, Metropolitan entered into an agreement to acquire a
new corporate headquarters building in Spokane,
<PAGE> 73
Washington. The transaction, which closed in the first quarter of fiscal
1998, carried a purchase price of approximately $11.7 million. Additionally,
the Consolidated Group expects to incur approximately $5 million in capital
expenditures for renovation of the building. Metropolitan anticipates funding
these commitments through cash provided by operating activities or cash
provided by financing activities.
The Consolidated Group 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 Consolidated Group 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. Metropolitan has never defaulted on any of its
obligations since its founding in 1953.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not currently applicable. However, See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Interest Sensitive
Income and Expense" under Item 7 and "BUSINESS-Securities Investments" under
Item 1.
<PAGE> 74
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 1997, 1996 and 1995
Page
----------
Report of Independent Accountants F-1
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5 - F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-59
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
We have audited the accompanying consolidated balance sheets of
Metropolitan Mortgage & Securities Co., Inc. and subsidiaries as of
September 30, 1997 and 1996, and the related consolidated statements
of income, stockholders' equity and cash flows for each of the three
years in the period ended September 30, 1997. 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, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended September 30, 1997 in conformity with generally accepted
accounting principles.
As discussed in Note 1, the Company changed its methods of accounting
for the transfer and servicing of financial assets in 1997 and
impaired loans in 1996.
/s/COOPERS & LYBRAND L.L.P.
Spokane, Washington
November 21, 1997
F-1
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 58,924,958 $ 35,226,746
Restricted cash and cash equivalents 132,652,334
Investments:
Trading securities, at market 34,477,091
Available-for-sale securities, at market 36,621,351 38,554,498
Held-to-maturity securities, at amortized cost 113,730,535 124,748,490
Accrued interest on investments 1,516,739 1,516,390
-------------- --------------
Total cash and investments 245,270,674 332,698,458
-------------- --------------
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 512,864,101 650,933,330
Real estate held for sale and development, including
foreclosed real estate received in satisfaction of
debt of $34,388,973 and $36,158,099 81,802,266 84,333,288
-------------- --------------
Total real estate assets 594,666,367 735,266,618
Less allowance for losses on real estate assets (12,327,098) (10,192,584)
-------------- --------------
Net real estate assets 582,339,269 725,074,034
-------------- --------------
Other receivable investments 164,534,354 107,494,150
-------------- --------------
Other assets:
Deferred costs, net 72,503,095 74,530,361
Land, buildings and equipment, net 9,408,578 8,516,598
Other assets, net 38,333,490 34,345,227
-------------- --------------
Total other assets 120,245,163 117,392,186
-------------- --------------
Total assets $1,112,389,460 $1,282,658,828
============== ==============
</TABLE>
F-2
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Life insurance and annuity reserves $ 825,368,988 $ 837,366,108
Debenture bonds and accrued interest 185,213,688 192,173,751
Debt payable 4,917,779 38,601,146
Securities sold, not owned 132,652,334
Accounts payable and accrued expenses, including
payable to affiliates 19,114,354 16,388,312
Deferred income taxes 22,029,778 17,589,301
Minority interest in consolidated subsidiaries 1,632,139 1,544,544
-------------- --------------
Total liabilities 1,058,276,726 1,236,315,496
-------------- --------------
Commitments and contingencies (Notes 5, 9 and 11)
Stockholders' equity:
Preferred stock, (liquidation preference $50,729,084
and $49,495,906) 20,954,141 21,518,198
Subordinate preferred stock, no par
Common stock, $2,250 par, 130 shares issued and
outstanding 293,417 293,417
Additional paid-in capital 18,596,231 16,791,670
Retained earnings 14,536,114 8,731,070
Net unrealized losses on investments (267,169) (991,023)
-------------- --------------
Total stockholders' equity 54,112,734 46,343,332
-------------- --------------
Total liabilities and stockholders' equity $1,112,389,460 $1,282,658,828
============== ==============
</TABLE>
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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Insurance premiums $ 3,000,000 $ 3,000,000 $ 3,000,000
Interest on receivables 55,645,799 58,529,828 56,553,869
Earned discount on receivables 21,848,947 18,036,075 13,786,977
Other investment income 17,323,222 15,291,496 15,039,706
Real estate sales 31,419,810 45,648,264 39,388,086
Fees, commissions, service and other income 4,697,766 4,300,381 5,847,020
Gains (losses) on sales of investments, net (494,877) (821,481) 34,565
Gains on sales of receivables, net 21,693,999 12,687,616 4,406,338
Gain on insurance settlement 50,922
----------- ----------- -----------
Total revenues 155,134,666 156,672,179 138,107,483
----------- ----------- -----------
Expenses:
Insurance policy and annuity benefits 50,454,970 48,301,010 45,483,802
Interest, net 19,374,968 18,787,655 16,381,004
Cost of real estate sold 31,669,166 43,910,654 36,449,309
Provision for losses on real estate assets 8,131,101 6,360,072 4,174,644
Salaries and employee benefits 13,762,940 10,199,812 8,803,131
Commissions to agents 7,743,437 10,574,049 12,588,546
Other operating and underwriting 6,932,014 6,958,938 7,414,502
Amortization of deferred costs, net of
costs capitalized (capitalized
deferred costs, net of amortization) 2,202,882 (801,825) (2,671,195)
----------- ----------- -----------
Total expenses 140,271,478 144,290,365 128,623,743
----------- ----------- -----------
Income before income taxes and minority
interest 14,863,188 12,381,814 9,483,740
Provision for income taxes (5,072,512) (4,235,469) (3,107,897)
----------- ----------- -----------
Income before minority interest 9,790,676 8,146,345 6,375,843
Income of consolidated subsidiaries allocated
to minority stockholders (122,365) (108,681) (73,197)
----------- ----------- -----------
Net income 9,668,311 8,037,664 6,302,646
Preferred stock dividends (4,112,988) (3,868,148) (4,037,921)
----------- ----------- -----------
Income applicable to common stockholders $ 5,555,323 $ 4,169,516 $ 2,264,725
=========== =========== ===========
Income per share applicable to common
stockholders $ 42,733 $ 32,073 $ 17,288
=========== =========== ===========
Weighted average number of shares of common
stock outstanding 130 130 131
=========== =========== ===========
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net
Unrealized
Additional Gains
Preferred Common Paid-In (Losses) on Retained
Stock Stock Capital Investments Earnings
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1994 $21,436,910 $ 296,621 $10,981,492 $(2,835,377) $ 2,745,678
Net income 6,302,646
Net change in unrealized gains
on available-for-sale securities,
net of income tax provision 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 minor-
ity interest (3,204) (123,551)
Redemption and retirement of pre-
ferred 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 party 52,733
----------- ----------- ----------- ----------- -----------
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 tax benefit of $83,247 (161,606)
Cash dividends, preferred (variable
rate) (3,868,148)
Redemption and retirement of pre-
ferred 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>
F-5
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
for the years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net
Unrealized
Additional Gains
Preferred Common Paid-In (Losses) on Retained
Stock Stock Capital Investments Earnings
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1996 21,518,198 293,417 16,791,670 (991,023) 8,731,070
Net income 9,668,311
Net change in unrealized losses on
available-for-sale securities, net
of income tax provision of
$372,891 723,854
Cash dividends, preferred (variable
rate) (4,112,988)
Redemption and retirement of pre-
ferred stock (78,635 shares) (786,346) (196,043)
Sale of variable rate preferred
stock, net (22,229 shares) 222,289 2,000,604
Contingent sales price on
subsidiary previously sold to
related party 249,721
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1997 $20,954,141 $ 293,417 $18,596,231 $ (267,169) $14,536,114
=========== =========== =========== =========== ===========
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,668,311 $ 8,037,664 $ 6,302,646
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Proceeds from sale of trading
securities 102,065 67,093,831 515,677,468
Purchase of trading securities (15,423,102) (67,448,595) (515,570,230)
Gains on sales of investments and
receivables, net (21,199,122) (11,866,135) (4,440,903)
(Gain) loss on sales of real estate 249,356 (1,737,610) (2,938,777)
Gain on insurance settlement (50,922)
Provision for losses on real estate
assets 8,131,101 6,360,072 4,174,644
Provision for losses (recoveries)
on other assets 42,995 70,500 (35,657)
Depreciation and amortization 6,738,395 4,617,664 3,023,233
Minority interests 122,365 108,681 73,197
Deferred income tax provision 4,067,586 3,640,356 2,747,990
Changes in assets and liabilities,
net of effects from sale of
subsidiaries:
Life insurance and annuity
reserves 46,638,177 45,782,339 42,033,038
Deferred costs, net 2,027,266 (8,558) (3,034,857)
Compound and accrued interest
on bonds (3,094,352) 4,642,760 (2,214,261)
Securities sold, not owned (132,652,334) 132,652,334
Other, net (7,536,786) (6,089,670) (4,910,909)
------------- ------------- -------------
Net cash provided by (used
in) operating activities (102,118,079) 185,855,633 40,835,700
------------- ------------- -------------
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 (132,652,334)
Principal payments on real estate
contracts and mortgage notes
receivable 100,359,493 107,702,333 118,869,137
Principal payments on other receivable
investments 8,090,734 6,049,097 1,664,132
Proceeds from sales of real estate
contracts and mortgage notes receiv-
able and other receivable investments 390,425,927 182,177,259 72,914,006
Acquisition of real estate contracts
and mortgage notes receivable (317,169,828) (282,313,300) (203,525,666)
Acquisition of other receivable
investments (72,853,425) (99,804,805) (56,229,758)
Proceeds from insurance settlement 50,922
Proceeds from sales of real estate 12,815,547 6,545,323 5,285,839
</TABLE>
F-7
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from investing activities,
continued:
Proceeds from maturities of held-to-
maturity investments 10,919,094 2,598,081 4,696,003
Proceeds from maturities of available-
for-sale investments 12,222,624 37,496,910
Purchases of held-to-maturity invest-
ments (99,625) (12,181,445) (1,557,219)
Proceeds from sales of available-for-
sale investments 22,556,364 31,686,315 92,779,569
Purchases of available-for-sale
investments (49,021,401) (4,138,391) (34,387,059)
Purchases of and costs associated with
real estate held for sale and
development (22,765,164) (28,499,006) (41,841,982)
Capital expenditures (1,989,246) (1,369,802) (894,673)
------------- ------------- -------------
Net cash provided by (used in)
investing activities 226,143,428 (186,703,765) (43,583,622)
------------- ------------- -------------
Cash flows from financing activities:
Increase (decrease) in short-term
borrowings (32,588,375) 11,353,125 (36,598,375)
Repayments of debt payable (2,614,991) (2,060,440) (524,046)
Receipts from life and annuity products 88,267,227 112,894,347 145,066,891
Withdrawals of life and annuity products (119,212,557) (103,026,731) (105,469,442)
Ceding of life and annuity products to
reinsurers (27,689,967)
Issuance of debenture bonds 38,510,520 9,125,303 53,120,179
Repayment of debenture bonds (42,376,231) (22,906,185) (48,970,828)
Issuance of preferred stock 2,222,893 2,135,714 4,513,293
Redemption and retirement of preferred
stock (982,389) (370,734) (327,336)
Cash dividends (4,112,988) (3,868,148) (4,539,503)
Receipt of contingent sale price for
subsidiary sold to related party 249,721
------------- ------------- -------------
Net cash provided by (used in)
financing activities (100,327,137) 3,276,251 6,270,833
------------- ------------- -------------
Net increase in cash and cash
equivalents 23,698,212 2,428,119 3,522,911
Cash and cash equivalents:
Beginning of year 35,226,746 32,798,627 29,275,716
------------- ------------- -------------
End of year $ 58,924,958 $ 35,226,746 $ 32,798,627
============= ============= =============
See Note 17 for supplemental cash flow information.
</TABLE>
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) was incorporated in 1953. Metropolitan invests
in real estate contracts and mortgage notes receivable and
other investments, including real estate development, with
proceeds from sales of life and annuity products and securities
offerings.
On January 31, 1995, Metropolitan and Summit Securities, Inc.
(Summit), a former subsidiary sold to an affiliated entity,
consummated a transaction whereby 100% of the common stock of
Metropolitan Investment Securities, Inc. (MIS) was sold to
Summit. The cash price of $288,950, approximated the
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 the period 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.
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 of $2,722,000, approximated the 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.
During the year ended September 30, 1997, the Company received
approximately $250,000 in contingent payments for the statutory
years ended December 1996 and 1995. 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
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
BUSINESS AND ORGANIZATION, CONTINUED
annuities, investment income and receivable cash flows. The
sale of OSL decreased total assets and liabilities of the
Company by approximately $46.2 million. The results of
operations of OSL are included in the consolidated financial
statements for the period 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.
Additionally, the contingent purchase price payment received in
fiscal 1997 was recorded as an increase to retained earnings.
Metropolitan is effectively controlled by C. Paul Sandifur, Jr.
through 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 deposit in
banks and financial institutions. The Company periodically
evaluates the credit quality of these banks and financial
institutions. Substantially all cash and cash equivalents are
on deposit with one financial institution and balances
periodically exceed the federal insurance limit.
INVESTMENTS
The Company has classified its investments in debt and equity
securities as "trading," "available-for-sale," or "held-to-
maturity". The accounting policies related to these investment
classifications are as follows:
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
INVESTMENTS, CONTINUED
TRADING SECURITIES: Trading securities, consisting primarily
of pass-through certificates, are retained in connection with
the Company's securitization transactions and are recorded at
market value. Realized and unrealized gains and losses are
included in the consolidated statements of income.
AVAILABLE-FOR-SALE SECURITIES: Available-for-sale
securities, consisting primarily of government-backed bonds,
corporate and public utility bonds, and mortgage- and asset-
backed securities, 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 government-backed, corporate and
public utility bonds and mortgage- and asset-backed
securities, are carried at amortized cost. Premiums and
discounts on these securities are amortized on a specific-
identification basis using the interest method. The Company
has the ability and intent to hold these investments until
maturity.
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 in the
consolidated statement of income. 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.
The Company accounts for its portfolio of discounted
receivables acquired before October 1992 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
expectations and prior experience with similar receivables.
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 trust.
Effective January 1, 1997, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 125 (SFAS
No. 125), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", as amended by SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions
of SFAS No. 125". SFAS No. 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
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD FOR
SALE, CONTINUED
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. The
application of the provisions of SFAS No. 125 did not have a
material effect on the Company's financial condition, results
of operations or cash flows.
REAL ESTATE HELD FOR SALE AND DEVELOPMENT
Real estate is stated at the lower of cost or fair value less
estimated costs to sell. The Company principally acquires real
estate through acquisition 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 being
charged to expense.
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 contracts
and mortgage notes receivable include amounts for estimated
probable losses on receivables determined in accordance with
the provisions of Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended. The adoption of this new standard on
October 1, 1995, did not have a material effect on the
Company's consolidated financial statements. Specific
allowances are established for delinquent receivables with net
carrying values in excess of $100,000, as necessary.
Additionally, the Company establishes allowances, based on
prior delinquency and loss experience, for currently performing
receivables and smaller delinquent receivables. Allowances for
losses are based on the net carrying values of the receivables,
including accrued interest. Accordingly, the Company accrues
interest on delinquent receivables until foreclosure, unless
the principal and accrued interest on the receivables exceed
the fair value of the collateral, net of 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.
The established allowance for losses on real estate held for
sale and development includes amounts for estimated losses as a
result of an impairment in value of the real property. The
Company reviews its real estate properties for impairment in
value whenever events or circumstances indicate that the
carrying value of the 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 recognized. As a result
of changes in the real estate markets in which these assets are
located, it is reasonably possible that the carrying values
could be reduced in the near term.
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-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
DEFERRED COSTS
Commission expense and other insurance and annuity policy costs
and debenture issuance costs are deferred. Deferred policy
acquisition costs that are estimated not to be recoverable from
surrender charges are amortized as a constant percentage of the
estimated gross profits (both realized and unrealized)
associated with the policies in force. Amortization of
debenture issuance costs is computed over the expected
debenture term which ranges from 6 months to 5 years, using the
level yield (interest) method. Changes in the amount or timing
of estimated gross profits on annuities or the expected term of
the debentures will result in adjustments in the cumulative
amortization of these costs.
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, 1997, total enhancement
costs of approximately $7,288,000 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.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
COMPUTER SOFTWARE COSTS, CONTINUED
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 credited
interest and 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.
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 benefited using the same assumptions as
are used to amortize deferred policy acquisition costs.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
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 of insolvent 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, 1997 and 1996, 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,
1997, 1996 and 1995, the Company capitalized interest of
$520,969, $2,468,411 and $2,730,373, 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.
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
reimbursement 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.
There were no common stock equivalents or potentially dilutive
securities outstanding during any of the three years in the
period ended September 30, 1997.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
EARNINGS PER COMMON SHARE, CONTINUED
In February 1997, Statement of Financial Accounting Standards
No. 128, "Earnings Per Share", (SFAS No. 128) was issued. SFAS
No. 128 establishes standards for computing and presenting
earnings per share (EPS) and simplifies the existing standards.
This standard replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires the dual
presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of
the diluted EPS computation. SFAS No. 128 is effective for
financial statements issued for periods ending after
December 15, 1997, including interim periods and requires
restatement of all prior-period EPS data presented. The
Company does not believe that the application of this standard
will have a material effect on the presentation of its earnings
per share disclosures.
COMPREHENSIVE INCOME
In June 1997, Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," (SFAS No. 130) was
issued. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose
financial statements. This Statement requires that all items
required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. This Statement does not require a
specific format for the financial statement, but requires an
enterprise to display an amount representing total
comprehensive income for the period in the financial statement.
This Statement requires an enterprise to classify items of
other comprehensive income by their nature in a financial
statement and display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement
of financial position. This Statement is effective for fiscal
years beginning after December 15, 1997. The Company has not
yet determined the financial statement effect of the
application of this Statement.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
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 mortgage- and
asset-backed securities for its investment portfolio. Such
purchases have been limited to tranches that perform in concert
with the underlying mortgages or assets; i.e., improving in
value with falling interest rates and declining in value with
rising interest rates. The Company has not invested in
"derivative products" that have been structured to perform in a
way that magnifies the normal impact of changes in interest
rates or in a way dissimilar to the movement in value of the
underlying securities.
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.
The deferred unrealized gains or losses are classified in the
same category as the items being hedged. 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
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
HEDGING ACTIVITIES, CONTINUED
with this obligation. The Company recognized an additional
loss of approximately $1,680,000 during the year ended
September 30, 1997 upon delivery of the securities. At
September 30, 1996, $132,652,000 of the Company's cash and cash
equivalents were restricted until such time as these
obligations were 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
debenture bonds) are subject to interest rate risk. In the
year ending September 30, 1998, approximately $657,000,000 of
the Company's financial liabilities will reprice or mature as
compared to approximately $191,000,000 of its financial assets,
resulting in a mismatch of approximately $466,000,000. 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 91% 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.
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 1996 and 1995 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.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS:
A summary of carrying and estimated market values of investments
at September 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market Values
Trading Costs Gains Losses (Carrying Values)
--------------------------------------------- ------------ ------------ ------------- -----------------
<S> <C> <C> <C> <C>
Pass-through certificates $ 33,427,969 $ 1,050,000 $ (878) $ 34,477,091
============ ============ ============ ============
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market Values
Available-for-Sale Costs Gains Losses (Carrying Values)
--------------------------------------------- ------------ ------------ ------------- -----------------
Government-backed bonds $ 11,722,759 $ 8,353 $ (144,090) $ 11,587,022
Corporate bonds 11,158,910 (164,016) 10,994,894
Utility bonds 2,999,471 (5,207) 2,994,264
Mortgage- and asset-backed securities 11,498,068 236,344 (694,787) 11,039,625
------------ ------------ ------------ ------------
Total fixed maturities 37,379,208 244,697 (1,008,100) 36,615,805
Equity securities 1,592 3,954 5,546
------------ ------------ ------------ ------------
Totals $ 37,380,800 $ 248,651 $ (1,008,100) $ 36,621,351
============ ============ ============ ============
<CAPTION>
Amortized
Costs Gross Gross
(Carrying Unrealized Unrealized Estimated
Held-to-Maturity Values) Gains Losses Market Values
--------------------------------------------- ------------ ------------ ------------- -----------------
Government-backed bonds $ 59,201,790 $ 16,315 $ (1,369,896) $ 57,848,209
Corporate bonds 5,493,662 (72,391) 5,421,271
Utility bonds 3,997,395 (67,070) 3,930,325
Mortgage- and asset-backed securities 45,037,688 766,094 (291,899) 45,511,883
------------ ------------ ------------ ------------
Totals $113,730,535 $ 782,409 $ (1,801,256) $112,711,688
============ ============ ============ ============
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
<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>
Amortized
Costs Gross Gross
(Carrying Unrealized Unrealized Estimated
Held-to-Maturity Values) Gains Losses Market Values
--------------------------------------------- ------------ ------------ ------------ -----------------
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>
All bonds, pass-through certificates and mortgage- and asset-
backed securities held at September 30, 1997 and 1996 were
performing in accordance with their terms.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
Net unrealized losses, net of deferred federal income taxes, of
approximately $501,000 and $625,000, respectively, on the
available-for-sale portfolio at September 30, 1997 and 1996 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, 1997,
the remaining unamortized loss of approximately $387,000, 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
transferred using the interest method.
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, 1997 was approximately $1,228,000. At
September 30, 1997 and 1996, the Company was not a party to any
derivative financial instruments relative to its investments in
debt or equity securities.
The following individual investments (excluding U.S. government
bonds) held by the Company at September 30, 1997 and 1996, were
in excess of ten percent of stockholders' equity.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
Carrying
Issuer Amount
----------------------------------------------- -----------
1997:
Mortgage- and asset-backed securities:
Residential Funding Mortgage Securities
(four issues) $16,215,058
Chase Mortgage Finance Corp. (seven issues) 10,516,239
Prudential Home Mortgage Securities (three
issues) 6,398,086
Countrywide Funding Corp. (three issues) 5,909,140
Pass-through certificates:
Metropolitan Asset Funding, Inc. (twelve
issues) 27,959,473
Tryon Mortgage Funding, Inc. (three issues) 6,517,618
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
The amortized costs and estimated market values of available-for-
sale and held-to-maturity debt securities at September 30, 1997,
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.
Estimated
Amortized Market
Cost Value
----------- ----------
Available-for-sale debt
securities:
Due in one year or less $ 4,293,751 $ 4,285,339
Due after one year through
five years 14,638,165 14,478,815
Due after five years through
ten years 6,950,816 6,817,572
----------- -----------
25,882,732 25,581,726
Mortgage- and asset-backed bonds 11,498,068 11,039,625
----------- -----------
$37,380,800 $36,621,351
=========== ===========
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
Estimated
Amortized Market
Cost Value
------------ ------------
Held-to-maturity debt
securities:
Due in one year or less $ 15,500,913 $ 15,392,818
Due after one year through
five years 52,987,224 51,590,727
Due after five years through
ten years 190,344 199,646
Due after ten years 14,366 16,614
------------ ------------
68,692,847 67,199,805
Mortgage- and asset-backed bonds 45,037,688 45,511,883
------------ ------------
$113,730,535 $112,711,688
============ ============
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).
3. 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, 1997, the Company held first
position liens associated with real estate contracts and mortgage
notes receivable with a face value of approximately $520,600,000
(99%) and second or lower position liens of approximately
$7,600,000 (1%).
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
The Company's real estate contracts and mortgage notes receivable
at September 30, 1997 are collateralized by property concentrated
in the following geographic areas:
Pacific Northwest (Alaska, Idaho, Montana, Oregon and
Washington) 28%
Pacific Southwest (Arizona, California and Nevada) 20
Southwest (New Mexico and Texas) 17
North Atlantic (Connecticut, Maryland, New Jersey,
New York and Pennsylvania) 9
Southeast (Florida, Georgia, North Carolina and South
Carolina) 9
Other 17
---
100%
===
The value of real estate properties in these geographic regions
will be affected by changes in the economic environment of that
region. It is reasonably possible that these values could change
in the near term, which would affect the Company's estimate of
its allowance for losses associated with these receivables.
The face value of the real estate contracts and mortgage notes
receivable range principally from $15,000 to $300,000. At
September 30, 1997, the Company had 56 receivables aggregating
approximately $34,700,000 which had face values in excess of
$300,000. No individual receivable is in excess of 0.5% of the
total carrying value of real estate contracts and mortgage notes
receivable, and less than 4% of the receivables are subject to
variable interest rates. Contractual interest rates for 89% 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, 1997 is approximately 9.4%.
Maturity dates range from 1997 to 2026.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
The following is a reconciliation of the face value of real
estate contracts and mortgage notes receivable to the Company's
carrying value at September 30, 1997 and 1996.
1997 1996
------------ ------------
Face value of discounted
receivables $442,958,303 $548,537,547
Face value of originated
receivables 85,249,254 132,640,600
Unrealized discounts, net of
unamortized acquisition costs (24,642,792) (38,607,376)
Accrued interest receivable 9,299,336 8,362,559
------------ ------------
Carrying value $512,864,101 $650,933,330
============ ============
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 $36,000,000 and $26,500,000 at September 30, 1997
and 1996, respectively.
Sales of receivables with net carrying values of approximately
$106,885,000 and $54,388,000 were sold without recourse to
various financial institutions resulting in gains of
approximately $2,243,000 and $2,645,000 in fiscal 1997 and 1996,
respectively.
Aggregate amounts of receivables (face value) to be received,
based upon contractual payment terms, are as follows:
Fiscal Year Ending
September 30,
------------------
1998 $ 20,414,000
1999 22,418,000
2000 24,619,000
2001 27,035,000
2002 29,689,000
Thereafter 404,032,557
------------
$528,207,557
============
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD FOR
SALE:
The Company acquires certain real estate contracts and mortgage
notes receivable for the purpose of sale or securitization.
The Company entered into securitization transactions during the
years ended September 30, 1997 and 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 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 years ended September 30, 1997 and 1996, proceeds from
securitization transactions were approximately $273,539,000 and
$112,975,000, respectively, and resulted in gains of
approximately $19,414,000 and $7,798,000, respectively. The gain
realized during the years ended September 30, 1997 and 1996
included approximately $4,642,000 and $2,290,000, respectively,
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.
Of the receivables securitized, the Company has retained an
investment in certain classes of the securities having a fair
value of approximately $34,477,000 and $4,333,000 at
September 30, 1997 and 1996, respectively. These securities were
transferred to the Company's investment portfolio and classified
as trading securities. These certificates are the lowest
investment grade rated 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
11.0% and 13.2% at September 30, 1997 and 1996, respectively.
F-28
<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, 1997 is as follows:
<TABLE>
<CAPTION>
Single- Multi-
Family Family
State Land Dwelling Dwelling Commercial Condominium Total
--------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alabama $ 34,900 $ 127,856 $ 60,553 $ 223,309
Alaska 36,755 103,135 $ 80,790 220,680
Arizona 533,661 407,206 52,623 23,662 1,017,152
Arkansas 21,000 21,000
California 1,439,482 1,633,047 111,950 149,467 3,333,946
Colorado 160,000 256,322 416,322
Connecticut 136,489 136,489
Florida 93,300 457,987 54,658 605,945
Georgia 39,500 39,500
Hawaii 76,309 3,643,799 10,767,754 14,487,862
Idaho 182,824 182,824
Illinois 12,000 75,491 87,491
Iowa 119,264 119,264
Kansas 28,668 28,668
Maine 24,900 24,900
Maryland 20,061 20,061
Massachusetts 24,703 24,703
Michigan 249,752 90,000 339,752
Minnesota 31,900 31,900
Mississippi 43,767 43,767
Missouri 40,500 284,572 325,072
Montana 19,290 19,290
Nevada 25,000 164,137 189,137
New Jersey 393,588 393,588
New Mexico 146,654 124,785 37,567 309,006
New York 35,972 668,592 50,495 755,059
North Carolina 41,248 41,248
Oklahoma 53,152 40,215 47,597 140,964
Oregon 9,600 322,996 332,596
Pennsylvania 32,400 148,046 250,000 430,446
South Carolina 22,415 22,415
South Dakota 520,265 520,265
Tennessee 65,238 65,238
</TABLE>
F-29
<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>
Texas 135,609 1,554,022 134,048 72,922 1,896,601
Utah 18,254 56,379 74,633
Virginia 24,610 153,730 37,500 215,840
Washington 39,340,637 464,564 14,860,132 54,665,333
----------- ----------- ----------- ----------- ----------- -----------
Balances at
September 30,
1997 $42,717,651 $ 8,153,274 $ $19,250,702 $11,680,639 $81,802,266
=========== =========== =========== =========== =========== ===========
Balances at
September 30,
1996 $36,884,497 $ 8,861,494 $ 84,543 $17,828,877 $20,673,877 $84,333,288
=========== =========== =========== =========== =========== ===========
</TABLE>
At September 30, 1997, the Company had approximately $67,000,000
invested in real estate development projects and approximately
$1,900,000 in commitments for construction associated with these
projects.
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,
1997, 1996 and 1995.
1997 1996 1995
----------- ----------- -----------
Beginning balance $10,192,584 $ 8,116,065 $ 9,108,383
Provisions 8,131,101 6,360,072 4,174,644
Charge-offs (5,996,587) (4,283,553) (5,166,962)
----------- ----------- -----------
Ending balance $12,327,098 $10,192,584 $ 8,116,065
=========== =========== ===========
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. ALLOWANCE FOR LOSSES ON REAL ESTATE ASSETS, CONTINUED:
At September 30, 1997 and 1996, the net investment in real estate
contracts and mortgage notes receivable for which impairment has
been recognized was approximately $1,919,000 and $2,642,000,
respectively, of which approximately $331,000 and $118,000,
respectively, representing the amounts by which the respective
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 years ended September 30, 1997 and 1996, the average
recorded investment in impaired receivables was approximately
$1,663,000 and $2,251,000, respectively. Interest income of
approximately $156,000 and $212,000 was recognized on these
receivables during the years ended September 30, 1997 and 1996,
respectively, during the period in which they were impaired.
7. 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, 1997 and 1996 was
approximately 8.94% and 8.71%, respectively. Maturity dates
range from 1997 to 2041.
The following is a reconciliation of the face value of the other
receivable investments to the Company's carrying value at
September 30, 1997 and 1996.
1997 1996
------------- -------------
Face value of receivables $ 265,087,029 $ 173,280,414
Unrealized discounts, net of
unamortized acquisition
costs (100,552,675) (65,786,264)
------------- -------------
Carrying value $ 164,534,354 $ 107,494,150
============= =============
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. OTHER RECEIVABLE INVESTMENTS, CONTINUED:
All such receivables were performing in accordance with their
contractual terms at September 30, 1997.
During the years ended September 30, 1997 and 1996, the Company
sold approximately $7,722,000 and $27,853,000, respectively, of
these receivables without recourse and recognized gains of
approximately $37,000 and $1,882,000, respectively.
The following other receivable investments, by obligor, were in
excess of ten percent of stockholders' equity at September 30,
1997 and 1996.
Aggregate
Carrying
Issuer Amount
--------------------------------------------- -------------
1997:
California State Agency $ 27,991,509
New York State Agency 16,940,146
Oregon State Agency 12,439,539
New Jersey State Agency 11,348,481
Arizona State Agency 11,249,875
Colorado State Agency 8,515,139
Pennsylvania State Agency 8,163,646
Tri-State Agency 7,934,432
Michigan State Agency 7,875,106
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
Aggregate amounts of contractual maturities of other receivable
investments (face amounts) are as follows:
Fiscal Year Ending
September 30,
------------------
1998 $ 25,071,000
1999 25,625,000
2000 26,678,000
2001 25,309,000
2002 22,733,000
Thereafter 139,671,029
-------------
$ 265,087,029
=============
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. DEFERRED COSTS:
An analysis of deferred costs related to policy acquisition and
debenture issuance for the years ended September 30, 1997, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
Policy Debenture
Acquisition Issuance Total
------------ ------------ ------------
<S> <C> <C> <C>
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
Deferred during the year:
Commissions 4,000,805 1,283,612 5,284,417
Other expenses 3,229,197 277,257 3,506,454
------------ ------------ ------------
Total deferred 79,162,886 4,158,346 83,321,232
Amortized during the year (9,432,884) (1,385,253) (10,818,137)
------------ ------------ ------------
Balance at September 30, 1997 $ 69,730,002 $ 2,773,093 $ 72,503,095
============ ============ ============
</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.
The amortization of debenture issuance costs could be affected by
an increase in the redemption of the debenture bonds, which is
based on the expected terms of the debentures. As a result, the
scheduled amortization could change in the near term.
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. LAND, BUILDINGS AND EQUIPMENT:
Land, buildings, equipment and related accumulated depreciation
at September 30, 1997 and 1996 consisted of the following:
1997 1996
------------ ------------
Land $ 561,794 $ 561,794
Buildings and improvements 7,014,199 6,850,175
Furniture and equipment 12,169,392 10,365,201
------------ ------------
19,745,385 17,777,170
Less accumulated depreciation (10,336,807) (9,260,572)
------------ ------------
Totals $ 9,408,578 $ 8,516,598
============ ============
During the year ended September 30, 1997, the Company entered
into an agreement to acquire a new corporate headquarters
building in Spokane, Washington. The transaction, which is
expected to close in the first quarter of fiscal 1998, carried a
purchase price of approximately $11.7 million. Additionally, the
Company expects to incur approximately $5 million of capital
expenditures for the renovation of the corporate headquarters
building.
10. LIFE INSURANCE AND ANNUITY RESERVES:
Life insurance and annuity reserves are based upon contractual
amounts due to the annuity holder, including credited interest.
Annuity contract interest rates ranged from 4.35% to 10.10% and
4.25% to 10.65% during the years ended September 30, 1997 and
1996, respectively. Interest assumptions used to compute life
insurance reserves ranged from 5.0% to 6.5% during each of the
years ended September 30, 1997 and 1996.
The Company's life insurance 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 $52,328,000 and $58,679,000 at September 30,
1997 and 1996, respectively. Life insurance premiums ceded were
$352,311 and $354,830 during the years ended September 30, 1997
and 1996, respectively. The Company is contingently liable for
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. LIFE INSURANCE AND ANNUITY RESERVES, CONTINUED:
claims on ceded life insurance business in the event the
reinsuring companies do not meet their obligations under those
reinsurance agreements. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit
risk to minimize its exposure to significant losses from
reinsurer insolvencies.
Beginning in fiscal year 1997, the Company's life insurance
subsidiary has ceded a portion of its annuity reserves and
related premiums to OSL, an affiliated entity. The reinsured
annuity deposits are treated as liabilities for which the
Company's life insurance subsidiary is not liable, and
accordingly, annuity reserves, as reported in these financial
statements, do not include reserves on the ceded business.
Annuity premiums ceded under this arrangement during the year
ended September 30, 1997 were approximately $28,000,000 and the
ceded reserve was approximately $28,359,000 at September 30,
1997. The life insurance subsidiary is contingently liable for
claims on ceded annuity business in the event OSL is unable to
meet its obligation under the reinsurance agreement.
11. GUARANTY FUND ASSESSMENTS:
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, 1997, 1996 and 1995
were $480,000, $900,000 and $782,000, 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 1995. 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 Company's estimate of future assessments could
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. GUARANTY FUND ASSESSMENTS, CONTINUED:
change in the near term. The Company does not believe that the
amount of future assessments associated with known insolvencies
after 1995 will be material to its financial condition or results
of operations. At September 30, 1997, the amount of estimated
future guaranty fund assessments of approximately $3,898,000 has
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 $412,000 at September 30, 1997.
12. DEBENTURE BONDS:
At September 30, 1997 and 1996, debenture bonds consisted of the
following:
Annual Interest Rates 1997 1996
----------------------------- ------------ ------------
5% to 6% $ 64,000 $ 537,000
6% to 7% 5,366,000 4,979,000
7% to 8% 49,022,000 51,261,000
8% to 9% 100,665,000 84,372,000
9% to 10% 2,084,000 20,136,000
10% to 11% 1,968,000 1,749,000
------------ ------------
159,169,000 163,034,000
Compound and accrued interest 26,044,688 29,139,751
------------ ------------
$185,213,688 $192,173,751
============ ============
Unamortized debenture issuance costs incurred in connection with
the sale of debentures aggregated $2,773,093 and $2,597,477 at
September 30, 1997 and 1996, respectively, and are included in
deferred costs on the consolidated balance sheets.
Debenture bonds at September 30, 1997 mature as follows:
Fiscal Year Ending
September 30,
------------------
1998 $ 58,369,000
1999 44,701,000
2000 41,916,000
2001 6,311,000
2002 26,313,000
Thereafter 7,603,688
------------
$185,213,688
============
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. DEBENTURE BONDS, CONTINUED:
At September 30, 1997, as required by Washington State
regulation, the parent company could not have more than an
aggregate total of $295,800,000 in outstanding debentures
(including accrued and compound interest) and outstanding
preferred stock (based on original sales price). At
September 30, 1997, the Company had total outstanding debentures
of approximately $185,214,000 and total outstanding preferred
stock of approximately $50,729,000.
13. DEBT PAYABLE:
At September 30, 1997 and 1996, debt payable consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Reverse repurchase agreements with Seattle
Northwest, interest at 6.15% per annum;
due on October 2, 1997; collateralized
by $2,900,000 in U.S. Treasury bonds $ 2,896,375
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
Real estate contracts and mortgage notes
payable, interest rates ranging from
3.0% to 11.6%, 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 1,988,843 2,965,107
Accrued interest payable 32,561 151,289
----------- -----------
$ 4,917,779 $38,601,146
=========== ===========
</TABLE>
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. DEBT PAYABLE, CONTINUED:
Aggregate amounts of principal and accrued interest payments due
on debt payable at September 30, 1997 are as follows:
Fiscal Year Ending
September 30,
------------------
1998 $3,755,000
1999 296,000
2000 172,000
2001 220,000
2002 119,000
Thereafter 355,779
----------
$4,917,779
==========
14. 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, 1997 and 1996 are as follows:
1997
-------------------------
Assets Liabilities
------------ -----------
Allowance for losses on real
estate assets $ 3,249,751
Allowances for repossessed real
estate 964,234
Deferred contract acquisition
costs and discount yield
recognition $13,464,592
Office properties and equipment 1,820,852
Deferred policy acquisition costs 22,714,853
Life insurance and annuity
reserves 7,920,469
Guaranty fund liability 1,325,299
Investments 238,796
Tax credit carryforwards 1,692,052
Other 2,143,518
Net operating loss carryforwards 2,723,436
----------- -----------
Total deferred income taxes $18,114,037 $40,143,815
=========== ===========
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. INCOME TAXES, CONTINUED:
1996
-------------------------
Assets Liabilities
------------ -----------
Allowance for losses on real
estate assets $ 2,678,016
Allowances for 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 735,264
Net operating loss carryforwards 9,739,608
------------ ------------
Total deferred income taxes $25,238,616 $42,827,917
=========== ===========
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Federal income taxes at statutory
rate $5,053,484 $4,209,817 $3,224,472
State taxes and other 19,028 25,652 (116,575)
---------- ---------- ----------
Income tax provision $5,072,512 $4,235,469 $3,107,897
========== ========== ==========
</TABLE>
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. INCOME TAXES, CONTINUED:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current $1,004,926 $ 595,113 $ 359,907
Deferred 4,067,586 3,640,356 2,747,990
---------- ---------- ----------
$5,072,512 $4,235,469 $3,107,897
========== ========== ==========
</TABLE>
At September 30, 1997, the Company and its subsidiaries had
unused net operating loss carryforwards, for income tax purposes,
as follows:
Net
Operating
Expiring in Losses
------------------ ----------
2005 $1,452,034
2006 5,612,555
2007 945,516
----------
$8,010,105
==========
At September 30, 1997, the Company has alternative minimum tax
credits of approximately $1,134,000 and general business tax
credit carryforwards of approximately $558,000 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
15. STOCKHOLDERS' EQUITY:
A summary of preferred and common shares at September 30, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
Issued and Outstanding Shares
-------------------------------------------------
1997 1996
----------------------- -----------------------
Authorized
Shares Shares Amount Shares Amount
---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Preferred Stock
Series A 750,000
Series B 200,000
Series C 1,000,000 413,554 $ 4,135,540 438,343 $ 4,383,432
Series D 1,375,000 637,627 6,376,266 673,915 6,739,150
Series E 5,000,000 1,044,233 10,442,335 1,039,562 10,395,616
--------- --------- ----------- --------- -----------
8,325,000 2,095,414 $20,954,141 2,151,820 $21,518,198
========= ========= =========== ========= ===========
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
-------------------------------------------------
1997 1996
----------------------- -----------------------
Shares Amount Shares Amount
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Series E-1 713,401 $ 7,134,008 728,698 $ 7,286,982
Series E-2 45,154 451,541 45,579 455,790
Series E-3 107,000 1,069,996 107,874 1,078,736
Series E-4 62,500 625,005 62,978 629,776
Series E-5 13,672 136,721 13,744 137,443
Series E-6 95,130 951,303 80,689 806,889
Series E-7 7,376 73,761
--------- ----------- --------- -----------
1,044,233 $10,442,335 1,039,562 $10,395,616
========= =========== ========= ===========
</TABLE>
F-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. 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, E-6 and
E-7 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, E-6 and E-7
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, 1997, as required by state regulation, the
amount of the Company's aggregate total outstanding preferred
stock and debentures was limited (see Note 12).
F-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. 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, 1997 and 1996, no subordinate
preferred stock had been issued.
COMMON STOCK
Class A and B common stock have a par value of $2,250 per
share. 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 $8,597,000 at
September 30, 1997 (see Note 16).
F-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. 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, 1997, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
Statutory GAAP
----------- -----------
<S> <C> <C>
Stockholders' equity:
1997 $51,751,693 $86,229,626
1996 48,721,922 81,605,742
1995 43,340,817 78,826,654
Net income:
1997 $ 6,811,628 $ 4,051,900
1996 7,224,359 3,076,252
1995 2,634,919 2,717,893
Unassigned statutory surplus and
retained earnings:
1997 $ 8,596,693 $43,074,626
1996 5,566,922 38,450,742
1995 1,985,817 38,233,333
</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, 1995. Also, the 1995
net income above includes OSL operations through May 31, 1995.
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 par value of capital stock as a liability." At
September 30, 1997, the Company's life insurance subsidiary was
in compliance with this requirement.
F-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. STATUTORY ACCOUNTING, CONTINUED:
The National Association of Insurance Commissioners (NAIC)
currently is in the process of codifying statutory accounting
practices, the result of which is expected to constitute the only
source of "prescribed" statutory accounting practices.
Accordingly, that project, which is expected to be completed in
1998, 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, 1997, this permitted accounting practice
increased statutory surplus by approximately $31,600,000 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, 1997 was above the minimum
standards.
17. 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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest, net of amounts
capitalized $22,588,759 $12,653,377 $20,214,329
Income taxes 5,006,812 2,503,482 1,157,155
</TABLE>
F-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS, CONTINUED:
Non-cash investing and financing activities of the Company during
the years ended September 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Loans to facilitate the sale of
real estate held $18,604,263 $39,102,941 $34,102,247
Transfers between annuity
products 20,899,096 17,051,327 58,012,857
Transfer of investment from
held-to-maturity portfolio to
available-for-sale portfolio 72,572,322
Transfer of investments from
available-for-sale portfolio to
trading securities portfolio 17,958,970
Transfer of property from land,
buildings and equipment to
real estate held for sale
and development 1,598,999
Change in net unrealized (losses)
gains on investments, net 723,854 (161,606) 2,005,960
Real estate held for sale and
development acquired through
foreclosure 14,977,384 14,270,520 13,850,388
Debt assumed upon foreclosure
of real estate contracts 16,059
Assumption of other debt payable
in connection with the
acquisition of real estate
contracts and mortgage notes 1,638,727 3,633,657 526,868
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
Real estate held for sale 514,889
Allowance for losses on
real estate assets 322,548
Deferred costs 2,620,571
Equipment 13,395
Other assets 186,316
Annuity reserves 44,558,959
Accounts payable and accrued
expenses 1,653,970
</TABLE>
F-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. 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.
Information about the Company's separate business segments and in
total as of and for the years ended September 30, 1997, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
Property Intersegment
Investing Insurance Development Elimination Total
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
September 30, 1997:
Revenues $ 46,236,369 $ 96,621,416 $ 19,305,764 $ (7,028,883) $ 155,134,666
Income (loss) from
operations 16,974,081 4,509,460 (6,620,353) 14,863,188
Identifiable assets, net 250,167,675 958,432,546 66,566,307 (162,777,068) 1,112,389,460
Depreciation and
amortization 1,528,939 223,848 4,985,608 6,738,395
Capital expenditures 1,977,251 11,995 1,989,246
September 30, 1996:
Revenues $ 37,093,527 $ 92,893,077 $ 33,948,826 $ (7,063,061) $ 156,872,369
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) 1,282,658,818
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) $ 138,107,485
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) 1,080,468,000
Depreciation and
amortization 1,172,856 119,476 1,730,901 3,023,233
Capital expenditures 811,006 83,667 894,673
</TABLE>
F-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. BUSINESS SEGMENT REPORTING, CONTINUED:
In June 1997, Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information," (SFAS No. 131) was issued. SFAS No. 131
establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas and major customers. This Statement supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information
about major customers.
This Statement is effective for financial statements for periods
beginning after December 15, 1997. The Company has not yet
determined the effect that the application of this Statement will
have on its consolidated financial statements.
19. RELATED-PARTY TRANSACTIONS:
During the years ended September 30, 1997, 1996 and 1995, the
Company had the following related-party transactions with Summit
and other affiliates:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Real estate contracts and mort-
gage notes receivable and
other receivable investments
sold to Summit, OSL and
Arizona Life Insurance
Company (AZL) $61,792,877 $45,137,473 $59,578,347
Net reinsurance premiums ceded
to OSL 27,689,967
Contract acquisition costs
charged to Summit, OSL and
AZL on sale of real estate
contracts and mortgage notes
receivable and other receiv-
able investments, including
management underwriting fees 3,419,394 1,753,206 1,967,409
Gain on real estate contract and
mortgage notes receivable and
other receivable investments
purchased from Summit and OSL 335,469
</TABLE>
F-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. RELATED-PARTY TRANSACTIONS, CONTINUED:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Service fees paid to Summit
Property Development $ 1,845,207 $ 2,038,202 $ 1,250,017
Commissions and service fees
paid to MIS 1,307,110 369,080 1,124,481
Dividends paid to Summit on
preferred stock 240,267 200,256 256,991
</TABLE>
At September 30, 1997 and 1996, the Company had payables due to
affiliates of $741,518 and $1,205,920, respectively, related
primarily to advance payments on receivable acquisitions.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value. Potential income tax
ramifications related to the realization of unrealized gains and
losses that would be incurred in an actual sale and/or settlement
have not been taken into consideration.
PUBLICLY TRADED INVESTMENT SECURITIES - Fair value is
determined by quoted market prices.
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE - For
receivables (excluding accrued interest receivable), the
discount rate is estimated using rates currently offered for
receivables of similar characteristics that reflect the credit
and interest rate risk inherent in the loan. For residential
mortgage notes, 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.
F-49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997
-----------------------------
Carrying
Amounts Fair Value
------------- -------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 58,924,458 $ 58,924,958
Investments:
Trading securities 34,477,091 34,477,091
Available-for-sale securities 36,621,351 36,621,351
Held-to-maturity securities 113,730,535 112,711,688
Real estate contracts and mortgage notes
receivable 503,564,765 527,951,852
Other receivable investments 164,534,354 170,809,066
Financial liabilities:
Debenture bonds - principal and compound
interest 182,546,047 187,109,699
Debt payable - principal 4,885,218 4,934,939
<CAPTION>
1996
-----------------------------
Carrying
Amounts Fair Value
------------- -------------
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-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
LIMITATIONS - The fair value estimates are made at a discrete
point in time based on relevant market information and
information about the financial instruments. Because no market
exists for a significant portion of these financial
instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the
estimates. Accordingly, the estimates presented herein are not
necessarily indicative of what the Company could realize in a
current market exchange.
21. EMPLOYEE BENEFIT PLANS:
The Company sponsors a Retirement Savings Plan (the Plan),
authorized under Section 401(k) of the Tax Reform Act of 1986, as
amended. This Plan is available to all employees over the age of
21 upon completion of six months of service in which he or she
has completed 500 hours of service. Employees may defer from 1%
to 15% of their compensation in multiples of whole percentages.
The Company matches contributions equal to 50% of pre-tax
contributions up to a maximum of 6% of compensation. This match
is made only if the Company had a net profit during the preceding
fiscal year. The Company's contributions to the Plan were
approximately $110,000, $93,000 and $70,000 during the years
ended September 30, 1997, 1996 and 1995, respectively.
F-51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
22. PARENT COMPANY ONLY FINANCIAL STATEMENTS:
The condensed balance sheets of Metropolitan Mortgage &
Securities Co., Inc. ("Metropolitan" or the "parent company") at
September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 6,395,707 $ 4,807,147
Investments 28,186,682 8,840,977
Real estate contracts and mortgage notes
receivable and other receivable investments 60,562,209 72,018,452
Real estate held for sale and development 68,816,344 69,360,885
Allowance for losses on real estate assets (10,220,537) (6,297,676)
Equity in subsidiary companies 99,088,985 97,302,358
Land, buildings and equipment, net 10,280,724 9,376,863
Prepaid expenses and other assets, net 10,770,248 12,620,101
Accounts and notes receivable, net 7,836,274 5,190,592
Receivables from affiliates 19,210,838 24,626,214
------------- -------------
Total assets $ 300,927,474 $ 297,845,913
============= =============
LIABILITIES
Debenture bonds and accrued interest $ 185,213,688 $ 192,173,751
Debt payable 25,131,716 13,155,334
Accounts payable and accrued expenses 4,818,165 7,463,342
Deferred underwriting fee income 31,651,171 38,710,154
------------- -------------
Total liabilities 246,814,740 251,502,581
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $10 par (liquidation preference,
$50,729,084 and $49,495,906, respectively) 20,954,141 21,518,198
Subordinate preferred stock, no par
Common stock, $2,250 par 293,417 293,417
Additional paid-in capital 18,596,231 16,791,670
Retained earnings 14,536,114 8,731,070
Net unrealized losses on investments (267,169) (991,023)
------------- -------------
Total stockholders' equity 54,112,734 46,343,332
------------- -------------
Total liabilities and stockholders' equity $ 300,927,474 $ 297,845,913
============= =============
</TABLE>
F-52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
22. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Metropolitan's condensed statements of income for the years ended
September 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Interest and earned discounts $ 12,895,522 $ 8,303,775 $ 8,721,451
Fees, commissions, service and
other income 25,607,641 28,567,964 21,788,065
Real estate sales 18,127,105 23,499,363 4,700,560
Realized net gains on sales of
investments and receivables 8,211,741 2,357,010 1,134,510
------------- ------------- -------------
Total revenues 64,842,009 62,728,112 36,344,586
------------- ------------- -------------
Expenses:
Interest, net 17,995,578 15,630,068 16,205,083
Cost of real estate sold 19,118,802 22,266,024 3,719,349
Provision for losses on real
estate assets 7,255,824 4,578,315 2,316,354
Salaries and employee benefits 12,396,324 12,085,532 10,035,360
Other operating expenses 3,810,812 1,523,541 816,134
------------- ------------- -------------
Total expenses 60,577,340 56,083,480 33,092,280
------------- ------------- -------------
Income from operations before
income taxes and equity in net
income of subsidiaries 4,264,669 6,644,632 3,252,306
Income tax provision (1,455,746) (2,268,916) (1,105,581)
------------- ------------- -------------
Income before equity in net
income of subsidiaries 2,808,923 4,375,716 2,146,725
Equity in net income of
subsidiaries 6,859,388 3,661,948 4,155,921
------------- ------------- -------------
Net income $ 9,668,311 $ 8,037,664 $ 6,302,646
============= ============= =============
</TABLE>
F-53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
22. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Metropolitan's condensed statements of cash flows for the years
ended September 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 9,668,311 $ 8,037,664 $ 6,302,646
Adjustments to reconcile net
income to net cash provided
by operating activities (40,384,815) 12,717,338 (3,909,025)
------------- ------------- -------------
Net cash provided by (used
in) operating activities (30,716,504) 20,755,002 2,393,621
------------- ------------- -------------
Cash flows from investing
activities:
Principal payments on real
estate contracts and mort-
gage notes receivable and
other receivable investments 18,604,302 12,480,667 5,069,237
Proceeds from sales of real
estate contracts and mort-
gage notes receivable and
other receivable investments 153,354,821 24,297,171 34,946,274
Acquisition of real estate
contracts and mortgage
notes and other receivable
investments (139,609,748) (32,175,162) (18,449,630)
Proceeds from real estate sales 4,250,277 9,221,958 1,876,900
Proceeds from sales of invest-
ments 3,294,326 7,647,099
Proceeds from maturities of
investments 6,922,604 5,800,000
Purchase of investments (4,097,601) (11,689,836) (12,108,637)
Additions to real estate held
for sale and development (21,681,182) (17,191,856) (12,483,117)
Capital expenditures (1,930,595) (1,271,041) (803,302)
Net change in investment in
and advances to subsidiaries 11,164,783 (16,293,198) (9,591,121)
------------- ------------- -------------
Net cash provided by (used
in) investing activities 26,977,661 (23,526,971) (3,896,297)
------------- ------------- -------------
</TABLE>
F-54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
22. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing
activities:
Net borrowings (repayments)
from banks and others 11,815,877 7,497,807 4,156,501
Issuance of debenture bonds 38,510,520 9,125,303 53,120,179
Issuance of preferred stock 2,222,893 2,135,714 4,513,293
Repayment of debenture bonds (42,376,231) (22,906,185) (48,970,828)
Cash dividends (4,112,988) (3,868,148) (4,539,503)
Redemption and retirement of
stock (982,389) (370,734) (266,460)
Receipt of contingent sale
price for subsidiary sold
to related party 249,721
------------- ------------- -------------
Net cash provided by (used
in) financing activities 5,327,403 (8,386,243) 8,013,182
------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 1,588,560 (11,158,212) 6,510,506
Cash and cash equivalents at
beginning of year 4,807,147 15,965,359 9,454,853
------------- ------------- -------------
Cash and cash equivalents at end
of year $ 6,395,707 $ 4,807,147 $ 15,965,359
============= ============= =============
</TABLE>
F-55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
22. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Non-cash investing and financing activities not included in
Metropolitan's condensed statements of cash flows for the years
ended September 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Loans to facilitate the sale of
real estate $ 13,976,828 $ 14,277,405 $ 2,823,660
Real estate acquired through
foreclosure 2,152,887 198,454 1,219,983
Transfer of investments from
available-for-sale portfolio to
trading securities portfolio 576,377
Debt assumed with acquisition of
real estate contracts and mort-
gage notes and debt assumed
upon foreclosure of real estate
contracts 165,744 113,876
Change in net unrealized gains
(losses) on investments 723,854 (161,606) 2,005,960
Increase in assets and liabilities
associated with liquidation
of subsidiary:
Real estate contracts and mort-
gage notes receivable 30,052,954
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.
F-56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
22. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
At September 30, 1997 and 1996, Metropolitan's debt payable
consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Reverse repurchase agreement with a securities
broker, interest at 6.15% per annum, due
October 2, 1997; collateralized by $2,900,000
in U.S. Treasury bonds $ 2,896,375
Revolving line of credit, interest at 8.75% per
annum, due December 31, 1997; collateralized
by certain of the Company's real estate
contracts and mortgage notes 12,000,000
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
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 10,220,242 10,456,496
Accrued interest payable 15,099 20,338
------------- -------------
$ 25,131,716 $ 13,155,334
============= =============
</TABLE>
Aggregate amounts of principal payments due on the parent company's
debt payable are expected to be as follows:
Fiscal Year Ending
September 30,
------------------
1998 $15,309,000
1999 398,000
2000 370,000
2001 372,000
2002 335,000
Thereafter 8,347,716
-----------
$25,131,716
===========
F-57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
22. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
At September 30, 1997 and 1996, Metropolitan's debenture bonds
payable consisted of the following:
Annual
Interest
Rates 1997 1996
---------- ------------ ------------
5% to 6% $ 64,000 $ 537,000
6% to 7% 5,366,000 4,979,000
7% to 8% 49,022,000 51,261,000
8% to 9% 100,665,000 84,372,000
9% to 10% 2,084,000 20,136,000
10% to 11% 1,968,000 1,749,000
------------ ------------
159,169,000 163,034,000
Compound and accrued interest 26,044,688 29,139,751
------------ ------------
$185,213,688 $192,173,751
============ ============
Unamortized debenture issuance costs totaled $2,665,775 at
September 30, 1997 and $2,597,477 at September 30, 1996.
Maturities of the parent company's debenture bonds are as
follows:
Fiscal Year Ending
September 30,
------------------
1998 $ 58,369,000
1999 44,701,000
2000 41,916,000
2001 6,311,000
2002 26,313,000
Thereafter 7,603,688
------------
$185,213,688
============
F-58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
22. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Metropolitan had the following related party transactions with
its various subsidiaries and affiliated entities:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Dividends received:
Old Standard Life Insurance Company $ 1,922,000
Metropolitan Mortgage & Securities
Co. of Alaska $ 2,134,000 $ 1,243,950
Spokane Mortgage Co. 125,000
Western United Life Assurance
Company 441,510 288,208
Beacon Properties, Inc. 185,000 360,000
Consumers Group Holding Co., Inc. 962,580 1,880,450 723,250
Metropolitan Investment Securities,
Inc. 138,950
Broadmore Park Factory Outlet, Inc. 200,000 85,000
----------- ----------- -----------
$ 3,296,580 $ 3,835,910 $ 3,557,408
=========== =========== ===========
Fees, commissions, service and other
income $25,628,142 $26,969,251 $18,829,557
Interest income 894,995 1,858,521 4,152,257
</TABLE>
Metropolitan charged various subsidiaries and affiliated entities
for underwriting fees of $20,068,000 in 1997, $29,362,000 in 1996
and $14,936,306 in 1995 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 $17,432,885 in
1997, $18,323,435 in 1996 and $10,416,849 in 1995.
The underwriting fees are based upon a yield requirement
established by the purchasing entity. For contracts acquired to
sell to Western United Life Assurance Co. (Western United), one
of Metropolitan's subsidiaries, the yield is guaranteed by
Metropolitan. In connection with its guarantee, Metropolitan has
holdbacks of $9,528,000 and $12,538,000 at September 30, 1997 and
1996, respectively.
F-59
<PAGE> 75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 76
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
MANAGEMENT
Directors, Executive Officers and Certain Employees
(Age Information Current as of September 30, 1997)
<TABLE>
<CAPTION>
Name Age Position
____ ___ ______________________________________________
<S> <C> <C>
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* 50 Senior Vice President/Underwriting
Steven Crooks* 51 Vice President, Controller and Acting Chief
Financial Officer
Susan Thomson* 37 Vice President and Assistant Corporate Counsel
Jon McCreary 29 Acting Treasurer
Reuel Swanson 58 Secretary and Director
John Van Engelen 44 President, Western United
Irv Marcus 73 Director
Charles H. Stolz 89 Director
John Trimble 67 Director
Harold Erfurth 80 Director
Neil Fosseen 88 Honorary Director
<FN>
*Member of Executive Committee
</TABLE>
Directors and officers are elected to one-year terms.
C. Paul Sandifur, Jr. became Executive Vice President in 1980, was
elected President in 1981, succeeded his father as Chief Executive Officer in
1991 and became Chairman of the Board in 1995. He has been a Director since
1975. Mr. Sandifur was a real estate salesman with Diversified Properties in
Kennewick, Washington during 1977 and 1978 and then with Century 21 Real
Estate in Kennewick. In June 1979, he became an associate broker with Red
Carpet Realty in Kennewick before rejoining Metropolitan in 1980. He is a
Director and Officer of most of the subsidiary companies. He is the sole
shareholder of National Summit Corp., which in turn is the sole shareholder of
former subsidiaries of Metropolitan, Summit and Old Standard.
Bruce J. Blohowiak joined Metropolitan's legal staff in 1979 and became
its Corporate Counsel in 1986. In 1987, he became an Assistant Vice President
and was appointed a Vice President in
<PAGE> 77
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. He was elected
Assistant Vice President in 1990, Vice President in 1992 and became Senior
Vice President-Production 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. During 1996, she was appointed Vice President of Western
United. She is a member of the Washington State Bar Association and received
her J.D. from Gonzaga University School of Law in 1989.
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 Secretary
of most of the subsidiary companies.
Jon 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
<PAGE> 78
President. Prior to working for Western United, 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.
John Trimble had been employed by Metropolitan from 1980 until his
retirement in 1995. His principal area of responsibility was Receivables
underwriting. At retirement he was Vice President. He became a Director in
February 1996.
Harold Erfurth was a stockbroker, and independent contractor selling the
securities issued and offered by Metropolitan from 1972 to 1983. He served as
a Director from 1979 to 1994, and was elected as a Director again in 1996.
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.
ITEM 11. EXECUTIVE COMPENSATION
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 executive officers of
Metropolitan received less than $100,000 in compensation during the year ended
September 30, 1997. No executive officer is a party to, or a participant in,
any pension plan, contract or other arrangement providing for cash or non-cash
forms of remuneration except Metropolitan's 401(k) qualified retirement plan
adopted as of January 1, 1992, which is available generally to all employees
of Metropolitan, except as described below. See "EMPLOYMENT CONTRACTS AND
TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS." The 401(k)
Plan provides for maximum annual company matching contributions equal
<PAGE> 79
to 3% of each participant's salary. As of September 30, 1997, Metropolitan
had no stock option plans in effect.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
(a) (b) (c) (d)
_________________________________ ____ __________ ___________
Bonus/
Name and Principal Position Year Salary ($) Commissions
___________________________ ____ __________ ___________
<S> <C> <C> <C>
C. Paul Sandifur, Jr. 1997 $ 150,000
Chief Executive Officer 1996 $ 147,145
1995 $ 128,869 $ 1,004
Bruce Blohowiak 1997 $ 126,667
Executive Vice President 1996 $ 105,000
General Counsel 1995 *
Michael Kirk 1997 $ 85,000 $ 103,021
Senior Vice President-Production 1996 $ 85,000 $ 91,867
1995 $ 65,813 $ 38,050
John Van Engelen 1997 $ 102,000 $ 39,581
President, Western United 1996 $ 105,500 $ 19,747
1995 *
<FN>
*Salaries and other compensation were less than $100,000
</TABLE>
COMPENSATION OF DIRECTORS
Directors (including honorary Directors) of Metropolitan are paid $500
per meeting.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
AND CHANGE IN CONTROL ARRANGEMENTS
Metropolitan has executed employment contracts with the following
executive officers.
<TABLE>
<CAPTION>
Name Effective Date Term Ends Compensation
_______________ ______________ _____________ ____________
<S> <C> <C> <C>
Bruce Blohowiak June 1, 1997 May 31, 2002 $400,000
<PAGE> 80
Jon McCreary June 1, 1997 May 31, 2002 $250,000
Michael Kirk June 1, 1997 May 31, 2002 $354,406
</TABLE>
These agreements provide that should the officer continue employment for
the designated term, the officer shall receive the designated compensation.
The agreements include non-compete provisions and non-disclosure of trade
secret provisions.
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/or the Human Resources Manager. 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 various transactions with these companies. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" under Item 13.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as to each class of
equity securities of Metropolitan and its subsidiaries beneficially owned by
Metropolitan officers and directors as of September 30, 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 257 0.05%
Spokane, WA 99201 Metropolitan Class A
Common Stock 35.6925 27.37%
C. Paul Sandifur, Jr. Metropolitan Class A
Trustee(1) Common Stock 82.4667(1) 63.24%
929 West Sprague
Spokane, WA 99201
<PAGE> 81
Summit Securities, Metropolitan Preferred
Inc.(2) Stock, All Series 248,025(2) 5.14%
929 West Sprague Metropolitan Class A
Spokane, WA 99201 Common Stock 9.2483(2) 7.09%
Irv Marcus Metropolitan Preferred
929 West Sprague Stock, All Series 406 0.01%
Spokane, WA 99201 Metropolitan Class A
Common Stock 1.0000 0.77%
Bruce J. Blohowiak Metropolitan Class A
929 West Sprague Common Stock 2.0000 1.53%
Spokane, WA 99201
Charles H. Stolz Metropolitan Preferred
929 West Sprague Stock, All Series 19,477 0.38%
Spokane, WA 99201
All Officers and Metropolitan Preferred
Directors as a Stock, All Series 268,165 5.58%
group Metropolitan Class A
Common Stock 130.4075 100.00%
<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 September 30, 1997.
<TABLE>
<CAPTION>
Shares of Class A
Name and Address Common Stock % of Class
________________ _________________ ___________
<S> <C> <C>
C. Paul Sandifur, Jr. 35.6925 27.37%
929 West Sprague
Spokane, WA 99201
C. Paul Sandifur, Jr. 82.4667 63.24%
Trustee
<PAGE> 82
Summit Securities, Inc. 9.2483 7.09%
929 West Sprague
Spokane, WA 99201
<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.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND 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 96.5% indirectly. See "BUSINESS-Organizational Chart" under Item 1.
During the three-year period ended September 30, 1997, Western United
purchased some of its Receivables from Metropolitan at Metropolitan's cost.
In these transactions, Western United paid Metropolitan $6,916,676 for
Receivables with aggregate outstanding principal balances of $7,351,986. The
difference represents unrealized discounts net of acquisition costs.
Metropolitan is compensated for Receivable acquisition services it
provides to Western United. In 1997, 1996 and 1995, respectively,
Metropolitan received Receivable acquisition compensation of $20.1 million,
$29.4 million and $14.6 million to Western United. The amounts for 1997, 1996
and 1995 are gross amounts before a loss reserve of $9.53 million in 1997,
$12.54 million in 1996 and $6.95 million in 1995 which was provided by
Metropolitan. The amounts of the Receivable acquisition compensation 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 was to reduce Western United's effective yields on the
purchased Receivables to approximately 8.5% in 1997, 8.2% in 1996 and 9.3% in
1995. 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
<PAGE> 83
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 21 to the Consolidated Financial Statements under
Item 8.
Metwest provides Receivable servicing and collection for Metropolitan
and Western United. See "BUSINESS-Receivable Investments-Servicing and
Collection Procedures, and Delinquency Experience" under Item 1.
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, 1997, there
were $15.5 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. As of September 30, 1997, these
loans outstanding totaled $3,800,000 and currently bear no interest.
In the three years ended September 30, 1997, Consumers sold credit
guaranty insurance to Metropolitan for $540,000 in total premiums.
Transactions with affiliates
In the normal course of business, Metropolitan engages in transactions
with companies which were former subsidiaries and which are currently
affiliated through the common control of C. Paul Sandifur, Jr.
Metropolitan Investment Securities (MIS), a broker-dealer and former
subsidiary of Metropolitan, sells the publicly registered securities of
Metropolitan and Summit. Metropolitan paid commissions to MIS for the sale of
Metropolitan's securities pursuant to the terms of written Selling Agreements.
During the fiscal years ended September 30, 1997, 1996 and 1995 Metropolitan
paid commissions to MIS in the amounts of $1,151,637, $203,946 and $1,461,033,
on sales of debt securities in the amounts of $38,510,520, $9,125,303 and
$53,120,179, respectively. During the fiscal years ended September 30, 1997,
1996 and 1995, Metropolitan paid commissions to MIS in the amounts of $0,
$8,216 and $152,427 on sales of preferred stock in the amounts of $2,135,714,
$2,143,930 and $4,665,720, respectively. Additionally, in 1997, 1996 and
1995, Metropolitan paid commissions to MIS in the amounts of $155,473,
$156,918 and $140,555 on sales of preferred stock through an in-house trading
list.
<PAGE> 84
Metropolitan provides Management and Receivable Acquisition Services for
a fee to Summit, Old Standard and Arizona Life. During 1997, such fees were
approximately $1.3 million. Also See "BUSINESS-Receivable Investments-
Management and Receivable Acquisition Services" under Item 1.
Metwest provides Receivable Collection services for a fee to Summit, Old
Standard and Arizona Life. During 1997, such fees were approximately
$341,000. Also See "BUSINESS-Receivable Investments-Servicing and Collection
Procedures, and Delinquency Experience" under Item 1.
Management believes that the terms of the service agreements are at
least as favorable as could have been obtained from non-affiliated parties.
Western United 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 were reinsured monthly with Old Standard. The monthly
amount reinsured varied depending upon Western United's annuity sales volume.
The Agreement provided that Old Standard pay Western United fees of 1% of the
policy issue cost based upon the 75% reinsurance quota, and a monthly
administrative fee of .0333% of the reinsurance quota share of the total
account values. Actual fees vary depending upon the volume reinsured. This
agreement was terminated September 30, 1997. However, another similar
Reinsurance Agreement is currently under negotiation and is expected to be
executed during early calendar year 1998. It is anticipated that
approximately $3-$5 million per month will be ceded during fiscal 1998, during
the months the new agreement is effective. See "BUSINESS-Life Insurance and
Annuity Operations-Reinsurance" under Item 1.
Metropolitan's property development activities are provided by Summit
Property Development. Metropolitan paid Summit Property Development $1.8
million in development fees during 1997. See "BUSINESS-Real Estate
Development" under Item 1.
<PAGE> 85
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, 1997 and 1996
Consolidated Statements of Income for the Years Ended September
30, 1997, 1996, and l995
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996, and l995
Notes to Consolidated Financial Statements
(a) 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.
(a) 3. Exhibits
3(a). Restated Articles of Incorporation, as amended,
dated November 30, 1987 (Exhibit 3(a) to
Metropolitan's Annual Report on Form 10-K for fiscal
1987).
<PAGE> 86
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
National Bank, Trustee (Exhibit 4 to Metropolitan's
Annual Report on Form 10-K for fiscal 1980).
4(c). Second Supplemental Indenture, dated as of November
12, 1984, between Metropolitan and Seattle-First
National Bank, Trustee (Exhibit 4(d) to Registration
No. 2-95146).
*4(d). Third Supplemental Indenture, dated as of December
31, 1997, between Metropolitan and First Trust.
4(e). Amended Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
C (Exhibit 4(g) to Registration No. 33-2699).
4(f). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series D (Exhibit
4(a) to Registration No. 33-25702).
4(g). Statement of Rights, Designations and Preferences of
Variable Rate Preferred
<PAGE> 87
Stock, Series E-1 (Exhibit 4(a) to Registration No. 33-
19238).
4(h). Amended Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
E-2 (Exhibit 4(a) to Registration No. 33-25702).
4(i). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series E-3 (Exhibit
4(a) to Registration No. 33-32586).
4(j). Statement of Rights, Designations and Preference of
Variable Rate Cumulative Preferred Stock, Series E-4
(Exhibit 4(h) to Registration No. 33-40221).
4(k). 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(l). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock, Series E-6
(Exhibit 4(l) to Registration No. 33-51905).
4(m). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock, Series E-7
(Exhibit 4(d) to Amendment 1 to Registration No. 333-
19755).
*10(a). Employment Agreement between Metropolitan Mortgage
and Securities Co., Inc. and Bruce Blohowiak.
*10(b). Employment Agreement between Metropolitan Mortgage
and Securities Co., Inc. and Michael Kirk.
*10(c). Employment Agreement between Metropolitan Mortgage
and Securities Co., Inc. and Jon McCreary.
*10(d). Reinsurance Agreement between Western United Life
Assurance Company and Old Standard Life Insurance
Company.
<PAGE> 88
9. Irrevocable Trust Agreement (Exhibit 9(b) to
Registration No. 2-81359).
*11. Statement indicating computation of earnings per
common share.
*12. Statement regarding computation of ratios.
*21. Subsidiaries of Registrant.
*27. Financial Data Schedule.
*Filed herewith.
(b) Reports on Form 8-K
A Report on Form 8-K was filed October 30, 1997 disclosing that on
September 26, 1997, in the ordinary course of its business,
Metropolitan and Western United sold approximately $143.75 million
in first lien mortgage loans secured by, and contracts for the
sale of real property relating to, residential, multi-family and
commercial properties. Such sale was made in connection with the
issuance of approximately $152.08 million of mortgage pass-through
certificates, of which $146.76 million were sold in a private
offering. In connection with the sale, Metropolitan received cash
and approximately $5.32 million in Certificates resulting in an
after tax profit of approximately $5.5 million.
<PAGE> 89
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
Our report on the consolidated financial statements of Metropolitan
Mortgage & Securities Co., Inc. and subsidiaries is included in Item 8 herein.
In connection with our audits of such financial statements, we have also
audited the related financial statement schedules listed in Item 14 of this
Form 10-K.
In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to
be included therein.
/s/ COOPERS & LYBRAND L.L.P.
_____________________________
Coopers & Lybrand L.L.P.
Spokane, Washington
November 21, 1997
<PAGE> 90
SCHEDULE I
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
September 30, 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D
____________________________ _____________ ____________ _____________
Amount At
Which Shown
Amortized Market On Balance
Type of Investments Cost Value Sheet
____________________________ _____________ ____________ _____________
<S> <C> <C> <C>
FIXED MATURITIES
Investments:
U.S. Government and
Government Agencies and
Authorities $ 70,924,549 $ 69,435,231 $ 70,788,812
Corporate Bonds 16,652,572 16,416,165 16,488,556
Utility Bonds 6,996,866 6,924,589 6,991,659
Mortgage and Asset Backed
Bonds and Pass Through
Certificates 89,963,725 91,028,599 90,554,404
_____________ ____________ _____________
TOTAL FIXED MATURITIES $ 184,537,712 $183,804,584 $ 184,823,431
============= ============ =============
EQUITY SECURITIES $ 1,592 $ 5,546 $ 5,546
============= ============ =============
Real Estate Contracts and
Mortgage Notes Receivables $ 512,864,101 $ 512,864,101
Real Estate Held for Sale and
Development (Including
$34,388,973 Acquired in
Satisfaction of Debt) 81,802,266 81,802,266
_____________ _____________
Total Real Estate Assets 594,666,367 594,666,367
Less Allowances for Losses on
Real Estate Assets (12,327,098) (12,327,098)
_____________ _____________
NET REAL ESTATE ASSETS $ 582,339,269 $ 582,339,269
============= =============
OTHER RECEIVABLE INVESTMENTS $ 164,534,354 $ 164,534,354
============= =============
OTHER ASSETS-POLICY LOANS $ 16,724,211 $ 16,724,211
============= =============
TOTAL INVESTMENTS $ 948,137,138 $ 948,426,811
============= =============
</TABLE>
<PAGE> 91
SCHEDULE III
Page 1 of 2
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Future Policy
Deferred Benefits Other
Policy Losses, Claims Policy Claims
Acquisition and Loss Unearned and Benefits
Cost Expenses Premiums Payable
____________ ______________ ________ _____________
<S> <C> <C> <C> <C>
September 30, 1997
Life Insurance and
Annuities $ 69,730,002 $ 825,368,988 $ -- $ --
============ ============= ======= ===========
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 $ -- $ --
============ ============= ======= ===========
</TABLE>
<PAGE> 92
SCHEDULE III
Page 2 of 2
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, 1997
Life Insurance and Annuities $ 3,000,000 $ 65,759,676 $ 50,454,970 $ 9,432,884 $ 3,635,756
=========== ============ ============ ============ ===========
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
=========== ============ ============ ============ ===========
</TABLE>
<PAGE> 93
SCHEDULE IV
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
SUPPLEMENTARY REINSURANCE INFORMATION
<TABLE>
<CAPTION>
Assumed Percentage
Ceded to From of Amount
Gross Other Other Net Assumed
Year Ended Amount Companies Companies Amount to Net
_________________________ ____________ ____________ _________ ____________ __________
<S> <C> <C> <C> <C> <C>
September 30, 1997
Life Insurance in Force $330,205,000 $ 52,328,000 $ -- $277,877,000 --
============ ============ ========= ============ ==========
Premiums
Life Insurance $ 3,352,311 $ 352,311 $ -- $ 3,000,000 --
============ ============ ========= ============ ==========
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 --
============ ============ ========= ============ ==========
</TABLE>
<PAGE> 94
SCHEDULE II
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Additions Deductions
(Reductions) and
Balance at Charged to Accounts Balance
Beginning Costs and Written at End
Description of Year Expenses Off 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
1997 $7,945,561 $4,051,975 $2,506,420 $9,491,116
1996 6,276,183 3,295,694 1,626,316 7,945,561
1995 7,199,984 (190,470) 733,331 6,276,183
Allowance for probable losses on real estate
held for sale from real estate assets in
balance sheet
1997 $2,247,023 $4,079,126 $3,490,167 $2,835,982
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
Allowance for losses on accounts and notes
receivable deducted from other assets in
balance sheet
1997 $ 180,954 $ 42,995 $ 156,975 $ 66,974
1996 77,039 70,500 (33,415) 180,954
1995 193,497 (35,657) 80,801 77,039
</TABLE>
<PAGE> 95
SCHEDULE IV
Page 1 of 3
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1997
At September 30, 1997, the Consolidated Group held first position liens
associated with contracts and mortgage notes receivable with a face value of
approximately $520.6 million (99%) and second or lower position liens of
approximately $7.6 million (1%). Approximately 28% of the face value of the
Consolidated Group's real estate Receivables 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), approximately 9% in the North
Atlantic (New York, Pennsylvania, New Jersey, Connecticut and Maryland) and
approximately 17% by property located in the Southwest (Texas and New Mexico).
The face value of the real estate Receivables range principally from $15,000 to
$300,000 with 56 real estate Receivables, aggregating approximately $34.7
million in excess of this range. No individual contract or note is in excess
of 0.5% of the total carrying value of real estate Receivables, and less than
4% of the contracts are subject to variable interest rates. Contractual
interest rates principally range from 6% to 13% per annum with approximately
89% of the face value of these receivables within this range. The weighted
average contractual interest rate on these real estate Receivables at September
30, 1997 is approximately 9.4%. Maturity dates range from 1997 to 2027.
<TABLE>
<CAPTION>
Interest Carrying Delinquent
Number of Rates Amount of Principal
Description Receivables Principally Receivables Amount
___________ ___________ ___________ ____________ ___________
<S> <C> <C> <C> <C>
RESIDENTIAL
First Mortgage > $100,000 509 6-13% $ 78,734,868 $ 7,535,954
First Mortgage > $50,000 1,580 6-13% 107,372,840 6,765,551
<PAGE> 96
First Mortgage < $50,000 8,687 6-13% 181,186,443 13,178,218
Second or Lower > $100,000 4 8-11% 659,050 156,878
Second or Lower > $50,000 7 7-12% 480,016 65,686
Second or Lower < $50,000 220 6-13% 3,337,545 96,903
COMMERCIAL
First Mortgage > $100,000 209 6-13% 48,492,725 3,887,374
First Mortgage > $50,000 182 6-13% 13,199,135 677,704
First Mortgage < $50,000 317 6-13% 7,917,653 262,922
Second or Lower > $100,000 4 5-11% 1,559,883 --
Second or Lower > $50,000 5 7-12% 407,624 --
Second or Lower < $50,000 10 8-11% 303,122 --
FARM, LAND AND OTHER
First Mortgage > $100,000 84 8-15% 27,214,026 1,326,710
First Mortgage > $50,000 178 6-13% 11,513,233 313,881
First Mortgage < $50,000 2,487 6-13% 45,195,703 1,620,079
Second or Lower > $100,000 1 14% 100,000 100,000
Second or Lower > $50,000 3 9-10% 227,634 --
Second or Lower < $50,000 30 9-12% 306,057 12,140
Unrealized discounts, net of
unamortized acquisition costs,
on Receivables purchased at a
discount (24,642,792)
Accrued Interest Receivable 9,299,336
____________ ___________
CARRYING VALUE $512,864,101 $36,000,000
============ ===========
<FN>
The principal amounts of Receivables subject to delinquent principal or
interest is defined as being in arrears for more than three months.
</TABLE>
<PAGE> 97
SCHEDULE IV
Page 2 of 3
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1997
<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 1997 - September 2000 $ 40,400,913 $11,167,553 $22,990,756 $ 74,559,222
October 2000 - September 2002 33,771,278 9,163,174 9,742,636 52,677,088
October 2002 - September 2004 32,216,791 6,381,830 6,795,393 45,394,014
October 2004 - September 2007 46,889,093 11,374,072 12,310,724 70,573,889
October 2007 - September 2012 68,260,410 13,429,000 16,920,159 98,609,569
October 2012 - September 2017 44,494,614 5,288,840 6,384,637 56,168,091
October 2017 - Thereafter 105,737,663 15,075,673 9,412,348 130,225,684
____________ ___________ ___________ ____________
$371,770,762 $71,880,142 $84,556,653 $528,207,557
============ =========== =========== ============
</TABLE>
<PAGE> 98
SCHEDULE IV
Page 3 of 3
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1997
<TABLE>
<CAPTION>
For the Years Ended September 30, 1997
_________________________________________
1997 1996 1995
____________ ____________ ____________
<S> <C> <C> <C>
Balance at beginning of period $650,933,330 $587,493,614 $567,256,298
____________ ____________ ____________
Additions during period
New Receivables-cash 317,169,828 282,313,300 203,525,666
Loans to facilitate the sale of
real estate held-non cash 18,604,263 39,102,941 34,102,247
Assumption of other debt
payable in conjunction with
acquisition of new
Receivables-non cash 1,638,727 3,633,657 526,868
Increase in accrued interest 2,231,416 2,109,831 912,348
____________ ____________ ____________
Total additions 339,644,234 327,159,729 239,067,129
____________ ____________ ____________
Deductions during period
Collections of principal-cash 100,359,493 107,702,333 118,869,137
Cost of Receivables sold 361,009,441 141,636,670 54,387,414
Reduction in net Receivables
associated with sale of
subsidiary-non cash -- -- 32,391,856
Foreclosures-non cash 16,344,529 14,381,010 13,181,406
Decrease in accrued interest -- -- --
____________ ____________ ____________
Total deductions 477,713,463 263,720,013 218,829,813
____________ ____________ ____________
Balance at end of period $512,864,101 $650,933,330 $587,493,614
============ ============ ============
</TABLE>
<PAGE> 99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
/s/ C. Paul Sandifur, Jr.
______________________________________________
C. Paul Sandifur, Jr., Chief Executive Officer
January 8, 1998
Date
Pursuant to the requirements of the Securities Exchange 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.
<TABLE>
<CAPTION>
Signature Title Date
_________ _____ ____
<S> <C> <C>
/s/ C. PAUL SANDIFUR, JR.
_________________________ President, Director and 1/8/98
C. Paul Sandifur, Jr. Chief Executive Officer
/s/ BRUCE J. BLOHOWIAK
_________________________ Chief Operating Officer, 1/8/98
Bruce J. Blohowiak Executive Vice President,
and Director
/s/ STEVEN CROOKS
_________________________ Controller and 1/8/98
Steven Crooks Vice President
/s/ REUEL SWANSON
_________________________ Secretary and Director 1/8/98
Reuel Swanson
/s/ IRV MARCUS
<PAGE> 100
_________________________ Director 1/8/98
Irv Marcus
/s/ HAROLD ERFURTH
_________________________ Director 1/8/98
Harold Erfurth
/s/ JOHN TRIMBLE
_________________________ Director 1/8/98
John Trimble
</TABLE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
AND
FIRST TRUST NATIONAL ASSOCIATION, TRUSTEE
THIRD SUPPLEMENTAL INDENTURE
Dated as of December 31, 1997
Relating to an issue of Investment Debentures, Series III
Supplemental to Indenture dated as of July 6, 1979
THIS THIRD SUPPLEMENTAL INDENTURE, dated as of December 31, 1997 is
between Metropolitan Mortgage & Securities Co., Inc., a Washington corporation
(hereinafter called "Metropolitan" or the "Company"), having its principal
office at 929 West Sprague Avenue, Spokane, Washington 99201, and First Trust
National Association, a national banking association (hereinafter called the
"Trustee"), having offices at Two Union Square, 601 Union Street, Suite 2120,
Seattle, Washington 98101, and is supplemental to an Indenture dated as of
July 6, 1979 and the First and Second Supplemental Indentures dated as of
October 3, 1980 and November 12, 1984, respectively, (the "Indenture") between
the Company and Seattle First National Bank, the prior Trustee.
RECITALS OF THE COMPANY
The Company previously executed and delivered to the Trustee the
Indenture that provides for the issuance in one or more series of the
Company's Investment Debentures (hereinafter called the "Debentures"), in
accordance with the Indenture. The initial series of Debentures issued under
the Indenture is known as the Company's Investment Debentures, Series I,
limited to the aggregate principal amount of $20,000,000.
The Company also previously executed and delivered to the Trustee First
and Second Supplemental Indentures dated as of
<PAGE> 102
October 3, 1980 and November 12, 1984, respectively, providing for the
issuance of the Company's Investment Debentures, Series II, and Installment
Debentures, Series I, respectively.
The Board of Directors of the Company has established a new series of
Debentures to be designated "Investment Debentures, Series III," not limited
in aggregate principal amount, and has authorized an initial issue of
$100,000,000 principal amount thereof. The Company has complied or will
comply with all provisions required to issue additional Debentures under the
Indenture.
The Company desires to execute and deliver this Third Supplemental
Indenture, in accordance with the provisions of the Indenture, for the purpose
of providing for the creation of a new series of Debentures, designating the
series to be created and specifying the form and provisions of the Debentures
of such series.
All things necessary to make the Investment Debentures, Series III, when
executed by the Company, authenticated by the Trustee, delivered as authorized
by the Company and duly issued by the Company, the valid obligations of the
Company, and to make this Third Supplemental Indenture a valid agreement of
the Company, in accordance with their or its terms, have been done.
NOW, THEREFORE, THIS THIRD SUPPLEMENTAL INDENTURE WITNESSETH that, for
and in consideration of the premises and the purchase of the Investment
Debentures, Series III, by the Holders thereof, it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders of the
Investment Debentures, Series III, as follows:
ARTICLE ONE
Investment Debentures, Series III and
Certain Provisions Relating Thereto
Section 1-1. Terms of Investment Debentures, Series III.
There shall be hereby established a series of Debentures to be
designated "Investment Debentures, Series III." The aggregate principal
amount of Investment Debentures, Series III, at any one time Outstanding shall
not be limited. The Investment Debentures, Series III, shall be issued in the
maturities and denominations with proposed interest rates upon the unpaid
principal amounts thereof as determined by the Company:
<TABLE>
<CAPTION>
<PAGE> 103
Interest Minimum
Maturity Rate Denomination
_____________ ________ ____________
<S> <C> <C>
</TABLE>
The maturities, interest rates and minimum denominations of Investment
Debentures, Series III, may be changed at any time by the Company, but no such
change will affect any Investment Debentures, Series III, issued prior to such
change. Holders of Investment Debentures, Series III, may select a monthly,
quarterly, semi-annual or annual Interest Payment Date or may elect to allow
interest to be compounded and paid as set forth in the form of the Investment
Debentures, Series III, in Section 1-2 hereof. Payment of the principal of
and interest on Investment Debentures, Series III will be made at the office
or agency of the Company maintained for that purpose in Spokane, Washington.
All such payments shall be made in such coin or currency of the United States
of America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that payment of interest may be made at the
option of the Company by check mailed to the address of the Person entitled
thereto as such address shall appear on the Debenture Register. In the event
of the death of any registered owner of an Investment Debenture, Series III,
any party entitled to receive some or all of the proceeds of such Investment
Debenture, Series III, may elect to have his or her share of such Investment
Debenture, Series III prepaid under the terms set out in the form of the
Investment Debentures, Series III in Section 1-2 hereof.
Global Debenture shall mean the Debenture, Series III, in the form shown
in Section 1-2 hereof, executed by the Company and registered in the name of
the Company or its nominee and authenticated by the Trustee. The Trustee
shall, upon request by the Company, authenticate for original issue up to
$100,000,000 principal amount of Debentures, Series III. Such authentication
of the Global Debenture shall satisfy the authentication requirement of the
Indenture with respect to the Debentures, Series III. The Company may amend,
and/or supplement the Global Debenture, and may increase and/or decrease the
principal amount of the Global Debenture from time to time. The Trustee shall
authenticate any endorsement to the Global Debenture to reflect such
amendment, supplement, increase or decrease in accordance with instructions
given by the Company. The Global Debenture, and any endorsements thereto
shall be deposited with the Company.
<PAGE> 104
Book Entry Debentures
The Debentures may be issued to investors in book entry form, without
the issuance of individual certificates, and without the requirement for
authentication by the Trustee of such book entry investments. Investors who
hold Investment Debentures in book entry form shall be considered to be
Debentureholders and shall have all the rights and privileges of a
Debentureholder pursuant to the Indenture, notwithstanding that record of
their Debenture investment is represented in book entry form. The Company
shall maintain accurate records of the individual holders of such Debentures.
The Company shall promptly provide the Trustee with a listing of all book
entry holders of the Debentures, Series III at such times and from time to
time, and in such format as the Trustee may reasonably request.
With respect to the Global Debenture, the ownership of which shall be
registered in the name of the Company or its nominee, except as otherwise
provided in the Indenture as amended, the Trustee shall have no responsibility
or obligation to any person for whom the Company or its nominee beneficially
holds an interest in book entry form in the Global Debenture. Without
limiting the generality of the foregoing, the Trustee shall have no
responsibility or obligation with respect to (i) the accuracy of the records
of the Company and its nominee with respect to the beneficial ownership
interests of Debentureholders in the Global Debenture; (ii) the delivery to
Debentureholders of any notice required to be given by the Company with
respect to their Investment Debentures; (iii) the payment by the Company or
its nominee to any Debentureholder, as shown on the books of the Company, of
principal or interest with respect to an Investment Debenture; or (iv) any
other action taken by the Company or its nominee as registered owner of the
Global Debenture.
Section 1-2. Form of Investment Debentures, Series III.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
929 West Sprague Avenue, Spokane, Washington 99201
Investment Debenture, Series III
Issued To ____________________________________
Principal Amount _____________________________
Issue Date ___________________________________
Maturity Date ________________________________
Interest Rate ________________________________
Certificate Number ___________________________
Interest Payable _____________________________
The Debenture
<PAGE> 105
This is a duly authorized Debenture of Metropolitan Mortgage &
Securities Co., Inc. ("Metropolitan"). This Debenture is issued under an
Indenture dated July 6, 1979 and a Third Supplemental Indenture dated as of
December 31, 1997 (the "Indenture") between Metropolitan and First Trust
National Association as Trustee (the "Trustee"). The Indenture permits
Metropolitan to issue an unlimited amount of Debentures, the terms of which
may vary according to series. This Debenture is of the series stated above;
that series is limited in aggregate principal amount as stated in the
Indenture (or supplemental indentures). The Indenture (and supplemental
indentures) contains statements of the rights of the Debentureholders,
Metropolitan and the Trustee and provisions concerning authentication and
delivery of the Debentures. Definitions of certain terms used in this
Debenture are also found in the Indenture (and supplemental indentures).
Payment of Principal
For value received, Metropolitan promises to pay the principal amount of
this Debenture at the maturity date stated above. Payment will be made to the
Person to whom this Debenture is issued, or registered assigns.
Payment of Interest
Metropolitan promises to pay interest on the principal amount of this
Debenture from the issue date until the principal amount is paid or made
available for payment. Interest will be computed at the annual interest rate
stated above. Interest will be payable or compounded as stated above or as
otherwise elected by the Person entitled to payment of interest. Metropolitan
will pay interest to the Person in whose name this Debenture (or one or more
Predecessor Debentures) is registered on the books of Metropolitan at the
close of business on the Regular Record Date for the payment of interest. The
Regular Record Date is the 15th day of the calendar month immediately
preceding an Interest Payment Date.
Compounding of Interest
If the Person entitled to payment of interest so elects, Metropolitan
will compound interest rather than pay interest in installments. Interest
will be compounded on a semi-annual basis at the interest rate stated above
from the Interest Payment Date immediately preceding receipt by Metropolitan
of the compounding election. Interest will be compounded from the issue date
of the Debenture if Metropolitan receives the compounding election prior to
the first Interest Payment Date. Interest will be compounded until the
maturity date stated above and will be paid on such
<PAGE> 106
date. Prior to Maturity, however, Metropolitan will pay at the
Debentureholder's request the interest accumulated in the last two semi-annual
compounding periods before Metropolitan receives the request, together with
the interest accrued from the end of the last such semi-annual period.
Interest compounded prior to the last two semi-annual compounding periods is
payable only on the maturity date stated above.
Alternative Installment Payments of Principal and Interest
If so elected by the person to whom this Debenture is originally issued,
Metropolitan promises, in lieu of the foregoing provisions for payment of
principal and interest, to pay equal monthly payments of principal and
interest, commencing thirty days from the Issue Date, until the Maturity Date,
at which time the remaining Principal Amount, if any, together with all unpaid
accrued interest, shall be paid. The amount of each monthly installment shall
be the amount necessary to amortize the Principal Amount at the specified
Interest Rate during the Amortization Term specified by the Debentureholder.
Prepayment on Death
In the event of a Debentureholder's death, any Person entitled to
receive some or all of the proceeds of this Debenture may elect to have his or
her share of the principal and any unpaid interest prepaid in full in five
consecutive equal monthly installments. Interest on the declining principal
balance of that share will continue to accrue at the interest rate stated
above. Any request for prepayment must be made in writing to Metropolitan.
The request must be accompanied by the Debenture and evidence, satisfactory to
Metropolitan, of the Debentureholder's death. Before Metropolitan prepays the
Debenture, it may require additional documents or other material it considers
necessary to establish the Persons entitled to receive some or all of the
proceeds of the Debenture. Metropolitan may also require proof of other facts
relevant to its obligation to prepay the Debenture in the event of death.
Miscellaneous
The provisions on the reverse are part of this Debenture.
This Debenture is not entitled to any benefit under the Indenture nor is
this Debenture valid or obligatory for any purpose unless the certificate of
authentication below has been executed by the Trustee by manual signature.
This Debenture is not insured by the United States government, the State
of Washington nor any agency thereof.
<PAGE> 107
IN WITNESS WHEREOF, Metropolitan has caused this Debenture to be duly
executed under its corporate seal.
METROPOLITAN MORTGAGE &
SECURITIES CO., INC.
(Corporate Seal)
Attest:________________________ By:___________________________
Secretary or Chairman of the Board,
Assistant Secretary President or Vice President
CERTIFICATE OF AUTHENTICATION
This is one of the Debentures referred to in the within-mentioned
Indenture.
FIRST TRUST NATIONAL ASSOCIATION,
as Trustee
By:______________________________
Authorized Officer
<PAGE> 108
[FORM OF REVERSE OF INVESTMENT DEBENTURE, SERIES III]
Transfer and Exchange of Global Debenture
Transfer and exchange of this Global Debenture is conditioned by certain
provisions in the Indenture as amended. To effect a transfer, the registered
owner must surrender this Debenture at Metropolitan's office or agency in
Spokane, Washington. This Debenture must be duly endorsed or accompanied by a
written instrument of transfer satisfactory to Metropolitan. Upon transfer,
one or more new Debentures of the same series, of authorized denominations and
for the same aggregate principal amount will be issued to the designated
transferee or transferees. Prior to due presentment for registration of
transfer, Metropolitan, the Trustee or any of their agents may treat any
Person in whose name this Debenture is registered as the owner of this
Debenture, regardless of notice to the contrary or whether this Debenture
might be overdue.
This Global Debenture is issuable only as a registered Debenture; it
does not bear coupons. As provided in the Indenture, this Global Debenture is
exchangeable for other Debentures of the same series of authorized
denominations with the same aggregate principal amount. To effect an
exchange, the registered owner must surrender this Debenture at Metropolitan's
office or agency in Spokane, Washington. The Debenture must be duly endorsed
or accompanied by a written instrument of exchange satisfactory to
Metropolitan.
No service charge will be made for a transfer or exchange, but
Metropolitan may require payment of a sum sufficient to cover any governmental
charge payable in connection with such transaction.
Amendment of the Indenture; Waiver of Rights
With certain exceptions, the Indenture may be amended, the obligations
and rights of Metropolitan may be modified and the rights of the
Debentureholders may be modified by Metropolitan at any time with the consent
of the Holders of 66-2/3% in aggregate principal amount of the Debentures at
the time Outstanding. The Indenture allows the Holders of specified
percentages in aggregate principal amount of the Debentures of a particular
series to waive compliance by Metropolitan with certain Indenture provisions
and to waive past defaults and their consequences on behalf of all the Holders
of Debentures of that series. Any such consent or waiver by the Holder of
this Debenture will be binding upon that Holder. The consent or waiver will
also be binding upon all future Holders of this Debenture and of any Debenture
issued upon the transfer
<PAGE> 109
of, or in exchange for or in lieu of this Debenture, whether or not that
consent or waiver is noted upon the Debenture.
Failure to Pay Interest; Events of Default
If interest is not punctually paid or duly provided for, it shall cease
to be payable to the registered Holder of this Debenture on the applicable
Regular Record Date. Instead, the Trustee will fix a Special Record Date for
payment of the Defaulted Interest. Upon receipt by the Trustee from the
Company of a list of all Debentureholders and their Debenture principal
amounts, the Trustee will give the Debentureholders notice of the Special
Record Date at least 10 days prior to the Special Record Date. The Person in
whose name this Debenture (or one or more Predecessor Debentures) is
registered on the books of the Company at the close of business on the Special
Record Date will be entitled to payment of the Defaulted Interest and the
Trustee may rely conclusively, without liability to any Debentureholder or the
Company, upon the information provided by the Company. If the Debentures are
listed on a securities exchange, however, the Defaulted Interest may be paid
at any time and in any lawful manner consistent with the requirements of the
exchange.
If an Event of Default occurs, the principal of all the Debentures may
be declared due and payable as provided in the Indenture.
Form of Payment
Payment of principal and interest will be made at the office or agency
of Metropolitan maintained for that purpose in Spokane, Washington. Payment
will be made in coin or currency of the United States of America that is legal
tender for payment of public and private debts at the time of payment. At
Metropolitan's option, however, payment of interest may be made by check
mailed to the Person entitled to the interest at that Person's address as it
appears in the Debenture Register.
Business Days
Whenever any Interest Payment Date, the Stated Maturity of this
Debenture or any date on which any Defaulted Interest is proposed to be paid
is not a Business Day, the appropriate payment or compounding of interest or
principal may be made on the next succeeding Business Day without accrual of
additional interest.
Certain Definitions
Metropolitan is a Washington corporation. The term "Metropolitan" and
"Company" includes any successor corporation
<PAGE> 110
under the Indenture. The term "Trustee" includes any successor trustee under
the Indenture.
Section 1-3. Events of Default.
"Event of Default," with respect to the Investment Debentures, Series
III, means any one of the events specified below in this Section 1-3 (whatever
the reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law, or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) default in the payment of any interest upon any Investment
Debenture, Series III, when such interest becomes due and payable, and
continuance of such default for a period of 30 days; or
(2) default in the payment of the principal of (or premium, if any,
on) any Investment Debenture, Series III, at its Maturity; or
(3) default in the performance, or breach, of any covenant or warranty
of the Company with respect to Investment Debentures, Series III, in the
Indenture or this Third Supplemental Indenture (other than a covenant or
warranty a default in whose breach is elsewhere in this Section specifically
dealt with), and continuance of such default or breach for a period of 60 days
after there has been given, by registered or certified mail, to the Company by
the Trustee or to the Company and the Trustee by the Holders of at least 10%
in principal amount of the Outstanding Investment Debentures, Series III, a
written notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default" hereunder; or
(4) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Company a bankrupt or an insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company under any Federal bankruptcy laws
or any other applicable Federal or State law, or appointing a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of the
Company or of any substantial part of its property, or ordering the winding up
or liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days; or
(5) the institution by the Company of proceedings to be adjudicated a
bankrupt or an insolvent, or the consent by it to the institution of
bankruptcy or insolvency proceedings against
<PAGE> 111
it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under any Federal bankruptcy laws or any other
applicable Federal or State law, or the consent by it to the filing of any
such petition or to the appointment of a receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of the Company or of any
substantial part of its property, or the making by it of an assignment for the
benefit of creditors, or the admission by it in writing of its inability to
pay its debts generally as they become due, or the taking of corporate action
by the Company in furtherance of any such action.
Section 1-4. Right of Redemption.
Notwithstanding anything to the contrary contained in the Indenture or
this Third Supplemental Indenture, the Investment Debentures, Series III are
not redeemable prior to Maturity; the Company may, however, pay principal and
premium, if any, and interest on such Debentures either upon mutual agreement
between the Holders of an Investment Debenture, Series III, and the Company or
as provided in the Indenture or this Third Supplemental Indenture in the event
of the death of any registered owner or any registered joint owner without
such payment constituting a redemption.
ARTICLE TWO
Miscellaneous
Section 2-1. Supplemental Indenture.
This Third Supplemental Indenture is executed and shall be construed as
an indenture supplemental to the Indenture, and shall form a part thereof, and
the Indenture, as hereby supplemented and modified, is hereby confirmed.
Except to the extent inconsistent with the express terms hereof, all of the
provisions, terms, covenants and conditions of the Indenture shall be
applicable to the Investment Debentures, Series III, to the same extent as if
specifically set forth herein. All terms used in this Third Supplemental
Indenture shall be taken to have the same meaning as in the Indenture, except
in cases where the context herein clearly indicates otherwise.
Section 2-2. Regulation of Interest Rates.
The Company hereby agrees that it will actively resist any attempts to
claim and will not voluntarily claim, the benefit of any interest rate
regulation law against any Debentureholder.
IN WITNESS WHEREOF, METROPOLITAN MORTGAGE & SECURITIES CO.,
<PAGE> 112
INC. has caused this Third Supplemental Indenture to be signed in its
corporate name by its Chairman of the Board, its President or a Vice-President
and its corporate seal to be affixed hereunto, and the same to be attested by
the signature of its Secretary or Assistant Secretary; and FIRST TRUST
NATIONAL ASSOCIATION, in evidence of its acceptance of the trust hereby
created, has caused this Third Supplemental Indenture to be signed in its
corporate name by one of its Trust Officers, and its corporate seal to be
affixed hereunto, and the same to be attested by one of its Trust Officers.
Executed and delivered as of the date first above written.
METROPOLITAN MORTGAGE &
SECURITIES CO., INC.
/s/ C. Paul Sandifur, Jr.
By: C. Paul Sandifur, Jr.
Title: President
(Corporate Seal)
Attest:
/s/ Reuel Swanson
Reuel Swanson
Secretary
FIRST TRUST NATIONAL ASSOCIATION,
as Trustee
/s/ Michael A. Jones
By: Michael A. Jones
Title: Assistant Vice President
(Corporate Seal)
STATE OF WASHINGTON )
) ss.
COUNTY OF SPOKANE )
On this 31st day of December, 1997, before me personally appeared C.
Paul Sandifur, Jr., to me known to be the President of Metropolitan Mortgage &
Securities Co., Inc., the corporation that executed the within and foregoing
instrument, and acknowledged said instrument to be the free and voluntary act
and deed of said corporation, for the uses and purposes therein mentioned, and
on oath stated that he was authorized to execute said instrument and that the
seal affixed is the corporate seal of said corporation.
<PAGE> 113
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ Susan Thomson
NOTARY PUBLIC in and for the
State of Washington, residing
[Seal] at Spokane
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 31st day of December, 1997, before me personally appeared
Michael A. Jones, to me known to be the Assistant Vice President of First
Trust National Association, the corporation that executed the within and
foregoing instrument, and acknowledged said instrument to be the free and
voluntary act and deed of said corporation, for the uses and purposes therein
mentioned, and on oath stated that he was authorized to execute said
instrument and that the seal affixed is the corporate seal of said
corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ Linda E. Houston
NOTARY PUBLIC in and for the
State of Washington, residing
[Seal] at Seattle
Metropolitan Mortgage & Securities Co., Inc.
AGREEMENT
Agreement dated June 10, 1997, between Metropolitan Mortgage &
Securities Co., Inc., hereinafter referred to as Company, and Bruce J.
Blohowiak, hereinafter referred to as Employee. Company and Employee mutually
agree on the terms and conditions set forth below.
1. Term of agreement. Subject to the provisions for employment at will
stated in paragraph 8 below, and as stated in Company policies,
incorporated herein, this agreement will begin on June 1, 1997, and will
end on May 31, 2002.
2. Deferred Compensation. If Employee is employed continuously until the
end of the agreement period, he shall be entitled to receive
$400,000.00, without interest, provided that Company remains solvent.
Within 30 days of the end of the agreement period, Employee will receive
full payment of the deferred compensation. Other payment arrangements
may be made if agreed to between Company and Employee in writing at
least 90 days prior to the end of the term of the agreement. Both
parties recognize that the payment(s) are, according to IRS rulings,
subject to Federal Insurance Contribution Act (FICA) and Federal Income
Tax (IRS) withholding and, therefore, Company will withhold applicable
FICA and IRS contributions when making payment(s) to Employee and will
also contribute the appropriate amount itself for its share of FICA
payments.
3. Employee to devote full-time to Company. Employee will devote his
entire working time, attention, and energies to the business of Company,
and, during employment, will not engage in any other business activity,
regardless of whether such activity is pursued for profit, gain, or
other pecuniary advantage. However, Employee is not prohibited from
making personal investments in any other business, as long as those
investments do not require participation in the operation of the
businesses.
4. Restriction on post-employment competition. For two years following the
end of his employment, Employee will not, within the United States of
America, own, manage, operate, control or be employed by or assist any
business similar to
<PAGE> 115
that conducted by Company and its business groups. Employee also agrees not
to solicit Company's employees or its customers for employment or sales
purposes. Company may, without waiving the protections of this
provision, grant Employee the right to engage in business otherwise
barred by this provision. Any such permission must be in writing and
approved by an authorized representative of Company in order to be
effective. If Employee violates the terms of this restriction,
Employer shall be relieved from the duty to make payments under
paragraph two of this agreement, and if Employee has already received
payment, Company shall be entitled to receive a full refund of payment,
including associated attorney and court fees to recover payment.
Employee acknowledges that a violation of the restrictions of this
paragraph will cause economic damage to Company, including damages that
are difficult to ascertain with certainty. Employee therefore agrees
that, in the event he violates the restrictions of this provision,
Company shall be entitled to seek injunctive relief to prevent further
violations and will also be entitled the recover $10,000.00 as
liquidated damages for each violation of this provision of the
agreement.
5. Confidentiality. Employee acknowledges that, during the course of his
employment, he will become aware of confidential business information,
including trade secrets, that are not generally known to the public and
which have commercial value from their limited publication. Employee
will not, at any time, during or after his employment with Company,
reveal any such confidential information or trade secrets to any person,
or use such confidential information, except as required in the course
of his duties with Company or at Company's request and direction.
6. Property rights. All materials, products, processes, and ideas
developed, established, used, or marketed during the course of the
employment contract will be the property of Company and its business
groups.
7. Death benefit. In the event Employee dies during the term of the
agreement, Company will pay to Employee's estate or beneficiary a pro-
rated amount of the deferred compensation rounded to the nearest month
of Employee's death. In the event Employee dies following the term of
agreement, but before the completion of payment(s), Company will
continue payment(s) to Employee's estate or beneficiary.
8. Termination of Agreement. The agreement between Company and Employee
will become null and void, if Employee violates the terms and conditions
of this agreement. The agreement
<PAGE> 116
between Company and Employee will also become null and void, if Employee is
discharged for cause which includes, but is not limited to, gross
misconduct or gross mismanagement of the business of Company,
insubordination, repeated failure to meet the expectations of her
supervisor, violation of existing Company policies or hereafter as
amended and adopted, and willful falsification of any information that
Employee gives to any officer or director of Company. Employee's
intentional violation of any federal, state, or local law or regulation,
determination by a court of competent jurisdiction that Employee is
prohibited for any reason from performing Employee's duties under this
agreement, and any fraud, theft, or dishonesty by Employee adversely
affecting Company, or its business groups, or its respective directors,
officers or shareholders, shall also constitute cause for termination.
If Employee's employment is terminated by the employee (resignation or
abandonment of job), or if he is terminated by Company for cause,
Company shall be relieved from the duty to make payment under paragraph
two of this agreement.
In the event Company terminates Employee at its own convenience,
Employee will receive a pro-rated amount of the deferred compensation.
The specific amount will be rounded to the nearest month.
9. This contract may not be assigned. Any waiver of a portion of this
contract by either party shall not constitute a waiver of any other
portion of the contract, nor shall a failure to seek redress for a
breach of the contract constitute a waiver of the right to enforce any
other portion of the contract.
10. Law and Venue. This contract is to be construed in accordance with the
laws of the State of Washington. Any legal action to enforce this
contract or for breach of this contract, shall be filed in the Superior
Court of Spokane County, Washington. Both parties hereby consent to
jurisdiction and venue in that court.
11. Severability. If any provision of this contract shall be found to be
unenforceable, all other provisions shall remain in effect as if the
unenforceable provision had never been included in the contract at all.
12. Entire agreement. This agreement supersedes and replaces all prior
discussions, understandings, and oral agreements between the parties and
contains the entire understanding and agreement between them on the
matters set forth herein.
<PAGE> 117
Moreover, this agreement cannot be modified by the parties except by an
instrument that is signed by the party or parties against whom such
modification is sought to be enforced.
IN WITNESS WHEREOF, the parties have caused this agreement to be signed and
validly executed to be effective as of the date set forth above.
Metropolitan Mortgage & Securities Co., Inc.
/s/ C. PAUL SANDIFUR
____________________________________
C. Paul Sandifur, President and CEO
/s/ BRUCE J. BLOHOWIAK
______________________________________
Bruce J. Blohowiak
Metropolitan Mortgage & Securities Co., Inc.
AGREEMENT
Agreement dated August 8, 1997, between Metropolitan Mortgage &
Securities Co., Inc., hereinafter referred to as Company, and Michael A. Kirk,
hereinafter referred to as Employee. Company and Employee mutually agree on
the terms and conditions set forth below in consideration for employee's
continued employment with Company and the promises set forth herein.
1. Term of agreement. Subject to the provisions for employment at will
stated in paragraph 8 below, and as stated in Company policies,
incorporated herein, this agreement will begin on June 1, 1997, and will
end on May 31, 2002.
2. Deferred Compensation. If Employee is employed continuously until May
31, 2002, he shall be entitled to receive $354,406.31, without interest,
provided that Company remains solvent. Within 30 days of the end of
the term of this agreement period, Employee will receive full payment of
the deferred compensation. Other payment arrangements may be made if
agreed to between Company and Employee in writing at least 90 days prior
to the end of the term of the agreement. Both parties recognize that
the payment(s) are, according to IRS rulings, subject to Federal
Insurance Contribution Act (FICA) and Federal Income Tax (IRS)
withholding and, therefore, Company will withhold applicable FICA and
IRS contributions when making payment(s) to Employee and will also
contribute the appropriate amount itself for its share of FICA payments.
3. Employee to devote full-time to Company. Employee will devote his
entire working time, attention, and energies to the business of Company,
and, during employment, will not engage in any other business activity,
regardless of whether such activity is pursued for profit, gain, or
other pecuniary advantage. However, Employee is not prohibited from
making personal investments in any other business, as long as those
investments do not require participation in the operation of said
businesses.
4. Restriction on post-employment competition. For one year following the
end of his employment, Employee will not, within the United States of
America, own, manage, operate,
<PAGE> 119
control or be employed by, or assist, any business that competes with Company
and its business groups. Employee also agrees not to solicit Company's
employees or its customers for employment or sales purposes. Company
may, without waiving the protections of this provision, grant Employee
the right to engage in business otherwise barred by this provision. Any
such permission must be in writing and approved by an authorized
representative of Company in order to be effective. If Employee
violates the terms of this restriction, Employer shall be relieved from
the duty to make payments under paragraph two of this agreement, and if
Employee has already received payment, Company shall be entitled to
receive a full refund of any payments made, including associated
attorney and court fees incurred by Company to recover said payments.
Employee acknowledges that a violation of the restrictions of this
paragraph will cause economic damage to Company, including damages that
are difficult to ascertain with certainty. Employee therefore agrees
that, in the event he violates the restrictions of this provision,
Company shall be entitled to seek injunctive relief to prevent further
violations and will also be entitled to recover $10,000.00 as
liquidated damages for each violation of this provision of the
agreement.
5. Confidentiality. Employee acknowledges that, during the course of his
employment, he will become aware of confidential business information,
including trade secrets, that are not generally known to the public and
which have commercial value from their limited publication. Employee
will not, at any time, during or after his employment with Company,
reveal any such confidential information or trade secrets to any person,
or use such confidential information, except as required in the course
of his duties with Company or at Company's request and direction.
6. Property rights. All materials, products, processes, and ideas
developed, established, used, or marketed during the course of the
employment contract will be the property of Company and its business
groups.
7. Death benefit. In the event Employee dies during the term of the
agreement, Company will pay to Employee's estate or beneficiary a pro-
rated amount of the deferred compensation rounded to the nearest month
of Employee's death. In the event Employee dies following the term of
agreement, but before the completion of payment(s), Company will
continue payment(s) to Employee's estate or beneficiary.
8. Termination of Agreement. The duties imposed upon Company under
paragraph two and seven of this agreement shall be
<PAGE> 120
discharged if employee terminates his employment (by resignation, abandonment
or otherwise) or if employee is terminated for Cause. Cause shall
include, but not be limited to, gross misconduct or gross mismanagement
of the business of Company, insubordination, repeated failure to meet
the expectations of his supervisor, violation of existing Company
policies or hereafter as amended and adopted, willful falsification of
any information that Employee gives to any officer or director of
Company, Employee's intentional violation of any federal, state, or
local law or regulation, a determination by a court of competent
jurisdiction that Employee is prohibited for any reason from performing
Employee's duties under this agreement, and/or any fraud, theft, or
dishonesty by Employee adversely affecting Company, or its business
groups, or its respective directors, officers or shareholders.
In the event Company terminates Employee at its own discretion and
without Cause, Employee will receive a pro-rated amount of the deferred
compensation up to and including the date Employee's employment is
terminated.
9. Waiver and Assignment. Any waiver of a portion of this contract by
either party shall not constitute a waiver of any other portion of the
contract, nor shall a failure to seek redress for a breach of the
contract constitute a waiver of the right to enforce any other portion
of the contract. Employee shall have no rights or power to assign this
agreement, or any of Employee's rights and duties hereunder and any
attempted assignment of the same by Employee shall be null and void.
10. Law and Venue. This contract is to be construed in accordance with the
laws of the State of Washington. Any legal action to enforce this
contract or for breach of this contract, shall be filed in the Superior
Court of Spokane County, Washington. Both parties hereby consent to
jurisdiction and venue in that court.
11. Severability. If any provision of this contract shall be found to be
unenforceable, all other provisions shall remain in effect as if the
unenforceable provision had never been included in the contract at all.
12. Entire agreement. This agreement supersedes and replaces all prior
discussions, understandings, and oral agreements between the parties and
contains the entire understanding and agreement between them on the
matters set forth herein. Moreover, this agreement cannot be modified
by the parties except by an instrument that is signed by the party or
<PAGE> 121
parties against whom such modification is sought to be enforced.
IN WITNESS WHEREOF, the parties have caused this agreement to be signed and
validly executed to be effective as of the date set forth above.
Metropolitan Mortgage & Securities Co., Inc.
/s/ C. PAUL SANDIFUR
____________________________________
C. Paul Sandifur, President and CEO
/s/ MICHAEL KIRK
______________________________________
Michael Kirk
Metropolitan Mortgage & Securities Co., Inc.
AGREEMENT
Agreement dated June 24, 1997, between Metropolitan Mortgage &
Securities Co., Inc., hereinafter referred to as Company, and Jon P. McCreary,
hereinafter referred to as Employee. Company and Employee mutually agree on
the terms and conditions set forth below.
1. Term of agreement. Subject to the provisions for employment at will
stated in paragraph 8 below, as stated in Company policies, and as
agreed to in his employment confirmation letter signed on September 10,
1993, incorporated herein, this agreement will begin on June 1, 1997,
and will end on May 31, 2002.
2. Deferred Compensation. If Employee is employed continuously until the
end of the agreement period, he shall be entitled to receive
$250,000.00, without interest, provided that Company remains solvent.
Within 30 days of the end of the agreement period, Employee will receive
full payment of the deferred compensation. Other payment arrangements
may be made if agreed to between Company and Employee in writing at
least 90 days prior to the end of the term of the agreement. Both
parties recognize that the payment(s) are, according to IRS rulings,
subject to Federal Insurance Contribution Act (FICA) and Federal Income
Tax (IRS) withholding and, therefore, Company will withhold applicable
FICA and IRS contributions when making payment(s) to Employee and will
also contribute the appropriate amount itself for its share of FICA
payments.
3. Employee to devote full-time to Company. Employee will devote his
entire working time, attention, and energies to the business of Company,
and, during employment, will not engage in any other business activity,
regardless of whether such activity is pursued for profit, gain, or
other pecuniary advantage. However, Employee is not prohibited from
making personal investments in any other business, as long as those
investments do not require participation in the operation of the
businesses.
4. Restriction on post-employment competition. For two years following the
end of his employment, Employee will not,
<PAGE> 123
within the United States of America, own, manage, operate, control or be
employed by or assist any business similar to that conducted by Company
and its business groups. Employee also agrees not to solicit Company's
employees or its customers for employment or sales purposes. Company
may, without waiving the protections of this provision, grant Employee
the right to engage in business otherwise barred by this provision. Any
such permission must be in writing and approved by an authorized
representative of Company in order to be effective. If Employee
violates the terms of this restriction, Employer shall be relieved from
the duty to make payments under paragraph two of this agreement, and if
Employee has already received payment, Company shall be entitled to
receive a full refund of payment, including associated attorney and
court fees to recover payment. Employee acknowledges that a violation
of the restrictions of this paragraph will cause economic damage to
Company, including damages that are difficult to ascertain with
certainty. Employee therefore agrees that, in the event he violates the
restrictions of this provision, Company shall be entitled to seek
injunctive relief to prevent further violations and will also be
entitled the recover $10,000.00 as liquidated damages for each violation
of this provision of the agreement.
5. Confidentiality. Employee acknowledges that, during the course of his
employment, he will become aware of confidential business information,
including trade secrets, that are not generally known to the public and
which have commercial value from their limited publication. Employee
will not, at any time, during or after his employment with Company,
reveal any such confidential information or trade secrets to any person,
or use such confidential information, except as required in the course
of his duties with Company or at Company's request and direction.
6. Property rights. All materials, products, processes, and ideas
developed, established, used, or marketed during the course of the
employment contract will be the property of Company and its business
groups.
7. Death benefit. In the event Employee dies during the term of the
agreement, Company will pay to Employee's estate or beneficiary a pro-
rated amount of the deferred compensation rounded to the nearest month
of Employee's death. In the event Employee dies following the term of
agreement, but before the completion of payment(s), Company will
continue payment(s) to Employee's estate or beneficiary.
<PAGE> 124
8. Termination of Agreement. The agreement between Company and Employee
will become null and void, if Employee violates the terms and conditions
of this agreement. The agreement between Company and Employee will also
become null and void, if Employee is discharged for cause which
includes, but is not limited to, gross misconduct or gross mismanagement
of the business of Company, insubordination, repeated failure to meet
the expectations of her supervisor, violation of existing Company
policies or hereafter as amended and adopted, and willful falsification
of any information that Employee gives to any officer or director of
Company. Employee's intentional violation of any federal, state, or
local law or regulation, determination by a court of competent
jurisdiction that Employee is prohibited for any reason from performing
Employee's duties under this agreement, and any fraud, theft, or
dishonesty by Employee adversely affecting Company, or its business
groups, or its respective directors, officers or shareholders, shall
also constitute cause for termination.
If Employee's employment is terminated by the employee (resignation or
abandonment of job), or if he is terminated by Company for cause,
Company shall be relieved from the duty to make payment under paragraph
two of this agreement.
In the event Company terminates Employee at its own convenience,
Employee will receive a pro-rated amount of the deferred compensation.
The specific amount will be rounded to the nearest month.
9. This contract may not be assigned. Any waiver of a portion of this
contract by either party shall not constitute a waiver of any other
portion of the contract, nor shall a failure to seek redress for a
breach of the contract constitute a waiver of the right to enforce any
other portion of the contract.
10. Law and Venue. This contract is to be construed in accordance with the
laws of the State of Washington. Any legal action to enforce this
contract or for breach of this contract, shall be filed in the Superior
Court of Spokane County, Washington. Both parties hereby consent to
jurisdiction and venue in that court.
11. Severability. If any provision of this contract shall be found to be
unenforceable, all other provisions shall remain in effect as if the
unenforceable provision had never been included in the contract at all.
<PAGE> 125
12. Entire agreement. This agreement supersedes and replaces all prior
discussions, understandings, and oral agreements between the parties and
contains the entire understanding and agreement between them on the
matters set forth herein. Moreover, this agreement cannot be modified
by the parties except by an instrument that is signed by the party or
parties against whom such modification is sought to be enforced.
IN WITNESS WHEREOF, the parties have caused this agreement to be signed and
validly executed to be effective as of the date set forth above.
Metropolitan Mortgage & Securities Co., Inc.
/s/ C. PAUL SANDIFUR
____________________________________
C. Paul Sandifur, President and CEO
/s/ JON P. McCREARY
______________________________________
Jon P. McCreary
REINSURANCE AGREEMENT
Between
WESTERN UNITED LIFE ASSURANCE COMPANY
and
OLD STANDARD LIFE INSURANCE COMPANY
TABLE OF CONTENTS
Page
A. REINSURANCE COVERAGE 1
B. PLACING REINSURANCE IN EFFECT 2
C. PAYMENTS BY REINSURED 2
D. PAYMENTS BY REINSURER 2
E. TERMS OF REINSURANCE 2
F. UNUSUAL EXPENSES AND ADJUSTMENTS 3
G. POLICY ADMINISTRATION 4
H. POLICY CHANGES 4
I. ASSIGNMENT OF REINSURANCE 5
J ERRORS 5
K. REDUCTIONS 5
L. AUDIT OF RECORDS AND PROCEDURES 6
M. ARBITRATION 6
N. CHOICE OF LAW AND FORUM 6
O. INSOLVENCY 7
P. PARTIES TO AGREEMENT 7
Q. EFFECTIVE DATE 8
R. DURATION OF AGREEMENT 8
S. MISCELLANEOUS 8
T. EXECUTION 9
SCHEDULES
SCHEDULE I 10
SCHEDULE II 11
SCHEDULE III 12
SCHEDULE IV 13
SCHEDULE V 14
SCHEDULE VI 16
<PAGE> 127
C O I N S U R A N C E A G R E E M E N T
between
WESTERN UNITED LIFE ASSURANCE COMPANY
of
Spokane, Washington.,
hereinafter referred to as the "REINSURED," and
OLD STANDARD LIFE INSURANCE COMPANY
of
Boise, Idaho,
hereinafter referred to as the "REINSURER."
A. REINSURANCE COVERAGE
1. The annuity policies (referred to herein as "Policies") issued by the
REINSURED on the forms listed in Schedule I shall be reinsured with the
REINSURER in accordance with the REINSURED'S underwriting rules applicable
to such policies.
2. The reinsurance shall cover the portion of the Policies specified in
Schedule I. All benefits provided by the Policies shall be reinsured
hereunder in the portion specified in Schedule I.
3. The liability of the REINSURER shall begin simultaneously with that of the
REINSURED but in no event prior to the effective date of this Agreement.
Reinsurance with respect to any Policy shall not be in force and binding
unless the insurance issued directly by the REINSURED is in force and
unless the issuance and delivery of such insurance constituted the doing of
business in a state of the United States of America, the District of
Columbia, or a country in which the REINSURED was properly licensed.
4. Reinsurance under this Agreement shall be coinsurance of the portion of the
policy which is reinsured with the REINSURER and shall follow the forms of
the REINSURED.
5. The reinsurance under this Agreement with respect to any policy shall be
maintained in force without reduction so long as the liability of the
REINSURED under such policy reinsured hereunder remains in force without
reduction, unless Coinsurance is terminated or reduced as provided herein.
B. PLACING REINSURANCE IN EFFECT
Reinsurance with respect to policies issued after the effective date of this
Agreement shall become effective automatically and simultaneously with the
liability of the REINSURED, provided however, that the REINSURED shall give
notification of such reinsurance to the REINSURER simultaneously with the
monthly reconciliation prescribed in Section E, paragraph 2.
C. PAYMENTS BY REINSURED
The REINSURED shall pay the REINSURER as Coinsurance premiums the Reinsurance
Share, as set forth in Schedule I, of the gross
<PAGE> 128
contributions or premiums the REINSURED receives on and after the effective
date of this Agreement.
D. PAYMENTS BY REINSURER
1. Benefits
The REINSURER shall pay the REINSURED:
(a) the Reinsurance Share of the gross amount of all death or annuity
benefits paid by the REINSURED (i.e., without deduction for
reserves) with respect to the Policies reinsured hereunder; and
(b) the Reinsurance Share of the net cash surrender values paid by the
REINSURED with respect to Policies reinsured hereunder.
2. Policy Expense Allowances
The REINSURER shall pay the REINSURED the full amount of Allowances for
Policy expenses as defined in Schedule I.
E. TERMS OF REINSURANCE
1. Except as otherwise specifically provided herein, all amounts due to be
paid to either the REINSURER or the REINSURED shall be determined and paid
on a net basis as of the last day of the calendar month to which such
amount is attributable. All amounts shall be due and accrued as of such
date. Such amounts shall be payable in accordance with the schedule set
forth in Section E, paragraph 2.
2. The REINSURED shall provide periodic reports to the REINSURER as specified
below.
(a) The REINSURED shall submit monthly, not later than fifteen (15)
days after the end of each calendar month, a Monthly Report
substantially in accordance with Schedule II. Any amounts indicated
in the Monthly Report as due the REINSURER shall accompany such
report.
(b) If a Policy is cancelled in accordance with a thirty day
cancellation provision, the REINSURED shall refund the entire
Allowance to the REINSURER, and the REINSURER shall refund the
entire Reinsurance Share to REINSURED each as they relate to the
cancelled Policy
(c) Any amounts indicated in the Monthly Report as due the REINSURED
shall be paid by the REINSURER within fifteen (15) days after
REINSURER'S receipt of the Monthly Report.
(d) Interest as specified in Schedule IV shall be paid on any amounts
not paid when due.
<PAGE> 129
(e) If the REINSURED ever becomes aware that its monthly reports for an
Accounting Period as required in section 2(a) did not accurately
reflect the actual experience of the Policies during the Accounting
Period, it shall promptly submit a revised summary to the
REINSURER. Any amount shown by the revised summary as owed by
either the REINSURED or the REINSURER to the other shall be paid
promptly.
(f) Upon notice to the REINSURED, the REINSURER may unilaterally amend
Schedule II in order to obtain the data it reasonably needs to
properly administer this Agreement or to prepare its financial
statements.
(g) Not later than thirty (30) days after the end of each calendar
year, the REINSURED shall submit to the REINSURER an Annual Report
substantially in accordance with Schedule III.
(h) Each year the REINSURED shall provide the REINSURER with a copy of
its annual financial reports prepared in accordance with GAAP, if
applicable, and its annual statutory statement, as soon as they are
available.
3. The parties elect to have this Agreement treated in accordance with Section
1.848-2(g)(8) of the Income Tax Regulations issued under Section 848 of the
Internal Revenue Code of 1986. Specific details of this election are set
forth in Schedule VI.
F. UNUSUAL EXPENSES AND ADJUSTMENTS
1. Any unusual expenses, as hereinafter defined, incurred by the REINSURED in
defending or investigating a claim for policy liability or rescinding a
policy reinsured hereunder, but net of unusual expenses receivable under
other reinsurance agreements with respect to the portion of the policies
reinsured hereunder, shall be participated in by the REINSURER in the same
proportion as its reinsurance bears to the total insurance under such
policy.
2. For purposes of this Agreement (but not as a limitation on the REINSURER'S
liability under paragraph 1), it is agreed that penalties, attorneys fees,
and interest imposed automatically by statute against the REINSURED and
arising solely out of a judgment rendered against the REINSURED in a suit
for policy benefits reinsured hereunder shall be considered unusual
expenses.
3. In no event, however, shall the following categories of expenses or
liabilities be considered for purposes of this Agreement as "unusual
expenses":
(a) routine investigative or administrative expenses;
<PAGE> 130
(b) expenses incurred in connection with a dispute or contest arising
out of conflicting claims of entitlement to policy proceeds or
benefits which the REINSURED admits are payable;
(c) expenses, fees, settlements, or judgments arising out of or in
connection with claims against the REINSURED for punitive or
exemplary damages; and
(d) expenses, fees, settlements, or judgments arising out of or in
connection with claims made against the REINSURED and based on
alleged or actual bad faith, failure to exercise good faith, or
tortious conduct.
G. POLICY ADMINISTRATION
1. The Policies reinsured pursuant to the terms of this Agreement shall be
administered by the REINSURED in accordance with the terms of each Policy
and in compliance with applicable statutes, regulations and rules.
2. The REINSURED shall bear all expenses incurred in connection with
administration of the Policies reinsured hereunder, except as provided in
paragraph F. hereinabove.
H. POLICY CHANGES
1. If the REINSURED intends to make a change in the terms or conditions of a
policy reinsured hereunder including, but not limited to a change in the
method used to calculate the statutory reserve on the policy and such
change is likely to affect the risk reinsured hereunder in respect of such
policy, the REINSURED shall notify the REINSURER of such proposed change.
2. For purposes of this Agreement, any change made to a policy reinsured
hereunder which has not been approved by the REINSURER shall be deemed to
be the issuance of a new policy form by the REINSURED. The REINSURER shall
inform the REINSURED whether the REINSURER will include such new policy
form under this Agreement or will terminate or modify the reinsurance
hereunder in respect of such policy.
3. Unless otherwise agreed by the REINSURER and the REINSURED, the interest
rates credited on the Policies reinsured hereunder shall be determined
according to interest rates credited by the REINSURED.
4. Unless otherwise agreed by the REINSURER and the REINSURED, the investments
underlying the Policies reinsured hereunder shall be made in accordance
with the investment policy adopted by the REINSURER. Such investment
policy may be amended from time to time by REINSURER in its sole discretion
upon reasonable notice to the REINSURED.
<PAGE> 131
I. ASSIGNMENT OF REINSURANCE
If the REINSURED proposes to sell, assumption reinsure or otherwise assist in
the transfer of the policies or risks that are reinsured under this Agreement
to any third party, it shall require that the third party agree in writing to
an assignment of all rights and obligations of the REINSURED under this
Agreement. The REINSURER may object to any assignment that would result in a
material adverse economic impact to the REINSURER. If the REINSURER objects to
an assignment on this basis, the REINSURED and the REINSURER shall mutually
agree on a termination charge which shall be paid by the REINSURED to the
REINSURER.
J. ERRORS
If either the REINSURED or the REINSURER shall fail to perform an obligation
under this Agreement and such failure shall be the result of an error on the
part of the REINSURED or the REINSURER, such error shall be corrected by
restoring both the REINSURED and the REINSURER to the positions they would
have occupied had no such error occurred; an "error" is a clerical mistake
made inadvertently and excludes errors of judgment and all other forms of
error.
K. REDUCTIONS
1. If a portion of the insurance issued by the REINSURED on a Policy reinsured
hereunder is terminated, reinsurance on that Policy shall be reduced.
2. The REINSURER shall return to the REINSURED any reinsurance premiums,
without interest thereon, paid to the REINSURER for any period beyond the
date of reduction of reinsurance hereunder.
L. AUDIT OF RECORDS AND PROCEDURES
The REINSURER and the REINSURED each shall have the right to audit, at the
office of the other, all records and procedures relating to reinsurance under
this Agreement.
M. ARBITRATION
If the REINSURED and the REINSURER cannot mutually resolve a dispute regarding
the interpretation or operation of this Agreement, the dispute shall be
decided through arbitration as set forth in the Schedule V. The arbitrators
shall base their decision on the terms and conditions of this Agreement.
However, if the terms and conditions of this Agreement do not explicitly
dispose of an issue in dispute between the parties, the arbitrators may base
their decision on the customs and practices of the insurance and reinsurance
industry rather than solely on an interpretation of applicable law. The
arbitrators' decision shall take into account the right to offset mutual debts
and credits as provided in this Agreement. There shall be no appeal from the
arbitrators'
<PAGE> 132
decision. Any court having jurisdiction over the subject matter and over the
parties may reduce the arbitrators' decision to judgment.
The parties intend this section to be enforceable in accordance with the
Federal Arbitration Act (9 U.S.C., Section 1) including any amendments to that
Act which are subsequently adopted. In the event that either party refuses to
submit to arbitration as required by paragraph 1, the other party may request
a United States Federal District Court to compel arbitration in accordance
with the Federal Arbitration Act. Both parties consent to the jurisdiction of
such court to enforce this section and to confirm and enforce the performance
of any award of the arbitrators.
N. CHOICE OF LAW AND FORUM
Idaho law shall govern the terms and conditions of the Agreement. In the case
of an arbitration, the arbitration hearing shall take place in Boise, Idaho,
O. INSOLVENCY
1. In the event of the insolvency of the REINSURED, all reinsurance shall be
payable directly to the liquidator, receiver, or statutory successor of
said REINSURED, without diminution because of the insolvency of the
REINSURED.
2. In the event of the insolvency of the REINSURED, the liquidator, receivor,
or statutory successor shall give the REINSURER written notice of the
pendency of a claim on a policy reinsured within a reasonable time after
such claim is filed in the insolvency proceeding. During the pendency of
any such claim, the REINSURER may investigate such claim and interpose, in
the name of the REINSURED (its liquidator, receiver, or statutory
successor), but at its own expense, in the proceeding where such claim is
to be adjudicated, any defense or defenses which the REINSURER may deem
available to the REINSURED or its liquidator, receiver, or statutory
successor.
3. The expense thus incurred by the REINSURER shall be chargeable, subject to
court approval, against the REINSURED as part of the expense of liquidation
to the extent of a proportionate share of the benefit which may accrue to
the REINSURED solely as a result of the defense undertaken by the
REINSURER. Where two or more reinsurers are participating in the same claim
and a majority in interest elect to interpose a defense or defenses to any
such claim, the expense shall be apportioned in accordance with the terms
of the Coinsurance agreement as though such expense had been incurred by
the REINSURED.
4. Any debts or credits, matured or unmatured, liquidated or unliquidated,
regardless of when they arose or were incurred, in favor of or against
either the REINSURED or the REINSURER with respect to this Agreement or
with respect to any other claim of one party against the other are deemed
mutual debts or
<PAGE> 133
credits, as the case may be, and shall be set off, and only the balance shall
be allowed or paid.
P. PARTIES TO AGREEMENT
This is an agreement for indemnity reinsurance solely between the REINSURED
and the REINSURER. The acceptance of reinsurance hereunder shall not create
any right or legal relation whatever between the REINSURER and the insured or
the beneficiary under any policy reinsured hereunder, and the REINSURED shall
be and remain solely liable to such insured or beneficiary under any such
policy.
Q. EFFECTIVE DATE
The effective date of this Agreement is January 1, 1997.
R. DURATION OF AGREEMENT
1. Except as otherwise provided herein, this Agreement shall be unlimited in
duration.
2. This Agreement may be terminated at any time by either the REINSURER or the
REINSURED upon thirty (30) days' written notice with respect to reinsurance
not yet placed in force. The REINSURER shall continue to accept reinsurance
during the thirty (30) day notice period, and shall remain liable on all
reinsurance placed in effect under this Agreement until the termination or
expiration of the insurance reinsured.
3. Upon ninety (90) days' written notice to the other party, REINSURER and
REINSURED shall have the right to terminate reinsurance under this
Agreement with respect to those policies which have attained the tenth or
any subsequent anniversary of having been reinsured hereunder. Any such
termination shall apply to all policies which attain the same or any
subsequent anniversary within the twelve (12) month period following the
effective date of such notice of termination. Termination with respect to
each affected policy shall be effective as of the anniversary of such
policy having been reinsured hereunder. The REINSURER shall pay to the
REINSURED a surrender benefit equal to the surrender value of each policy
for which reinsurance is terminated.
4. The termination of this Agreement or of the reinsurance in effect under
this Agreement shall not extend to or affect any of the rights or
obligations of the REINSURED and the REINSURER applicable to any period
prior to the effective date of such termination. In the event that,
subsequent to the termination of this Agreement, an adjustment is made
necessary with respect to any accounting hereunder, a supplementary
accounting shall take place. Any amount owed to either party by reason of
such supplementary accounting shall be paid promptly upon the completion
thereof.
S. MISCELLANEOUS
<PAGE> 134
1. This Agreement represents the entire agreement between the REINSURED and
REINSURER and supersedes, with respect to its subject matter, any prior
oral or written agreements between the parties.
2. No modification of any provision of this Agreement shall be effective
unless set forth in a written amendment to this Agreement which is executed
by both parties.
3. A waiver shall constitute a waiver only with respect to the particular
circumstance for which it is given and not a waiver of any future
circumstance.
T. EXECUTION
IN WITNESS WHEREOF the said
WESTERN UNITED LIFE ASSURANCE COMPANY
of
Spokane, Washington.,
and the said
OLD STANDARD LIFE INSURANCE COMPANY
of
Boise, Idaho,
have by their respective officers executed this Agreement in duplicate on the
dates shown below.
WESTERN UNITED LIFE ASSURANCE COMPANY
Signed at Spokane, WA
By: John Van Engelen
Title: President
Date: 2/26/97
OLD STANDARD LIFE INSURANCE COMPANY
Signed at Spokane, WA
By: Clayton Rudd
Title: President
Date: 2/26/97
<PAGE> 135
SCHEDULE I
POLICIES SUBJECT TO REINSURANCE, AMOUNT OF REINSURANCE & ALLOWANCES
The percentage of single premium deferred annuity contracts as defined below
issued by the REINSURED on and after the effective date of the Agreement are
subject to reinsurance as set forth in the Agreement. The amount of
reinsurance under this Agreement shall be percentage of the liability of the
REINSURED on all policies in the forms list defined below. All benefits
provided by such policies shall be reinsured.
<TABLE>
<CAPTION>
Reinsuran Allowances
ce Quota
Share
Policy
Reserves, Monthly
Claims & Admin. Admin.
Trade Name Premiums Benefits Commissions Policy Issue Servicing
<S> <C> <C> <C> <C> <C>
TDCD 75% 75% 3.00% 1.00% 0.0333%
CDMaxI 75% 75% 3.00% 1.00% 0.0333%
CDMax III 75% 75% 4.00% 1.00% 0.0333%
CDMax V 75% 75% 5.00% 1.00% 0.0333%
Navigator II 75% 75% 5.00% 1.00% 0.0333%
UNIMAXIII 75% 75% 5.00% 1.00% 0.0333%
Policy Reinsurance
Reserves, Reinsurance Reinsurance Quota
Policy Quota Share Quota Share Share
Basis for Gross Claims & of Gross of Gross of Account
Charge Premiums Benefits Premiums Premiums Value
</TABLE>
NOTES:
The Monthly Administrative Servicing Allowance percentage shall be
applied to the account at the end of each month on all reinsured
deferred annuity business in force.
<PAGE> 136
SCHEDULE II
Annuity Coinsurance
Monthly Report to
OLD STANDARD LIFE INSURANCE COMPANY
Amounts Due OLD STANDARD LIFE INSURANCE COMPANY
First year premiums (gross first year premium received during the month,
multiplied by the Reinsurance Quota Share percentage)
$_________
Sum of amounts due to OLD STANDARD LIFE INSURANCE COMPANY
$_________
Amounts Due WESTERN UNITED LIFE ASSURANCE COMPANY
Commission Allowances (Attach detailed worksheet of
calculations)
$_________
Policy Issue Allowances (Attach detailed worksheet of
calculations)
$_________
Monthly Administrative Servicing Allowances (Attach
detailed worksheet of calculations)
$_________
Surrender values paid during the month multiplied by
the Reinsurance Share percentage
$_________
Death benefits paid during the month multiplied by
the Reinsurance Share percentage
$_________
Policy Cancellations (Attach detailed worksheet of
calculations) (1)
$_________
Sum of amounts due to WESTERN UNITED LIFE ASSURANCE
COMPANY
$_________
Net amount due (sum of amounts due OLD STANDARD LIFE
INSURANCE Company minus sum of amounts due to
WESTERN UNITED LIFE ASSURANCE)
$_________
<PAGE> 137
Note: If the net amount due is negative, then that amount is due from OLD
STANDARD LIFE INSURANCE COMPANY to WESTERN UNITED LIFE ASSURANCE COMPANY.
Additional Items Needed By
OLD STANDARD LIFE INSURANCE COMPANY For Financial Reporting
A monthly listing of statutory and GAAP reserves, account values, and interest
credited.
(1) Policies cancelled pursuant to the thirty day cancellation provision.
<PAGE> 138
SCHEDULE III
ANNUAL REPORT
The annual report shall provide the following information:
(a) Exhibit 8 from the NAIC-prescribed annual statement
(b) a breakdown of the reserves by withdrawal characteristic of the
annuity contract
(c) "Analysis of Increase in Reserves" from the NAIC-prescribed annual
statement
(d) "Exhibit of Annuities" from the NAIC-prescribed annual statement
(e) an actuarial certification of the reported statutory reserves
(f) tax reserves and required interest.
<PAGE> 139
SCHEDULE IV
INTEREST RATE
.75% per month times the amount overdue; if any interest is due.
<PAGE> 140
SCHEDULE V
ARBITRATION SCHEDULE
To initiate arbitration, either the REINSURED or the REINSURER shall notify
the other party in writing of its desire to arbitrate, relating the nature of
its dispute and the remedy sought. The party to which the notice is sent shall
respond to the notification in writing within ten (10) days of its receipt.
The arbitration hearing shall be before a panel of three arbitrators, each of
whom must be a present or former officer of a life insurance company. An
arbitrator may not be a present or former officer, attorney, or consultant of
the REINSURED or the REINSURER or either's affiliates.
The REINSURED and the REINSURER shall each name five (5) candidates to serve
as an arbitrator. The REINSURED and the REINSURER shall each choose one
candidate from the other party's list, and these two candidates shall serve as
the first two arbitrators. If one or more candidates so chosen shall decline
to serve as an arbitrator, the party which named such candidate shall add an
additional candidate to its list, and the other party shall again choose one
candidate from the list. This process shall continue until two arbitrators
have been chosen and have accepted. The REINSURED and the REINSURER shall each
present their initial lists of five (5) candidates by written notification to
the other party within twenty-five (25) days of the date of the mailing of the
notification initiating the arbitration. Any subsequent additions to the list
which are required shall be presented within ten (10) days of the date the
naming party receives notice that a candidate that has been chosen declines to
serve.
The two arbitrators shall then select the third arbitrator from the eight (8)
candidates remaining on the lists of the REINSURED and the REINSURER within
fourteen (14) days of the acceptance of their positions as arbitrators. If the
two arbitrators cannot agree on the choice of a third, then this choice shall
be referred back to the REINSURED and the REINSURER. The REINSURED and the
REINSURER shall take turns striking the name of one of the remaining
candidates from the initial eight (8) candidates until only one candidate
remains. If the candidate so chosen shall decline to serve as the third
arbitrator, the candidate whose name was stricken last shall be nominated as
the third arbitrator. This process shall continue until a candidate has been
chosen and has accepted. This candidate shall serve as the third arbitrator.
The first turn at striking the name of a candidate shall belong to the party
that is responding to the other party's initiation of the arbitration. Once
chosen, the arbitrators are empowered to decide all substantive and procedural
issues by a majority of votes.
<PAGE> 141
It is agreed that each of the three arbitrators should be impartial regarding
the dispute and should resolve the dispute on the basis described in the
Agreement and this ARBITRATION Schedule. Therefore, at no time will either the
REINSURED or the REINSURER contact or otherwise communicate with any person
who is to be or has been designated as a candidate to serve as an arbitrator
concerning the dispute, except upon the basis of jointly drafted
communications provided by both the REINSURED and the REINSURER to inform
those candidates actually chosen as arbitrators of the nature and facts of the
dispute. Likewise, any written or oral arguments provided to the arbitrators
concerning the dispute shall be coordinated with the other party and shall be
provided simultaneously to the other party or shall take place in the presence
of the other party. Further, at no time shall any arbitrator be informed that
the arbitrator has been named or chosen by one party or the other.
The arbitration hearing shall be held on the date fixed by the arbitrators. In
no event shall this date be later than six (6) months after the appointment of
the third arbitrator. As soon as possible, the arbitrators shall establish
prearbitration procedures as warranted by the facts and issues of the
particular case. At least ten (10) days prior to the arbitration hearing, each
party shall provide the other party and the arbitrators with a detailed
statement of the facts and arguments it will present at the arbitration
hearing. The arbitrators may consider any relevant evidence; they shall give
the evidence such weight as they deem it entitled to after consideration of
any objections raised concerning it. The party initiating the arbitration
shall have the burden of proving its case by a preponderance of the evidence.
Each party may examine any witnesses who testify at the arbitration hearing.
Within twenty (20) days after the end of the arbitration hearing, the
arbitrators shall issue a written decision that sets forth their findings and
any award to be paid as a result of the arbitration, except that the
arbitrators may not award punitive or exemplary damages. In their decision,
the arbitrators shall also apportion the costs of arbitration, which shall
include, but not be limited to, their own fees and expenses.
<PAGE> 142
SCHEDULE VI
SECTION 1.848-2(g)(8) ELECTION
The REINSURED and the REINSURER agree to the following pursuant to Section
1.848-2(g)(8) of the Income Tax Regulations issued under Section 848 of the
Internal Revenue Code of 1986 (hereinafter "Section 1.848-2(g)(8).")
1. As used below, the term "party" will refer to the REINSURED or the
REINSURER as appropriate.
2. As used below, the phrases "net positive consideration",
"capitalize specified policy acquisition expenses", "general
deductions limitation", and "net consideration" shall have the
meaning used in Section 1.848-2(g)(8).
3. The party with net positive consideration for this Agreement for
any taxable year beginning with the taxable year prescribed in
paragraph 5 below will capitalize specified policy acquisition
expenses with respect to this Agreement without regard to the
general deductions limitation.
4. The parties agree to exchange information pertaining to the amount
of net consideration under this Agreement to ensure consistency.
This will be accomplished as follows:
(a) The REINSURED shall submit to the REINSURER by the
fifteenth day of March in each year its calculation of
the net consideration for the preceding calendar year.
Such calculation will be accompanied by a statement
signed by an officer of the REINSURED stating that the
REINSURED will report such net consideration in its
tax return for the preceding calendar year.
(b) The REINSURER may contest such calculation by
providing an alternative calculation to the REINSURED
in writing within thirty (30) days of the REINSURER'S
receipt of the REINSURED'S calculation. If the
REINSURER does not so notify the REINSURED, the
REINSURER will report the net consideration as
determined by the REINSURED in the REINSURER'S tax
return for the previous calendar year.
(c) If the REINSURER contests the REINSURED'S calculation
of the net consideration, the parties will act in good
faith to reach an agreement as to the current amount
within thirty (30) days of the date the REINSURER
submits its alternative calculation. If the
<PAGE> 143
REINSURED and the REINSURER reach agreement on an amount of
net consideration, each party shall report such amount
in their respective tax returns for the preceding
calendar year.
5. This election shall be effective for 1997 and all subsequent
taxable years for which the Reinsurance Agreement remains in
effect.
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Year ended September 30,
1997 1996 1995 1994 1993
__________ __________ _________ _________ _________
<S> <C> <C> <C> <C> <C>
Earnings:
Net income $ 9,668 $ 8,038 $ 6,303 $ 5,478 $ 4,003
Preferred dividends (4,113) (3,868) (4,038) (3,423) (3,313)
__________ __________ _________ _________ _________
Net income available to
common stockholders $ 5,555 $ 4,170 $ 2,265 $ 2,055 $ 690
========== ========== ========= ========= =========
Weighted average number
of common shares
outstanding (1) 130 130 131 137 134
========== ========== ========= ========= =========
Net income per common
share $ 42,733 $ 32,073 $ 17,288 $ 14,996 $ 5,150
========== ========== ========= ========= =========
<FN>
(1) All information retroactively reflects the reverse common stock split of
2,250:1 which occurred during the fiscal year ended September 30, 1994.
</TABLE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The ratio of adjusted earnings to fixed charges and preferred stock
dividends was computed using the following tabulations to compute adjusted
earnings and the defined fixed charges and preferred stock dividends.
<TABLE>
<CAPTION>
Year Ended September 30
________________________________________________
(Dollars in Thousands)
1997 1996 1995 1994 1993
_______ _______ _______ _______ _______
<S> <C> <C> <C> <C> <C>
Net income $ 9,668 $ 8,038 $ 6,303 $ 5,478 $ 8,303
Add:
Interest 19,375 18,788 16,381 19,895 19,442
Taxes on income 5,073 4,235 3,108 4,422 1,871
_______ _______ _______ _______ _______
Adjusted earnings $34,116 $31,061 $25,792 $28,365 $32,167
======= ======= ======= ======= =======
Preferred stock dividend
requirements $ 4,113 $ 3,868 $ 4,038 $ 3,423 $ 3,313
Ratio factor of income after
provision for income taxes
to income before provision
for income taxes 66% 66% 67% 66% 66%
Preferred stock dividend
factor on pretax basis 6,244 5,880 6,006 5,220 5,020
Fixed charges
Interest 19,375 18,788 16,381 19,895 19,442
Capitalized interest 521 2,468 2,730 2,152 3,013
_______ _______ _______ _______ _______
Fixed charges and
preferred stock
dividends $26,140 $27,136 $25,117 $27,267 $27,475
======= ======= ======= ======= =======
Ratio of adjusted earnings
to fixed charges and
preferred stock dividends 1.31 1.14 1.03 1.04 1.17
======= ======= ======= ======= =======
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
State of
Company Name Incorporation
____________ _____________
<S> <C>
Beacon Properties, Inc. Washington
Broadmoor Park-Factory Outlet, Inc. Washington
Consumers Group Holding Co., Inc. Washington
Consumers Insurance Company Washington
Lawai Beach Realty, Inc. Washington
Metropolitan Financial Services, Inc. Washington
Metropolitan Mortgage & Securities Company of Alaska
Alaska, Inc.
Metwest Mortgage Services, Inc. Washington
M.M.S.C.I. Washington
National Systems, Inc. Washington
Southshore Corporation Hawaii
Tall Spruce, Inc. Alaska
Western United Life Assurance Company Washington
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 58,925
<SECURITIES> 186,346
<RECEIVABLES> 677,398
<ALLOWANCES> 12,327
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 19,745
<DEPRECIATION> 10,337
<TOTAL-ASSETS> 1,112,389
<CURRENT-LIABILITIES> 0
<BONDS> 190,131
<COMMON> 293
0
20,954
<OTHER-SE> 32,866
<TOTAL-LIABILITY-AND-EQUITY> 1,112,389
<SALES> 0
<TOTAL-REVENUES> 155,135
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 112,766
<LOSS-PROVISION> 8,131
<INTEREST-EXPENSE> 19,375
<INCOME-PRETAX> 14,863
<INCOME-TAX> 5,072
<INCOME-CONTINUING> 9,791
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,668
<EPS-PRIMARY> 42,733.00
<EPS-DILUTED> 42,733.00
</TABLE>
