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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22041
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
(Exact name of registrant as specified in its charter)
Washington (State of incorporation) 91-0609840 (IRS Employer No.)
601 West First Avenue Spokane, WA 99201-5015 (Zip Code)
(Address of Principal executive
offices)
Registrant's telephone number, including area code: (509) 838-3111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock Series:
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
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)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]
Neither the voting nor non-voting common stock of the registrant is 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 common
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.
The number of shares of the Registrant's Class A Common Stock outstanding as
of December 1, 1999 was 129.
Documents incorporated by reference: None
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PART I
Item 1. Business.
ORGANIZATIONAL CHART
(as of September 30, 1999)
The above chart lists Metropolitan Mortgage & Securities Co., Inc.'s
("Metropolitan" or the "Registrant") principal operating subsidiaries and
their ownership (together with Metropolitan, the "Consolidated Group").
Metropolitan Mortgage & Securities Co., Inc.: Parent organization, invests
in Receivables (as defined herein) and other investments, including real
estate development, which are principally funded by 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 is being 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 proceeds from Receivable investments and sales and from annuity contract
and life insurance policy sales.
Metwest Mortgage Services, Inc.: Performs loan origination, collection and
servicing functions for the Consolidated Group and others. It is an FHA/HUD
licensed servicer and lender and is licensed as a Fannie Mae seller/servicer.
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* The remaining 3.5% of Consumers Group Holding Co., Inc. is owned by Summit
Securities, Inc., an affiliate of Metropolitan.
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BUSINESS OVERVIEW
General
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 Life Assurance Company ("Western
United"), an annuity and life insurance company, and Metwest Mortgage
Services, Inc. ("Metwest"), a Receivable servicer and loan originator. The
Consolidated Group had 635 full time equivalent employees at September 30,
1999.
The Consolidated Group's principal business activity is investing in cash
flowing assets, consisting of obligations collateralized by real estate,
structured settlements, annuities, lottery prizes, equipment leases and other
investments ("Receivables"). The Receivables primarily consist of real estate
contracts and promissory notes collateralized by first position liens on real
estate. The Consolidated Group predominantly invests in Receivables where the
borrower or the collateral does not qualify for conventional financing or the
seller or the buyer chose to use non-conventional financing. This market is
commonly referred to as the non-conventional market. Obligors on the
Consolidated Group's real estate Receivables includes A-, B and C credit
quality obligors. See "RECEIVABLE INVESTMENTS." In addition to investing in
existing Receivables, the Consolidated Group began originating non-
conventional, A-, B and C credit borrower loans during late fiscal 1996
through Metwest. See "RECEIVABLE INVESTMENTS--Receivable Acquisitions--Loan
Originations Sources." Metropolitan and its subsidiaries also acquire other
types of Receivables, including, but not limited to, lottery prizes,
structured settlements, annuities and leases. See "RECEIVABLE INVESTMENTS--
Receivables Acquisitions--Lottery, Structured Settlement, Annuity and Lease
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 "RECEIVABLE INVESTMENTS--Yield and Discount Considerations." The
Consolidated Group strives to achieve a positive spread between its
investments and its cost of funds.
Metwest performs Receivable servicing and collections for itself,
Metropolitan and Western United, as well as other entities. See "RECEIVABLE
INVESTMENTS--Servicing and Collection Procedures, and Delinquency Experience."
Also see "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. These
investments also include security hedging investments and subordinate
certificates and residual interests created out of Receivable securitizations.
See "SECURITIES INVESTMENTS" and "RECEIVABLE INVESTMENTS--Receivable Sales."
The Consolidated Group has developed several funding sources. These sources
include collateralized lines of credit; the sale of Receivables, including
sales through securitizations; Receivable investment income; the issuance of
annuity and life insurance policies; the issuance of debt and equity
securities; the sale of real estate; and securities portfolio earnings. See
"SECURITIES INVESTMENTS--Method of Financing."
Metropolitan also sells and, through the services of Summit Property
Development, Inc. ("Summit Property Development"), an affiliate of
Metropolitan, develops real estate primarily as the result of repossessions of
property securing Receivables or in exchange for property securing Receivables
that have been repossessed. In addition, Metropolitan was the developer of a
timeshare resort, Lawai Beach Resort, located on Kauai, Hawaii, and certain
other developments. See "REAL ESTATE DEVELOPMENT."
The Consolidated Group provides services to certain affiliated entities (the
"Affiliated Companies") for a fee and engages in various business transactions
with these entities. The Affiliated Companies are National Summit Corp. and
its principal subsidiaries which include Summit Securities, Inc. ("Summit"),
Old Standard
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Life Insurance Company ("Old Standard"), Old West Annuity & Life Insurance
Company ("Old West"), Summit Property Development and Metropolitan Investment
Securities, Inc. ("MIS"). The Affiliated Companies are affiliated with the
Consolidated Group because of the common control of the Consolidated Group and
the Affiliated Companies by C. Paul Sandifur, Jr. See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS" under Item 13.
Factors Affecting Future Operating Results
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act"), became effective in December 1995. The Act provides a "safe harbor"
for companies which make forward-looking statements providing prospective
information. The "safe harbor" under the Act relates to protection for
companies with respect to litigation filed on the basis of such forward-
looking statements.
Metropolitan wishes to take advantage of the "safe harbor" provisions of the
Act and is therefore including this section in its Annual Report on Form 10-K.
The statements contained in this Annual Report, if not historical, are
forward-looking statements and involve risks and uncertainties which are
described below and elsewhere herein that could cause actual results to differ
materially from the results, financial or otherwise, or other expectations
described in such forward-looking statements. These statements are identified
with the words such as "may," "will," "expect," "intend," "anticipate,"
"believe," "continue," "seeks," "plans," variations of those terms or the
negative of those terms, or words of similar meaning. Therefore, forward-
looking statements should not be relied upon as a prediction of actual future
results or occurrences.
Metropolitan's future results may be affected by certain risks and
uncertainties including but not limited to the following:
Falling interest rates could
negatively effect the
profitability and the fair
value of equity of the
Consolidated Group........... If interest rates fall, the profitability and
the fair value of equity of the Consolidated
Group may decline because of a refinancing of
Receivables and a net decrease in interest
revenues. When interest rates fall, borrowers
have an incentive to refinance their
Receivables by taking out new loans at a lower
rate of interest and repaying existing loans
having a higher rate of interest in full.
Because the Receivables with the higher rate of
interest may be repaid early, the interest
earned by the Consolidated Group may decline.
In addition, lower interest rates could cause
interest revenues to decrease faster than
interest expenses decrease, because more
financial assets than liabilities are scheduled
to reprice or mature for the Consolidated Group
during the fiscal year that began on October 1,
1999.
Financial performance and
growth of the Consolidated
Group could be negatively
effected by the inability to
sell or securitize
Receivables.................. The Consolidated Group currently sells and
securitizes pools of Receivables and intends to
continue to sell and securitize pools of
Receivables. Several factors affect the
Consolidated Group's ability to securitize or
sell pools of Receivables, including conditions
in the securities markets generally, conditions
in the asset-backed securities markets
specifically, the credit quality of the
Receivables, compliance of the Consolidated
Group's Receivables with the eligibility
requirements established by the securitization
documents
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and the absence of any material downgrading or
withdrawal of ratings given to securities
issued in the Consolidated Group's previous
securitizations. The Consolidated Group's
financial performance and growth prospects may
be adversely effected if they cannot favorably
sell or securitize Receivables, or if they are
completely unable to sell or securitize
Receivables.
Residual and subordinate
interests in securitizations
may not perform consistent
with our valuation
assumptions, resulting in
lower than anticipated
income earnings by the
Consolidated Group........... The Consolidated Group owns subordinated and
residual interests in several securitized loan
pools, which generally are in a "first loss"
position relative to the more senior securities
sold to third parties and which carry a greater
risk if loans in the securitizations are not
paid or losses occur. The Consolidated Group
values these interests based on assumptions,
including anticipated prepayments, defaults and
losses of the securitized Receivables. If those
assumptions are inaccurate, the Consolidated
Group will have overvalued these interests on
its balance sheet and will earn less income
than was anticipated from those assets.
Risk that foreclosure on
mortgages will delay or
reduce payments on
Receivables.................. Foreclosure, bankruptcy and other similar
proceedings used to enforce mortgage loans are
generally subject to principles of equity which
are designed to relieve the indebted party from
the legal effect of such party's default.
Statutes may limit the right of the
Consolidated Group to obtain a deficiency
judgment against the defaulting party after a
foreclosure or sale. The application of any
such principle may lead to a loss or delay in
the payment on a certificate in a
securitization in which the Consolidated Group
is involved or in loans held by the
Consolidated Group.
Real estate used as
collateral to cover losses
on Receivables may be
inadequate................... Most of the Receivables purchased by the
Consolidated Group are collateralized by real
estate to provide collateral if a borrower
defaults on such borrower's mortgage. The real
estate used as collateral may be insufficient
to cover any loss in the event of foreclosure.
Several factors influence whether the value of
the real estate will be sufficient to cover the
value of the Receivables, including changes in
economic conditions, property values, zoning,
land use, environmental laws and other legal
restrictions, including changes in and
restrictions on the timing and methods of
foreclosure.
Risk of default on
Receivables that are secured
only by a promise to pay..... The Consolidated Group purchases some
Receivables that are not collateralized, such
as annuities, lottery prizes, structured
settlements or other investments. In these
cases, since the Consolidated Group does not
have collateral in a specific asset, it
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relies instead upon a promise to pay from an
insurance company, a state government or other
entity. There is a risk that the payor will not
keep its promise to pay and will default.
Net income may be
insufficient to cover fixed
charges...................... Net income of the Consolidated Group in 1999
was insufficient to cover fixed charges
including preferred stock dividend
requirements. The elimination of non-recurring
income items would have increased this
insufficiency and would also have created an
insufficiency in 1998 and 1997. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
Introduction" under Item 7.
Risks resulting from the
inexperience of the
Consolidated Group in
originating equipment
leases....................... The Consolidated Group recently began
originating equipment leases. Management cannot
predict whether it will have the ability or the
desire to continue to originate equipment
leases in the future, whether such leases will
achieve desirable yields or whether it will be
able to accurately predict default or loss
rates on equipment leases.
Underwriting may
insufficiently evaluate the
risk of losses on
Receivables.................. Metropolitan underwrites the Receivables that
are purchased by the Consolidated Group. Many
of the purchased receivables were originated by
sellers and other non-institutional lenders.
Therefore, the underwriting standards used to
originate such loans may have been less strict
than the standards that are typically used when
underwriting conventional mortgage loans.
Metropolitan uses a variety of procedures to
evaluate Receivables depending on the type of
investment. While Metropolitan tries to
minimize the risk of default and the risk of
losses if there is a default, there is no
assurance that these underwriting procedures
will be effective.
Insurance subsidiary
earnings may be unavailable
for dividends and fees....... At September 30, 1999, approximately 78% of the
Consolidated Group's assets were held by its
insurance subsidiary, Western United. Insurance
company regulations restrict the way in which
an insurance company can transfer assets and
the amount of money that can be paid out in
dividends by the insurance company. To use
money for dividends, the insurance company must
obtain permission from the insurance
commissioner in the state of domicile of the
insurance company. These restrictions on the
ability to declare dividends and transfers of
assets could have an adverse effect on
Metropolitan's financial performance and
ability to meet its debt obligations and
preferred stock dividend payments.
The Consolidated Group may
be unable to meet its
financial obligations as
they become due.............. The Consolidated Group generates cash flow
primarily from Receivable and other
investments, the sale of annuities and life
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insurance, the sale or securitization of
Receivables and the sale of debt and equity
securities. Cash flows from existing assets
have been adequate during the past five years
to satisfy the demand for payment of maturing
debentures and to pay preferred stock
dividends. However, the Consolidated Group's
ability to repay interest and principal on debt
securities and preferred stock dividends that
become due in the future and other outstanding
obligations depends in part on the success of
future public offerings of debt and equity
securities.
An increase in life
insurance and annuity
termination rates may
decrease earnings............ An increase in the termination rate of annuity
contracts and life insurance policies would
tend to decrease the earnings of Western
United. If terminations increase, costs would
increase because the insurance subsidiaries
would have to immediately expense the
unamortized deferred acquisition costs on those
surrendered policies instead of continuing to
amortize those costs over time. The rate at
which annuity contracts and life insurance
policies terminate is effected by several
factors, including changes in interest rates,
competition and changes in tax and other
regulations. Management cannot predict the
future rate of termination of life insurance
and annuity policies.
Environmental conditions and
regulations of property
acquired by the Consolidated
Group may lead to losses..... The Consolidated Group acquires properties in
the course of its business some of which may
contain hazardous waste or other toxic
materials. Various federal, state and local
environmental laws, ordinances and regulations
hold the owner or the previous owner liable for
the costs of removal or remediation of
hazardous or toxic substances on, under, in or
near the effected property. Historically, the
Consolidated Group has tried to avoid acquiring
properties or Receivables collateralized by
properties which may be contaminated. The
Consolidated Group is currently evaluating
whether to acquire or originate commercial
loans where the property type or use creates a
greater risk of environmental problems or on
properties where known environmental problems
exist. In those circumstances, the Consolidated
Group is evaluating insurance programs to
eliminate or minimize the potential
environmental costs to the Consolidated Group.
However, there is no guarantee that the
Consolidated Group can effectively implement an
insurance program or that, if implemented, it
would be sufficient to cover the losses caused
by any of these environmental liabilities. As a
result of its current business or if the
proposed program is implemented, the
Consolidated Group may sustain significant
losses due to such liability.
The Consolidated Group may
be liable for environmental
clean-up on real estate...... The government can place a lien on
environmentally contaminated property to
guarantee that the clean up costs for that
property are
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paid. In many states, these liens have priority
over the existing mortgage on the property. The
Consolidated Group may be subject to these
liens directly if they own real property
subject to these liens, or indirectly if they
participate in a securitization of property and
have a role in the day-to-day management of the
facility or property. Environmental assessments
to determine whether certain properties are
contaminated are rarely performed by the
Consolidated Group, and even where they are
performed, there is no guarantee that the
Consolidated Group will be insulated from
liability for an environmental condition.
The Consolidated Group may
be adversely affected by
competition among companies
in the Consolidated Group.... Several companies are affiliated with the
Consolidated Group through common control by C.
Paul Sandifur, Jr. Certain officers and
directors of these affiliated companies are
also employees of the Consolidated Group. In
addition, the Consolidated Group provides
services to affiliated companies, buys and
sells Receivables to and from such affiliated
companies and makes loans to or borrows money
from affiliated companies. These factors may
lead to conflicts of interest such as which
company receives a particular securities sale,
how Receivables are distributed among or
between separate companies, how fees for
services are established and charged, how
intercompany sales and purchases of Receivables
are priced and the terms of any intercompany
loans. Old Standard and Old West may compete
with the Consolidated Group in acquiring
Receivables and for the sale of annuities.
Also, the Consolidated Group may compete with
Summit for the acquisition of Receivables and
the sale of securities.
Computer system failures in
connection with the Year
2000 could negatively impact
the Consolidated Group....... The Year 2000 problem arises from the use by
software developers of two digits rather than
four digits to denote year dates in software
programs, computer hardware operating systems
and microprocessor based embedded controls in
automated equipment. As a result, information
systems that operate date sensitive software or
automated equipment that contains date
sensitive microprocessors may interpret "00" to
signify 1900 rather than 2000, thereby
impairing the ability of the information
systems or automated equipment to correctly
calculate, sequence or recognize dates. This
could result in serious malfunctions or
complete failures of affected systems,
including an inability to process transactions,
issue securities or checks, or engage in other
normal business activities.
We have conducted tests on our internally
developed and supported software, hardware and
facilities systems for Year 2000 compliance and
have reviewed and worked with outside vendors
regarding compliance on ancillary systems and
services involved with our
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business operations. Additionally, we have
developed contingency plans in the event that a
Year 2000 related problem or failure occurs. We
believe that we will be compliant prior to the
year 2000. However, in the event that there are
computer problems arising out of a failure of
such efforts our business operations could be
negatively impacted since the conduct of our
business in relationship to purchasing
Receivables, servicing or administering the
Receivables, the sale and administration of
annuities, life insurance and the sale and
administration of securities all rely heavily
on computer programs and systems for processing
our business transactions. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Year 2000
Disclosure" under Item 7.
Risk that real estate held
for development may not be
sold, or may not be sold
profitably................... The Consolidated Group is engaged in the
development of various real estate properties,
including substantially undeveloped properties.
Development of such properties are at risk that
the property will not be able to be sold, or
will not be able to be sold at a price
exceeding the carrying value for the property.
Factors such as local and national trends in
commercial property values as well as local,
state and national economic trends may impact
the potential sales price for such properties.
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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,
Old West and Summit. See "--Management and Receivable Acquisition Services."
Also see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" under Item 13. The
evaluation, underwriting and closing operations are performed at
Metropolitan's headquarters in Spokane, Washington. The following information
describes the Consolidated Group's Receivable acquisition and underwriting
procedures undertaken on its behalf by Metropolitan as of September 30, 1999.
These practices may be amended, supplemented and changed at any time at the
discretion of the Consolidated Group.
Unless otherwise indicated in this section and in the sections entitled
"SECURITIES INVESTMENTS" and "REAL ESTATE DEVELOPMENT," or unless the context
otherwise requires, references to a year (e.g. 1999) refer to the fiscal year
ended September 30 of that year.
Types of Receivables
The Consolidated Group's Receivable acquisitions include three principal
types of Receivables: (1) Receivables collateralized by real estate (both the
acquisition of existing loans and the origination of loans principally
involving residential properties), (2) alternative cash flows consisting of
lottery prizes, structured settlements, annuities and other cash flows, and,
recently, (3) Receivables collateralized by equipment (the origination of
leases involving small ticket equipment items).
Secondary Mortgage Markets
The market for the acquisition of existing real estate Receivables is
commonly referred to as the secondary mortgage market. The secondary mortgage
market includes individual Receivables which are held and sold by individual
investors. The secondary mortgage market includes the sale of seller financed
real estate Receivables and the sale and resale of pools of Receivables which
can be seller financed, or originated or acquired by a financial institution.
The Consolidated Group acquires both individual and pools of Receivables.
Receivable Acquisition Volume
Metropolitan's Receivable acquisition activities (total activities for
itself and for others), grew from approximately $390.0 million in 1997, to
$494.3 million in 1998 and to $654.0 million in 1999. During 1999, the average
monthly acquisition volume was approximately $54.5 million. Metropolitan's
median closing time was approximately 14 days in 1999, in comparison to 13
days in 1998 and 14 days in 1997. Management considers closing time to be an
important factor in a seller's decision to sell a Receivable to Metropolitan.
Receivable Acquisitions
Metropolitan has developed marketing techniques, sources and underwriting
practices for each of its different types of Receivables. In general, the real
estate Receivables acquired or originated by the Consolidated Group consist of
non-conventional (A-, B and C credit grade) 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 or the seller or borrower chose to use non-conventional
financing. 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.
Individual Receivable Acquisition Sources
Historically, the majority of the Consolidated Group's real estate
Receivables were acquired as individual Receivable acquisitions. See "--
Current Mix of Receivable Investment Holdings." Metropolitan's principal
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source for private market Receivables is 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 acquisition strategy is designed to provide flexible
structuring and pricing alternatives to the real estate Receivable seller as
well as short closing times. Metropolitan believes these are key factors to
Metropolitan's ability to attract and purchase such 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(R), (3) implementing 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.
Capital Markets (Loan Pool) Acquisition Sources
Approximately $198 million or 32% of total real estate Receivables acquired
during 1999 were acquisitions of pools of real estate Receivables through
Metropolitan's capital markets department. These portfolios may be either
seller or institutionally originated. They may be acquired from brokers,
banks, savings and loan organizations, mortgage brokerage firms or other
financial institutions.
Over the years, Metropolitan has built relationships with several brokers
and lenders who provide a regular flow of potential acquisitions to the
capital markets group. In addition, other brokers learn about Metropolitan
through word of mouth and contact Metropolitan directly. Finally, some leads
on loan pools are generated by direct calls to lending institutions or
brokers.
The capital markets group acquisitions are typically negotiated through
direct contact with the selling broker or the portfolio departments at the
various selling institutions or acquired through bidding at an auction. The
closing costs per loan for institutional acquisitions are frequently lower
than private secondary mortgage market acquisitions. However, the investment
yield generally is lower for institutional acquisitions than for private
market acquisitions.
Metropolitan continues to hire additional sales and support staff to explore
new marketing methods and to continue to increase its institutional pool
purchase activities. There can be no assurance that these efforts will
increase the volume of the pool purchases of the capital market group.
Loan Originations Sources
Metwest originates first lien residential mortgage loans, including both
fixed and adjustable interest rate loans. Metwest is currently licensed for
such mortgage loans as a lender or is exempt from licensing as a wholesale
lender in thirty states and as a retail lender in thirty-four states.
Through its "retail" program, Metwest originates real estate 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 1999, Metwest originated an average of approximately 144 real estate
loans per month, including loans to facilitate the resale of repossessed real
estate. In an effort to increase its volume, Metwest is making both procedural
and staffing revisions. Metwest continues to develop new pricing programs for
loan originations. Management can give no assurance that these efforts will
increase origination volume.
Metwest is also planning a new "wholesale" origination program. Through this
program, Metwest intends to establish strategic alliances with conventional
lenders, where the conventional lender will refer their non-qualifying leads
to Metwest. There can be no assurance that these efforts will increase the
volume of Metwest originations.
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Correspondent Lending Sources
Beginning in 1997, Metropolitan began acquiring real estate loans through
loan correspondent agreements. Under these agreements, Metropolitan agrees to
purchase loans at a specified yield immediately after their origination, so
long as the loans comply with Metropolitan's specified underwriting
guidelines. Many of these loans are insured by a primary mortgage guaranty
insurance policy. In addition, loan correspondents may also submit loans which
do not meet established underwriting guidelines for individual evaluation and
pricing, which is done by Metwest. Each correspondent makes standard
representations and warranties with respect to each loan and has certain
limited repurchase obligations. Metropolitan has added staff to support growth
in its correspondent lending activities. There can be no assurance that these
efforts will increase correspondent lending volumes.
Real Estate Receivable Underwriting
Metropolitan's loan underwriting guidelines and Metwest's real estate loan
acquisition and origination guidelines apply criteria which include (i)
evaluating the borrower's credit, which generally may include credit scores,
income and debt to income ratios; (ii) obtaining and reviewing a current
appraisal of the collateral; (iii) evaluating the property type; (iv)
comparing the loan amount to the collateral value; and (v) 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 may be
required. In addition, title insurance in an amount equal to the Receivable
balance at the time of our acquisition is generally 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 or yield, which
may be obtained through a discounted purchase price. Unlike the seller
financed real estate Receivables purchased in the private secondary mortgage
market, the real estate loans originated by Metwest, certain pool acquisitions
and the loans purchased through Metropolitan's loan correspondent program have
standardized documentation and terms. In addition, the real estate Receivables
acquired or originated for inclusion in securitization pools generally have
more stringent underwriting guidelines than other acquired or originated real
estate loans.
Lottery, Structured Settlement, Annuity and Lease Sources
Metropolitan also negotiates the purchase of Receivables which are not
collateralized by real estate, such as structured settlements, annuities,
lottery prizes and equipment leases. 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.
Leases have been acquired through brokers who specialize in these types of
assets. Currently, management plans to begin to establish strategic alliances
with other equipment lessors, financial institutions and equipment vendors to
expand its leasing activities. There can be no assurance that these alliances
will materialize or, if entered into that they will be successful in expanding
the leasing activities.
Lottery, Structured Settlement and Annuity Underwriting
In the case of all annuity purchases, Metropolitan's underwriting guidelines
generally include a review of: (1) an application for sale of structured
benefits which requests certain information regarding (i) the annuitant,
including current employment, (ii) the annuity policy, and (iii) the nature of
the claim and injuries sustained in connection with the structured settlement;
(2) a copy of the executed settlement agreement or judgment, if applicable;
and (3) a copy of the executed annuity policy together with any qualified
assignments. In certain circumstances, Metropolitan waives certain of these
submission requirements if, in its sole best judgment, it determines that the
failure to have those documents would not impair the acquiring company's
interest in the structured settlement. Upon submission of the file, the
closing department will obtain a credit report regarding
11
<PAGE>
the annuitant and the most current credit rating of the annuity issuer.
Furthermore, Metropolitan will conduct a Uniform Commercial Code ("UCC")
search by county or state where applicable, on the annuitant in each state or
county, as applicable, where the annuitant resided over the last five years
and where the annuity issuer is located in order to ensure that no prior liens
exist on the structured settlement payments.
When underwriting a structured settlement, Metropolitan will review the
credit report, the annuitant's completed purchase application, the results of
the UCC search, and the terms of the settlement and annuity policy, among
other things. Metropolitan will not knowingly purchase settlements paid to a
trust containing a spendthrift clause nor will it knowingly purchase
settlements where the payments are the annuitant's sole source of income,
where the loss of income would significantly damage the livelihood of the
annuitant or where the payments are used exclusively for the payment of
medical necessities. Metropolitan will not purchase payments from a minor
without a court order approving the transaction or from annuitants who are
currently members of the armed forces or from annuitants that do not otherwise
have the legal capacity to contract without a court order. Metropolitan will
not purchase settlements from annuitants that evidence a pattern of fraudulent
behavior. In underwriting a structured settlement, Metropolitan will confirm
that the settlement is not a workers compensation settlement agreement or
retirement or pension benefit.
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, the sale of a state lottery prize requires that the
winner obtain a court order permitting the sale. In those states, Metropolitan
requires a certified copy of the court order.
Equipment Leases
In August of 1999, Metropolitan began to originate and to negotiate the
purchase from others of equipment leases. These equipment leases are generally
originated or purchased for less than $250,000. Metropolitan has added staff
with prior experience in equipment leasing to support the addition of
equipment leasing activities.
Metropolitan's current equipment leasing underwriting and origination
guidelines apply criteria similar to that applied to Receivables
collateralized by real estate, which include (i) evaluating the borrower's
credit, which may include credit scores, income and debt to income ratios;
(ii) obtaining and reviewing a current appraisal of the collateral and (iii)
comparing the lease amount to the collateral value.
Other Receivables
Metropolitan continually seeks opportunities in new Receivable markets.
Metropolitan currently has Receivable programs involving the acquisition of
conservation reclamation programs, farm subsidies and similar cash flows.
These programs account for a minimal amount of Metropolitan's current and
projected Receivable acquisition volume. However, Metropolitan always remains
open to new opportunities that may arise for the acquisition of new types of
Receivables.
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 or present value and
the purchase price is the "discount." The amount of the discount will vary in
any given transaction depending upon the Consolidated Group'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.
12
<PAGE>
The discounts originating at the time of purchase, net of capitalized
acquisition costs, are amortized on an individual basis using the level yield
(interest) method over the remaining contractual term of the Receivable.
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 extended, maintained or accelerated.
Acceleration increases the yield realized on a Receivable purchased at a
discount from its face value through accelerating recognition of the discount.
Current Mix of Receivable Investment Holdings
The Consolidated Group's investments in Receivables are concentrated in
Receivables collateralized by first priority liens on single-family
residential property. Management believes that this concentration in
residential real estate presents a lower credit risk than a portfolio
predominantly collateralized by commercial property, unimproved land or other
assets. It also believes that much of the risk in the portfolio is further
dissipated by the large number of relatively small Receivables, the geographic
dispersion of the collateral and the collateral value to investment amount
requirements.
At the time of acquisition, the face value of Receivables collateralized by
real estate generally ranges in size from approximately $15,000 to $300,000.
During 1999, the average real estate Receivable balance at the time of
acquisition by the Consolidated Group was approximately $66,000. See "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS--Note 3" 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.
13
<PAGE>
The following charts present information regarding type of real estate
collateral, geographical distribution and lien priority of the Consolidated
Group's portfolio of outstanding real estate Receivables as of September 30,
1999.
DISTRIBUTION OF RECEIVABLES BY COLLATERAL TYPE
[Pie Chart showing:
<TABLE>
<CAPTION>
<S> <C>
Residential................................................................ 70%
Commercial................................................................. 18%
Farms, Land, Other......................................................... 12%]
</TABLE>
DISTRIBUTION OF RECEIVABLES (COLLATERALIZED BY REAL ESTATE)
BY SECURITY POSITION
<TABLE>
<CAPTION>
<S> <C>
[Pie Chart showing:
First Lien Position........................................................ 98%
Second Lien or Lower Position.............................................. 2%]
</TABLE>
DISTRIBUTION OF ASSETS AS A PERCENTAGE OF TOTAL ASSETS
<TABLE>
<CAPTION>
<S> <C>
[Pie Chart showing:
Cash and Cash Equivalents.................................................. 2%
Securities Investments..................................................... 22%
Receivables Collateralized by Real Estate.................................. 43%
Other Receivables (Structured Settlements, Lotteries and Annuities)........ 14%
Real Estate Held........................................................... 7%
Deferred Costs............................................................. 5%
Other...................................................................... 7%]
</TABLE>
14
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
PERCENTAGE DISTRIBUTION BY STATE OF THE PRINCIPAL AMOUNT OF RECEIVABLES
COLLATERALIZED BY REAL ESTATE AS OF SEPTEMBER 30, 1999
[Map showing:
<TABLE>
<S> <C>
Washington................................................................. 15%
California................................................................. 11%
Arizona.................................................................... 9%
Texas...................................................................... 9%
Florida.................................................................... 6%
Oregon..................................................................... 6%
New Mexico................................................................. 4%
New York................................................................... 4%
Alaska..................................................................... 3%
Idaho...................................................................... 3%
North Carolina............................................................. 3%
Montana.................................................................... 2%
Nevada..................................................................... 2%
Utah....................................................................... 2%
Colorado................................................................... 1%
Connecticut................................................................ 1%
Georgia.................................................................... 1%
Hawaii..................................................................... 1%
Maryland................................................................... 1%
Michigan................................................................... 1%
Minnesota.................................................................. 1%
Missouri................................................................... 1%
New Jersey................................................................. 1%
Ohio....................................................................... 1%
Oklahoma................................................................... 1%
Pennsylvania............................................................... 1%
South Carolina............................................................. 1%
Tennessee.................................................................. 1%
Virginia................................................................... 1%]
</TABLE>
States not showing a percentage have less than 1%.
15
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
SEPTEMBER 30, 1999
At September 30, 1999, the Consolidated Group held first priority liens
associated with contracts and mortgage note receivables with a face value of
approximately $531 million (98%) and second or lower priority liens of
approximately $12 million (2%). Approximately 29% of the face value of the
Consolidated Group's real estate Receivables are collateralized by properties
located in the Pacific Northwest (Washington, Alaska, Idaho, Montana and
Oregon), approximately 22% by properties located in the Pacific Southwest
(California, Arizona and Nevada), approximately 11% in the Southeast (Florida,
Georgia, North Carolina and South Carolina), approximately 8% in the North
Atlantic (New York, Pennsylvania, New Jersey, Connecticut and Maryland) and
approximately 13% by properties located in the Southwest (Texas and New
Mexico). The face value of the real estate Receivables ranges principally from
$15,000 to $300,000 with 114 real estate Receivables, aggregating
approximately $62 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 9% of the contracts and notes are subject to
variable interest rates. Contractual interest rates principally range from 6%
to 13% per annum with approximately 94% of the face value of these Receivables
within this range. The weighted average contractual interest rate on these
real estate Receivables at September 30, 1999 is approximately 9.4%. Maturity
dates range from 1999 to 2029.
<TABLE>
<CAPTION>
Interest Carrying Delinquent NonAccrual Number of
Number of Rates Amount of Principal Principal NonAccrual
Description Receivables Principally Receivables Amount Amount Receivables
- ----------- ----------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL
First Mortgage >
$100,000............... 665 8-12% $111,543,183 $ 7,326,286 $2,131,568 14
First Mortgage >
$50,000................ 1,637 8-12 111,724,327 6,393,943 94,419 1
First Mortgage <
$50,000................ 7,771 8-14 149,421,102 7,352,985 -- --
Second or Lower > $
100,000................ 2 8-9 241,165 -- -- --
Second or Lower >
$50,000................ 21 8-10 1,377,633 -- -- --
Second or Lower <
$50,000................ 250 8-11 4,254,171 131,973 -- --
COMMERCIAL
First Mortgage >
$100,000............... 267 8-12 63,882,965 3,400,951 251,140 2
First Mortgage >
$50,000................ 255 8-11 18,658,472 616,173 -- --
First Mortgage <
$50,000................ 361 8-11 9,807,575 282,658 -- --
Second or Lower >
$100,000............... 11 8-11 3,768,425 -- -- --
Second or Lower >
$50,000................ 17 8-10 1,194,734 -- -- --
Second or Lower <
$50,000................ 35 8-11 915,669 -- -- --
FARM, LAND AND OTHER
First Mortgage >
$100,000............... 114 8-12 23,419,057 3,158,580 582,478 1
First Mortgage >
$50,000................ 159 8-13 11,206,573 565,419 -- --
First Mortgage <
$50,000................ 1,771 8-12 31,189,625 771,032 -- --
Second or Lower >
$100,000............... -- -- -- -- -- --
Second or Lower >
$50,000................ 1 8 75,215 -- -- --
Second or Lower <
$50,000................ 16 8-10 238,760 -- -- --
Unrealized discounts,
net of unamortized
acquisition costs, on
Receivables purchased
at a discount.......... (13,416,777)
Accrued Interest
Receivable............. 10,024,083
------------ ----------- ----------
CARRYING VALUE.......... $539,525,957 $30,000,000 $3,059,605
============ =========== ==========
</TABLE>
The principal amounts of Receivables subject to delinquent principal or
interest is defined as being in arrears for more than three months.
16
<PAGE>
The future contractual maturities of the aggregate amounts of Receivables
(face amount) are as follows:
<TABLE>
<CAPTION>
Residential Commercial Farm, Land,
Principal Principal Other Principal Total Principal
------------ ----------- --------------- ---------------
<S> <C> <C> <C> <C>
October 1999 September
2002................... $ 39,372,682 $13,786,448 $14,395,020 $ 67,554,150
October 2002 September
2004................... 29,844,651 13,306,380 8,592,041 51,743,072
October 2004 September
2006................... 28,847,580 14,151,225 8,239,914 51,238,720
October 2006 September
2009................... 42,674,415 19,708,583 9,765,512 72,148,509
October 2009 September
2014................... 68,138,399 12,229,150 10,273,626 90,641,175
October 2014 September
2019................... 32,018,242 7,748,329 7,906,404 47,672,975
October 2019
Thereafter............. 137,665,612 17,297,725 6,956,713 161,920,050
------------ ----------- ----------- ------------
$378,561,581 $98,227,840 $66,129,230 $542,918,651
============ =========== =========== ============
</TABLE>
17
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
SEPTEMBER 30, 1998
At September 30, 1998, the Consolidated Group held first priority liens
associated with contracts and mortgage note receivables with a face value of
approximately $615 million (99%) and second or lower priority liens of
approximately $9 million (1%). Approximately 29% of the face value of the
Consolidated Group's real estate Receivables are collateralized by properties
located in the Pacific Northwest (Washington, Alaska, Idaho, Montana and
Oregon), approximately 24% by properties located in the Pacific Southwest
(California, Arizona and Nevada), approximately 10% 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 13% by properties located in the Southwest (Texas and New
Mexico). The face value of the real estate Receivables ranges principally from
$15,000 to $300,000 with 96 real estate Receivables, aggregating approximately
$53 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 5% of the contracts and notes are subject to variable interest rates.
Contractual interest rates principally range from 6% to 13% per annum with
approximately 94% of the face value of these Receivables within this range.
The weighted average contractual interest rate on these real estate
Receivables at September 30, 1998 is approximately 9.4%. Maturity dates range
from 1998 to 2028.
<TABLE>
<CAPTION>
Interest Carrying Delinquent NonAccrual Number of
Number of Rates Amount of Principal Principal NonAccrual
Description Receivables Principally Receivables Amount Amount Receivables
- ----------- ----------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL
First Mortgage >
$100,000............... 945 6-13% $150,451,934 $ 7,589,733 $1,623,481 8
First Mortgage >
$50,000................ 1,984 6-13 131,054,371 7,982,302 -- --
First Mortgage <
$50,000................ 7,730 6-13 173,825,947 10,109,264 -- --
Second or Lower > $
100,000................ 4 8-9 455,540 -- -- --
Second or Lower >
$50,000................ 14 7-10 1,047,682 -- -- --
Second or Lower <
$50,000................ 219 6-13 3,328,275 151,457 -- --
COMMERCIAL
First Mortgage >
$100,000............... 265 6-13 57,868,536 3,405,491 -- --
First Mortgage >
$50,000................ 250 6-13 17,772,894 724,282 -- --
First Mortgage <
$50,000................ 364 6-13 9,480,915 454,429 -- --
Second or Lower >
$100,000............... 6 8-10 2,292,282 177,947 -- --
Second or Lower >
$50,000................ 7 9-12 553,297 -- -- --
Second or Lower <
$50,000................ 16 8-12 530,875 -- -- --
FARM, LAND AND OTHER
First Mortgage >
$100,000............... 115 8-13 22,834,543 1,496,631 224,068 1
First Mortgage >
$50,000................ 181 6-13 12,343,223 218,562 -- --
First Mortgage <
$50,000................ 3,123 6-13 39,211,108 1,679,952 -- --
Second or Lower >
$100,000............... -- -- -- -- -- --
Second or Lower >
$50,000................ 3 8-10% 224,849 -- -- --
Second or Lower <
$50,000................ 20 8-12% 274,866 9,950 -- --
Unrealized discounts,
net of unamortized
acquisition costs, on
Receivables purchased
at a discount.......... (19,729,926)
Accrued Interest
Receivable............. 10,357,112
------------ ----------- ----------
CARRYING VALUE.......... $614,178,323 $34,000,000 $1,847,549
============ =========== ==========
</TABLE>
The principal amounts of Receivables subject to delinquent principal or
interest is defined as being in arrears for more than three months.
18
<PAGE>
The future contractual maturities of the aggregate amounts of Receivables
(face amount) are as follows:
<TABLE>
<CAPTION>
Residential Commercial Farm, Land,
Principal Principal Other Principal Total Principal
------------ ----------- --------------- ---------------
<S> <C> <C> <C> <C>
October 1998 September
2001................... $ 46,603,474 $13,932,981 $15,651,071 $ 76,187,526
October 2001 September
2003................... 32,911,059 9,283,321 7,264,059 49,458,439
October 2003 September
2005................... 31,569,559 8,913,569 7,920,438 48,403,566
October 2005 September
2008................... 47,500,753 12,951,272 9,569,276 70,021,301
October 2008 September
2013................... 73,473,113 17,654,657 13,190,462 104,318,232
October 2013 September
2018................... 41,266,554 5,441,008 9,095,150 55,802,712
October 2018
Thereafter............. 186,839,237 20,321,991 12,198,133 219,359,361
------------ ----------- ----------- ------------
$460,163,749 $88,498,799 $74,888,589 $623,551,137
============ =========== =========== ============
</TABLE>
The following tables present certain statistical information regarding the
Consolidated Group's Receivable investment activity during the three fiscal
years ended September 30, 1999.
<TABLE>
<CAPTION>
Year Ended or at September 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
REAL ESTATE RECEIVABLES PURCHASED OR
ORIGINATED DURING PERIOD
Number................................... 8,205 5,263 5,919
Average Face Amount...................... $ 66 $ 58 $ 51
Face Amount.............................. $ 537,289 $ 307,170 $ 300,450
Unrealized Discounts, Net of Acquisition
Costs................................... (1,247) (11,208) (16,918)
Underlying Obligations Assumed(l)........ (530) (707) (1,810)
---------- ---------- ----------
$ 535,512 $ 295,255 $ 281,722
========== ========== ==========
TOTAL REAL ESTATE RECEIVABLES OUTSTANDING
AT END OF PERIOD(2)
Number................................... 13,353 15,246 14,517
---------- ---------- ----------
Face Amount Discounted Receivables....... $ 438,838 $ 509,736 $ 442,958
Face Amount Originated Receivables....... 104,081 113,815 85,250
---------- ---------- ----------
Total Outstanding Receivables............ 542,919 623,551 528,208
Unrealized Discounts Net of Unamortized
Acquisition Costs....................... (13,417) (19,730) (24,643)
Accrued Interest Receivable.............. 10,024 10,357 9,299
---------- ---------- ----------
Net Balance.............................. $ 539,526 $ 614,178 $ 512,864
========== ========== ==========
Average Net Balance per Receivable
(Excluding Accrued Interest)............ $ 40.0 $ 39.6 $ 34.7
Average Annual Yield on Discounted and
Originated Receivables(3)............... 10.4% 10.6% 11.5%
</TABLE>
- --------
(1) Consisting of pre-existing first lien position Receivables which remain
when the Consolidated Group invests in second lien position Receivables.
(2) Approximately 19% of the portfolio at September 30, 1999, 18% of the
portfolio at September 30, 1998 and 16% of the portfolio at September 30,
1997 represented financing for resales of repossessed properties and other
originated 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 broker contacts and those purchased in bulk;
(iv) the amortization of the existing portfolio; and (v) the amount of
discount on Receivables purchased.
19
<PAGE>
At September 30, 1999, the average contractual interest rate on Receivables
collateralized by real estate (weighted by principal balances) was
approximately 9.4%.
Servicing and Collection Procedures, and Delinquency Experience
The servicing and collection of Receivables of all types owned by the
Consolidated Group is performed by Metwest. Metwest also services the
Receivables of Summit, Old Standard, and Old West, as well as Receivables sold
through securitizations. Metwest uses a flexible computer software program,
Sanchez, to monitor and service the Receivables. The Consolidated Group
considers consistent and timely collection activity to be critical to
successful servicing and minimization of foreclosure losses for its
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 during fiscal 1999 as they are eliminated in the consolidated financial
statements. Fees for providing servicing and collection services to the trusts
holding securitized pools and to Summit, Old Standard and Old West were
approximately $4,676,000, before deducting amortization and valuation of
servicing rights of approximately $2,062,000 during fiscal 1999. These charges
to parties outside the Consolidated Group provide an additional source of
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:
<TABLE>
<S> <C>
1999................................................................. 5.5%
1998................................................................. 5.5%
1997................................................................. 6.8%
</TABLE>
The real estate Receivables purchased or originated by the Consolidated
Group are A-, B and C credit Receivables. Accordingly, in comparison to
conventional "A" credit lenders, higher delinquency rates are expected which
Management believes are generally offset by higher yields and the value of the
underlying collateral. 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 those 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.
Collections of delinquent amounts of Receivables are organized in a step
stage format which staggers the intensity of the collection effort based upon
the delinquency severity and allowing the more experienced collectors to
handle the more delinquent accounts. Metwest utilizes a computer generated
payment behavior and scoring system to determine at which point a borrower
will be called on a late payment which sometimes may be as soon as the first
day of delinquency. If the system determines that a call should be placed to a
borrower prior to the tenth day of delinquency a front-end collector will
place a collection call to the payor. Generally, if a payment becomes seven
days past due, a late notice will automatically be sent to the payor notifying
the payor of the delinquency and the applicable late charge. When 10 days
delinquent, the Receivable will be assigned to a second stage collector who
will attempt to make verbal contact with the payor no later than the twenty-
ninth day of delinquency if the payment and behavior scoring system indicates
that a call should be placed at that time. The collector works closely with a
more senior collector in a team environment. If no satisfactory arrangement is
made by the twenty-second day of delinquency a pre-litigation (demand) letter
will be sent to the payor. Additionally at the thirtieth day of delinquency
the senior collector for that team will attempt to make contact with the
payor. If verbal contact or satisfactory arrangements are not made by the
forty-fifth day, a decision matrix is used to determine whether to forward the
file: (i) to the loan modification center for a workout
20
<PAGE>
solicitation or acceleration; (ii) to the foreclosure department; or (iii) to
the pre-foreclosure committee for review to determine the best method for
solving the delinquency (either through additional workout attempts or through
foreclosure). Generally, for those loans for which verbal contact has been
made, a collector will work with the borrower to bring the loan current, or
refer the loan to the loan modification center for a work out. Collectors
continue to attempt to make contact with the payor, unless otherwise referred
to the foreclosure department or the loan modification center, through the
sixtieth day of delinquency. Collection activity may also involve the
initiation of legal proceedings against the Receivable obligor. Legal
proceedings, when necessary, are generally initiated within approximately
seventy-five days after the initial default. If accounts are reinstated prior
to completion of the legal action, as a condition of reinstatement, attorney
fees, costs, expenses and late charges are generally collected from the payor,
or added to the Receivable balance, in some cases.
When a lottery, structured settlement, or annuity becomes delinquent,
Metwest attempts to commence collection efforts within four 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 losses on
resales. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Provision for Losses on Real Estate Assets" under Item
7.
The following table outlines the Consolidated Group's changes in the
allowance for losses on real estate assets:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Beginning Balance................... $ 11,000,618 $12,327,098 $10,192,584
Provisions.......................... 10,675,560 6,199,297 8,131,101
Charge-Offs......................... (12,358,106) (7,525,777) (5,996,587)
------------ ----------- -----------
Ending Balance...................... $ 9,318,072 $11,000,618 $12,327,098
============ =========== ===========
Percentage of Ending Balance of
Allowances to Outstanding Real
Estate Assets...................... 1.5% 1.6% 2.1%
============ =========== ===========
Ratio of Net Charge-Offs to Average
Real Estate Assets Outstanding
During the Period.................. 1.9% 1.2% 0.9%
============ =========== ===========
</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 purpose 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 one year from the date of repossession.
21
<PAGE>
The carrying value of a repossessed property is determined as of the date of
repossession of the property. It is based on a statistical valuation, a price
opinion from a broker and/or 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. The
current market value of real estate owned having a remaining balance in excess
of $300,000 will be re-determined if the most recent current market value
determination is more than 24 months old. Real estate owned with an
outstanding loan equity balance of $300,000 or less is not required to be re-
determined provided management is satisfied as to the value of such property.
22
<PAGE>
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, 1999 and/or September 30, 1998. The carrying values
of certain properties may reflect additional costs incurred, such as taxes and
improvements, when such costs are estimated to be recoverable from the sale of
the repossessed property.
<TABLE>
<CAPTION>
Carrying Carrying Market
Value Value Value Year of Total Rent
Property Type/State Location 9/30/98 9/30/99 9/30/99 Foreclosure Received
- ---------------------------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
House, Vermont.......... $ 149,765 $ 166,406 1999
Commercial, New York.... $ 218,633 239,058 265,620 1998
House, Florida.......... 137,522 152,802 1999
House, Utah............. 134,682 149,647 1999
House, Washington....... 131,563 125,910 139,900 1998
House, Texas............ 108,108 120,120 1999
Commercial, New York.... 124,098 137,887 1999
Land, New York.......... 108,000 120,000 1999
Land, California........ 107,672 29,250 1998
Land, California........ 117,000 A 1994
House, California....... 290,156 B 1998
House, New Jersey....... 107,100 119,000 1999 950
House, Pennsylvania..... 112,500 125,000 1999
House, California....... 103,410 C 1998
House, New Jersey....... 102,051 D 1998
House, California....... 153,607 E 1998
Condo, Maryland......... 333,000 370,000 1999
House, Oregon........... 178,200 F 1997
RV Park, New Mexico..... 117,037 G 1998
Commercial, Washington.. 517,505 H 1998 8,500
House, Texas............ 134,910 I 1998
Commercial Land,
Florida................ 153,000 170,000 1999
House, Pennsylvania..... 292,500 J 1998
Land, Washington........ 247,719 247,719 275,243 1998
Commercial, Washington.. 645,215 716,906 1999 1,000
Commercial, New York.... 181,020 201,133 1999
House, Arizona.......... 236,039 262,266 1999
Commercial, Florida..... 123,750 137,500 1999
Land, Florida........... 282,843 282,843 314,270 1998
Commercial, Virginia.... 224,100 K 1998
Condo, Washington....... 108,152 120,169 1999
Commercial, New York.... 208,800 232,000 1999
Condo, Florida.......... 116,100 L 1998
Condo, New Jersey....... 155,837 173,152 1999
House, California....... 126,861 140,957 1999
Commercial, New York.... 144,000 160,000 1999
House, California....... 121,908 M 1998
Commercial Land,
Florida................ 203,742 226,380 1999
Commercial, Florida..... 241,711 40,500 1998
Commercial, New York.... 209,295 179,550 199,500 1998 878
House, California....... 126,900 141,000 1999
House, Idaho............ 123,750 N 1998
House, Idaho............ 127,425 141,583 1999
Land, Arizona........... 108,495 90,000 1998
Commercial, California.. 999,509 999,509 1,110,566 1998 4,483
House, California....... 151,200 O 1998
House, Florida.......... 688,817 765,352 1999
Land, Oregon............ 120,506 133,895 1999
House, Oregon........... 104,999 P 1998
House, Arizona.......... 131,950 146,611 1999
Commercial, Washington.. 153,765 170,850 1999
House, Utah............. 108,000 120,000 1999
House, Oregon........... 117,900 131,000 1999
Land, Utah.............. 126,051 140,057 1999
Commercial, Idaho....... 125,471 139,412 1999
House, Colorado......... 100,350 111,500 1999
Land, California........ 130,500 145,000 1999
Condo, California....... 110,700 123,000 1999
House, Washington....... 478,242 531,380 1999
Commercial, Rhode
Island................. 115,200 128,000 1999
Commercial, New Jersey.. 124,309 138,121 1999
House, Indiana.......... 192,324 213,693 1999
House, Washington....... 111,475 123,861 1999
House, California....... 243,000 270,000 1999
House, California....... 192,322 213,691 1999
---------- --- ---------- ---------- ---- -------
....................... $5,395,872 $6,749,413 $7,321,847 $15,811
========== ========== ========== =======
</TABLE>
23
<PAGE>
The sales prices of the referenced properties were as follow:
<TABLE>
<S> <C> <C>
$ 65,000 A
259,000 B
109,500 C
38,000 D
99,000 E
198,000 F
129,500 G
575,000 H
147,000 I
288,000 J
200,000 K
80,000 L
140,000 M
125,000 N
172,500 O
79,000 P
----------
Total....................... $2,704,500
==========
</TABLE>
For information regarding the Consolidated Group's activity in properties
held for development, see "REAL ESTATE DEVELOPMENT."
Management and Receivable Acquisition Services
Metropolitan provides management and Receivable acquisition services to its
subsidiaries and to Summit, Old Standard and Old West. 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, except with respect to
Western United which, beginning April 1, 1998, acquires loans from
Metropolitan at Metropolitan's cost in compliance with current regulatory
application of statutes regulating transactions within a holding company
group.
In the case of Western United, beginning in 1994 and ending March 31, 1998,
the yield requirement established by Western United had been guaranteed by
Metropolitan and an intercompany reserve was established to support the
guarantee. Because of the guarantee and the corresponding decrease in risk,
Western United's stated yield requirement was relatively lower than that
required by Old Standard and Old West. The reserve established in 1998 on
purchases of $122.0 million, including origination expenses, net of purchase
discount was $4.89 million. Metropolitan remains liable to Western United for
any losses in excess of the reserve. While this charge had the effect of
reducing the Receivable yield of the insurance subsidiary, there was 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 guarantee by
Metropolitan has been eliminated with respect to all Receivables sold to
Western United after March 31, 1998.
Prior to April 1, 1998, the excess yield retained by Metropolitan was
amortized into Metropolitan's income over the same period and in the same
amount as it is amortized into expenses by Western United. During 1998 and
1997, Metropolitan charged Western United fees of approximately $10.4 million
and $20.1 million, respectively. The 1998 and 1997 charges were before loss
reserves of $4.89 million and $9.53 million, respectively. Underwriting fees
charged to Summit, Old Standard and Old West are recognized as revenues when
the related fees are charged to those companies. During 1999, Metropolitan
charged Summit, Old Standard and Old West fees of $5,000, $361,000 and
$30,000, respectively. The service agreements with Western United have
24
<PAGE>
no effect upon the consolidated financial results of the Consolidated Group.
The service agreements with companies outside the Consolidated Group,
including Summit, Old Standard and Old West provide 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 bankruptcy remote single purpose trust. The trust issues
certificates which represent an undivided ownership interest in the
Receivables transferred to the trust. Typically the certificates consist of
several different classes, which include classes of senior certificates, a
class of residual interests certificates, 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 through the establishment of a reserve fund. In connection with
securitizations, the senior certificates are sold to investors, which are
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 and
may be resecuritized.
Through September 30, 1999, the Consolidated Group (principally Metropolitan
and Western United) has participated as a co-sponsor in nine real estate
Receivable securitizations of which five were also participated in by
affiliates, Summit, Old Standard and Old West. The affiliates' percentage of
each securitization has been less than approximately 10% in each transaction
in which they participated. In each securitization, Metropolitan has used
either futures contracts or securities "short sales" to hedge or protect the
profits for all or a portion of the transaction. The price to the participants
at settlement for each securitization includes their proportionate share of
hedging transactions related to each securitization. See "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS--Note 2" under Item 8.
In the typical securitization structure, the Receivable payments are
distributed first to the senior certificates, then to the subordinated
certificates, if any, and finally 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 in which the Consolidated Group has participated, 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. The selling companies initially retained their
respective residual interests but recently, certain of such residual interests
were resecuritized. At September 30, 1999, the value of residual interests
held by the Consolidated Group was $31.8 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 conform to the
representations and warranties made at the time of sale.
25
<PAGE>
During the year ended September 30, 1999, the Consolidated Group sold
portfolios of real estate Receivables through both direct sales and
securitizations with proceeds of approximately $592.8 million and gains of
$21.8 million. During that same period, the Consolidated Group sold other
Receivables through both direct sales and securitizations with proceeds of
approximately $50.0 million and gains of $3.0 million.
During the year ended September 30, 1998, the Consolidated Group sold
portfolios of real estate Receivables through both direct sales and
securitizations with proceeds of approximately $195.6 million and gains of
$11.6 million. During that same period, the Consolidated Group sold other
Receivables with proceeds of approximately $33.8 million and gains of $2.2
million.
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.
All lottery acquisitions are currently 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
One of the Consolidated Group's principal subsidiaries is Western United.
Western United was incorporated in Washington State in 1963. As of September
30, 1999, Western United owned approximately $963 million in assets, or
approximately 78% of the Consolidated Group's total assets. Based on its
admitted statutory assets at December 31, 1998, Western United ranks sixth in
size among the twenty-two individual life and health insurance companies
domiciled in the State of Washington. Nationally, Western United ranked 303rd
in size out of 1,282 companies based on admitted assets.
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, Indiana, Montana, Nebraska, Nevada, North Dakota,
Oregon, South Dakota, Texas, Utah, Washington, and Wyoming. During 1998 (the
most recent year for which statistical information is available), Western
United's annuity market share was 3.0%, ranking it sixth in production, in the
six states in which approximately 93% of its annuity business was produced:
Washington, Oregon, Idaho, Montana, North Dakota and Texas.
Management intends to expand the operations of Western United into other
states as opportunities arise, which may include the acquisition of other
existing insurance companies. Western United currently has insurance license
applications pending in the States of New Mexico and Oklahoma.
Western United is a member of the Insurance Market Standards Association,
which is an association established to promote ethical insurance marketing
standards among its members. Western United is also a member of the Federal
Home Loan Bank of Seattle.
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 in a variety of other areas as permitted by applicable insurance
regulations. See "SECURITIES INVESTMENTS" and "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
26
<PAGE>
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 calendar years, over 98% of
Western United's direct premiums were derived from annuity sales.
Western United's annuities also qualify as investments under several tax
advantaged programs.
Western United prices its new annuity products and renewals in order to
achieve a positive spread between its annuity costs and available Receivable
and other 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.
During fiscal 1999, Western United introduced three new products-the Horizon
Equity Indexed Annuity, the Liquid Flexible Premium Annuity and the Discover
Max series of single premium annuities.
At September 30, 1999, deferred policy acquisition costs were approximately
7.8% 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 annuity interest spreads, which are anticipated to be
about 200 basis points. 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
1998 1997 1996 Average
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Net Investment Earnings Rate....................... 7.52% 7.71% 8.15% 7.79%
Average Credited Interest Rate..................... 5.84 6.03 6.03 5.97
Spread............................................. 1.68 1.68 2.12 1.82
</TABLE>
During fiscal 1999, 1998, and 1997, amortization of actuarily determined
deferred policy acquisition costs was $11.0 million, $10.0 million and $9.4
million, respectively.
Annuity lapse rates are calculated by dividing cash outflows related to
partial and full surrenders, periodic payments and death benefits by average
annuity reserves. For the calendar years 1998, 1997 and 1996, lapse rates were
18.9%, 16.9% and 14.7%, respectively. Based upon results for the nine months
ended September 30, 1999, lapse rates were 15.6%.
Life Insurance
During the year ended September 30, 1999, approximately 1% of Western
United's statutory direct premiums were derived from the sale of interest
sensitive whole life insurance and term life insurance policies. As of
September 30, 1999, the face amount of life insurance policies written and
outstanding totaled $241,109,000, 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 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.
27
<PAGE>
The following table sets forth certain key financial information regarding
the Consolidated Group's life insurance subsidiary.
<TABLE>
<CAPTION>
Year Ended at September 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Insurance In Force
Individual Life............................ $ 282,481 $ 308,191 $ 330,205
Less Ceded to other Companies.............. (41,372) (47,653) (52,328)
--------- --------- ---------
241,109 260,538 277,877
========= ========= =========
Life Insurance Premiums...................... 3,026 3,123 3,352
Less Ceded Premiums.......................... (326) (323) (352)
--------- --------- ---------
Net Life Insurance Premiums.................. 2,700 2,800 3,000
========= ========= =========
Net Investment Income........................ 61,555 62,453 65,760
========= ========= =========
Benefits, Claim Losses and Settlement
Expenses.................................... 45,495 48,098 50,455
========= ========= =========
Deferred Policy Acquisition Costs............ 61,764 67,167 69,730
========= ========= =========
Reserves for Future Policy Benefits, Losses,
Claims and Loss Expenses.................... 795,744 800,849 825,369
========= ========= =========
Total Assets................................. 962,896 939,910 953,249
========= ========= =========
Statutory Capital and Surplus................ 100,420 89,618 86,230
========= ========= =========
</TABLE>
Reinsurance
Reinsurance is the practice whereby an insurance company enters into
agreements (termed "treaties") with other insurance companies in order to
assign some of its insured risk, for which a premium is paid, while retaining
the remaining risk. Although reinsurance treaties provide a contractual basis
for shifting a portion of the insured risk to other insurers, the primary
liability for payment of claims remains with the original insurer. Life
insurers commonly obtain reinsurance on a portion of their risks in the
ordinary course of business.
Annuity Reinsurance
Western United has entered into two separate reinsurance agreements with Old
Standard. The first of those two agreements became effective January 23, 1997
and was terminated with respect to additional premiums on September 30, 1997.
Under this first agreement, Western United reinsured with Old Standard 75% of
the risk on six different annuity products and the premiums ceded were
approximately $28.0 million. Western United received ceding allowances equal
to expected commission plus 1.0% of premium, which was approximately $1.6
million.
The second of the two agreements became effective July 1, 1998 and remained
in effect at September 30, 1999. Under this second agreement, Western United
reinsured with Old Standard 75% of the risk on 15 different annuity products
and the premiums ceded during the fiscal year ended September 30, 1999 were
approximately $44.7 million. Western United received ceding allowances equal
to actual commission plus 1.5% of premium, which was approximately $2.3
million during the fiscal year ended September 30, 1999.
These agreements allow Western United to continue its market presence and
relationship with its insurance agents while moderating its rate of growth.
Under its contractual terms, the second agreement is an ongoing arrangement
with no stated expiration or termination date, although either party may stop
and restart at their discretion upon providing a 30-day advance written
notice. It is expected that approximately $30 million will be ceded under this
treaty during fiscal 2000. Western United receives a fee from Old Standard for
servicing the reinsured policies, which fee is 40 basis points annually on the
cash value of the reinsured policies.
28
<PAGE>
Life Policy Reinsurance
Western United reinsured $41,372,000 of life insurance risk at September 30,
1999 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 $282,481,000. Western United is a party to seventeen
separate reinsurance treaties with seven reinsurance companies. The largest
treaty is with Lincoln National Life Insurance Company and provided, at
September 30, 1999, approximately $21,307,000 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 life policy
reinsurance premiums paid by Western United during the fiscal year ended
September 30, 1999 were approximately $326,000.
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, 1999, such
reserves were $795,744,000. Reserves are recalculated each year to reflect
amounts of reinsurance in force, issue ages of new policy holders, duration of
policies and variations in policy terms. Since such reserves are based on
actuarial assumptions, no representation is made that ultimate liability will
not exceed these reserves.
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, 1999, 1998 and 1997, respectively, is
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Income--GAAP......................... $11,565,311 $ 3,576,495 $ 4,051,900
Adjustments to reconcile:
Deferred policy acquisition costs...... 5,128,668 1,884,429 717,718
State insurance guaranty fund.......... (942,315) (168,840) 110,290
Annuity reserves and benefits.......... (2,356,786) (653,420) (2,714,024)
Capital gains and IMR amortization..... (9,275,889) (5,272,116) (379,910)
Allowance for losses................... 8,162,103 5,464,639 5,166,518
Federal income taxes................... (6,246,200) (2,179,558) (140,864)
----------- ----------- -----------
Net Income--Statutory.................... $ 6,034,832 $ 2,651,629 $ 6,811,628
=========== =========== ===========
</TABLE>
29
<PAGE>
SECURITIES INVESTMENTS
At September 30, 1999, 1998, and 1997, 84.6%, 80.3% and 84.5%, 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, 1999:
<TABLE>
<CAPTION>
Available- Held-to-
Trading For-Sale Maturity
Portfolio Portfolio Portfolio Total Percentage
----------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Total Amount............ $44,471,146 $116,772,234 $65,226,400 $226,469,780 100.0%
=========== ============ =========== ============ =====
% Invested in:
Fixed Income.......... $44,471,146 $114,058,044 $65,226,400 $223,755,590 98.8%
Equities.............. -- 2,714,190 -- 2,714,190 1.2
----------- ------------ ----------- ------------ -----
$44,471,146 $116,772,234 $65,226,400 $226,469,780 100.0%
=========== ============ =========== ============ =====
% Fixed Income:
Taxable............... $44,471,146 $114,058,044 $65,226,400 $223,755,590 100.0%
Non-taxable........... -- -- -- -- 0.0
----------- ------------ ----------- ------------ -----
$44,471,146 $114,058,044 $65,226,400 $223,755,590 100.0%
=========== ============ =========== ============ =====
% Taxable:
Government/Agency..... $ -- $ -- $46,566,748 $ 46,566,748 20.8%
Corporate............. 44,471,146 114,058,044 18,659,652 177,188,842 79.2
----------- ------------ ----------- ------------ -----
44,471,146 114,058,044 65,226,400 223,755,590 100.0%
=========== ============ =========== ============ =====
% Corporate Bonds:
AAA................... $10,109,766 $ 7,027,038 $ 6,183,980 $ 23,320,784 13.2%
AA.................... -- 10,865,132 -- 10,865,132 6.1
A..................... 11,653,807 22,951,095 2,998,397 37,603,299 21.2
BBB................... 13,624,162 53,779,874 999,443 68,403,479 38.6
BB.................... -- 16,781,317 6,294,079 23,075,396 13.0
B..................... -- 2,575,809 2,083,753 4,659,562 2.6
Below Investment
Grade................ 9,083,411 77,779 100,000 9,261,190 5.3
----------- ------------ ----------- ------------ -----
$44,471,146 $114,058,044 $18,659,652 $177,188,842 100.0%
=========== ============ =========== ============ =====
% Corporate:
Mortgage and Asset-
backed............... $44,471,146 $107,105,723 $14,661,812 $166,238,681 93.8%
Finance............... -- 6,952,321 2,998,397 9,950,718 5.6
Industrial............ -- -- -- -- 0.0
Utility............... -- -- 999,443 999,443 0.6
----------- ------------ ----------- ------------ -----
$44,471,146 $114,058,044 $18,659,652 $177,188,842 100.0%
=========== ============ =========== ============ =====
</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
"REGULATION."
Metropolitan and Western are authorized by their respective 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
30
<PAGE>
portfolio and therefore must be purchased to close out the sale agreement) as
another means of hedging interest rate risk to benefit from an anticipated
movement in the financial markets. See "RECEIVABLE INVESTMENTS--Receivable
Sales." At September 30, 1999 and 1998, the Consolidated Group had no open
hedging positions relative to hedging its securities portfolio, but did have
outstanding hedging transactions relating to its securitizations. See "NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS--Note 1" under Item 8.
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, 1999, the
Consolidated Group was not a party to any derivative financial instruments
relative to its CMO investment portfolio.
The Consolidated Group has retained investments in certain subordinate
classes of securities from its securitizations having an estimated fair value
of approximately $99,596,000 and $49,484,000 at September 30, 1999 and 1998,
respectively.
At September 30, 1999, 1998 and 1997, amounts in the trading portfolio on a
consolidated basis, at market, were $45.0 million, $55.9 million and $34.5
million, respectively. At September 30, 1999, 1998 and 1997, amounts in the
available-for-sale portfolio on a consolidated basis were $156.3 million, 26.0
million and $36.6 million, respectively. The available-for-sale portfolio had
net unrealized losses of approximately $5,129,000 at September 30, 1999,
$496,000 at September 30, 1998 and $759,000 at September 30, 1997. In the
held-to-maturity portfolio, net unrealized losses were approximately
$1,182,000 at September 30, 1999, while net unrealized gains were
approximately $3,359,000 at September 30, 1998, while net unrealized losses
were approximately $1,019,000 at September 30, 1997. See "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS--Note 2" under Item 8.
During fiscal year ended September 30, 1999, in accordance with Statement of
Financial Accounting Standards No. 134, the Consolidated Group reclassified
trading securities with a carrying value of approximately $46.3 million to the
available-for-sale classification. The reclassified securities were
consistently carried at estimated fair value. However, future changes in
estimated fair value will be recorded as a component of accumulated other
comprehensive income (loss) rather than being recognized in operations.
Method of Financing
The Consolidated Group finances its business operations and growth with
collateralized lines of credit, the proceeds from the sale and securitization
of Receivables, Receivable cash flows, the sale of life insurance and annuity
products, the sale of debt and equity securities, the sale of real estate and
securities portfolio earnings. In this regard, Metropolitan engages in a
substantially continuous public offering of debt securities and preferred
stock while Western United markets annuities and life insurance policies. See
"LIFE INSURANCE AND ANNUITY OPERATIONS."
31
<PAGE>
The following table presents information regarding the debentures issued by
the Consolidated Group (the "Debentures"):
<TABLE>
<CAPTION>
As of September 30,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Principal Amount Outstanding...................... $176,239 $175,273 $159,169
Compound and Accrued Interest..................... 22,650 22,932 26,045
-------- -------- --------
TOTAL............................................. $198,889 $198,205 $185,214
======== ======== ========
Weighted Average Interest Rate.................... 7.96% 7.96% 7.99%
======== ======== ========
Range of Interest Rates........................... 5%-11% 5%-11% 5%-11%
======== ======== ========
</TABLE>
Substantially all of the Debentures outstanding at September 30, 1999 will
mature during the five-year period ending September 30, 2004. 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, 1999,
approximately 67% 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:
<TABLE>
<S> <C>
Fiscal 1999.................................................. $814,133,000
Fiscal 1998.................................................. $402,901,000
Fiscal 1997.................................................. $533,541,000
</TABLE>
Proceeds of preferred stock issuances less redemptions were $3,738,000 in
1999. Redemption of preferred stock exceeded issuances and reinvestments of
dividends by $1,516,000 in 1998. Proceeds of preferred stock issuances less
redemptions were $1,241,000 in 1997. The liquidation preference of outstanding
preferred stock at September 30, 1999 was $53,095,000. Preferred shareholders
are entitled to monthly distributions at a variable rate based on the rates on
various maturities of U.S. Treasury obligations. The average monthly
distribution rate during fiscal 1999 was 7.21%. Preferred stock distributions
paid by Metropolitan were $3,642,000 in 1999, $3,732,000 in 1998 and
$4,113,000 in 1997.
The following table summarizes Metropolitan's anticipated annual cash
principal and interest obligations on Debentures, credit lines and 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, 1999, assuming no reinvestments of maturing Debentures:
<TABLE>
<CAPTION>
Credit
Fiscal Year Lines/Other Preferred
Ending Debt Stock
September 30, Debentures Payable Dividends(1) Total
------------- ---------- ----------- ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
2000........................... $ 57,205 $123,679 $ 4,303 $185,187
2001........................... 13,820 1,152 4,303 19,275
2002........................... 42,834 1,276 4,303 48,413
2003........................... 50,741 1,191 4,303 56,235
2004........................... 50,230 1,307 4,303 55,840
-------- -------- ------- --------
$214,830 $128,605 $21,515 $364,950
======== ======== ======= ========
</TABLE>
- --------
(1) Based on an assumed dividend rate per annum of 8.1%.
In addition to these contractual cash flow requirements, a certain amount of
Western United'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.
32
<PAGE>
In addition to the above sources of funds, the Consolidated Group also
obtains funds through the sale and repurchase of Receivables in accordance
with a nonrecourse committed facility with Banc of America Securities LLC
("Banc of America" f/k/a NationsBanc Mortgage Capital Corporation). Pursuant
to the terms of the facility, Metropolitan and Metwest may sell loans in an
aggregate amount not to exceed $200 million from time to time to Banc of
America for an agreed upon advance rate and shall repurchase such receivables
at a specified price on a specified date. The facility matures on March 24,
2000, and accrues interest at LIBOR plus 1%. The amount advanced at September
30, 1999, of $62,908,030, including accrued interest at 6.383% per annum, is
collateralized by real estate contracts and mortgage notes receivable held for
sale with a carrying value of approximately $65,505,000. The Consolidated
Group intends to continue using this facility or others like it to facilitate
the purchase and securitization of Receivables.
The Consolidated Group, also obtains funds through a borrowing facility with
Federal Home Loan Bank of Seattle. Pursuant to the terms of the line of
credit, Western United is authorized to borrow in an aggregate amount not to
exceed $92.2 million from time to time for an agreed upon advance rate and
pledge of acceptable collateral. The amount advanced at September 30, 1999, of
$33 million, including accrued interest ranging from 5.39% to 5.42% per annum,
is collateralized by CMO bonds with a carrying value of approximately
$41,250,000.
33
<PAGE>
REAL ESTATE DEVELOPMENT
Lawai Beach Resort
Description
Metropolitan was the owner and developer of Lawai Beach Resort on the island
of Kauai, Hawaii. Metropolitan also owns other condominium units adjoining the
resort. A Metropolitan subsidiary, the Southshore Corporation, owns a
restaurant property adjacent to the Lawai Beach Resort.
Lawai Beach Resort is located on 8.7 acres of deeded oceanfront property on
the south shore of Kauai near the area known as Poipu Beach. It consists of
three four-story buildings containing a total of 170 residential condominium
units. Related amenities include swimming pools, tennis courts, a 180 car
parking garage, 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, 1999 was
approximately $464,102, which was primarily the carrying value of a
condominium unit retained for corporate use.
Additional properties owned by Metropolitan (or subsidiaries), all of which
adjoin the Lawai Beach Resort, include 3 condominium units in the Prince Kuhio
Condominiums with an aggregate carrying value of approximately $166,000 and a
restaurant site with a carrying value (land and building) of approximately
$3,438,000 as of September 30, 1999. The restaurant is currently under
contract for sale at a price of $4,875,000. Rental income from the restaurant
was approximately $412,000 in 1999.
Marketing
As of September 30, 1999, all timeshare weeks in Lawai Beach Resort have
been sold. Metropolitan had engaged an affiliate of the Shell Group, Chicago,
Illinois, Shell-Lawai ("Shell"), to provide management services and sell
timeshare units at Lawai Beach. With the sale of all timeshare weeks complete,
Shell's sales and marketing agreement has been terminated.
In 1997, timeshare sales totaled approximately $13.8 million for monthly
average sales of over $1.1 million. In 1998, timeshare sales totaled
approximately $10.8 million for monthly average sales of over $0.9 million. In
1999, timeshare sales totaled approximately $8.4 million for monthly average
sales of over $0.7 million.
Additional Information
The tables below set forth additional historical information about the
timeshare sales and revenue of Lawai Beach Resort.
<TABLE>
<CAPTION>
For the Years Ended September 30,
--------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
TIMESHARE SALES
Number of Sales...................... 606 756 909
Amount of Sales...................... $ 8,397,511 $10,760,405 $ 13,837,687
Costs................................ (2,617,978) (3,696,622) (3,930,281)
Expenses............................. (6,013,521) (6,799,648) (11,116,543)
----------- ----------- ------------
Profit (Loss)........................ $ (233,988) $ 264,135 $ (1,209,137)
=========== =========== ============
WHOLEUNIT CONDOMINIUM SALES
Number of Units...................... 1 4 --
Amount of Sales...................... $ 357,500 $ 898,075 $ --
Costs................................ (311,519) (655,039) --
Expenses............................. (35) -- --
----------- ----------- ------------
Operating Profit..................... $ 45,946 $ 243,036 $ --
=========== =========== ============
</TABLE>
34
<PAGE>
Receivable Financing
Most purchasers of timeshare weeks at Lawai Beach Resort finance a portion
of the purchase price through Metropolitan, subject to approval of credit. On
September 29, 1997, Metropolitan sold approximately $29.7 million in time
share Receivables, through a securitization. As of September 30, 1999,
Metropolitan's outstanding Lawai Beach Resort timeshare Receivables balance
was approximately $3.0 million. The loan delinquency rate (based on the
principal balances of loans more than ninety days in arrears) on that date was
approximately 7%.
Skier's Edge Resort
As of October 1, 1997, Metropolitan owned approximately 127 timeshare use
periods at Skier's Edge, a timeshare condominium located near Breckenridge,
Colorado. All remaining timeshare use periods in the project were sold during
1998. Approximately 18 acres of undeveloped land adjoining the resort were
sold June 23, 1999. The sale price of the land was $200,000.
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 business, generally through repossessions. In addition, the
Consolidated Group may acquire property for development. Subsequent
acquisitions may include properties adjoining those properties presently owned
by the Consolidated Group in order to enhance the value of the original
parcel, or may include 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 1999, approximately $1.9 million in fees were paid to Summit Property
Development for property development activities.
Significant sales activities of development property occurred in 1999. There
can be no assurance that the Consolidated Group will be successful in its 2000
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 1999, the property included one
residential development parcel and one business parcel, which are described
more fully below. These parcels are located within the MeadowWood master-
planned community, which includes residential, commercial and industrial
properties, including a business park.
Liberty Lake Center (formerly MeadowWood Business Park Phase II): In 1989,
Metropolitan acquired an option to purchase a major portion of Liberty Lake
Center. Repossessed properties were used as consideration for the acquisition.
Another 17.12 acres of industrial-zoned property were acquired by exchange in
1990. In 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 were purchased from Spokane County in 1996. This brought the total land
area of Liberty Lake Center (excluding subsequently dedicated road rights-of-
way) to 100.24 acres.
A Final Binding Site Plan was filed on the property in July 1997. Three
sales closed in fiscal 1998. WAM Enterprises purchased 3.42 acres for
telemarketer Dakotah Direct, Inc. as a call center for $469,274. Doty/Scott
Investments purchased 2.93 acres for a medical facility for $511,136 and
purchased an additional 2.87 acres for $468,815.
35
<PAGE>
Three sales closed in fiscal 1999. These sales included 5.13 acres to Fore
Investments, 6.45 acres to Garco Construction and 10.00 acres to R&R R.V.
Sales. Total sales for 1999 were $2,490,224. At September 30, 1999, the
carrying value of the remaining property was $4,821,472. The undiscounted cash
flow appraised value as of November 23, 1998 was $5,700,000.
MeadowWood Residential: This residential parcel, the Glen, consisted of 37
acres of which 32 acres were sold in February, 1996 for $755,000. The
remaining five acres were sold in September 1999 for $149,400. This completes
the sale of all residential property related to the original MeadowWood
acquisition.
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 that were purchased between
1982 and 1996. The property is zoned for mixed uses, ranging 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 was completed in 1998. At September 30, 1999, the carrying value of
the property was $12,557,868. The appraised value of this property as of
September 1, 1999 was $16,300,000. The Company is currently exploring options
with local government offices for the infrastructural development of the
property.
Airway Business Centre
Airway Business Centre (the "Center") 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.
The first phase of the Center 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-half mile of frontage on U.S. Highway 2, a regional
east/west transportation route. Current improvements to the property include
the construction of public streets to serve the various parcels created,
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.
Previous sales include sites for a McDonald's restaurant, Conoco/Burger King
convenience store, NAPA Auto Parts and a custom metal fabrication shop. In
1999, there were additional sales to Ford Leasing Development--10.43 acres for
$950,000, SLR Properties--0.81 acres for $135,000 and Redmat, LLC--2.00 acres
for $239,619. The carrying value of the first phase as of September 30, 1999
was $1,912,755.
The second phase of the Center 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 50.61 acres of the project have an approved binding site
plan, while 21.23 acres await city approval of further subdivision.
Metropolitan developed and sold a new headquarters building to Spokane County
Fire Protection District #10 in 1997. The carrying value of the second phase
as of September 30, 1999 was $764,553. The carrying value for the entire
project as of September 30, 1999 was $2,677,308. The appraised value for the
entire project as of September 30, 1998 was $5,730,000.
Spokane Valley Plaza
This property is located near the Sullivan Road and Interstate 90 freeway
interchange just east of Spokane and consists of 33 acres of land zoned for
regional commercial use. 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
36
<PAGE>
infrastructure at a cost to Metropolitan of approximately $900,000. An
additional 2.75 acres was sold to Toys R Us in June 1997 for $1,256,860.
During 1999, the following leases and sales contracts have been executed with
occupancy and closings to take place in fiscal 1999 and 2000:
<TABLE>
<CAPTION>
Area--
Leases Square Feet Annual Rent Occupancy Date
------ ----------- ----------- --------------
<S> <C> <C> <C>
Michaels' Craft Supply.................. 23,912 $263,988 1/1/99
Ross Dress for Less..................... 30,187 $286,777 9/15/99
Fashion Bug............................. 8,057 $ 88,627 9/1/99
Corral West Ranchwear................... 7,057 $ 70,800 4/1/99
Sally's Beauty Supply................... 1,507 $ 24,866 12/1/99
Cigarettes Cheaper...................... 1,507 $ 24,866 11/6/99
</TABLE>
<TABLE>
<CAPTION>
Sales (pending) Sale Price
--------------- ----------
<S> <C>
Vaughn/McGann (Arby's Restaurant).................................... $504,000
Farmers and Merchants' Bank.......................................... $257,040
</TABLE>
The carrying value of this property as of September 30, 1999 was $10,961,962
which included the cost of buildings built for Michael's, Ross and a building
for the Fashion Bug, Corral West Ranchwear, Sally's Beauty Supply and
Cigarettes Cheaper. The appraised value of this property as of October 1, 1998
was $10,053,800 and did not include values of the constructed buildings.
Broadmoor Park (Pasco)
This property, acquired through repossession in 1988, consists of 410 acres
of land, at a freeway interchange in Pasco, Washington. The property was zoned
in 1994 for mixed residential and commercial use. Water, sewer, gas,
electricity and telephone have been extended to the property. Access to the
property has been improved by construction of interior roads.
Broadmoor Park Outlet Mall: The Broadmoor Park Outlet Mall is 10.98 acres
located on the north side of Interstate 182 freeway. The Mall is 107,000
square feet and over 91% leased as of September 30, 1999. The carrying value
of the property as of September 30, 1999 was $9,371,786. The appraised value
was $13,325,000 as of December 15, 1995. Lease payments from the initial
tenants commenced in August 1995. The mall generated approximately $1,001,000
of rental income in 1997, approximately $919,000 in 1998 and approximately
$792,611 in 1999. The Outlet Mall has not developed as anticipated and to
retain tenants, leases were converted to percentage rents based upon sales in
order to retain occupancy.
Broadmoor Park General: The remaining 399 acres of Broadmoor Park are zoned
for development as hotels, motels, fast food restaurants, gas stations, a
variety of stores, and for development of both single and multi-family
residential housing. Previous sales included 28.17 acres for a private high
school, 1.15 acres to the City of Pasco for a water storage tank site, 1.5
acres for a motel and 2.02 acres for a gas station/convenience store. Sales in
1999 included 1.56 acres to Garco Construction, 10.34 acres to Sandy Heights
R.V. Park, 1.02 acres to the Bank of Whitman and 0.63 acres to Alan Williams.
Sales for 1999 totaled $916,459. The carrying value as of September 30, 1999
was $8,710,394, including facilities built and held for lease. The appraised
value as of September 30, 1998 was $12,795,000.
Two facilities were constructed on the property by Metropolitan in 1997. One
facility was built for Dakotah Direct, a national telemarketing firm. This
1.70-acre project was subsequently sold for $1,200,000 in 1998. The
transaction included an option to purchase the adjacent 1.76 acres for future
expansion. The second facility was built for lease to Broadmoor RV and Truck
Center. The project was completed and opened for business in June 1997.
Monthly lease payments are $10,000. Subsequently, Broadmoor RV and Truck
Center leased an additional 1.00 acres. Monthly lease payments for the
expansion are $2,000.
37
<PAGE>
Puyallup
This property is approximately 20 acres of land zoned for commercial
development in Puyallup, Pierce County, Washington and is located adjacent to
a major shopping area. This property was sold for $2,000,000 on September 30,
1999.
Everett
This property is a 98-acre parcel of land zoned for industrial use 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, 1999, the carrying value of the property was
$5,163,257. The appraised value was $8,737,000 as of September 9, 1999.
Renton
This property is approximately 35 acres. It is characterized by heavily
vegetated terrain and is zoned for residential use. 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, 1999, the
carrying value in the property was $3,279,461. The appraised value was
$3,419,000 as of September 30, 1998.
Summary
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 and carrying 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 or carrying values will be realized.
Total development property sales were approximately $7.24 million during
fiscal 1999. At September 30, 1999, the carrying value of real properties
subject to operating leases was approximately $18.58 million.
38
<PAGE>
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,
---------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
REAL ESTATE HELD FOR SALES AND DEVELOPMENT
Investment Property Held for Sale and
Development.............................. $ 44,945 $ 45,207 $ 47,413
Real Estate Acquired in Satisfaction of
Debt and Foreclosures in Process......... 40,802 44,507 34,389
--------- ---------- ----------
Net Balance............................... $ 85,747 $ 89,714 $ 81,802
========= ========== ==========
SUMMARY OF CHANGES
Balance at Beginning of Year.............. $ 89,714 $ 81,802 $ 84,333
Additions and Improvements:
Condominiums............................ 6,437 7,628 11,664
Repossessed and Development Real
Estate................................. 31,789 33,035 22,460
Depreciation............................ (2,557) (2,171) (4,986)
Cost of Real Estate Sold:
Condominium Units....................... (8,974) (11,756) (16,028)
Real Estate............................. (30,662) (18,824) (15,641)
--------- ---------- ----------
Balance at End of Year.................... $ 85,747 $ 89,714 $ 81,802
========= ========== ==========
GAIN (LOSS) ON SALE OF REAL ESTATE
Condominiums:
Sales................................... $ 8,822 $ 12,267 $ 14,719
Unit Costs.............................. (2,930) (4,608) (4,486)
Associated Selling Costs................ (6,044) (7,148) (11,542)
--------- ---------- ----------
Condominium-Gain (Loss)................... (152) 511 (1,309)
========= ========== ==========
Real Estate:
Sales................................... 33,660 20,011 16,701
Equity Basis............................ (30,662) (18,824) (15,641)
--------- ---------- ----------
Real Estate-Gain........................ 2,998 1,187 1,060
--------- ---------- ----------
Total Gain (Loss) on Sale of Real
Estate................................. $ 2,846 $ 1,698 $ (249)
========= ========== ==========
</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 the primary competitive factors are the amounts offered and paid to
Receivable sellers and the speed in which the processing and funding of the
transaction can be completed. Competitive advantages enjoyed by the
Consolidated Group include (i) its access to markets throughout the United
States; (ii) Metropolitan's BrokerNet software; (iii) its flexibility in
structuring Receivable acquisitions; (iv) its long history in the business;
and (v) 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.
39
<PAGE>
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, structured
settlements and annuities.
Metwest competes with other lending institutions in its loan origination
program, pool acquisition program and 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. Management is implementing
a new "wholesale" program in an effort to expand these activities. See
"RECEIVABLE INVESTMENTS." There can be no assurance that these programs will
be successful in expanding these activities or 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. Western
United has been assigned a rating of "B+" ("Very Good") by A.M. Best Co., a
nationally recognized insurance company rating organization. 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" because it obtains capital for its business
activities, in part, through offerings of debt securities to residents of the
State of Washington. These laws are collectively referred to as the Debenture
Company Act of 1973, as amended (the "Act") and 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 that Metropolitan may issue by requiring that debenture
companies maintain certain ratios of net worth to outstanding debt securities.
The required ratio decreases as the amount of outstanding debt securities
increases. The highest ratio of 20% must be maintained by debenture companies
with $1,000,000 or less in debt securities outstanding, the ratio of 10% must
be maintained by debenture companies with anywhere between $1,000,000 and
$100,000,000 in debt securities outstanding and the lowest ratio of 5% must be
maintained by debenture companies with debt securities outstanding exceeding
$100,000,000. At September 30, 1999, Metropolitan's required net worth for
this purpose was approximately $15,045,000 while its actual net worth
(stockholders' equity) was approximately $71,704,000. The Act also 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
40
<PAGE>
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 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.
Metropolitan's aggregate principal amount of outstanding debentures,
including accrued and compound interest, and its aggregate amount of preferred
stock outstanding currently are limited to $300,000,000, by the terms of the
securities sales permits issued by the Department. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
Liquidity and Capital Resources" under Item 7.
It is expected, however, that the continued applicability of the Act to the
Consolidated Group may be limited by the successful listing of its 9% Notes
due 2004 for trading on Tier I of the Pacific Exchange pursuant to a
registration statement filed with the Securities and Exchange Commission.
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, the Truth in Lending Act, the Real Estate
Settlement Procedures Act, and Regulation X and Z promulgated by the Board of
Governors of the Federal Reserve System. 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 has been 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. With
the sale of all of Metropolitan's timeshare units, these regulations will no
longer be applicable except to the extent that such regulations may apply to
the resale of any repossessed timeshares.
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. This 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 its 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, setting
dividend levels, prescribing the nature and amount of permitted investments,
establishing solvency standards and conducting extensive periodic examinations
of insurance company records. Such regulations are intended to protect annuity
contract holders and insurance 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 Guaranty fund assessments to protect the interests
of policyholders of insolvent life insurance companies.
41
<PAGE>
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 (recovered) by Western United for guaranty fund
assessments and charged to operations for the years ended September 30, 1999,
1998 and 1997 were $(942,000), $149,000 and $480,000, 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 1997. Management does not believe that the
amount of future assessments associated with known insolvencies after 1997
will be material to its financial condition or results of operations. During
the year ended September 30, 1999, Western United reduced its total estimate
of these future net losses by $1,500,000 based upon updated information from
the National Organization of Life and Health Guaranty Associations. During the
year ended September 30, 1998, Western United reduced its total estimate of
these future net losses by $320,000 based upon updated information from the
National Organization of Life and Health Guaranty Associations. During the
year ended September 30, 1997, Western United reduced its estimate of these
losses by $401,000 based upon updated information from the National
Organization of Life and Health Guaranty Associations. 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 6.00% discount
rate applied to the estimated payment term of approximately seven years. The
remaining unamortized discount associated with this accrual was less than
$1,000 at September 30, 1999. At September 30, 1999, the discounted amount of
estimated future guaranty fund assessments was approximately $2,283,000.
Dividend restrictions are imposed by regulatory authorities on Western
United. The unrestricted statutory surplus of Western United totaled
approximately $15,927,000 as of September 30, 1999, $7,738,000 as of September
30, 1998 and $8,597,000 as of September 30, 1997. The principal reason for the
increase in statutory surplus during 1999 was due to net earnings.
For statutory purposes, Western United's capital and surplus and its ratio
of capital and surplus to admitted assets were as follows for the dates
indicated:
<TABLE>
<CAPTION>
As of As of December 31,
September 30, ----------------------
1999 1998 1997 1996
------------- ------ ------ ------
<S> <C> <C> <C> <C>
Capital and Surplus(Millions)........... $58.4 $ 59.8 $ 52.2 $ 50.1
Ratio of Capital and Surplus to Admitted
Assets................................. 6.3% 6.8% 5.6% 5.4%
</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 of the insurance company. Western
United's capital and surplus levels exceeded the calculated minimum
requirements at its statutory reporting period ended December 31, 1998.
Item 2. Properties.
On November 14, 1997, Metropolitan acquired an office building containing
approximately 200,000 square feet located at 601 West First Avenue, Spokane,
Washington, approximately three blocks from its previous headquarters.
Metropolitan moved its headquarters to this building in fiscal 1998.
Approximately 35% of the building is currently leased by other tenants.
42
<PAGE>
Item 3. Legal Proceedings.
There are no material legal proceedings or actions pending or threatened
against Metropolitan or to which its property is subject.
Item 4. Submission Of Matters To A Vote Of Security Holders.
None.
43
<PAGE>
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 4 holders of Common Stock as of September 30, 1999.
(c) Dividends: The Registrant declared dividends on its Common Stock
during the last two fiscal years ended September 30, 1999 as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<C> <S> <C>
$312,578 $156,489
</TABLE>
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 dividends on its Common Stock
in the future.
2.Recent Sales of Unregistered Securities: None.
44
<PAGE>
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated financial data shown below as of September 30, 1999 and
1998 and for the years ended September 30, 1999, 1998 and 1997 (other than the
ratios 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,
1997, 1996 and 1995 and for the years ended September 30, 1996 and 1995 (other
than the ratios of earnings to fixed charges and preferred stock dividends)
have been derived from audited consolidated financial statements not included
herein.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF INCOME DATA:
Revenues................ $ 165,221 $ 155,955 $ 155,135 $ 156,672 $ 138,107
========== ========== ========== ========== ==========
Income before minority
interest............... $ 16,593 $ 10,453 $ 9,791 $ 8,146 $ 6,376
Income allocated to
minority interests..... (318) (126) (123) (108) (73)
---------- ---------- ---------- ---------- ----------
Net income.............. 16,275 10,327 9,668 8,038 6,303
Preferred stock
dividends.............. (3,642) (3,732) (4,113) (3,868) (4,038)
---------- ---------- ---------- ---------- ----------
Income applicable to
common stockholders.... $ 12,633 $ 6,595 $ 5,555 $ 4,170 $ 2,265
========== ========== ========== ========== ==========
Ratio of earnings to
fixed charges.......... 1.12 1.75 1.77 1.46 1.35
Ratio of earnings to
fixed charges and
preferred stock
dividends.............. (1) 1.37 1.31 1.14 1.03
PER COMMON SHARE DATA:
Income applicable to
common
stockholders(2)........ $ 97,933 $ 50,728 $ 42,733 $ 32,073 $ 17,288
========== ========== ========== ========== ==========
Weighted average number
of common shares
outstanding............ 129 130 130 130 131
========== ========== ========== ========== ==========
Cash dividends per
common share........... $ 2,400 $ 1,200 $ -- $ -- $ 3,800
========== ========== ========== ========== ==========
CONSOLIDATED BALANCE
SHEET DATA:
Total assets............ $1,230,957 $1,226,665 $1,112,389 $1,282,659 $1,078,468
Debentures, line of
credit advances, other
debt payable and
securities sold, not
owned.................. 336,233 323,908 190,131 363,427 226,864
Stockholders' equity.... 71,704 58,757 54,113 46,343 40,570
</TABLE>
- --------
(1) Earnings were insufficient to meet fixed charges and preferred stock
dividends by approximately $808,000 for the year ended September 30, 1999.
The consolidated ratio of earnings to fixed charges and preferred stock
dividends was 1.37, 1.31, 1.14 and 1.03 for the years ended September 30,
1998, 1997, 1996 and 1995, respectively.
Assuming no benefit from the earnings of its subsidiaries with the
exception of direct dividend payments, earnings were insufficient to meet
fixed charges and preferred stock dividends by approximately $390,000 for
the year ended September 30, 1999. The ratio of earnings to fixed charges
and preferred dividends for Metropolitan alone was 1.10, 1.01, 1.11, and
1.05 for the years ended September 30, 1998, 1997, 1996 and 1995,
respectively.
The consolidated ratio of earnings to fixed charges excluding preferred
stock dividends was 1.12, 1.75, 1.77, 1.46 and 1.35 for the years ended
September 30, 1999, 1998, 1997, 1996 and 1995, respectively. 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 1.13, 1.40, 1.36, 1.48
and 1.40 for the years ended September 30, 1999, 1998, 1997, 1996 and 1995,
respectively.
(2) Earnings per common share, basic and diluted, 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.
45
<PAGE>
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
The following should be read in conjunction with the attached audited
consolidated financial statements and the notes attached thereto for the three
years ended September 30, 1999.
Introduction
The Consolidated Group's net income after income taxes and minority interest
was approximately $16.3 million for the fiscal year ended September 30, 1999
as compared to $10.3 million and $9.7 million for the comparable 1998 and 1997
periods, respectively. The increase in 1999 over 1998 was primarily
attributable to a net increase of $1.1 million in gains from real estate
sales, an increase of $1.7 million in fees, commissions, service and other
income and a reduction of $17.9 million in income taxes and income allocated
to minority stockholders, being offset by a $277,000 decrease in net interest
sensitive income and expense, a net decrease of $2.5 million in realized gains
from sales of investments and Receivables, an increase of $4.5 million in the
provision for losses on real estate assets and an increase of $7.5 million in
other operating expenses, including salaries and benefits, commissions to
agents, general operating expenses and capitalized costs, net of amortization.
The increase in 1998 over 1997 was primarily attributable to a net increase of
$623,000 in realized gains from sales of investments and Receivables, an
increase of $1.9 million in gains from real estate sales, an increase of $2.1
million in fees, commissions, service and other income, and a decrease of $1.9
million in the provision for losses on real estate assets, being offset by a
$727,000 decrease in net interest sensitive income and expense, an increase of
$4.8 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 $406,000 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 or the buyer or seller chose non-
conventional financing. 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 may have
blemished credit records and the Consolidated Group may not be able to receive
income or 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, 1999, the Consolidated
Group operated in an environment of fluctuating interest rates. Interest rate
levels fluctuated higher in 1999 after downward fluctuations in interest rate
levels in 1998 after being relatively stable in 1997. The five-year U.S.
Treasury rate was approximately 6.1% at October 1, 1996, hit a low of
approximately 4.2% at September 30, 1998 and closed out September 1999 at
approximately 5.8%. 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 through 1998, while
negatively impacting earnings and fair values during 1999. A portion of this
improvement in value was recognized with the realization of gains from the
sale of investment securities and Receivables of $19.3 million, $21.8 million
and $21.2 million in 1999, 1998 and 1997, 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
46
<PAGE>
the investment portfolio see "LIFE INSURANCE AND ANNUITY OPERATIONS" and
"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.
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. As of September 30, 1999, all timeshare weeks in
Lawai Beach Resort were sold, including the final phase which consisted
primarily of the Banyan building. The Company has retained one condominium
unit for corporate use. See "REAL ESTATE DEVELOPMENT--Lawai Beach Resort"
under Item 1.
Net income in 1999 was insufficient by approximately $880,000 to cover fixed
charges including preferred stock dividend requirements. Net income in 1998,
1997, 1996 and 1995 was sufficient to cover fixed charges including preferred
stock dividend requirements. After considering the effects of potentially non-
recurring income items such as the gains from sales of investments,
Receivables and real estate, the 1999 income would have been insufficient to
cover fixed charges by approximately $23.0 million. Additionally, the
elimination of similar items in 1998, 1997 and 1996 would have resulted in
insufficient earnings to cover fixed charges by approximately $14.0 million,
$13.0 million and $9.7 million, respectively. See "SELECTED CONSOLIDATED
FINANCIAL DATA" under Item 6.
Revenues and Expenses
Revenues for the Consolidated Group of $165.2 million for the fiscal year
ended September 30, 1999 showed a $9.2 million increase from the $156.0
million reported in fiscal 1998. Revenues of $156.0 for the fiscal year ended
September 30, 1998 showed a $0.9 million increase from the $155.1 million
reported in fiscal 1997. The increase in 1999 was primarily attributable to a
$1.7 million increase in fees, commissions, service and other income, a $10.2
million increase in real estate sales and a $11.0 million increase in gains on
sales of Receivables, being offset by a $13.5 million reduction in net gains
on investments. The increase in 1998 was primarily attributable to a $2.1
million increase in fees, commissions, service and other income, a $8.5
million increase in gains on investments and a $900,000 increase in real
estate sales being offset by a decrease of $2.6 million from interest related
revenues and a $7.9 million decrease in gains on sales of Receivables.
Expenses of operation for the Consolidated Group were $161.2 million, $140.0
million and $140.3 million for fiscal years ended September 30, 1999, 1998 and
1997, respectively. The increase in expenses in 1999 over 1998 was primarily
the result of an increase in interest expense of $2.7 million, an increase of
$9.1 million in cost of real estate sold, increased salaries and benefits of
$4.9 million, an increase of $3.3 million in other operating and underwriting
costs and an increase of $4.5 million in the provision for losses on real
estate assets, being offset by a reduction in insurance policy and annuity
benefits of $2.5 million and a reduction in commissions to agents of $700,000.
The slight decrease in expenses in 1998 over 1997 was primarily the result of
a decrease of $2.4 million in the cost of insurance policy and annuity
benefits, a decrease of $1.9 million in the provision for losses on real
estate assets and a $1.1 million decrease in the cost of real estate sold
being offset by increased salaries and benefits of $4.7 million and increased
commissions to agents of $400,000.
Interest Sensitive Income and Expense
Management monitors interest sensitive income and expense as it manages the
objectives for the Consolidated Group's 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
47
<PAGE>
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 Net Present Value ("NPV")
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.
NPV is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest provided
by independent broker quotations and other public sources.
Computation of forecasted effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and redemptions of debentures, and should not be
relied upon as indicative of actual future results.
The following table presents, as of September 30, 1999, the Consolidated
Group's estimate of the change in the NPV of the financial assets and
liabilities of the Consolidated Group if interest rate levels generally were
to increase or decrease by 1% and 2%, respectively. These calculations, which
are highly subjective and technical, may differ from actual results. See "--
Asset/Liability Management."
<TABLE>
<CAPTION>
Fair Value With 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............ $ 20,407 $ 20,407 $ 20,407 $ 20,407 $ 20,407 $ 20,407
Investments............. 267,718 266,536 278,225 289,368 257,805 248,444
Real estate contracts
and mortgage notes..... 529,502 537,911 555,797 574,789 521,044 505,121
Mortgage servicing
rights................. 10,899 10,899 11,225 11,569 10,590 10,297
Other receivable
investments............ 174,708 179,870 187,618 195,854 172,576 165,704
---------- ---------- ---------- ---------- ---------- ----------
$1,003,234 $1,015,623 $1,053,272 $1,091,987 $ 982,422 $ 949,973
========== ========== ========== ========== ========== ==========
FINANCIAL LIABILITIES:
Annuity reserves........ $ 795,744 $ 795,744 $ 815,273 $ 835,471 $ 776,857 $ 758,590
Debentures payable...... 196,126 202,421 199,949 203,877 192,404 188,780
Advances under line of
credit................. 62,908 62,908 62,908 62,908 62,908 62,908
Debt payable............ 74,317 74,842 74,636 74,963 74,006 73,704
---------- ---------- ---------- ---------- ---------- ----------
$1,129,095 $1,135,915 $1,152,766 $1,177,219 $1,106,175 $1,083,982
========== ========== ========== ========== ========== ==========
</TABLE>
Net interest sensitive income was $27.0 million for the fiscal year ended
September 30, 1999. The comparable results for 1998 and 1997 were $27.3
million and $28.0 million, respectively. Interest rates for 1999 trended
higher throughout the year. Interest rates for 1998 were relatively stable in
the beginning of such fiscal year with rates declining as the fiscal year
closed. Interest rates for 1997 were relatively stable with slightly
increasing rates in the beginning of such fiscal year and declining rates as
the fiscal year closed. Also contributing to the changes in net interest
sensitive income was the capitalization of approximately $0.9 million, $0.6
million and $0.5 million for the years 1999, 1998 and 1997, respectively, of
interest costs associated with various real estate development projects owned
by the Consolidated Group.
The calculations of present value have certain shortcomings. The discount
rates utilized for Receivables and investment securities are based on
estimated market interest rate levels of similar receivables and securities
nationwide, with prepayment levels generally assumed based on global
statistics. The unique characteristics of the Consolidated Group's Receivables
and investment securities may not necessarily parallel those assumed in the
model, and therefore, would likely result in different discount rates,
prepayment experiences, and present
48
<PAGE>
values. The discount rates utilized for debentures, annuity reserves and debt
payable are based upon alternative types and sources of funds which are not
necessarily indicative of the present value of such instruments. The present
values are determined based on the discounted cash flows over the remaining
estimated lives of the financial instruments and assume that the resulting
cash flows are reinvested in financial instruments with virtually identical
terms. The total measurement of the Consolidated Group's exposure to interest
rate risk as presented in the above table may not be representative of the
actual values which might result from a higher or lower interest rate
environment. A higher or lower interest rate environment will most likely
result in different investment and borrowing strategies by the Consolidated
Group designed to mitigate the effect on the value of, and the net earnings
generated from, the Consolidated Group's net assets from any change in
interest rates.
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 "REAL ESTATE
DEVELOPMENT" under Item 1.
At September 30, 1999, excluding timeshare development property,
approximately 78% of real estate owned by the Consolidated Group is located in
the Pacific Northwest (Alaska, Washington, Oregon, Idaho, Montana), which has
experienced a 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
$19.7 million is invested in commercial developments with approximately $40.9
million invested in undeveloped or partially developed land.
The Consolidated Group is engaged in the development of various properties
acquired in the course of its business through repossession or as investment
property. The development or improvement of properties is undertaken for the
purpose of enhancing values to increase salability and to maximize profit
potential.
Real estate sales exceeded real estate costs by $2.8 million in 1999. Real
estate sales exceeded real estate costs by $1.7 million in 1998, while real
estate costs exceeded real estate sales by $249,000 in 1997. Included in these
results are sales of timeshare units with a net loss of $152,000 in 1999, a
net gain of $0.5 million in 1998 and a net loss of $1.3 million in 1997. With
the sale of the remaining timeshare units during 1999, Metropolitan has
terminated the sales and marketing agreement with an affiliate of the Shell
Group, Chicago, Illinois, Shell-Lawai ("Shell") to provide management services
and sell timeshare units at Lawai Beach. See "REAL ESTATE DEVELOPMENT--Lawai
Beach Resort" under Item 1. This agreement provided 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 at Lawai Beach in 1999,
1998 and 1997 were approximately $8.4 million, $10.8 million and $13.8
million, respectively.
Real estate sales, including timeshare unit sales, totaled $42.5 million for
1999, $32.3 million for 1998 and $31.4 million for 1997. The Consolidated
Group's total investment in repossessed real estate was $40.8 million at
September 30, 1999, $44.5 million at September 30, 1998 and $34.4 million at
September 30, 1997. The aggregate investment in real estate held for sale and
development decreased to $85.7 million at September 30, 1999 from $89.7
million at September 30, 1998 and from $81.8 million at September 30, 1997.
The decrease from 1998 to 1999 is primarily attributable to the decreased
investment in repossessed real estate and the sale of the timeshare units. The
increase from 1997 to 1998 is primarily attributable to the increased
investment in repossessed real estate. In addition to its prior 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, 1999 were a $12.6 million development located in downtown
Spokane adjacent to the central business district and a $9.4 million factory
outlet mall development located in Pasco, Washington. See "REAL ESTATE
DEVELOPMENT--Other Development Properties" under Item 1.
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Gains or losses on real estate sold, excluding timeshare units, is 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,
--------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Amount of delinquencies over three months at fiscal
year end.......................................... $ 30,000 $ 34,000 $ 36,000
Amount of foreclosures during the fiscal year...... 26,224 27,049 14,977
Amount of foreclosed real estate held for sale at
fiscal year end................................... 40,802 44,507 34,389
Gain on sale of real estate during the fiscal
year.............................................. 2,846 1,187 1,060
</TABLE>
The principal amount of Receivables in arrears for more than ninety days as
of September 30, 1999, 1998 and 1997 was 5.5%, 5.5% and 6.8%, respectively,
stated as a percentage of the total outstanding principal amount of
Receivables. See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Note 3" 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 decrease in delinquencies from 1998 to 1999 of approximately $4.0
million was primarily the result of the Company's reduced investment in real
estate Receivables. While delinquency rates have remained stable, the Company
has reduced its investment in real estate Receivables from $614 million in
1998 to $540 million in 1999. The decrease in delinquencies from 1997 to 1998
of approximately $2.0 million was primarily the result of an overall decrease
in the general delinquency rate for all Receivables including timeshare
Receivables. The Consolidated Group believes the allowance for real estate
losses to be adequate, and accordingly the Consolidated Group has decreased
the allowance for loss on real estate assets associated with Receivables from
$8.7 million at September 30, 1998 to $6.9 million at September 30, 1999.
Provision for Losses on Real Estate Assets
During the years ended September 30, 1999, 1998 and 1997, the Consolidated
Group provided $10.7 million, $6.2 million and $8.1 million, respectively, for
losses on real estate assets. At September 30, 1999, 1998 and 1997, the
Consolidated Group had aggregate allowances for losses on real estate assets
of $9.3 million, $11.0 million and $12.3 million, respectively, on real estate
assets of $625 million, $704 million and $595 million, respectively. See
"NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Note 3" and "--Note 6" under Item
8.
Non-Interest Income and Expense
Non-interest income, composed of "Fees, Commissions, Services, and Other
Income" was $8.5 million for the fiscal year ended September 30, 1999, $6.8
million for the fiscal year ended September 30, 1998 and $4.7 million for the
fiscal year ended September 30, 1997. Income sources include service fees and
late charges in connection with Receivables, charges for loan servicing and
other services provided to outside affiliated companies, and rents,
commissions and other revenues primarily associated with the Lawai Beach
Resort, Kauai, Hawaii. The increase from 1997 to 1998 and again from 1998 to
1999 was primarily attributable to additional fees associated with the
retained servicing rights on the Receivable securitizations.
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 $43.0 million for the year ended September 30, 1999
compared to $35.5 million for the year ended September 30, 1998 and $30.6
million for the year ended September 30, 1997. The increase in non-interest
expense of $7.5 million in 1999 over 1998 was primarily attributable to
increased salaries and benefits of $4.9 million and increased other operating
expenses of $3.3 million, being offset by a reduction in commissions to agents
of $0.7 million. The increase in non-interest expense of $4.9 million in 1998
over 1997 was primarily attributable to increased salaries and benefits of
$4.7 million and increased commissions to agents of $0.4 million, being offset
by a reduction of $0.2 million in other operating expenses.
50
<PAGE>
Net Gains (Losses) on 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 mark-to-market adjustment of trading
securities, including residual certificates and the sale of investments were
$5.5 million in 1999. Net gains from the mark-to-market adjustment of trading
securities, including residual certificates and the sale of investments were
$8.0 million in 1998. Net losses from the sale and mark-to-market adjustment
of investments were $0.5 million in 1997. See "SECURITIES INVESTMENTS" under
Item 1. The Consolidated Group purchases Receivables collateralized by real
estate, lottery prizes structured settlements, and annuities. See "RECEIVABLE
INVESTMENTS" under Item 1 and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
Note 3" and--Note 7" under Item 8. Such assets are generated through the
ongoing production operations of the Consolidated Group. At times, Receivables
that have increased in value, primarily from a decreasing interest rate
environment, or which exceed internal demand, may be remarketed either through
whole loan sales or securitizations. See "RECEIVABLE INVESTMENTS--Receivable
Sales" under Item 1. Net gains from the sale of Receivables were $24.8
million, $13.8 million and $21.7 million for the fiscal years ended September
30, 1999, 1998 and 1997, respectively.
Income Taxes
The Company's income tax provision for the year ended September 30, 1999
reflects the income tax benefit associated with capital losses generated by an
implemented investment strategy. These losses were used to offset certain
taxable temporary differences previously recorded. The Company recorded
approximately $14.0 million in income tax benefits associated with this
transaction. The tax provisions for fiscal 1998 and 1997 approximated amounts
that would have been provided by applying statutory rates to pre-tax income.
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 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 2000,
approximately $486.4 million of interest sensitive assets are expected to
reprice or mature. These assets consist of approximately $261.7 million of
Receivables, $204.3 million of fixed income investments and $20.4 million of
cash and cash equivalents. For liabilities, most of the balance of life
insurance and annuity contracts may be repriced during 2000. Management
estimates this amount at $621.3 million. In addition, approximately $50.7
million of debentures and $121.6 million of other debt, including line of
credit advances, will mature or reprice during that period. At September 30,
2000, these estimates result in interest sensitive liabilities in excess of
interest sensitive assets of approximately $307.2 million, or a ratio of
interest sensitive liabilities to interest sensitive assets of approximately
163%.
The Consolidated Group is able to manage this liability to asset mismatch of
approximately 1.6:1 by the fact that approximately 76% of the interest
sensitive liabilities are life insurance and annuity contracts which are
subject to surrender charges. These contracts have surrender charges that
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 $15.6 million at September
30, 1999. Depending on the remaining surrender charges, the Consolidated Group
has the option to extend any interest rate increase over a two to three year
period, thereby making it not generally economical for an annuitant to pay the
surrender charge in order to receive payment in lieu of accepting a rate of
interest that is lower than current market rates of interest. As a result, the
Consolidated Group may respond more slowly to increases in market interest
rate levels thereby diminishing the impact of the current mismatch in the
interest sensitivity ratio. Additionally, through Receivable securitizations,
the Consolidated Group has increased its liquidity and ability to manage the
liability to asset mismatch. If necessary, the proceeds from the
securitization could be used to pay off maturing liabilities.
51
<PAGE>
Effect of Inflation
During the three-year period ended September 30, 1999, 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 "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 decrease over the three-year period in
the positive spread between the rate of return on interest earning assets less
the cost of interest bearing 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 real
estate values have historically 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 June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS 130") was issued. SFAS 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 statements. 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 application of this
standard did not have a material effect on the consolidated financial
statements.
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"), was issued. SFAS 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 Statement of Financial Accounting Standards 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
application of this standard did not have a material effect on the disclosures
of its business segments.
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments (SOP 97-3). SOP 97-3 applies to
all entities that are subject to guaranty-fund and other insurance-related
assessments. Assessments covered by this SOP include any charge mandated by
statute or regulatory authority that is related directly or indirectly to
underwriting activities (including self-insurance), except for income taxes
and premium taxes. SOP 97-3 is effective for financial statements for fiscal
years beginning after December 15, 1998. The Consolidated Group does not
believe that the application of SOP 97-3 will have a material effect on its
consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98- 1). SOP 98-1
52
<PAGE>
provides guidance on accounting for the costs of computer software by
identifying the characteristics of internal-use software. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998. The Consolidated
Group does not believe that the application of this Statement will have a
material effect on its financial statements.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
was issued. SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as "Derivatives") and for hedging
activities. It requires that an entity recognize all Derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date of SFAS 133" ("SFAS No. 137"), was
issued. SFAS No. 137 amends SFAS No. 133 to become effective for all quarters
of fiscal years beginning after June 15, 2000; however, earlier application is
encouraged as of the beginning of any fiscal quarter. The Consolidated Group
has not yet determined the effect of SFAS 133 on its consolidated financial
statements.
In October 1998, the FASB issued Statement of Financial Accounting Standards
No. 134, "Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage-Banking
Enterprise;" which requires that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. This Statement conforms
the subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent accounting
for securities retained after the securitization of other types of assets by a
nonmortgage banking enterprise. This Statement is effective for the first
fiscal quarter beginning after December 15, 1998. In accordance with the
application of this statement, the Company reclassified trading securities
with a carrying value of approximately $46.3 million to the available-for-sale
classification.
Liquidity and Capital Resources
The Consolidated Group's sources of liquidity are tied to its ability to
renew, maintain or obtain 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 $40.9 million in 1999 and $133,000 in
1998 and $118.9 million in 1997. Cash provided by the Consolidated Group in
its investing activities was $63.9 million in 1999 and $242.9 million in 1997,
while cash utilized in its investing activities was $88.9 million in 1998.
Cash utilized in financing activities was $3.9 million in 1999 and $2.9
million in 1997, while cash provided by the Consolidated Group in its
financing activities was $61.8 million in 1998. These cash flows have resulted
in year-end cash and cash equivalent balances of $20.4 million in 1999, $31.7
million in 1998 and $58.9 million in 1997. Cash and cash equivalents decreased
by $11.3 million in 1999 over 1998. In 1999, Receivable acquisitions of $654.0
million, $17.1 million in acquisition and costs associated with real estate
held for sale and development, $111.2 million used to fund investment
securities acquisitions less sales and maturities and $46.0 million used to
fund life and annuity withdrawals less receipts were financed by proceeds from
Receivable sales, securitizations and principal payments of $779.2 million,
$34.9 million in proceeds from sales of real estate, an increase in short-term
borrowings of $22.6 million, $1.0 million in proceeds from the issuance of
debenture bonds less repayments and other cash proceeds of $10.4 million from
other activities. Cash and cash equivalents decreased by $27.2 million in 1998
over 1997. In 1998, Receivable acquisitions of $494.3 million, $17.0 million
in acquisition and costs associated with real estate held for sale and
development and $69.0 million used to fund life and annuity withdrawals less
receipts were financed by proceeds from Receivable sales, securitizations and
principal payments of $381.5 million, $61.6 million in proceeds from sales of
real estate and from maturities and sales less purchases of investments, an
increase in short-term borrowings of $120.9 million, $16.1 million in proceeds
from the issuance of debenture bonds less repayments and other cash proceeds
of $200,000 from other activities. At September 30, 1999, 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.
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The State of Washington regulates the total amount of debentures and
preferred stock that Metropolitan can have outstanding. During the offering
that became effective in Washington on February 9, 1999, Metropolitan was
authorized to have no more than $250.0 million in outstanding debentures,
including accrued and compounded interest, and outstanding preferred stock. On
June 24, 1999, the State of Washington authorized an increase in the amount of
outstanding securities to $300.0 million. See "REGULATION" under Item 1. At
September 30, 1999, Metropolitan had total outstanding debentures of
approximately $198.9 million and total outstanding preferred stock at
liquidation value of approximately $53.1 million. During the three offerings
which expired January 31, 1999, 1998 and 1997, the aggregate debenture and
preferred stock permits varied from approximately $251-$296 million. These
regulatory limitations did not cause any material adverse impact on liquidity
during 1994 through 1998; however, Metropolitan did forego various investment
opportunities which could have been made if they could have been funded by the
additional sales of debentures and preferred stock.
During 2000, anticipated principal, interest and dividend payments on
outstanding debentures, other debt payments and preferred stock distributions
are expected to be approximately $185.2 million. During 1999, the principal
portion of the payments received on the Consolidated Group's Receivables and
proceeds from sales of real estate and Receivables totaled $814.1 million. A
decrease in the prepayment rate on Receivables or the inability 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 adequate levels of liquidity in
the foreseeable future by continuing its securities offerings, annuity sales
and the sale and securitization of Receivables. At September 30, 1999, cash or
cash equivalents were $20.4 million, or 1.6% of total assets. As of September
30, 1999, the Consolidated Group had no cash or cash equivalents restricted
from general corporate use. Including trading and available for-sale
securities, total liquidity was approximately $222 million, $114 million and
$130 million as of September 30, 1999, 1998 and 1997, respectively, or 18.0%,
9.3% and 11.7% 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
improve 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 1998, the results of this cash flow testing process were
satisfactory.
Metropolitan alone used approximately $44.1 million in cash in operations in
1999. Investing activities provided net cash of approximately $81.1 million.
Funds provided included $605.6 million from proceeds from sales and principal
payments of Receivables and real estate and $11.9 million from investment
sales and maturities. Funds used included $511.4 million for the purchase of
Receivables, $1.9 million in capital expenditures, $11.3 million for the
purchase of investments and $9.2 million in additions to real estate held. Net
cash used in financing activities in 1999 of $31.4 million included $46.4
million in new debenture sales and new issuance of preferred stock, less
redemptions, of $3.6 million, which were offset by repayment of debentures of
$45.4 million, a reduction of net borrowings of $32.0 million and $4.0 million
in dividend payments.
Metropolitan alone used approximately $7.5 million in cash in operations in
1998. Investing activities used net cash of approximately $128.9 million.
Funds provided included $241.9 million from proceeds from sales and principal
payments of Receivables and real estate, $2.0 million from investment sales
and maturities and $20.2 million from a reduction in investment and advances
to subsidiaries. Funds used included $362.4 million for the purchase of
Receivables, $17.9 million in capital expenditures, $0.9 million for the
purchase of investments and $11.8 million in additions to real estate held.
Net cash provided by financing activities in 1998 of $133.4 million included
$65.0 million in new debenture sales and net borrowings of $122.5 million,
which were offset by repayment of debentures of $48.9 million, redemption of
preferred stock, net of new issuance, of $1.5 million and $3.9 million in
dividend payments.
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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. 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.
At September 30, 1999, Metropolitan had approximately $926,000 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. Additionally, the
Company has budgeted approximately $5.2 million in capital expenditures for
fiscal 2000.
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.
Year 2000 Disclosure
The Consolidated Group is aware of the potential effect that the year 2000
and the new century may have on computer hardware, computer software and
applications and embedded micro-controllers in non-computer equipment
(collectively "Information Technology"). The problem is insuring that the
Consolidated Group is "Year 2000 Compliant" meaning that the Information
Technology is able to (i) process date and time data accurately and (ii)
calculate, compare and sequence from, into and between the twentieth and
twenty-first centuries, the years 1999, 2000 and leap years.
The Consolidated Group and its affiliates share many software, hardware,
facilities and other systems. Therefore, the Consolidated Group's Year 2000
efforts are a combined and coordinated effort among all companies within the
Consolidated Group and its affiliates. The following are statements regarding
the Year 2000 compliance of the Consolidated Group. The information below has
not been independently verified by the Consolidated Group, other than
statements relating to the Consolidated Group.
State of Readiness
The Consolidated Group has established a Year 2000 task force which has
developed an action plan for addressing issues related to the Year 2000. The
plan, with the exception of the contingency plan, was completed by September
30, 1999. The contingency plan, including rollover planning, was completed on
December 1, 1999, but will continue to be revised thereafter as needed in
order to maintain an effective contingency plan. The action plan includes the
following phases:
. Inventory--Identify all internal and external systems and services that
may utilize date sensitive information.
. Assessment--Determine whether each system or service meets the
Consolidated Group's definition of Year 2000 Compliance and assess the
potential business impact of non-compliance.
. Renovation--Modify and/or replace any systems or services that do not
satisfy the Consolidated Group's definition of Year 2000 Compliance.
. Certification--Obtain certification that each system or service meets
the definition of compliance.
. Training--Develop and implement any training and procedural changes to
ensure correct data entry.
. Contingency Planning--Develop and implement contingency plans against
possible failures.
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The plan includes a timeline for the completion of each of the phases and
components of the work within each phase. Many of the different phases have
overlapping timelines and are therefore progressing simultaneously; therefore
the status of progress on any particular phase is difficult to assess at any
point in time. The Year 2000 task force generally met weekly to coordinate its
efforts as well as to monitor progress.
The status of the Consolidated Group's Year 2000 efforts are regularly
monitored by the internal auditor. In addition, during the first quarter of
calendar 1999, the Consolidated Group engaged a third party to provide an
external evaluation of its Year 2000 action plan and the status of the
preparations of the Consolidated Group at that time.
The Consolidated Group completed the testing of its internally supported
software applications and its hardware. Testing did not produced any results
which were not able to be resolved.
The Consolidated Group requested vendor documentation certifying Year 2000
compliance with respect to third party software applications, third party
services, equipment and facilities related systems. Certain equipment and
facilities systems which were identified as higher priority were also tested
for compliance, where testing was possible. The Consolidated Group did not
receive any indication from any third party that a mission critical system or
service was not Year 2000 compliant. The Year 2000 task force is monitoring
and tracking projected certification dates from third party providers.
The Consolidated Group developed a Year 2000 contingency plan to address
potential Year 2000 related failures that was completed on December 1, 1999.
There can be no assurance that this contingency plan or that the Year 2000
action plan will be able to prevent a material disruption of the Consolidated
Group's business.
Expected Costs of Remediation
Prior to fiscal 1998, the Consolidated Group did not track Year 2000 related
costs. The Consolidated Group and its affiliates incurred approximately
$803,000 in remediation costs related to Year 2000 as of September 30, 1999.
The Consolidated Group does not believe that any remaining remediation costs
will be significant. The Consolidated Group will pay certain of these costs
while the remainder of the costs will be paid by or charged to the affiliated
companies. The predominant components of both past and future costs consist of
soft costs related to employee time and resource allocations rather than
direct costs such as the acquisition of new software.
Risks
The Consolidated Group, as a financial institution, relies heavily upon
computers and information technology systems to acquire, service and sell
Receivables as well as for its securities and insurance sales activities. The
Consolidated Group faces extensive Year 2000 related risks. The order within
which these risks are presented is not intended as a prioritization of the
potential risks nor an exhaustive identification of the risks. These risks
include, but are not limited to the following:
. unavailability of electrical power or telecommunication systems supplied
by third parties;
. inability of obligors on the Receivables to access their funds to make
required payments;
. inability of the mail systems or wire transfer systems performed by
third parties to deliver such payments;
. inability of banks to process those payments;
. failure of any of the software/hardware systems which the Consolidated
Group uses to track insurance products, securities products or acquire,
service and sell Receivables;
. inability of the Consolidated Group to access its own funds or to make
wire transfers or otherwise make payments on its obligations due to
internal or third party (generally banking) system failures; and
. inability of the Consolidated Group to process data accurately or timely
for general business management purposes, regulatory reporting purposes
or other purposes.
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Contingency Plans
The Consolidated Group has commenced the development of a contingency plan
but had not finalized such a plan by September 30, 1999. Such plan was
completed by December 1, 1999. Development of contingency plans for mission
critical items was the first and top priority of the contingency planning
phase. Where appropriate and feasible, the plan also addresses alternatives
for internally developed systems as well as externally developed ones, and
includes steps to implement transition to an alternative system. There can be
no assurance that this contingency plan or that the Year 2000 action plan will
be able to prevent a material disruption of the Consolidated Group's business.
Item 7.A. Quantitative And Qualitative Disclosures About Market Risk
Metropolitan 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,
thus rising interest rates will have a negative impact on results of
operations. Conversely, in a falling interest rate environment, the net return
from interest sensitive assets and liabilities will tend to improve, thus
falling interest rates will have a positive impact on results of operations.
As with the impact on operations from changes in interest rates,
Metropolitan's Net Present Value ("NPV") of financial assets and liabilities
is subject to fluctuations in interest rates. Metropolitan continually
monitors the sensitivity of net interest income and NPV to changes in interest
rates. NPV is calculated based on the net present value of estimated cash
flows utilizing market prepayment assumptions and market rates of interest
provided by independent broker quotations and other public sources. Any
computation of forecasted effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and redemptions of certificates, and should not be
relied upon as indicative of actual future results.
Metropolitan and Western are authorized by their respective 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 means of hedging interest rate risk to benefit from an anticipated
movement in the financial markets. See "RECEIVABLE INVESTMENTS--Receivable
Sales." At September 30, 1999 and 1998, the Consolidated Group had no open
hedging positions relative to hedging its securities portfolio, but did have
outstanding hedging transactions relating to its securitizations. See "NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS--Note 1" under Item 8.
Metropolitan believes that there has not been a material change in its
market risk since the end of its last fiscal year. For additional quantitative
information about market risk of the Registrant, see "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Interest
Sensitive Income and Expense" under Item 7.
For qualitative information about market risk of the Registrant, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Asset/Liability Management" under Item 7.
Item 8. Financial Statements And Supplementary Data
The consolidated financial statements and related financial information
required to be filed are attached to this Report. Reference is made to page F-
1 of this Report for an index to the consolidated financial statements.
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
None.
57
<PAGE>
PART III
Item 10. Directors And Executive Officers Of the Registrant
MANAGEMENT
Directors, Executive Officers and Certain Employees
(Age Information Current as of September 30, 1999)
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
C. Paul Sandifur, Jr.... 57 President, CEO and Chairman of the Board
William D. Snider....... 58 Chief Financial Officer
Bruce J. Blohowiak...... 45 Executive Vice President, Corporate Counsel and Director
Michael Kirk............ 47 Senior Vice President/Production
Steven Crooks........... 53 Vice President and Controller
Jon McCreary............ 31 Acting Treasurer
Reuel Swanson........... 60 Secretary and Director
John Van Engelen........ 46 President, Western United
Irv Marcus.............. 75 Director
Charles H. Stolz........ 91 Director
John Trimble............ 69 Director
Harold Erfurth.......... 82 Director
Neal Fosseen............ 90 Honorary Director
</TABLE>
All officers are appointed by and serve at the discretion of the Board of
Directors. Directors serve for one-year terms or until their successor is duly
elected and qualified.
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.
William D. Snider has been Metropolitan's Chief Financial Officer since May
of 1999. Mr. Snider was the Chairman of Snider Financial Partners from June of
1997 through December of 1998. From March, 1992 until June of 1997, he was the
Executive Vice President and Chief Financial Officer of Finance and Operations
of Co Bank in Denver, Colorado. Prior to that Mr. Snider was Senior Vice
President and Treasury Group Head for Continental Bank Corporation in Chicago,
Illinois. Mr. Snider is a member of the Financial Executive Institute, and
received his BS and MBA from the University of Illinois.
Bruce J. Blohowiak joined Metropolitan's legal staff in 1979 and became its
Corporate Counsel in 1986. In 1987, he became an Assistant Vice President and
was appointed a Vice President in 1990. In 1995 he was named Executive Vice
President and Chief Operating Officer. He is also a Vice President of Western
United. A member of the Washington State bar, Mr. Blohowiak received his J.D.
degree from Gonzaga University School of Law in 1979.
Michael Kirk joined Metropolitan as a Receivable Contract Buyer in 1982. He
later became a member of the underwriting committee. He was elected Assistant
Vice President in 1990, Vice President in 1992 and became Senior Vice
President-Production in 1995.
58
<PAGE>
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 was Acting Chief Financial Officer from 1996 to
February 1999. Mr. Crooks has been a Washington licensed Certified Public
Accountant since 1974.
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 B.S. in Finance from Central Washington
University.
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.
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 to 1994, he was the marketing manager.
During 1994, he was appointed 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.
Neal 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 to 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 the other four most highly compensated executive officers. Most other
executive officers of Metropolitan received less than $100,000 in compensation
during the year ended September 30, 1999. 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
59
<PAGE>
CONTROL ARRANGEMENTS." The 401(k) Plan provides for maximum annual company
matching contributions equal to 3% of each participant's salary. As of
September 30, 1999, Metropolitan had no stock option plans in effect.
<TABLE>
<CAPTION>
(d)
(a) (b) (c) Bonus/
Name and Principal Position Year Salary Commissions
--------------------------- ---- -------- -----------
<S> <C> <C> <C>
C. Paul Sandifur, Jr................................. 1999 $437,500 --
Chief Executive Officer 1998 316,734 --
1997 150,000 --
Bruce Blohowiak...................................... 1999 191,667 $48,000
Executive Vice President, Chief Operations Officer 1998 171,250 --
and General Counsel
1997 126,667 --
Michael Kirk......................................... 1999 185,500 40,000
Senior Vice President-Production 1998 118,333 65,557
1997 85,000 103,021
John Van Engelen..................................... 1999 159,194 --
President, Western United 1998 121,678 40,422
1997 102,000 39,581
William D. Snider.................................... 1999 156,250 --
Chief Financial Officer
</TABLE>
COMPENSATION OF DIRECTORS
Directors (including honorary Directors) of Metropolitan are paid $500 per
meeting. There were ten such meetings during fiscal 1999.
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
Jon McCreary................... June 1, 1997 May 31, 2002 $250,000
Michael Kirk................... June 1, 1997 May 31, 2002 $354,406
William D. Snider.............. February 16, 1999 February 15, 2004 $431,315
</TABLE>
These agreements provide that should the officer continue employment for the
designated term, the officer shall receive the designated compensation in a
lump sum at the end of the term. The agreements include non-compete provisions
and non-disclosure of trade secret provisions.
60
<PAGE>
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
Corporation, which in turn owns Summit, Old Standard and Old West. 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, 1999.
<TABLE>
<CAPTION>
Number of Shares
Name Title of Class Beneficially Owned % of Class
---- ---------------------- ------------------ ----------
<S> <C> <C> <C>
C. Paul Sandifur, Jr..... Metropolitan Preferred
601 W. First Avenue Stock, All Series 302 0.06%
Spokane, WA 99201 Metropolitan Class A
Common Stock 35.6925 27.58%
C. Paul Sandifur, Jr. Metropolitan Class A
Trustee(1) Common Stock 82.4667 63.73%
601 W. First Avenue
Spokane, WA 99201
Summit Securities,
Inc.(2)................. Metropolitan Preferred
601 W. First Avenue Stock, All Series 247,622 4.90%
Spokane, WA 99201 Metropolitan Class A
Common Stock 9.2483 7.15%
Irv Marcus(3)............ Metropolitan Preferred
601 W. First Avenue Stock, All Series 406 --%
Spokane, WA 99201
Bruce J. Blohowiak....... Metropolitan Class A
601 W. First Avenue Common Stock 2.0000 1.54%
Spokane, WA 99201
Charles H. Stolz Metropolitan Preferred
601 W. First Avenue Stock, All Series 19,477 0.37%
Spokane, WA 99201
All Officers and
Directors as a group.... Metropolitan Preferred
Stock, All Series 267,807 5.33%
Metropolitan Class A
Common Stock 129.4075 100.00%
</TABLE>
- --------
(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.
61
<PAGE>
(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.
(3) Irv Marcus had one (1.0000) share of Class A Common Stock that was
repurchased by Metropolitan as of September, 1999.
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, 1999.
<TABLE>
<CAPTION>
Shares of Class A
Name and Address Common Stock % of Class
---------------- ----------------- ----------
<S> <C> <C>
C. Paul Sandifur, Jr............................... 35.6925 27.58%
601 West First Avenue
Spokane, WA 99201
C. Paul Sandifur, Jr............................... 82.4667 63.73%
Trustee(1)
Summit Securities, Inc............................. 9.2483 7.15%
601 West First Avenue
Spokane, WA 99201(2)
</TABLE>
- --------
(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 controlled by C. Paul Sandifur, Jr.
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 "ORGANIZATIONAL CHART" under Item 1.
During the last year ended September 30, 1999, Western United purchased some
of its Receivables from Metropolitan at Metropolitan's cost. In these
transactions, Western United paid Metropolitan $99,632,903 for Receivables
with aggregate outstanding principal balances of $98,626,735.
Through 1998, Metropolitan was compensated for Receivable acquisition
services it provided to Western United. In 1998, Metropolitan received
Receivable acquisition compensation of $10.4 million from Western United. The
amounts for 1998 are gross amounts before a loss reserve of $4.89 million
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 8.1% in 1998. Management
believes the adjusted yields represent the yields which Western United could
achieve by purchasing similar Receivables in arms-length transactions with
unrelated vendors. In addition, Metropolitan charges Western United for
management services, Receivable collection services and rental of offices and
equipment. These charges have no effect on the Consolidated Financial
Statements, but create fee income for Metropolitan when presented alone. See
"NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Note 25" under Item 8.
62
<PAGE>
Metwest provides Receivable servicing and collection for Metropolitan and
Western United. See "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, 1999, there were $16.0
million in loans outstanding.
In the normal course of business, Western has acquired certain development
real estate properties from Metropolitan. During fiscal 1999, these
acquisitions totaled $3.5 million.
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, 1999, these loans
outstanding totaled $3,710,000 and currently bear no interest.
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 year ended September 30, 1999, Metropolitan paid commissions
to MIS in the amount of $1,451,132 and $169,422 on sales of debt securities
and preferred stock in the amount of $46,399,862 and $4,681,277, respectively.
During the fiscal year ended September 30, 1999, Metropolitan also paid
commissions to MIS in the amount of $165,834 on sales of preferred stock
through an in-house trading list.
Metropolitan provides management and receivable acquisition services for a
fee to Summit, Old Standard and Old West. During 1999, such fees were
approximately $396,000 million. See "RECEIVABLE INVESTMENTS--Management and
Receivable Acquisition Services" under Item 1.
Metwest provides Receivable collection services for a fee to Summit, Old
Standard and Old West. During 1999, such fees were approximately $491,000. See
"RECEIVABLE INVESTMENTS--Servicing and Collection Procedures, and Delinquency
Experience" under Item 1.
In the ordinary course of business the Consolidated Group may purchase or
sell Receivables from or to affiliated companies or borrow or lend money from
or to affiliated companies. See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
NOTE 21" under Item 8.
In the ordinary course of business Metropolitan and Metwest borrow from
Western United. Such loans are collateralized by real estate or Receivables.
At September 30, 1999, such loans from Western totaled approximately $23
million for Metropolitan and $2 million for Metwest. Such loans within the
Consolidated Group have no effect on the consolidated financial statements.
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 entered into a reinsurance agreement with Old Standard
which became effective July 1, 1998 and remained in effect at September 30,
1999. Under this agreement, Western reinsured with Old Standard 75% of the
risk on 15 different annuity products and the premiums ceded during the fiscal
year ended September 30, 1999 were approximately $44.7 million. Western
received ceding allowances equal to actual commission plus 1.5% of premium,
which was approximately $2.3 million during the fiscal year ended September
30, 1999.
63
<PAGE>
This agreement allows Western United to continue its market presence and
relationship with its insurance agents while moderating its rate of growth.
Under its contractual terms, the reinsurance agreement is an ongoing
arrangement with no stated expiration or termination date, although either
party may stop and restart at their discretion upon providing a 30-day advance
written notice. It is expected that approximately $30 million will be ceded
under this treaty during fiscal 2000. Western receives a fee from Old Standard
for servicing the reinsured policies, which fee is 40 basis points annually on
the cash value of the reinsured policies.
Metropolitan's and Western United's property development activities are
provided by Summit Property Development. The Consolidated Group paid Summit
Property Development $1.9 million in development fees during fiscal 1999. See
"REAL ESTATE DEVELOPMENT" under Item 1.
64
<PAGE>
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, 1999 and 1998
Consolidated Statements of Income for the Years Ended September 30, 1999,
1998, and 1997
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999, 1998, and 1997
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
Included in Part IV of this report:
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
<TABLE>
<C> <S>
3.01 Restated Articles of Incorporation, as amended, dated November 30,
1987 (Incorporated by Reference to Exhibit 3(a) to Metropolitan's
Annual Report on Form 10-K for fiscal 1987).
3.02 Amendment to Articles of Incorporation dated November 5, 1991
(Incorporated by Reference to Exhibit 3(c) to Registration No. 33-
40220).
3.03 Amendment to Articles of Incorporation dated September 20, 1992
(Incorporated by Reference to Exhibit 3(c) to Metropolitan's Annual
Report on Form 10-K for fiscal 1992).
3.04 Restated Bylaws, as amended on December 26, 1995 (Incorporated by
Reference to Exhibit 3(e) to Form 10-K for Period Ending September
30, 1995).
4.01 Indenture, dated as of October 1999, between Metropolitan and U.S.
Bank Trust National Association, Trustee (Incorporated by reference
to Exhibit 4.01 to Metropolitan's Registration Statement on Form S-2
filed October 7, 1999).
4.02 Indenture, dated as of July 6, 1979, between Metropolitan and
Seattle-First National Bank, Trustee (Incorporated by Reference to
Exhibit 3 to Metropolitan's Annual Report on Form 10-K for fiscal
1979).
4.03 First Supplemental Indenture, dated as of October 3, 1980, between
Metropolitan and Seattle-First National Bank, Trustee (Incorporated
by Reference to Exhibit 4 to Metropolitan's Annual Report on Form
10-K for fiscal 1980).
4.04 Second Supplemental Indenture, dated as of November 12, 1984,
between Metropolitan and Seattle-First National Bank, Trustee
(Incorporated by Reference to Exhibit 4(d) to Registration No. 2-
95146).
</TABLE>
65
<PAGE>
(a) 3. Exhibits--(cont'd)
<TABLE>
<C> <S>
4.05 Third Supplemental Indenture, dated as of December 31, 1997,
between Metropolitan and First Trust (Incorporated by Reference to
Exhibit 4(d) to Metropolitan's Annual Report on Form 10-K for
fiscal 1997).
4.06 Amended Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series C (Incorporated by Reference
to Exhibit 4(g) to Registration No. 33-2699).
4.07 Statement of Rights, Designations and Preferences of Variable Rate
Preferred Stock, Series D (Incorporated by Reference to Exhibit
4(a) to Registration No. 33-25702).
4.08 Statement of Rights, Designations and Preferences of Variable Rate
Preferred Stock, Series E-1 (incorporated by Reference to Exhibit
4(a) to Registration No. 33-19238).
4.09 Amended Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series E-2 (Incorporated by
Reference to Exhibit 4(a) to Registration No. 33-25702).
4.10 Statement of Rights, Designations and Preferences of Variable Rate
Preferred Stock, Series E-3 (Incorporated by Reference to Exhibit
4(a) to Registration No. 33-32586).
4.11 Statement of Rights, Designations and Preference of Variable Rate
Cumulative Preferred Stock, Series E-4 (Incorporated by Reference
to Exhibit 4(h) to Registration No. 33-40221).
4.12 Form of Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series E-5 (Incorporated by
Reference to Exhibit 4(i) to Registration No. 33-57396).
4.13 Statement of Rights, Designations and Preferences of Variable Rate
Cumulative Preferred Stock, Series E-6 (Incorporated by Reference
to Exhibit 4(l) to Registration No. 33-51905).
4.14 Statement of Rights, Designations and Preferences of Variable Rate
Cumulative Preferred Stock, Series E-7 (Incorporated by Reference
to Exhibit 4(d) to Amendment 1 to Registration No. 333-19755).
9.01 Irrevocable Trust Agreement (Incorporated by Reference to Exhibit
9(b) to Registration No. 2-81359).
10.01 Employment Agreement between Metropolitan Mortgage and Securities
Co., Inc. and Bruce Blohowiak (Incorporated by Reference to
Exhibit 10(a) to Metropolitan's Annual Report on Form 10-K for
fiscal 1997).
10.02 Employment Agreement between Metropolitan Mortgage and Securities
Co., Inc. and Michael Kirk (Incorporated by Reference to Exhibit
10(b) to Metropolitan's Annual Report on Form 10-K for fiscal
1997).
10.03 Employment Agreement between Metropolitan Mortgage and Securities
Co., Inc. and Jon McCreary (Incorporated by Reference to Exhibit
10(c) to Metropolitan's Annual Report on Form 10-K for fiscal
1997).
10.04 Form of Reinsurance Agreement between Western United Life
Assurance Company and Old Standard Life Insurance Company
(Incorporated by Reference to Exhibit 10(d) to Metropolitan's
Annual Report on Form 10-K for fiscal 1998).
10.05 Employment Agreement between Metropolitan Mortgage and Securities
Co., Inc. and William D. Snider (Incorporated by Reference to
Exhibit 10(c) to Metropolitans Quarterly Report on Form 10-K for
the fiscal quarter ended June 30, 1999).
*11.01 Statement indicating computation of earnings per common share.
</TABLE>
66
<PAGE>
(a) 3. Exhibits--(cont'd)
<TABLE>
<C> <S>
*12.01 Statement regarding computation of ratios.
21.01 Subsidiaries of Registrant (Incorporated by Reference to Exhibit
21 to Metropolitan's Annual Report on Form 10-K for fiscal 1997).
*27.01 Financial Data Schedule.
</TABLE>
- --------
* Filed herewith.
(b) Reports on Form 8-K
Report on Form 8-K filed as of August 26, 1999.
67
<PAGE>
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.
By: _________________________________
C. Paul Sandifur, Jr.,
Chief Executive Officer
Date: December 29, 1999
POWER OF ATTORNEY
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. Chief Executive Officer, December 29, 1999
______________________________________ President and Director
C. Paul Sandifur, Jr.
/s/ Bruce J. Blohowiak Chief Operating Officer, December 29, 1999
______________________________________ Executive Vice President
Bruce J. Blohowiak and Director
/s/ William D. Snider Chief Financial Officer December 29, 1999
______________________________________
William D. Snider
/s/ Reuel Swanson Secretary and Director December 29, 1999
______________________________________
Reuel Swanson
/s/ Irv Marcus Director December 29, 1999
______________________________________
Irv Marcus
/s/ Harold Erfurth Director December 29, 1999
______________________________________
Harold Erfurth
/s/ John Trimble Director December 29, 1999
______________________________________
John Trimble
/s/ Charles H. Stolz Director December 29, 1999
______________________________________
Charles H. Stolz
</TABLE>
68
<PAGE>
Index to Consolidated Financial Statements
Years Ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Report of Independent Accountants...................................... F-1
Consolidated Balance Sheets............................................ F-2
Consolidated Statements of Income...................................... F-3
Consolidated Statements of Comprehensive Income........................ F-4
Consolidated Statements of Stockholders' Equity........................ F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7-F-52
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Metropolitan Mortgage & Securities Co., Inc. and its
subsidiaries (the "Company") at September 30, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1999 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedules listed in the index appearing under Item 14(a)(2) present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedules based on our
audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for mortgage-backed securities retained after
the securitization of mortgage loans held for sale in fiscal 1999.
/s/ PricewaterhouseCoopers LLP
-------------------------------------
PricewaterhouseCoopers LLP
Spokane, Washington
December 6, 1999
F-1
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Assets:
Cash and cash equivalents..................... $ 20,406,837 $ 31,733,362
Investments:
Trading securities, at market............... 45,013,522 55,865,875
Available-for-sale securities, at market.... 156,263,086 25,988,789
Held-to-maturity securities, at amortized
cost....................................... 66,441,407 83,036,525
Accrued interest on investments............. 1,855,352 1,646,527
-------------- --------------
Total cash and investments................ 289,980,204 198,271,078
-------------- --------------
Real estate contracts and mortgage notes
receivable, net, including real estate
contracts and mortgage notes receivable held
for sale of approximately $201,815,000 in
1999 and $159,855,000 in 1998................ 539,525,957 614,178,323
Real estate held for sale and development,
including foreclosed real estate received in
satisfaction of debt of $40,802,345 and
$44,506,871.................................. 85,747,433 89,713,967
-------------- --------------
Total real estate assets.................. 625,273,390 703,892,290
Less allowance for losses on real estate
assets....................................... (9,318,072) (11,000,618)
-------------- --------------
Net real estate assets.................... 615,955,318 692,891,672
-------------- --------------
Other receivable investments, net............. 174,707,840 200,773,533
-------------- --------------
Other assets:
Deferred costs, net......................... 66,339,586 71,262,489
Land, buildings and equipment, net.......... 26,342,123 25,889,102
Mortgage servicing rights, net.............. 10,898,621 6,292,375
Other assets, net, including receivables
from affiliates............................ 46,732,827 31,284,532
-------------- --------------
Total other assets........................ 150,313,157 134,728,498
-------------- --------------
Total assets.............................. $1,230,956,519 $1,226,664,781
============== ==============
Liabilities:
Life insurance and annuity reserves......... $ 795,744,055 $ 800,848,929
Debenture bonds and accrued interest........ 198,888,779 198,205,294
Advances under line of credit............... 62,908,030 118,342,972
Debt payable................................ 74,436,600 7,359,339
Accounts payable and accrued expenses,
including payable to affiliates............ 11,274,411 18,687,539
Deferred income taxes....................... 13,943,294 22,725,052
Minority interest in consolidated
subsidiaries............................... 2,056,887 1,738,887
-------------- --------------
Total liabilities.......................... 1,159,252,056 1,167,908,012
-------------- --------------
Commitments and contingencies (Notes 5, 11 and
12)
Stockholders' equity:
Preferred stock, (liquidation preference
$53,094,517 and $49,200,583)............... 19,099,294 19,454,071
Subordinate preferred stock, no par
Common stock, Class A, $2,250 par, 129 and
130 shares issued and outstanding.......... 291,167 293,417
Common stock, Class B, $2,250 par Additional
paid-in capital............................ 22,522,036 18,580,051
Accumulated other comprehensive loss........ (3,638,723) (680,619)
Retained earnings........................... 33,430,689 21,109,849
-------------- --------------
Total stockholders' equity................ 71,704,463 58,756,769
-------------- --------------
Total liabilities and stockholders'
equity................................... $1,230,956,519 $1,226,664,781
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Insurance premiums................ $ 2,700,000 $ 2,800,000 $ 3,000,000
Interest on receivables........... 49,417,826 50,997,190 55,645,799
Earned discount on receivables.... 21,092,324 25,288,312 21,848,947
Other investment income........... 21,720,696 15,937,128 17,323,222
Real estate sales................. 42,481,673 32,277,672 31,419,810
Fees, commissions, service and
other income..................... 8,488,571 6,832,513 4,697,766
Gains (losses) on investments,
net.............................. (5,499,995) 8,000,392 (494,877)
Gains on sales of receivables,
net.............................. 24,819,841 13,822,102 21,693,999
------------ ------------ ------------
Total revenues.................. 165,220,936 155,955,309 155,134,666
------------ ------------ ------------
Expenses:
Insurance policy and annuity
benefits......................... 45,558,102 48,098,422 50,454,970
Interest, net..................... 22,388,390 19,663,254 19,374,968
Cost of real estate sold.......... 39,635,685 30,579,511 31,669,166
Provision for losses on real
estate assets.................... 10,675,560 6,199,297 8,131,101
Salaries and employee benefits.... 23,269,895 18,415,723 13,762,940
Commissions to agents............. 7,483,464 8,171,329 7,743,437
Other operating and underwriting.. 6,790,716 6,337,089 6,932,014
Amortization of deferred costs,
net of costs capitalized......... 5,403,432 2,562,817 2,202,882
------------ ------------ ------------
Total expenses.................. 161,205,244 140,027,442 140,271,478
------------ ------------ ------------
Income before income taxes and
minority interest.................. 4,015,692 15,927,867 14,863,188
Income tax benefit (provision)...... 12,577,447 (5,475,416) (5,072,512)
------------ ------------ ------------
Income before minority interest..... 16,593,139 10,452,451 9,790,676
Income of consolidated subsidiaries
allocated to minority
stockholders....................... (318,000) (125,748) (122,365)
------------ ------------ ------------
Net income.......................... 16,275,139 10,326,703 9,668,311
Preferred stock dividends........... (3,641,721) (3,732,047) (4,112,988)
------------ ------------ ------------
Income applicable to common
stockholders....................... $ 12,633,418 $ 6,594,656 $ 5,555,323
============ ============ ============
Basic and diluted income per share
applicable to common stockholders.. $ 97,933 $ 50,728 $ 42,733
============ ============ ============
Weighted average number of shares of
common stock outstanding........... 129 130 130
============ ============ ============
</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 COMPREHENSIVE INCOME
for the years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income............................... $16,275,139 $10,326,703 $ 9,668,311
----------- ----------- -----------
Other comprehensive income (loss):
Change in unrealized gains (losses) on
investments........................... (4,560,564) (626,439) 1,096,745
Less deferred income tax provision
(benefit)............................. (1,602,460) (212,989) 372,891
----------- ----------- -----------
Net other comprehensive income (loss).. (2,958,104) (413,450) 723,854
----------- ----------- -----------
Comprehensive income..................... $13,317,035 $ 9,913,253 $10,392,165
=========== =========== ===========
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Additional Other
Preferred Common Paid-in Comprehensive Retained
Stock Stock Capital Loss Earnings Total
----------- -------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1996................... $21,518,198 $293,417 $16,791,670 $ (991,023) $ 8,731,070 $46,343,332
Net income.............. 9,668,311 9,668,311
Net change in unrealized
losses on available-
for-sale securities,
net of income tax
provision of $372,891.. 723,854 723,854
Cash dividends,
preferred (variable
rate).................. (4,112,988) (4,112,988)
Redemption and
retirement of preferred
stock (78,635 shares).. (786,346) (196,043) (982,389)
Sale of variable rate
preferred stock, net
(22,229 shares)........ 222,289 2,000,604 2,222,893
Contingent sales price
on subsidiary
previously sold to
related party.......... 249,721 249,721
----------- -------- ----------- ----------- ----------- -----------
Balance, September 30,
1997................... 20,954,141 293,417 18,596,231 (267,169) 14,536,114 54,112,734
Net income.............. 10,326,703 10,326,703
Net change in unrealized
losses on available-
for-sale securities,
net of income tax
benefit of $212,989.... (413,450) (413,450)
Cash dividends, common
($1,200 per share)..... (156,489) (156,489)
Cash dividends,
preferred (variable
rate).................. (3,732,047) (3,732,047)
Redemption and
retirement of preferred
stock (170,284
shares)................ (1,702,843) (1,841,144) (3,543,987)
Sale of variable rate
preferred stock, net
(20,277 shares)........ 202,773 1,824,964 2,027,737
Contingent sales price
on subsidiary
previously sold to
related party.......... 135,568 135,568
----------- -------- ----------- ----------- ----------- -----------
Balance, September 30,
1998................... 19,454,071 293,417 18,580,051 (680,619) 21,109,849 58,756,769
Net income.............. 16,275,139 16,275,139
Net change in unrealized
losses on available-
for-sale securities,
net of income tax
benefit of $1,602,460.. (2,958,104) (2,958,104)
Cash dividends, common
($2,400 per share)..... (312,578) (312,578)
Cash dividends,
preferred (variable
rate).................. (3,641,721) (3,641,721)
Redemption and
retirement of common
stock (1 share)........ (2,250) (150,696) (152,946)
Redemption and
retirement of preferred
stock (83,939 shares).. (839,392) (103,981) (943,373)
Sale of variable rate
preferred stock, net
(48,462 shares)........ 484,615 4,196,662 4,681,277
----------- -------- ----------- ----------- ----------- -----------
Balance, September 30,
1999................... $19,099,294 $291,167 $22,522,036 $(3,638,723) $33,430,689 $71,704,463
=========== ======== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income....................... $ 16,275,139 $ 10,326,703 $ 9,668,311
Adjustments to reconcile net
income to net cash from
operating activities:
Proceeds from sales of trading
securities...................... 6,538,788 7,961,675 102,065
Proceeds from maturities of
trading securities.............. 431,244 907,206
Acquisition of trading
securities...................... (47,912,064) (22,392,318) (15,423,102)
Earned discounts on
receivables..................... (21,092,324) (25,288,312) (21,848,947)
Gains on investments and
receivables, net................ (19,319,846) (21,822,494) (21,199,122)
(Gains) losses on sales of real
estate.......................... (2,845,988) (1,698,161) 249,356
Provision for losses on real
estate assets................... 10,675,560 6,199,297 8,131,101
Provision for losses on other
assets.......................... 21,000 72,000 42,995
Depreciation and amortization.... 5,353,717 4,496,663 6,738,395
Minority interests............... 318,000 125,748 122,365
Deferred income tax provision
(benefit)....................... (7,179,298) 695,274 4,067,586
Changes in assets and
liabilities:
Deferred costs, net............. 4,922,903 1,240,606 2,027,266
Life insurance and annuity
reserves....................... 40,877,478 44,490,782 46,638,177
Compound and accrued interest
on debentures.................. (281,937) (3,112,623) (3,094,352)
Securities sold, not owned...... (132,652,334)
Other assets.................... (19,025,842) 442,798 (4,686,779)
Accounts payable and accrued
expenses....................... (7,413,128) (426,815) 2,726,042
Other, net...................... (1,248,176) (2,350,659) (471,687)
------------- ------------- -------------
Net cash from operating
activities.................... (40,904,774) (132,630) (118,862,664)
------------- ------------- -------------
Cash flows from investing
activities:
Change in restricted cash and
cash equivalents................ 132,652,334
Principal payments on real estate
contracts and mortgage notes
receivable and other receivable
investments..................... 136,387,320 152,090,496 130,299,174
Proceeds from sales of real
estate contracts and mortgage
notes receivable and other
receivable investments.......... 642,838,824 229,397,266 390,425,927
Acquisition of real estate
contracts and mortgage notes
receivable...................... (617,643,225) (413,325,154) (317,169,828)
Acquisition of other receivable
investments..................... (36,386,892) (80,961,649) (72,853,425)
Proceeds from sales of real
estate.......................... 34,906,432 21,413,545 12,815,547
Proceeds from maturities of held-
to-maturity investments......... 16,704,422 30,530,666 10,919,094
Proceeds from maturities of
available-for-sale investments.. 15,572,964 8,752,353 12,222,624
Purchases of held-to-maturity
investments..................... (151,479) (99,625)
Proceeds from sales of available-
for-sale investments............ 11,295,790 1,769,954 22,556,364
Purchases of available-for-sale
investments..................... (113,666,443) (888,713) (49,021,401)
Purchases of and costs associated
with real estate held for sale
and development................. (17,106,964) (17,031,884) (22,765,164)
Retained mortgage servicing
rights.......................... (6,668,524) (2,613,144) (5,104,362)
Capital expenditures............. (2,214,419) (18,039,964) (1,989,246)
------------- ------------- -------------
Net cash from investing
activities.................... 63,867,806 (88,906,228) 242,888,013
------------- ------------- -------------
Cash flows from financing
activities:
Increase (decrease) in
borrowings...................... 22,617,308 120,899,347 (32,588,375)
Repayments of debt payable....... (11,520,594) (876,255) (2,614,991)
Receipts from life and annuity
products........................ 104,020,462 88,921,513 88,267,227
Withdrawals of life and annuity
products........................ (110,555,531) (135,346,826) (119,212,557)
Ceding of life and annuity
products to reinsurers.......... (39,447,283) (22,585,528) (27,689,967)
Issuance of debenture bonds...... 46,399,862 65,048,869 38,510,520
Repayment of debenture bonds..... (45,434,440) (48,944,640) (42,376,231)
Issuance of preferred stock...... 4,681,277 2,027,737 2,222,893
Redemption and retirement of
preferred stock................. (943,373) (3,543,987) (982,389)
Redemption and retirement of
common stock.................... (152,946)
Cash dividends................... (3,954,299) (3,888,536) (4,112,988)
Receipt of contingent sale price
for subsidiary sold to related
party........................... 135,568 249,721
------------- ------------- -------------
Net cash from financing
activities.................... (34,289,557) 61,847,262 (100,327,137)
------------- ------------- -------------
Net change in cash and cash
equivalents...................... (11,326,525) (27,191,596) 23,698,212
Cash and cash equivalents:
Beginning of year................ 31,733,362 58,924,958 35,226,746
------------- ------------- -------------
End of year...................... $ 20,406,837 $ 31,733,362 $ 58,924,958
============= ============= =============
</TABLE>
See Note 19 for supplemental cash flow information.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended September 30, 1999, 1998 and 1997
1. Summary of Significant Accounting Policies:
Business and Organization
Metropolitan Mortgage & Securities Co., Inc. (the "Company" and
"Metropolitan") was incorporated in the state of Washington in 1953.
Metropolitan engages, nationwide, in the business of acquiring, holding,
selling, originating and servicing receivables. These receivables include real
estate contracts and mortgage notes collateralized by first position liens on
residential real estate. Metropolitan also invests in receivables consisting
of real estate contracts and mortgage notes collateralized by second and lower
position liens, structured settlements, annuities, lottery prizes, leases and
other investments. The receivables collateralized by real estate are typically
non-conventional because they are originated as the result of seller financing
or they are originated by lenders who specialize in borrowers with impaired
credit histories or non-conventional properties. In addition to receivables,
the Company invests in U.S. Treasury obligations, mortgage- and asset-backed
securities, corporate bonds and other securities.
The Company invests in receivables and securities using funds generated from
the sale and securitization of receivables, collateralized borrowings,
receivable cash flows, the sale of annuities, debentures and preferred stock,
the sale of real estate and securities portfolio earnings.
Metropolitan provides receivable acquisition, management and collection
services, for a fee, to its subsidiaries and affiliates (see Note 21).
Metropolitan owns various properties acquired through foreclosure and other
sources. These properties are held for sale or development.
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.
Metropolitan's significant subsidiaries include Western United Life Assurance
Company ("Western"), a life insurance company, Consumers Group Holding Co.,
Inc., a holding company and shareholder of Consumers Insurance Co., Inc., an
inactive property and casualty insurer, and Metwest Mortgage Services, Inc., a
mortgage loan originator and servicer. Minority interest represents minority
stockholders' proportionate share of the equity in the Company's consolidated
subsidiaries. All significant intercompany transactions and balances have been
eliminated in consolidation.
Cash and Cash Equivalents
Cash includes all balances on deposit in banks and financial institutions.
The Company considers all highly-liquid debt instruments purchased with a
remaining maturity of three months or less to be cash equivalents.
Substantially all cash and cash equivalents are on deposit with one financial
institution and balances often exceed the federal insurance limit. The Company
periodically evaluates the credit quality of these banks and financial
institutions.
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-7
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Trading Securities: Trading securities consist primarily of mortgage- and
asset-backed securities and are recorded at market value. Realized and
unrealized gains and losses on these securities are included in the
consolidated statements of income.
Available-for-Sale Securities: Available-for-sale securities, consisting
primarily of government-backed bonds, corporate bonds, mortgage- and asset-
backed securities and equity securities, are carried at quoted and
estimated market values. Unrealized gains and losses on these securities
are presented as accumulated other comprehensive income or loss, net of
related deferred income taxes. Restricted equity securities represent the
Company's investment in the common stock of the Federal Home Loan Bank of
Seattle ("FHLB Seattle"). This stock may only be sold to FHLB Seattle or to
another member institution; therefore, it is restricted and is carried at
cost.
Held-to-Maturity Securities: Held-to-maturity securities, consisting
primarily of government-backed, corporate and 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.
The Company initially records residual interests from securitization
transactions at their allocated cost based upon the present value of the
interest in the cash flows retained by the Company after considering various
economic factors, including interest rates, collateral value and estimates of
the value of future cash flows using expected loss and prepayment assumptions,
discounted at a market yield. The fair value of these securities is determined
based on interest rates, actual prepayment rates, collateral value and
historical default rates experienced by the securities.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise" which requires that after the securitization
of mortgage loans held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other retained
interests based on its ability and intent to sell or hold those investments.
This Statement conforms the subsequent accounting for securities retained
after the securitization of mortgage loans by a mortgage banking enterprise
with the subsequent accounting for securities retained after the
securitization of other types of assets by a non-mortgage banking enterprise.
This Statement was effective for the first fiscal quarter beginning after
December 15, 1998. On January 1, 1999, the Company adopted this new standard
and reclassified approximately $46.3 million of securities that were retained
after securitizations from trading securities to available-for-sale
securities.
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, publicly traded bond or mortgage- or asset-backed security 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-8
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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 on an individual
contract basis using the level yield (interest) method over the remaining
contractual term of the 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 receivable. 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 during the period held for sale. 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 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 held for sale and development 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 (net unpaid receivable carrying value).
Project costs, including interest, associated with the development of real
estate are capitalized and included in the cost basis of the real estate.
Occasionally, 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.
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.
F-9
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 receivable investments 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.
Deferred Costs
Deferred policy acquisition costs, consisting of commissions to agents and
other insurance underwriting and annuity policy costs, are deferred. Costs
that are estimated not to be recoverable from surrender charges are amortized
as a constant percentage of the estimated gross realized and unrealized
profits associated with the policies in force.
Debenture issuance costs, including commissions to sales representatives and
other issuance costs, are deferred. These costs are amortized over the
expected term of the related debenture bond, which ranges from 6 months to 5
years, using the interest method.
Changes in the amount or timing of estimated gross profits on policies in
force or the expected term of debenture bonds will result in adjustments to
the related 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 expensed 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.
Mortgage Servicing Rights
Mortgage servicing rights are recorded at the lower of cost or the present
value of future net servicing cash flows. Such rights are amortized in
proportion to and over the period of expected net servicing income.
F-10
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management periodically evaluates the estimates and assumptions used in
determining the carrying values of mortgage servicing rights and the
amortization thereon. Such carrying values are reduced to estimated future
discounted net servicing cash flows when the valuation indicates the carrying
value is impaired. For purposes of measuring impairment, the rights are
stratified based primarily on remaining term, prepayment and interest rate
risks. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights for a stratum exceed their fair value.
As a result of increased prepayment experience, the carrying value of mortgage
servicing rights could be reduced in the near term.
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, 1999, total
enhancement costs of approximately $8,814,000 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.
Accumulated amortization of these costs was $5,048,000 and $3,905,000 at
September 30, 1999 and 1998, respectively. Due to technological advancements,
it is reasonably possible that the remaining estimated useful lives could
change in the near term.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides
guidance on accounting for the costs of internal-use computer software. SOP
98-1 is effective for fiscal years beginning after December 15, 1998. The
Company does not believe that the application of this Statement will have a
material effect on its financial statements.
Policy Loans
Policy loans are carried at the unpaid principal balance of the loans and
are included in other assets on the consolidated balance sheet.
Life Insurance and Annuity Reserves
Premiums for universal life insurance contracts and annuities are reported
as life insurance and annuity reserves under the deposit method. Reserves for
universal 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 Life Insurance and Annuity Revenues
Revenues for universal life contracts are recognized upon assessment. These
revenues consist of charges to policyholders, primarily for mortality expenses
and surrender charges. Revenues related to annuity contracts are recognized
over the estimated policy term. 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-11
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Guaranty Fund Assessments
The Company's life insurance subsidiary is subject to insurance guaranty
laws in the states in which it writes premiums. 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, 1999 and 1998, the Company has accrued an
estimated liability for guaranty fund assessments for known insolvencies net
of estimated recoveries through premium tax offsets. As a result of future
insolvencies or changes in the assessment of known insolvencies, the guaranty
fund liability could change in the near term.
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments ("SOP 97-3"). SOP 97-3 applies
to all entities that are subject to guaranty fund and other insurance-related
assessments. Assessments covered by this SOP include any charge mandated by
statute or regulatory authority that is related directly or indirectly to
underwriting activities (including self-insurance), except for income taxes
and premium taxes. SOP 97-3 is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company does not believe that the
application of SOP 97-3 will have a material effect on its consolidated
financial statements.
Interest Costs
Interest costs associated with the development of real estate projects are
capitalized. During the years ended September 30, 1999, 1998 and 1997, the
Company capitalized interest of $935,735, $611,144 and $520,969, 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
expected future income tax consequences of events that have been recognized in
the financial statements. Deferred tax assets and liabilities are recognized
based on the temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities 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.
Income Per Share
Income per share--basic is computed by dividing income applicable to common
stockholders by the weighted-average number of common shares outstanding
during the period. Income per share--diluted is computed by dividing income
applicable to common stockholders by the weighted-average number of common
shares outstanding increased by the additional common shares that would have
been outstanding if potentially dilutive common shares had been issued. There
were no potentially dilutive common shares outstanding during any of the three
years in the period ended September 30, 1999.
Comprehensive Income
During the year ended September 30, 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes
F-12
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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. Prior years financial statements have been
reclassified to conform to this Statement.
Reclassification adjustments, representing the net gains (losses) on
available-for-sale securities that were realized during the period, net of
related deferred income taxes, were as follows:
<TABLE>
<CAPTION>
Year Ended
September 30,
-------------
<S> <C>
1999.............................................................. $ 48,619
1998.............................................................. 16,779
1997.............................................................. 315,223
</TABLE>
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 Company also purchases collateralized mortgage obligations, and
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.
The Company uses future contracts to hedge against interest rate risk
arising from real estate contracts and mortgage notes receivable held for
sale. Gains and losses on interest rate futures are deferred and included in
the carrying value of the related hedged assets. The unrealized gains and
losses are amortized over the estimated lives of the related assets as a yield
adjustment. Upon settlement of the assets being hedged, deferral accounting is
discontinued and the resultant gain or loss is realized in operations. At
September 30, 1999, the Company had open hedge positions on 1,000 futures
contracts on U.S. treasury notes with a notional value of approximately $130
million, resulting in deferred gains of approximately $495,000, which were
used to hedge interest rate risk on real estate contracts and mortgage notes
receivable that were held for sale.
Unrealized gains or losses associated with financial future contracts that
meet the hedge criteria 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.
In fiscal 1996, the Company sold U.S. Treasury securities, which it did not
own, to provide an economic hedge for the anticipated securitization of real
estate contracts and mortgage notes receivable which was completed in November
1996. At September 30, 1996, the Company was obligated to deliver U.S.
Treasury securities with a market value of approximately $132,652,000. During
the year ended September 30, 1996, the Company recognized a loss of
approximately $820,000 associated with this obligation. The Company recognized
an additional loss of approximately $1,680,000 during the year ended September
30, 1997 upon delivery of the securities.
F-13
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), was issued. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of Effective Date of SFAS 133" ("SFAS No. 137"), was
issued. SFAS No. 137 amends SFAS No. 133 to become effective for all quarters
of fiscal years beginning after June 15, 2000; however, earlier application is
encouraged as of the beginning of any fiscal quarter. The Company has not yet
determined the effect of the implementation of SFAS No. 133 on its financial
statements.
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, 2000,
approximately $794,000,000 of the Company's financial liabilities will reprice
or mature as compared to approximately $486,000,000 of its financial assets,
resulting in a mismatch of approximately $308,000,000. 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 83% 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 1998 and 1997 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-14
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Investments:
A summary of carrying and estimated market values of investments at
September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market Values
Trading Costs Gains Losses (Carrying Values)
------- ------------ ---------- ----------- -----------------
<S> <C> <C> <C> <C>
Mortgage- and asset-
backed securities...... $ 44,531,376 $ 666,952 $ (727,182) $ 44,471,146
Equity securities....... 410,628 131,748 542,376
------------ ---------- ----------- ------------
Totals................ $ 44,942,004 $ 798,700 $ (727,182) $ 45,013,522
============ ========== =========== ============
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market Values
Available-for-Sale Costs Gains Losses (Carrying Values)
------------------ ------------ ---------- ----------- -----------------
<S> <C> <C> <C> <C>
Government-backed
bonds.................. $ 6,787,536 $ 5,489 $ (55,562) $ 6,737,463
Corporate bonds......... 7,087,072 1,633 (136,384) 6,952,321
Mortgage- and asset-
backed securities...... 144,821,834 1,155,032 (6,117,754) 139,859,112
------------ ---------- ----------- ------------
Total fixed maturities.. 158,696,442 1,162,154 (6,309,700) 153,548,896
Equity securities
(restricted)........... 2,695,492 18,698 2,714,190
------------ ---------- ----------- ------------
Totals................ $161,391,934 $1,180,852 $(6,309,700) $156,263,086
============ ========== =========== ============
<CAPTION>
Amortized
Costs Gross Gross
(Carrying Unrealized Unrealized Estimated
Held-to-Maturity Values) Gains Losses Market Values
---------------- ------------ ---------- ----------- -----------------
<S> <C> <C> <C> <C>
Government-backed
bonds.................. $ 47,781,755 $ 435,541 $(1,750,039) $ 46,467,257
Corporate bonds......... 2,998,397 (8,529) 2,989,868
Utility bonds........... 999,443 (28,743) 970,700
Mortgage- and asset-
backed securities...... 14,661,812 414,710 (244,512) 14,832,010
------------ ---------- ----------- ------------
Totals................ $ 66,441,407 $ 850,251 $(2,031,823) $ 65,259,835
============ ========== =========== ============
</TABLE>
F-15
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market Values
Trading Costs Gains Losses (Carrying Values)
------- ----------- ---------- ----------- -----------------
<S> <C> <C> <C> <C>
Mortgage- and asset-
backed securities...... $48,393,152 $7,720,384 $ (247,661) $55,865,875
=========== ========== =========== ===========
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market Values
Available-for-Sale Costs Gains Losses (Carrying Values)
------------------ ----------- ---------- ----------- -----------------
<S> <C> <C> <C> <C>
Government-backed
bonds.................. $ 9,749,745 $ 101,756 $ 9,851,501
Corporate bonds......... 10,124,513 118,930 $ (1,026) 10,242,417
Mortgage- and asset-
backed securities...... 6,609,314 270,040 (988,537) 5,890,817
----------- ---------- ----------- -----------
Total fixed maturities.. 26,483,572 490,726 (989,563) 25,984,735
Equity securities....... 1,592 2,462 4,054
----------- ---------- ----------- -----------
Totals................ $26,485,164 $ 493,188 $ (989,563) $25,988,789
=========== ========== =========== ===========
<CAPTION>
Amortized
Costs Gross Gross
(Carrying Unrealized Unrealized Estimated
Held-to-Maturity Values) Gains Losses Market Values
---------------- ----------- ---------- ----------- -----------------
<S> <C> <C> <C> <C>
Government-backed
bonds.................. $48,497,962 $2,714,507 $(1,287,443) $49,925,026
Corporate bonds......... 2,995,502 13,774 3,009,276
Utility bonds........... 999,273 3,835 1,003,108
Mortgage- and asset-
backed securities...... 30,543,788 2,409,071 (494,248) 32,458,611
----------- ---------- ----------- -----------
Totals................ $83,036,525 $5,141,187 $(1,781,691) $86,396,021
=========== ========== =========== ===========
</TABLE>
All bonds and mortgage- and asset-backed securities held at September 30,
1999 were performing in accordance with their terms.
During the year ended September 30, 1999, in accordance with Statement of
Financial Accounting Standards No. 134, the Company reclassified trading
securities with a carrying value of approximately $46.3 million to the
available-for-sale classification. The reclassified securities were
consistently carried at estimated fair value. However, future changes in
estimated fair value will be recorded as a component of accumulated other
comprehensive income (loss) rather than being recognized in operations.
Proceeds from sales of available-for-sale securities during the years ended
September 30, 1999, 1998 and 1997 were $11,295,790, $1,769,954 and
$22,556,364, respectively, which resulted in gross realized gains of $74,798,
$39,964 and $498,208 and gross realized losses of $0, $14,727 and $20,598
during each respective year.
During the year ended September 30, 1998, the Company determined that
certain available-for-sale and held-to-maturity asset-backed securities had an
other than temporary impairment in value. Accordingly, the carrying value of
the securities was decreased by approximately $819,000, representing the
amount permanently impaired, through a charge to operations.
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 was recognized in accumulated other comprehensive loss.
F-16
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended September 30, 1995, the Company entered into financial
futures contracts to hedge its interest rate risk on certain held-to-maturity
debt securities with remaining contractual terms of approximately eight years
against a potential increase in interest rates. Interest rates declined,
resulting in a realized loss of $1,600,000 associated with such contracts. The
hedging loss has been deferred and is being amortized over the contractual
term of the hedged debt securities using the interest method. The remaining
unamortized hedging loss at September 30, 1999 and 1998 was approximately
$854,000 and $1,046,000, respectively.
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, 1999, the remaining
unamortized loss of approximately $254,000, net of deferred income taxes, is
reported in accumulated other comprehensive loss.
The activity related to the certain mortgage-backed securities, which
represent the Company's residual interests from securitization transactions,
for the years ended September 30, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Carrying value,
beginning of year...... $ 24,471,211 $18,809,877 $ 3,873,740
Securities
resecuritized.......... (17,842,015)
Securities retained..... 22,346,212 5,184,816 11,050,818
Sales................... (4,953,937)
Remittances............. (2,395,473) (1,561,191) (170,412)
Investment income....... 4,325,890 2,941,646 3,005,731
Fair market value
adjustments............ 900,000 4,050,000 1,050,000
------------ ----------- -----------
Carrying value, end of
year................... $ 31,805,825 $24,471,211 $18,809,877
============ =========== ===========
</TABLE>
Although the Company believes it has made reasonable estimates of the fair
value of the residual interests likely to be realized, the rate of prepayments
and the amount of defaults utilized by the Company are estimates and actual
experience may vary. Higher than anticipated rates of prepayments or losses
would require the Company to reduce the fair value of the residual interests.
The Company estimates prepayment rates and defaults based upon the seasoning
of its existing securitization receivable portfolio and historical experience.
As of September 30, 1999 and 1998, the Company's underlying assumptions used
in determining the fair value of its residual interests are as follows:
Estimated annual prepayment rate: 14.0% based on actual experience;
Constant default rate assumption: 1.00% to 1.25% of the outstanding
securitized pool;
Annual discount rate: 12.0% to 15.0% per annum to determine the present
value of cash flows from mortgage-backed securities.
Through September 30, 1999, actual cash flows from the Company's
securitization trusts have approximated management's expectations.
During the year ended September 30, 1999, the Company participated in a
resecuritization of certain of its residual interests. The carrying value of
the residual interests that were contributed by the Company was $17,842,015.
The residual interests were restructured and a class was created, which was
assigned a credit rating.
F-17
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following individual investments (excluding U.S. government bonds) held
by the Company at September 30, 1999 and 1998, were in excess of ten percent
of stockholders' equity.
<TABLE>
<CAPTION>
Carrying
Issuer Amount
------ -----------
<S> <C>
1999:
Mortgage- and asset-backed securities:
Metropolitan Asset Funding, Inc............................. $48,503,362
GreenTree Home Improvement.................................. 18,817,197
Metropolitan Trust I........................................ 18,470,966
Conti Mortgage Home Equity.................................. 14,849,053
Saxen Asset Securities Trust................................ 9,126,639
1998:
Mortgage- and asset-backed securities:
Metropolitan Asset Funding, Inc............................. $47,613,828
Residential Funding Mortgage Securities..................... 11,658,090
Chase Mortgage Finance Corp................................. 7,141,308
Tryon Mortgage Funding, Inc................................. 7,071,011
</TABLE>
The amortized costs and estimated market values of available-for-sale and
held-to-maturity debt securities at September 30, 1999, 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.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
------------ ------------
<S> <C> <C>
Available-for-sale debt securities:
Due in one year or less......................... $ 4,810,055 $ 4,814,269
Due after one year through five years........... 9,064,553 8,875,515
------------ ------------
13,874,608 13,689,784
Mortgage- and asset-backed securities........... 144,821,834 139,859,112
------------ ------------
$158,696,442 $153,548,896
============ ============
Held-to-maturity debt securities:
Due in one year or less......................... $ 2,998,396 $ 2,989,868
Due after one year through five years........... 48,642,107 47,294,590
Due after five years through ten years.......... 106,929 111,218
------------ ------------
51,747,432 50,395,676
Mortgage- and asset-backed securities........... 14,661,812 14,832,010
------------ ------------
$ 66,409,244 $ 65,227,686
============ ============
</TABLE>
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.
F-18
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Real Estate Contracts and Mortgage Notes Receivable:
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,
1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Face value of discounted receivables........... $438,837,770 $509,735,611
Face value of originated receivables........... 104,080,881 113,815,526
Unrealized discounts, net of unamortized
acquisition costs............................. (13,416,777) (19,729,926)
Accrued interest receivable.................... 10,024,083 10,357,112
------------ ------------
Carrying value................................. $539,525,957 $614,178,323
============ ============
</TABLE>
The originated receivables are collateralized primarily by first position
liens and result from loans made by the Company, some of which were made to
facilitate the sale of its repossessed property.
At September 30, 1999, the Company held first position liens associated with
real estate contracts and mortgage notes receivable with a face value of
approximately $530,800,000 (98% of its total portfolio) and second or lower
position liens of approximately $12,100,000 (2% of its total portfolio).
Real estate contracts and mortgage notes receivable include mortgages
collateralized by property located throughout the United States. The Company's
real estate contracts and mortgage notes receivable at September 30, 1999 and
1998 are collateralized by property concentrated in the following geographic
areas:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Pacific Northwest (Washington, Oregon, Idaho, Alaska and
Montana)....................................................... 29% 29%
Pacific Southwest (California, Arizona and Nevada).............. 22 24
Southwest (Texas and New Mexico)................................ 13 13
Southeast (Florida, North Carolina, Georgia and South
Carolina)...................................................... 11 10
North Atlantic (New York, New Jersey, Maryland, Pennsylvania,
and Connecticut)............................................... 8 9
Other........................................................... 17 15
--- ---
100% 100%
=== ===
</TABLE>
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 and are grouped by the following
dollar ranges:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Under $15,001...................................... $ 23,642,684 $ 27,541,407
$15,001 to $40,000................................. 122,736,795 142,915,848
$40,001 to $80,000................................. 147,626,046 170,017,120
$80,001 to $150,000................................ 115,545,605 141,183,526
Greater than $150,000.............................. 133,367,521 141,893,236
------------ ------------
$542,918,651 $623,551,137
============ ============
</TABLE>
F-19
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At September 30, 1999, the Company had 114 receivables aggregating
approximately $62,000,000 which had face values in excess of $300,000. No
individual receivable is in excess of 0.4% of the total carrying value of real
estate contracts and mortgage notes receivable.
Contractual interest rates on the face value of the Company's real estate
contracts and mortgage notes receivable as of September 30, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Less than 8.00%.................................... $ 69,156,085 $ 70,506,544
8.00% to 8.99%..................................... 114,742,912 134,222,504
9.00% to 9.99%..................................... 132,866,299 165,119,985
10.00% to 10.99%................................... 149,748,690 155,222,027
11.00% to 11.99%................................... 36,724,112 48,270,590
12.00% to 12.99%................................... 21,806,435 31,954,168
13% or higher...................................... 17,874,118 18,255,319
------------ ------------
$542,918,651 $623,551,137
============ ============
</TABLE>
Contractual interest rates for 94% of the face value of receivables fall
within a range from 6% to 13% per annum, and less than 9% of the receivables
are subject to variable interest rates. The weighted average contractual
interest rate on these receivables at September 30, 1999 and 1998 is
approximately 9.4%. Maturity dates range from 1999 to 2029.
The principal amount of receivables with required principal or interest
payments being in arrears for more than three months was approximately
$30,000,000 and $34,000,000 at September 30, 1999 and 1998, respectively.
Sales of receivables with net carrying values of approximately $55,656,000,
$26,759,000 and $106,885,000 were sold without recourse to various financial
institutions resulting in gains of approximately $60,000, $989,000 and
$2,243,000 in fiscal 1999, 1998 and 1997, respectively.
Aggregate amounts of contractual maturities of receivables at their face
value are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
September 30,
------------------
<S> <C>
2000.......................................................... $ 25,619,000
2001.......................................................... 21,335,000
2002.......................................................... 21,842,000
2003.......................................................... 24,298,000
2004.......................................................... 27,445,000
Thereafter.................................................... 422,379,651
------------
$542,918,651
============
</TABLE>
Actual repayments of receivables will likely differ from contractual amounts
due to prepayments.
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, 1999, 1998 and 1997. The Company participates in these
securitization transactions with its subsidiaries and affiliates. These
F-20
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
receivables are structured in classes by credit rating and transferred to a
trust, which sells mortgage-backed securities 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, 1999, 1998 and 1997, proceeds from
securitization transactions were approximately $530,040,000, $167,809,000 and
$273,539,000, respectively, and resulted in gains of approximately
$21,459,000, $10,502,000 and $19,414,000, respectively. The gains realized
during the years ended September 30, 1999, 1998 and 1997 included
approximately $6,591,000, $2,463,000 and $4,642,000, respectively, associated
with the estimated fair value of the mortgage servicing rights retained on the
pool. The fair value of these rights was determined based on the estimated
present value of future net servicing cash flows, including float interest and
late fees, adjusted for anticipated prepayments. 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 subordinate classes of the securities having an estimated fair value
of approximately $99,596,000 and $49,484,000 at September 30, 1999 and 1998,
respectively.
F-21
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
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, 1999 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 $ 17,000 $ 51,900
Alaska.................. 60,000 $ 80,790 140,790
Arizona................. 294,598 680,645 113,173 1,088,416
Arkansas................ 212,175 212,175
California.............. 560,644 1,297,425 $ 1,264,248 309,500 3,431,817
Colorado................ 167,500 167,500
Connecticut............. 209,567 65,202 274,769
Delaware................ 56,000 56,000
District of Columbia.... 120,000 120,000
Florida................. 767,150 1,568,972 262,500 21,000 2,619,622
Georgia................. 208,435 208,435
Hawaii.................. 54,015 3,437,890 635,249 4,127,154
Idaho................... 13,749 848,525 139,412 1,001,686
Illinois................ 53,000 53,000
Indiana................. 248,693 248,693
Iowa.................... 19,060 19,060
Kansas.................. 64,900 64,900
Kentucky................ 17,941 17,941
Maine................... 72,367 72,367
Maryland................ 87,728 363,768 451,496
Massachusetts........... 88,000 88,000
Michigan................ 367,402 95,675 463,077
Minnesota............... 126,000 126,000
Missouri................ 344,912 29,000 373,912
Montana................. 49,850 239,605 289,455
Nebraska................ 39,910 39,910
Nevada.................. 257,190 257,190
New Hampshire........... 98,000 98,000
New Jersey.............. 39,015 343,579 138,122 230,829 751,545
New Mexico.............. 78,684 572,862 651,546
New York................ 147,625 496,549 $25,000 1,392,499 79,111 2,140,784
North Carolina.......... 194,194 194,194
Ohio.................... 57,660 57,660
Oklahoma................ 16,944 18,000 34,944
Oregon.................. 233,000 408,843 641,843
Pennsylvania............ 6,500 513,832 520,332
Rhode Island............ 138,286 224,286 362,572
South Carolina.......... 223,102 223,102
Tennessee............... 39,900 39,900
Texas................... 1,102,353 193,920 1,296,273
Utah.................... 140,057 306,679 446,736
Vermont................. 13,836 166,405 180,241
Virginia................ 24,610 86,000 110,610
Washington.............. 40,644,390 1,564,333 19,537,112 120,168 61,866,003
West Virginia........... 23,160 23,160
Wyoming................. 42,723 42,723
----------- ----------- ------- ----------- ---------- -----------
Balances at September
30, 1999............... $43,123,212 $13,825,867 $25,000 $26,491,744 $2,281,610 $85,747,433
=========== =========== ======= =========== ========== ===========
Balances at September
30, 1998............... $49,385,349 $14,526,909 $97,653 $19,063,019 $6,641,037 $89,713,967
=========== =========== ======= =========== ========== ===========
</TABLE>
F-22
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At September 30, 1999, the Company had approximately $61,900,000 invested in
real estate development projects and approximately $926,000 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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Beginning balance.................... $ 11,000,618 $12,327,098 $10,192,584
Provisions........................... 10,675,560 6,199,297 8,131,101
Charge-offs.......................... (12,358,106) (7,525,777) (5,996,587)
------------ ----------- -----------
Ending balance....................... $ 9,318,072 $11,000,618 $12,327,098
============ =========== ===========
</TABLE>
At September 30, 1999 and 1998, the net investment in real estate contracts
and mortgage notes receivable for which impairment has been recognized was
approximately $3,408,000 and $1,992,000, respectively, of which approximately
$489,000 and $362,000, 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, 1999, 1998 and 1997, the average
recorded investment in impaired receivables was approximately $2,403,000,
$1,732,000 and $1,663,000, respectively. Interest income of approximately
$226,000, $163,000 and $156,000 was recognized on these receivables during the
years ended September 30, 1999, 1998 and 1997, respectively, during the period
in which they were impaired, which was fully provided for in the allowance for
losses on real estate assets.
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, 1999 and
1998 was approximately 9.39% and 9.03%, respectively. Maturity dates range
from 1999 to 2026.
The following is a reconciliation of the face value of the other receivable
investments to the Company's carrying value at September 30, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Face value of receivables..................... $266,442,653 $ 318,756,442
Unrealized discounts, net of unamortized
acquisition costs............................ (91,734,813) (117,982,909)
------------ -------------
Carrying value................................ $174,707,840 $ 200,773,533
============ =============
</TABLE>
Substantially all such receivables were performing in accordance with their
contractual terms at September 30, 1999.
F-23
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the years ended September 30, 1999, 1998 and 1997, the Company sold
or securitized approximately $47,067,000, $31,623,000 and $7,722,000,
respectively, of these receivables without recourse and recognized gains of
approximately $2,975,000, $2,218,000 and $37,000, respectively.
The following other receivable investments, by issuer, were in excess of ten
percent of stockholders' equity at September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Aggregate
Carrying
Issuer Amount
------ -----------
<S> <C>
1999:
WULA Trust Lotteries.......................................... $28,952,903
California State Agency....................................... 19,438,773
Met Trust Lotteries........................................... 18,793,835
Arizona State Agency.......................................... 10,777,158
Pennsylvania State Agency..................................... 8,153,696
New York State Agency......................................... 7,947,511
Colorado State Agency......................................... 7,861,678
1998:
California State Agency....................................... $21,757,390
New York State Agency......................................... 15,822,029
Arizona State Agency.......................................... 11,015,505
New Jersey State Agency....................................... 10,492,977
Pennsylvania State Agency..................................... 8,813,126
Colorado State Agency......................................... 8,002,035
Tri-State Agency.............................................. 7,451,919
Oregon State Agency........................................... 6,991,363
</TABLE>
Aggregate amounts of contractual maturities of other receivable investments
to be received at their face values are approximately as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
September 30,
------------------
<S> <C>
2000.......................................................... $ 34,288,000
2001.......................................................... 30,694,000
2002.......................................................... 29,857,000
2003.......................................................... 25,394,000
2004.......................................................... 25,165,000
Thereafter.................................................... 121,044,653
------------
$266,442,653
============
</TABLE>
F-24
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
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, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Policy Debenture
Acquisition Issuance Total
----------- ---------- -----------
<S> <C> <C> <C>
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
Deferred during the year:
Commissions............................. 4,434,324 2,412,994 6,847,318
Other expenses.......................... 3,002,859 374,760 3,377,619
----------- ---------- -----------
Total deferred............................ 77,167,185 5,560,847 82,728,032
Amortized during the year................. (10,000,000) (1,465,543) (11,465,543)
----------- ---------- -----------
Balance at September 30, 1998............. 67,167,185 4,095,304 71,262,489
Deferred during the year:
Commissions............................. 3,134,166 1,418,480 4,552,646
Other expenses.......................... 2,462,402 626,657 3,089,059
----------- ---------- -----------
Total deferred............................ 72,763,753 6,140,441 78,904,194
Amortized during the year................. (11,000,000) (1,564,608) (12,564,608)
----------- ---------- -----------
Balance at September 30, 1999............. $61,763,753 $4,575,833 $66,339,586
=========== ========== ===========
</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.
9. Land, Buildings and Equipment:
Land, buildings, equipment and related accumulated depreciation at September
30, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land............................................... $ 2,778,274 $ 2,778,274
Buildings and improvements......................... 21,534,349 20,786,169
Furniture and equipment............................ 15,608,163 14,142,554
----------- -----------
39,920,786 37,706,997
Less accumulated depreciation...................... (13,578,663) (11,817,895)
----------- -----------
$26,342,123 $25,889,102
=========== ===========
</TABLE>
F-25
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended September 30, 1998, the Company acquired a new
corporate headquarters building in Spokane, Washington for a purchase price of
approximately $11.7 million. Additionally, the Company incurred approximately
$4.5 million of capital expenditures for the renovation of the new corporate
headquarters building.
10. Mortgage Servicing Rights:
The following is an analysis of the mortgage servicing rights activity for
the years ended September 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Beginning balance......................... $ 6,292,375 $5,767,607 $1,524,551
Additions................................. 6,668,524 2,613,144 5,104,362
Amortization and valuation adjustments.... (2,062,278) (2,088,376) (861,306)
----------- ---------- ----------
Ending balance............................ $10,898,621 $6,292,375 $5,767,607
=========== ========== ==========
</TABLE>
The servicing of securitized pools of receivables are subject to "Pooling
and Servicing Agreements." In accordance with the terms of the various
agreements, the Company collects payments from the individual borrowers and
remits such payments to the trustee of the pool. The Company is obligated to
make cash advances with respect to delinquent principal and interest payments
on any receivable to the extent that the Company determines the advances to be
recoverable. Subject to certain conditions, the Company has the option to
purchase from the mortgage pool any receivable which is 90 days or more
delinquent or to sell any receivable in a commercially reasonable manner if
such a sale would produce a greater recovery than the liquidation of the
mortgaged property.
As compensation for its services, the Company is entitled to retain, from
amounts collected on the receivables, service fees that range from .50% to
.75% per annum of the scheduled principal balance of the receivable pool as of
the first day of the month. The agreements also entitle the Company to receive
all late payment fees, prepayment penalties, assumption fees and other similar
charges and all investment income earned on amounts collected prior to their
remittance to the trustee or other third party.
11. Life Insurance and Annuity Reserves:
Life insurance and annuity reserves are based upon contractual amounts due
to the policy holder, including credited interest. Annuity contract interest
rates ranged from 4.45% to 9.85%, 4.35% to 9.85% and 4.35% to 10.10% during
the years ended September 30, 1999, 1998 and 1997, respectively. Interest
assumptions used to compute life insurance reserves ranged from 4.5% to 6.5%
during each of the years ended September 30, 1999, 1998 and 1997.
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's life insurance subsidiary to recover defined
portions of losses from claims on life insurance policies issued. The
reinsured risks are treated as though they are risks for which the Company's
life insurance subsidiary is not liable.
The Company's life insurance subsidiary has ceded a portion of its annuity
reserves and related premiums to Old Standard Life Insurance Company ("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.
F-26
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of reinsurance transactions ceded to OSL and
other reinsurers as of and for the years ended September 30, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
Direct Ceded to Ceded to Net
Amount OSL Others Amount
------------ ------------ --------- ------------
<S> <C> <C> <C> <C>
As of and for the year
ended September 30, 1999:
Insurance and annuity
premiums................ $151,792,940 $(44,746,374) $(326,104) $106,720,462
============ ============ ========= ============
Insurance policy and
annuity benefits........ $ 50,759,328 $ (5,048,993) $(152,233) $ 45,558,102
============ ============ ========= ============
Life insurance and
annuity reserves........ $893,144,042 $(97,232,653) $(167,334) $795,744,055
============ ============ ========= ============
As of and for the year
ended September 30, 1998:
Insurance and annuity
premiums................ $117,493,155 $(25,448,538) $(323,104) $ 91,721,513
============ ============ ========= ============
Insurance policy and
annuity benefits........ $ 50,076,969 $ (1,842,891) $(135,656) $ 48,098,422
============ ============ ========= ============
Life insurance and
annuity reserves........ $853,785,512 $(52,787,226) $(149,357) $800,848,929
============ ============ ========= ============
As of and for the year
ended September 30, 1997:
Insurance and annuity
premiums................ $119,626,260 $(28,006,722) $(352,311) $ 91,267,227
============ ============ ========= ============
Insurance policy and
annuity benefits........ $ 51,378,888 $ (668,840) $(255,078) $ 50,454,970
============ ============ ========= ============
Life insurance and
annuity reserves........ $853,877,924 $(28,358,807) $(150,129) $825,368,988
============ ============ ========= ============
</TABLE>
The Company is contingently liable for claims on ceded life insurance
business in the event the reinsuring companies do not meet their obligations
under those reinsurance agreements. 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.
12. 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 (recovered) by the Company's life insurance
subsidiary for guaranty fund assessments and amounts estimated to be assessed
for the years ended September 30, 1999, 1998 and 1997 were approximately
$(942,000), $149,000 and $480,000, 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 1997. 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 change in the near term. The
Company does not believe that the amount of future assessments associated with
known insolvencies after 1997 will be material to its financial condition or
results of operations. At September 30, 1999, the amount of estimated future
guaranty fund assessments of approximately $2,283,000 has been recorded.
F-27
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Debenture Bonds:
The Company has registered $100,000,000 of Series III Debenture Bonds, of
which a face amount of approximately $65,281,000 was unissued at September 30,
1999. This current registration expires January 31, 2000.
At September 30, 1999 and 1998, debenture bonds consisted of the following:
<TABLE>
<CAPTION>
Annual Interest Rates 1999 1998
--------------------- ------------ ------------
<S> <C> <C>
5% to 6%.......................................... $ 716,000 $ 1,000
6% to 7%.......................................... 8,814,000 7,854,000
7% to 8%.......................................... 40,541,000 46,504,000
8% to 9%.......................................... 124,327,000 117,332,000
9% to 10%......................................... 1,765,000 1,867,000
10% to 11%........................................ 76,000 1,715,000
------------ ------------
176,239,000 175,273,000
Compound and accrued interest..................... 22,649,779 22,932,294
------------ ------------
$198,888,779 $198,205,294
============ ============
</TABLE>
The weighted-average interest rate on outstanding debentures was
approximately 8.0% at September 30, 1999 and 1998.
Debenture bonds (including principal and compound and accrued interest)
mature as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
September 30,
------------------
<S> <C>
2000............................................................ $ 50,709,000
2001............................................................ 9,378,000
2002............................................................ 33,473,000
2003............................................................ 39,668,000
2004............................................................ 39,199,000
Thereafter...................................................... 26,461,779
------------
$198,888,779
============
</TABLE>
At September 30, 1999, as required by Washington State regulation, the
Company could not have more than an aggregate total of $300,000,000 in
outstanding debentures (including accrued and compound interest) and
outstanding preferred stock (based on original sales price). At September 30,
1999, the Company had total outstanding debentures of approximately
$198,889,000 and total outstanding preferred stock of approximately
$53,095,000.
14. Advances Under Line of Credit:
The Company has a nonrecourse committed facility with Banc of America
Securities LLC in the authorized amount of $200,000,000, with interest at the
London Interbank Offered Rate plus 1%, maturing on March 24, 2000. The amount
advanced at September 30, 1999 of $62,908,030, including accrued interest at
6.383% per annum, is collateralized by real estate contracts and mortgage
notes receivable held for sale with a carrying value of approximately
$65,505,000.
F-28
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Debt Payable:
At September 30, 1999 and 1998, debt payable consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Note payable to Federal Home Loan Bank of Seattle,
authorized amount of $92,200,000, interest rates
ranging from 5.39% to 5.42% per annum; due October
25, 1999; collateralized by $41,250,000 of
mortgage-backed securities........................ $33,000,000
Note payable to Summit Securities, Inc., interest
at 11.0% per annum; due on June 30, 2000;
collateralized by $12,500,000 in structured
settlement agreements............................. 10,000,000 $2,560,000
Note payable to IDS Life Insurance Company,
interest at 7.04% per annum; due August 1, 2009;
collateralized by Metropolitan Financial Center
located in Spokane, Washington.................... 11,970,474
Note payable to Old Standard Life Insurance
Company, interest at 10.5% per annum; due May 3,
2004; collateralized by Beach House Restaurant
located in Kauai, Hawaii.......................... 2,507,289
Reverse repurchase agreement with Bear Stearns,
interest at 5.33% per annum; due on October 13,
1999; collateralized by $10,000,000 in U.S.
Treasury bonds.................................... 10,000,000
Reverse repurchase agreement with Seattle
Northwest, interest at 5.35% per annum; due on
October 13, 1999; collateralized by $5,000,000 in
U.S. Treasury bonds............................... 4,962,500
Reverse repurchase agreement with Seattle
Northwest, interest at 5.57% per annum; due on
October 1, 1998; collateralized by $2,900,000 in
U.S. Treasury bonds............................... 2,892,750
Real estate contracts and mortgage notes payable,
interest rates ranging from 3.0% to 11.6%, due in
installments through 2026; collateralized by
senior liens on certain of the Company's real
estate contracts, mortgage notes and real estate
held for sale..................................... 1,877,056 1,802,680
Accrued interest payable........................... 119,281 103,909
----------- ----------
$74,436,600 $7,359,339
=========== ==========
</TABLE>
Aggregate amounts of principal and accrued interest payments due on debt
payable are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
September 30,
------------------
<S> <C>
2000............................................................. $58,712,000
2001............................................................. 393,000
2002............................................................. 516,000
2003............................................................. 440,000
2004............................................................. 2,815,000
Thereafter....................................................... 11,560,600
-----------
$74,436,600
===========
</TABLE>
F-29
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. 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, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999
------------------------
Assets Liabilities
----------- -----------
<S> <C> <C>
Net operating loss carryforwards.................. $19,728,062
Life insurance and annuity reserves............... 3,770,836
Investments....................................... 2,528,716
Allowance for losses on real estate assets........ 2,703,023
Tax credit carryforwards.......................... 2,118,023
Allowances for repossessed real estate............ 835,484
Guaranty fund liability........................... 799,174
Deferred policy acquisition costs................. $20,839,362
Contract acquisition costs and discount yield
recognition...................................... 9,323,459
Office properties and equipment................... 1,854,704
Other............................................. 809,087
Valuation allowance............................... (13,600,000)
----------- -----------
Total deferred income taxes....................... $18,883,318 $32,826,612
=========== ===========
<CAPTION>
1998
------------------------
Assets Liabilities
----------- -----------
<S> <C> <C>
Life insurance and annuity reserves............... $ 4,971,432
Net operating loss carryforwards.................. 2,696,596
Allowance for losses on real estate assets........ 2,621,973
Allowances for repossessed real estate............ 1,220,875
Guaranty fund liability........................... 1,121,876
Tax credit carryforwards.......................... 612,098
Investments....................................... 413,354
Other............................................. 193,790
Deferred policy acquisition costs................. $27,407,445
Contract acquisition costs and discount yield
recognition...................................... 7,154,906
Office properties and equipment................... 2,014,695
----------- -----------
Total deferred income taxes....................... $13,851,994 $36,577,046
=========== ===========
</TABLE>
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 for the years ended September 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes at
statutory rate......... $ 1,405,495 35% $5,415,475 34% $5,053,484 34%
Loss carryforwards
generated from
investments............ (13,997,187) (348)
State taxes and other... 14,245 59,941 19,028
------------ ---- ---------- --- ---------- ---
Income tax provision.... $(12,577,447) (313)% $5,475,416 34% $5,072,512 34%
============ ==== ========== === ========== ===
</TABLE>
F-30
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended September 30, 1999, the Company implemented an
investment strategy that generated losses, which were used to offset certain
taxable temporary differences. The Company has provided a valuation allowance
for certain of its deferred tax assets due to uncertainty of recoverability.
The components of the income tax provision (benefit) for the years ended
September 30, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Current.................................. $ (5,398,149) $4,780,142 $1,004,926
Deferred................................. (7,179,298) 695,274 4,067,586
------------ ---------- ----------
$(12,577,447) $5,475,416 $5,072,512
============ ========== ==========
</TABLE>
At September 30, 1999, the Company and its subsidiaries had unused net
operating loss carryforwards, for income tax purposes, as follows:
<TABLE>
<CAPTION>
Net
Operating
Losses
Expiring in -----------
<S> <C>
2005............................................................. $ 1,373,094
2006............................................................. 5,612,555
2007............................................................. 945,516
2008............................................................. 48,434,726
-----------
$56,365,891
===========
</TABLE>
At September 30, 1999, the Company has alternative minimum tax credits of
approximately $1,450,000 and general business tax credit carryforwards of
approximately $666,000 available to reduce regular income taxes payable. The
general business tax credit carryforwards begin to expire in 2004.
F-31
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Stockholders' Equity:
A summary of preferred and common shares at September 30, 1999 and 1998 is
as follows:
<TABLE>
<CAPTION>
Issued and Outstanding Shares
-------------------------------------------
1999 1998
Authorized --------------------- ---------------------
Shares Shares Amount Shares Amount
---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Preferred Stock
Series A........... 750,000 -- $ -- -- $ --
Series B........... 200,000 -- -- -- --
Series C........... 1,000,000 373,052 3,730,517 389,885 3,898,847
Series D........... 1,375,000 539,058 5,390,581 574,307 5,743,070
Series E........... 5,000,000 997,820 9,978,196 981,215 9,812,154
--------- --------- ----------- --------- -----------
8,325,000 1,909,930 $19,099,294 1,945,407 $19,454,071
========= ========= =========== ========= ===========
<CAPTION>
Issued and Outstanding Shares
-------------------------------------------
1999 1998
Authorized --------------------- ---------------------
Shares Shares Amount Shares Amount
---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Common Stock
Class A............ 222 129 $ 291,167 130 $ 293,417
Class B............ 222 -- -- -- --
--------- --------- ----------- --------- -----------
444 129 $ 291,167 130 $ 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
-------------------------------------
1999 1998
------------------ ------------------
Shares Amount Shares Amount
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Series E-1............................. 620,095 $6,200,949 650,699 $6,506,986
Series E-2............................. 42,283 422,836 42,299 422,994
Series E-3............................. 101,130 1,011,298 101,419 1,014,191
Series E-4............................. 58,413 584,127 58,479 584,786
Series E-5............................. 12,512 125,121 12,549 125,495
Series E-6............................. 89,761 897,609 89,968 899,682
Series E-7............................. 73,626 736,256 25,802 258,020
------- ---------- ------- ----------
997,820 $9,978,196 981,215 $9,812,154
======= ========== ======= ==========
</TABLE>
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
F-32
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999, as required by state regulation, the amount of the
Company's aggregate total outstanding preferred stock and debentures was
limited (see Note 13).
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, 1999
and 1998, 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.
In April 1998, the Company's Board of Directors authorized the payment of
dividends on the outstanding Class A common stock. Dividends of $200 per share
have been declared and paid in each subsequent month and will continue until
further action by the Board.
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 $11,484,000 at
September 30, 1999 (see Note 18).
F-33
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. 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 GAAP
financial statement balances for the life insurance subsidiary as of and for
the years ended September 30, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Statutory GAAP
----------- ------------
<S> <C> <C>
Capital and surplus and stockholders' equity:
1999............................................ $58,438,906 $100,420,235
1998............................................ 50,893,450 89,617,766
1997............................................ 51,751,693 86,229,626
Net income:
1999............................................ $ 6,034,832 $ 11,565,311
1998............................................ 2,651,629 3,576,495
1997............................................ 6,811,628 4,051,900
Unassigned statutory surplus and retained
earnings:
1999............................................ $11,483,906 $ 53,475,235
1998............................................ 7,738,450 46,462,766
1997............................................ 8,596,693 43,074,626
</TABLE>
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, 1999, the
Company's life insurance subsidiary was in compliance with this requirement.
The National Association of Insurance Commissioners (the "NAIC") adopted the
Codification of Statutory Accounting Principles guidance, which will replace
the current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. The NAIC is now considering amendments to
the Codification guidance that would also be effective upon implementation.
The NAIC has recommended an effective date of January 1, 2001. The
Codification provides guidance for areas where statutory accounting has been
silent and changes current statutory accounting in some areas.
It is not known whether the Insurance Department of the State of Washington
(the state of domicile of the Company's life insurance subsidiary) will adopt
the Codification, and whether the Insurance Department of the State of
Washington will make any changes to that guidance. The Company has not
estimated the potential effect of the Codification guidance if adopted by the
Insurance Department of the State of Washington. However, the actual effect of
adoption could differ as changes are made to the Codification guidance prior
to its recommended effective date of January 1, 2001.
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
estimated RBC measure of the insurance subsidiary at September 30, 1999 was
above the minimum standards.
F-34
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. Supplemental Disclosures for Statements of Cash Flows:
The following table summarizes interest costs, net of amounts capitalized
and income taxes paid (refunded) during the years ended September 30, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest, net of amounts
capitalized......................... $22,655,533 $22,704,300 $22,588,759
Income taxes......................... (222,159) 5,060,178 5,006,812
</TABLE>
Non-cash investing and financing activities of the Company during the years
ended September 30, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Loans to facilitate the sale of real
estate held.......................... $ 7,575,241 $10,864,127 $18,604,263
Transfers between annuity products.... 34,371,559 41,954,744 20,899,096
Real estate held for sale and
development acquired through
foreclosure.......................... 26,224,220 27,048,940 14,977,384
Assumption of other debt payable in
connection with the acquisition of
real estate contracts and mortgage
notes................................ 530,233 690,093 1,638,727
Change in net unrealized (losses)
gains on investments, net............ (2,958,104) (413,450) 723,854
Transfer of investments from
available-for-sale portfolio to
trading securities portfolio......... 17,958,970
Transfer of investments from trading
portfolio to available-for-sale
portfolio............................ 46,316,206
</TABLE>
20. 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 activities. 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.
The accounting policies of the Company's business segments are the same as
those described in Note 1. All transactions between segments are eliminated.
The Company allocates certain overhead and operating expenses amongst its
segments.
F-35
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information about the Company's separate business segments and in total as of
and for the years ended September 30, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Property Intersegment
Investing Insurance Development Elimination Total
------------ ------------ ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
September 30, 1999:
Revenues............... $ 63,119,408 $ 96,573,678 $17,521,219 $ (11,993,369) $ 165,220,936
Income (loss) from
operations............ 4,956,942 661,264 (1,602,514) 4,015,692
Identifiable assets,
net................... 389,165,927 947,774,901 62,746,457 (168,730,766) 1,230,956,519
Depreciation and
amortization.......... 2,279,849 517,543 2,556,325 5,353,717
Capital expenditures... 2,112,303 102,116 2,214,419
September 30, 1998:
Revenues............... $ 55,047,900 $ 95,094,548 $17,051,189 $ (11,238,328) $ 155,955,309
Income (loss) from
operations............ 11,890,255 6,062,643 (2,025,031) 15,927,867
Identifiable assets,
net................... 408,340,047 944,943,849 66,876,206 (193,495,321) 1,226,664,781
Depreciation and
amortization.......... 2,022,965 303,028 2,170,670 4,496,663
Capital expenditures... 17,957,462 76,377 6,125 18,039,964
September 30, 1997:
Revenues............... $ 46,236,369 $ 96,621,416 $19,305,764 $ (7,028,883) $ 155,134,666
Income (loss) from
operations............ 14,548,441 6,850,975 (6,536,228) 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
</TABLE>
21. Related-Party Transactions:
During the years ended September 30, 1999, 1998 and 1997, the Company had the
following related-party transactions with Summit Securities, Inc. ("Summit")
and other affiliates due to common control of C. Paul Sandifur, Jr.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Real estate contracts and mortgage
notes receivable and other receivable
investments sold to Summit, OSL and
Old West Annuity & Life Insurance
Company ("OWAL")...................... $47,063,832 $36,268,548 $63,980,678
Contract acquisition costs charged to
Summit, OSL and OWAL on sale of real
estate contracts and mortgage notes
receivable and other receivable
investments, including management
underwriting fees..................... 395,856 899,999 3,384,572
Real estate contracts and mortgage
notes receivable and other receivable
investments purchased from Summit or
its affiliates........................ 56,587,031 9,350,960 3,815,973
Direct reinsurance premiums ceded to
OSL................................... 44,746,374 25,448,535 28,006,722
Ceding commissions charged to OSL...... 2,300,000 1,600,000
Service fees paid to Summit Property
Development........................... 1,911,112 1,844,026 1,845,207
Commissions and service fees paid to
Metropolitan Investment Securities,
Inc................................... 1,786,408 2,448,075 1,307,110
Dividends paid to Summit on stock
investments........................... 207,589 214,354 240,267
Servicing and collection fees charged
by Metwest to Summit and its
affiliates............................ 490,726 500,832 341,000
Administrative services charged by
Metropolitan to Summit and its
affiliates............................ 1,153,000 891,000 706,000
Net change in notes payable to Summit
and OSL............................... 9,947,289 2,560,000
Interest paid on note payable to Summit
and OSL............................... 734,126 80,028
</TABLE>
F-36
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At September 30, 1999 and 1998, the Company had receivables due from
affiliates of $289,810 and payables due to affiliates of $10,829,461,
respectively, related primarily to advance payments on receivable acquisitions
and reinsurance transactions.
The Company provides management, receivable acquisition and receivable
collections services to Summit, OSL and OWAL for a fee pursuant to the terms
of the Management, Receivable Acquisition and Servicing Agreement. The
receivable acquisition fees are based upon yield requirements established by
management of Summit, OSL and OWAL. The Company charges, as its receivable
acquisition service fee, the difference between the yield requirement and the
yield which Summit, OSL and OWAL actually negotiated when the receivable is
acquired. During the years ended September 30, 1999, 1998 and 1997, the
Company received service fees for receivable acquisition from Summit, OSL and
OWAL of approximately $396,000, $900,000 and $3,385,000, respectively. The
agreements are non-exclusive and may be terminated in whole or part by either
party upon notice.
During the year ended September 30, 1999, the Company acquired pools of real
estate contracts and mortgage notes receivable from Summit or its affiliates
which were subsequently securitized. To the extent these sales were
consummated just prior to the securitization transaction, Summit or its
affiliates were allocated a gain as if they had participated in the
securitization transaction. This allocation represented the fair value of the
pool of real estate contract and mortgage notes receivable sold. If the sales
were made in advance of the securitization transaction, then such sales were
made at estimated fair value on the date of the sale.
The Company provides accounting, data processing, contract servicing and
other administrative services to Summit, OSL and OWAL. Charges for these
services were approximately $1,153,000, $891,000 and $706,000 in the years
ended September 30, 1999, 1998 and 1997, respectively, and were assessed based
on the number of real estate contracts and mortgage notes receivable serviced
by the Company on their behalf. Other indirect services provided to these
companies, such as management and regulatory compliance, were not directly
charged.
Management believes that these charges are reasonable and result in the
reimbursement to Metropolitan of all significant direct expenses incurred on
behalf of its affiliates and its subsidiaries.
Summit Property Development, Inc., a wholly owned subsidiary of Summit,
provides real estate development services to the Company for a fee. Such
services may include, but are not limited to the following: sales, marketing,
market analysis, architectural services, design services, subdividing
properties and coordination with regulatory groups to obtain the approvals
which are necessary to develop a particular property. The fees charged to the
Company for these services were approximately $1,911,000, $1,844,000 and
$1,845,000 during the years ended September 30, 1999, 1998 and 1997,
respectively.
MIS is a securities broker/dealer and member of the National Association of
Securities Dealers. It markets the securities products of Metropolitan and of
Summit. MIS charges commissions ranging from .25% to 6% of the face value of
the security sold. The commission rate depends on the type of security sold,
its stated term and whether the security sale involved a reinvestment by a
prior investor or a new investment. Commissions and service fees charged to
the Company during the years ended September 30, 1999, 1998 and 1997 were
approximately $1,786,000, $2,448,000 and $1,307,000, respectively.
Metwest provides receivable collection services for a fee to Summit, OSL and
OWAL. During the years ended September 30, 1999, 1998 and 1997, such fees were
approximately $491,000, $501,000 and $341,000, respectively.
F-37
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Western has entered into a reinsurance agreement with OSL which became
effective July 1, 1998 and remained in effect at September 30, 1999. Under
this agreement, Western reinsured with Old Standard 75% of the risk on certain
annuity products. Western received ceding allowances equal to actual
commission plus 1.5% of premium, which was approximately $2.3 million and $1.6
million during the years ended September 30, 1999 and 1998, respectively.
The reinsurance agreement is an ongoing arrangement with no stated
expiration or termination date, although either party may stop and restart at
their discretion upon providing a 30-day advance written notice. Western
receives a fee from OSL for servicing the reinsured policies, which fee is 40
basis points annually on the cash value of the reinsured policies.
22. 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.
Non-Publicly Traded Investment Securities--Fair value is determined based
upon quoted market prices for securities with similar characteristics and
risks or is estimated based upon expected discounted future cash flows.
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.
Futures Contracts--The fair value of futures contracts is determined by
quoted market prices for settlement of the contracts.
Mortgage Servicing Rights--The fair value of mortgage servicing rights is
based on the discounted value of contractual servicing income using
estimated prepayment rates of the related serviced receivables.
Life Insurance and Annuity Reserves--The fair value of annuity reserves
approximates the carrying value because the majority of the life insurance
and annuity policies provide for variable rates of interest.
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.
Advances Under Line of Credit--The fair value approximates the carrying
value because the advances have variable rates of interest.
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.
F-38
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated fair values of the following financial instruments as of
September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999
-------------------------
Carrying
Amounts Fair Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents.......................... $ 20,406,837 $ 20,406,837
Investments:
Trading securities............................... 45,013,522 45,013,522
Available-for-sale securities.................... 156,263,086 156,263,086
Held-to-maturity securities...................... 66,441,407 65,259,835
Real estate contracts and mortgage notes receivable
(including futures contracts used for hedging
purposes)......................................... 529,501,874 537,910,651
Other receivable investments....................... 174,707,840 179,870,173
Mortgage servicing rights.......................... 10,898,621 10,898,621
Financial liabilities:
Life insurance and annuity reserves................ 795,744,055 795,744,055
Debenture bonds--principal and compound interest... 196,125,748 202,421,385
Debt payable--principal............................ 74,317,319 74,721,376
Advances under line of credit...................... 62,908,030 62,908,030
<CAPTION>
1998
-------------------------
Carrying
Amounts Fair Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents.......................... $ 31,733,362 $ 31,733,362
Investments:
Trading securities............................... 55,865,875 55,865,875
Available-for-sale securities.................... 25,988,789 25,988,789
Held-to-maturity securities...................... 83,036,525 86,396,021
Real estate contracts and mortgage notes receivable
(including futures contracts used for hedging
purposes)......................................... 603,821,211 649,257,843
Other receivable investments....................... 200,773,533 213,276,722
Mortgage servicing rights.......................... 6,292,375 6,292,375
Financial liabilities:
Life insurance and annuity reserves................ 800,848,929 800,848,929
Debenture bonds--principal and compound interest... 195,469,708 200,884,219
Debt payable--principal............................ 7,359,339 7,362,269
Advances under line of credit...................... 118,342,972 118,342,972
</TABLE>
Limitations--The fair value estimates are made at a discrete point in
time based on relevant market information and information about the
financial instruments. Because no market exists for a significant portion
of these financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Accordingly, the estimates presented herein are not necessarily indicative
of what the Company could realize in a current market exchange.
F-39
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
23. 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 $354,000, $224,000 and $110,000 during the years
ended September 30, 1999, 1998 and 1997, respectively.
24. Subsequent Events:
On October 28, 1999, the Company participated in a securitization
transaction. The Company contributed real estate contracts and mortgage notes
receivable with a face value of approximately $51,498,000 to the pool and
realized a pre-tax gain of approximately $1,387,000.
On November 30, 1999, the Company participated in a securitization
transaction. The Company contributed real estate contracts and mortgage notes
receivable with a face value of approximately $153,268,000 to the pool and
realized a pre-tax gain of approximately $3,967,000.
F-40
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
25. Parent Company Only Financial Statements:
The condensed balance sheets of Metropolitan Mortgage & Securities Co., Inc.
("Metropolitan" or the "parent company") at September 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents......................... $ 8,927,795 $ 3,331,341
Investments....................................... 40,949,401 32,022,744
Real estate contracts and mortgage notes
receivable and other receivable investments,
net.............................................. 138,517,808 202,008,048
Real estate held for sale and development, net.... 47,446,952 53,726,746
Allowance for losses on real estate assets........ (5,238,662) (8,889,707)
Equity in subsidiary companies.................... 122,257,341 99,601,333
Land, buildings and equipment, net................ 23,652,322 26,660,321
Prepaid expenses and other assets, net............ 25,459,326 20,586,556
Accounts and notes receivable, net................ 1,264,047 524,796
Receivables from affiliates....................... 8,018,740 18,483,277
------------ ------------
Total assets.................................... $411,255,070 $448,055,455
============ ============
LIABILITIES
Debenture bonds and accrued interest.............. $198,888,779 $198,205,294
Advances under line of credit..................... 62,908,030 118,342,972
Debt payable...................................... 53,023,521 29,465,246
Accounts payable and accrued expenses............. 5,026,509 16,726,165
Deferred underwriting fee income.................. 19,703,768 26,559,009
------------ ------------
Total liabilities............................... 339,550,607 389,298,686
============ ============
STOCKHOLDERS' EQUITY
Preferred stock, $10 par (liquidation preference,
$53,094,517 and $49,200,583, respectively)....... 19,099,294 19,454,071
Common stock, Class A, $2,250 par................. 291,167 293,417
Additional paid-in capital........................ 22,522,036 18,580,051
Accumulated other comprehensive loss.............. (3,638,723) (680,619)
Retained earnings................................. 33,430,689 21,109,849
------------ ------------
Total stockholders' equity........................ 71,704,463 58,756,769
------------ ------------
Total liabilities and stockholders' equity........ $411,255,070 $448,055,455
============ ============
</TABLE>
F-41
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Metropolitan's condensed statements of income for the years ended September
30, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest and earned discounts......... $21,268,991 $17,587,674 $12,895,522
Fees, commissions, service and other
income............................... 18,052,107 18,638,026 25,607,641
Real estate sales..................... 18,210,587 17,822,870 18,127,105
Net gains on investments and
receivables.......................... 15,200,505 14,194,350 8,211,741
----------- ----------- -----------
Total revenues...................... 72,732,190 68,242,920 64,842,009
----------- ----------- -----------
Expenses:
Interest, net......................... 24,216,315 20,818,307 17,995,578
Cost of real estate sold.............. 17,498,561 17,298,334 19,118,802
Provision for losses on real estate
assets............................... 5,101,553 4,041,334 7,255,824
Salaries and employee benefits........ 17,396,221 14,413,335 12,396,324
Other operating expenses.............. 6,074,452 4,249,390 3,810,812
----------- ----------- -----------
Total expenses...................... 70,287,102 60,820,700 60,577,340
----------- ----------- -----------
Income from operations before income
taxes and equity in net income of
subsidiaries........................... 2,445,088 7,422,220 4,264,669
Income tax benefit (provision).......... 1,928,823 (2,578,267) (1,455,746)
----------- ----------- -----------
Income before equity in net income of
subsidiaries........................... 4,373,911 4,843,953 2,808,923
Equity in net income of subsidiaries.... 11,901,228 5,482,750 6,859,388
----------- ----------- -----------
Net income.............................. $16,275,139 $10,326,703 $ 9,668,311
=========== =========== ===========
</TABLE>
F-42
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Metropolitan's condensed statements of cash flows for the years ended
September 30, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income.................. $ 16,275,139 $ 10,326,703 $ 9,668,311
Adjustments to reconcile net
income to net cash from
operating activities....... (60,382,813) (17,815,622) (40,384,815)
------------- ------------- -------------
Net cash from operating
activities............... (44,107,674) (7,488,919) (30,716,504)
------------- ------------- -------------
Cash flows from investing
activities:
Proceeds from sale of
capital assets............. 3,480,000
Principal payments on real
estate contracts and
mortgage notes receivable
and other receivable
investments................ 32,086,911 26,532,257 18,604,302
Proceeds from sales of real
estate contracts and
mortgage notes receivable
and other receivable
investments................ 559,410,863 208,388,900 153,354,821
Acquisition of real estate
contracts and mortgage
notes and other receivable
investments................ (511,368,761) (362,448,218) (139,609,748)
Proceeds from real estate
sales...................... 10,635,346 6,958,743 4,250,277
Proceeds from sales of
investments................ 4,442,432 1,094,788
Proceeds from maturities of
investments................ 7,477,003 922,309 6,922,604
Purchase of investments..... (11,269,236) (888,713) (4,097,601)
Additions to real estate
held for sale and
development................ (9,180,011) (11,814,327) (21,681,182)
Capital expenditures........ (1,944,699) (17,879,532) (1,930,595)
Net change in investment in
and advances to
subsidiaries............... (2,639,065) 20,195,480 11,164,783
------------- ------------- -------------
Net cash from investing
activities............... 81,130,783 (128,938,313) 26,977,661
------------- ------------- -------------
Cash flows from financing
activities:
Net borrowings from
(repayments to) banks and
others..................... (32,022,736) 122,527,855 11,815,877
Issuance of debenture
bonds...................... 46,399,862 65,048,869 38,510,520
Issuance of preferred
stock...................... 4,681,277 2,027,737 2,222,893
Repayment of debenture
bonds...................... (45,434,440) (48,944,640) (42,376,231)
Cash dividends.............. (3,954,299) (3,888,536) (4,112,988)
Redemption and retirement of
stock...................... (1,096,319) (3,543,987) (982,389)
Receipt of contingent sale
price for subsidiary sold
to related party........... 135,568 249,721
------------- ------------- -------------
Net cash from financing
activities............... (31,426,655) 133,362,866 5,327,403
------------- ------------- -------------
Net change in cash and cash
equivalents.................. 5,596,454 (3,064,366) 1,588,560
Cash and cash equivalents at
beginning of year............ 3,331,341 6,395,707 4,807,147
------------- ------------- -------------
Cash and cash equivalents at
end of year.................. $ 8,927,795 $ 3,331,341 $ 6,395,707
============= ============= =============
</TABLE>
F-43
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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, 1999,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Loans to facilitate the sale of real
estate............................... $ 7,575,241 $10,864,127 $13,976,828
Real estate acquired through
foreclosure.......................... 4,766,951 7,331,974 2,152,887
Transfer of investments from trading
portfolio to available-for-sale
portfolio............................ 34,403,299
Transfer of investments from
available-for-sale portfolio to
trading securities portfolio......... 576,377
Debt assumed with acquisition of real
estate contracts and mortgage notes
and debt assumed upon foreclosure of
real estate contracts................ 141,384 82,911 165,744
Change in net unrealized gains
(losses) on investments.............. (2,958,104) (413,450) 723,854
</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.
Metropolitan has a nonrecourse committed facility with Banc of America
Securities LLC in the authorized amount of $200,000,000, with interest at the
London Interbank Offered Rate plus 1%, maturing on March 24, 2000. The amount
advanced at September 30, 1999 of $62,908,030, including accrued interest at
6.383% per annum, is collateralized by real estate contracts and mortgage
notes receivable held for sale with a carrying value of approximately
$65,505,000.
At September 30, 1999 and 1998, Metropolitan's debt payable consists of the
following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revolving line of credit, interest at 8.75% per
annum, due December 31, 1999; collateralized by
certain of the Company's real estate contracts and
mortgage notes.................................... $14,000,000 $14,000,000
Notes payable to Summit Securities, Inc., interest
at 11.0% per annum; due on June 30, 2000;
collateralized by $12,500,000 in structured
settlement agreements............................. 10,000,000 2,560,000
Reverse repurchase agreement with Seattle
Northwest, interest at 5.35% per annum, due
October 13, 1999; collateralized by $5,000,000 in
U.S. Treasury bonds............................... 4,962,500 2,892,750
Real estate contracts and mortgage notes payable,
interest rates ranging from 3.0% to 10.9%, due in
installments through 2016; collateralized by
senior liens on certain of the Company's real
estate contracts, mortgage notes and real estate
held for sale..................................... 23,975,501 9,931,661
Accrued interest payable........................... 85,520 80,835
----------- -----------
$53,023,521 $29,465,246
=========== ===========
</TABLE>
F-44
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Aggregate amounts of principal payments due on the parent company's debt
payable are expected to be as follows:
<TABLE>
<CAPTION>
Fiscal Year
Ending
September 30,
-------------
<S> <C>
2000........................................................... $29,645,000
2001........................................................... 621,000
2002........................................................... 643,000
2003........................................................... 668,000
2004........................................................... 2,981,000
Thereafter..................................................... 18,465,521
-----------
$53,023,521
===========
</TABLE>
At September 30, 1999 and 1998, Metropolitan's debenture bonds payable
consisted of the following:
<TABLE>
<CAPTION>
Annual Interest Rates 1999 1998
--------------------- ------------ ------------
<S> <C> <C>
5% to 6%.......................................... $ 716,000 $ 1,000
6% to 7%.......................................... 8,814,000 7,854,000
7% to 8%.......................................... 40,541,000 46,504,000
8% to 9%.......................................... 124,327,000 117,332,000
9% to 10%......................................... 1,765,000 1,867,000
10% to 11%........................................ 76,000 1,715,000
------------ ------------
176,239,000 175,273,000
Compound and accrued interest..................... 22,649,779 22,932,294
------------ ------------
$198,888,779 $198,205,294
============ ============
</TABLE>
Maturities of the parent company's debenture bonds are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
September 30,
------------------
<S> <C>
2000......................................................... $ 50,709,000
2001......................................................... 9,378,000
2002......................................................... 33,473,000
2003......................................................... 39,668,000
2004......................................................... 39,199,000
Thereafter................................................... 26,461,779
------------
$198,888,779
============
</TABLE>
F-45
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Metropolitan had the following related-party transactions with its various
subsidiaries and affiliated entities:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Dividends received:
Metropolitan Mortgage & Securities Co.
of Alaska............................ $ 892,000 $ 2,134,000
Western United Life Assurance
Company.............................. $ 1,027,760
Metwest Mortgage Services, Inc........ 180,000
Consumers Group Holding Co., Inc...... 526,000 962,580
Broadmore Park Factory Outlet, Inc.... 200,000
----------- ----------- -----------
$ 1,207,760 $ 1,418,000 $ 3,296,580
=========== =========== ===========
Fees, commissions, service and other
income................................ $16,192,551 $17,453,679 $25,628,142
Interest income........................ 4,030,257 3,013,354 894,995
</TABLE>
Metropolitan charged various subsidiaries and affiliated entities for
underwriting fees of $10,373,000 in 1998 and $20,068,000 in 1997 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 $6,493,329 in 1999, $10,121,720 in 1998
and $17,432,885 in 1997.
The underwriting fees are based upon a yield requirement established by the
purchasing entity. In the case of Western, one of Metropolitan's subsidiaries,
beginning in 1994 and ending March 31, 1998, the yield requirement established
by Western had been guaranteed by Metropolitan and an intercompany reserve was
established to support the guarantee. Metropolitan remains liable to Western
for any losses in excess of the reserve. In connection with its guarantee,
Metropolitan has holdbacks of $3.7 million and $9.4 million at September 30,
1999 and 1998, respectively. The guarantee by Metropolitan has been eliminated
with respect to all receivables sold to Western after March 31, 1998.
F-46
<PAGE>
SCHEDULE I
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
September 30, 1999
<TABLE>
<CAPTION>
Column A Column B Column C Column D
-------- -------------- ------------- --------------
Amount At
Which Shown
Amortized on Balance
Types of Investments Cost Market Value Sheet
-------------------- -------------- ------------- --------------
<S> <C> <C> <C>
FIXED MATURITIES
Investments:
U.S. Government and Government
Agencies and Authorities...... $ 54,537,128 $ 53,172,571 $ 54,487,055
Corporate Bonds................ 10,085,469 9,942,189 9,950,718
Utility Bonds.................. 999,443 970,700 999,443
Mortgage and Asset Backed
Bonds......................... 204,015,022 199,162,268 198,992,070
-------------- ------------- --------------
TOTAL FIXED MATURITIES........... $ 269,637,062 $ 263,247,728 $ 264,429,286
============== ============= ==============
Equity Securities................ $ 3,138,283 $ 3,288,715 $ 3,288,729
============== ============= ==============
Real Estate Contracts and
Mortgage Notes Receivables...... $ 539,525,957 $ 539,525,957
Real Estate Held for Sale and
Development (Including
$40,802,345 Acquired in
Satisfaction of Debt)........... 85,747,433 85,747,433
Total Real Estate Assets......... 625,273,390 625,273,390
Less Allowances for Losses on
Real Estate Assets.............. (9,318,072) (9,318,072)
-------------- --------------
NET REAL ESTATE ASSETS........... $ 615,955,318 $ 615,955,318
============== ==============
OTHER RECEIVABLE INVESTMENTS..... $ 174,707,840 $ 174,707,840
============== ==============
OTHER ASSETS--POLICY LOANS....... $ 19,117,927 $ 19,117,927
============== ==============
TOTAL INVESTMENTS................ $1,082,566,430 $1,077,499,100
============== ==============
</TABLE>
S-1
<PAGE>
SCHEDULE II
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended September 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Additions Deductions
(Reductions) and
Balance at Charged to Accounts Balance at
Beginning Costs and Written End of
Description of Year Expenses Off 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
1999.......................... $8,678,589 $5,429,416 $7,252,399 $6,855,606
1998.......................... 9,491,116 3,239,676 4,052,203 8,678,589
1997.......................... 7,945,561 4,051,975 2,506,420 9,491,116
Allowance for probable losses on
real estate held for sale from
real estate assets in balance
sheet
1999.......................... $2,322,029 $5,246,144 $5,105,707 $2,462,466
1998.......................... 2,835,982 2,959,621 3,473,574 2,322,029
1997.......................... 2,247,023 4,079,126 3,490,167 2,835,982
Allowance for losses on accounts
and notes receivable deducted
from other assets in balance
sheet
1999.......................... $ 118,128 $ 21,000 $ 37,071 $ 102,057
1998.......................... 66,974 72,000 20,846 118,128
1997.......................... 180,954 42,995 156,975 66,974
</TABLE>
S-2
<PAGE>
SCHEDULE III
Page 1 of 2
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Future
Policy
Benefits,
Deferred Losses, Other Policy
Policy Claims Claims and
Acquisition and Loss Unearned Benefits
Cost Expenses Premiums Payable
----------- ------------ -------- ------------
<S> <C> <C> <C> <C>
September 30, 1999
Life Insurance and Annuities... $61,763,753 $795,744,055 $-- $--
September 30, 1998
Life Insurance and Annuities... $67,167,185 $800,848,929 $-- $--
September 30, 1997
Life Insurance and Annuities... $69,730,002 $825,368,988 $-- $--
</TABLE>
S-3
<PAGE>
SCHEDULE III
Page 2 of 2
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Benefit Amortification
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, 1999
Life Insurance and
Annuities............ $2,700,000 $61,555,496 $45,558,102 $11,000,000 $2,242,808
September 30, 1998
Life Insurance and
Annuities............ $2,800,000 $62,452,734 $48,098,422 $10,000,000 $3,393,667
September 30, 1997
Life Insurance and
Annuities............ $3,000,000 $65,759,676 $50,454,970 $ 9,432,884 $3,635,756
</TABLE>
S-4
<PAGE>
SCHEDULE IV
Page 1 of 3
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1999
At September 30, 1999, the Consolidated Group held first priority liens
associated with contracts and mortgage note receivables with a face value of
approximately $531 million (98%) and second or lower priority liens of
approximately $12 million (2%). Approximately 29% of the face value of the
Consolidated Group's real estate Receivables are collateralized by properties
located in the Pacific Northwest (Washington, Alaska, Idaho, Montana and
Oregon), approximately 22% by properties located in the Pacific Southwest
(California, Arizona and Nevada), approximately 11% in the Southeast (Florida,
Georgia, North Carolina and South Carolina), approximately 8% in the North
Atlantic (New York, Pennsylvania, New Jersey, Connecticut and Maryland) and
approximately 13% by properties located in the Southwest (Texas and New
Mexico). The face value of the real estate Receivables ranges principally from
$15,000 to $300,000 with 114 real estate Receivables, aggregating
approximately $62 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 9% of the contracts and notes are subject to
variable interest rates. Contractual interest rates principally range from 6%
to 13% per annum with approximately 94% of the face value of these Receivables
within this range. The weighted average contractual interest rate on these
real estate Receivables at September 30, 1999 is approximately 9.4%. Maturity
dates range from 1999 to 2029.
<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 greater
than $100,000.......... 665 8-12% $111,543,183 $ 7,326,286 $2,131,568 14
First Mortgage greater
than $50,000........... 1,637 8-12 111,724,327 6,393,943 94,419 1
First Mortgage less than
$50,000................ 7,771 8-14 149,421,102 7,352,985 -- --
Second or Lower greater
than $100,000.......... 2 8-9 241,165 -- -- --
Second or Lower greater
than $50,000.......... 21 8-10 1,377,633 -- -- --
Second or Lower less than
$50,000................ 250 8-11 4,254,171 131,973 -- --
COMMERCIAL
First Mortgage greater
than $100,000.......... 267 8-12 63,882,965 3,400,851 251,140 2
First Mortgage greater
than $50,000........... 255 8-11 18,658,472 616,173 -- --
First Mortgage less than
$50,000................ 361 8-11 9,807,575 282,658 -- --
Second or Lower greater
than $100,000.......... 11 8-11 3,768,425 -- -- --
Second or Lower greater
than $50,000........... 17 8-10 1,194,734 -- -- --
Second or Lower less than
$50,000................ 35 8-11 915,669 -- -- --
FARM, LAND AND OTHER
First Mortgage greater
than $100,000.......... 114 8-12 23,419,057 3,158,580 582,478 1
First Mortgage greater
than $50,000........... 159 8-13 11,206,573 565,419 -- --
First Mortgage less than
$50,000................ 1,771 8-12 31,189,625 771,032 -- --
Second or Lower greater
than $100,000.......... -- -- -- -- -- --
Second or Lower greater
than $50,000........... 1 8 75,215 -- -- --
Second or Lower less than
$50,000................ 16 8-10 238,760 -- -- --
Unrealized discounts,
net of unarnortized
acquisition costs, on
Receivables purchased
at a discount.......... (13,416,777)
Accrued Interest
Receivable............. 10,024,083
------------ ----------- ----------
CARRYING VALUE.......... $539,525,957 $30,000,000 $3,059,605
============ =========== ==========
</TABLE>
The principal amounts of Receivables subject to delinquent principal or
interest are defined as being in arrears for more than three months.
S-5
<PAGE>
SCHEDULE IV
Page 2 of 3
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1999
The future contractual maturities of the aggregate amounts of Receivables
(face amount) are as follows:
<TABLE>
<CAPTION>
Residential Commercial Farm, Land, Total
Principal Principal Other Principal Principal
------------ ----------- --------------- ------------
<S> <C> <C> <C> <C>
October 1999--September
2002................... $ 39,372,682 $13,786,448 $14,395,020 $ 67,554,150
October 2002--September
2004................... 29,844,651 13,306,380 8,592,041 51,743,072
October 2004--September
2006................... 28,847,580 14,151,225 8,239,914 51,238,720
October 2006--September
2009................... 42,674,415 19,708,583 9,765,512 72,148,509
October 2009--September
2014................... 68,138,399 12,229,150 10,273,626 90,641,175
October 2014--September
2019................... 32,018,242 7,748,329 7,906,404 47,672,975
October 2019--
Thereafter............. 137,665,612 17,297,725 6,956,713 161,920,050
------------ ----------- ----------- ------------
$378,561,581 $98,227,840 $66,129,230 $542,918,651
============ =========== =========== ============
</TABLE>
S-6
<PAGE>
SCHEDULE IV
Page 3 of 3
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1999
<TABLE>
<CAPTION>
For the Years Ended September 30, 1998
--------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period......... $614,178,323 $512,864,101 $650,933,330
------------ ------------ ------------
Additions during period
New Receivables--cash.................. 617,643,225 413,325,154 317,169,828
Loans to facilitate the sale of real
estate
held--non cash........................ 7,575,241 10,864,127 18,604,263
Assumption of other debt payable in
conjunction with acquisition of new
Receivables--non cash................. 530,233 690,093 1,638,727
Increase in accrued interest........... 2,529,472 3,605,376 2,231,416
------------ ------------ ------------
Total additions...................... 628,278,171 428,484,750 339,644,234
------------ ------------ ------------
Deductions during period
Collections of principal--cash......... 99,909,044 113,702,441 100,359,493
Cost of Receivables sold............... 570,952,350 183,952,437 361,009,441
Foreclosures--non cash................. 32,069,143 29,515,650 16,344,529
------------ ------------ ------------
Total deductions....................... 702,930,537 327,170,528 477,713,463
------------ ------------ ------------
Balance at end of period............... $539,525,957 $614,178,323 $512,864,101
============ ============ ============
</TABLE>
S-7
<PAGE>
SCHEDULE V
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
SUPPLEMENTARY REINSURANCE INFORMATION
<TABLE>
<CAPTION>
Assumed Percentage
Ceded to From of Amount
Gross Other Other Assumed to
Year Ended Amount Companies Companies Net Amount Net
---------- ------------ ----------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
September 30, 1999
Life Insurance in
Force................ $282,481,000 $41,372,000 $-- $241,109,000 --
Premiums
Life Insurance...... $ 3,026,130 $ 326,130 $-- $ 2,700,000 --
September 30, 1998
Life Insurance in
Force................ $308,191,000 $47,653,000 $-- $260,538,000 --
Premiums
Life Insurance...... $ 3,123,104 $ 323,104 $-- $ 2,800,000 --
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 --
</TABLE>
S-8
<PAGE>
STATEMENT RE COMPUTATION OF EARNINGS PER COMMON SHARE
EXHIBIT 11.01
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings:
Net income $16,275 $10,327 $ 9,668 $ 8,038 $ 6,303
Preferred dividends (3,642) (3,732) (4,113) (3,868) (4,038)
------- ------- ------- ------- -------
Net income available to
common stockholders $12,633 $ 6,595 $ 5,555 $ 4,170 $ 2,265
======= ======= ======= ======= =======
Weighted average number
of common shares
outstanding 129 130 130 130 131
======= ======= ======= ======= =======
Net income per common
share $97,933 $50,728 $42,733 $32,073 $17,288
======= ======= ======= ======= =======
</TABLE>
<PAGE>
STATEMENT RE COMPUTATION OF RATIOS
EXHIBIT 12.01
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
------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
Net income $ 16,275 $10,327 $ 9,668 $ 8,038 $ 6,303
Add:
Interest 22,388 19,663 19,375 18,788 16,381
Taxes (benefit) on income (12,577) 5,475 5,073 4,235 3,108
-------- ------- ------- ------- -------
Adjusted earnings $ 26,086 $35,465 $34,116 $31,061 $25,792
======== ======= ======= ======= =======
Preferred stock dividend
requirements $ 3,642 $ 3,732 $ 4,113 $ 3,868 $ 4,038
Ratio factor of income after
provision for income taxes
to income before provision
for income taxes 100% 66% 66% 66% 67%
Preferred stock dividend
factor on pretax basis 3,642 5,687 6,244 5,880 6,006
Fixed charges
Interest 22,388 19,663 19,375 18,788 16,381
Capitalized interest 936 611 521 2,468 2,730
-------- ------- ------- ------- -------
Fixed charges and
preferred stock
dividends $ 26,966 $25,961 $26,140 $27,136 $25,117
======== ======= ======= ======= =======
Ratio of adjusted earnings
to fixed charges and
preferred stock dividends * 1.37 1.31 1.14 1.03
</TABLE>
- ------------
* Earnings were insufficient to meet fixed charges and preferred stock dividends
by approximately $808,000 for the year ended September 30, 1999.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 20,407
<SECURITIES> 269,573
<RECEIVABLES> 714,234
<ALLOWANCES> 9,318
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 39,921
<DEPRECIATION> 13,579
<TOTAL-ASSETS> 1,230,957
<CURRENT-LIABILITIES> 0
<BONDS> 336,233
0
19,099
<COMMON> 291
<OTHER-SE> 52,314
<TOTAL-LIABILITY-AND-EQUITY> 1,230,957
<SALES> 0
<TOTAL-REVENUES> 165,221
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 128,141
<LOSS-PROVISION> 10,676
<INTEREST-EXPENSE> 22,388
<INCOME-PRETAX> 4,016
<INCOME-TAX> 12,577
<INCOME-CONTINUING> 16,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,275
<EPS-BASIC> 97,933.00
<EPS-DILUTED> 97,933.00
</TABLE>
