FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 1998
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 ____________
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-0609840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 W. 1ST AVENUE, SPOKANE, WASHINGTON 99201-5015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (509)838-3111
Former name, former address and former fiscal year, if changed since last
report: N/A.
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 / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: N/A.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes / / No / / N/A.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common "A": 130 shares at January 31, 1999.
Common "B": 0 shares at January 31, 1999.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
As of December 31, 1998 and September 30, 1998 (unaudited)
Condensed Consolidated Statements of Income
Three Months Ended December 31, 1998 and 1997 (unaudited)
Consolidated Statements of Comprehensive Income
Three Months Ended December 31, 1998 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31, 1998 and 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
______________ ______________
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 106,889,738 $ 31,733,362
Investments
Trading Securities, at market 84,269,370 55,865,875
Available-for-Sale Securities, at
market 28,523,554 25,988,789
Held-to-Maturity Securities, at
amortized cost (market value
$80,420,964 and $86,396,021) 77,992,645 83,036,525
Accrued Interest on Investments _____1,808,868 _____1,646,527
TOTAL CASH AND INVESTMENTS ___299,484,175 __ 198,271,078
Real Estate Contracts and Mortgage
Notes and Other Receivables 604,649,375 692,822,886
Real Estate Contract Securities,
pledged to NationsBanc Mortgage
Capital Corp. 29,630,736 122,128,970
Real Estate for Sale and Development,
Including Foreclosed Real Estate 89,886,868 89,713,967
______________ ______________
Total Receivables and Real Estate
Assets 724,166,979 904,665,823
Less Allowance for Losses (10,412,277) (11,000,618)
______________ ______________
NET RECEIVABLES AND REAL ESTATE
ASSETS 713,754,702 893,665,205
______________ ______________
Deferred Acquisition Costs, Net 69,495,368 71,262,489
Land, Building and Equipment - net
of accumulated depreciation 26,076,708 25,889,102
Mortgage Servicing Rights, Net 8,303,147 6,292,375
Other Assets, net of allowance 35,555,327 31,284,532
______________ ______________
TOTAL ASSETS $1,152,669,427 $1,226,664,781
============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
______________ ______________
<S> <C> <C>
LIABILITIES
Life Insurance and Annuity Reserves $ 796,679,167 $ 800,848,929
Debenture Bonds 200,257,134 198,205,294
Advances under line of credit 28,495,434 118,342,972
Other Debt Payable 20,122,528 7,359,339
Accounts Payable and Accrued Expenses 19,026,157 18,687,539
Deferred Income Taxes 23,904,346 22,725,052
Minority Interest in Consolidated
Subsidiaries 1,728,147 1,738,887
______________ ______________
TOTAL LIABILITIES 1,090,212,913 1,167,908,012
______________ ______________
STOCKHOLDERS' EQUITY
Preferred Stock, Series A, B, C, D,
E Cumulative with Variable Rate,
$10 Par Value, Authorized 8,325,000,
issued 1,935,141 Shares and
1,945,407 Shares (Liquidation
Preference $49,478,075 and
$49,200,583, respectively) 19,351,412 19,454,071
Class A Common Stock-Voting, $2,250
par value, authorized 222 shares,
issued 130 shares 293,417 293,417
Additional Paid-In Capital 18,961,398 18,580,051
Retained Earnings 24,668,656 21,109,849
Accumulated other comprehensive income (818,369) (680,619)
______________ ______________
TOTAL STOCKHOLDERS' EQUITY 62,456,514 58,756,769
______________ ______________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,152,669,427 $1,226,664,781
============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
____________ ____________
<S> <C> <C>
REVENUES
Insurance Premiums Earned $ 675,000 $ 700,000
Interest and Earned Discounts 22,546,428 22,223,453
Real Estate Sales 7,782,847 9,023,915
Fees, Commissions, Service and Other
Income 1,748,935 1,780,820
Investment Gains (Losses), Net (302,957) 4,153,476
Realized Gains on Sales of Receivables 11,645,525 98,390
____________ ____________
TOTAL REVENUES 44,095,778 37,980,054
____________ ____________
EXPENSES
Insurance Policy and Annuity Benefits 10,951,812 12,265,107
Interest Expense 5,751,035 4,064,642
Cost of Real Estate Sold 7,520,227 8,457,734
Provision for Losses on Real Estate
Assets 2,157,402 1,766,034
Salaries and Employee Benefits 5,270,422 4,083,797
Commissions to Agents 1,202,119 1,958,130
Other Operating and Underwriting
Expenses 2,646,962 1,548,582
Decrease in Deferred Acquisition Costs 1,745,899 409,102
____________ ____________
TOTAL EXPENSES 37,245,878 34,553,128
____________ ____________
Income Before Income Taxes and
Minority Interest 6,849,900 3,426,926
Provision for Income Taxes (2,398,141) (1,158,582)
____________ ____________
Income Before Minority Interest 4,451,759 2,268,344
(Income) Loss of Consolidated Subsidiaries
Allocated to Minority Stockholders 10,740 (29,940)
____________ ____________
Net Income 4,462,499 2,238,404
Preferred Stock Dividends (825,448) (988,271)
____________ ____________
INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 3,637,051 $ 1,250,133
============ ============
Basic and Diluted Income per Share
Applicable to Common Stockholders $ 27,977 $ 9,616
============ ============
Weighted Average Number of shares of Common
Stock Outstanding 130 130
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
____________ ____________
<S> <C> <C>
NET INCOME $ 4,462,499 $ 2,238,404
OTHER COMPREHENSIVE LOSS, BEFORE INCOME
TAXES:
Change in unrealized losses on
investments (208,712) (398,264)
Less deferred income tax benefit (70,962) (135,409)
____________ ____________
Net other comprehensive income (loss) (137,750) (262,855)
____________ ____________
Comprehensive income $ 4,324,749 $ 1,975,549
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1998 1997
______________ ______________
<S> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (24,641,818) $ 5,421,022
______________ ______________
CASH FLOWS FROM INVESTING ACTIVITIES
Principal Payments on Real Estate
Contracts and Mortgage Notes and
Other Receivables 30,842,794 33,963,548
Proceeds From Real Estate Sales 6,418,501 5,833,371
Proceeds From Investment Maturities 13,665,167 4,213,283
Proceeds from Sale of Available-for-
Sale Securities 2,991,773 1,770,168
Purchase of Available-for-Sale
Securities (14,676,712)
Proceeds From Sale of Real Estate
Contracts and Mortgage Notes and
Other Receivables 276,825,258 11,407,020
Acquisition of Real Estate Contracts
and Mortgage Notes and Other
Receivables (121,133,043) (109,894,173)
Additions to Real Estate Held (3,907,172) (4,070,583)
Capital Expenditures (365,174) (12,302,770)
______________ ______________
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 190,661,392 (69,080,136)
______________ ______________
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change Short Term Borrowings From
Brokers and Banks (77,342,288) 53,161,607
Receipts From Life and Annuity 41,747,096 14,801,881
Products
Withdrawals on Life and Annuity
Products (25,551,057) (31,283,358)
Ceding of Life and Annuity Products to
Reinsurers, Net (30,053,218) 678,868
Repayment to Banks and Others (65,881) (201,627)
Issuance of Debenture Bonds 8,065,511 13,685,931
Issuance of Preferred Stock 452,694 541,239
Repayment of Debenture Bonds (7,038,357) (12,072,693)
Cash Dividends (903,692) (988,271)
Redemption of Preferred Stock (174,006) (239,395)
______________ ______________
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (90,863,198) 38,084,182
______________ ______________
Net Change in Cash and Cash Equivalents 75,156,376 (25,574,932)
Cash and Cash Equivalents at Beginning
of Period 31,733,362 58,924,958
______________ ______________
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 106,889,738 $ 33,350,026
============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the Company's financial position as of December 31, 1998,
and the results of operations for the three months ended December 31,
1998 and 1997 and the cash flows for the three months ended December 31,
1998 and 1997. The results of operations for the three month periods
ended December 31, 1998 and 1997 are not necessarily indicative of the
results to be expected for the full year. As provided for in
regulations promulgated by the Securities and Exchange Commission, all
financial statements included herein are unaudited; however, the
condensed consolidated balance sheet at September 30, 1998 has been
derived from the audited consolidated balance sheet. These financial
statements should be read in conjunction with the consolidated financial
statements including notes thereto included in the Company's fiscal 1998
Form 10-K.
2. The principal amount of receivables as to which payments were in arrears
more than three months was $35,600,000 at December 31, 1998 and
$34,000,000 at September 30, 1998.
3. The Company had no outstanding legal proceedings other than normal
proceedings associated with receivable foreclosures and/or the general
business activities of the Company.
4. Certain amounts in the prior year's condensed 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.
5. In November, 1998, the Company and its subsidiary Western United Life
Assurance Company (WULA) participated as two of the four co-sellers in a
receivable securitization sponsored by Metropolitan Asset Funding Inc.,
II, an affiliated company. Approximately $194.4 million of receivables,
with $182.4 million provided by the Company and WULA, were sold in the
securitization. The Company and WULA recorded approximately $8.8
million in pre-tax gains from their portion of the sale. In December,
1998, the Company participated as one of the two co-sellers in a
structured settlement securitization sponsored by Select Asset Funding
Corporation, an affiliated company. Approximately $37.7 million in
structured settlements at amortized costs, with $21.8 million provided
by the Company, were sold in the securitization. The Company recorded
approximately $1.4 million in pre-tax gains from its portion of the
sale.
6. On November 14, 1997, the Company acquired an approximately 200,000
square foot office building located at 601 West First Avenue, Spokane,
Washington, approximately three blocks from the current headquarters.
Purchase price was approximately $11.7 Million with remodel costs
estimated at an additional $5 Million. Approximately 50% of the
building is currently leased by other tenants.
7. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
These discussions may contain forward-looking statements. A forward-
looking statement may contain words such as "will continue to be," "will be,"
"continue to," "expect to," "anticipates that," "to be," or "can impact."
Management cautions that forward-looking statements are subject to risks and
uncertainties that could cause the Company's actual results to differ
materially from those projected in forward-looking statements.
Significant First Quarter Transactions:
In November 1998, Metropolitan Mortgage & Securities Co., Inc.
(Metropolitan or the Company) and its subsidiary Western United Life Assurance
Company (WULA) participated as two of four co-sellers in a receivable
securitization sponsored by Metropolitan Asset Funding II, Inc, an affiliated
company. Approximately $194.4 million of receivables, with $182.4 million
provided by Metropolitan and WULA, were sold in a securitization transaction
with proceeds, after costs, of approximately $199.3 million, which $187.0
million was allocated to Metropolitan and WULA. With an amortized carrying
value of approximately $178.2 million in the receivables sold in the
securitization, Metropolitan and WULA recorded approximately $8.8 million in
pre-tax gains from their portion of the sale. The gain included approximately
$2.5 million associated with the estimated fair value of the mortgage
servicing rights retained on the pool.
In December 1998, Metropolitan participated as one of the two co-sellers
in a structured settlement securitization sponsored by Select Asset Funding
Corporation, an affiliated company. Approximately $37.7 million of structured
settlements at amortized cost, with $21.8 million provided by Metropolitan,
were sold with proceeds, after costs, of approximately $39.7 million, of which
$23.2 million was allocated to Metropolitan. With an amortized carrying value
of approximately $21.8 million in the structured settlements sold in the
securitization, Metropolitan recorded approximately $1.4 million in pre-tax
gains from their portion of the sale.
Financial Condition and Liquidity:
As of December 31, 1998, the Company had cash or cash equivalents of
$106.9 million and liquid investments (trading or available-for-sale
securities) of $112.8 million compared to $31.7 million in cash and cash
equivalents and $81.9 million in liquid investments at September 30, 1998.
Management believes that cash and cash equivalents and other liquidity
provided by investments and available lines of credit, along with the
Company's ability to securitize real estate collateralized receivables, are
adequate to meet planned asset additions, debt retirements or other business
operational requirements during the next twelve months. Total cash and
investments at December 31, 1998, including held-to-maturity securities, were
$299.5 million as compared to $198.3 million at September 30, 1998. During
the three month period ended December 31, 1998, approximately $24.6 million
were used in operating activities. The primary reason for the use of funds in
operating activities was the acquisition of approximately $34.0 million of
trading securities. Funds provided by investing activities of $190.7 million
were primarily the result of sale proceeds and collections of receivables of
$307.7 million, proceeds from the sale of real estate of $6.4 million and
sales and maturities of investments of $16.7 million, exceeding the $121.1
million of new receivable acquisitions, additions to real estate held of $3.9
million and purchase of available-for-sale securities of $14.7 million. Funds
used in financing activities of $90.9 million were primarily the result of
decreases in short-term borrowings of $77.3 million and the net ceding of
annuity products to reinsurers of $30.1 million, which exceeded the $1.0
million net cash inflow from debentures sales less maturities, the net cash
inflow of $16.2 million in life and annuity products, and payment of cash
dividends of $900,000.
The receivable portfolio totaled $634.3 million at December 31, 1998
compared to $815.0 million at September 30, 1998. During the three months
ended December 31, 1998, the decrease primarily resulted from the principal
collections on receivables of $30.8 million, reduction for the cost basis of
receivables sold of $265.2 million and reductions due to foreclosed
receivables of approximately $6.3 million, exceeding the acquisition of
receivables totaling $121.1 million plus an additional $1.4 million in loans
to facilitate the sale of real estate.
Real estate held for sale and development increased slightly to $89.9
million at December 31, 1998 from $89.7 million at September 30, 1998. For
the three months ended December 31, 1998, real estate additions of $10.2
million, including $6.3 million of foreclosed receivables, were offset by
costs of real estate sold of $7.5 million, depreciation of $1.5 million and
charge-offs to the allowance for losses of $1.0 million.
Life insurance and annuity policy reserves decreased $4.2 million during
the three months ended December 31, 1998 to approximately $796.7 million from
$800.8 million at September 30, 1998. This decrease was the result of
withdrawals in the amount of $25.6 million and net reinsurance ceded of $30.0
million exceeding credited earnings of $9.7 million and receipts from sales of
new life and annuity products of $41.7 million. Net debenture bonds
outstanding increased by $2.1 million to $200.3 million at December 31, 1998
from $198.2 million at September 30, 1998. Net cash inflow from issuance less
maturities of debentures was approximately $1.1 million plus an additional
$1.0 million increase in credited interest held. Additionally, the Company
had cash flow, net of redemptions, of approximately $.3 million from the
reinvestment of preferred stock dividends during the three months ended
December 31, 1998. During the three month period ended December 31, 1998, the
Company had a net decrease in short-term borrowings of $77.3 million to an
approximate outstanding amount of $46.5 million on December 31, 1998. The
reduction was primarily the result of the securitization of receivables of
which portions of the proceeds were used to payoff a line of credit
collateralized in part by loans sold in the securitization.
Total assets decreased by $74.0 million to $1,152.7 million at December
31, 1998 from $1,226.7 million at September 30, 1998. During the three-month
period, the Company primarily used existing cash, cash flow from its
receivable investment portfolio and cash flow from receivable securitizations
to decrease its short-term borrowings and to increase its securities
investment portfolio. At December 31, 1998, the Company had net unrealized
losses on securities available-for-sale in the amount of $818,000 as compared
to unrealized losses of $681,000 at September 30, 1998. Net unrealized losses
on securities available-for-sale is presented as accumulated other
comprehensive loss.
Results of Operations:
The Company recorded net income before preferred dividends for the three
months ended December 31, 1998 of $4,462,000 compared to $2,238,000 in the
prior year's period. Comparing the current year's three month period with the
prior year's similar period, the increase in gains on the sale of receivables
completely offset increases in the provision for losses on real estate assets,
increases in salaries, commissions and benefits, a small decrease in the net
interest spread, a decrease in gains from the sale of real estate, a loss on
investment securities and increased other operating expenses.
For the three-month period ended December 31, 1998, the Company reported
a positive spread on its interest sensitive assets and liabilities of $6.5
million as compared to $6.6 million in the prior year's period. The slight
decrease was primarily the result of a decrease in the receivable portfolio
and the larger cash position of the Company, primarily the result of recent
securitizations. After securitizations it often takes the Company a few
months to reinvest the proceeds in new receivable investments. While there
has been some contraction in the portfolio investments earnings rate in the
current year's period, the Company has also experienced reduced renewal rates
on some of its life and annuity policies and has used short-term borrowings
with a lower interest cost in an effort to maintain its level of net interest
spread. Currently, the Company continues to control life and annuity policy
surrenders by maintaining current market credited rates. Normally, the
Company's investment earnings rates are not as sensitive to market conditions
as is its life and annuity policy rates. Thus, a sustained rise in interest
rates could have a negative impact on its net interest spread as its
liabilities presently reprice faster than its assets.
During the three months ended December 31, 1998, the Company realized
net gains on sales of receivables of $11.6 million as compared to $98,000 in
the prior year's period. The increase resulted primarily from a real estate
receivable securitization in November 1998 and a structured settlement
securitization in December 1998. The Company did not complete any
securitizations during the prior year's similar period.
During the three months ended December 31, 1998, the Company realized
net losses on investments of $303,000, including mark-to-market adjustments on
trading securities, compared to net gains of $4.2 million in the prior year's
period. The current period net loss includes both sales gains and mark-to-
market losses as higher interest rates and increased spreads to treasuries
have decreased the valuation of the trading securities, which primarily
consists of the Company's retained interests in residual certificates
associated with securitizations. The prior year's gain was primarily the
result of reduced interest rates and tightening of spreads to treasuries which
increased the fair value of the Company's trading securities. The Company
realized gains of $263,000 on sales of $7.8 million of real estate in the
current year's period compared to gains of $567,000 on sales of $9.0 million
in the prior year. It is the policy of management to actively market real
estate in order to return the investment to an earning asset.
In the three months ended December 31, 1998, the Company made
provisions for losses on receivables and real estate assets of approximately
$2.2 million as compared to $1.8 million in the prior year's period. The
increased provision is the result of an increase in the real estate asset
portfolio; in particular the Company's portfolio of repossessed properties.
The increase in reserves and valuation accounts was based upon updated
appraisals on delinquent receivables, appraisals or fair market valuations of
newly acquired repossessed properties and a slight increase in overall
delinquency rates. The Company has experienced increased receivable
delinquency rates when comparing the current year's period with the prior
year's period; however, a stable to improving real estate market has generally
offset any significant effects of the delinquency rate increases.
In the three months ended December 31, 1998, the Company has incurred
increases in other operating expenses including decreases in deferred
acquisition costs related to its insurance business. Of the $1.1 million
increase in other operating expenses, the significant increase came from
additional depreciation and amortization expenses of $900,000 associated
principally with the Company's new headquarters building. Additionally, in
the current year's period the Company experienced a larger decrease in
deferred acquisition costs related to its insurance business as increased
amortization and reduced capitalization resulted in a $1.3 million expense
increase.
New Accounting Rules:
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130). 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. The Company adopted SFAS 130 as of October 1, 1998.
The application of SFAS 130 did not have a material effect on the Company's
net income or stockholders' equity. The Statement of Comprehensive Income for
the three months ended December 31, 1997 has been presented to conform to SFAS
130.
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments for 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 SFAS 14, "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about major
customers. The Company adopted this standard as of October 1, 1998; however,
this standard does not require interim period disclosures in the initial year
of adoption.
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 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 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. SFAS 133 is effective for all quarters of fiscal
years beginning after June 15, 1999, however, earlier application is
encouraged as of the beginning of any fiscal quarter. The Consolidated Group
has not yet determined the effect of the application of this statement on its
consolidated financial statements.
In October 1998, Statement of Financial Accounting Standards No. 134,
"Accounting for Mortgage-Banking Enterprise" ("SFAS 134"), was issued. SFAS
134 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 is effective for the first fiscal quarter
beginning after December 15, 1998. The Consolidated Group has not yet
determined the effect of the application of this statement on its consolidated
financial statements
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.
Management currently contemplates that the plan, with the exception of the
contingency plan, will be substantially completed by August 1, 1999. The
contingency plan is expected to be substantially completed by 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.
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 meets 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 intends to engage a third party to
provide an external evaluation of its Year 2000 plan and the status of the
preparations of the Consolidated Group at that time.
The Consolidated Group has begun the testing of its internally developed
and supported software applications, hardware and facilities systems. Testing
to date has not produced any results which were not able to be resolved. The
testing continues to be substantially on track with the Year 2000 action plan
timeline.
The Consolidated Group is requesting 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 have been identified as higher priority are also
being tested for compliance, where testing is possible. To date, the
Consolidated Group has not received any indication from any third party that a
mission critical system or service will not be able to be certified by them as
Year 2000 compliant. The Year 2000 task force is monitoring and tracking
projected certification dates from third party providers.
The Consolidated Group has begun the development of a Year 2000
contingency plan to address potential Year 2000 related failures. 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 had developed a Year
2000 budget of approximately $1.3 million for the fiscal year commencing
October 1, 1998. Certain of these costs will be charged to or reimbursed by
the affiliated companies, and certain of these costs will be paid by the
Consolidated Group with respect to their respective costs associated with the
Year 2000 action plan. 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.
Contingency Plans
The Consolidated Group has commenced the development of a contingency plan but
has not finalized such a plan to date. Development of contingency plans for
mission critical items is the first and top priority of the contingency
planning phase. Where appropriate and feasible, the plan will also address
alternatives for internally developed systems as well as externally developed
ones, and will include steps to implement transition to an alternative system.
The plan will include trigger dates for implementing alternative solutions
prior to the Year 2000, where system testing or third party documentation
indicates that a system is not and will not be compliant. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Consolidated Group is in a "liability sensitive" position in that it
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,
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 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.
The Company believes that there has not been a material change in its
market risk since the end of its last fiscal year.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or threatened
against Metropolitan Mortgage & Securities Co., Inc. or to which its property
is subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of Security Holders during the
reporting period.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(a). Restated Articles of Incorporation, as amended,
dated November 30, 1987 (Exhibit 3(a) to
Metropolitan's Annual Report on Form 10-K for fiscal
1987).
3(b). Amendment to Articles of Incorporation dated
November 5, 1991 (Exhibit 3(c) to Registration No.
33-40220).
3(c). Amendment to Articles of Incorporation dated
September 20, 1992 (Exhibit 3(c) to Metropolitan's
Annual Report on Form 10-K for fiscal 1992).
3(d). Restated Bylaws as amended to December 26, 1995
(Exhibit 3(e) to Metropolitan's Annual Report on
Form 10-K for fiscal 1995).
4(a). Indenture, dated as of July 6, 1979, between
Metropolitan and Seattle-First National Bank,
Trustee (Exhibit 3 to Metropolitan's Annual Report
on Form 10-K for fiscal 1979).
4(b). First Supplemental Indenture, dated as of October 3,
1980, between Metropolitan and Seattle-First
National Bank, Trustee (Exhibit 4 to Metropolitan's
Annual Report on Form 10-K for fiscal 1980).
4(c). Second Supplemental Indenture, dated as of November
12, 1984, between Metropolitan and Seattle-First
National Bank, Trustee (Exhibit 4(d) to Registration
No. 2-95146).
4(d). Third Supplemental Indenture, dated as of December
31, 1997 between Metropolitan and First Trust
(Exhibit 4(d)) to Form 10-K filed January 8, 1998).
4(e). Amended Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
C (Exhibit 4(g) to Registration No. 33-2699).
4(f). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series D (Exhibit
4(a) to Registration No. 33-25702).
4(g). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series E-1 (Exhibit
4(a) to Registration No. 33-19238).
4(h). Amended Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
E-2 (Exhibit 4(a) to Registration No. 33-25702).
4(i). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series E-3 (Exhibit
4(a) to Registration No. 33-32586).
4(j). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock, Series E-4
(Exhibit 4(h) to Registration No. 33-40221).
4(k). Form of Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
E-5 (Exhibit 4(i) to Registration No. 33-57396).
4(l). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock, Series E-6
(Exhibit 4(1) to Registration No. 333-19755).
4(m). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock, Series E-7
(Exhibit 4(d) to Amendment 1 to Registration No. 333-
19755).
10(a). Employment Agreement between Metropolitan Mortgage
and Securities Co., Inc. and Bruce Blohowiak
(Exhibit 10(a) to Form 10-K filed January 8, 1998).
10(b). Employment Agreement between Metropolitan Mortgage
and Securities Co., Inc. and Michael Kirk (Exhibit
10(b) to Form 10-K filed January 8, 1998).
10(c). Employment Agreement between Metropolitan Mortgage
and Securities Co., Inc. and Jon McCreary (Exhibit
10(c) to Form 10-K filed January 8, 1998).
10(d). Reinsurance Agreement between Western United Life
Assurance Company and Old Standard Life Insurance
Company (Exhibit 10(d) for the fiscal year ended
September 30, 1998.
11. Statement indicating Computation of Per-Share
Earnings (see Condensed Consolidated Financial
Statements).
*27. Financial Data Schedule
*Filed herewith.
(b) Reports on Form 8-K
On December 4, 1998 a Report on Form 8-K was filed reporting that
on November 24, 1998 Metropolitan and WULA sold through a
securitization approximately $182.4 Million in first lien mortgage
loans.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on this 22nd day of
February, 1999 on its behalf by the undersigned, thereunto duly authorized.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
/s/ C. PAUL SANDIFUR, JR.
______________________________________________
C. Paul Sandifur, Jr.
Chairman, President, Chief Executive Officer
/s/ BRUCE J. BLOHOWIAK
______________________________________________
Bruce J. Blohowiak
Executive Vice President, Chief Operating Officer and
Director
/s/ STEVEN CROOKS
______________________________________________
Steven Crooks
Vice President, Principal Accounting Officer
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