<PAGE>
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, 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 ____________
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
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(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.
<PAGE>
Yes /X / 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": 129 shares at January 31, 2000.
Common "B": 0 shares at January 31, 2000.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
Condensed Consolidated Balance Sheets
As of December 31, 1999 and September 30, 1999 (unaudited)
Condensed Consolidated Statements of Operations
Three Months Ended December 31, 1999 and 1998 (unaudited)
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended December 31, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31, 1999 and 1998 (unaudited)
Notes to Condensed Consolidated Financial Statements
<PAGE>
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,
1999 1999
------------- ---------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 29,003,825 $ 20,406,837
Investments
Trading Securities, at market 47,457,470 45,013,522
Available-for-Sale Securities, at Market 173,129,183 156,263,086
Held-to-Maturity Securities, at amortized cost (market
value $63,259,838 and $65,227,686) 65,197,960 66,441,407
Accrued Interest on Investments 2,724,744 1,855,352
-------------- --------------
TOTAL CASH AND INVESTMENTS 317,513,182 289,980,204
-------------- --------------
Real Estate Contracts and Mortgage Notes and Other
Receivables, net, including real estate contracts and
mortgage notes receivable held for sale of approximately
$39,875,000 and $201,815,000 638,963,147 714,233,797
Real Estate for Held Sale and Development,Including
Foreclosed Real Estate 85,629,609 85,747,433
-------------- --------------
Total Receivables and Real Estate Assets 724,592,756 799,981,230
Less Allowance for Losses (9,451,305) (9,318,072)
-------------- --------------
NET RECEIVABLES AND REAL ESTATE ASSETS 715,141,451 790,663,158
-------------- --------------
Deferred Acquisition Costs, Net 65,688,525 66,339,586
Land, Building and Equipment, net of accumulated
depreciation 27,682,096 26,342,123
Mortgage Servicing Rights, Net 13,388,573 10,898,621
Other Assets, net of allowance, including receivable from
affiliates 34,730,298 46,732,827
-------------- --------------
TOTAL ASSETS $1,174,144,124 $1,230,956,519
============== ==============
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, continued
(unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
(unaudited) (audited)
-------------- ---------------
<S> <C> <C>
LIABILITIES
Life Insurance and Annuity Reserves $ 804,560,895 $ 795,744,055
Debenture Bonds and Accrued Interest 184,292,709 198,888,779
Advances under line of credit 38,570,748 62,908,030
Other Debt Payable 53,395,480 74,436,600
Accounts Payable and Accrued Expenses 10,307,139 11,274,411
Deferred Income Taxes 12,055,673 13,943,294
Minority Interest in Consolidated Subsidiaries 2,075,187 2,056,887
______________ _____________
TOTAL LIABILITIES 1,105,257,831 1,159,252,056
______________ _____________
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 $55,156,883 and $53,094,517, respectively) 19,109,776 19,099,294
Class A Common Stock-Voting, $2,250 Par value, authorized
222 shares, issued 129 and 129 shares 291,167 291,167
Additional Paid-In Capital 24,477,546 22,522,036
Retained Earnings 30,482,527 33,430,689
Accumulated other comprehensive loss (5,474,724) (3,638,723)
______________ _____________
TOTAL STOCKHOLDERS' EQUITY 68,886,293 71,704,463
______________ _____________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,174,144,124 $1,230,956,519
============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
(unaudited) (unaudited)
------------ ------------
<S> <C> <C>
REVENUES
Insurance Premiums Earned $ 700,000 $ 675,000
Interest and Earned Discounts 22,547,529 22,546,428
Real Estate Sales 8,542,974 7,782,847
Fees, Commissions, Service and Other Income 2,768,198 1,748,935
Investment Gains (Losses), Net (917,391) (302,957)
Realized Gains on Sales of Receivables 5,295,408 11,645,525
------------ ------------
TOTAL REVENUES 38,936,718 44,095,778
------------ ------------
EXPENSES
Insurance Policy and Annuity Benefits 12,239,700 10,951,812
Interest Expense 5,827,814 5,751,035
Cost of Real Estate Sold 7,565,462 7,520,227
Provision for Losses on Real Estate Assets 3,005,272 2,157,402
Salaries and Employee Benefits 7,224,410 5,270,422
Commissions to Agents 2,677,382 1,202,119
Other Operating and Underwriting Expenses 2,519,257 2,646,962
Amortization of Deferred Acquisition Costs, net of costs
capitalized 630,136 1,745,899
------------ ------------
TOTAL EXPENSES 41,689,433 37,245,878
------------ ------------
Income (Loss) Before Income Taxes and Minority Interest (2,752,715) 6,849,900
(Provision) Benefit for Income Taxes 976,216 (2,398,141)
------------ ------------
Income (Loss) Before Minority Interest (1,776,499) 4,451,759
Income (Loss) of Consolidated Subsidiaries Allocated to
Minority Stockholders (18,300) 10,740
------------ ------------
Net Income (Loss) (1,794,799) 4,462,499
Preferred Stock Dividends (1,075,719) (825,448)
------------ ------------
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $(2,870,518) $ 3,637,051
============ ============
Basic and Diluted Income (Loss) per Share Applicable to Common $ (22,252) $ 27,977
Stockholders ============ ============
Weighted Average Number of shares of Common Stock Outstanding 129 130
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
----------- ----------
<S> <C> <C>
NET INCOME (LOSS) $(1,794,799) $4,462,499
OTHER COMPREHENSIVE LOSS:
Change in unrealized losses on investments (2,823,849) (208,712)
Less deferred income tax benefit 987,848 70,962
----------- ----------
Net other comprehensive loss (1,836,001) (137,750)
----------- ----------
Comprehensive income (loss) $(3,630,800) $4,324,749
=========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1999 1998
------------- -------------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 13,134,270 $ (24,641,818)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal Payments on Real Estate Contracts and Mortgage Notes
and Other Receivables 42,075,131 30,842,794
Proceeds From Real Estate Sales 8,542,974 6,418,501
Proceeds From Investment Maturities 2,540,094 13,665,167
Proceeds from Sale of Available-for- Sale Securities 0 2,991,773
Purchase of Available-for-Sale Securities (21,065,217) (14,676,712)
Proceeds From Sale of Real Estate Contracts and Mortgage Notes
and Other Receivables 195,201,045 276,825,258
Acquisition of Real Estate Contracts and Mortgage Notes and
Other Receivables (164,394,571) (121,133,043)
Additions to Real Estate Held (2,677,495) (3,907,172)
Capital Expenditures (1,779,628) (365,174)
------------- -------------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 58,442,333 190,661,392
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in borrowings (45,074,554) (77,342,288)
Receipts From Life and Annuity Products 26,193,205 41,747,096
Withdrawals on Life and Annuity Products (28,755,898) (25,551,057)
Ceding of Life and Annuity Products to Reinsurers, Net (160,167) (30,053,218)
Repayment of Debt Payable (252,105) (65,881)
Issuance of Debenture Bonds 32,854,995 8,065,511
Issuance of Preferred Stock 2,183,497 452,694
Repayment of Debenture Bonds (48,597,720) (7,038,357)
Cash Dividends (1,153,363) (903,692)
Redemption of Preferred Stock (217,505) (174,006)
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (62,979,615) (90,863,198)
------------- -------------
Net Change in Cash and Cash Equivalents 8,596,988 75,156,376
Cash and Cash Equivalents at Beginning of Period 20,406,837 31,733,362
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,003,825 $ 106,889,738
============= ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
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, 1999,
the results of operations for the three months ended December 31, 1999 and
1998 and the cash flows for the three months ended December 31, 1999 and
1998. The results of operations for the three month periods ended December
31, 1999 and 1998 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, 1999 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 1999 Form 10-K.
2. The principal amount of receivables as to which payments were in arrears
more than three months was $32,000,000 at December 31, 1999 and $30,000,000
at September 30, 1999.
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 to the current year's
presentation. These reclassifications had no effect on net income or
retained earnings as previously reported.
5. In October 1999, the Company and its subsidiary Western United Life
Assurance Company (WULA)participated in a receivable securitization
sponsored by Metropolitan Asset Funding Inc., II, an affiliated company.
Approximately $51.5 million of receivables were sold in the securitization.
The Company and WULA recorded approximately $1.1 million in pre-tax gains
from their portion of the sales. In November 1999, the Company and WULA
participated in a receivable securitization sponsored by Metropolitan Asset
Funding Inc., II, an affiliated company. Approximately $153.3 million of
receivables were sold in the securitization with a pre-tax gain of
approximately $4.0 million. In November 1998, the Company and WULA
participated as two of the four co-sellers in a receivable
<PAGE>
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. 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.
7. The Company principally operates in three industry segments which
encompass: (1) the investing in real estate contracts and mortgage notes
receivable, other receivables and investment securities; (2) insurance and
annuity operations; and (3) a 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. All
transactions between segments are eliminated. The Company allocates certain
overhead and operating expenses amongst its segments.
Information about the Company's separate business segments and in total as
of and for the quarters ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
As of and for the quarter ended December 31, 1999
------------------------------------------------------------------------------------------
Property Intersegment
Investing Insurance Development Elimination Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 18,461,602 $ 20,497,474 $ 1,959,877 $ (1,982,235) $ 38,936,718
Income (loss) from operations (4,821,926) 1,954,485 48,726 - (2,752,715)
Identifiable assets, net 335,166,734 916,287,065 63,516,039 (140,825,714) 1,174,144,124
Depreciation and amortization 376,547 169,619 593,833 - 1,139,999
Capital expenditures 1,598,400 181,228 - - 1,779,628
</TABLE>
<TABLE>
<CAPTION>
As of and for the quarter ended December 31, 1998
-------------------------------------------------------------------------------------------
Intersegment
Investing Insurance Property Development Elimination Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 22,875,566 $ 20,831,574 $ 3,515,039 $ (3,126,401) $ 44,095,778
Income (loss) from operations 9,106,342 (840,208) (1,416,234) 6,849,900
Identifiable assets, net 267,685,905 918,795,787 65,034,403 (98,846,668) 1,152,669,427
Depreciation and amortization 308,985 72,275 1,549,290 - 1,930,550
Capital expenditures 357,274 7,900 - - 365,174
</TABLE>
<PAGE>
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 October 1999, the Company and its subsidiary Western United Life
Assurance Company (WULA)participated in a receivable securitization sponsored by
Metropolitan Asset Funding Inc., II, an affiliated company. Approximately $51.5
million of receivables were sold in the securitization. The Company and WULA
recorded approximately $1.1 million in pre-tax gains from their portion of the
sales. In November 1999, the Company and WULA participated in a receivable
securitization sponsored by Metropolitan Asset Funding Inc., II, an affiliated
company. Approximately $153.3 million of receivables were sold in the
securitization with a pre-tax gain of approximately $4.0 million.
In November 1998, the Company and 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.
<PAGE>
Financial Condition and Liquidity:
As of December 31, 1999, the Company had cash or cash equivalents of $29.0
million and liquid investments (trading or available-for-sale securities) of
$220.6 million compared to $20.4 million in cash and cash equivalents and $201.3
million in liquid investments at September 30, 1999. 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, 1999, including held-
to-maturity securities, were $317.5 million as compared to $290.0 million at
September 30, 1999. During the three month period ended December 31, 1999,
operating activities generated approximately $13.1 million. The primary reason
for the provision of funds in operating activities was the decrease in other
assets and the proceeds from payments and maturities of trading securities.
Funds provided by investing activities of $58.4 million were primarily the
result of sale proceeds and collections of receivables of $237.3 million,
proceeds from the sale of real estate of $8.5 million and sales and maturities
of investments of $2.5 million. These changes were partially offset by $164.4
million of new receivable acquisitions, purchase of available-for-sale
securities of $21.1 million, and additions to real estate held of $2.7 million.
Funds used in financing activities of $63.0 million were primarily the result of
decreases in short-term borrowings of $45.1 million, the net cash outflow from
debentures sales less maturities of $15.7 million and the net cash outflow of
$2.6 million in life and annuity products.
The receivable portfolio totaled $639.0 million at December 31, 1999
compared to $714.2 million at September 30, 1999. During the three months ended
December 31, 1999, the decrease primarily resulted from the principal
collections on receivables of $42.1 million, reduction for the cost basis of
receivables sold of $185.9 million and reductions due to foreclosed receivables
of approximately $7.5 million, exceeding the acquisition of receivables totaling
$164.4 million.
Real estate held for sale and development remained relatively constant at
$85.6 million at December 31, 1999 as compared to $85.7 million at September 30,
1999. For the three months ended December 31, 1999, real estate additions of
$8.8 million, including $6.1 million of foreclosed receivables, were offset by
costs of real estate sold of $7.6 million, depreciation
<PAGE>
of $0.3 million and charge-offs to the allowance for losses of $1.0 million.
Life insurance and annuity policy reserves increased $8.8 million during
the three months ended December 31, 1999 to approximately $804.6 million from
$795.7 million at September 30, 1999. This increase was the result of receipts
from sales of new life and annuity products of $26.2 million and a decrease in
the required reserves of $11.5 million, partially offset by withdrawals in the
amount of $28.8 million. Net debenture bonds outstanding decreased by $14.6
million to $184.3 million at December 31, 1999 from $198.9 million at September
30, 1999. Net cash outflow from maturities of debentures less issuances was
approximately $15.7 million less an additional $1.1 million increase in credited
interest. Additionally, the Company had cash flow, net of redemptions, of
approximately $2.0 million from the sales of preferred stock and the
reinvestment of preferred stock dividends during the three months ended December
31, 1999. During the three month period ended December 31, 1999, the Company had
a net decrease in borrowings of $45.1 million to an approximate outstanding
amount of $92.0 million on December 31, 1999. 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 receivables sold
in the securitization.
Total assets decreased by $56.8 million to $1,174.1 million at December 31,
1999 from $1,231.0 million at September 30, 1999. 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, 1999, the Company had net unrealized losses on securities
available-for-sale in the amount of $5.5 million as compared to unrealized
losses of $3.6 million at September 30, 1999. Net unrealized losses on
securities available-for-sale are presented as accumulated other comprehensive
loss in stockholders' equity.
Results of Operations:
The Company recorded a net loss before preferred dividends for the three
months ended December 31, 1999 of $1.8 million compared to net income of $4.5
million in the prior year's period. Comparing the current year's three month
period with the prior year's similar period, the gains on the sale of
receivables decreased by approximately $6.4 million, salaries, benefits, and
commission expense increased by $3.4 million and insurance policy and annuity
benefits expense increase by approximately $1.3
<PAGE>
million. These increases were partially offset by an increase in fees,
commissions service and other income of $1.0 million and an increase in the tax
benefit of $3.4 million.
For the three-month period ended December 31, 1999, the Company reported a
positive spread on its interest sensitive assets and liabilities of $5.2 million
as compared to $6.5 million in the prior year's period. The decrease was
primarily the result of a decrease in the average 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, 1999, the Company realized net
gains on sales of receivables of $5.3 million as compared to $11.6 million in
the prior year's period. The decrease resulted primarily from market conditions
which resulted in lower margins for the securitized product.
During the three months ended December 31, 1999, the Company realized net
losses on investments of $0.9 million, including mark-to-market adjustments on
trading securities, compared to net losses of $0.3 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 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 Company realized gains of $1.0 million on sales of $8.5
million of real estate in the current year's period compared to gains of
$263,000 on sales of $7.8 million in the prior year. It is the policy of
management to actively market
<PAGE>
real estate in order to return the investment to an earning asset.
In the three months ended December 31, 1999, the Company made provisions
for losses on receivables and real estate assets of approximately $3.0 million
as compared to $2.2 million in the prior year's period. The increased provision
is the result of an increase in the Company's portfolio of repossessed
properties and market conditions. 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 review
of the receivables delinquency rates. The Company has experienced increased
receivable delinquency rates when comparing the current year's period with the
prior year's period; however in the past, 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, 1999, the Company has incurred
increases in operating expenses. The increase in salaries, employee benefits and
commissions of $3.4 million reflects the increased receivable acquisition volume
in the current period as compared to the quarter ended December 31, 1998. The
Company has also experienced a larger deferral of costs related to the insurance
operations which is reflected in the $1.1 million decrease in amortization of
deferred acquisition costs, net of costs capitalized.
New Accounting Rules:
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 Company adopted this standard effective October 1,
1999 with no 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 provides guidance
on accounting for the costs of computer software by identifying the
characteristics of internal-use software. The Company adopted this standard
<PAGE>
effective October 1, 1999 with no material effect 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. The
plan, with the exception of the contingency plan, was completed by September 30,
1999. The contingency plan, including rollover planning was completed by
December 1, 1999, but has continued to be revised thereafter as needed in order
to maintain an effective contingency plan. The action plan included 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.
<PAGE>
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 included a timeline for the completion of each of the phases and
components of the work within each phase. Many of the different phases had
overlapping timelines and, therefore, progressed simultaneously. 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 has completed the testing of its internally
supported software applications and its hardware. Testing to date did not
produce any results which were not able to be resolved. Newly acquired or
upgraded software, hardware and facilities systems will continue to be tested as
deemed necessary.
The Consolidated Group has 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 tested for
compliance, where testing is possible. The Consolidated Group has not received
any indication from any third party that a mission critical system or service
was not Year 2000 compliant.
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 $1.4 million
in Year 2000 related costs through December 31, 1999. The Consolidated Group
does not believe that 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
<PAGE>
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 developed a contingency plan which included plans for
mission critical items as the first and top priority. Where appropriate and
feasible, the plan also addressed alternatives for internally developed systems
as well as externally developed ones, and included steps to implement transition
to an alternative system. The plan included trigger dates for implementing
alternative solutions prior to the Year 2000, where system testing or third
party documentation indicates
<PAGE>
that a system was not and would 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 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, 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.
<PAGE>
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. and its subsidiaries 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
3.01. 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).
3.02. Amendment to Articles of Incorporation dated November 5,
1991 (Exhibit 3(c) to Registration No. 33-40220).
3.03. Amendment to Articles of Incorporation dated September 20,
1992 (Exhibit 3(c) to Metropolitan's Annual Report on Form
10-K for fiscal 1992).
3.04. Restated Bylaws as amended to December 26, 1995 (Exhibit
3(e) to Metropolitan's Annual Report on Form 10-K for
fiscal 1995).
4.01. Indenture, dated as of October 1999, between Metropolitan
and U.S. Bank Trust National
<PAGE>
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 4 to Metropolitan's Annual Report on
Form 10-K for fiscal 1980.)
4.03. 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).
4.04. 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).
4.05. 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).
4.06. Amended Statement of Rights, Designations and Preferences
of Variable Rate Preferred Stock, Series C (Exhibit 4(g) to
Registration No. 33-2699).
4.07. Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series D (Exhibit 4(a) to
Registration No. 33-25702).
4.08. Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series E-1 (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 (Exhibit 4(a)
to Registration No. 33-25702).
4.10. Statement of Rights, Designations and Preferences of
Variable Rate Preferred
<PAGE>
Stock, Series E-3 (Exhibit 4(a) to Registration No. 33-
32586).
4.11. Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock, Series E-4
(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 (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
(Exhibit 4(1) to Registration No. 333-19755).
4.14. 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).
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 (Exhibit 10(a) to
Form 10-K filed January 8, 1998).
10.02 Employment Agreement between Metropolitan Mortgage and
Securities Co., Inc. and Michael Kirk (Exhibit 10(b) to
Form 10-K filed January 8, 1998).
10.03. Employment Agreement between Metropolitan Mortgage and
Securities Co., Inc. and Jon McCreary (Exhibit 10(c) to
Form 10-K filed January 8, 1998).
10.04. 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.
10.05. Employment Agreement between Metropolitan Mortgage and
Securities Co., Inc. and William D. Snider (Incorporated by
reference
<PAGE>
to Exhibit 10(c) to Metropolitan's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1999.
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
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on this 14th 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/ WILLIAM SNIDER
___________________________________________
William Snider
Vice President, Chief Finanical Officer
/s/ JULIE HANLEY
___________________________________________
Julie Hanley
Vice President, Principal Accounting Officer
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 29,004
<SECURITIES> 288,509
<RECEIVABLES> 638,963
<ALLOWANCES> 9,451
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<CURRENT-ASSETS> 0
<PP&E> 48,853
<DEPRECIATION> 14,123
<TOTAL-ASSETS> 1,174,144
<CURRENT-LIABILITIES> 0
<BONDS> 184,293
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<COMMON> 19,110
<OTHER-SE> 49,484
<TOTAL-LIABILITY-AND-EQUITY> 1,174,144
<SALES> 0
<TOTAL-REVENUES> 38,937
<CGS> 0
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<OTHER-EXPENSES> 32,856
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<INCOME-PRETAX> (2,753)
<INCOME-TAX> (976)
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