<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 March 31, 2000
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 /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": 127 shares at April 30, 2000.
Common "B": 0 shares at April 30, 2000.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
Consolidated Balance Sheets
As of March 31, 2000 and September 30, 1999 (unaudited).......... 4
Consolidated Statements of Operations
Three Months Ended March 31, 2000 and 1999 (unaudited)
Six Months Ended March 31, 2000 and 1999 (unaudited)............. 5
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended March 31, 2000 and 1999 (unaudited)
Six Months Ended March 31, 2000 and 1999 (unaudited)............. 7
Consolidated Statement of Stockholders' Equity
Six Months Ended March 31, 2000 (unaudited)...................... 8
Consolidated Statements of Cash Flows
Six Months Ended March 31, 2000 and 1999 (unaudited)............. 9
Notes to Condensed Consolidated Financial Statements............. 11
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
----------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 17,312,748 $ 20,406,837
Investments
Trading securities, at market 68,321,566 45,013,522
Available-for-sale securities, at market 220,214,661 156,263,086
Held-to-maturity securities, at amortized
cost (market value $60,510,161 and
$65,227,686) 62,268,587 66,441,407
Accrued interest on investments 2,620,211 1,855,352
--------------- ---------------
TOTAL CASH AND INVESTMENTS 370,737,773 289,980,204
--------------- ---------------
Real estate contracts and mortgage notes
receivable, net, including real estate
contracts and mortgage notes receivable
held for sale of approximately $42,055,000
and $201,815,000 427,231,631 539,525,957
Real estate held for sale and development,
including foreclosed real estate 81,090,967 85,747,433
--------------- ---------------
Total receivables and real estate assets 508,322,598 625,273,390
Less allowance for losses (9,432,008) (9,318,072)
--------------- ---------------
NET RECEIVABLES AND REAL ESTATE ASSETS 498,890,590 615,955,318
--------------- ---------------
Other receivable investments, net 185,405,374 174,707,840
Deferred acquisition costs, net 66,491,483 66,339,586
Land, building and equipment, net of
accumulated depreciation 30,324,422 26,342,123
Mortgage servicing rights, net 14,509,990 10,898,621
Other assets, net of allowance,
including receivable from affiliates 32,014,739 46,732,827
--------------- ---------------
TOTAL ASSETS $1,198,374,371 $1,230,956,519
=============== ===============
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
(unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
--------------------------------------------------
<S> <C> <C>
LIABILITIES
Life insurance and annuity reserves $ 801,023,802 $ 795,744,055
Debenture bonds and accrued interest 208,202,018 198,888,779
Advances under line of credit 40,665,816 62,908,030
Other debt payable 46,581,441 74,436,600
Accounts payable and accrued expenses 17,582,874 11,274,411
Deferred income taxes 11,012,583 13,943,294
Minority interest in consolidated subsidiaries 2,149,237 2,056,887
-------------- -------------
TOTAL LIABILITIES 1,127,217,771 1,159,252,056
-------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, series A, B, C, D, E cumulative with 18,898,557 19,099,294
variable rate, $10 par value, authorized 8,325,000,
issued 1,889,856 shares and 1,909,929 shares (liquidation
preference $57,756,981 and $53,094,517, respectively)
Class A common stock-voting, $2,250 par value, authorized 286,667 291,167
222 shares, issued 127 and 129 shares
Additional paid-in capital 26,920,117 22,522,036
Retained earnings 29,704,003 33,430,689
Accumulated other comprehensive loss (4,652,744) (3,638,723)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 71,156,600 71,704,463
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,198,374,371 $1,230,956,519
============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
----------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Insurance premiums earned $ 267,267 $ 151,214 $ 459,941 $ 302,781
Interest on receivables 11,183,512 11,595,866 22,167,908 24,790,262
Earned discount on receivables 5,575,408 5,008,099 10,941,821 10,487,170
Other investment income 7,124,214 5,511,210 13,556,936 9,720,170
Real estate sales 13,034,852 10,516,226 21,577,826 18,299,073
Fees, commissions, service and other income 3,070,310 2,265,573 5,838,508 4,014,508
Investment gains (losses), net 2,164,116 (2,830,236) 1,246,725 (3,133,193)
Realized gains on sales of receivables 4,376,711 8,021,374 9,672,119 19,666,899
----------- ----------- ----------- -----------
TOTAL REVENUES 46,796,390 40,239,326 85,461,784 84,147,670
----------- ----------- ----------- -----------
EXPENSES
Insurance policy and annuity benefits 11,142,946 11,210,901 22,875,320 21,639,280
Interest expense 6,593,010 4,973,089 12,420,824 10,724,124
Cost of real estate sold 11,504,405 10,188,367 19,069,867 17,708,594
Provision for losses on real estate assets 2,530,823 3,482,406 5,536,095 5,639,808
Provision for losses on other assets 718,578 386,000 954,578 722,000
Salaries and employee benefits 7,960,107 5,675,209 15,184,517 10,945,631
Commissions to agents 3,144,140 2,132,245 5,821,522 3,334,364
Other operating and underwriting expenses 1,806,252 1,365,266 4,325,511 4,012,227
Amortization of deferred acquisition costs, net of costs
capitalized 633,874 1,157,806 1,264,010 2,903,705
----------- ----------- ----------- -----------
TOTAL EXPENSES 46,034,135 40,571,288 87,452,244 77,629,733
----------- ----------- ----------- -----------
Income (loss) before income taxes and minority interest 762,255 (331,963) (1,990,460) 6,517,937
(Provision) benefit for income taxes (237,037) 14,110,133 739,179 11,711,992
----------- ----------- ----------- -----------
Income (loss) before minority interest 525,218 13,778,170 (1,251,281) 18,229,929
</TABLE>
5
<PAGE>
<TABLE>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
----------------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) of consolidated subsidiaries allocated to
minority stockholders (74,050) (298,950) (92,350) (288,210)
----------- ----------- ----------- -----------
Net income (loss) 451,168 13,479,220 (1,343,631) 17,941,719
Preferred stock dividends (1,152,447) (903,002) (2,228,166) (1,728,450)
----------- ----------- ----------- -----------
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (701,279) $12,576,218 $(3,571,797) $16,213,269
=========== =========== =========== ===========
Basic and diluted income (loss) per share applicable to common
stockholders $ (5,478) $ 96,740 $ (27,688) $ 124,717
=========== =========== =========== ===========
Weighted average number of shares of common stock outstanding 128 130 129 130
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
----------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 451,168 $13,479,220 $(1,343,631) $17,941,719
OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized losses on investments (1,559,433) (4,659,168)
1,264,416 (4,450,456)
Less deferred income tax benefit (442,437) 1,525,909 545,412 1,596,871
---------- ----------- ----------- -----------
Net other comprehensive income (loss) 821,979 (2,924,547) (1,014,021) (3,062,297)
---------- ----------- ----------- -----------
Comprehensive income (loss) $1,273,147 $10,554,673 $(2,357,652) $14,879,422
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
7
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Class A Additional Other
Preferred Common Paid-In Comprehensive Retained
Stock Stock Capital Income (Loss) Earnings Total
----------- -------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1999 $19,099,294 $291,167 $22,522,036 $(3,638,723) $33,430,689 $71,704,463
Net loss (1,343,631) (1,343,631)
Net change in unrealized losses
on investments, net of taxes (1,014,021) (1,014,021)
Cash dividends, common (154,889) (154,889)
Cash dividends, preferred
(variable rate) (2,228,166) (2,228,166)
Redemption and retirement of
common stock (4,500) (207,688) (212,188)
Redemption and retirement of
preferred stock (741,093) (741,093)
Sale of variable rate preferred
stock, net 540,356 4,605,769 5,146,125
----------- -------- ----------- ----------- ----------- -----------
BALANCE, MARCH 31, 2000 $18,898,557 $286,667 $26,920,117 $(4,652,744) $29,704,003 $71,156,600
=========== ======== =========== =========== =========== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
8
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended March 31,
2000 1999
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (1,343,631) $ 17,941,719
Adjustments to reconcile net income to net cash from operating
activities
Proceeds from sales of trading securities 13,269,542 6,538,788
Proceeds from maturities of trading securities 96,501 330,820
Acquisition of trading securities (16,907,206) (42,881,731)
Earned discounts on receivables (10,941,821) (10,487,170)
Gains on investments and receivables, net (10,918,843) (16,533,706)
Gains on sales of real estate (2,507,959) (590,479)
Provision for losses on real estate assets 5,536,095 5,639,808
Provision for losses on other assets 954,578 722,000
Depreciation and amortization 2,318,194 3,450,724
Minority interests 92,350 288,210
Deferred income tax provision (benefit) (2,385,300) (6,615,678)
Changes in assets and liabilities:
Deferred costs (151,897) 2,781,553
Life insurance and annuity reserves 22,229,586 20,043,300
Compound and accrued interest on debentures and debt payable (3,341,742) 987,342
Other assets 12,766,773 (7,843,509)
Accrued interest on receivables and investments (783,257) (422,046)
Accounts payable and accrued expenses 6,225,849 2,664,616
Other, net (605,847) (795,448)
-------------- ------------
Net cash provided by (used in) operating activities 13,601,965 (24,780,887)
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments on real estate contracts and mortgage notes and other 94,239,113 73,133,449
receivables
Proceeds from real estate sales 16,610,798 14,032,773
Proceeds from investment maturities 6,228,800 23,275,139
Proceeds from sale of available-for-sale securities 6,155,340 2,991,773
Purchase of available-for-sale securities (74,593,427) (90,165,550)
Proceeds from sale of held to maturity investments 998,740 -
Purchase of held to maturity investments (42,934) -
Proceeds from sale of real estate contracts and mortgage notes and other 337,569,348 418,377,092
receivables
Acquisition of real estate contracts and mortgage notes and other (337,482,619) (294,048,335)
receivables
Additions to real estate held (4,921,613) (9,291,921)
Increase in mortgage servicing rights (3,611,369) (2,965,986)
Capital expenditures (4,978,589) (533,387)
-------------- ------------
NET CASH PROVIDED BY 36,171,588 134,805,047
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C>
INVESTING ACTIVITIES
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in borrowings (47,329,084) (108,795,722)
Receipts from life and annuity products 52,278,402 65,522,506
Withdrawals on life and annuity products (80,181,801) (50,680,607)
Ceding of life and annuity products to reinsurers (160,140) (31,425,075)
Reimbursement of life and annuity products from reinsurers 11,113,700 1,302,060
Repayment of debt payable (3,052,897) (299,720)
Issuance of debenture bonds 48,984,538 18,192,586
Issuance of preferred stock 5,146,125 937,566
Repayment of debenture bonds (36,330,149) (18,644,497)
Cash dividends (2,383,055) (1,884,937)
Redemption of preferred stock (741,093) (239,740)
Redemption of common stock (212,188) -
-------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (52,867,642) (126,015,580)
-------------- --------------
Net change in cash and cash equivalents (3,094,089) (15,991,420)
Cash and cash equivalents at beginning of period 20,406,837 31,733,362
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,312,748 $ 15,741,942
============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
10
<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 March 31, 2000, the
results of operations for the three and six months ended March 31, 2000 and
1999 and the cash flows for the six months ended March 31, 2000 and 1999.
The results of operations for the six months ended March 31, 2000 and 1999
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 real estate receivables as to which payments were
in arrears more than three months was $25,000,000 at March 31, 2000 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 consolidated financial statements have
been reclassified to conform to the current year's presentation. These
reclassifications had no effect on net income (loss) 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 March 2000, the Company and WULA
participated in a receivable securitization sponsored by Metropolitan
11
<PAGE>
Mortgage Funding Inc., an affiliated company. Approximately $148.7 million
of receivables were sold in the securitization with a pre-tax gain of
approximately $4.2 million. In November 1998, the Company and 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. In March 1999, the Company and its subsidiary, WULA,
participated as co-sellers in a receivable securitization sponsored by
Metropolitan Asset Funding, Inc., II, an affiliated company. Approximately
$124.8 million of receivables were sold in the securitization. The Company,
including its subsidiaries, recorded approximately $8.1 million in pre-tax
gains from 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) 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 six and three month period ended March 31, 2000 and 1999 is
as follows:
12
<PAGE>
<TABLE>
<CAPTION>
As of and for the six month period ended March 31, 2000
-------------------------------------------------------------------------------------------
Intersegment
Investing Insurance Property Development Elimination Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 44,713,824 $ 40,493,458 $ 4,443,782 $ (4,189,280) $ 85,461,784
Income (loss) from operations (6,377,649) 4,561,054 (173,865) - (1,990,460)
Identifiable assets, net 342,943,330 934,243,294 59,183,857 (137,996,110) 1,198,374,371
Depreciation and amortization 1,541,670 163,724 612,800 - 2,318,194
Capital expenditures 4,790,707 187,882 - - 4,978,589
</TABLE>
<TABLE>
<CAPTION>
As of and for the three month period ended March 31, 2000
-------------------------------------------------------------------------------------------
Intersegment
Investing Insurance Property Development Elimination Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 26,252,222 $ 19,995,984 $ 2,483,905 $ (1,935,721) $ 46,796,390
Income (loss) from operations (1,652,557) 2,606,569 (191,757) - 762,255
Identifiable assets, net 342,943,330 934,243,294 59,183,857 (137,996,110) 1,198,374,371
Depreciation and amortization 811,287 83,005 283,900 - 1,178,192
Capital expenditures 3,100,079 98,882 - - 3,198,961
</TABLE>
<TABLE>
<CAPTION>
As of and for the six month period ended March 31, 1999
-------------------------------------------------------------------------------------------
Intersegment
Investing Insurance Property Development Elimination Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 40,243,300 $ 42,868,813 $ 8,380,700 $ (7,345,143) $ 84,147,670
Income (loss) from operations 7,113,071 2,010,618 (2,605,752) 6,517,937
Identifiable assets, net 268,114,365 923,904,301 64,701,306 (125,146,074) 1,131,573,898
Depreciation and amortization 676,600 146,312 2,627,812 - 3,450,724
Capital expenditures 504,663 28,724 - - 533,387
</TABLE>
<TABLE>
<CAPTION>
As of and for the three month period ended March 31, 1999
--------------------------------------------------------------------------------------------
Intersegment
Investing Insurance Property Development Elimination Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 17,367,734 $ 22,037,239 $ 4,865,661 $ (4,031,308) $ 40,239,326
Income (loss) from operations (1,993,271) 2,850,826 (1,189,518) (331,963)
Identifiable assets, net 268,114,365 923,904,301 64,701,306 (125,146,074) 1,131,573,898
Depreciation and amortization 367,615 74,037 1,078,522 - 1,520,174
Capital expenditures 147,389 20,824 - - 168,213
</TABLE>
13
<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.
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"
or "WULA"), an annuity and life insurance company, and Metwest Mortgage
Services, Inc. ("Metwest"), a receivable servicer and loan originator.
The Company (the "Consolidated Group") 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. The receivables primarily consist of real estate
contracts and promissory notes collateralized by first position liens on real
estate. The Company 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 Company's real estate
receivables include A-, B and C credit quality obligors. In addition to
investing in existing receivables, the Company also originates non-conventional,
A-, B and C credit borrower loans through its Metwest subsidiary.
Individual Receivable Acquisition Sources
Historically, the majority of the Company's real estate receivables were
acquired as individual receivable acquisitions. The Company's principal source
for private market receivables is independent brokers located throughout the
United State. These independent brokers typically deal directly with private
individuals or organizations who own and wish to sell a receivable.
Capital Markets Acquisition Sources
14
<PAGE>
In the recent past, the Company acquired pools of real estate receivables
through its capital markets department. These portfolios may be either seller or
institutionally originated. They may be acquired from brokers, banks, savings
and loans organizations, mortgage broker firms or other financial institutions.
However, the investment yield on capital market acquisitions are generally lower
than private market acquisitions. Therefore, the Company recently scaled-back
this acquisition source.
Loan Origination Sources
The Company, through its Metwest subsidiary, 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.
Correspondent Lending Sources
The Company also acquires real estate loans through correspondent
agreements. Under these agreements, the Company agrees to purchase loans at a
specified yield immediately after their origination, so long as the loans comply
with the Company'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.
Lottery, Structured Settlement, Annuity and Lease Sources
The Company also negotiates the purchase of receivables which are not
collateralized by real estate, such as structured settlements, annuities and
lottery prizes. The lottery prizes generally arise out of state operated lottery
games which are typically paid in annual installments to the prize winner. The
structured settlements generally arise out of the settlement of legal disputes
where the prevailing party is awarded a sum of money, payable over a period of
time, generally through the creation of an annuity. Other annuities generally
consist of investments which cannot be cashed in directly with the issuing
insurance company. The Company's source for these investments is generally
private brokers who specialize in these types of receivables.
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Leases have been acquired through brokers who specialize in these types of
assets, primarily business equipment. 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.
Funding Sources
The Company 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.
Significant transactions in the six months ended March 31, 2000 and 1999:
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 March 2000,
the Company and WULA participated in a receivable securitization sponsored by
Metropolitan Mortgage Funding Inc., an affiliated company. Approximately $148.7
million of receivables were sold securitization with a pre-tax gain of
approximately $4.2 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
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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. In March 1999, the Company and its subsidiary, WULA,
participated as co-sellers in a receivable securitization sponsored by
Metropolitan Asset Funding, Inc., II, an affiliated company. Approximately
$124.8 million of receivables were sold in the securitization. The Company,
including subsidiary, recorded approximately $8.1 million in pre-tax gains from
the sale.
In March 1999, the Company recorded the income tax benefits from the
disposition of an investment strategy, which also generated additional losses
for income tax purposes. These losses were used to offset certain income tax
temporary differences. The Company recorded approximately $14.0 million in
income tax benefits associated with the transactions, which reduced deferred
income taxes previously recorded. The Company incurred an approximate $2.6
million investment loss associated with the transaction.
Financial Condition and Liquidity:
As of March 31, 2000, the Company had cash or cash equivalents of $17.3
million and liquid investments (trading or available-for-sale securities) of
$288.5 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 March 31, 2000, including held-to-
maturity securities, were $370.7 million as compared to $290.0 million at
September 30, 1999.
Funds provided by operating activities of $10.0 million were primarily the
result of an increase in life and annuity reserves of $22.2 million and a
decrease in other assets of $12.8 million. These changes were only partially
offset by $10.9 million in
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earned discounts and $10.9 million in gains on
investments and receivables.
Funds provided by investing activities of $39.8 million were primarily the
result of sale proceeds and collections of receivables of $431.8 million,
proceeds from the sale of real estate of $16.6 million and sales and maturities
of investments of $13.4 million. These changes were partially offset by $337.5
million of new receivable acquisitions, purchase of available-for-sale
securities of $74.6 million, and additions to real estate held of $4.9 million,
and capital expenditures of $5.0 million.
Funds used in financing activities of $52.9 million were primarily the
result of decreases in borrowings of $47.3 million, the net cash outflow of
$16.9 million in life and annuity products, repayments of other debt of $3.1
million, and cash dividends of $2.4 million. These changes were only partially
offset by the net cash inflow from debenture sales less maturities of $12.7
million, and issuance of preferred stock, including reinvestment of preferred
stock dividends, net of redemptions of $4.4 million.
Total assets decreased by $32.6 million to $1,198.4 million at March 31,
2000 from $1,231.0 million at September 30, 1999.
The receivable portfolio totaled $612.6 million at March 31, 2000 compared
to $714.2 million at September 30, 1999. During the six months ended March 31,
2000, the decrease primarily resulted from the principal collections on
receivables of $94.2 million, reduction for the cost basis of receivables sold
of $346.4 million and reductions due to foreclosed receivables of approximately
$12.2 million, exceeding the acquisition of receivables totaling $337.5 million.
Real estate held for sale and development decreased $4.6 million to $81.1
million at March 31, 2000 from $85.7 million at September 30, 1999. The cost of
real estate sold of $19.1 million, depreciation of $0.6 million and charge offs
to the allowance for losses of $2.1 million were only partially offset by real
estate additions of $17.1 million, including $12.2 million of foreclosed
receivables.
Life insurance and annuity policy reserves increased $5.3 million during
the six months ended March 31, 2000 to approximately $801.0 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 $52.3 million and an increase in the
required reserves of $22.2 million, which were partially offset by withdrawals,
net of ceding activity, in the amount of $69.2
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million. Net debenture bonds outstanding increased $9.3 million to $208.2
million at March 31, 2000 from $198.9 million at September 30, 1999. Net cash
inflows from sales of debentures less maturities were approximately $12.7
million less an additional $3.3 million increase in compounded and accrued
interest. Additionally, the Company had cash flow, net of redemptions, of
approximately $4.4 million from the sales of preferred stock and the
reinvestment of preferred stock dividends during the six months ended March 31,
2000.
During the six month period ended March 31, 2000, the Company had a net
decrease in borrowings of $50.1 million to an approximate outstanding amount of
$87.2 million on March 31, 2000. Part of the reduction in borrowings resulted
from activity related to the securitization of receivables. The Company
collateralizes a portion of the receivables acquired for securitization through
a line of credit agreement. At the time of securitization, a portion of the
proceeds are used to payoff the line of credit. During the six months ended
March 31, 2000, line of credit borrowings had a net decrease of $22.2 million.
Additionally, the Company paid off $25.0 million in short term borrowings that
were collateralized by certain securities in the investment portfolio.
At March 31, 2000, the Company had net unrealized losses on securities
available-for-sale in the amount of $4.7 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:
Six Months Ended March 31, 2000 Compared to Six Months Ended March 31, 1999.
The Company originated and purchased $342.4 million in real estate
contracts, mortgage notes and other cash flow receivables for the six month
period ended March 31, 2000, compared to $264.9 million for the six month period
ended March 31, 1999. Individual seller-financed loans acquired from the private
market totaled $103.0 million or 30.1% of total production for the six month
period ended March 31, 2000. Loans acquired from the capital markets and
correspondents total $72.2 million or 21.1% of total production for the six
month period ended March 31, 2000. Loans originated through the Company's
Metwest subsidiary totaled $123.8 million or 36.2% of total production for the
six month period ended March 31, 2000. Purchases of lottery, structured
settlements and annuities totaled $23.1 million or 6.7% of total
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production for the six month period ended March 31, 2000. All other production
of receivables including leasing, loans to facilitate the sale of the Company's
development properties and purchases from affiliates, totaled $20.3 or 5.9% of
total production for the six month period ended March 31, 2000.
The loss before income taxes and minority interest for the six months ended
March 31, 2000 was $2.0 million on $85.5 million in revenues compared to $6.5
million in income on $84.1 million in revenues for the six month period ended
March 31, 1999. Gains on sales of receivables decreased from $19.7 million to
$9.7 million. This decrease was primarily the result of a $9.0 million reduction
in securitization gains. The securitization gains decreased from $18.3 million
on $344.9 million of receivables sold for the six months ended March 31, 1999,
to $9.3 million on $353.5 million of receivables sold for the six months ended
March 31, 2000. The decrease in securitization gains resulted mainly from
increasing interest rates as investors in the Company's mortgage-backed
securities demand higher yields in line with competing financial instruments.
Market changes, including increased competition, has also reduced the yields at
which the Company can acquire securitizable product. These reduced yields have
also contributed to the decrease in securitization gains. The other $1.0 million
decrease in gains on receivables was the result of receivable sales to
affiliates and other third parties in the prior year.
Management monitors interest sensitive income and expenses as it manages
the objectives for the Company's results of operations. Interest sensitive
income consists of interest and earned discounts 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 Company is in a "liability sensitive" position in that its interest
sensitive liabilities reprice or mature more quickly than do its interest
sensitive assets. Consequently, in a rising interest rate environment, the net
return from interest sensitive assets and liabilities will tend to decrease.
Conversely, in a falling interest rate environment, the net return from interest
sensitive assets and liabilities will tend to improve.
During the six month period ended March 31, 2000, the Company reported a
positive spread on its interest sensitive assets and liabilities of $11.8
million compared to $12.9 million in the prior years period. Interest and earned
discount on receivables decreased $2.2 million to $33.1 million for the six
month period ended March 31, 2000, compared to $35.3 million for the six month
period ended March 31, 1999. The decrease in
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interest and earned discount was primarily the result of a decrease in the
average receivable portfolio balance due to securitization activity in addition
to the Company experiencing reduced yields on its real estate receivable
production. Other investment income increased $3.8 million to $13.6 million for
the six month period ended March 31, 2000 from $9.7 million for the six months
ended March 31, 1999 as the Company increased its securities investment
portfolio. Interest expense and insurance policy and annuity benefits increased
$2.9 million for the six month period ended March 31, 2000 to $35.3 compared to
$32.4 for the six month period ended March 31, 1999. The increase was primarily
the result of a growth in the Company's average borrowing balance in addition to
the repricing of interest sensitive liabilities in a rising interest rate
environment.
During the six months ended March 31, 2000, the Company realized net gains
on investments of $1.2 million, including mark-to-market adjustments on trading
securities, compared to a net loss of $3.1 million for the six month period
ended March 31, 1999. The current period net gains were the result of $1.4
million in mark-to-market gains which exceeded $0.2 million in realized losses
on the sale of investments. The mark-to-market gains in the current period were
primarily the result of implementing a portfolio diversification strategy. As
part of the strategy to add additional diversification to the investment
portfolio, the Company contracted with an outside portfolio manager to establish
an equity securities portfolio. The mark-to-market gains on the equity portfolio
for the six month period ended March, 31, 2000 were $1.1 million. The prior
year's loss of $3.1 million includes both sales gains and mark-to-market losses
as higher interest rates and increased spreads to treasuries decreased the
valuation of certain trading securities. Additionally, included in the prior
year's period are approximately $2.6 million in investment loss associated with
the implementation of the tax strategy.
Gains on sales of real estate increased $1.9 million from $0.6 million for
the six months ended March 31, 1999 to $2.5 million for the six months ended
March 31, 2000. The Company is in the real estate market primarily due to its
repossession of properties following receivable default. The Company is also
engaged in the development of various properties acquired in the course of its
business through repossession or as an investment property. The development or
improvement of properties is undertaken for the purpose of enhancing values to
increase stability and to maximize profit potential. The increase in gains on
real estate was primarily the result of an increase in development property
gains of $1.3 million from $0.3 million to $1.6 million.
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During the six month period ended March 31, 2000, the Company has
experienced a growth in operating expenses and salaries and employee benefits in
comparison to the six month period ended March 31, 1999. The $4.2 million
increase in salaries and employee benefits resulted primarily from the Company's
investment into new areas of business such as leasing, commercial lending, and
loan origination, in addition to the administrative and technical support needed
to support the new areas of business. Commissions paid to agents increased $2.5
million to $5.8 million for the six months ended March 31, 2000, compared to
$3.3 million for the six month period ended March 31, 1999. The increase in
agent commission expense reflects the growth in the insurance annuity and life
production. The increased commissions also contributed to the reduction in
deferred acquisition cost amortization, net of costs capitalized of $1.7
million.
The Company's benefit for income taxes decreased $11.0 million to a
provision of $0.7 million for the six months ended March 31, 2000 from a benefit
of $11.7 million for the six months ended March 31, 1999. Last year, the Company
recorded the income tax benefits from the disposition of an investment strategy,
which also generated additional losses for income tax purposes. These losses
were used to offset certain income tax temporary differences. The Company
recorded approximately $14.0 million in income tax benefits associated with the
transactions, which reduced deferred income taxes previously recorded.
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999.
The Company originated and purchased $184.2 million in real estate
contracts, mortgage notes and other cash flow receivables for the three months
ended March 31, 2000, compared to $140.0 million for the three months ended
March 31, 1999. Individual seller-financed loans acquired from the private
market totaled $51.8 million or 28.1% of total production for the three month
period ended March 31, 2000. Loans acquired from the capital markets and
correspondents total $33.5 million or 18.2% of total production for the three
month period ended March 31, 2000. Loans originated through the Company's
Metwest subsidiary totaled $72.4 million or 39.3% of total production for the
three month period ended March 31, 2000. Purchases of lottery, structured
settlements and annuities totaled $13.4 million or 7.8% of total production for
the three month period ended March 31, 2000. All other production of receivables
including leasing and loans to facilitate the sale of the Company's development
properties totaled $13.1 or 6.6% of total production for the three month period
ended March 31, 2000.
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Net income before preferred dividends for the three months ended March 31,
2000 decreased $13.0 million to $.5 million on $46.7 million in revenues for the
three month period ended March 31, 2000, compared to $13.5 million net income on
$40.2 million in revenues for the three month period ended March 31, 1999. Gains
on sales of receivables decreased from $8.0 million to $4.4 million. This
decrease was primarily the result of a reduction in securitization gains. The
securitization gains decreased from $8.1 million on $124.8 million of
receivables sold for the three months ended March 31, 1999, to $4.2 million on
$148.7 million of receivables sold for the three months ended March 31, 2000.
The decrease in securitization gains resulted mainly from increasing interest
rates as investors in the Company's mortgage-backed securities demand higher
yields in line with competing financial instruments. Market changes, including
increased competition, has also reduced the yields at which the Company can
acguire securitizable receivables. These reduced yields have also contributed to
the decrease in secutization gains.
Management monitors interest sensitive income and expenses as it manages
the objectives for the Company's results of operations. Interest sensitive
income consists of interest and earned discounts on receivables, insurance
revenues and other investment interest. Interest sensitive expense consists of
interest expense on borrowed money and insurance policy and annutiy benefits.
The Company is in a "liability sensitive" position in that its interest
sensitive liabilities reprice or mature more quickly than do its interest
sensitive assets. Consequently, in a rising interest rate environment, the net
return from interest sensitive assets and liabilities will tend to decrease.
Conversely, in a falling interest rate environment, the net return from interest
sensitive assets and liabilities will tend to improve.
During the three month period ended March 31, 2000, the Company reported a
positive spread on its interest sensitive assets and liabilities of $6.1 million
compared to $5.9 million in the prior years period. Interest and earned discount
on receivables increased slightly to $16.8 million during the three month period
ended March 31, 2000, compared to $16.6 million for the three month period ended
March 31, 1999. Other investment income increased $1.6 million to $7.1 million
for the three month period ended March 31, 2000 from $5.5 million for the three
months ended March 31, 1999 as the Company has increased its securities
investment portfolio. Interest expense and insurance policy and annuity benefits
increased $1.6 million for the three month period ended March 31, 2000 to $17.8
compared to $16.2 for the three month period ended March 31, 1999. The increase
was
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primarily the result of a growth in the Company's average borrowing balance.
During the three months ended March 31, 2000, the Company realized net
gains on investments of $2.2 million, including mark-to-market adjustments on
trading securities, compared to a net loss of $2.8 million for the three month
period ended March 31, 1999. The current period net gains were the result of
$2.0 million in mark-to-market gains in addition to $0.2 million in realized
gains on the sale of investments. The mark-to-market gains in the current period
were partially the result of implementing a portfolio diversification strategy.
As part of the strategy to add additional diversification to the investment
portfolio, the Company contracted with an outside portfolio manager to establish
an equity securities portfolio. The mark-to-market gains on the equity portfolio
for the three month period ended March, 31, 2000 was $.8 million. Additionally,
due to the tightening of spreads to treasuries during the second quarter, the
valuation of certain trading securities increased by $1.2 million.
Gains on sales of real estate increased $1.2 million from $0.3 million for
the three months ended March 31, 1999 to $1.5 million for the three months ended
March 31, 2000. The Company is in the real estate market due primarily to its
repossession of properties following receivable default. The Company is also
engaged in the development of various properties acquired in the course of its
business through repossession or as an investment property. The development or
improvement of properties is undertaken for the purpose of enhancing values to
increase stability and to maximize profit potential. The increase in gains on
real estate was primarily the result of an increase in development property
gains of $1.1 million from $0.1 million to $1.2 million.
During the three month period ended March 31, 2000, the Company has
experienced a growth in operating expenses and salaries and employee benefits in
comparison to the three month period ended March 31, 1999. The $3.2 million
increase in these expenses resulted primarily from the Company's investment into
new areas of business such as leasing, commercial lending, and loan origination,
in addition to the administrative and technical support needed to support the
new areas of business. The $42.2 million increase in origination and acquisition
of receivables from last year also contributed to the increase in expenses.
Commissions paid to agents increased $1.0 million to $3.1 million for the three
months ended March 31, 2000, compared to $2.1 million for the three month period
ended March 31, 1999. The increase in agent commission expense reflects the
growth in the insurance annuity and life production. Deferred acquisition cost
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amortization, net of costs capitalized decreased to $0.6 million for the three
months ended March 31, 2000 from $1.2 million for the three months ended March
31, 1999. The decrease was the result of $0.4 million in additional deferred
cost amortization being offset by the $1.0 million in additional capitalized
agent commissions.
The Company's benefit for income taxes decreased $14.3 million to a
provision of $0.2 million for the three months ended March 31, 2000 from a
benefit of $14.1 million for the three months ended March 31, 1999. Last year,
the Company recorded the income tax benefits from the disposition of an
investment strategy, which also generated additional losses for income tax
purposes. These losses were used to offset certain income tax temporary
differences. The Company recorded approximately $14.0 million in income tax
benefits associated with the transactions, which reduced deferred income taxes
previously recorded
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
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
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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.
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
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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 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
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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 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
28
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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.
29
<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
30
<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
31
<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
32
<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
33
<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 15th day of May,
2000 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 Financial Officer
/s/ JULIE HANLEY
______________________________________________
Julie Hanley
Vice President, Principal Accounting Officer
34
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 17,313
<SECURITIES> 353,425
<RECEIVABLES> 427,232
<ALLOWANCES> 9,432
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 45,095
<DEPRECIATION> 14,771
<TOTAL-ASSETS> 1,198,374
<CURRENT-LIABILITIES> 0
<BONDS> 208,202
287
0
<COMMON> 18,899
<OTHER-SE> 51,971
<TOTAL-LIABILITY-AND-EQUITY> 1,198,374
<SALES> 0
<TOTAL-REVENUES> 85,462
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 68,540
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<INTEREST-EXPENSE> 12,421
<INCOME-PRETAX> (1,990)
<INCOME-TAX> (739)
<INCOME-CONTINUING> (1,251)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (1,251)
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