<PAGE>
SUBJECT TO COMPLETION DATED FEBRUARY 7, 1995
PROSPECTUS
SUMMIT SECURITIES, INC.
$40,000,000 Investment Certificates, Series A
150,000 Shares Variable Rate Cumulative Preferred Stock,
Series S-1 ($100 Per Share Offering Price
and Liquidation Preference)
The Investment Certificates, Series A ("Certificates") and the
shares of Variable Rate Cumulative Preferred Stock, Series S-1
("Preferred Stock") of Summit Securities, Inc. ("Summit") are being
offered separately and not as units. Certificates will pay simple
interest monthly, quarterly, semi-annually or annually, or if left
with the issuer, interest will compound semi-annually; or, will pay
equal monthly installments of principal and interest until maturity
according to an amortization schedule selected by the owner. The
Certificates are unsecured, senior in liquidation to outstanding
equity securities, subordinated to collateralized debt, on a parity
with unsecured accounts payable and accrued liabilities and on parity
with all other issued and outstanding Certificates. The Certificates
will be issued in fully registered form in fractional denominations
of $0.01 or multiples thereof at 100% of the principal amount paid.
Summit reserves the right to change prospectively the interest rates,
maturities, and minimum investment amounts on unsold Certificates.
The current provisions are set forth below. See "DESCRIPTION OF
CERTIFICATES"
<TABLE>
<CAPTION>
MINIMUM TERM TO ANNUAL
INVESTMENT MATURITY INTEREST RATE
---------- ---------------------- -------------
(Investment Certificates, Series A)
<S> <C> <C>
$1,000 60 to 71 months 8.50%
$1,000 48 to 59 months 7.95%
$1,000 36 to 47 months 7.90%
$100 24 to 35 months 7.75%
$100 12 to 23 months 7.35%
$1,000 6 to 11 months 6.75%
$100 72 to 119 months 8.50%
$100 120 to 125 months 8.75%
(Installment Certificates)
$100 60 to 108 months 7.75%
</TABLE>
<TABLE>
<CAPTION> PREFERRED STOCK, SERIES S-1
PRICE DISTRIBUTION
PER SHARE FORMULA (Applicable Rate)
<S> <C>
$100.00 The greater per annum rate of the
Treasury Bill Rate, the
Ten Year Constant Maturity Rate, or the
Twenty Year Constant Maturity Rate,
plus .5% (Minimum 6%/Maximum 14%)
</TABLE>
The Preferred Stock offered hereunder will be sold in whole or
fractional units. Preferred Stock distributions are cumulative and
are to be declared and paid monthly. The Board has authorized, for
an indefinite period, a distribution payment on the Preferred Stock
of one percentage point above the Applicable Rate. See "DESCRIPTION
OF PREFERRED STOCK - Distributions."
Preferred Stock may be redeemed, in whole or in part, at the
option of Summit at the redemption prices set forth herein. Under
certain limited circumstances, the Board of Directors may, in their
sole discretion and without any obligation to do so, redeem shares
tendered for redemption by stockholders at the redemption prices set
forth herein. See "DESCRIPTION OF PREFERRED STOCK -Redemption of
Shares".
In liquidation, Preferred Stock is junior to all debts of Summit
including Summit's Certificates and in parity with other preferred
stock and preferred to Summit's common stock. See "DESCRIPTION OF
PREFERRED STOCK -Redemption of Shares".
There is no trading market for the Certificates or the Preferred
Stock and none is expected to be established in the future. See
"CERTAIN INVESTMENT CONSIDERATIONS - RISK FACTORS". A list of
persons willing to sell or purchase Preferred Stock is maintained by
Summit's broker-dealer as a convenience to holders of Summit's
preferred stock. See "DESCRIPTION OF PREFERRED STOCK-Redemption of
Shares". This offering of Certificates and Preferred Stock is
subject to withdrawal or cancellation by Summit without notice. No
minimum amount of Certificates or Preferred Stock must be sold.
The Certificates and Preferred Stock offered hereby involve
significant investor considerations which should be analyzed prior to
any investment decision. See "CERTAIN INVESTMENT CONSIDERATIONS -
RISK FACTORS".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE SALES PROCEEDS TO
TO PUBLIC COMMISSIONS (1) SUMMIT (2)
<S> <C> <C> <C>
Per
Certificate 100% .25% to 6% 99.75% to 94%
Total: $40,000,000 $100,000-$2,400,000 $39,900,000-$37,600,000
Per
Preferred
Share $100 0% to 6% 100% to 94%
Total: $15,000,000 None - $900,000 $15,000,000-$14,100,000
</TABLE>
(1) There is no sales charge to the investor. Summit will
reimburse Metropolitan Investment Securities, Inc., its broker-
dealer, for commissions paid to licensed securities sales
representatives. Sales commission rates on the sale of Certificates
depend upon the terms of the sale and upon whether the sales are
renewals or new purchases. See "PLAN OF DISTRIBUTION".
(2) Before deducting expenses estimated at $150,000
The Certificates and Preferred Stock are being offered for sale
on a continuous, best efforts basis, directly to investors through
Metropolitan Investment Securities, Inc., a wholly-owned subsidiary
(acquired January 31, 1995), which is the exclusive sales agent for
the publicly issued securities of Summit. No offering will be made
pursuant to this prospectus subsequent to January 31, 1996. The
offering is subject to Schedule E of the Bylaws of the National
Association of Securities Dealers, Inc. See "PLAN OF DISTRIBUTION".
The date of this prospectus is February , 1995.
<PAGE>
INSIDE FRONT COVER PAGE OF PROSPECTUS, REFER TO GRAPH APPENDIX ITEM
1
<PAGE>
No person has been authorized to give any information or to make
any representations other than those contained in this Prospectus.
If given or made, such information or representations must not be
relied upon as having been authorized by Summit. This Prospectus
does not constitute an offer to sell securities in any jurisdiction
to any person to whom it is unlawful to make such offer in such
jurisdiction. Neither the delivery of this Prospectus nor any sales
made hereunder shall under any circumstances create any implication
that there has been no change in the affairs of Summit since the date
hereof.
AVAILABLE INFORMATION
Summit is subject to the informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, files
periodic reports and other information with the Securities and
Exchange Commission. Such reports can be inspected at the public
reference facilities maintained by the Commission in Washington, D.C.
at 450 5th Street, N.W., Judiciary Plaza, Washington, DC 20549 and at
the public reference facilities in the New York Regional Office, 7
World Trade Center, Suite 1300, New York, NY 10048, and Chicago
Regional Office, Northwest Atrium Center, Suite 1400, 500 West
Madison Avenue, Chicago, IL 60661-2511. Copies of such material can
be obtained from the Public Reference Section of the Commission at
450 5th Street N.W., Judiciary Plaza, Washington, DC 20549 at
prescribed rates.
Summit has filed with the Securities and Exchange Commission in
Washington, D.C., a Registration Statement under the Securities Act
of 1933 with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement, as permitted by the rules and regulations of
the Commission. For further information, reference is made to the
Registration Statement, including the exhibits filed or incorporated
as a part thereof, which may be examined without charge at the Public
Reference Room of the Commission in Washington, D.C., or copies of
which may be obtained from the Commission upon payment of the
prescribed fees.
Incorporation of Certain Documents by Reference
Summit's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994, filed with the Securities and Exchange Commission
(File No. 2-63708) is hereby incorporated in this Prospectus by
reference.
Summit hereby undertakes to provide without charge to each
person, including any beneficial owner, to whom a prospectus is
delivered, upon written or oral request of such person, a copy of any
and all of the information that has been incorporated by reference in
this Prospectus (not including exhibits to the information that is
incorporated by reference into the information that the Prospectus
incorporates). Requests for such copies should be directed to
Corporate Secretary, Summit Securities Inc., PO Box 2162, Spokane, WA
99210-2162, telephone number (509) 838-3111.
<PAGE>
TABLE OF CONTENTS
Page
Available Information.............................
Prospectus Summary ...............................
Summary Financial Data............................
Certain Investment Considerations-Risk
Factors...........................................
Description of Securities.........................
Description of Certificates..................
Description of Capital Stock.................
Description of Preferred Stock...............
Legal Matters.....................................
Experts...........................................
Plan of Distribution..............................
Use of Proceeds...................................
Capitalization....................................
Selected Financial Data...........................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................
Business..........................................
Management........................................
Indemnification...................................
Principal Shareholders............................
Certain Transactions..............................
Index to Financial Statements.....................
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety, and should be read in
conjunction with the detailed information and financial statements
appearing elsewhere in this prospectus. This offering involves
certain considerations to prospective investors which are set forth
in "Description of Securities" and "Certain Investment
Considerations-Risk Factors".
Summit Securities Inc.
Summit Securities, Inc. was incorporated under the laws of the
State of Idaho on July 25, 1990. When Summit was founded it was a
wholly-owned subsidiary of Metropolitan Mortgage & Securities Co.,
Inc., a Washington corporation ("Metropolitan"). On September 9,
1994, Summit was acquired by National Summit Corporation, which is
wholly owned by C. Paul Sandifur, Jr. (President and controlling
shareholder of Metropolitan). Accordingly, the change in ownership
altered the form of control, but did not the change the individual in
control. See "CERTAIN TRANSACTIONS".
Summit is engaged in the business of acquiring, holding and
selling receivables (hereafter "Receivables"). These Receivables
generally consist of real estate contracts and promissory notes
secured by first lien mortgages or deeds of trust on residential real
estate. Summit also invests in Receivables consisting of real estate
contracts and promissory notes secured by second and lower position
liens, annuities, lottery prizes, and other investments. In
addition, Summit intends to provide real estate development services
through a newly acquired subsidiary, Summit Property Development
Inc. Summit invests directly in Receivables using funds generated
from Receivable cash flows and the sale of certificates and preferred
stock which Summit sells through its subsidiary Metropolitan
Investment Securities, Inc., (MIS). Summit's Receivable investments
are currently acquired through a contractual arrangement with
Metropolitan, which performs the Receivable acquisition, collection
and management services for Summit for a fee. Summit may also engage
in other businesses or activities without restriction in accordance
with the provisions of its Articles of Incorporation.
On December 15, 1994, Metropolitan and Summit entered into an
understanding that on January 31, 1995 Metropolitan Investment
Securities (MIS) would be sold by Metropolitan to Summit. Also, on
December 15, 1994, Metropolitan and Summit entered into an
understanding that Metropolitan would discontinue its property
development division, which consists of a group of employees
experienced in real estate development. On that same date, Summit
Property Development, Inc. (a subsidiary of Summit) commenced
property development operations employing those same individuals who
had previously been employed by Metropolitan. Summit Property
Development is negotiating an agreement with Metropolitan to provide
property development services to Metropolitan. See "CERTAIN
TRANSACTIONS."
In addition, Summit is currently negotiating the purchase of Old
Standard Life Insurance ("Old Standard"), a wholly owned subsidiary
of Metropolitan. It is currently anticipated that the sale of Old
Standard will occur during the first quarter of the 1995 calendar
year and that the sale price will be based upon an independent
valuation of Old Standard. See "CERTAIN TRANSACTIONS-Proposed
Acquisition of Old Standard and Financial Statements of Old Standard,
and Pro Forma Financial Statements of Summit and Subsidiaries."
Summit's principal offices are located at 929 West Sprague
Avenue, Spokane, Washington 99204. Its telephone number is (509)
838-3111. Summit also maintains offices at 1000 Hubbard, Coeur
d'Alene, Idaho.
<PAGE>
ORGANIZATIONAL CHART FOR SUMMIT SECURITIES, INC.
(as of February 1, 1995)
National Summit Corp.
|
|
|
Summit Securities, Inc.
|
|
- --------------------------------------------------------------------
| | |
Metropolitan Summit Old Standard Life Insurance
Investment Property Company (proposed acquisition.
Securities Development See "CERTAIN TRANSACTIONS -
Inc. Proposed Acquisition of Old
Standard")
National Summit - Parent Company, inactive except as owner of
Summit. Wholly Owned by C. Paul Sandifur, Jr.,
President of Metropolitan.
Summit - Invests in Receivables and other investments with proceeds
of investments and securities offerings.
MIS - Securities broker/dealer marketing securities, principally
those offered by Summit and Metropolitan (MIS was acquired by
Summit on January 31, 1995).
Summit Property Development - Will provide real estate development
services to others, with the principal initial client
being Metropolitan.
Proposed purchase of Old Standard Life Insurance Company - Summit is
currently negotiating the purchase of Old Standard from Metropolitan.
It is currently contemplated that if purchased, it will be a
subsidiary of Summit, however, it may be held directly by National
Summit or may be purchased through an additional holding company
which would be a subsidiary of Summit. See "CERTAIN TRANSACTIONS -
Proposed Purchase of Old Standard."
<PAGE>
The Offering
INVESTMENT CERTIFICATES:
The Offering . . . . This Certificate offering consists of
$40,000,000 in principal of Investment Certificates, Series A, issued
at minimum investment amounts, terms, and rates set forth on the
cover page of this Prospectus. There is no minimum amount of
Certificates which must be sold. Certificates are issued in fully
registered form. See "DESCRIPTION OF CERTIFICATES."
The Certificates . . . . The Certificates are unsecured indebtedness
of Summit. At September 30, 1994, Summit had outstanding
approximately $31,093,000 (principal and compounded and accrued
interest) of certificates and similar obligations and approximately
$120,000 (principal and accrued interest) of collateralized debt. See
"CAPITALIZATION".
Use of Proceeds . . . . The proceeds of this offering will provide
funds for Receivable investments, other investments, retiring and
renewing maturing certificates, preferred stock dividends and for
general corporate purposes which may include acquisition of other
companies, including Old Standard and the commencement of new
business ventures, including Summit Property Development. See "USE
OF PROCEEDS" and "CERTAIN TRANSACTIONS."
Principal and Interest Payments . . . . At the option of the holders
of Investment Certificates, Series A, interest is paid monthly,
quarterly, semiannually or annually (without compounding) or if left
with Summit, interest will compound semiannually; or, holders may be
paid equal monthly installments of principal and interest pursuant to
an amortization schedule. The minimum investment amounts, terms and
interest rates on unissued Certificates offered hereby may be changed
from time to time by Summit, but any such change shall not affect any
Certificates issued prior to the change. See "DESCRIPTION OF
CERTIFICATES."
PREFERRED STOCK:
Offering . . . . This Preferred Stock offering consists of 150,000
shares of Variable Rate Cumulative Preferred Stock, Series S-1 (the
Preferred Stock), offered at $100 per share, and sold in whole and
fractional shares. There is no minimum amount of Preferred Stock
which must be sold.
Distributions. . . . Distributions on Preferred Stock offered
hereunder are cumulative from the date of issuance, and, when and as
declared, are payable monthly at the annual rates described on the
cover page of the Prospectus based on the price of $100.00 per share.
All preferred stock of Summit including this Preferred Stock is
entitled to receive distributions on the same basis. See
"DESCRIPTION OF PREFERRED STOCK-Distributions". Distributions may be
classified as dividends or returns of capital for Federal Income Tax
purposes. See "DESCRIPTION OF PREFERRED STOCK - Federal Income Tax
Consequences of Distributions.
Liquidation Rights . . . . In the event of liquidation of Summit, the
Preferred Stock liquidation rights are $100 per share of Preferred
Stock, plus declared and unpaid dividends. The liquidation rights of
the Preferred Stock is senior to the common stock of Summit and
junior to all debts of Summit including Summit's Certificates. See
"DESCRIPTION OF PREFERRED STOCK - Liquidation Rights".
Redemption: Upon Call by Summit . . . . The shares of Preferred Stock
are redeemable, in whole or in part, at the option of Summit, upon
not less than 30 nor more than 60 days' notice by mail, at a
redemption price of $100 per share plus, accrued and unpaid dividends
to the date fixed for redemption. See "DESCRIPTION OF PREFERRED
STOCK-Redemption of Shares".
Redemption: Upon Request of Holder . . . . Subject to certain
limitations, Summit may, in its sole discretion and without any
obligation to do so accept share(s) of Preferred Stock for redemption
upon the receipt of unsolicited written requests for redemption of
share(s) from any holder. Redemption prices in such event will be $97
per share if the redemption occurs during the first twelve months
after the date of original issuance of the shares and $99 per share
thereafter plus, in each case, any declared but unpaid dividends.
Summit will not redeem shares at the holder's request during the
first three years after the initial sale of such shares except in
those cases involving the death or major medical emergency of the
holder or any joint holder. Any such discretionary redemptions will
also depend on Summit's financial condition, including its liquidity
position. See "DESCRIPTION OF PREFERRED STOCK - Redemption of
Shares". Summit through its broker-dealer, intends to use its best
efforts to maintain a trading list for holders of Preferred Stock.
See "DESCRIPTION OF PREFERRED STOCK - Redemption of Shares" &
"CERTAIN INVESTMENT CONSIDERATIONS-RISK FACTORS".
Voting Rights . . . . The holders of Preferred Stock have no voting
rights except (i) as expressly granted by the laws of the State of
Idaho and (ii) in the event distributions payable on Preferred Stock
are in arrears in an amount equal to twenty-four or more full monthly
distributions, or more per share. See "DESCRIPTION OF PREFERRED
STOCK-Voting Rights".
Use of Proceeds . . . . The proceeds of this offering will provide
funds for Receivables investments, other investments, retiring and
renewing maturing certificates, preferred stock dividends and for
general corporate purposes which may include the acquisition of other
companies, including Old Standard and the commencement of new
business ventures including Summit Property Development. See "USE OF
PROCEEDS" and "CERTAIN TRANSACTIONS".
Federal Income Tax Considerations. . . . In the event Summit has
earnings and profits for federal income tax purposes in any future
year, the distributions paid in that year will constitute taxable
income to the recipient to the extent of such earnings and profits.
Summit is unable to predict the future character of its
distributions. Purchasers are advised to consult their own tax
advisors with respect to the federal income tax treatment of
distributions made. See "DESCRIPTION OF PREFERRED STOCK-Federal
Income Tax Consequences of Distributions."
<PAGE>
SUMMIT SECURITIES, INC.
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
The financial data shown below as of September 30, 1994 and 1993 and for the years ended
September 30, 1994, 1993 and 1992(other than the ratio of earnings to fixed charges) have been
derived from, and should be read in conjunction with, Summit's consolidated financial
statements, related notes, and Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing elsewhere herein. The financial data shown as of September 30,
1992 and 1991 and for the years ended September 30, 1992, and 1991 and the period from July 25,
1990 (date of incorporation) through September 30, 1990 (other than the ratio of earnings to
fixed charges) have been derived from audited financial statements not included herein. The
financial statements as of and for the years ended September 30, 1994 and 1993 have been
audited by Coopers & Lybrand L.L.P. The financial statements as of and for the years ended
September 30, 1992, and 1991 and for the period from July 25, 1990 (date of incorporation)
through September 30, 1990, have been audited by BDO Seidman.
July 25, 1990
(Date of
Year Ended Year Ended Year Ended Year Ended Incorporation)
September 30, September 30, September 30,September, 30 Through
September 30,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Revenues $3,395,252 $ 2,815,624 $ 2,435,843 $1,026,405 $ 8,229
========== ========== ========== ========== ============
Income before
extraordinary item $ 264,879 $ 283,107 $ 611,595 $ 238,205 $ 5,345
Extraordinary item (1) -- -- 49,772 -- --
---------- ---------- ---------- ---------- ------------
Net Income 264,879 283,107 661,367 238,205 5,345
Preferred Stock Dividends (2,930) -- -- -- --
---------- ---------- ---------- ---------- ------------
Income Applicable to Common
Stockholders $ 261,949 $ 283,107 $ 661,367 $ 238,205 $ 5,345
========== ========== ========== ========== ============
Per Common Share Data:
Income before
extraordinary
item $ 13.47 $ 14.15 $ 30.58 $ 11.91 $ .27
Extraordinary item -- -- 2.49 -- --
---------- ---------- ---------- ---------- ------------
Net income $ 13.47 $ 14.15 $ 33.07 $ 11.91 $ .27
========== ========== ========== ========== ============
Weighted average number
of common shares
outstanding 19,445 20,000 20,000 20,000 20,000
========== ========== ========== ========== ============
Ratio of Earnings
to Fixed
Charges and Preferred Dividends: 1.16 1.24 1.53 1.37 --
BALANCE SHEET DATA:
Due from/(to) affiliated
companies, net -- $ 1,710,743 $ (400,365)$(5,528,617) $ (22,010)
Total Assets $35,101,988 $25,441,605 $17,696,628 $16,718,823 $2,027,355
Debt Securities
and Other
Debt Payable $31,212,718 $21,982,078 $14,289,648 $ 8,451,106 --
Stockholders' Equity $ 3,321,230 $ 3,188,024 $ 2,904,917 $ 2,243,550 $2,005,345
<FN>
(1) Benefit from utilization of net operating loss carryforwards.
</TABLE>
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
The financial data shown below as of December 31, 1993 and 1992 and for the years ended
December 31, 1993, 1992 and 1991 have been derived from and should be read in conjunction with,
Old Standard's financial statements and related notes appearing elsewhere herein. The
financial data shown as of and for the year ended December 31, 1991 has been derived from
audited financial statements not included herein. The financial statements as of and for the
year ended December 31, 1993 has been audited by Coopers & Lybrand L.L.P. The financial
statements as of and for the years ended December 31, 1992 and 1991 have been audited by BDO
Seidman. The financial data as of and for the nine months ended September 30, 1994 and 1993
has been derived from unaudited financial statements.
Nine Months Nine Months
Ended Ended Year Ended Year Ended Year Ended
September 30, September 30, December 31, December 31 December 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Revenues $ 3,069,811 $2,754,706 $3,721,664 $3,004,046 $1,465,329
=========== =========== =========== =========== ===========
Net Income $ 477,969 $ 134,407 $ 281,794 $ 874,588 $ 382,913
=========== =========== =========== =========== ===========
Per Common Share Data:
Net Income $ 11.95 $ 3.36 $ 7.04 $ 21.86 $ 9.57
=========== =========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding 40,000 40,000 40,000 40,000 40,000
========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Due from/(to) affiliated
Companies $ 210,542 $ (127,853) $ 1,456,431$(2,374,634) $ (154,353)
Total Assets $47,488,675 $40,209,800 $42,668,424 $33,814,749 $14,903,175
Annuity Reserves $43,396,028 $36,229,519 $39,344,173 $28,055,857 $12,488,351
Stockholder's Equity $ 2,536,627 $ 2,641,961 $ 2,015,706 $ 2,493,223 $ 1,618,635
</TABLE>
<PAGE>
PRO FORMA COMBINED SELECTED FINANCIAL DATA
OF SUMMIT SECURITIES, INC. AND PROPOSED SUBSIDIARIES
The following table sets forth certain pro forma combined
financial information of Summit to illustrate the estimated effect of
the proposed business combination with Old Standard to be accounted
for as a purchase under generally accepted accounting principles.
This pro forma information should be read in conjunction with the
historical financial statements and selected financial data of Summit
and Old Standard, including the notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of
Operations, and with the pro forma combined financial statements,
including the notes thereto, included elsewhere in this document.
The pro forma combined financial information does not purport to
represent what the combined financial information actually would have
been had the combination occurred at the beginning of the period
presented or to project the combined financial position or results of
operations for any future date or period.
<TABLE>
<CAPTION>
Year Ended
September 30,
1994
<S> <C>
INCOME STATEMENT DATA:
Revenues $ 7,879,006
Net Income Applicable to
Common Stockholders $ 615,998
BALANCE SHEET DATA:
Total Assets $79,990,663
Annuity Reserves $43,396,028
Debt Securities and Other
Debt Payable $31,223,542
Stockholder's Equity $ 3,257,857
</TABLE>
<PAGE>
CERTAIN INVESTMENT CONSIDERATIONS - RISK FACTORS
General
1. Impact of Interest Rates and Economic Conditions: During
the twelve month period ending September 30, 1995, more of Summit's
financial assets, principally Receivables and fixed income
investments, are scheduled to reprice or mature than are its
financial liabilities, principally Certificates. In a rising rate
environment such as has recently been experienced, the proceeds
received from these assets will generally be reinvested at higher
rates of interest while Certificates are retained at their existing
rates of interest. This potential benefit is limited to the extent
that Receivable holders tend to reduce the level of early repayments
in a rising interest rate environment and to the extent that the
purchase yield of Receivables tends to change less rapidly than the
rate of interest paid on Certificates. Additionally, the fair value
of Summit's equity will tend to increase in a falling interest rate
environment as its longer term financial liabilities are discounted
at lower rates of interest thus reducing their present value relative
to financial assets and increasing the margin (equity) of assets over
liabilities. For a number of periods subsequent to the initial
twelve month period, financial liabilities are scheduled to reprice
or mature more quickly than financial assets. During this subsequent
time period, the conditions described above may reverse. However, as
Summit purchases the substantial majority of its Receivables at a
discount, the yield on these Receivables will be accelerated in a
falling interest rate environment to the extent that borrowers
underlying the Receivables are induced to refinance their balances.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Asset/Liability Management." A decline in
economic conditions could cause an increase in the number of
foreclosures on properties underlying Receivables and a reduction in
the probable sales prices for property obtained through such action.
Summit is currently negotiating the purchase of Old Standard Life
Insurance (Old Standard) from Metropolitan as further described
below. A combination of Summit and Old Standard would reverse the
current interest rate sensitivity position of Summit. During the
twelve month period ending September 30, 1995, more of the combined
companies financial liabilities, principally annuities and
Certificates, would be expected to reprice or mature than would its
financial assets. See "CERTAIN TRANSACTIONS - Contemplated Purchase
of Old Standard Life Insurance Company."
2. Dependence Upon Metropolitan: All decisions with respect to
the day-to-day management of Summit will be made exclusively by its
officers, who are also employees of Metropolitan. Summit has
contracted with Metropolitan, for Metropolitan to provide principally
all of the administrative services necessary for the operation of
Summit. These include the review and determination of the
acceptability of the Receivables offered for purchase, the servicing
and collections of such Receivables, the resale of repossessed
properties, and other administrative services for Summit. The
Receivable acquisitions, and all other services are subject to the
standards and guidelines established from time to time by Summit.
Metropolitan charges a fee to Summit for Metropolitan's services.
During the fiscal year ended September 30, 1994, the fee charged was
$681,911. Summit is not contractually restricted from obtaining
these services from outside sources and can terminate these
agreements at any time. However, it is anticipated that these
arrangements will continue indefinitely. See "BUSINESS & CERTAIN
TRANSACTIONS".
3. Conflicts of Interest: All of Summit's officers and
directors are also employees of Metropolitan, therefore certain
conflicts of interest may arise between the companies. The officers
and directors expect to devote as much time as necessary to the
affairs of Summit. Summit may compete with Metropolitan in the
acquisition of Receivables. Recently, Summit and C. Paul Sandifur,
Jr. (President of Metropolitan) negotiated the sale of Summit to
National Summit Corporation, a holding company wholly owned by Mr.
Sandifur. See "CERTAIN TRANSACTIONS." Mr. Sandifur has voting
control of Metropolitan. Previously, through Metropolitan, Mr.
Sandifur had effective control of its subsidiaries including Summit.
Following this sale, Mr. Sandifur through National Summit Corporation
continues to hold control of Summit. Following the sale, the
officers and directors of Summit resigned and new officers and
directors were elected. See "MANAGEMENT AND CERTAIN TRANSACTIONS".
It is not anticipated that this sale or the change in directors and
officers will materially effect the management or operations of
Summit.
On December 15, 1994, Metropolitan and Summit entered into an
understanding that on January 31, 1995, Metropolitan Investment
Securities (MIS) would be sold to Summit. MIS is a limited-purpose
broker/dealer and the exclusive broker/dealer for the securities sold
by Metropolitan and Summit. It is not anticipated that this sale
will materially affect the business of MIS or Summit. See "CERTAIN
TRANSACTIONS." Also on December 15, 1994, Metropolitan and Summit
entered into an understanding that on January 31, 1995, Metropolitan
would discontinue its property development division, which consists
of a group of employees experienced in real estate development. On
the same date, Summit will commence the operation of a property
development division employing those same individuals who had
previously been employed by Metropolitan. Summit Property
Development is negotiating an agreement with Metropolitan to provide
property development services to Metropolitan. See "BUSINESS" &
"CERTAIN TRANSACTIONS."
Summit is currently negotiating the purchase of Old Standard
Life Insurance a wholly owned subsidiary of Metropolitan. Old
Standard is engaged in the sale of annuities and life insurance. It
is currently anticipated that this proposed purchase may occur during
the first quarter of calendar 1995. See "BUSINESS-Contemplated
Acquisition of Old Standard", "Financial Statements", "Certain
Transactions" & "Pro Forma Financial Statements."
Conflicts of interest are not anticipated to be substantially
different from those that existed prior to these sales, such as
conflicts in the time available to devote to Summit or its
subsidiaries and conflicts with respect to the selection of
Receivables. Other conflicts may arise in the normal course of
business transactions. Such potential additional conflicts cannot
currently be identified with any certainty and therefore cannot be
quantified at this time. The purchasers of the Certificates and
Preferred Stock must, to a great extent, rely on the integrity and
corporate fiduciary responsibilities of Summit's current and future
officers and directors to assure themselves that they will not abuse
their discretion in selecting Receivables for purchase through
Metropolitan, and in making other business decisions.
4. Use of Leverage and Related Indebtedness: Summit's primary
sources of new financing for its operations are the sale of
certificates and preferred stock. See "BUSINESS - Method of
Financing" & "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION" & "RESULTS OF OPERATIONS". Summit's principal sources of
cash flow include Receivable payments and proceeds from the sale of
certificates and preferred stock. To the extent Summit's cash flow is
insufficient or unavailable for the payoff of certificates which
mature during the period ending January 31, 1996, portions of the net
proceeds from this Certificate and Preferred Stock offering may be
used for such purpose. See "USE OF PROCEEDS". Approximately $
2,420,000 in principal amount of Investment Certificates will mature
between January 31, 1995 and January 31, 1996. It has been Summit's
experience that the majority of the Investment Certificates are sold
with a five year maturity. Summit has been operating for fewer than
five full fiscal years. Therefore, it has not yet experienced
significant levels of maturities of outstanding Investment
Certificates. The cash flow from the existing assets has been
adequate during the past four years to satisfy the demand for payment
of maturing investment certificates. Summit's ability to repay its
other outstanding obligations, including those created by the sale of
the securities described herein, may be contingent upon the success
of future public offerings of certificates and preferred stock.
5. Investments in Receivables:
Receivables Secured by Real Estate: Summit is engaged in the
purchase of Receivables which principally consist of Receivables
secured by real estate. See "BUSINESS-Receivable Investments." All
such Receivable investments are subject to a risk of payment default
and loss in the event of foreclosure. The risk of default and loss
can be affected by changes in economic conditions, property values,
changes in zoning, land use, environmental laws and other legal
restrictions, including restrictions on timing and methods of
foreclosure. There is no assurance that these Receivables will be
paid according to their terms, or that property values will be
adequate to preclude loss in the event of a foreclosure. Summit's
underwriting is currently provided through Metropolitan.
Metropolitan's investment underwriting procedure includes a review
of demographics, market values, property appraisal, economy, and
credit of the buyer. Summit buys these Receivables nationwide,
allowing it to focus its activities on areas where the market trends
and economic conditions are more favorable to this line of business.
Management believes that these procedures minimize the risk of
default or loss in the event of foreclosure. However, there is no
assurance that these procedures will be effective.
Investments in other Receivables: In addition to the purchase
of Receivables secured by real estate, Summit is engaged nationwide
in the purchase of other types of Receivables including the purchase
of annuities issued in the settlement of disputes, other types of
annuities, lottery prizes, and other investments. All such
Receivables are subject to the risk of default by the payor,
(generally an unrelated insurance company, or a state government).
Unlike Receivables secured by real estate, these Receivables are
generally not secured by a specific asset. Summit's underwriting is
currently provided through Metropolitan. Metropolitan's investment
underwriting procedures included a review of the credit rating of the
payor, a review of corresponding state laws including the existence
of a state insurance guaranty fund designed to protect annuity
holders, and/or other relevant factors designed to evaluate the risk
of the particular investment. Management believes that these
procedures minimize the risk of loss in the event of a default.
However, there is no assurance that these procedures will be
effective. See "BUSINESS - Investment Real Estate Secured Receivables
". As of September 30, 1994, Summit's Receivables investments
secured by real estate were principally located in the following
regions:
<TABLE>
<S> <C>
Percent Region
------- ------
16% Pacific Northwest (Washington, Oregon,
Idaho and Montana)
18% Pacific Southwest (California, Nevada and
Arizona)
22% Southwest (Texas and New Mexico);
14% Southeast (Florida, Georgia, North Carolina
and South Carolina).
</Table
Relative to Certificates
1. Lack of Indenture Restrictions and Related Indebtedness:
The Indenture pursuant to which the Certificates are issued does not
restrict Summit's ability to issue additional certificates or to
incur other debt. Neither does the Indenture require Summit to
maintain any specified financial ratios, minimum net worth or minimum
working capital. The Certificates are senior in liquidation to all
outstanding equity securities of Summit, are subordinate to Summit's
collateralized debt and are on a parity with all other outstanding
certificates, unsecured accounts payable and accrued liabilities.
There are no limitations on Summit's ability to incur additional
collateralized debt. As of September 30, 1994, Summit's
collateralized debt and related accrued interest amounted to
$120,000. There was $27,987,000 of principal plus compound and
accrued interest of $3,106,000 on outstanding certificates on
September 30, 1994.
2. Absence of Insurance and Guarantees: The Certificates are
not insured by any governmental agency (as are certain investments in
financial institutions such as banks, savings and loans or credit
unions) or are they guaranteed by any public agency or private
entity. It should also be noted that Summit is not subject to any
generally applicable governmental limitations on its own borrowing.
In these respects, Summit is similar to most other commercial
enterprises which sell debt to public investors, but dissimilar to
those financial institutions providing insurance against the risk of
loss to investors. The investment risk in the Certificates is thus
higher than the risk incurred by investors in such insured financial
institutions. There are no provisions for a sinking fund for
repayment of the Certificates.
3. Absence of Trading Market/Liquidity: It is not anticipated
that a trading market for the Certificates will develop. The
Certificates are not subject to redemption prior to maturity.
Prepayments pursuant to the "prepayment on death" provision described
in "Description of Certificates" or upon mutual agreement between
Summit and the Certificateholders will not constitute redemptions.
Prospective investors should carefully consider their needs for
liquidity before investing in the Certificates and upon investing,
should be prepared to hold the Certificates until maturity. See
"DESCRIPTION OF SECURITIES".
Relative to Preferred Stock
1. Effect of Certain Subordination and Liquidation Rights: The
liquidation preference of Preferred Stock offered herein is $100 per
share. In the event of liquidation of Summit, outstanding shares of
Preferred Stock are at parity with the liquidation preference of all
other series of preferred stock of Summit which may be outstanding,
and are subordinate to all outstanding debt of Summit including its
Certificates. Preferred Stock is preferred in liquidation to Summit's
common stock. As of September 30, 1994, total assets of Summit were
approximately $35,102,000 and the total liabilities of Summit ranking
senior in liquidation preference to Preferred Stock were
approximately $31,781,000.
The preference in liquidation would not necessarily be
applicable to terms afforded Preferred Stock in the event of other
extraordinary corporate events such as the sale of substantially all
its assets, capital restructuring, merger, reorganization and
bankruptcy. The outcomes thereof could be subject to negotiation
among all interested parties and/or court determinations and are not
presently determinable. In such circumstances, Preferred Stock would
not necessarily enjoy any preference over terms available to common
stock, or even be as favorable.
2. Federal Income Tax Considerations: To the extent that
Summit may not have current or accumulated earnings and profits as
computed for federal income tax purposes, Summit believes that
distributions made with respect to Preferred Stock would be
characterized as tax free returns of capital for federal income tax
purposes. Summit believes that the majority of the distributions on
its outstanding common and preferred stock were tax free returns of
capital for federal income tax purposes in calendar 1994. Summit is
unable to predict the future character of its distributions.
Purchasers are advised to consult their own tax advisors with respect
to the federal income tax treatment of distributions made. See
"DESCRIPTION OF PREFERRED STOCK-Federal Income Tax Consequences of
Distributions."
3. Limited Marketability of Shares: The Preferred Stock is not
expected to be traded on any National or Regional Stock Exchange and
no independent public market for Preferred Stock is anticipated. At
present, management does not anticipate applying for a listing for
such public trading. The broker/dealer for this offering,
Metropolitan Investment Securities, operates a trading list to match
buyers and sellers of Summit's preferred stock. Summit will use its
best efforts to maintain the availability of this listing for the
Preferred Stock offered hereunder. With limited exceptions, Summit
has established a policy that all preferred shareholders must place
their shares for sale on the trading list for 60 consecutive days
before Summit will entertain a request for redemption. There is no
assurance that the shares will be sold within the 60 day period.
There is no assurance that Summit will redeem the shares if they have
not sold within the 60 day period. Therefore, a prospective purchaser
should not rely on this in-house trading list or Summit's
discretionary redemption provisions as assurance that such shares
could ever be sold or redeemed. There can be no assurance that this
system will continue to operate, or that it will provide liquidity
comparable to securities traded on recognized public stock exchanges.
See "DESCRIPTION OF PREFERRED STOCK-Redemption of Shares".
4. Control by Common Shareholders: The Common Stock is the
only class of Summit's stock carrying voting rights. Common
stockholders now hold, and upon completion of this offering will
continue to hold, effective control of Summit except as described
below. The Board resolution authorizing the Preferred Stock provides
that in the event distributions payable on any shares of preferred
stock, including the Preferred Stock offered hereunder, are in
arrears in an amount equal to twenty four full monthly dividends or
more per share, then the holders of Preferred Stock and all other
outstanding preferred stock shall be entitled to elect a majority of
the Board of Directors of Summit. Preferred Stock shareholders may
also become entitled to certain other voting rights as required by
law. See "DESCRIPTION OF PREFERRED STOCK-Voting Rights".
5. Limitations on Redemption and Restrictions on
Distributions: Preferred Stock is designed as a long term investment
in the equity of Summit, not as a short-term liquid investment. The
Preferred Stock is redeemable solely at the option of Summit, and
with limited exceptions is specifically not redeemable for 3 years
following its purchase. In addition, Summit may not purchase or
acquire any shares of Preferred Stock in the event that cumulative
dividends thereon have not been paid in full except pursuant to a
purchase or exchange offer made on the same terms to all holders of
Preferred Stock. See "DESCRIPTION OF PREFERRED STOCK-Redemption of
Shares". Summit is restricted from making distributions on Preferred
Stock in the event that any distributions to which the holders of
other series of preferred stock are entitled to have not been paid.
See "DESCRIPTION OF PREFERRED STOCK-Distributions."
<PAGE>
DESCRIPTION OF SECURITIES
Description of Certificates
The Certificates will be issued under a Trust Indenture, as
amended, dated as of November 15, 1990, between Summit and West One
Bank, Idaho, N.A. as Trustee (the "Trustee"). The following
statements under this caption relating to the Certificates and the
Indenture are summaries and do not purport to be complete. Such
summaries are subject to the detailed provisions of the Indenture and
are qualified in their entirety by reference to the Indenture. A
copy of the Indenture is filed as an exhibit to the Registration
Statement of which this Prospectus is a part and is incorporated in
this Prospectus by reference.
General
The Certificates will represent general unsecured obligations of
Summit and will be issued in fully registered book entry form without
coupons, in fractional denominations of $0.01 or more. The
Certificates will be sold at 100% of the principal amount, subject to
the stated minimum investment amount requirements. The Certificates
will have the minimum investment amounts, maturities and the interest
rates set forth on the cover page of this Prospectus. The stated
interest rates, maturities, and minimum investment amounts of
unissued Certificates may be changed at any time by Summit. Any such
change will have no effect on the terms of the previously sold
certificates.
Certificates may be transferred or exchanged for other
Certificates of the same series of a like aggregate principal amount,
subject to the limitations provided in the Indenture. No service
charge will be made for any transfer or exchange of Certificates.
Summit may require payment of taxes or other governmental charges
imposed in connection with any such transfer or exchange. Interest
will accrue at the stated rate from date of issue until maturity.
The Certificates are not convertible into capital stock or other
securities of Summit.
The Certificates are not subject to redemption prior to
maturity, but may be prepaid pursuant to the prepayment on death
provision described below or in limited circumstances involving an
investor's demonstrated financed hardship, and subject to regulatory
restrictions affecting redemptions and exchanges of securities during
an offering. Summit may, in its sole discretion, entertain a request
for an early payout of a Certificate upon terms mutually agreed to by
the holder of the Certificate and Summit. Such early payout
requests, when received, are reviewed on a first come first served
basis and are subject to review by Summit's Executive Committee.
Payment of Principal and Interest
Interest will be payable in cash to the Certificateholder(s)
under one of several plans of interest payment. The purchaser may
elect to have interest paid on a monthly, quarterly, semiannual or
annual basis, without compounding or elect to accumulate interest
with compounding semiannually at the stated interest rate.
Certificateholders make the interest payment election at the time of
purchase of the Certificates. The interest payment election may be
changed at any time by written notice to Summit. Under the
compounding option, the Certificateholder(s), upon written notice to
Summit, may withdraw the interest accumulated during the last two
completed semiannual compounding periods as well as the interest
accrued from the end of the last compounding period to the date
Summit receives the notice. Amounts compounded prior to the last two
compounding periods are available only at maturity.
At the election of the Certificateholder at the time of
investment, and subject to the minimum term and investment
requirements set forth on the cover page of this Prospectus, level
monthly installments comprised of principal and interest will be paid
to the Certificateholder commencing 30 days from the issue date of
the Certificate until maturity. The amount of each installment will
be determined by the amortization term designated by the
Certificateholder at the time the Certificate is purchased.
Certificateholders will be notified in writing approximately 30
days prior to the date their Certificates will mature. The amounts
due on maturity are placed in a separate bank trust account until
paid to the Certificateholder(s). Certificates do not earn interest
after the maturity date. Unless otherwise requested by the
Certificateholder, Summit will pay the principal and accumulated
interest due on the matured certificate to the Certificateholder(s)
at Summit's main office, or by mail to the address designated by the
Certificateholder(s).
Prepayment on Death
In the event of the death of a registered owner of a
Certificate, any party entitled to receive some or all of the
proceeds of the Certificate may elect to have his or her portion of
the principal and any accrued but unpaid interest prepaid in full in
five consecutive equal monthly installments. Interest will continue
to accrue on the declining principal balance of such portion. No
interest penalties will be assessed. Any request for prepayment
shall be made to Summit in writing and shall be accompanied by the
Certificate and evidence satisfactory to Summit of the death of the
registered owner or joint registered owner. Before prepayment,
Summit may require the submission of additional documents or other
material which it may consider necessary to determine the portion of
the proceeds the requesting party is entitled to receive, or
assurances which, in Summit's discretion, it considers necessary to
the fulfillment of its obligations.
Related Indebtedness
The Indenture pursuant to which the Certificates are issued does
not restrict Summit's ability to issue additional Certificates or to
incur other debt. The Indenture does not require Summit to maintain
any specified financial ratios, minimum net worth or minimum working
capital. Certificates will not be guaranteed or insured by any
governmental or private agency. The Certificates offered hereby are
senior in liquidation to all outstanding equity securities of Summit.
They are subordinate to Summit's collateralized debt and are on a
parity with all other outstanding certificates, unsecured accounts
payable and accrued liabilities. The amount of outstanding
certificates on September 30, 1994, (including compound and accrued
interest) was $31,093,000. There are no limitations on Summit's
ability to incur collateralized debt. Collateralized debt
outstanding on that date of $120,000 (principal and accrued interest)
consisted primarily of senior liens on the real estate collateral for
Summit's real estate receivables.
West One Bank, the Trustee, is obligated under the Indenture to
oversee, and if necessary, to take action to enforce fulfillment of
Summit's obligations to Certificateholders. The Trustee is a
national banking association headquartered in Boise, Idaho, with a
combined capital and surplus in excess of $200,000,000. Summit and
certain of its affiliates maintain deposit accounts with and expect
to, from time to time, borrow money from the bank and conduct other
banking transactions with it. At September 30, 1994 and as of the
date of this Prospectus, no loans from the Trustee were outstanding.
In the event of default, the Indenture permits the Trustee to become
a creditor of Summit and does not preclude the Trustee from enforcing
its rights as a creditor, including rights as a holder of
collateralized indebtedness.
Rights and Procedures in the Event of Default
Events of Default include the failure of Summit to pay interest
on any Certificate for a period of 30 days after it becomes due and
payable; the failure to pay the principal or any required installment
thereof of any Certificate when due; the failure to perform any other
covenant in the Indenture for 60 days after notice; and certain
events in bankruptcy, insolvency or reorganization with respect to
Summit. Upon the occurrence of an Event of Default, either the
Trustee or the holders of 25% or more in principal amount of
Certificates then outstanding may declare the principal of all the
Certificates to be due and payable immediately.
The Trustee must give the Certificateholders notice by mail of
any default within 90 days after the occurrence of the default,
unless it has been cured or waived. The Trustee may withhold such
notice if it determines in good faith that such withholding is in the
best interest of the Certificateholders, except if the default
consists of failure to pay principal or interest on any Certificate.
Subject to certain conditions, any such default, except failure
to pay principal or interest when due, may be waived by the holders
of a majority (in aggregate principal amount) of the Certificates
then outstanding. Such holders will have the right to direct the
time, method and place of conducting any proceeding for any remedy
available to the Trustee, or of exercising any power conferred on the
Trustee, except as otherwise provided in the Indenture. The Trustee
may require reasonable indemnity from holders of Certificates before
acting at their direction.
Within 120 days after the end of each fiscal year Summit must
furnish to the Trustee a statement of certain officers of Summit
concerning their knowledge as to whether or not Summit is in default
under the Indenture.
Modification of the Trust Indenture
Certificateholders' rights may be modified with the consent of
the holders of 66 2/3% of the outstanding principal amounts of
Certificates, and 66 2/3% of each series affected. In general, no
adverse modification of the terms of payment and no modification
reducing the percentage of Certificates required for modification is
effective against any Certificateholder without his or her consent.
Restrictions on Consolidation, Merger, etc.
Summit may not consolidate with or merge into any other
corporation or transfer substantially all its assets unless either
Summit is the continuing corporation formed by such consolidation, or
into which Summit is merged, or the person acquiring by conveyance or
transfer of such assets shall be a corporation organized and existing
under the laws of the United States or any state thereof which
assumes the performance of every covenant of Summit under the
Indenture and certain other conditions precedent are fulfilled. The
Indenture contains no other provisions or covenants which afford
holders of the Certificates special protection in the event of a
highly leveraged buyout transaction.
DESCRIPTION OF CAPITAL STOCK
Holders of shares of Common Stock are entitled to one vote per
share on all matters to be voted on by the shareholders. Subject to
the rights of holders of outstanding shares of Preferred Stock, if
any, the holders of Common Stock are entitled to receive such
dividends, if any, as may be declared from time to time by the Board
of Directors in its discretion from funds legally available, and upon
liquidation or dissolution of Summit are entitled to receive all
assets available for distribution to common shareholders. The Common
Stock has no preemptive or other subscription rights, and there are
no conversion rights or redemption or sinking fund provisions with
respect to such shares. All outstanding shares of Common Stock are
fully paid and nonassessable. Currently, National Summit Corp. holds
100% of the Common Stock of Summit. See "CERTAIN TRANSACTIONS"
DESCRIPTION OF PREFERRED STOCK
This offering consists of 150,000 shares of Variable Rate
Cumulative Preferred Stock, Series S-1 (hereinafter referred to as
"Preferred Stock"). All of the shares of Preferred Stock offered by
Summit, hereby, when issued and sold against the consideration set
forth in the prospectus will be validly issued, fully paid and
nonassessable. The relative rights and preferences of Preferred
Stock have been fixed and determined by the Board of Directors of
Summit and are set forth in the Preferred Stock Authorizing
Resolution (the "Authorizing Resolution").
The following statements relating to the Preferred Stock are
summaries and do not purport to be complete and are qualified in
their entirety by reference to the Preferred Stock Authorizing
Resolution, a copy of which has been filed with the Commission as an
exhibit to the Registration Statement and is also available for
inspection at the principal office of Summit.
Distributions
Distributions on Preferred Stock are cumulative and are to be
declared monthly on the first business day of the month payable to
the shareholders of record as of the fifth calendar day of each month
commencing on the month following commencement of the offering.
Distributions are to be paid in cash on the twentieth calendar day of
each month in an amount equal to the offering price of $100 per share
multiplied by the distribution rate divided by twelve. The
distribution rate will be the "Applicable Rate" as defined herein
subject to the authority of Summit's Board of Directors to authorize,
by resolution, a higher rate.
The Applicable Rate for any monthly distribution period cannot
be less than 6% or greater than 14% per annum. The Applicable Rate
for any monthly distribution period shall be (i) the highest of the
Treasury Bill Rate, the Ten-Year Constant Maturity Rate and the
Twenty-Year Constant Maturity Rate (each as hereinafter defined),
(ii) plus one half of one percentage point. Should Summit determine
in good faith that one or more of such rates cannot be determined for
any distribution period, then the Applicable Rate of such period
shall be the higher of whichever of such rates can be so determined,
plus one half of one percentage point. Should Summit determine in
good faith that none of such rates can be determined for any
distribution period, then the Applicable Rate in effect for the
preceding distribution period shall be continued for such
distribution period. The distribution rate for each monthly
distribution period shall be calculated as promptly as practical by
Summit. Summit will cause notice of the distribution rate to be
enclosed with the next mailed distribution payment check. In making
such calculation, the Treasury Bill Rate, Ten-Year Constant Maturity
Rate and Twenty-Year Constant Maturity Rate shall each be rounded to
the nearest five hundredths of a percentage point.
Summit's Board of Directors has adopted a resolution to
authorize a distribution rate on the Preferred Stock at one
percentage point higher than the Applicable Rate. Such higher
distribution rate will continue from month to month until the Board
elects to terminate it.
Treasury Bill Rate
Except as provided below in this paragraph, the "Treasury Bill
Rate" for each distribution period will be the arithmetic average of
the two most recent weekly per annum market discount rates (or the
one weekly per annum market discount rate, if only one such rate
shall be published during the relevant weekly Calendar Period (as
defined below)) for the three-month U.S. Treasury bills, as published
weekly by the Federal Reserve Board during the Calendar Period
immediately prior to the ten calendar days immediately preceding the
first day of the distribution period for which the distribution rate
on Preferred Stock is being determined.
In the event that Federal Reserve Board does not publish such
weekly per annum market discount rate during any such Calendar
Period, then the Treasury Bill Rate for the related distribution
period shall be the arithmetic average of the two most recent weekly
per annum market discount rates (or the one weekly per annum market
discount rate, if only one such rate shall be published during the
relevant Calendar Period) for the three-month U.S. Treasury Bills,
as published weekly during such Calendar Period by any Federal
Reserve Bank or by any U.S. Government department or agency selected
by Summit. In the event that a per annum market discount rate for
the three-month U.S. Treasury bills shall not be published by the
Federal Reserve Board or by any Federal Reserve Bank, or by any U.S.
Government department or agency during such Calendar Period, then the
Treasury Bill Rate for such distribution period shall be the
arithmetic average of the two most recent weekly per annum market
discount rates (or the one weekly per annum market discount rate, if
only one such rate shall be published during the relevant Calendar
Period) for all of the U.S. Treasury Bills then having maturities of
not less than 80 nor more the 100 days, as published during such
Calendar Period by the Federal Reserve Board or, if the Federal
Reserve Board shall not publish such rates, by any Federal Reserve
Bank or by any U.S. Government department or agency selected by
Summit.
In the event that Summit determines in good faith that for any
reason Summit cannot determine the Treasury Bill Rate for any
distribution period as provided above in this paragraph, the Treasury
Bill Rate for such distribution period shall be the arithmetic
average of the per annum market discount rates based upon the closing
bids during such Calendar Period for each of the issues of marketable
noninterest bearing U.S. Treasury securities with a maturity of not
less than 80 nor more than 100 days from the date of each such
quotation, as quoted daily for each business day in New York City (or
less frequently if daily quotations shall not be generally available)
to Summit by at least three recognized primary U.S Government
securities dealers selected by Summit.
In the event that Summit determines in good faith that for any
reason Summit cannot determine the Treasury Bill Rate for any
distribution period as provided above in this paragraph, the Treasury
Bill Rate for such distribution period shall be the arithmetic
average of the per annum market discount rates based upon the closing
bids during such Calendar Period for each of the issues of marketable
interest bearing U.S. Treasury securities with a maturity of not less
than 80 nor more than 100 days from the date of each such quotation,
as quoted daily for each business day in New York City (or less
frequently if daily quotations shall not be generally available) to
Summit by at least three recognized primary U.S. Government
securities dealers selected by Summit.
Ten-year Constant Maturity Rate
Except as provided below in this paragraph, the "Ten-Year
Constant Maturity Rate" for each distribution period shall be the
arithmetic average of the two most recent weekly per annum Ten-Year
Average Yields (or the one weekly per annum Ten-Year average Yield,
if only one such yield shall be published during the relevant
Calendar Period as provided below), as published weekly by the
Federal Reserve board during the Calendar Period immediately prior to
the ten calendar days immediately preceding the first day of the
distribution period for which the distribution rate on Preferred
Stock is being determined.
In the event that the Federal Reserve Board does not publish
such a weekly per annum Ten-Year Average Yield during such calendar
Period, then the Ten-Year Constant Maturity Rate for such
distribution period shall be the arithmetic average of the two most
recent weekly per annum Ten-Year Average Yields (or the one weekly
per annum Ten-Year Average Yield, if only one such Yield shall be
published during such Calendar Period), as published weekly during
such Calendar Period by any Federal Reserve Bank or by any U.S.
Government department or agency selected by Summit. In the event
that a per annum Ten-Year Average Yield shall not be published by the
Federal Reserve Board or by any Federal Reserve Bank or by any U.S.
Government department or agency during such Calendar Period, then the
Ten-Year Constant Maturity Rate for such distribution period shall be
the arithmetic average of the two most recent weekly per annum
average yields to maturity (or the one weekly average yield to
maturity, if only one such yield shall be published during the
relevant Calendar Period) for all of the actively traded marketable
U.S. Treasury fixed interest rate securities (other than Special
Securities (as defined below)) then having maturities of not less
than eight nor more than twelve years, as published during such
Calendar Period by the Federal Reserve Board or, if the Federal
Reserve Board shall not publish such yields, by any Federal Reserve
Bank or by any U.S. Government department or agency selected by
Summit.
In the event that Summit determines in good faith that for any
reason Summit cannot determine the Ten Year Constant Maturity Rate
for any distribution period as provided above in this paragraph, then
the Ten-Year Constant Maturity Rate for such distribution period
shall be the arithmetic average of the per annum average yields to
maturity based upon the closing bids during such Calendar Period for
each of the issues of actively traded marketable U.S. Treasury fixed
interest rate securities (other than Special Securities) with a final
maturity date not less than eight or more then twelve years from the
date of each quotation, as quoted daily for each business day in New
York City (or less frequently if daily quotations shall not be
generally available) to Summit by at least three recognized primary
U.S. Government securities dealers selected by Summit.
Twenty-Year Constant Maturity Rate
Except as provided below in this paragraph, the "Twenty-Year
Constant Maturity Rate" for each distribution period shall be the
arithmetic average of the two most recent weekly per annum
Twenty-Year Average Yields (or the one weekly per annum Twenty-Year
Average Yield, if only one such yield shall be published during the
relevant Calendar Period), as published weekly by the Federal Reserve
board during the Calendar Period immediately prior to the ten
calendar days immediately preceding the first day of the distribution
period for which the distribution rate on Preferred Stock is being
determined.
In the event that the Federal Reserve Board does not publish
such a weekly per annum Twenty-Year Average Yield during such
Calendar Period, then the Twenty-Year Constant Maturity Rate for such
distribution period shall be the arithmetic average of the two most
recent weekly per annum Twenty-Year Average Yields (or the one weekly
per annum Twenty-Year Average Yield, if only one such Yield shall be
published during such Calendar Period), as published weekly during
such Calendar Period by any Federal Reserve Bank or by any U.S.
Government department or agency selected by Summit. In the event
that a per annum Twenty-Year Average Yield shall not be published by
the Federal Reserve Board or by any Federal Reserve Bank or by any
U.S. Government department or agency during such Calendar Period,
then the twenty-Year Constant Maturity Rate for such distribution
period shall be the arithmetic average of the two most recent weekly
per annum average yields to maturity (or the one weekly average yield
to maturity, if only one such yield shall be published during such
Calendar Period) for all of the actively traded marketable U.S.
Treasury fixed interest rate securities (other than Special
Securities) then having maturities of not less than eighteen nor more
than twenty-two years, as published during such Calendar Period by
the Federal Reserve board or, if the Federal Reserve Board shall not
publish such yields, by any Federal Reserve Bank or by any U.S.
Government department or agency selected by Summit.
In the event Summit determines in good faith that for any reason
Summit cannot determine the Twenty-Year Constant Maturity rate for
any distribution period as provided above, then the Twenty-Year
Constant Maturity Rate for such distribution period shall be the
arithmetic average of the per annum average yields to maturity based
upon the closing bids during such Calendar Period for each of the
issues of actively traded marketable U.S. Treasury Fixed interest
rate securities (other than Special Securities) with a final maturity
date of not less than eighteen or more than twenty-two years from the
date of each such quotation, as quoted daily for each business day in
New York City (or less frequently if daily quotations shall not be
generally available) to Summit by at least three recognized primary
U.S. Government securities dealers selected by Summit.
As used herein, the term "Calendar Period" means a period of 14
calendar days; the term "Special Securities" means securities which
may, at the option of the holder, be surrendered at face value in
payment of any federal estate tax or which provide tax benefits to
the holder and are priced to reflect such tax benefits or which were
originally issued at a deep or substantial discount; the term "Ten
Year Average Yield" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities
(adjusted to constant maturities of ten years); and the term
"Twenty-Year Average Yield" means the average yield of maturities for
actively traded marketable U.S. treasury fixed interest rate
securities (adjusted to constant maturities of 20 years).
Restrictions on Distributions
Summit may not declare or pay a distribution on any share of
Preferred Stock for any distribution period unless, at the same time
a like distribution shall be declared or paid on all shares of
preferred stock then issued and outstanding and entitled to receive
distributions. See "CAPITALIZATION".
So long as any shares of Preferred Stock are outstanding, and
unless the full cumulative dividends on all outstanding preferred
shares shall have been paid or declared and set apart for all past
dividend periods, Summit may not: (i) declare or pay or set aside for
payment any dividend (other than a dividend in common stock or in any
other stock ranking junior to Preferred Stock as to dividends and
upon liquidation and other than as provided in the foregoing
paragraph); (ii) declare or pay any other distribution upon common
stock or upon any other stock ranking junior to or on a parity with
Preferred Stock as to dividends or upon liquidation; or (iii) redeem,
purchase or otherwise acquire common stock or any other stock of
Summit ranking junior to or on a parity with Preferred Stock as to
dividends or upon liquidation for any consideration (or pay or make
available any funds for a sinking fund for the redemption of any
shares of any such stock) except by conversion into or exchange for
stock of Summit ranking junior to Preferred Stock as to dividends and
upon liquidation.
Summit may make distributions ratably on the shares of Preferred
Stock and shares of any stock of Summit ranking on a parity therewith
with regard to the payment of dividends, in accordance with the sums
which would be payable on such shares if all dividends, including
accumulations, if any, were declared and paid in full. As of the
date hereof, no dividends on Summit's preferred stock are in arrears.
No interest will be paid for or on account of any unpaid dividends.
Liquidation Rights
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of Summit, the holders of shares of
Preferred Stock will be entitled to receive out of the assets of
Summit available for distribution to stockholders, before any
distribution of assets is made to holders of common stock or any
stock of Summit ranking, upon liquidation, junior to Preferred Stock,
liquidating distributions in the amount of $100 per share plus
declared and unpaid dividends. Preferred Stock is junior in
liquidation to outstanding debt of Summit. As of September 30, 1994,
the total liabilities of Summit ranking senior in liquidation
preference to Preferred Stock were $31,781,000. See "BUSINESS -
Regulation". There are no limitations on Summit's ability to incur
additional secured indebtedness. See "CAPITALIZATION AND CERTAIN
INVESTMENT CONSIDERATIONS - Risk Factors".
The Preferred Stock Authorizing Resolution provides that,
without limitation, the voluntary sale, lease or conveyance of all or
substantially all of Summit's property or assets to, or its
consolidation or merger with, any other corporation shall not be
deemed to be a liquidation, dissolution or winding up of Summit. If,
upon any voluntary or involuntary liquidation, dissolution or winding
up of Summit, the amounts payable with respect to Preferred Stock and
any other shares of stock of Summit ranking as to any such
distribution on a parity with Preferred Stock are not paid in full,
the holders of Preferred Stock and of such other shares will share
ratably in any such distribution of assets of Summit in proportion to
the full respective preferential amounts to which they are entitled.
After payment of the full amount of the liquidating distribution to
which they are entitled, the holders of shares of Preferred Stock
will not be entitled to any further participation in any distribution
of assets by Summit.
Redemption of Shares
Upon call by Summit: . . . Subject to regulatory restrictions
affecting redemptions during an offering, the shares of Preferred
Stock are redeemable, in whole or in part, only at the option of
Summit at a redemption price of $100 per share plus, declared and
unpaid dividends to the date fixed for redemption. In the event that
fewer than all of the outstanding shares of Preferred Stock are to be
redeemed, the number of shares to be redeemed shall be determined by
Summit and the shares to be redeemed shall be determined by such
method as Summit, in its sole discretion, deems to be equitable.
Discretionary Redemption Upon Request of the Holder: . . . As
provided in the Preferred Stock Authorizing Resolution, the shares of
Preferred Stock are not redeemable at the option of the holder. If,
however, Summit receives an unsolicited written request for
redemption of a block of shares from any holder, Summit may, in its
sole discretion, subject to regulatory restrictions, and subject to
the limitations described below, accept such shares for redemption.
Such redemption requests are reviewed on a first come first served
basis, and are subject to review by Summit's Executive Committee. Any
shares so tendered, which Summit in its discretion, allows for
redemption shall be redeemed by Summit directly, (and not from or
through a broker or dealer), at a price equal to $97 per share, plus
any declared but unpaid dividends to date if redeemed during the
first year after the date of original issuance and $99 per share plus
any declared but unpaid dividends if redeemed thereafter. Summit may
change such optional redemption prices at anytime with respect to
unissued shares of Series S.
There can be no assurance that Summit's financial condition will
allow it to exercise its discretion to accept any particular request
for redemption of Preferred Stock. Summit will not redeem any such
shares tendered for redemption if to do so would be unsafe or unsound
in light of Summit's financial condition (including its liquidity
position); if payment of interest or principal on any outstanding
instrument of indebtedness is in arrears or in default; or if payment
of any dividend on Preferred Stock or share of any stock of Summit
ranking at least on a parity therewith is in arrears as to dividends.
In the event that cumulative dividends on Preferred Stock have not
been paid in full, Summit may not purchase or acquire any shares of
Preferred Stock otherwise than pursuant to a purchase or exchange
offer made on the same terms to all holders of Preferred Stock.
As provided in the Preferred Stock Authorizing Resolution, for
a period of three years from the date of initial sale of each share
of Preferred Stock, any such optional redemption of such share shall
occur only upon the death or major medical emergency of the holder or
any joint holder of the share requested to be redeemed.
The Preferred Stock is not expected to be traded on any National
or Regional Stock Exchange and no independent public market for
Preferred Stock is anticipated. Management does not anticipate
applying for a listing for such public trading. The broker-dealer
for this offering, Metropolitan Investment Securities, operates a
trading list to match buyers and sellers of issues of preferred
stock. Summit will use its best efforts to maintain the availability
of this listing for the preferred stock offered hereunder following
completion of this offering. With limited exceptions, Summit has
established a policy that all preferred shareholders including
holders of the Preferred Shares offered herein, must place their
shares for sale on the trading list for 60 consecutive days before
Summit will entertain a request for redemption.
Voting Rights
The Preferred Stock has no voting rights except as provided in
the Preferred Stock Authorizing Resolution and except as required by
Idaho State Law regarding amendments to Summit's Articles of
Incorporation which adversely affect holders of such shares as a
class and requires approval of a majority of the outstanding shares
entitled to vote.
The Preferred Stock Authorizing Resolution provides that holders
of Preferred Stock, together with the holders of Summit's other
preferred stock thereafter authorized, voting separately and as a
single class, shall be entitled to elect a majority of the Board of
Directors of Summit in the event that distributions payable on any
shares of Preferred Stock shall be in arrears in an amount equal to
twenty-four full monthly dividends per share. Such right will
continue until all distributions in arrears have been paid in full.
Federal Income Tax Consequences of Distributions
The following discussion of the federal income tax consequences
of distributions is based upon the present Internal Revenue Code of
1986 as amended (the "Code"), existing Treasury regulations, current
published administrative positions of the Internal Revenue Service
(the "Service") contained in revenue rulings revenue procedures and
notes and existing judicial decisions. No assurance can be given
that legislative or administrative changes or court decisions may not
be forthcoming that could significantly modify the statements in this
discussion. Any such changes may or may not be retroactive with
respect to transactions effected prior to the date of such changes.
Distributions made to the holders of Preferred Stock will either
be taxable or not depending, in part, on the extent to which they are
made out of current or accumulated earnings and profits of Summit as
calculated for federal income tax purposes. To the extent, if any,
that distributions made by Summit to the holders of Preferred Stock
exceed current and accumulated earnings and profits of Summit, such
distributions will be treated first as a tax-free return of capital,
reducing the holder's basis in Preferred Stock (not below zero) and
thereafter as capital gains (provided Preferred Stock is held by the
holder as a capital asset).
Distributions treated as capital gains result in (1) federal
income tax to a corporate holder at a maximum federal rate of 35% for
1994 and thereafter (exclusive of the impact, if any, of the
alternative minimum tax imposed by Section 55 of the Code) and (2)
federal income tax to a noncorporate holder on any amount treated as
a long-term capital gain at a maximum rate of 28% for 1994 and
thereafter (exclusive of the impact, if any, of the alternative
minimum tax imposed by Section 55 of the Code). Under certain
circumstances, distributions could be taxed as short-term capital
gains which are subject to the same tax rates as dividends. For 1994
and later years, the maximum tax rate of noncorporate holders on such
ordinary income is 39.6% which may be higher pursuant to certain
statutory adjustments.
If, and to the extent, distributions made to the holders of
Preferred Stock constitute dividends for federal income tax purposes,
any corporate holder of Preferred Stock otherwise entitled to the 70%
dividends received deduction permitted by Section 243 of the Code
will be entitled to such deduction with respect to such dividends.
If such holder is entitled to the full dividends-received deduction,
the maximum effective federal income tax rate on such dividends will
be 10.5% based on existing federal income tax rates applicable to
corporations generally (exclusive of the alternative minimum tax).
However, a corporate holder should be aware that, under Code Section
246A, the 70% dividends received deduction will be reduced if the
holder has debt that is directly attributable to the holder's
investment in Preferred Stock. In addition, corporate shareholders
may be required under Code Section 1059 to treat the amount of
dividends as an extraordinary dividend and reduce the remaining basis
and recognize capital gain if no basis remains when the stock is
sold. Noncorporate taxpayers are not entitled to such a dividends
received deduction.
The corporate dividends received deduction, pursuant to Section
246(b)(1) of the Code, cannot exceed 70% of the corporate
shareholder's taxable income computed without regard to the dividends
received deduction, net operating loss deduction, and certain other
deductions and adjustments. Code Section 246(b)(2) provides that the
246(b)(1) limitation does not apply for any taxable year for which
there is a net operating loss and, for purposes of determining
whether there is a net operating loss, the dividends received
deduction is allowed without regard to the 246(b)(1) limit. In
addition, Section 246(c)(2) mandates, in the case of preferred stock,
that the stock on which the dividend is paid be held for at least 91
days in order for the corporate shareholder to qualify for the
dividends received deduction. This rule applies if the holder
receives dividends on that stock which were attributable to a period
or periods more than 366 days. Special rules prescribed by Section
246(c)(3) apply for determining holding periods.
Summit believes that the majority of the distributions on its
outstanding common and preferred stock were tax free returns of
capital for federal income tax purposes in calendar 1994. Summit is
unable to predict the future character of its distributions.
In the event the holder of Preferred Stock disposes of the stock
by redemption or otherwise in a taxable sale or exchange, the holder
will recognize gain equal to the excess of the amount received over
the holder's basis in the stock. The basis is equal to the holder's
cost of acquiring the stock, which is anticipated to be the $100 per
share offering price. This amount is reduced (not below zero) by the
return of capital distributions previously received by the holder.
Provided the stock is held by such holder as a capital asset, such
gain would be capital gain.
Thus, the basis in the Preferred Stock may ultimately be reduced
to zero assuming distributions are a return of a capital and that the
holder received aggregate distributions at least equal to the
holder's basis. In that event, the entire amount received by the
holder from redemption or otherwise in a taxable sale or exchange
would be recognized as gain.
Prospective purchasers are advised to consult their own tax
advisor with respect to the income tax treatment or any distribution
made with respect to the Preferred Stock.
Distributions paid with respect to Preferred Stock, whether
deemed to be dividends, return of capital, or capital gains for
federal income tax purposes will result in the same federal income
tax consequences to Summit as other payments of dividends. These
distributions are not deductible by Summit under current tax law.
Additionally, distributions to foreign taxpayers are subject to
special rules not discussed herein.
TAX WITHHOLDING WITH RESPECT TO CERTIFICATES AND PREFERRED STOCK
The Code generally requires reporting of all distributions on
capital stock and inclusion of dividends as income to the
stockholder. In addition, the Code requires the reporting of interest
income earned on investment certificates, and inclusion of interest
as income to the certificate holder. The Code will, in certain
instances, require 31% backup withholding by the payor of such
dividends and interest.
In general, Summit is required to file with the Service each
year a Form 1099-DIV and Form 1099-INT information return (with a
copy to the holder) reporting the amount of dividends and interest
paid to the applicable holder during each calendar year. The holder
must report dividends, capital gain distributions or interest as
income on the holder's federal income tax return for that year. In
addition, nontaxable distributions on capital stock may be subject to
tax if the stockholder has no remaining tax basis in the stock.
Backup withholding on dividends and interest generally will be
imposed if:
(1) the taxpayer fails to furnish a taxpayer identification
number to the payor;
(2) the Service notifies the payor twice within three calendar
years that the taxpayer furnished an incorrect taxpayer
identification number;
(3) the taxpayer is notified that he is subject to backup
withholding because he failed to report taxable dividends or interest
applicable;
(4) the taxpayer fails to certify to the payor that the
taxpayer is not subject to backup withholding; or
(5) the taxpayer fails to certify his taxpayer identification
number.
Transfer Agent and Registrar
Metropolitan acts as Transfer Agent and Registrar for Summit's
Certificates and capital stock.
<PAGE>
LEGAL MATTERS
LEGAL OPINION
The legality of the Certificates and Preferred Stock being
offered hereby is being passed upon for Summit by Susan A. Thomson,
Esq., who is Assistant Corporate counsel for Summit, and Vice
President and legal counsel for Metropolitan Investment Securities,
and also employed by Metropolitan Mortgage & Securities Co., Inc. as
its Assistant Corporate Counsel and Assistant Secretary.
LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or
threatened against Summit, or to which its property is subject.
EXPERTS
The Consolidated Financial Statements of Summit as of September
30, 1994 and 1993 and each of the years in the two-year period ended
September 30, 1994 included in this Prospectus have been included
herein in reliance on the report, which includes an explanatory
paragraph describing changes in Summit's methods of accounting for
repossessed real properties and income taxes, of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing. The Financial Statements of
Summit for the year ended September 30, 1992 included in this
Prospectus and in the Registration Statement have been audited by BDO
Seidman, independent certified public accountants, to the extent and
for the periods set forth in their report appearing elsewhere herein
and in the Registration Statement, and have been so included in
reliance upon such authority of said firm as experts in auditing and
accounting.
The Financial Statements of Old Standard as of December 31, 1993
and for the year then ended included in this Prospectus have been
included herein in reliance on the report, which includes an
explanatory paragraph describing changes in Old Standard's methodof
accounting for its investment in certain debt securities of Coopers
& Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing. The Financial
Statements of Old Standard as of December 31, 1992 and for the years
ended December 31, 1992 and 1991, included in this Prospectus and in
the Registration Statement have been audited by BDO Seidman,
independent certified public accountants, to the extent and for the
periods set forth in their report appearing elsewhere herein and in
the Registration Statement, and have been so included in reliance
upon such authority of said firm as experts in auditing and
accounting.
<PAGE>
PLAN OF DISTRIBUTION
The Certificates and Preferred Stock are offered directly to the
public on a continuing best efforts basis through Metropolitan
Investment Securities, Inc. (MIS) which is an affiliate of Summit.
Accordingly, the offering has not received the independent selling
agent review customarily made when an unaffiliated selling agent
offers securities. MIS is the exclusive selling agent for the
publicly issued securities of Summit. No commission or other expense
of the offering will be paid by the purchasers of the Certificates or
Preferred Stock. A commission will, however, be paid by Summit on
most Certificate purchases ranging from 0.25% to 6% of the
Certificate price, depending on the term of the Certificate and
whether or not the transaction is a reinvestment or new purchase. A
commission in the maximum amount of 6% of the offering price will
also be paid by Summit on most Preferred Stock purchases.
Certificates are offered only for cash or cash equivalents.
Preferred Stock is offered for cash or other consideration acceptable
to Summit as determined by the Board of Directors. Summit will also
pay certain other expenses in connection with the offering. During
the three fiscal years ended September 30, 1994, MIS has received
commissions of $751,000 from Summit on sales of approximately
$26,224,000 of Summit's certificates and preferred stock. Preferred
Stock was sold for the first time in 1994.
MIS is a member of the National Association of Securities
Dealer's, Inc. (NASD). As such Schedule E of the By-laws of the NASD
applies and requires, in part, that a qualified independent
underwriter be engaged to render an opinion regarding the fairness of
the interest rates to be paid on the Certificates and the fairness of
the pricing of the Preferred Stock offered through this Prospectus.
Accordingly, MIS has obtained an opinion from Welco Securities, Inc.,
an NASD member, ("Welco") that the interest rates on the Certificates
using a formula tied to corresponding interest rates paid by the U.S.
Treasury and regional financial institutions meets this fairness
objective based on conditions and circumstances existing as of the
date of the Prospectus. A similar opinion has been obtained from
Welco, which states that the offering price of the Preferred Stock
meets the fairness objective based on conditions and circumstances,
existing as of the date of the Prospectus. Summit undertakes to
maintain the interest rates on Certificates no lower than those
recommended by Welco based on the formula. Accordingly, the yield at
which the Certificates will be distributed will be no lower than that
recommended by Welco and the price offered for the Preferred Stock
will be no higher than Welco would have independently recommended.
Welco has assumed the responsibilities of acting as the qualified
independent underwriter in pricing the offering and conducting due
diligence. For performing its functions as a qualified independent
underwriter with respect to the Certificates and Preferred Stock
offered hereunder, Welco is to be paid $35,000 in fees and $10,000 in
non-accountable expenses plus its accountable expenses, which are not
expected to exceed $2,500.
There is not now and Summit does not expect that there will be
a public trading market for the Certificates or Preferred Stock in
the future. MIS does not intend to make a market for the
Certificates or Preferred Stock. However, MIS maintains a list of
persons willing to sell or purchase outstanding series of preferred
stock of Summit. Summit will use its best efforts to maintain the
availability of this listing for Preferred Stock offered hereunder
following completion of this offering. See "CERTAIN INVESTMENT
CONSIDERATIONS -Risk Factors-Limited Marketability of Shares."
MIS may enter into selected dealer agreements with and reallow
to certain dealers who are members of the NASD, and certain foreign
dealers who are not eligible for membership in the NASD, a commission
of up to 6% of the principal amount of Certificates and Preferred
Stock sold by such dealers. After the commencement of the offering
the commissions and reallowances, if any, may be lowered.
USE OF PROCEEDS
Certificate Proceeds . . . . Summit expects net proceeds from this
Certificate offering of $37,600,000 to $39,900,000 before deducting
expenses estimated at $150,000 (combined total for both Certificates
and Preferred Stock expenses) and after sales commissions, assuming
all of the Certificates are sold. There can be no assurance,
however, that any of the Certificates can be sold. Sales commissions
will range between $100,000 and $2,400,000 (0.25% to 6%) depending on
maturities of Certificates sold and whether sales are reinvestments
or new purchases. Such proceeds may be supplemented with funds
generated by Summit's operations and/or borrowings from brokers or
banks. See "BUSINESS-Method of Financing."
Preferred Stock Proceeds . . . .Summit expects net proceeds from this
Preferred Stock offering of $14,100,000 to $15,000,000 before
deducting expenses estimated at $150,000 (combined total for both
Certificates and Preferred Stock expenses) and after sales
commissions of up to $900,000 (6%), assuming all of the Preferred
Stock is sold. There can be no assurance, however, that any of the
Preferred Stock can be sold. Such proceeds may be supplemented with
funds generated by Summit's operations and/or borrowings from brokers
or banks. See "BUSINESS-Method of Financing."
In conjunction with the other funds available to it, Summit will
utilize the proceeds of the Certificates and Preferred Stock
offerings for funding investments in Receivables, and other
investments, which may include the acquisition of other companies,
including Old Standard. See "CERTAIN TRANSACTIONS". To the extent
internally generated funds are insufficient or unavailable for the
retirement of maturing certificates through the period ending January
31, 1996, and for payment of operational expenses and preferred stock
dividend requirements, portions of the net proceeds of this offering
may also be used for such purposes. Approximately $2,420,000 in
principal amount of debt securities will mature between January 31,
1995 and January 31, 1996 with interest rates ranging from 6% to 10%
and averaging approximately 7.8% per annum. See Note 5 to the
Consolidated Financial Statements and "Certain Investment
Considerations - Risk Factors".
Management anticipates that some of the proceeds of this
offering will be invested in money market funds, bank repurchase
agreements, commercial paper, U.S. Treasury Bills and similar short
term investments until used as stated above. Due to Summit's
inability to accurately forecast the total amount of Certificates or
Preferred Stock to be sold pursuant to this offering, no specific
amounts have been allocated for any of the foregoing purposes.
CIRCULAR DIAGRAM OF USE OF PROCEEDS REFER TO GRAPH APPENDIX ITEM 2
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Summit at
September 30, 1994:
</TABLE>
<TABLE>
<CAPTION>
September 30,
1994,
<S> <C>
DEBT PAYABLE
Real estate contracts and
mortgage notes payable
7% to 10%, due 1994 to 2018 $ 119,888
-----------
INVESTMENT CERTIFICATES
Investment Certificates,
Maturing 1994 to 1999,
at 6% to 11% 27,986,535
Compound and accrued interest 3,106,295
-----------
Total Investment Certificates 31,092,830
-----------
STOCKHOLDERS' EQUITY
Preferred Stock, $10 par:
10,000,000 shares authorized;
31,719 shares issued and
outstanding (Liquidation Preference
$3,171,940) 317,194
Common Stock, $10 par:
2,000,000 shares authorized;
10,000 shares issued and
outstanding 100,000
Additional paid-in capital 1,454,063
Retained earnings 1,449,973
----------
Total Stockholders' Equity 3,321,230
----------
Total Capitalization $34,533,948
==========
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
The financial data shown below as of September 30, 1994 and 1993 and for the years ended
September 30, 1994, 1993 and 1992(other than the ratio of earnings to fixed charges) have been
derived from, and should be read in conjunction with, Summit's consolidated financial
statements, related notes, and Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing elsewhere herein. The financial data shown as of September 30,
1992 and 1991 and for the years ended September 30, 1992, and 1991 and the period from July 25,
1990 (date of incorporation) through September 30, 1990 (other than the ratio of earnings to
fixed charges) have been derived from audited financial statements not included herein. The
financial statements as of and for the years ended September 30, 1994 and 1993 have been
audited by Coopers & Lybrand L.L.P. The financial statements as of and for the years ended
September 30, 1992, and 1991 and for the period from July 25, 1990 (date of incorporation)
through September 30, 1990, have been audited by BDO Seidman.
July 25, 1990
(Date of
Year Ended Year Ended Year Ended Year Ended Incorporation)
September 30, September 30, September 30, September, 30 Through
September 30,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Revenues $3,395,252 $ 2,815,624 $ 2,435,843 $1,026,405 $ 8,229
========== ========== ========== ========== ============
Income before
extraordinary item $ 264,879 $ 283,107 $ 611,595 $ 238,205 $ 5,345
Extraordinary item (1) -- -- 49,772 -- --
---------- ---------- ---------- ---------- ------------
Net Income 264,879 283,107 661,367 238,205 5,345
Preferred Stock Dividends (2,930) -- -- -- --
---------- ---------- ---------- ---------- ------------
Income Applicable to Common
Stockholders $ 261,949 $ 283,107 $ 661,367 $ 238,205 $ 5,345
========== ========== ========== ========== ============
Per Common Share Data:
Income before
extraordinary
item $ 13.47 $ 14.15 $ 30.58 $ 11.91 $ .27
Extraordinary item -- -- 2.49 -- --
---------- ---------- ---------- ---------- ------------
Net income $ 13.47 $ 14.15 $ 33.07 $ 11.91 $ .27
========== ========== ========== ========== ============
Weighted average number
of common shares
outstanding 19,445 20,000 20,000 20,000 20,000
========== ========== ========== ========== ============
Ratio of Earnings
to Fixed
Charges and Preferred Dividends: 1.16 1.24 1.53 1.37 --
BALANCE SHEET DATA:
Due from/(to) affiliated
companies, net -- $ 1,710,743 $ (400,365) $(5,528,617) $ (22,010)
Total Assets $35,101,988 $25,441,605 $17,696,628 $16,718,823 $2,027,355
Debt Securities
and Other
Debt Payable $31,212,718 $21,982,078 $14,289,648 $ 8,451,106 --
Stockholders' Equity $ 3,321,230 $ 3,188,024 $ 2,904,917 $ 2,243,550 $2,005,345
<FN>
(1) Benefit from utilization of net operating loss carryforwards.
</TABLE>
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
The financial data shown below as of December 31, 1993 and 1992 and for the years ended
December 31, 1993, 1992 and 1991 have been derived from and should be read in conjunction with,
Old Standard's financial statements and related notes appearing elsewhere herein. The
financial data shown as of December 31, 1991 has been derived from audited financial statements
not included herein. The financial statements as of and for the year ended December 31, 1993
has been audited by Coopers and Lybrand L.L.P. The financial statements as of and for the
years ended December 31, 1992 and 1991 have been audited by BDO Seidman. The financial data
as of and for the nine months ended September 30, 1994, and 1993 has been derived from
unaudited financial statements.
Nine Months Nine Months
Ended Ended Year Ended Year Ended Year Ended
September 30, September 30, December 31, December 31 December 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Revenues $ 3,069,811 $2,754,706 $3,721,664 $3,004,046 $1,465,329
=========== =========== =========== =========== ===========
Net Income $ 477,969 $ 134,407 $ 281,794 $ 874,588 $ 382,913
=========== =========== =========== =========== ===========
Per Common Share Data:
Net Income $ 11.95 $ 3.36 $ 7.04 $ 21.86 $ 9.57
=========== =========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding 40,000 40,000 40,000 40,000 40,000
=========== =========== =========== =========== ===========
Balance Sheet Data:
Due from/(to) affiliated
Companies $ 210,542 $ (127,853) $ 1,456,431 $(2,374,634) $ (154,353)
Total Assets $47,488,675 $40,209,800 $42,668,424 $33,814,749 $14,903,175
Annuity Reserves $43,396,028 $36,229,519 $39,344,173 $28,055,857 $12,488,351
Stockholder's Equity $ 2,536,627 $ 2,641,961 $ 2,015,706 $ 2,493,223 $ 1,618,635
</TABLE>
<PAGE>
PRO FORMA COMBINED SELECTED FINANCIAL DATA
OF SUMMIT SECURITIES, INC. AND SUBSIDIARIES
The following table sets forth certain pro forma combined financial
information of Summit to illustrate the estimated effect of the
proposed business combination with Old Standard to be accounted for
as a purchase under generally accepted accounting principles. This
pro forma information should be read in conjunction with the
historical financial statements and selected financial data of Summit
and Old Standard, including the notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of
Operations and with the pro forma combined financial statements,
including the notes thereto, included elsewhere in this document.
The pro forma combined financial information does not purport to
represent what the combined financial information actually would have
been had the combination occurred at the beginning of the period
presented or to project the combined financial position or results of
operations for any future date or period.
<TABLE>
<CAPTION>
Year Ended
September 30,
1994
<S> <C>
INCOME STATEMENT DATA:
Revenues $ 7,879,006
Net Income Applicable to
Common Stockholders $ 615,998
BALANCE SHEET DATA:
Total Assets $79,990,663
Annuity Reserves $43,396,028
Debt Securities and Other
Debt Payable $31,223,542
Stockholder's Equity $ 3,257,857
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
For the Three Fiscal Years Ended September 30, 1994
Results of Operations
Revenues of Summit increased to $3.4 million in 1994, from $2.8
million in 1993 and $2.4 million in 1992. The growth from 1993 to
1994 is attributable primarily to increased investment earnings on
additional outstanding Receivables along with gains realized on the
sale of a portion of the Receivable portfolio. These increases were
offset partially, in 1994 by a reduction in revenues associated with
the sale of repossessed property. The growth from 1992 to 1993 is
attributable primarily to increased investment earnings on additional
outstanding Receivables and increased revenues associated with the
sale of repossessed property. These increases were partially offset
by a reduction in dividends received on investments in an affiliated
company. Summit has increased its investment in Receivables from
$11.6 million at September 30, 1992 to $19.5 million at September 30,
1993 to $27.3 million at September 30, 1994.
Summit continued to realize income from operations during 1994.
Net income for the fiscal year ended September 30, 1994 was $262,000
compared to $283,000 in 1993 and $661,000 in 1992. The relatively
small decrease from 1993 to 1994 was the result of Summit being able
to realize gains on the sales of Receivables, improve other income
sources and reduce operating expenses, all of which were necessary as
Summit experienced a reduced margin between interest sensitive income
and interest sensitive expense along with increases in the provisions
for losses on real estate assets. The 1993 decrease in net income
was attributable to a reduced margin between interest sensitive
income and interest sensitive expense along with increased operating
expenses associated with the increased volume of Certificate sales,
Receivable investments and real estate held for sale. Additionally,
during 1993, Summit experienced a slight increase in the loss from
the sale of real estate repossessions and also increased its
provision for losses on real estate assets.
Since the date of its incorporation through approximately the
end of calendar year 1993, Summit generally benefitted from a
declining interest rate environment with lower money costs and
relatively consistent yields on Receivables. In addition, a
declining rate environment positively impacted earnings by increasing
the value of the portfolio of predominantly fixed rate Receivables.
This was evident in 1994 as Summit was able to realize gains from the
sale of Receivables. Higher than normal prepayments in the
Receivable portfolio were experienced during 1994, 1993 and 1992,
allowing Summit to recognize unamortized discounts on Receivables at
an accelerated rate. During 1994, Metropolitan, Summit's former
parent through September 9, 1994 and the primary supplier of
Receivable investments, began charging underwriting fees associated
with Receivable acquisitions. The charging of the underwriting fee
has resulted in a slightly lower yield over the life of the new
Receivables, however, management believes this yield to be superior
to other investment opportunities. See "BUSINESS-Investment in
Receivables."
Maintaining efficient collection efforts and minimizing
delinquencies in Summit's Receivable portfolio are ongoing management
goals. During 1994, Summit realized a gain on the sale of
repossessed real estate of $12,300 compared to losses of $18,400 and
$5,300 in 1993 and 1992, respectively. In relation to the increasing
size of Summit's Receivable and real estate portfolios, Summit has
increased its provision for losses on real estate assets. Provisions
for losses have been $155,000, $51,000 and $18,800 for 1994, 1993,
and 1992, respectively. At September 30, 1994, Summit had an
allowance for losses on real estate assets of $251,000 compared to
$97,000 at September 30, 1993.
In April 1992, the Accounting Standards Division of the American
Institute of Certified Public Accountants issued Statement of
Position (SOP) No. 92-3, "Accounting for Foreclosed Assets," which
provides guidance on determining the accounting treatment for
foreclosed assets. SOP 92-3 requires that foreclosed assets be
carried at the lower of (a) fair value minus estimated costs to sell,
or (b) cost. Summit applied the provisions of SOP 92-3 effective
October 1, 1992. The initial charge for its application was
approximately $10,000, before the application of related income
taxes, and is included in operations in 1993.
Interest Sensitive Income and Expense
Management continually monitors the interest sensitive income
and expense of Summit. Interest sensitive expense is predominantly
the interest costs of Certificates, while interest sensitive income
includes interest and earned discounts on Receivables, dividends and
other investment income.
The spread between interest sensitive income and interest
sensitive expense was $925,000 in 1992, $696,000 in 1993 and $543,000
in 1994. The decrease from 1993 to 1994 of approximately $153,000
was attributable to several factors including: (1) charging of
underwriting fees by Metropolitan which reduced 1994 interest income
by approximately $60,000; (2) the sale of $4.5 million of high
yielding, time-share Receivables to Metropolitan in February 1994;
(3) lower yields on acquired Receivables; and (4) the accumulation of
cash, which was invested in low yielding overnight investments, which
was necessary for the September 1994 payment of $3.6 million to
Metropolitan to redeem its outstanding common stock. The decrease in
interest spread from 1992 to 1993 of approximately $230,000 was the
result of management's decision to accumulate cash to fund a contract
purchase commitment in excess of $7 million from an affiliate in
December 1992. Included in the Receivables purchased were
approximately $6.0 million of timeshare Receivables, which were
collateralized by timeshares located at a single project in Hawaii.
These Receivables were sold to Metropolitan at carrying value on
February 18, 1994. Also, Summit recognized $366,935 of dividend
income (13% dividend rate) from its preferred stock investment in its
affiliate in 1992 and paid interest to Metropolitan at prime plus 1
1/2% on the borrowings used to finance the purchase of the preferred
stock. In March 1992, Summit transferred the preferred stock to
Metropolitan in full satisfaction of the $6 million payable.
Therefore, there were no dividends received by Summit in fiscal 1994
or 1993 on the preferred stock. See Note 9 to the Consolidated
Financial Statements.
Summit's assets have tended to reprice or mature more quickly
than have its liabilities. This condition generally leads to a
reduced interest margin in a falling interest rate environment as the
cash flow from assets is reinvested at lower rates of interest.
Interest rates generally declined over the past three years, with the
exception of the last nine months of fiscal 1994. See
"Asset/Liability Management."
Other Income
Other income increased from approximately $16,600 in 1992 to
$42,700 in 1993 and $60,700 in 1994. Other income is predominantly
miscellaneous fees and charges related to Receivables, thus its
growth is primarily due to the growth in Receivables.
Other Expenses
Operating expenses increased from approximately $178,300 in 1992
to $244,600 in 1993 and remained relatively stable at $231,400 in
1994. In general, the increases have been the result of increased
volume of Certificate sales and Receivable investments. During 1994,
Summit was able to improve efficiency and reduce some operating
expenses while increasing the volume of Certificate sales and
Receivable investments.
Provision for Losses on Real Estate Receivables and Repossessed Real
Estate
The provision for losses on Receivables and repossessed real
estate has increased as the size of the portfolio of Receivables and
repossessed real estate has grown. The following table summarizes
Summit's allowance for losses on Receivables and repossessed real
estate:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Beginning Balance $ 96,654 $59,244 $50,000
Provision 103,000 15,000 18,762
(Charge-offs)/
Recoveries, net 50,918 22,410 ( 9,518)
------- ------- -------
Ending Balance $250,572 $96,654 $59,244
======= ======= =======
<FN>
These allowances are in addition to unamortized discounts of $1.3
million at September 30, 1994, and $1.1 million at September 30, 1993
and 1992.
</TABLE>
Gain/Loss on Real Estate Sold
During 1994, Summit experienced a gain on the sale of real
estate of approximately $12,000. At the end of fiscal 1994, Summit
had $453,000 in real estate held for sale, less than 2% of total real
estate assets.
Effect of Inflation
During the three year period ended September 30, 1994, inflation
has had a generally positive impact on Summit's operations. This
impact has primarily been indirect in that the level of inflation
tends to influence inflation expectations, which tends to impact
interest rates on both Summit's assets and liabilities. Thus, with
lower inflation rates over the past three years, interest rates have
been generally declining during this period, which has reduced
Summit's cost of funds. Interest rates on Receivables acquired, due
to their nature, have not declined to the same extent as the cost of
Summit's borrowings. In addition, inflation has not had a material
effect on Summit's operating expenses. The main reason for the
increase in operating expenses has been an increase in the number of
Receivables acquired and serviced and increased sales of
Certificates.
Revenues from real estate sold are influenced in part by
inflation, as, historically, real estate values have fluctuated with
the rate of inflation. However, Summit is unable to quantify the
effect of inflation in this respect.
Asset/Liability Management
As most of Summit's assets and liabilities are financial in
nature, Summit is subject to interest rate risk. In fiscal 1995,
more of Summit's financial assets (primarily Receivables and fixed
income investments) will reprice or mature more quickly than its
financial liabilities (primarily Certificates). In a rising interest
rate environment, this factor will tend to increase earnings as cash
flow from assets is reinvested at higher rates of interest. However,
for a number of periods subsequent to fiscal 1995 , financial
liabilities are scheduled to reprice or mature more quickly than
financial assets. During this period, earnings will tend to decline
as funds available for investing are obtained at a higher interest
cost. Also, yields on Receivables have not been as sensitive to rate
fluctuations as have Certificate rates. Therefore, the benefit of an
increase in interest rates during the initial period would be reduced
to the extent that required yields on Receivable investments were not
increased in concert with general market rates of interest. In a
falling interest rate environment, when financial assets reprice or
mature more quickly than financial liabilities, earnings will tend to
decrease as cash flow from assets is reinvested at lower rates of
interest. This effect is mitigated to the extent that yields on
Receivables may be less sensitive to rate fluctuations than are rates
on Certificates.
Summit is authorized to use financial futures instruments for
the purpose of hedging interest rate risk relative to investments in
the securities portfolio or potential trading situations. In both
cases, the futures transaction is intended to reduce the risk
associated with price movements for a balance sheet asset.
Additionally the Company could sell securities "short" (the sale of
securities which are not currently in the portfolio and therefore
must be purchased to close out the sale agreement) as another means
of hedging interest rate risk, or to take a trading position in an
attempt to benefit from an anticipated movement in the financial
markets. The Company has not employed either strategy prior to or as
of September 30, 1994.
During fiscal 1995, approximately $6.4 million of interest
sensitive assets (cash and Receivables) are expected to reprice or
mature. For liabilities, approximately $2.6 million of Certificates
will mature during fiscal 1995, along with about $10,500 of other
debt payable. These estimates result in repricing of interest
sensitive assets in excess of interest sensitive liabilities of
approximately $3.8 million, or a ratio of interest sensitive assets
to interest sensitive liabilities of approximately 245%.
New Accounting Rules
In the fourth quarter of fiscal 1993, Summit adopted the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109), retroactive to October
1, 1992 and resulted in no significant effect on Summit's financial
position. In 1992, Summit accounted for income taxes as required by
Accounting Principles Board Opinion No. 11. See Note 1 to the
Consolidated Financial Statements.
In May 1993, Statement of Financial Accounting Standards No. 114
(SFAS No. 114) "Accounting by Creditors for Impairment of a Loan" was
issued. SFAS No. 114 requires that certain impaired loans be
measured based on the present value of expected future cash flows
discounted at the loans' effective interest rate or the fair value of
the collateral. Summit is required to adopt this new standard by
October 1, 1995. Summit does not anticipate that the adoption of
SFAS No. 114 will have a material effect on the financial statements.
In December 1991, Statement of Financial Accounting Standards
No. 107 (SFAS No. 107), "Disclosures about Fair Value of Financial
Instruments," was issued. SFAS No. 107 requires disclosures of fair
value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to
estimate that value. SFAS No. 107 is effective for financial
statements issued for fiscal years ending after December 31, 1995
(Summit's fiscal year ending September 30, 1996) for entities with
less than $150 million in total assets. This pronouncement does not
change any requirements for recognition, measurement or
classification of financial instruments in Summit's financial
statements.
Liquidity and Capital Resources
As a financial institution, Summit's liquidity is largely tied
to its ability to renew, maintain or obtain additional sources of
cash. Summit has successfully performed this task during the past
three years and has continued to invest funds generated by operations
and financing activities.
Summit has continued to generate cash from operations with net
cash provided of $2.3 million in 1994, $1.4 million in 1993 and $1.4
million in 1992. Cash utilized by Summit in its investing activities
was $6.3 million in 1994, $9.2 million in 1993 and $2.6 million in
1992. Cash provided by Summit's financing activities was $4.1
million in 1994, $5.8 million in 1993 and $5.0 million in 1992.
These cash flows have resulted in year end cash and cash equivalent
balances of $3.6 million in 1994, $3.6 million in 1993 and $5.6
million in 1992.
During 1994, the cash provided by operating activities of $2.3
million plus cash provided by financing activities of $4.1 million
was used entirely to support the net investing activities of $6.3
million. Cash from operating activities of $2.3 million resulted
primarily from net income of $.3 million, increases in compound and
accrued interest on Certificates of $1.2 million and other accrual
adjustments of $.6 million. Cash used in investing activities of
$6.3 million primarily included acquisition of Receivables, net of
payments and sales, of $8.0 million being offset by the collection of
advances from related parties of $1.7 million. Cash from financing
activities of $4.1 million resulted primarily from: (1) issuance of
Certificates, net of repayment and related debt issue costs, of $7.5
million; (2) issuance of common and preferred stock of $.2 million;
less (3) redemption of common stock, owned by its former parent, of
$3.6 million.
During 1993, the $2.1 million decrease in cash and cash
equivalents resulted from cash provided by operating activities of
$1.4 million less cash used in investing activities of $9.2 million
plus cash provided by financing activities of $5.7 million. Cash
from operating activities resulted primarily from net income of $.3
million and the increase in compound and accrued interest on
Certificates of $1.0 million. Cash used in investing activities
primarily included: (1) acquisition of real estate Receivables, net
of payments and sales, of $7.6 million; and (2) an advance to its
parent company of $1.7 million for the purchase of Receivables. Cash
provided by financing activities included: (1) issuance of
Certificates, net of repayments and related debt issue costs, of $7.0
million; less (2) repayment of amounts due its parent of $.4 million;
and (3) repayment to banks and others of $.9 million.
Summit's investing activities during 1993 were supported by cash
from operations and external financing. Summit's increases in
Receivables were primarily funded by sales of Certificates. During
1992, the $3.9 million increase in cash and cash equivalents resulted
from cash provided by operating activities of $1.4 million less cash
used in investing activities of $2.5 million plus cash provided by
financing activities of $5.0 million. Cash from operating activities
resulted primarily from net income of $.7 million and the increase in
compound and accrued interest on Certificates of $.7 million. Cash
used in investing activities primarily included the acquisition of
real estate Receivables net of payments and sales, of $3.0 million
less $.5 million advance repaid by its parent. Cash provided by
financing activities included: (1) issuance of Certificates, net of
repayments and related debt issue costs, of $4.7 million; (2)
borrowings from its parent of $.4 million; less (3) repayment to
banks and others of $.1 million.
During 1992, Summit's investing activities were supported by
internal cash from operations and external cash from financing.
Summit's increases in Receivables were primarily funded by sales of
Certificates.
Management believes that cash flow from operating activities and
financing activities and the liquidity provided from current
investment will be sufficient for Summit to conduct its business and
meet its anticipated obligations as they mature during fiscal 1995
including the planned acquisition of Old Standard, MIS and
commencement of operations of Summit Property Development, Inc.
Summit has not defaulted on any of its obligations since its founding
in 1990.
<PAGE>
BUSINESS
INTRODUCTION
Summit is engaged in the business of investing in Receivables
through funds provided by Receivable investment proceeds, certificate
sales, and preferred stock sales. Summit's goal is to achieve a
positive spread between the return on its Receivable investments and
its cost of funds. Summit may also engage in other businesses or
activities without restriction in accordance with the provisions of
its Articles of Incorporation.
Summit was originally organized as a wholly owned subsidiary of
Metropolitan Mortgage & Securities Co., Inc, a Washington corporation
(Metropolitan). On September 9, 1994, Summit, Metropolitan and C.
Paul Sandifur, Jr. completed a sale of the common stock of Summit to
National Summit Corporation. National Summit Corporation is a
holding company wholly owned by C. Paul Sandifur Jr. Mr. Sandifur
holds effective control over Metropolitan. Prior to the sale, Mr.
Sandifur held effective control of Summit, through Metropolitan.
Following the sale, Mr. Sandifur holds effective control of Summit
through National Summit Corporation. Prior to the sale, the officers
and directors of Summit were also officers or directors of
Metropolitan and/or its affiliates. Contemporaneously with the sale,
the officers and directors resigned and new officers and directors
were elected. The newly elected officers and directors are employees
of Metropolitan, but not officers or directors of Metropolitan or any
of its subsidiaries. There are no plans to make any material changes
in the business, operations or administration of Summit as a result
of the sale. See "CERTAIN TRANSACTIONS".
Summit has reached an agreement with Metropolitan whereby
effective January 31, 1995, Summit will acquire Metropolitan
Investment Securities, Inc. (MIS) from Metropolitan. MIS is the
broker/dealer for this offering and the offering of Metropolitan's
securities. MIS had total assets and stockholder's equity of
$380,000 and $283,000 respectively, at September 30, 1994. Also,
effective January 31, 1995, Summit Property Development, Inc. (a
subsidiary of Summit) will commence real estate development
activities previously performed by Metropolitan. Additionally,
Summit is currently negotiating the purchase of Old Standard Life
Insurance Company (Old Standard) from Metropolitan. Old Standard is
a wholly-owned subsidiary of Metropolitan. Old Standard had total
assets and stockholder's equity of $47 million and $2.5 million,
respectively, at September 30, 1994. See "CERTAIN TRANSACTIONS".
MANAGEMENT
As of September 30, 1994, Summit's personnel consisted of its
officers and directors, See "MANAGEMENT", an accountant and an
attorney. Each of those individuals is also employed by
Metropolitan. It is anticipated that they will continue to devote
substantially all of their time to their duties related to their
respective positions with Metropolitan and its other affiliates
subject to the necessary commitment of time to ensure that Summit
fulfills its obligations to Preferred shareholders and its duties
under the Indenture pursuant to which it issues Investment
Certificates and such other duties and responsibilities as Summit may
undertake in the conduct of its business or as may be required by
law. No additional employees are expected to be necessary or hired
during the foreseeable future.
Metropolitan provides management, Receivable acquisition and
Receivable collection services for a fee to Summit pursuant to the
terms of a Management Acquisition and Servicing Agreement. The
Receivable acquisition fees are based upon a yield requirement
established by Summit. Summit pays as its Receivable acquisition
service fee the difference between the yield requirement and the
yield which Metropolitan actually negotiates when the Receivable is
acquired. In 1994, Summit paid total service fees to Metropolitan of
$497,132. Management believes that the terms and conditions of the
agreements with Metropolitan are at least as favorable to Summit as
those that could have been obtained by a non-affiliated third party.
The agreements are non-exclusive and may be terminated in whole or
part by either party upon notice to the other party.
RECEIVABLE INVESTMENTS
The Receivables consist primarily of notes secured by real
estate mortgages, deeds of trust and conditional real estate sales
contracts. To a lesser extent, Summit also acquires other types of
Receivables, including but not limited to annuities and lottery
prizes. All such Receivables are purchased at prices calculated to
provide a desired yield. Often, in order to obtain the desired
yield, the Receivables will be purchased at a discount from their
face amount. See "BUSINESS -YIELD and DISCOUNT CONSIDERATIONS".
Summit's investments in Receivables are financed primarily by
the cash flow from Receivables, the sale of Certificates, and the
sale of Preferred Stock.
<PAGE>
Sources of Receivables
Summit acquires its Receivables through the services of
Metropolitan. See "BUSINESS-Management". Metropolitan acquires
approximately 80% of the Receivables through independent brokers
located throughout the country. These brokers typically deal directly
with private individuals or organizations who own and wish to sell a
Receivable. These independent brokers contact one of Metropolitan's
branch offices to submit the Receivable for evaluation by
Metropolitan. It is the opinion of management that its
responsiveness to the independent Receivable brokers, and to
Receivable sellers has been a key to Metropolitan's ability to
attract and purchase quality Receivables at acceptable yields.
Metropolitan is also approached directly by prospective
Receivable sellers. These direct contacts are generally the result
of a referral or a previous business contact. Metropolitan also
negotiates the acquisition of portfolios of Receivables from banks,
savings and loan associations, the Resolution Trust Corporation and
the Federal Deposit Insurance Corporation. Summit has acquired
Receivables from all such sources through Metropolitan.
Yield and Discount Considerations
Summit's management establishes Summit's yield requirements
based upon its cost of funds, and market conditions. Summit's yield
requirements are provided to Metropolitan, which negotiates
Receivable purchases at prices calculated to provide a desired yield.
Often this results in a purchase price less than the Receivable's
unpaid balance. The difference between the unpaid balance and the
purchase price is the "discount." The amount of the discount will
vary in any given transaction depending upon Summit's yield
requirements at the time of the purchase and the terms and nature of
the Receivable. Yield requirements are established in light of
capital costs, market conditions, the characteristics of particular
classes or types of Receivables and the risk of default by the
Receivable payor. See Also "BUSINESS-RECEIVABLE INVESTMENTS-
Underwriting"
For Receivables of all types, the discounts originating at the
time of purchase, net of capitalized acquisition costs, are amortized
using the level yield (interest) method over the remaining
contractual term of the contract. For Receivables which were
acquired after September 30, 1992, these net purchase discounts are
amortized on an individual contract basis using the level yield
method over the contractual remaining life of the contract. For
those Receivables acquired before October 1, 1992, these net purchase
discounts were pooled by the fiscal year of purchase and by similar
contract types, and amortized on a pool basis using the level yield
method over the expected remaining life of the pool. For these older
Receivables, the amortization period, which is approximately 78
months, estimates a constant prepayment rate of 10-12 percent per
year on scheduled balances, which is consistent with Summit's prior
experience with similar loans and Summit's expectations.
YIELD CHART: REFER TO GRAPH APPENDIX ITEM 3
Summit's management establishes the yield requirements for
Receivable investments by assuming that all payments on the
Receivables will be made and that a certain percentage of unpaid
balances will be prepaid on an annual basis (9% for fiscal 1994) .
During fiscal 1994, Summit's average initial yield requirement was
11%-14%. However, to the extent that Receivables are purchased at a
discount and payments are received earlier than anticipated, the
discount is earned more quickly resulting in an increase in the
yield. Conversely, to the extent that payments are received later
than anticipated, the discount is earned less quickly resulting in a
lower yield.
A greater effective yield can also be achieved through
negotiating amendments to the Receivable agreements. These amendments
may involve adjusting the interest rate and/or monthly payments,
extension of financing in lieu of a required balloon payment or other
adjustments in cases of delinquencies where the payor appears able to
resolve the delinquency. As a result of these amendments, the cash
flow may be maintained or accelerated, the latter of which increases
the yield realized on a Receivable purchased at a discount.
Underwriting
The review of the Receivables (underwriting) is performed for
Summit by Metropolitan. When Metropolitan is offered a Receivable,
an initial study of the terms of the Receivable, including any
associated documents, is performed by Metropolitan's underwriting and
closing staff. If the Receivable appears acceptable, the purchase
price for the Receivable is calculated based on Summit's yield
requirements at that time. If the broker and/or seller accepts the
proposed purchase price, a written agreement to purchase is executed,
subject to Metropolitan's full underwriting review. Metropolitan
also negotiates the purchases of "partial" interests in Receivables.
Partial purchases are purchases of the right to receive a portion of
the Receivable's balance, and where the seller's right to the unsold
portion of the Receivable is subordinated to the interest of Summit.
These "partials" generally result in a reduced level of investment
risk to the purchaser than if the entire Receivable cash flow is
purchased.
The underwriting guidelines adopted by Summit for Receivables
secured by real estate include a requirement that the ratio of
Summit's investment in a Receivable compared to the appraised value
of the property which secures the Receivable may not exceed 75% on
Receivables secured by single family residences; and that the ratio
of the investment to the property's appraised value may not exceed
70% on Receivables secured by other types of improved property; and
55% on unimproved raw land. These more stringent than conventional
investment to collateral ratios provide higher than conventional
levels of collateral to protect Summit's investment in the event of
a default on a Receivable.
For each Receivable secured by real estate, a current market
value appraisal of the real estate providing security is obtained.
These appraisals are obtained through licensed independent appraisers
or through one of Metropolitan's licensed staff appraisers. These
appraisals are based on drive-by and comparative sales analysis.
Each independent appraisal is also subject to review by a staff
appraiser.
Additionally, every proposed investment in a Receivable secured
by real estate is evaluated by Metropolitan's demography department
utilizing computerized data which identifies local trends in property
values, personal income, population and other social and economic
indicators. Other underwriting functions related to Receivables
secured by real estate may include obtaining and evaluating credit
reports on the Receivable payors; evaluation of the potential for
environmental risks; verifying payment histories and current payment
status; and obtaining title reports to verify the record status of
the Receivable and other matters of record.
Summit also acquires Receivables from Metropolitan which are not
secured by real estate, such as annuities and lottery prizes. The
annuities often arise out of the settlement of legal disputes where
the prevailing party is awarded a sum of money payable over a period
of time. In the case of such settlement annuity purchases, the
underwriting guidelines of Summit generally require that Metropolitan
review the settlement agreement. In the case of all annuity
purchases, Summit's underwriting guidelines generally require that
Metropolitan review the annuity policy, related documents, the credit
rating of the payor (generally an insurance company), determination
of the existence of any state insurance fund designed to protect
annuity holders, and the review of other factors relevant to the risk
of purchasing a particular annuity as deemed appropriate by the
underwriting committee in each circumstance. In the case of lottery
prizes, the underwriting guidelines generally include a review of the
documents providing proof of the prize, and a review of the credit
rating of the insurance company, or other entity, making the lottery
prize payments. Where the lottery prize is from a state run
lottery, the underwriting guidelines generally include a
determination of whether the prize is backed by the general credit of
the state, and confirmation with the respective lottery commission of
the prize winners right to sell the prize, and acknowledgment from
the lottery commission of their notice of the sale. In many states,
in order to sell a state lottery prize, the winner must obtain a
court order permitting the sale. In those states, Summit requires a
certified copy of the court order.
Receivable investments which are identified for legal review are
referred to Metropolitan's in-house legal department which currently
includes a staff of five attorneys. All Receivable purchases which
involve investments greater than $150,000 ($100,000 if the real
property collateral is not an owner-occupied single family residence)
are submitted to an additional special risk evaluation committee, and
are subject to legal department review. In addition, transactions
involving investments of more than $500,000 are subject to approval
by Summit's Board of Directors.
Upon completion of the underwriting process and the approval of
the investment, appropriate closing and transfer documents are
executed by the seller and/or broker, and the transaction is funded.
Management believes that the underwriting functions that are
employed in its Receivable investment activity are as thorough as
reasonably possible considering the nature of this business.
Summit's acquisition of Receivables secured by real estate should be
distinguished from the conventional mortgage lending business which
involves substantial first-hand contact by lenders with each borrower
and the ability to obtain an interior inspection appraisal prior to
granting a loan.
Current Mix of Receivable Investment Holdings
Summit's investments in Receivables are secured by first or
second liens primarily on single family residential property. Summit
believes that these Receivables present lower credit risks than a
portfolio of mortgages secured by commercial property or raw land,
and that much of the risk in the portfolio is dissipated by the large
numbers of relatively small individual Receivables and their
geographic dispersion.
The following table presents information about Summit's
investments in Receivables as of September 30, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Face value of discounted
receivables $21,931,395 $14,416,037
Face value of originated
and non-discounted
receivables 6,473,183 6,285,706
Unrealized discounts,
net of amortized
acquisition costs (1,337,365) (1,076,488)
Allowance for losses (250,572) (96,654)
Performance Holdback on
Receivable Purchase -- (600,000)
Accrued interest
receivable 466,350 598,624
----------- -----------
Carrying value $27,282,991 $19,527,225
=========== ===========
</TABLE>
As of September 30, 1994, approximately 77% of Summit's
investments in Receivables are in first lien position Receivables
with the balance in second lien positions. The Receivables are
secured by residential, business and commercial properties with
residential properties securing approximately 84% of such investments
as of September 30, 1994. The Receivables acquired by Summit are
primarily generated by private individuals or businesses and are
therefore not government insured loans.
During fiscal 1993, Summit purchased, from an affiliate of
Metropolitan, approximately $6.0 million of timeshare Receivables, of
which approximately $5.5 million were outstanding at September 30,
1994. These Receivables were originated by an affiliate of
Metropolitan in connection with sales of its timeshare resort
condominiums in Hawaii. These Receivables had an approximate
contractual interest rate of 13% and were purchased at par (eg. at
the amount of their outstanding principal balance). In conjunction
with the purchase, Summit withheld a 10% performance holdback of
$600,000 to cover any realized losses from these Receivables. The
holdback was maintained at a balance of approximately 10% of the
outstanding timeshare Receivables and was released as principal was
paid down. At September 30, 1993, Summit held approximately $680,000
of delinquent timeshare contracts purchased from the affiliate.
Summit believes that the performance holdback of $600,000 was
adequate to cover any losses related to these certain timeshare
Receivables. At September 30, 1993, timeshare Receivables
represented approximately 27% of the total outstanding principal for
Receivables owned by Summit. These timeshare receivables were sold to
Metropolitan at par on February 18, 1994.
Summit's receivable investments at September 30, 1994 were
secured by properties located throughout the United States with not
more than 3% (by dollar amount) in any single state except as
follows:
Arizona . . . . . . 6%
California . . . . 11%
Oregon . . . . . . 5%
Texas . . . . . . . 20%
Washington . . . . 10%
Florida . . . . . . 3%
Georgia . . . . . . 4%
North Carolina. . . 3%
South Carolina. . . 3%
<PAGE>
SUMMIT SECURITIES, INC.
RECEIVABLES SECURED BY REAL ESTATE
September 30, 1994
<TABLE>
<CAPTION>
Less than 1% of the contracts are subject to variable interest rates. Interest rates range from
0% to 20% with rates principally (87% of face value) within the range of 7% to 12%. The
following table breaks down Summit's Receivable portfolio by type, size and lien position.
Number Carrying Delinquent Number of
of Interest Maturity Amount of Principal Delinquent
Description Receivables Rates Dates Receivables Amount Receivables
---------- -------- -------- ----------- ---------- -----------
RESIDENTIAL Principally
<S> <C> <C> <C> <C> <C> <C>
First Mortgage > $75,000 46 7%-12% 1994-2024 $5,069,495 $331,928 3
First Mortgage > $40,000 122 7%-12% 1994-2024 6,554,375 303,003 5
First Mortgage < $40,000 338 9%-14% 1994-2023 7,190,121 250,572 33
Second or Lower> $75,000 4 8%-12% 1996-2014 405,950 -- --
Second or Lower> $40,000 23 7%-11% 1994-2020 1,240,937 155,577 3
Second or Lower< $40,000 155 9%-12% 1994-2024 3,387,961 43,920 2
COMMERCIAL
First Mortgage > $75,000 6 9%-11% 1998-2009 544,561 -- --
First Mortgage > $40,000 19 9%-10% 1995-2003 1,078,666 -- --
First Mortgage < $40,000 21 8%-10% 1995-2004 427,103 -- --
Second or Lower> $75,000 2 8%-10% 1999-2005 192,254 -- --
Second or Lower> $40,000 6 9%-11% 1997-2009 341,703 -- --
Second or Lower< $40,000 12 9%-11% 1996-2015 296,589 -- --
FARM, LAND AND OTHER
First Mortgage > $75,000 1 12% 1995 495,405 -- --
First Mortgage > $40,000 2 7%-10% 2004-2014 101,366 -- --
First Mortgage < $40,000 26 9%-12% 1995-2010 475,705 -- --
Second or Lower> $75,000 1 0% 1994 245,279 -- --
Second or Lower> $40,000 4 5%-12% 1998-2007 239,751 -- --
Second or Lower< $40,000 7 10%-12% 1996-2014 117,357 -- --
Unrealized discounts, net
of unamortized acquisition
costs, on receivables
purchased at a discount (1,337,365)
Accrued Interest Receivable 466,350
Allowance for Losses (250,572)
-----------
TOTAL $ 27,282,991 $ 1,085,000
=========== ===========
<FN>
The principal amount of Receivables subject to delinquent principal or interest is defined as
being in arrears for more than three months.
</TABLE>
<TABLE>
<CAPTION>
The contractual maturities of the aggregate amounts of Receivables (face amount) are as
follows:
Residential Commercial Farm, Land, Other Total
Principal Principal Principal Principal
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
October 1994 - September 1997 $ 2,324,000 $ 721,000 $ 777,000 $ 3,822,000
October 1997 - September 1999 2,425,000 816,000 92,000 3,333,000
October 1999 - September 2001 1,470,000 374,000 220,000 2,064,000
October 2001 - September 2004 2,220,000 362,000 109,000 2,691,000
October 2004 - September 2009 3,290,000 580,000 300,000 4,170,000
October 2009 - September 2014 2,744,000 -- 176,863 2,920,863
October 2014 - Thereafter 9,375,839 27,876 -- 9,403,715
---------- ---------- ---------- ----------
$23,848,839 $2,880,876 $1,674,863 $28,404,578
=========== ========== ========== ==========
</TABLE>
<PAGE>
Summit held 795 Receivables as of September 30, 1994. The
average stated interest rate (weighted by principal balances) on
Receivables held by Summit on that date was approximately 10%. See
Note 2, to Consolidated Financial Statements.
Delinquency Experience & Collection Procedures
The principal amount of Receivables held by Summit (as a
percentage of the total outstanding principal amount of Receivables)
which was in arrears for more than ninety days at September 30, 1994
was 3.8% compared to 8.0% and 4.2% at September 30, 1993 and 1992,
respectively. The decrease in 1994 is attributable to the sale of the
timeshare receivables to Metropolitan and improved collection
efforts. The increase in the amount for September 30, 1993 includes
approximately $680,000 of timeshare contracts purchased from an
affiliate. Without the effect of the delinquent timeshare
receivables, the 1993 delinquency rate would have been 6.5%. Summit
had a performance holdback of $600,000 to cover any losses related to
certain contracts including these Receivables. Because Receivables
purchased by Summit are typically not of the same quality as
mortgages that are subsequently securitized and sold in the secondary
market with government guarantees, higher delinquency rates are
expected. However, because these Receivables are purchased at a
discount, losses on sales after repossession are generally lower than
might otherwise be expected given these higher delinquency rates.
Receivable collection services are performed for Summit by
Metropolitan, pursuant to the following guidelines. When a
Receivable becomes delinquent, the payor is initially contacted by
telephone (generally on the 17th day following the payment due date).
If the default is not promptly cured (generally within three to six
days after the initial call), then additional collection activity,
including written correspondence and further telephone contact, is
pursued. If these collection procedures are unsuccessful, then the
account is referred to a committee who analyzes the basis for
default, the economics of the situation and the potential for
environmental risks. When appropriate, a phase I environmental study
is obtained prior to foreclosure. Based upon this analysis, the
Receivable is considered for a workout arrangement, further
collection activity, or foreclosure of any property providing
security for the Receivable. Collection activity may also involve
the initiation of legal proceedings against the payor of the
Receivable payments. Such legal proceedings, when necessary are
generally initiated within approximately ninety days after the
initial default. If accounts are reinstated prior to completion of
the legal action, then attorney fees, costs, expenses and late
charges are generally collected from the payor, or added to the
receivable balance, as a condition of reinstatement.
Allowance for Losses on Real Estate Assets
Summit establishes an allowance for losses on Receivables and
repossessed real estate based on an evaluation of delinquent
Receivables and appraisals for real estate held. During 1992, Summit
adopted an appraisal policy to require annual appraisals on
properties securing delinquent receivables when the Receivable
balances exceed a threshold equal to 1/2% of total assets of Summit.
Biannual appraisals are required on all other delinquent Receivables
with balances in excess of $50,000. The allowance for losses was
.9%, .5% and .5% of the face value of Receivables at September 30,
1994, 1993 and 1992, respectively.
Properties
Summit owns various repossessed properties held for sale. At
September 30, 1994, eight properties, acquired in satisfaction of
debt, with a combined carrying amount of approximately $453,000 were
held.
Method of Financing
Summit's continued growth is expected to depend on its ability
to market its securities to the public and to invest the proceeds in
higher-yielding investments. Financing needs are intended to be met
primarily by the sale of its Investment Certificates and Preferred
Stock. Such funds may be supplemented by short term bank financing
and borrowing from affiliates. As of the date of this document,
Summit had not established any formal lines of credit with banks or
other lending institutions.
The availability of Receivables offered for investment in the
national market is believed by management to be adequate to meet the
needs of Summit which are in addition to the needs of Metropolitan.
Competition
Summit's ability to compete for Receivable investments is
currently dependent upon Metropolitan. Metropolitan competes with
various real estate financing firms, real estate brokers, banks and
individual investors for the Receivables it acquires. The largest
single competitors are subsidiaries of much larger companies such as
Associates First Capital Corporation, a subsidiary of Ford Motor
Company, while the largest number of competitors are a multitude of
individual investors. The primary competitive factors are the amounts
offered and paid to Receivable sellers and the speed with which the
processing and funding of the transaction can be completed.
Competitive advantages enjoyed by Summit include access to
Metropolitan's branch office system which allows it access to markets
throughout the country; its ability to purchase long-term
Receivables; availability of funds; and its in-house capabilities for
processing and funding transactions. Competitive disadvantages
include the length of time required to process and fund approved
transactions (up to thirty days); an investment policy which excludes
purchases of Receivables which involve discounts of less than $2,500;
and relatively high yield requirements.
<PAGE>
MANAGEMENT
Directors and Executive Officers
(As of December 31, 1994)
Name Age Position
John Trimble 64 President/Director
J. Evelyn Sandifur 81 Vice President/Director
Philip Sandifur 23 Vice President/Director
Tom Turner 44 Secretary/Treasurer/Director
Ernest Jurdana 50 Chief Financial Officer
John Trimble was elected President on September 28, 1994. He
has been an employee of Metropolitan since 1980. From 1980-1985 he
served as a loan officer for Metropolitan. From 1985-1994, he was an
officer of Metropolitan. From 1985, to the present, he has been a
member of the Receivable Evaluation Committee.
J. Evelyn Sandifur is the wife of C. Paul Sandifur Sr., founder
of Metropolitan Mortgage & Securities Co., Inc, and mother of C. Paul
Sandifur Jr., who is the controlling shareholder of Metropolitan, and
also the controlling shareholder of the parent company of Summit,
National Summit Corp. She is not active in the day to day operations
of Summit except to the extent necessary to carry out duties as Vice
President and Director.
Philip Sandifur is the son of C. Paul Sandifur Jr., who is the
sole controlling shareholder of National Summit Corp., the parent
company of Summit Securities and also the controlling shareholder of
Metropolitan Mortgage & Securities Co., Inc. Philip graduated in 1993
from Santa Clara University receiving a BA in Business. He is not
active in the day to day operations of Summit except to the extent
necessary to carry out his duties as Vice President and Director.
Tom Turner was elected Secretary/Treasurer of Summit on
September 28, 1994. He has been an employee of Metropolitan since
1985, as a financial analyst. From 1983-1985, Mr. Turner was employed
by Olsten Temporary Services. Prior to 1983, Mr. Turner was self-
employed, principally doing business in the real estate industry.
Ernest Jurdana joined Metropolitan as Chief Financial Officer
in June of 1994. Since that date he has also been the Chief
Financial Officer for Summit. From 1990 to June 1994 he was Senior
Vice President and Chief Financial Officer for Continental Savings of
America. Prior to that time, he was Senior Vice President for
Financial Management with Washington Mutual Savings Bank where he
served in various accounting and financial positions from 1966. He
received a MBA designation from City University, and was licensed as
a Certified Public Accountant in 1986.
The directors of Summit are elected for one-year terms at
annual shareholder meetings. The officers of Summit serve at the
direction of the Board of Directors.
Summit's officers and directors will continue to hold their
respective positions with Metropolitan and do not anticipate that
their responsibilities with Summit will involve a significant amount
of time. They will, however, devote such time to the business and
affairs of Summit as may be necessary for the proper discharge of
their duties.
EXECUTIVE COMPENSATION
The officers and directors do not receive any compensation for
services rendered on behalf of Summit but they are entitled to
reimbursement for any expenses incurred in the performance of such
services. Such expenses include only items such as travel expense
incurred for attendance at corporate meetings or other business. No
such expenses have been incurred to date.
INDEMNIFICATION
Summit's Articles of Incorporation provide for indemnification
of Summit's directors, officers and employees for expenses and other
amounts reasonably required to be paid in connection with any civil
or criminal proceedings brought against such persons by reason of
their service of or position with Summit unless it is adjudged in
such proceedings that the person or persons are liable due to willful
malfeasance, bad faith, gross negligence or reckless disregard of his
duties in the conduct of his office. Such right of indemnification
is not exclusive of any other rights that may be provided by contract
of other agreement or provision of law.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Summit's officers,
directors or controlling persons pursuant to the foregoing
provisions, Summit has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is therefore unenforceable.
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the
beneficial owners of more than five percent of Summit's voting stock
as of September 30, 1994.
<TABLE>
<CAPTION>
SHARES OF
NAME AND ADDRESS COMMON STOCK % OF CLASS
<S> <C> <C>
National Summit Corporation 10,000 100%
W. 929 Sprague Ave.,
Spokane, Washington
</TABLE>
CERTAIN TRANSACTIONS
Summit was originally organized as a wholly owned subsidiary of
Metropolitan. On September 9, 1994, the controlling interest in
Summit was acquired by National Summit Corp., a Delaware corporation
which is wholly owned by C. Paul Sandifur, Jr. The change in control
was made pursuant to a reorganization wherein Summit redeemed all the
common shares held by its former parent company, Metropolitan, which
consisted of 100% of the outstanding common stock of Summit.
Contemporaneously with this redemption, Summit issued 10,000 shares
of common stock to National Summit Corp., a Delaware Corporation, for
$100,000. In addition, various investors in Metropolitan's common
and preferred stock, including members of Mr. Sandifur's immediate
family acquired 30,224 shares of Summit's Preferred Stock Series S-1
for $100 per share in exchange for preferred and common shares of
Metropolitan with a value of approximately $3 million dollars.
Following this sale, Metropolitan will continue to provide, for a
fee, principally all the manangement services to Summit. See
"BUSINESS-RECEIVABLE INVESTMENTS."
Mr. Sandifur holds effective control of Metropolitan. Prior to
the sale, Mr. Sandifur held effective control of Summit through
Metropolitan. Following the sale, Mr. Sandifur holds effective
control of Summit through National Summit.
Prior to the sale, the officers and directors of Summit, were
also officers or directors of Metropolitan and/or its affiliates.
Contemporaneously with the sale, the officers and directors resigned
and new officers and directors were elected. The newly elected
officers and directors are employees of Metropolitan but not officers
or directors of Metropolitan or any of its subsidiaries.
Summit considered the sale to be in its best interest due to
regulatory considerations and other business considerations. The
regulatory considerations include the impact of regulations imposed
upon Metropolitan by its state of domicile. In the opinion of
management these regulations penalized Summit in its prior corporate
structure.
On December 15, 1994, Metropolitan and Summit entered into an
understanding that on January 31, 1995 Metropolitan Investment
Securities (MIS) would be sold to Summit. MIS is a limited-purpose
broker dealer and the exclusive broker/dealer for the securities sold
by Metropolitan and Summit. It is not anticipated that this sale
will materially affect the business of MIS. See "CERTAIN INVESTMENT
CONSIDERATIONS-RISK FACTORS." Also on December 15, 1994,
Metropolitan and Summit entered into an understanding that on January
31, 1995, Metropolitan would discontinue its property development
division, which consists of a group of employees experienced in real
estate development. On the same date, Summit will commenced the
operation of a property development division employing those same
individuals who had previously been employed by Metropolitan. Summit
Property Development is negotiating an agreement with Metropolitan to
provide property development services to Metropolitan. See "BUSINESS"
& "CERTAIN INVESTMENT CONSIDERATIONS-RISK FACTORS."
Metropolitan Investment Securities, Inc. (MIS) is a securities
broker-dealer which is wholly-owned by Metropolitan. MIS is
currently the exclusive selling agent for securities issued by
Metropolitan and Summit. Summit has entered into Selling Agreements
with MIS to provide for the sale of the Certificates and Preferred
Stock pursuant to which MIS will be paid commissions ranging from
.25% to 6% of the investment amount in each transaction. During the
fiscal year ended September 30, 1994, Summit paid or accrued
commissions to MIS in the amount of $299,748 upon the sale of
$10,539,684 of Certificates and commissions of $7,552 upon the sale
of $149,512 of preferred stock. MIS also maintains, on behalf of
Summit, certain investor files and information pertaining to
investments in Summit's Certificates.
Transactions between Metropolitan and Summit take place in the
normal course of Summit's business. Such transactions include rental
of office space, provision of administrative and data processing
support, accounting and legal services and similar matters.
Receivable acquisition and servicing agreements have been entered
into between Summit and Metropolitan and are summarized under
"Business". See Also "CERTAIN INVESTMENT CONSIDERATIONS-RISK
FACTORS" & Note 9 to Consolidated Financial Statements, for
additional information. Summit believes that such transactions are
and will continue to be made on terms at least as favorable as could
be obtained from non-affiliated parties.
Contemplated Purchase of Old Standard Life Insurance Co.
Summit is currently negotiating the acquisition of Old Standard
Life Insurance (Old Standard) from Summit's former parent company,
Metropolitan. It is currently anticipated that this sale will occur
during the first quarter of calendar 1995. The purchase price is
currently estimated at $2.6 million, the approximate net book value
of Old Standard, with future contingency payments based on the
earnings of Old Standard. See Note 1 to Pro Forma Financial
Statements of Summit and Old Standard. The final purchase price will
be established based upon an actuarial valuation of Old Standard.
The source of funds will be cash or cash equivalents transferred from
Summit to Metropolitan in exchange for all the common stock of Old
Standard.
Metropolitan and Summit are currently negotiating whether the
purchase of Old Standard will be a direct purchase by Summit, or
purchased through a new subsidiary of Summit which subsidiary would
operate initially as an insurance holding company. This
determination is not anticipated to materially impact the purchase
price or operations of Summit.
Old Standard is engaged in the business of acquiring Receivables
using funds derived from the sale of annuities, and funds derived
from Receivable cash flows. Old Standard was a sister corporation of
Summit when both companies were subsidiaries of Metropolitan.
Metropolitan and its subsidiaries provide substantially all of Old
Standard's Receivable management and servicing support through a
Management, Receivable Acquisition and Servicing Agreement, which
agreement functions substantially similar to the Management,
Receivable Acquisitions and Servicing Agreement between Metropolitan
and Summit. See "RECEIVABLE INVESTMENTS".
For pro forma financial data related to this proposed
transaction See "Selected Financial Data, and Financial Statements of
Summit and Old Standard, and Pro Forma Financial Statements and
related footnotes thereto.
<PAGE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
Summit Securities, Inc. and Subsidiary:
Historical:
Reports of Independent Certified
Public Accountants................................
Consolidated Balance Sheets.........................
Consolidated Statements of Income...................
Consolidated Statements of Stockholders' Equity.....
Consolidated Statements of Cash Flows...............
Notes to Consolidated Financial Statements..........
Pro Forma Unaudited Financial Statements:
Condensed Consolidated Balance Sheet...............
Condensed Consolidated Statementof Income.........
Notes to Condensed Consolidated Balance Sheet
and Statement of Income...........................
Old Standard Life Insurance Company Historical
Financial Statements:
Reports of Independent Certified Public
Accountants.......................................
Balance Sheets......................................
Statements of Income................................
Statements of Stockholder's Equity..................
Statements of Cash Flows............................
Notes to Financial Statements.......................
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Directors and Stockholders
Summit Securities, Inc.
We have audited the accompanying consolidated balance sheets of
Summit Securities, Inc. and subsidiary as of September 30, 1994 and
1993, and the related consolidated statements of income,
stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated
financial position of Summit Securities, Inc. and subsidiary as of
September 30, 1994 and 1993 and the consolidated results of their
operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 1, the Company changed its methods of
accounting for repossessed real property and income taxes in 1993.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Spokane, Washington
November 21, 1994, except for
Note 9 as to which the date is
December 15, 1994
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Summit Securities, Inc.
We have audited the accompanying statements of income, stockholders'
equity and cash flows of Summit Securities, Inc. (a wholly-owned
subsidiary of Metropolitan Mortgage & Securities Co., Inc.) for the
year ended September 30, 1992. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash
flows for the year ended September 30, 1992 of Summit Securities,
Inc. in conformity with generally accepted accounting principles.
/s/ BDO Seidman
BDO SEIDMAN
Spokane, Washington
December 7, 1992
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1994 and 1993
____________
<TABLE>
<CAPTION>
ASSETS 1994 1993
______ ______
<S> <C> <C>
Cash and cash equivalents $ 3,608,764 $ 3,594,472
Investments in affiliated company 3,022,425
(Note 3)
Real estate contracts and mortgage
notes receivable, net
(Notes 2, 4 and 9) 27,282,991 19,527,225
Real estate held for sale (Note 4) 452,700 60,816
Deferred costs (Note 6) 705,994 524,376
Advances to parent and affiliated
companies (Note 9) 1,710,743
Other assets 29,114 23,973
----------- -----------
Total assets $35,101,988 $25,441,605
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Investment certificates and accrued
interest (Note 5) $31,092,830 $21,959,425
Debt payable (Note 4) 119,888 22,653
Accounts payable and accrued expenses
(Note 9) 416,262 49,353
Deferred income taxes (Note 7) 151,778 222,150
----------- -----------
Total liabilities 31,780,758 22,253,581
----------- -----------
Stockholders' equity (Note 8):
Preferred stock, $10 par (liquidation
preference $3,171,940) 317,194
Common stock, $10 par 100,000 200,000
Additional paid-in capital 1,454,063 1,800,000
Retained earnings 1,449,973 1,188,024
----------- -----------
Total stockholders' equity 3,321,230 3,188,024
----------- -----------
Total liabilities and
stockholders' equity $35,101,988 $25,441,605
=========== ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30, 1994, 1993 and 1992
____________
<TABLE>
<CAPTION>
1994 1993 1992
__________ __________ __________
<S> <C> <C> <C>
Revenues:
Interest on receivables $2,422,484 $1,938,206 $1,319,825
Dividends (Note 9) 366,935
Earned discount on receivables373,003 428,482 542,047
Other investment interest 275,180 120,998 87,447
Real estate sales 88,000 280,500 103,000
Realized net gains on sales
of investment securities 4,252 4,724
Realized net gains on sales
of receivables 171,756
Other income 60,677 42,714 16,589
--------- --------- ---------
Total revenues 3,395,352 2,815,624 2,435,843
--------- --------- ---------
Expenses:
Interest expense 2,527,945 1,792,059 1,390,968
Cost of real estate sold 75,656 298,900 108,256
Provision for losses on
real estate assets 155,042 51,012 18,762
Operating expenses (Note 9) 231,423 244,595 178,273
--------- --------- ---------
Total expenses 2,990,066 2,386,566 1,696,259
--------- --------- ---------
Income before income taxes and
extraordinary item 405,286 429,058 739,584
Income tax provision (Note 7)(140,407) (145,951) (127,989)
--------- --------- ---------
Income before extraordinary item264,879 283,107 611,595
Extraordinary item - utilization
of net operating loss
carryforwards (Note 7) 49,772
--------- --------- ---------
Net income 264,879 283,107 661,367
Preferred stock dividends (2,930)
--------- --------- ---------
Income applicable to common
stockholders $ 261,949 $ 283,107 $ 661,367
========= ========= =========
Net income per common share:
Before extraordinary item $ 13.47 $ 14.15 $ 30.58
Extraordinary item 2.49
--------- --------- ---------
Net income per common share $ 13.47 $ 14.15 $ 33.07
========= ========= =========
Weighted average number of
shares of common stock
outstanding 19,445 20,000 20,000
========= ========= =========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 1994, 1993 and 1992
____________
<TABLE>
<CAPTION>
Additional
PreferredCommon Paid-In Retained
Stock Stock Capital Earnings Total
______ _______ __________ _________ _____
<S> <C><C> <C> <C> <C>
Balance, October 1, 1991 $200,000 $1,800,000 $ 243,550 $2,243,550
Net income 661,367 661,367
---------------- ---------- ---------- ----------
Balance, September 30, 1992 200,000 1,800,000 904,917 2,904,917
Net income 283,107 283,107
---------------- ---------- ---------- ----------
Balance, September 30, 1993 200,000 1,800,000 1,188,024 3,188,024
Net income 264,879 264,879
Cash dividends on preferred
stock (variable rate) (2,930) (2,930)
Common stock redeemed and
retired (20,000 shares)
(Note 1) (200,000)(3,400,000) (3,600,000)
Sale of common stock
(10,000 shares)
(Note 1) 100,000 100,000
Sale of variable rate
preferred stock, net
of offering costs
(1,495 shares) $14,952 127,008 141,960
Issuance of variable rate
preferred stock
(30,224 shares)
(Note 1) 302,242 2,720,183 3,022,425
Income tax benefit
associated with
disaffiliation
(Note 1) 206,872 206,872
---------------- ---------- ---------- ----------
Balance, September 30, 1994$317,194$100,000$1,454,063$1,449,973$3,321,230
================ ==================== ==========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1994, 1993 and 1992
____________
<TABLE>
<CAPTION>
1994 1993 1992
______ ______ ______
<S> <C> <C> <C>
Operating activities:
Net income $ 264,879 $ 283,107 $ 661,367
Adjustments to reconcile net
income to net cash provided
by operating activities:
Proceeds from sale of
trading securities 20,077,343 2,052,187
Purchase of trading
securities (20,073,050) (2,047,812)
Gain on sale of investment
securities (4,252) (4,724)
Gain on sale of receivables(171,756)
(Gain) loss on sale of
real estate (12,344) 18,400 5,256
Provision for losses on
real estate assets 155,042 51,012 18,762
Amortization of deferred
costs 262,484 151,763 144,647
Deferred income tax
provision 136,500 145,951 76,300
Changes in:
Compound and accrued
interest on investment
certificates
and debt payable 1,229,371 955,322 689,014
Accrued interest
receivable 107,423 (175,460) (153,709)
Other 312,110 7,383 (19,054)
---------- ---------- -----------
Net cash provided by
operating activities 2,283,750 1,437,129 1,422,583
---------- ---------- ----------
Investing activities:
Advances to parent and
affiliated companies (1,710,743)
Collection of advances to
parent and affiliated
companies 1,710,743 471,383
Principal payments on real
estate contracts and
and mortgage notes receivable1,829,515 4,039,074 2,245,740
Purchases of real estate
contracts and mortgage
notes receivable (20,177,705) (15,667,120) (5,274,528)
Proceeds from real estate sales 6,200 75,008 6,283
Additions to real estate held (82,135) (24,155) (8,400)
Proceeds from sale of
receivables 10,393,131 4,044,423
---------- ---------- -----------
Net cash used in
investing activities (6,320,251) (9,243,513) (2,559,522)
__________ __________ ___________
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
CONSOLIDATED CASH FLOWS, Continued
For the Years Ended September 30, 1994, 1993 and 1992
____________
<TABLE>
<CAPTION>
1994 1993 1992
______ ______ ______
<S> <C> <C> <C>
Financing activities:
Repayment of amounts due to
parent company $(400,365)
Borrowings from parent company $ 400,365
Proceeds from investment
certificates $10,539,684 9,677,843 5,864,051
Repayments of investment
certificates (2,635,649) (2,300,088) (903,226)
Repayments to banks and others(48,170) (890,247) (99,182)
Debt issuance costs (444,102) (333,489) (240,490)
Issuance of preferred stock 141,960
Issuance of common stock 100,000
Redemption and retirement
of common stock (3,600,000)
Dividends paid on preferred
stock (2,930)
---------- ---------- ---------
Net cash provided by
financing activities 4,050,793 5,753,654 5,021,518
---------- ---------- ---------
Net increase (decrease) in
cash and cash
equivalents 14,292 (2,052,730) 3,884,579
Cash and cash equivalents,
beginning of year 3,594,472 5,647,202 1,762,623
---------- ---------- ----------
Cash and cash equivalents,
end of year $ 3,608,764$ 3,594,472$5,647,202
========== ========== ==========
<FN>
See Note 10 for supplemental cash flow information.
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
1. Summary of Accounting Policies
Business and Reorganization
Summit Securities, Inc., d/b/a National Summit Securities,
Inc. in the states of New York and Ohio ("Summit" or "the
Company"), was incorporated on July 25, 1990. Prior to
September 9, 1994, Summit was a wholly-owned subsidiary of
Metropolitan Mortgage & Securities Co., Inc. ("Metropolitan").
On September 9, 1994, the controlling interest in Summit was
acquired by National Summit Corp., a Delaware corporation
which is wholly-owned by C. Paul Sandifur, Jr. The change in
control was made pursuant to a reorganization wherein Summit
redeemed all the common shares held by its former parent
company, Metropolitan, which consisted of 100% of the
outstanding common stock of Summit for $3,600,000 cash, which
approximated the net book value of Summit at the transaction
date. Contemporaneously with this redemption, Summit issued
10,000 shares of common stock to National Summit Corp. for
$100,000 cash. In addition, various investors holding
Metropolitan's common and preferred stock, including members
of Mr. Sandifur's immediate family, acquired 30,224 shares of
Summit's preferred stock Series S-1 for $100 per share in
exchange for preferred and common shares of Metropolitan. The
preferred shares issued for the Metropolitan shares were
recorded at their face value which approximated recent
issuances to unrelated parties. The face value of the
preferred shares approximates fair value due to the variable
dividend rate associated with such shares (see Note 3).
Metropolitan is effectively controlled by C. Paul Sandifur,
Jr. through his common stock ownership and voting control.
National Summit Corp. is wholly-owned by C. Paul Sandifur, Jr.
through ownership of 100% of the voting stock. National
Summit Corp. did not have any operations or activities other
than the acquisition of Summit. The consolidated financial
statements include the accounts of Summit and its wholly-owned
subsidiary, Summit Property Development, Inc. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Summit purchases contracts and mortgage notes collateralized
by real estate, with funds generated from the public issuance
of debt securities in the form of investment certificates,
cash flow from receivables and sales of real estate.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
1. Summary of Accounting Policies, Continued
Cash and Cash Equivalents
For purposes of balance sheet classification and the statement
of cash flows, the Company considers all highly liquid debt
instruments purchased with a remaining maturity of three
months or less to be cash equivalents. Cash includes all
balances on hand and on deposit in banks and financial
institutions. The Company periodically evaluates the credit
quality of its financial institutions. Substantially all cash
and cash equivalents are on deposit with one financial
institution and balances periodically exceed the FDIC
insurance limit.
Investments in Affiliated Companies
Investments in equity securities of Metropolitan are carried
at cost, which approximates market.
Real Estate Contracts and Mortgage Notes Receivable
Real estate contracts and mortgage notes held for investment
purposes are carried at amortized cost. Discounts originating
at the time of purchase, net of capitalized acquisition costs,
are amortized using the level yield (interest) method. For
contracts acquired after September 30, 1992, net purchase
discounts are amortized on an individual contract basis using
the level yield method over the remaining contractual term of
the contract. For contracts acquired before October 1, 1992,
the Company accounts for its portfolio of discounted loans
using anticipated prepayment patterns to apply the level yield
(interest) method of amortizing discounts. Discounted
contracts are pooled by the fiscal year of purchase and by
similar contract types. The amortization period, which is
approximately 78 months, estimates a constant prepayment rate
of 10-12 percent per year and scheduled payments, which is
consistent with the Company's prior experience with similar
loans and the Company's expectations.
In May 1993, Statement of Financial Accounting Standards
No. 114 (SFAS No. 114), "Accounting by Creditors for
Impairment of a Loan," was issued. SFAS No. 114 requires that
certain impaired loans be measured based on the present value
of expected future cash flows discounted at the loan's
effective interest rate or the fair value of the collateral.
The Company is required to adopt this new standard by October
1, 1995. The Company does not anticipate that the adoption of
SFAS No. 114 will have a material effect on the financial
statements.
<PAGE>
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
1. Summary of Accounting Policies, Continued
Real Estate Held for Sale
Real estate is valued at the lower of cost or market. The
Company principally acquires real estate through foreclosure
or forfeiture. Cost is determined by the purchase price of
the real estate or, for real estate acquired by foreclosure,
at the lower of (a) the fair value of the property at the date
of foreclosure less estimated selling costs, or (b) cost
(unpaid contract carrying value). Periodically, the Company
reviews its carrying values of real estate held for sale by
obtaining new or updated appraisals, and adjusts its carrying
values to the lower of cost or net realizable value, as
necessary.
Profit on sales of real estate is recognized when the buyers'
initial and continuing investment is adequate to demonstrate
that (1) a commitment to fulfill the terms of the transaction
exists, (2) collectibility of the remaining sales price due is
reasonably assured, and (3) the Company maintains no
continuing involvement or obligation in relation to the
property sold and transfers all the risks and rewards of
ownership to the buyer.
In April 1992, the Accounting Standards Division of the
American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 92-3, "Accounting for
Foreclosed Assets," which provides guidance on determining the
accounting treatment of foreclosed assets. SOP 92-3 requires
that foreclosed assets be carried at the lower of (a) fair
value minus estimated costs to sell, or (b) cost. The Company
applied the provisions of SOP 92-3 effective October 1, 1992.
The application of SOP 92-3, estimated to be approximately
$10,000 before the application of related income taxes, is
included in continuing operations for the year ended
September 30, 1993.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
1. Summary of Accounting Policies, Continued
Allowance for Losses on Real Estate Assets
The established allowances for losses on real estate assets
include amounts for estimated probable losses on both real
estate held for sale and real estate contracts and mortgage
notes receivable. Specific allowances are established for all
delinquent contract receivables with net carrying values in
excess of $100,000. Additionally, the Company establishes
general allowances, based on prior delinquency and loss
experience, for currently performing receivables and smaller
delinquent receivables. Allowances for losses are determined
on the net carrying values of the contracts, including accrued
interest. Accordingly, the Company continues interest
accruals on delinquent loans until foreclosure, unless the
principal and accrued interest on the loan exceed the fair
value of the collateral, net of estimated selling costs. The
Company obtains new or updated appraisals on appropriate
delinquent receivables, and adjusts the allowance for losses
as necessary, such that the net carrying value does not exceed
net realizable value.
Deferred Costs
Commission and other expenses incurred in connection with the
registration and public offering of investment certificates
are capitalized and amortized using the interest method over
the estimated life of the related investment certificates,
which range from 6 months to 5 years.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
1. Summary of Accounting Policies, Continued
Income Taxes
The Company was included in the group of companies which file
a consolidated income tax return with Metropolitan, its former
parent through September 9, 1994. Subsequent to that date,
the Company is included in the group of companies which file
a consolidated income tax return with National Summit Corp.
The Company is allocated a current and deferred tax provision
from Metropolitan or National Summit Corp. as if the Company
filed a separate tax return. Effective October 1, 1992,
Metropolitan adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109). Under this method, deferred tax liabilities
and assets are determined on temporary differences between the
financial statement carrying amounts and tax bases of assets
and liabilities using enacted tax rates in effect in the years
in which the temporary differences are expected to reverse.
There was no effect on the Company's financial statements of
adopting SFAS No. 109. In 1992, Metropolitan and the Company
accounted for income taxes as required by Accounting
Principles Board Opinion No. 11. In association with the
disaffiliation with Metropolitan in 1994, the Company received
certain income tax benefits, principally associated with the
allocation of the Metropolitan consolidated group's net
operating loss carryforwards and reduction in amounts payable
to Metropolitan, which resulted in a reduction of deferred
taxes of approximately $207,000. This benefit has been
recorded as additional paid-in capital due to the affiliation
between Metropolitan and the Company.
Financial Instruments
In December 1991, Statement of Financial Accounting Standards
No. 107 (SFAS No. 107), "Disclosures about Fair Value of
Financial Instruments," was issued. SFAS No. 107 requires
disclosures of fair value information about financial
instruments, whether or not recognized in the balance sheet,
for which it is practicable to estimate that value. SFAS
No. 107 is effective for financial statements issued for
fiscal years ending after December 31, 1995 (Summit's fiscal
year ending September 30, 1996) for entities with less than
$150 million in total assets. This pronouncement does not
change any requirements for recognition, measurement or
classification of financial instruments in the Company's
financial statements.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
1. Summary of Accounting Policies, Continued
Reclassifications
Certain amounts in the 1993 and 1992 financial statements have
been reclassified to conform with the current year's
presentation. These reclassifications had no effect on net
income or retained earnings as previously reported.
2. Real Estate Contracts and Mortgage Notes Receivable
Real estate contracts and mortgage notes receivable include
mortgages collateralized by property located throughout the
United States. At September 30, 1994, the Company held first
position liens associated with contracts and mortgage notes
receivable with a face value of approximately $21,900,000 and
second position liens of approximately $6,500,000.
Approximately 22% of the face value of the Company's real estate
contracts and mortgage notes receivable are collateralized by
property located in the Southwest (Texas and New Mexico),
approximately 18% by property located in the Pacific Southwest
(California, Nevada and Arizona), approximately 16% by property
located in the Pacific Northwest (Washington, Idaho, Montana and
Oregon) and approximately 14% by property located in the
Southeast (Florida, Georgia, North Carolina and South Carolina).
Contracts totaling approximately $6,000,000 which were
collateralized by property in Hawaii were purchased from a
Metropolitan affiliated company during fiscal 1993. At September
30, 1993, approximately $5,500,000 of these contracts were
outstanding. These contracts relate to the sale of timeshare
units in a condominium resort development which is owned by a
Metropolitan affiliated company. On February 18, 1994, the
Company sold its remaining timeshare contracts at their carrying
values to Metropolitan.
The face value of the Company's real estate contracts and
mortgage notes receivable as of September 30, 1994 and 1993 are
grouped by the following dollar ranges:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Under $15,001 $ 1,262,236 $ 5,210,788
$15,001 to $40,000 10,555,623 7,649,859
$40,001 to $80,000 9,970,820 4,609,278
$80,001 to $150,000 4,684,026 2,324,242
Greater that $150,000 1,931,873 907,576
----------- -----------
$28,404,578 $20,701,743
=========== ===========
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
2. Real Estate Contracts and Mortgage Notes Receivable, Continued
Contractual interest rates on the face value of the Company's
real estate contracts and mortgage notes receivable as of September
30, 1994 and 1993 are as follows:
<TABLE>
<S> <C> <C>
Less than 8.00% $3,072,262 1,433,022
8.00% to 8.99% 3,682,307 1,664,066
9.00% to 9.99% 6,489,889 3,232,543
10.00% to 10.99% 10,242,985 6,342,842
11.00% to 11.99% 2,868,603 1,799,826
12.00% to 12.99% 1,533,520 2,189,840
13% or higher 515,012 4,039,604
----------- -----------
$28,404,578 $20,701,743
=========== ===========
</TABLE>
The weighted average contractual interest rate on these receivables
at September 30, 1994 is approximately 10%. Maturity dates range
from 1994 to 2024. The constant effective yield on contracts
purchased in fiscal 1994 and 1993 was approximately 11.5% and 12%,
respectively.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
2. Real Estate Contracts and Mortgage Notes Receivable, Continued
The following is a reconciliation of the face value of the real
estate contracts and mortgage notes receivable to the Company's
carrying value at September 30, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
______ ______
<S> <C> <C>
Face value of discounted
receivables $21,931,395 $14,416,037
Face value of originated and
non-discounted receivables 6,473,183 6,285,706
Unrealized discounts, net
of unamortized acquisition
costs (1,337,365) (1,076,488)
Allowance for losses (250,572) (96,654)
Performance holdback on
receivable purchase (600,000)
Accrued interest receivable 466,350 598,624
------------ ------------
Carrying value $27,282,991 $19,527,225
============ ============
</TABLE>
The principal amount of receivables with required principal or
interest payments being in arrears for more than three months
was approximately $1,085,000 and $1,662,000 at September 30,
1994 and 1993, respectively. Included in the amount for
September 30, 1993 was approximately $680,000 of delinquent
contracts purchased from an affiliate during 1993. The Company
had a performance holdback of $600,000 to cover any losses
related to certain timeshare unit contracts, including these
delinquent contracts. On February 18, 1994, the Company sold
the remaining timeshare receivables, related to the holdback
provisions, at their carrying value to Metropolitan. During the
year ended September 30, 1994, the Company sold approximately
$10,400,000 of receivables without recourse and recognized a
gain of approximately $172,000.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
2. Real Estate Contracts and Mortgage Notes Receivable, Continued
Aggregate amounts of receivables (face amount) expected to be
received, based upon prepayment patterns, are as follows:
<TABLE>
<CAPTION>
Fiscal year ending
September 30,
_____________
<S> <C>
1995 $ 2,835,000
1996 2,708,000
1997 2,591,000
1998 2,483,000
1999 2,382,000
Thereafter 15,405,578
-----------
Total $28,404,578
===========
</TABLE>
3. Investments in Affiliated Companies
At September 30, 1994, the Company owns the following preferred
and common shares of Metropolitan:
Cost and
Type Number Carrying
of Shares of Shares Value
_________ _________ _______
Class A common 9 $ 420,205
Preferred:
Series C 116,094 1,160,942
Series D 24,328 243,278
Series E-1 105,800 1,058,000
Series E-4 1,400 140,000
---------
$ 3,022,425
==========
Class A common stock is the only voting class of Metropolitan's
stock. Class A common stock is junior to Class B common stock
as to liquidation preference. At September 30, 1994, Summit
owned 7.12% of the outstanding Class A common stock.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
3. Investments in Affiliated Companies, Continued
The preferred stock have a par value of $10 per share and have
liquidation preferences equal to their issue price. They are
non-voting and are senior to the common shares as to dividends.
Dividends are cumulative and at variable rates; however,
dividends shall be no less than 6% or greater than 14% per anum.
At September 30, 1994, the preferred Series C, D and E-1 had
dividend rates of 8.612%. The preferred Series E-4 had a
dividend rate of 9.112%. Neither the common or preferred shares
are traded in a public market; however, the preferred stock
trades at face value on a trading list maintained by
Metropolitan.
4. Debt Payable
At September 30, 1994 and 1993, debt payable consists of:
<TABLE>
<CAPTION>
1994 1993
______ ______
<S> <C> <C>
Real estate contracts and
mortgage notes payable,
interest rates ranging
from 7% to 10%, due in
installments through 2018,
collateralized by senior
liens on certain of the
Company's real estate
contracts, mortgage notes
and real estate held for sale $ 119,573 $ 22,653
Accrued interest payable 315
--------- ---------
$ 119,888 $ 22,653
========= =========
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
4. Debt Payable, Continued
<CAPTION>
Aggregate amounts of principal payments due on debt payable at
September 30, 1994 are as follows:
Fiscal year ending
September 30,
_____________
<S> <C>
1995 $ 10,522
1996 10,656
1997 11,574
1998 12,572
1999 11,799
Thereafter 62,765
---------
Total $ 119,888
=========
</TABLE>
5. Investment Certificates
At September 30, 1994 and 1993, investment certificates consist
of:
<TABLE>
<CAPTION>
Annual
Interest Principally
Rates Maturing In 1994 1993
________ ___________ ______ ______
<S> <C> <C> <C>
6% to 7% 1995, 1996
and 1997 $ 1,732,000 $ 1,265,000
7% to 8% 1995 and
1996 1,083,000 1,018,000
8% to 9% 1998 and
1999 15,808,000 7,947,000
9% to 10% 1995, 1996
and 1997 3,202,000 3,624,000
10% to 11% 1996 6,161,535 6,228,501
----------- -----------
27,986,535 20,082,501
Compound
and accrued
interest 3,106,295 1,876,924
----------- -----------
Total $31,092,830 $21,959,425
=========== ===========
<PAGE>
SUMMIT SECURITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
5. Investment Certificates, Continued
<CAPTION>
The weighted average interest rate on outstanding investment
certificates at September 30, 1994 and 1993 was approximately
8.8% and 9.1%, respectively.
Investment certificates and compound and accrued interest at
September 30, 1994 mature as follows:
Fiscal year ending
September 30,
_____________
<S> <C>
1995 $ 2,559,000
1996 8,466,000
1997 4,036,000
1998 8,241,000
1999 7,468,000
Thereafter 322,830
-----------
Total $ 31,092,830
===========
</TABLE>
6. Deferred Costs
An analysis of unamortized commissions and other capitalized
expenses incurred in connection with the sale of investment
certificates for the years ended September 30, 1994 and 1993 is
as follows:
<TABLE>
<CAPTION>
1994 1993
______ ______
<S> <C> <C>
Balance at the beginning of
the year $524,376 $342,650
Deferred during the year:
Commissions 299,748 276,060
Other expenses 144,354 57,429
-------- --------
Total deferred costs 968,478 676,139
Amortized during the year (262,484) (151,763)
-------- --------
Balance at the end of the year $705,994 524,376
======== ========
<PAGE>
<CAPTION>
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
7. Income Taxes
The tax effect of the primary temporary differences giving rise
to the Company's deferred tax assets and liabilities as of
September 30, 1994 and 1993 is as follows:
1994 Asset Liability
_______ _________
<S> <C> <C>
Management fee payable $ 20,400
Allowance for losses on real
estate $ 17,102
Allowance for losses on
receivables 86,573
Deferred acquisition costs $ 619,716
Net operating loss carryforwards 343,863
-------- --------
Total deferred income taxes $467,938 $ 619,716
======== ========
1993 Asset Liability
_______ _________
<S> <C> <C>
Allowance for losses on real
estate $ 2,277
Allowance for losses on
receivables 32,862
Deferred acquisition costs $ 481,472
Net operating loss carryforwards 224,183
-------- --------
Total deferred income taxes $259,322 $ 481,472
======== ========
</TABLE>
No valuation allowance has been established to reduce the
deferred tax assets, as it is more likely than not that these
assets will be realized due to the future reversals of existing
taxable temporary differences. As of September 30, 1994, the
Company's net operating loss carryforwards of approximately
$1,011,000 expire in 2006.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
7. Income Taxes, Continued
The provision for income taxes is computed by applying the
statutory federal income tax rate to income before income taxes
as follows:
<TABLE>
<CAPTION>
1994 1993 1992
______ ______ ______
<S> <C> <C> <C>
Federal income tax at
statutory rate $ 137,797 $ 145,880 $ 251,458
Affiliate corporate
dividend received
deduction (124,758)
Other 2,610 71 1,289
-------- --------- --------
Income tax provision $ 140,407 $ 145,951 $ 127,989
======== ========= ========
<CAPTION>
The components of the provision for income taxes are as follows:
1994 1993 1992
______ ______ ______
<S> <C> <C> <C>
Current $ 3,907 $ 1,917
Deferred 136,500 $ 145,951 126,072
-------- --------- ---------
$140,407 $ 145,951 $127,989
======== ========= ========
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
7. Income Taxes, Continued
<CAPTION>
The deferred provision for income taxes for each of the fiscal
years ended September 30, 1994, 1993 and 1992 results from the
following:
1994 1993 1992
______ ______ ______
<S> <C> <C> <C>
Earned discounts $ 938 $ 69,081 $ 200,532
Contract acquisition
costs 130,225 15,400 52,342
Allowance for losses (68,536) (13,976) (3,127)
Accrued management fees (20,400)
Net operating losses used
to reduce deferred tax
credits (123,675)
Realization of net
operating loss
carryforward to
reduce current
taxes payable 94,273 75,446
-------- -------- --------
$136,500 $ 145,951 $ 126,072
======== ======== ========
</TABLE>
During the year ended September 30, 1992, the Company recognized
an extraordinary credit of $49,772 by the utilization of net
operating loss carryforwards of approximately $146,000.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
8. Stockholders' Equity
A summary of preferred and common shares at September 30, 1994
and 1993 is as follows:
Issued and Outstanding Shares
_________________________________
1994 1993
Authorized
Shares Amount Shares Amount Shares
__________ ________ ______ ________ ________
Registered
preferred
stock,
Series S-1 150,000 $ 317,194 31,719 $ -- --
========= ======== ====== ======== ======
Common stock 2,000,000 $ 100,000 10,000 $ 200,000 20,000
========= ======== ====== ======== ======
In addition to the shares above, the Company has authorized
10,000,000 total shares of Series S preferred stock, of which
150,000 shares were registered at September 30, 1994.
Series S-1 preferred stock is cumulative and the holders thereof
are entitled to receive monthly dividends at an annual rate
equal to the highest of the "Treasury Bill Rate," the "Ten Year
Constant Maturity Rate" or the "Twenty Year Constant Maturity
Rate" as defined in the Series S-1 offering prospectus
determined immediately prior to declaration date. The board of
directors may, at its sole option, declare a higher dividend
rate; however, dividends shall be no less than 6% or greater
than 14% per annum.
Series S-1 preferred stock has a par value of $10 per share and
was sold to the public at $100 per share. Series S-1 shares are
callable at the sole option of the board of directors at $102
per share prior to January 1, 1995 and $100 per share
thereafter.
All preferred stock has liquidation preferences equal to their
issue price, are non-voting and are senior to the common shares
as to dividends. All preferred stock dividends are based upon
the original issue price.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
9. Related Party Transactions
Through September 9, 1994, the date of disaffiliation, Summit
received accounting, data processing, contract servicing and
other administrative services from Metropolitan. Charges for
these services were approximately $58,000 in fiscal 1994,
$97,000 in fiscal 1993 and $50,000 in fiscal 1992 and were
assessed based on the number of real estate contracts and
mortgage notes receivable serviced by Metropolitan on Summit's
behalf. Other indirect services provided by Metropolitan to
Summit, such as management and regulatory compliance, were not
directly charged to Summit.
Management believes that this allocation is reasonable and
results in the reimbursement to Metropolitan of all significant
direct expenses incurred on behalf of Summit. Currently,
management anticipates that Metropolitan will continue to supply
these services in the future.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
9. Related Party Transactions, Continued
Summit had the following related party transactions with
Metropolitan and affiliates during fiscal years 1994, 1993 and
1992:
<TABLE>
<CAPTION>
1994 1993 1992
______ ______ ______
<S> <C> <C> <C>
Real estate contracts
and mortgage notes
receivable purchased
through Metropolitan
or affiliates $ 19,495,714 $15,423,706 $4,792,398
Contract acquisition
costs charged to
Summit on purchased
real estate contracts
and mortgage notes
receivable, including
management under-
writing fees 681,991 243,414 347,021
----------- ----------- ----------
Total cost of real
estate contracts
and mortgage notes
receivable
purchased from
Metropolitan $ 20,177,705 $15,667,120 $5,139,419
=========== =========== ==========
Real estate contracts
and mortgage notes
receivable sold to
Metropolitan or
affiliates $ 10,122,544 $4,044,423
Interest expense
paid to parent and
affiliated companies $ 11,684 $ 6,000 $ 243,306
Commissions capitalized
as deferred costs,
paid to an affiliate
on sale of investment
certificates $ 299,748 $ 276,060 $ 168,089
Commissions deducted
from additional
paid-in capital,
paid to an affiliate
on sale of preferred
stock $ 7,552
Dividends received from
Western United Life
Assurance Company $ 366,935
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
9. Related Party Transactions, Continued
Advances to parent of $1,710,743 at September 30, 1993 represent
advances to Metropolitan for the purchase of Summit's
investments in real estate contracts and mortgage notes
receivable.
Advances due Metropolitan of $267,735 at September 30, 1994
represent real estate contracts and mortgage notes and related
costs advanced by Metropolitan on behalf of Summit and are
included in accounts payable.
In December 1994, the Company reached an agreement with
Metropolitan whereby it will acquire Metropolitan
Investment Securities, Inc. (MIS) effective January 31,
1995. Additionally, the Company is negotiating the
purchase of Old Standard Life Insurance Company (Old
Standard) from Metropolitan. Both MIS and Old Standard are
wholly-owned subsidaries of Metropolitan.
10. Supplemental Disclosures for Statements of Cash Flows
Supplemental information on interest and income taxes paid
during the years ended September 30, 1994, 1993 and 1992 is as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
______ ______ ______
<S> <C> <C> <C>
Interest paid $1,298,248 $ 836,737 $ 701,955
Income taxes paid 3,907 101 1,917
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
10. Supplemental Disclosures for Statements of Cash Flows, Continued
<CAPTION>
Non-cash investing and financing activities of the Company
during the years ended September 30, 1994, 1993 and 1992 are as
follows:
1994 1993 1992
______ ______ ______
<S> <C> <C> <C>
Assumption of other debt
payable in conjunction
with purchase of real
estate contracts and
mortgage notes
receivable $ 81,451 $ 235,374 $ 259,116
Assumption of other debt
payable in conjunction
with acquisition of
real estate held
for sale 63,650 14,225 28,769
Transfer of investment in
affiliate as full
consideration for
amount due on
note payable to
parent company 6,000,000
Real estate held for sale
acquired through
foreclosure 437,448 276,573 194,856
Loans to facilitate
the sale of
real estate 81,800 205,492 96,717
Exchange of Summit
Securities, Inc.
preferred stock
as full consideration
for Metropolitan
preferred and
common stock 3,022,425
Additional paid-in
capital resulting
from income tax
benefits associated
with disaffiliation 206,872
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND OLD STANDARD LIFE INSURANCE COMPANY
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following pro forma condensed consolidated balance sheet and
income statement and related notes thereto reflect the purchase of
all of the outstanding common stock of Old Standard Life Insurance
Company by Summit Securities, Inc. Due to the entities being under
common control, the business combination will be accounted for using
the purchase method, but will retain the historical cost bases of the
assets and liabilities of Old Standard Life Insurance Company.
<PAGE>
SUMMIT SECURITIES, INC. AND OLD STANDARD LIFE INSURANCE COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, 1994
<TABLE>
<CAPTION>
Purchase of Consolidation Consolidation
Summit Old Standard of Adjustments Pro
Historical Dr.(Cr.) Old Standard Dr.(Cr.) Forma
--------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents $3,608,764 $(2,600,000) (a) $5,829,278 $6,838,042
Investments:
Investments in
affiliated
company 3,022,425 2,600,000 (a) (2,600,000) (b)3,022,425
Held-to-maturity
securities, at
amortized cost 9,283,204 9,283,204
Accrued interest on
investments 52,557 52,557
Real estate contracts
and mortgage notes
receivable, net 27,282,991 28,916,961 56,199,952
Real estate held
for sale 452,700 447,413 900,113
Deferred costs 705,994 2,539,587 3,245,581
Office equipment, net of
accumulated depreciation 14,235 14,235
Advances to affiliated
companies 210,542 210,542
Other assets 29,114 194,898 224,012
---------- --------- ---------- ---------- ----------
Total Assets $35,101,988 $ 0 $47,488,675 $(2,600,000) $79,990,663
========== ========= ========== ========== ==========
<PAGE>
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Life insurance and
annuity reserves $43,396,028 $43,396,028
Investment certificates
and accrued interest $31,092,830 31,092,830
Debt payable 119,888 10,824 130,712
Accounts payable and
accrued expenses 416,262 515,179 931,441
Income taxes payable 254,435 254,435
Deferred income
taxes 151,778 775,582 927,360
---------- ---------- ---------- ---------- ----------
Total Liabilities 31,780,758 44,952,048 76,732,806
----------- ---------- ---------- ---------- ----------
Stockholders' equity:
Preferred Stock,
$10 par (liquidation
preference
$3,171,940) 317,194 317,194
Common stock,
$10 par 100,000 400,000 (400,000) (b) 100,000
Additional paid-in
capital 1,454,063 800,000 (800,000) (b)1,454,063
Retained earnings 1,449,973 1,352,986 (1,400,000) (b)1,402,959
Net unrealized
losses on investments,
net of deferred income
taxes (16,359) (16,359)
---------- ---------- ---------- ---------- ----------
Total Stockholders'
Equity 3,321,230 0 2,536,627 (2,600,000) 3,257,857
---------- ---------- ---------- ---------- ----------
Total Liabilities and
Stockholders' Equity $35,101,988 $ 0 $47,488,675 $(2,600,000) $79,990,663
========== ========== ========== ========== ==========
The accompanying notes are an integral part of this pro forma balance sheet.
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND OLD STANDARD LIFE INSURANCE COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
For the Year Ended September 30, 1994
<TABLE>
<CAPTION>
Reduction Consolidation
Summit in Earnings of Pro
Historical Dr.(Cr.) Old Standard Forma
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Interest on receivables$2,422,484 $(286,000) (c) $2,890,198 $5,026,682
Earned discount on
receivables 373,003 482,951 855,954
Other investment
income 275,180 626,989 902,169
Real estate sales 88,000 621,950 709,950
Realized net gains on
sales of investment
securities 4,252 33,143 37,395
Realized net gains on
sales of receivables 171,756 51,842 223,598
Other income 60,677 62,581 123,258
---------- ---------- ---------- ----------
Total Revenues 3,395,352 (286,000) 4,769,654 7,879,006
---------- ---------- ---------- ----------
Expenses:
Insurance policy and
annuity benefits 2,643,783 2,643,783
Interest expense 2,527,945 280 2,528,225
Cost of real estate
sold 75,656 606,821 682,477
Provision for losses
on real estate assets 155,042 192,714 347,756
Salaries and benefits 42,630 42,630
Commissions to agents 500,134 500,134
Other operating and
underwriting expenses 231,423 247,759 479,182
Less amount capitalized
as deferred costs,
net of amortization (418,125) (418,125)
---------- ---------- ---------- ----------
Total Expenses 2,990,066 3,815,996 6,806,062
---------- ---------- ---------- ----------
Income before income
taxes 405,286 (286,000) 953,658 1,072,944
Income tax provision (140,407) 97,240 (d) (328,302) (371,469)
---------- ---------- ---------- ----------
Net income 264,879 (188,760) 625,356 701,475
Preferred stock dividends (2,930) (2,930)
---------- ---------- ---------- ----------
Income applicable to
common stockholders $ 261,949 $ (188,760) $ 625,356 $ 698,545
========== ========== ========== ==========
The accompanying notes are an integral part of this pro forma statement of income.
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND OLD STANDARD LIFE INSURANCE COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET AND STATEMENT OF INCOME
NOTE 1:
The pro forma condensed consolidated balance sheet at September 30,
1994 assumes the purchase of all of the outstanding common stock of
Old Standard Life Insurance Company (OSL) as if it occurred on
September 30, 1994 through the payment of $2,600,000 to Metropolitan.
As additional consideration for the purchase of OSL, it is
anticipated that the Company will agree to pay an estimated 20% of
the net income of OSL to Metropolitan for each of the next three to
five years. Each future year's calculation of amounts owing under
this provision will be independently calculated. Due to the fact
that these entities are under common control, any amounts paid under
this provision will be accounted for as dividends. Due to the fact
that the Company, Metropolitan and OSL are all entities under the
common control of one individual, this business combination will be
accounted for using the purchase method, but will retain the
historical cost bases of the assets and liabilities of OSL. Thus,
the excess of the purchase price of OSL, over its net book value has
been treated as if it were a dividend and has been charged against
retained earnings.
NOTE 2:
The pro forma condensed consolidated statement of income reflects the
above described transaction as if the purchase of OSL occurred at
the beginning of the period presented.
NOTE 3:
The following adjustments have been made to the pro forma
consolidated condensed balance sheet and statement of income to
reflect the acquisition of OSL:
Pro Forma Balance Sheet:
(a) To record the acquisition of OSL by the Company through the
payment of $2,600,000 to Metropolitan.
(b) To consolidate the balance sheet of OSL with the Company
and to charge the excess of the purchase price over OSL's net book
value of approximately $47,000 to retained earnings.
Pro Forma Statement of Income:
(c) To reflect the reduction in investment income associated
with the $2,600,000 purchase price paid to Metropolitan, calculated
at an assumed net yield of 11% per annum.
(d) To record the income tax effects of adjustment (c) .
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Directors and Stockholder
Old Standard Life Insurance Company
We have audited the accompanying balance sheet of Old Standard Life
Insurance Company, a wholly-owned subsidiary of Metropolitan Mortgage
& Securities Co., Inc., as of December 31, 1993, and the related
statements of income, stockholder's equity and cash flows for the
year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Old
Standard Life Insurance Company as of December 31, 1993, and the
results of its operations and its cash flows for the year then ended
in conformity with generally accepted accounting principles.
As discussed in Note 1, the Company changed its method of accounting
for its investment in certain debt securities in 1993.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Spokane, Washington
January 12, 1995
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Directors and Stockholder
Old Standard Life Insurance Company
We have audited the accompanying balance sheet of Old Standard Life
Insurance Company, a wholly owned subsidiary of Metropolitan Mortgage
& Securities Co., Inc. as of December 31, 1992 and the related
statements of income, stockholder's equity, and cash flows for the
years ended December 31, 1992 and 1991. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Old
Standard Life Insurance Company as of December 31, 1992, and the
results of its operations and its cash flows for the years ended
December 31, 1992 and 1991 in conformity with generally accepted
accounting principles.
/s/ BDO Seidman
BDO SEIDMAN
Spokane, Washington
March 19, 1993
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
BALANCE SHEETS
____________
<TABLE>
<CAPTION>
December 31,
September 30, ___________________________
1994 1993 1992
_____________ ____________ ____________
(Unaudited)
<S> <C> <C> <C>
ASSETS
Invested assets:
Investments (Note 2):
Held-to-maturity securities, at
amortized cost $ 9,283,204 $ 3,323,735 $ 200,000
Available-for-sale securities, at
market 5,908,968
Real estate contracts and mortgage notes
receivable, net (Note 3) 28,506,656 23,542,397 25,282,727
Real estate held for sale (Note 4) 447,413 372,301
Policy loans 14,614 5,468
Cash and cash equivalents 5,829,278 5,051,110 6,328,775
------------ ------------ -----------
Total invested assets 44,081,165 38,203,979 31,811,502
------------ ------------ -----------
Receivables 23,245 34,127 10,752
------------ ------------ -----------
Other assets:
Deferred acquisition costs (Note 5) 2,539,587 2,283,615 1,667,623
Accrued investment income 462,921 515,613 273,314
Furniture and equipment, net 14,235 15,179 16,948
Due from affiliated companies (Note 8) 210,542 1,456,431
Other 156,980 159,480 34,610
------------ ------------ -----------
Total other assets 3,384,265 4,430,318 1,992,495
------------ ------------ -----------
Total assets $ 47,488,675 $ 42,668,424 $ 33,814,749
============ ============ ============
</TABLE>
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
BALANCE SHEETS, Continued
____________
<TABLE>
<CAPTION>
December 31,
September 30, ___________________________
1994 1993 1992
_____________ ____________ ____________
(Unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Annuity reserves (Note 6) $ 43,396,028 $ 39,344,173 $ 28,055,857
Due to affiliated companies (Note 8) 2,374,634
Income taxes payable (Note 7) 254,435
Deferred income taxes (Note 7) 775,582 801,650 688,950
Advance annuity deposit funds 7,532 14,222 195,943
Accounts payable and accrued expenses 518,471 492,673 6,142
------------ ------------ ------------
Total liabilities 44,952,048 40,652,718 31,321,526
------------ ------------ ------------
Stockholder's equity (Notes 9 and 10):
Common stock, $10 par value, 250,000
shares authorized; 40,000 shares
issued and outstanding 400,000 400,000 400,000
Additional paid-in capital 800,000 800,000 800,000
Retained earnings 1,352,986 875,017 1,293,223
Net unrealized losses on investments,
net of deferred income taxes of $8,429
at September 30, 1994 and $30,554 at
December 31, 1993 (Note 2) (16,359) (59,311)
------------ ------------ ------------
Total stockholder's equity 2,536,627 2,015,706 2,493,223
------------ ------------ ------------
Total liabilities and
stockholder's equity $ 47,488,675 $ 42,668,424 $ 33,814,749
============ ============ ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
____________
<TABLE>
<CAPTION>
Nine Months
Ended September 30,Year Ended December 31,
____________________________ _____________________________________________
1994 1993 1993 1992 1991
____________________________________________________________
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Net investment income $2,964,109$2,689,494$3,615,585$2,922,996$1,450,478
Net realized investment gains (Note 2) 66,378 45,200 77,936 55,454 8,867
Other insurance revenues 39,324 20,012 28,143 25,596 5,984
------------------------------------------------------------
Total revenues 3,069,8112,754,7063,721,6643,004,0461,465,329
------------------------------------------------------------
Benefits and expenses:
Annuity benefits 2,040,2861,726,8832,377,8351,655,550 714,624
Commissions (Note 5) 316,012 467,956 652,077 856,090 491,877
General expenses (Note 8) 90,276 68,360 96,529 87,120 78,357
Provision for losses (recoveries) on real estate
contracts and mortgage notes 166,476 237,460 263,697 (23,762) 110,000
Insurance taxes, licenses and fees (17,338) 502,875 518,920 11,548 5,694
Increase in deferred acquisition costs
(Note 5) (255,972)(453,839)(615,992)(907,488)(540,036)
------------------------------------------------------------
Total benefits and expenses 2,339,7402,549,6953,293,0661,679,058 860,516
------------------------------------------------------------
Income before income taxes 730,071 205,011 428,5981,324,988 604,813
Provision for income taxes (Note 7) 252,102 70,604 146,804 450,400 221,900
------------------------------------------------------------
Net income $477,969 $134,407 $281,794 $874,588 $382,913
============================================================
Net income per share $ 11.95 $ 3.36 $ 7.04 $ 21.86 $ 9.57
============================================================
Weighted average number of shares outstanding 40,000 40,000 40,000 40,000 40,000
============================================================
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
for the years ended December 31, 1993, 1992 and 1991
and for the nine months ended September 30, 1994
____________
<TABLE>
<CAPTION>
Additional Net Unrealized
Common Paid-in RetainedLosses on
Stock Capital EarningsInvestments
__________ __________________________________
<S> <C> <C> <C> <C>
Balance, January 1, 1991$400,000 $800,000 $35,722 $ --
Net income 382,913
---------- ---------------------------------
Balance, December 31, 1991400,000 800,000 418,635
Net income 874,588
---------- ---------------------------------
Balance, December 31, 1992400,000 800,000 1,293,223
Net income 281,794
Cash dividends (700,000)
Adoption of SFAS No. 115, net of
deferred income taxes of $30,544
(Notes 2 and 7) (59,311)
---------- ---------------------------------
Balance, December 31, 1993400,000 800,000 875,017 (59,311)
Net income (unaudited) 477,969
Net change in unrealized losses
on available-for-sale securities,
net of deferred income taxes of
$22,125 (Notes 2 and 7)
(unaudited) 42,952
---------- ---------- -----------------------
Balance, September 30, 1994
(unaudited) $400,000 $800,000 $1,352,986$(16,359)
========== ==================================
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
____________
<TABLE>
<CAPTION>
Nine Months
Ended September 30,Year Ended December 31,
--------------------------------------------------------------------------
1994 1993 1993 1992 1991
____________________________________________________________
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $477,969 $134,407 $281,794 $874,588 $382,913
Adjustments to reconcile net income to net cash provided by
operating activities:
Net realized investment gain (66,378) (45,200) (77,936) (55,454) (8,867)
Provision for losses (recoveries) on real estate contracts
and mortgage notes 166,476 237,460 263,697 (23,762) 110,000
Depreciation and amortization 944 1,454 1,769 3,151 2,312
Deferred income tax provision (benefit) (48,194) 67,304 143,254 449,600 221,900
Changes in assets and liabilities:
Deferred acquisition costs (255,972)(453,839)(615,992)(907,488)(540,036)
Accrued investment income 52,692 (143,878)(242,299)(157,366)(100,960)
Other accruals and adjustments 236,173 431,313 348,678 (24,173) (17,536)
Annuity reserves 2,000,9621,707,0182,349,8391,679,807 714,624
----------------------------------------------------------
Net cash provided by operating activities2,564,6721,936,0392,452,8041,838,903 764,350
---------------------------------------------------------
Cash flows from investing activities:
Principal payments on real estate contracts and mortgage notes receivable4,034,4233,220,8034,554,8272,637,228471,202
Proceeds from sale of real estate contracts and mortgage notes receivable633,650
Proceeds from sale of real estate held for sale77,218 31,560 56,378 12,050
Acquisition of furniture and equipment (172) (185)
Purchase of held-to-maturity investments (3,030,000)(4,083,594)
Proceeds from sales of trading investments 3,076,1724,092,461
Proceeds from maturities of held-to-maturity investments200,000 200,000
Purchase of available-for-sale investments (28,766,401)(58,768,357)
Proceeds from sales of available-for-sale investments19,494,68849,529,844
Purchase of real estate contracts and mortgage notes receivable(9,776,499)(3,350,581)(3,473,576)(16,053,302)(10,527,664)
Net increase in policy loans (9,146) (5,822) (5,468)
Change in due from affiliated companies 1,245,889(2,246,782)(3,831,065)2,220,281(160,864)
Additions to real estate held for sale (36,242) (32,902) (49,808) (18,378)
------------------------------------------------------------
Net cash used in investing activities (3,830,707)(11,455,437)(11,787,225)(11,156,121)(10,208,644)
-----------------------------------------------------------
</TABLE>
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS, Continued
____________
<TABLE>
<CAPTION>
Nine Months
Ended September 30,Year Ended December 31,
--------------------------------------------------------------------------
1994 1993 1993 1992 1991
____________________________________________________________
(Unaudited ) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Receipts from annuity products $5,902,105$8,832,023$12,228,314$15,484,747$9,333,100
Withdrawals on annuity products (3,851,212)(2,365,379)(3,289,837)(1,597,048)(671,638)
Change in advance annuity deposits (6,690)(144,260)(181,721)(202,452) 343,902
Dividends paid (700,000)
------------------------------------------------------------
Net cash provided by financing activities2,044,2036,322,3848,056,75613,685,2479,005,364
------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents778,168(3,197,014)(1,277,665)4,368,029(438,930)
Cash and cash equivalents:
Beginning of period 5,051,1106,328,7756,328,7751,960,7462,399,676
------------------------------------------------------------
End of period $5,829,278$3,131,761$5,051,110$6,328,775$1,960,746
============================================================
See Note 11 for supplemental cash flow information.
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(All information as of September 30, 1994
and for the nine months ended September 30,
1994 and 1993 is unaudited)
____________
1. SUMMARY OF ACCOUNTING POLICIES:
Nature of Business
Old Standard Life Insurance Company (Old Standard or the
Company), a wholly-owned subsidiary of Metropolitan
Mortgage & Securities Co., Inc. (Metropolitan), is engaged
primarily in the offering, issuance and sale of variable
rate annuity contracts and life insurance policies.
Investments
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), "Accounting for
Certain Investments in Debt and Equity Securities," on
December 31, 1993. The effect of applying this new standard
was to decrease stockholder's equity at December 31, 1993 by
$59,311, which is net of $30,554 of deferred income tax
effect (see Note 8). The Company has classified its
investments in debt and equity securities as either
"available-for-sale" or "held-to-maturity." The accounting
policies related to these investments are as follows:
Available-for-Sale Securities: Available-for-sale
securities, consisting primarily of government-backed
securities and corporate bonds, are carried at market value.
Realized gains and losses on the sale of these securities
are recognized on a specific identification basis in the
statement of income in the period the securities are sold.
Unrealized gains and losses are presented as a separate
component of stockholder's equity, net of related deferred
income taxes.
Held-to-Maturity Securities: Held-to-maturity securities,
consisting primarily of government-backed securities and
corporate bonds having fixed maturities, are carried at
amortized cost. The Company has the ability and intent to
hold these investments until maturity.
<PAGE>
1. SUMMARY OF ACCOUNTING POLICIES, Continued:
Real Estate Contracts and Mortgage Notes Receivable
Real estate contracts and mortgage notes receivable
(contracts) held for investment purposes are carried at
amortized cost. Discounts originating at the time of
purchase, net of capitalized acquisition costs, are
amortized using the level yield (interest) method. For
contracts acquired after September 30, 1992, net purchase
discounts are amortized on an individual contract basis
using the level yield (interest) method over the remaining
contractual term of the contract. For contracts acquired
before October 1, 1992, the Company accounts for its
portfolio of discounted loans using anticipated prepayment
patterns to apply the level yield (interest) method of
amortizing discounts. Discounted contracts are pooled by
the fiscal year of purchase and by similar contract types.
The amortization period, which is approximately 78 months,
estimates a constant prepayment rate of 10-12 percent per
year and scheduled payments, which is consistent with the
Company's prior experience with similar loans and the
Company's expectations.
In May 1993, Statement of Financial Accounting Standards No.
114 (SFAS No. 114), "Accounting by Creditors for Impairment
of a Loan," was issued. SFAS No. 114 requires that the
carrying value of certain impaired loans be measured based
on the present value of expected future cash flows
discounted at the loan's effective interest rate or the fair
value of the collateral. The Company is required to adopt
this new standard by January 1, 1995. The Company does not
anticipate that the adoption of SFAS No. 114 will have a
material effect on the financial statements.
Real Estate Held for Sale
The Company holds real estate, stated at the lower of cost
or market, for purposes of resale. The Company acquires
real estate through foreclosure. Cost is determined by the
lower of (a) the fair value of the property at date of
foreclosure less estimated selling costs, or (b) cost
(unpaid contract carrying value). Periodically, the Company
reviews its carrying values of real estate held for sale by
obtaining new or updated appraisals and adjusts its carrying
values to the lower of cost or net realizable value, as
necessary. Occasionally, properties are rented, with the
revenue being included in other income and holding costs are
charged to expense.
1. SUMMARY OF ACCOUNTING POLICIES, Continued:
Real Estate Held for Sale, Continued
Profit on sales of real estate is recognized when the
buyers' initial and continuing investment is adequate to
demonstrate (1) a commitment to fulfill the terms of the
transaction, (2) collectibility of the remaining sales price
due is reasonably assured, and (3) the Company maintains no
continuing involvement or obligation in relation to the
property sold and transfers all the risks and rewards of
ownership to the buyer.
The Company records foreclosed assets at the lower of (a)
fair value minus estimated costs to sell, or (b) cost.
Allowance for Losses on Real Estate Assets
The established allowance for losses on real estate assets
include amounts for estimated probable losses on both real
estate held for sale and receivables. Specific allowances
are established for all delinquent contract receivables with
net carrying values in excess of $100,000. Additionally,
the Company establishes general allowances, based on
historic delinquency and loss experience, for currently
performing receivables and smaller delinquent receivables.
Allowances for losses are determined based upon the net
carrying values of the contracts, including accrued
interest. Accordingly, the Company continues to accrue
interest on delinquent loans until foreclosure, unless the
principal and accrued interest on the loan exceeds the fair
value of the collateral, net of the estimated selling costs.
The Company obtains new or updated appraisals on appropriate
delinquent receivables, and adjusts the allowances for
losses as necessary, such that the net carrying value does
not exceed estimated net realizable value.
<PAGE>
1. SUMMARY OF ACCOUNTING POLICIES, Continued:
Cash and Cash Equivalents
For purposes of the balance sheet and the statement of cash
flows, the Company considers all highly liquid debt
instruments purchased with a remaining maturity of three
months or less to be cash equivalents. Cash includes all
balances on hand and on deposit in banks and financial
institutions. The Company periodically evaluates the credit
quality of its depository financial institutions.
Substantially all cash and cash equivalents are on deposit
with one financial institution and exceed the FDIC insurance
limit.
Deferred Acquisition Costs
Sales commissions and other sales costs related to sales of
annuity contracts are deferred. For annuities, the portion
of the deferred policy acquisition cost that is estimated
not to be recoverable from surrender charges is amortized as
a constant proportion of the estimated gross profits
associated with the policies in force.
Annuity Reserves
Annuity reserves are equal to the sum of the individual
account accumulation values. Deposits and interest credited
to annuity account balances are not reported as insurance
revenues, but as annuity reserves.
Recognition of Annuity Revenues
Premiums for annuities are not reported as revenue, but as
annuity reserves. Revenues for these annuities consist of
the charges assessed against the account balance. These
charges include expense and surrender charges. Charges
designed to compensate the insurer for future services are
not recognized in the period assessed; instead, they are
deferred and recognized in income over the period benefited
using the same assumptions as are used to amortize deferred
acquisition costs.
<PAGE>
1. SUMMARY OF ACCOUNTING POLICIES, Continued:
Income Taxes
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109), effective January 1, 1993. There was no
cumulative effect of adopting SFAS No. 109. SFAS No. 109
requires deferred tax liabilities and assets to be
determined based on the temporary differences between the
financial statement carrying amounts and tax bases of assets
and liabilities and tax attributes using enacted tax rates
in effect in the years in which the temporary differences
are expected to reverse. In 1992 and 1991, the Company
accounted for income taxes as required by Accounting
Principles Board Opinion No. 11.
Earnings Per Share
Earnings per share are computed by dividing net income by
the weighted average number of shares of common stock
outstanding.
Reclassifications
Certain 1992 and 1991 amounts have been reclassified to
conform with the 1993 presentation. These reclassifications
had no effect on net income or retained earnings as
previously reported.
Interim Financial Information
In the opinion of the Company, the accompanying unaudited
interim financial information contains all adjustments
necessary to present fairly the financial position as of
September 30, 1994 and the results of operations and changes
in cash flows for the nine month periods ended September 30,
1994 and 1993. The results of operations for the nine month
period ended September 30, 1994 and 1993 are not necessarily
indicative of the results to be expected for the full year.
<PAGE>
2. INVESTMENTS:
As discussed in Note 1, effective December 31, 1993, the
Company adopted the provisions of SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
Accordingly, securities are classified as "Held-to-Maturity"
or "Available-for-Sale". Additionally, to facilitate the
adoption of SFAS No. 115, the Company restructured its
investment portfolio to better match the average terms of its
investments in debt securities with those of its annuities.
Prior to the adoption of SFAS No. 115, the Company classified
and accounted for its debt securities as "Trading" or
"Investment." Securities classified as Trading were recorded
at market value, similar to the treatment of Available-for-
Sale securities. Securities classified as Investment were
recorded at amortized cost, similar to the treatment of Held-
to-Maturity securities. Accordingly, the 1992 balance sheet
presentation of investments has been reclassified to conform
with the 1993 presentation.
The Company has not invested in "derivative products" that
have been structured to perform in a way that magnifies the
normal impact of changes in interest rates or in a way
dissimilar to the movement in value of the underlying
securities. At September 30, 1994, the Company was not a
party to any derivative financial instruments.
<PAGE>
2. INVESTMENTS, Continued:
A summary of carrying and estimated market values of
investments at September 30, 1994 and December 31, 1993 and
1992 is as follows:
<TABLE>
<CAPTION>
<S>
Held-to-Maturity 1994
____________________________________________________________________
<C> <C> <C> <C>
Amortized Gross Gross
Cost UnrealizedUnrealized Estimated
(Carrying Value) Gains Losses Market Values
_________________________________________________
Government-backed bonds$5,223,122$--$389,995 $4,833,127
Corporate bonds4,060,082 -- 186,479 3,873,603
-------------------------------------------------
Total $9,283,204 $ -- $576,474 $8,706,730
=================================================
Available-for-Sale 1993
___________________________________________________________________
Gross Gross Estimated
Amortized UnrealizedUnrealizedMarket Values
Cost Gains Losses(Carrying Values)
_________________________________________________
Government-backed bonds$5,000,000$--$81,250 $4,918,750
Corporate bonds 998,833 -- 8,615 990,218
-------------------------------------------------
Total $5,998,833 $ -- $89,865 $5,908,968
=================================================
Held-to-Maturity 1993
____________________________________________________________________
Amortized Gross Gross
Costs UnrealizedUnrealized Estimated
(Carrying Value) Gains Losses Market Values
__________________________________________________
Government-backed bonds$255,351 $3,867 $ 251,484
Corporate bonds2,005,008 $3,237 1,225 2,007,020
Utility bonds 1,063,376 1,624 1,065,000
-------------------------------------------------
Total $3,323,735 $4,861 $5,092 $3,323,504
===================================================
<PAGE>
2. INVESTMENTS, Continued:
Held-to-Maturity 1992
____________________________________________________________________
Amortized Gross Gross
Costs UnrealizedUnrealized Estimated
(Carrying Value) Gains Losses Market Values
___________________________________________________
Government-backed bonds$200,000$4,000$ -- $ 204,000
=============== ===================================
</TABLE>
The government-backed securities above include investments on
deposit for regulatory authorities (as required by law) of
$250,000, $250,000 and $200,000 at September 30, 1994,
December 31, 1993 and 1992.
There were no sales or maturities of bonds for the nine months
ended September 30, 1994. Proceeds from sales and maturities
of bonds for the year ended December 31, 1993 were
$49,729,844. Gross gains of $122,866 and gross losses of
$26,805 were realized on those transactions. Proceeds from
the sale of trading bonds for the years ended December 31,
1992 and 1991 were $3,076,172 and $4,092,461. Gross gains of
$47,190 and $18,242 were realized during 1992 and 1991. Gross
losses of $9,375 were realized on those sales in 1991.
Net unrealized gains and losses on the available-for-sale
portfolio at September 30, 1994 and December 31, 1993 are
reported as a separate component of stockholder's equity, net
of deferred federal income taxes. During the year ended
December 31, 1993 and the nine months ended September 30,
1994, the Company transferred $3,250,000 and $6,000,000,
respectively, of investments from the available-for-sale
portfolio to the held-to-maturity portfolio. At the date of
transfer, these investments had net unrealized losses of
approximately $29,000 before deferred income taxes. These
unrealized losses are being amortized over the term of the
investments transferred using the interest method. During the
year ended December 31, 1993 and the nine months ended
September 30, 1994, $0 and $4,563, respectively, of these
losses were amortized. At September 30, 1994, the remaining
unamortized loss, net of deferred income taxes of $8,429, of
$16,359 is reported as a reduction of stockholder's equity.
<PAGE>
2. INVESTMENTS, Continued:
The amortized costs and estimated market values of debt
securities at September 30, 1994 and December 31, 1993, by
contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without
call or prepayment penalties.
Held-to-maturity debt securities at September 30, 1994:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Values
_________ _________
<S> <C> <C>
Due after one year
through five years $9,283,204 $8,706,730
========== ==========
Available-for-sale debt securities at December 31, 1993:
Estimated
Amortized Market
Cost Values
_________ _________
Due after one year
through five years $4,972,375 $4,918,750
Due after five years
through 10 years 995,904 990,218
---------- ----------
$5,968,279 $5,908,968
========== ==========
Held-to-maturity debt securities at December 31, 1993:
Estimated
Amortized Market
Cost Values
_________ _________
Due after one year
through five years $3,323,735 $3,323,504
========== ==========
</TABLE>
3. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE:
Real estate contracts and mortgage notes receivable consist of
first lien mortgages collateralized by property primarily
located in the Pacific Northwest (Washington and Northern
Idaho). The face value of the real estate contracts and
mortgage notes range principally from $15,000 to $150,000 with
no single amount in the excess of $300,000. Interest rates
principally range from 5% to 13.125%. The weighted average
interest rate on these receivables at December 31, 1993 is
approximately 9.8%. Maturity dates range from 1994 to 2021.
The following is a reconciliation of the face value of the
real estate contracts and mortgage notes to the Company's
carrying value.
<TABLE>
<CAPTION>
December 31,
September 30,_________________________________
1994 1993 1992
________________________________________
<S> <C> <C> <C>
Face value $29,870,460 $25,325,877 $27,070,726
Unrealized discounts, net
of unamortized
acquisition costs(1,135,582)(1,537,425)(1,702,761)
Allowance for losses(228,222)(246,055) (85,238)
---------------------------------------
Carrying value $28,506,656 $23,542,397 $25,282,727
========================================
</TABLE>
The principal amount of contracts and notes subject to
delinquent principal or interest, defined as payment being in
arrears for more than three months, totaled approximately
$1,010,000 at September 30, 1994, $1,139,000 at December 31,
1993 and $1,162,000 at December 31, 1992.
<PAGE>
4. REAL ESTATE HELD FOR SALE:
Real estate held for sale consists of the following at
September 30, 1994 and December 31, 1993:
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
_____________ ____________
<S> <C> <C>
Single-family
dwelling $218,700 $372,301
Land - Residential
Improved 202,500
Commercial 26,213
-------- --------
$447,413 $372,301
======== ========
</TABLE>
5. DEFERRED ACQUISITION COSTS:
An analysis of deferred costs related to policy and annuity
acquisitions is as follows:
<TABLE>
<CAPTION>
December 31,
September 30,_________________________________
1994 1993 1992
_________________________________________
<S> <C> <C> <C>
Balance at beginning
of period $2,283,615 $1,667,623 $760,135
Deferred during period:
Commissions 316,012 652,076 856,001
General expenses 62,035 96,097 81,787
--------------------------------------
Total deferred 2,661,662 2,415,796 1,697,923
Amortized during period(122,075) (132,181) (30,300)
---------------------------------------
Balance at end of period$2,539,587 $2,283,615 $1,667,623
========================================
</TABLE>
<PAGE>
6. ANNUITY RESERVES:
Annuity reserves are based on the annuity contract terms.
These terms call for reserves covering all principal paid plus
accrued interest. Annuity contract interest rates ranged from
5% to 9% during the nine months ended September 30, 1994; 5%
to 9% during the year ended December 31, 1993, 5.5% to 8.5%
during the year ended December 31, 1992 and 7.5% to 9.2%
during the year ended December 31, 1991.
7. INCOME TAXES:
The Company files a separate tax return from Metropolitan
under specific provisions which require newly formed life
insurance entities to file a separate federal income tax
return for the first five years of their existence. The
Company is taxed as a life insurance company under Part I of
Subchapter L of the Internal Revenue Code.
<PAGE>
7. INCOME TAXES, Continued:
The components of the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
___________________________________________________________
1994 1993 1993 1992 1991
__________________________________________________
<S> <C> <C> <C> <C> <C>
Current $300,296$3,300 $3,550 $ 800 $ --
Deferred (48,194) 67,304 143,254 449,600 221,900
--------------------------------------------------
$252,102$70,604 $146,804$450,400$221,900
==================================================
</TABLE>
The effective income tax rate differs from the statutory
income tax rate due to state income taxes.
The deferred income tax provision (benefit) results from the
following:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
___________________________________________________________
1994 1993 1993 1992 1991
__________________________________________________
<S> <C> <C> <C> <C> <C>
Deferred policy
acquisition costs$80,518$140,998$180,304$252,630$136,211
Reserves on
repossessed real
estate (4,815)(14,664)(14,707)
Amortization of
discounts on
purchased real
estate contracts,
net of contract
acquisition costs
and underwriting
fees 16,135 93,983 (64,481)819,036 304,537
Annuity reserves(74,683)(166,254)(281,460)(247,901)(102,731)
Allowance for losses761(58,945)(69,266)8,419(37,400)
Operating loss
carryover(165,573)251,404433,362(382,584)(78,717)
Guaranty fund(30,059)(167,221)(160,609)
Other 129,522 (11,997)120,111
------------------------------------------------
Provision (benefit) for
income taxes$(48,194)$67,304$143,254$449,600$221,900
================================================
</TABLE>
<PAGE>
7. INCOME TAXES, Continued:
The income tax effect of the temporary differences giving rise
to the Company's deferred tax assets and liabilities as of
September 30, 1994 and December 31, 1993 is as follows:
<TABLE>
<CAPTION>
1994 1993
__________________________________________________
AssetLiability AssetLiability
<S> <C> <C> <C> <C>
Allowance or
contract losses$97,485 $98,246
Reserves on
repossessed real
estate 19,522 14,707
Deferred loan fees $1,105,983 $1,089,848
Deferred acquisition
costs 730,753 650,235
Annuity reserves706,776 632,093
Guaranty fund reserve190,688 160,609
Investments and other46,683 132,795
Net operating loss
carryforwards 165,573
------------------------------------------------
$1,061,154$1,836,736$1,071,228$1,872,878
================================================
</TABLE>
No valuation allowance has been established at December 31,
1993 to reduce deferred tax assets as it is more likely than
not that these assets will be realized due to the future
reversals of existing taxable temporary differences.
At December 31, 1993, the Company had unused net operating
loss carryforwards, for income tax purposes, of approximately
$487,000. These carryforwards have been utilized to reduce
the current income tax provision for the nine months ended
September 30, 1994.
<PAGE>
8. RELATED PARTY TRANSACTIONS:
The Company had the following related party transactions with
Metropolitan:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
_____________________________________________________________
1994 1993 1993 1992 1991
__________________________________________________
<S> <C> <C> <C> <C> <C>
Real estate
contracts and
mortgage notes
purchased
through
Metropolitan$9,827,000$528,724$603,465$13,620,522$9,820,458
Contract
acquisition cost
and underwriting
fees charged to
the Company on
purchases of
real estate
contracts and
mortgage notes52,72930,86133,5752,432,780 707,206
Investment and
general expenses
paid to
Metropolitan95,95547,742 62,677 53,496 --
</TABLE>
Additionally, the Company paid commissions of $31,332 and
$12,803 during 1993 and 1992, respectively, to Beacon
Properties, Inc. (Beacon) for acting as broker on real estate
sold throughout 1993. The Company also received rent from
Summit Securities, Inc. (Summit) of $1,800 during 1993.
Beacon and Summit were wholly-owned subsidiaries of
Metropolitan in 1993. Old Standard declared a common stock
dividend of $700,000 to Metropolitan during 1993.
In 1993, the Company purchased a government bond with a value
of $5,124,197 and mortgage loans worth $2,865,000 from Western
United Life Assurance Company, a subsidiary of Metropolitan.
<PAGE>
9. STOCKHOLDER'S EQUITY:
Old Standard is required to file statutory financial
statements with state insurance regulatory authorities.
Accounting principles used to prepare these statutory
financial statements differ from generally accepted accounting
principles. Stockholder's equity, as reported in Old
Standard's statutory financial statements, was approximately
$2,527,500 as of September 30, 1994, $2,069,000 as of December
31, 1993 and $2,078,000 as of December 31, 1992.
The payment of dividends by Old Standard is subject to certain
restrictions imposed by statute. Dividends can only be paid
out of earned surplus. Earned surplus includes surplus
arising from unrealized capital gains or revaluation of
assets.
<PAGE>
10. RECONCILIATION OF GAAP AND STATUTORY ACCOUNTING:
A reconciliation from the basis of accounting followed by the
Company as prescribed or permitted by state insurance
regulations to the basis of generally accepted accounting
principles is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
__________________________________________________________________
1994 1993 1993 1992 1991
___________________________________________________________
<S> <C> <C> <C> <C> <C>
Net income per statutory
statements $515,235 $777,142 $900,085 $809,272$334,119
Adjustments for:
Change in annuity
reserves (175,563)(407,672) (682,476)(561,297)(160,142)
Change in deferred
acquisition costs255,972453,839 615,992 907,488 540,036
Deferred tax expense48,194(67,304)(143,254)(449,600)(221,100)
Interim current tax
adjustment (258,296)
State guaranty fund
provision 71,070 (488,573) (472,379)
Interest maintenance
reserves 45,337 37,942 58,642 14,867
Policy contract benefits(31,703)73,353180,604129,096
Adjustment to loss reserves(6,649)(142,463)
Unrealized gains (losses) on
mortgage loans and real
estate contracts(25,521)(94,997)(173,420) 24,762(110,000)
Other expense adjustments39,893(6,860)(2,000)
-----------------------------------------------------------
Net income in accordance
with GAAP $477,969 $134,407 $281,794 $874,588$382,913
===========================================================
Stockholder's Equity September 30,December 31,
1994 1993 1992
____________________________________
Stockholder's equity per
statutory statements $2,527,464$2,069,030$2,077,808
Adjustments for:
Deferred acquisition costs2,539,5872,283,6151,667,623
Annuity reserves (1,603,336)(1,427,803)(745,342)
Deferred income taxes (775,582) (801,650)(688,950)
Interim current tax adjustment(258,296)
Nonadmitted assets 16,204 5,442 (8,516)
Interest maintenance reserve104,31073,510 14,867
Asset valuation reserve 218,910 188,548 47,437
State guaranty fund provision(401,309)(472,379)
Adjustment of real estate related assets
to statutory values (70,129) (130,650)
Securities valuation reserves(16,359)(59,311)
Policy and contract benefits283,640309,700129,096
Other (28,477) (22,346) (800)
---------------------------------
Stockholder's equity
in accordance
with GAAP $2,536,627$2,015,706$2,493,223
====================================
</TABLE>
<PAGE>
11. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS:
The following table summarizes income taxes paid during the
periods:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
_____________________________________________________________
1994 1993 1993 1992 1991
__________________________________________________
<S> <C> <C> <C> <C> <C>
Income taxes$45,860 $3,300 $3,550 $ 800 $ --
</TABLE>
Non-cash investing and financing activities of the Company
during the periods are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
_____________________________________________________________
1994 1993 1993 1992 1991
__________________________________________________
<S> <C> <C> <C> <C> <C>
Loans to facilitate
the sale of real
estate held$370,732$291,190$440,372$170,850$ --
Real estate held
for sale and
development
acquired through
foreclosure615,260808,794976,668 64,000 92,258
Debt assumed upon
foreclosure of
real estate
contracts 10,598 -- -- -- --
<PAGE>
INSIDE BACK COVER PAGE: REFER TO APPENDIX ITEM 4
<PAGE>
GRAPHS APPENDIX
1. INSIDE FRONT COVER PAGE: Full color page with Summit's name and logo on top of page. The page
contains a background image of a mountain which matches the image to be used on the outside cover of
Summit's annual report.
2. A circular diagram with an arrow from one paragraph to the next, depicting how the investor's
proceeds are used. The graphic contains the following introductory statement: "The following diagram depicts
a standard model for how an investor's money is used by the Company for investment in Receivables. This
model is for illustrative purposes, and is not intended to be exhaustive. It is qualified in its entirety
and should be read in conjunction with the detailed information provided elsewhere in the prospectus."
The graphic includes the following paragraphs within the circular diagram. The diagram contains an arrow
from one paragraph to the next: Election is made to invest/reinvest in Preferred Stock. The Company invests
the money in Receivables secured by real estate. The Receivable obligors make principal and interest
payments to the Company. Some of the money received as payment is used to finance the cost of doing
business. Dividend payments are paid or reinvested at the direction of the investor.
The graphic contains the following statement in bold in the center of the circular diagram: DIAGRAM SHOWING
HOW INVESTORS' MONEY IS USED IN THE PURCHASE OF RECEIVABLES.
3. Two graphs depicting how the Company earns a greater yield on a Receivable through purchasing the
Receivables at a discount from the face amount. Both graphs have a vertical axis which show the Company's
investment in the receivable, the face value and the interest earned. The horizontal axis shows years. A
line is drawn from each of the three points on the vertical axis, sloping down to the 15 year mark on the
horizontal axis. The areas between these lines are identified as A, B and C.
The first graph contains the following explanatory heading: Receivable Purchased at a Discount - Example of
a $50,000 Receivable purchased at a discount. Interest rate is 10%, term is 15 years. The Company pays A
and receives B and C as income.
The second graph contains the following explanatory heading: Receivable Purchased without a Discount -
Example of a $50,000 Receivable purchased without a discount. Interest rate if 10%, term is 15 years. The
Company pays A and B. The Company receives C as income.
4. INSIDE BACK COVER: Full cover page with Summit's name and logo on the top of the page with a
background of the mountain scene which is also set forth on the inside front cover. The page contains a
color map of the United States and indicates the location of Metropolitan's branch offices. The following
text is set forth above the graph: The Source for Summit Securities' Receivable Investments is: The
Metropolitan Receivable Acquisition Network. Location of Home and Branch Offices: Metropolitan Mortgage &
Securities Co., Inc. *Home Office, Branch Office Information as of December 31, 1994.
</TABLE>
