<PAGE>
PROSPECTUS
SUMMIT SECURITIES, INC.
$40,000,000 Investment Certificates, Series A
150,000 Shares Variable Rate Cumulative
Preferred Stock, Series S-2
($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-2
("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 parity
with unsecured accounts payable and accrued liabilities and on
parity with all previously issued and outstanding investment
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>
$1,000 60 to 120 months 8.25%
$1,000 48 to 59 months 7.75%
$1,000 36 to 47 months 7.50%
$ 100 24 to 35 months 7.25%
$ 100 12 to 23 months 7.00%
$1,000 6 to 11 months 6.50%
(Installment Certificates)
$2,000 60 to 120 months 7.50%
</TABLE>
<TABLE>
<CAPTION> PREFERRED STOCK, SERIES S-2
PRICE DISTRIBUTION
PER SHARE FORMULA (Applicable Rate)
<S> <C>
$100.00 The greater of the per annum rate of the
Three-month U.S. 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 two percentage points 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 its
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, on parity with other
preferred stock and preferred as to Summit's common stock. See
"DESCRIPTION OF PREFERRED STOCK-Liquidation Rights".
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 subsidiary 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 and risks which should be
analyzed prior to any investment. 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% 0% to 6% 100% to 94%
Total: $40,000,000 None-$2,400,000 $40,000,000-37,600,000
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 MIS, its broker-dealer, a wholly-owned subsidiary acquired
January 31, 1995, 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
reinvestments or new purchases. See "PLAN OF DISTRIBUTION".
(2) Before deducting other expenses estimated at $173,000.
The Certificates and Preferred Stock are being offered for sale
on a continuous, best efforts basis, directly to investors through
MIS 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, 1997. 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 1, 1996
<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 and other information filed by
Summit can be inspected and copied at the public reference
facilities maintained by the Commission in Washington, D.C. at 450
Fifth Street, N.W., Room 1024, Washington, DC 20549 and at certain
of its regional offices which are located in the New York Regional
Office, 7 World Trade Center, Suite 1300, New York, NY 10048, and
Chicago Regional Office, 500 West Madison Street, Suite 1400,
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 on Form S-2 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.
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 Consolidated Financial Data...............
Certain Investment Considerations-Risk
Factors...........................................
Description of Securities.........................
Description of Certificates..................
Description of Capital Stock.................
Description of Preferred Stock...............
Legal Matters.....................................
Legal Opinion................................
Legal Proceedings............................
Experts...........................................
Plan of Distribution..............................
Use of Proceeds...................................
Capitalization....................................
Selected Consolidated Financial Data..............
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................
Business..........................................
Management........................................
Executive Compensation.......................
Indemnification...................................
Principal Shareholders............................
Certain Transactions..............................
Index to Consolidated Financial Statements........
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to, and
should be read in conjunction with, the detailed information and
financial statements appearing elsewhere in this Prospectus. This
offering involves certain investment considerations for prospective
investors which are set forth in "Description of Securities" and
"Certain Investment Considerations-Risk Factors".
The Summit Consolidated Group of Companies
Summit Securities, Inc.(Summit) was incorporated under the laws
of the State of Idaho on July 25, 1990. Its principal executive
offices are located at 929 West Sprague Avenue, Spokane WA 99210-
2162. Its mailing address is P.O. Box 2162, Spokane WA 99210-2162
and its telephone number is (509) 838-3111. Summit also maintains
an office at 8601 W. Emerald, Ste. 150, Boise, Idaho 83704 and its
telephone number is (208)376-8260.
Where reference herein is intended to include Summit
Securities, Inc. and its subsidiaries, they are jointly referred to
as the "Consolidated Group". Where reference herein is intended to
refer to Summit Securities, Inc. as the parent company only, it is
referred to individually as "Summit".
Summit was founded in 1990 by Metropolitan Mortgage &
Securities Co., Inc. (Metropolitan) as a wholly-owned subsidiary.
On September 9, 1994, Summit was acquired by National Summit Corp.,
which is wholly-owned by C. Paul Sandifur, Jr. Mr. Sandifur is
President and controlling shareholder of Metropolitan. Accordingly,
the change in ownership altered the form of control, but did not
result in a change of the individual in control. See "CERTAIN
TRANSACTIONS".
Between January and June of 1995, Summit acquired MIS and a
wholly-owned holding company acquired Old Standard Life Insurance
Company (Old Standard) from Metropolitan. In addition, Summit
commenced operation of a property development company, Summit
Property Development Inc. See "BUSINESS" & "CERTAIN TRANSACTIONS".
The Consolidated Group is engaged nationwide in the business
of acquiring, holding and selling receivables (hereafter
Receivables). These Receivables include real estate contracts, and
promissory notes collateralized by first position liens on
residential real estate. The Consolidated Group also invests in
Receivables consisting of real estate contracts and promissory notes
collateralized by second and lower position liens, structured
settlements, annuities, lottery prizes, and other investments. In
addition, it also invests in U.S. Treasury obligations, corporate
bonds and other securities. The Consolidated Group invests directly
in Receivables using funds generated from Receivable cash flows, the
sale of annuities, the sale of certificates and preferred stock, and
securities portfolio earnings. See "BUSINESS" & "CERTAIN
TRANSACTIONS".
Definitions:
For ease of reading, the following is a compilation of several of
the defined terms which appear regularly within this document.
Also, See "Business".
Arizona Life: Arizona Life Insurance Company
Certificates: Where this term is capitalized it refers to the
Investment Certificates being offered herein. Where not
capitalized, it refers to certificates generally.
Consolidated Group: This term refers to the combined businesses
consisting of Summit and all subsidiaries.
MIS: Metropolitan Investment Securities, Inc.
Metropolitan: Metropolitan Mortgage & Securities Co., Inc.
Old Standard: Old Standard Life Insurance Company.
Preferred Stock: Where this term is capitalized it refers to the
Series S-2 Preferred Stock being offered herein. Where it is not
capitalized, it refers to preferred stock generally.
Receivables: Investments in cash flows, consisting of obligations
collateralized by real estate, structured settlements, annuities,
lottery prizes and other investments.
Summit: Summit Securities, Inc.
<PAGE>
ORGANIZATIONAL CHART FOR SUMMIT SECURITIES, INC.
(including subsidiaries, effective December 31, 1995)
National Summit Corp.
|
|
|
Summit Securities,
Inc.
|
|
- -----------------------------------------------
| | |
Metropolitan Summit Summit Group Holding
Investment Property Company
Securities , Development, |
Inc. Inc. |
Old Standard Life
Insurance Company
|
|
Arizona Life
Insurance Company
National Summit Corp.: Parent Company, inactive except as owner
of Summit Securities, Inc. and Summit Trade Services Inc.* Wholly-
Owned by C. Paul Sandifur, Jr., President of Metropolitan.
Summit Securities, Inc.: Invests in Receivables and other
investments principally funded by proceeds from investments and
securities offerings.
Metropolitan Investment Securities, Inc.: Limited-purpose
securities broker/dealer currently marketing securities offered by
Summit and Metropolitan, and certain mutual funds.
Summit Property Development, Inc.: Provides real estate development
services to others, with the principal clients being Metropolitan
and its subsidiaries.
Summit Group Holding Company: Inactive except as owner of Old
Standard Life Insurance Company.
Old Standard Life Insurance Company: Invests in Receivables and
other investments principally funded by proceeds from investments,
investment income and from annuity sales.
Arizona Life Insurance Company: Old Standard purchased this
insurance company effective December 28, 1995. Its business
activities are expected to commence in 1996, and are anticipated to
include investments in Receivables and other investments principally
funded by proceeds from Receivables, and from annuity sales. See
"BUSINESS-Recent Developments-Subsidiary Acquisitions".
* Other Subsidiaries:
In addition to the companies shown above, the parent company,
National Summit Corp. has an additional wholly-owned subsidiary,
Summit Trade Services Inc. This company was established in 1995,
and intends to operate as a new business ventures company. Revenues
to date have been negligible. It is principally managed by Philip
Sandifur, son of C. Paul Sandifur Jr.
<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, 1995, Summit had outstanding
approximately $38,546,000 (principal and compounded and accrued
interest) of certificates and similar obligations and approximately
$105,000 (principal and accrued interest) of collateralized debt.
See "CAPITALIZATION".
Use of Proceeds . . . . The proceeds of this Certificate offering
will provide funds for Receivable investments, retiring maturing
certificates, preferred stock dividends, other investments (which
may include investments in existing subsidiaries and the acquisition
of other companies, or the commencement of new business ventures),
and general corporate purposes. See "USE OF PROCEEDS".
Principal and Interest Payments . . . . At the option of the holders
of Certificates, 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-2 (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 this 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 are senior to the common
stock of Summit, on parity with the liquidation rights of all other
previously issued and outstanding preferred stock and junior to all
debts of Summit including Summit's previously issued Certificates
and the Certificates offered herein. 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. 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 full monthly
distributions or more, per share. See "DESCRIPTION OF PREFERRED
STOCK-Voting Rights".
Use of Proceeds . . . . The proceeds of this Preferred Stock
offering will provide funds for Receivable investments, retiring
maturing certificates, preferred stock dividends, other investments
(which may include investments in existing subsidiaries and the
acquisition of other companies or the commencement of new business
ventures) and for general corporate purposes. See "USE OF
PROCEEDS".
Federal Income Tax Considerations. . . . In the event the
Consolidated Group has earnings and profits for federal income tax
purposes in any future year, the distributions paid on Preferred
Stock in that year will constitute taxable income to the recipient
to the extent of such earnings and profits. Management 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 CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
The consolidated financial data shown below as of September 30, 1995 and 1994 and for the years
ended September 30, 1995, 1994 and 1993 (other than the ratio of earnings to fixed charges and
preferred stock dividends) have been derived from, and should be read in conjunction with, the
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, 1993, 1992 and 1991 and for the years ended September 30, 1992 and 1991 have been
derived from audited financial statements not included herein. The consolidated financial statements
as of and for the years ended September 30, 1995, 1994 and 1993 have been audited by Coopers &
Lybrand L.L.P. The consolidated financial statements as of and for the years ended September 30,
1992, and 1991 have been audited by BDO Seidman.
Year Ended Year Ended Year Ended Year Ended Year Ended
September 30, September 30, September 30, September 30, September, 30
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Revenues $ 9,576,615 $3,395,252 $ 2,815,624 $ 2,435,843 $1,026,405
=========== ========== ========== ========== ==========
Income before
extraordinary item $ 587,559 $ 264,879 $ 283,107 $ 611,595 $ 238,205
Extraordinary item (1) -- -- -- 49,772 --
----------- ---------- ---------- ---------- ----------
Net Income 587,559 264,879 283,107 661,367 238,205
Preferred Stock Dividends (309,061) (2,930) -- -- --
----------- ---------- ---------- ---------- ----------
Income Applicable to Common
Stockholders $ 278,498 $ 261,949 $ 283,107 $ 661,367 $ 238,205
=========== ========== ========== ========== ==========
Per Common Share:
Income before
extraordinary
item $ 27.85 $ 13.47 $ 14.15 $ 30.58 $ 11.91
Extraordinary item (1) -- -- -- 2.49 --
----------- ---------- --------- --------- ----------
Income applicable to
common stockholders $ 27.85 $ 13.47 $ 14.15 $ 33.07 $ 11.91
=========== ========== ========== ========== ==========
Weighted average number
of common shares
outstanding 10,000 19,445 20,000 20,000 20,000
=========== ========== ========== ========== ==========
Ratio of Earnings
to Fixed Charges
and Preferred Stock
Dividends 1.11 1.16 1.24 1.53 1.37
BALANCE SHEET DATA:
Due from/(to) affiliated
companies, net $ 1,960,104 $ 267,735 $ 1,710,743 $ (400,365) $(5,528,617)
Total Assets $96,346,572 $35,101,988 $25,441,605 $17,696,628 $16,718,823
Debt Securities
and Other
Debt Payable $38,650,532 $31,212,718 $21,982,078 $14,289,648 $ 8,451,106
Stockholders' Equity $ 3,907,067 $3,321,230 $3,188,024 $2,904,917 $2,243,550
<FN>
(1) Benefit from utilization of net operating loss carryforwards.
</TABLE>
<PAGE>
CERTAIN INVESTMENT CONSIDERATIONS - RISK FACTORS
General
1. Impact of Interest Rates and Economic Conditions: During
the twelve month period ending September 30, 1996, more of the
Consolidated Group's financial liabilities, principally annuities
and Certificates, are scheduled to reprice or mature than are its
financial assets, principally Receivables and fixed income
investments. Consequently, in a falling interest rate environment
such as has recently been experienced, the current level of
profitability and the fair value of the Consolidated Group's equity
are likely to improve. Conversely, in a rising interest rate
environment, the net interest income and the fair value of equity
for the Consolidated Group would likely decline. The fair value of
equity is the difference between the fair value of all assets less
the fair value (as opposed to book value) of all liabilities. The
impact of a change in interest rates will be reflected to the
greatest extent in the fair value of assets and liabilities with the
longest maturities or time to their scheduled repricing date.
Additionally, borrowers tend to repay Receivable loans when interest
rates decline when they are able to refinance such loans at lower
rates of interest. This factor reduces the amount of interest to be
received over time as loans with higher rates of interest are
prepaid more rapidly. However, the Consolidated Group purchases the
substantial majority of its Receivables at a discount. The yield on
these Receivables is improved when recognition of the discount is
accelerated through prepayment. 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 that
collateralize the Receivables and a reduction in the probable sales
prices for property obtained through such action which could
adversely affect the results of operations and financial position of
the Consolidated Group.
2. Dependence Upon Metropolitan: All decisions with respect
to the day-to-day management of the Consolidated Group will be made
exclusively by the officers of the respective companies, many of
whom are also employees of Metropolitan and/or its subsidiaries.
The Consolidated Group has contracted with Metropolitan, for
Metropolitan to provide principally all of the administrative
services related to their general business administration, including
those related to their Receivable activities. Metropolitan charges
a fee for its services. The fee charged to the Consolidated Group
relating to Receivable acquisition activities during the fiscal
years ended September 30, 1995, 1994 and 1993 was $1,967,409,
$681,991, and $243,414, respectively. See "BUSINESS" & "CERTAIN
TRANSACTIONS".
Management considers these contractual arrangements to be more
beneficial to the Consolidated Group than incurring the cost to
duplicate these services internally. These contracts do not
restrict any of the companies from obtaining these services from
other sources and they may be terminated at any time. However, it
is anticipated that these contracts will continue indefinitely. See
"BUSINESS" & "CERTAIN TRANSACTIONS".
3. Conflicts of Interest: Many of the officers and directors
of Summit and its subsidiaries 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 and its subsidiaries. Summit
and Old Standard may compete with Metropolitan and its subsidiaries
in the acquisition of Receivables. Summit may compete with
Metropolitan for the sale of securities, and Old Standard may
compete with Metropolitan's insurance subsidiary for the sale of
annuities.
On September 9, 1994, Metropolitan sold Summit to National
Summit Corp., a holding company wholly-owned by C. Paul Sandifur Jr.
In fiscal 1995, Summit purchased MIS and Old Standard from
Metropolitan, and commenced operations of Summit Property
Development Inc. See "CERTAIN TRANSACTIONS". Mr. Sandifur is the
President and has voting control of Metropolitan. Prior to these
transactions, Mr. Sandifur had effective control of Summit and its
subsidiaries through his control of Metropolitan. Following these
transactions, Mr. Sandifur through National Summit Corp. continues
to control Summit, and through Summit controls Summit's
subsidiaries.
Conflicts of interest are not anticipated to be substantially
different from those which existed prior to these sales, such as
conflicts in the time available to devote to Summit or its
subsidiaries and conflicts with respect to securities sales and 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.
Purchasers of 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 by each company,
and in making other business decisions.
4. Effect of Certain Insurance Regulations: Insurance company
regulations restrict transfers of assets and the amount of dividends
that the insurance subsidiaries may pay. Accordingly, to the extent
of such restrictions, assets and earnings of the insurance
subsidiaries are not available to Summit without special permission
from the respective insurance commissioner in the insurance
subsidiary's state of domicile. This restriction on dividends could
affect Summit's ability to pay interest, retire certificates and pay
Preferred Stock distributions. The total unrestricted statutory
surplus of Old Standard was approximately $249,000 as of September
30, 1995. See "BUSINESS-Regulation" & "CERTAIN TRANSACTIONS."
5. 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 payment of certificates which
mature during the period ending January 31, 1997, portions of the
net proceeds from this Certificate and Preferred Stock offering may
be used for such purpose. See "USE OF PROCEEDS". Approximately
$7,851,000 in principal amount of certificates will mature between
February 1, 1996 and January 31, 1997. The majority of Summit's
certificates have been sold with a five year maturity. Summit has
been operating for fewer than six full fiscal years. Therefore, it
has not yet experienced significant levels of maturities of
outstanding certificates. During the fiscal year ended September
30, 1995, its fifth full year of operation, 60% of Summit's maturing
certificates were reinvested. The cash flow from the existing
assets has been adequate during the past five years to satisfy the
demand for payment of maturing certificates. Summit's ability to
repay its other outstanding obligations, including those created by
the sale of the securities described herein, may be contingent in
part upon the success of future public offerings of certificates and
preferred stock.
6. Effect of Life Insurance and Annuity Termination Rates: An
increase in the number of annuity policy terminations will tend to
negatively impact the insurance subsidiaries' earnings, (and in turn
the Consolidated Group's earnings) by requiring the expensing of
unamortized deferred costs related to policy surrenders. At
September 30, 1995, deferred policy acquisition costs on annuities
were approximately 5.6% of annuity reserves. Surrender charges
typically do not exceed 5% of the annuity contract balance at the
contract's inception, and such charges decline annually from that
rate. Annuity termination rates based upon results for the four
months ended September 30, 1995, were approximately 12%. Management
believes a reasonable estimate for future lapse rates to be 10%
(including 4% for death and partial withdrawal and 6% for basic
surrenders and surrenders occurring in the year the surrender charge
expires. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" & "Note 12, Consolidated
Financial Statements".
7. Investments in Receivables:
Receivables Collateralized by Real Estate: The Consolidated
Group is engaged in the purchase of Receivables which include
Receivables collateralized 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. The Consolidated Group's underwriting
is currently provided through Metropolitan. Metropolitan's
investment underwriting procedure includes a review of demographics,
market values, property appraisal, economy, and the buyer's credit.
Through Metropolitan, the Consolidated Group buys these Receivables
nationwide, allowing it to diversify its investments geographically
into areas where the market trends and economic conditions may be
favorable. 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 collateralized by real estate, the Consolidated
Group, through Metropolitan, 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 (frequently an unrelated
insurance company, or in the case of lotteries, a state government).
Unlike Receivables collateralized by real estate, these Receivables
are generally not collateralized by a specific asset. The
Consolidated Group's underwriting is currently provided through
Metropolitan. Metropolitan's investment underwriting procedures
vary with the type of investment and may include any or all of the
following: a review of the credit rating of the payor, a review of
corresponding state laws including the potential 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 to minimize
the occurrence of any default. See "BUSINESS-Receivable
Investments". As of September 30, 1995, the Consolidated Group's
Receivable investments consisted of the following:
<TABLE>
<S> <C>
Percent Type of Receivable
_______ __________________
78% Receivables collateralized by Real Estate
2% Annuities
20% Lotteries and Loans collateralized by
Lotteries
</TABLE>
As of September 30, 1995, the Consolidated Group's Receivable
investments collateralized by real estate were principally located
in the following regions:
<TABLE>
<S> <C>
Percent Region
------- ------
22% Pacific Northwest (Washington, Alaska,
Oregon, Idaho and Montana)
21% Pacific Southwest (California, Nevada and
Arizona)
18% Southwest (Texas, Louisiana and New
Mexico)
10% Southeast (Florida, Georgia, North
Carolina and South Carolina)
29% Other areas (of which no more than 3% were
located in any one state)
</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 unsecured or collateralized debt. Neither does the
Indenture require Summit to maintain any specified financial ratios,
minimum net worth, minimum working capital or a sinking fund. 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 other unsecured accrued liabilities.
As of September 30, 1995, Summit had approximately $105,000 of
collateralized debt and related accrued interest. Also as of
September 30, 1995, the principal and accrued interest on Summit's
outstanding certificates was approximately $38,546,000.
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) nor 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 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 of the Certificates is thus
higher than the risk incurred by investors in such insured financial
institutions.
3. Term Investment/Absence of Trading Market/Liquidity: There
is no trading market for the Certificates, and it is not anticipated
that one will develop. The Certificates are not subject to
redemption prior to maturity. Prepayments pursuant to the
"prepayment on death" provision or upon mutual agreement between
Summit and a Certificateholder 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-Description of Certificates".
Relative to Preferred Stock
1. Limited Marketability of Shares: The Preferred Stock is
not listed, nor does management anticipate applying for a listing on
any national or regional stock exchange and no independent public
market for Preferred Stock is anticipated. The broker/dealer for
this offering, MIS, 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 a recognized public stock
exchange. See "DESCRIPTION OF PREFERRED STOCK-Redemption of
Shares".
2. 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 under limited
circumstances solely at the option of Summit. 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".
3. 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, all shares of
Series S Preferred Stock, including shares of additional sub-series
which may subsequently be authorized and sold, are on a parity.
Preferred Stock is 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, 1995,
total assets of Summit were approximately $96,347,000 and the total
liabilities of Summit ranking senior in liquidation preference to
Preferred Stock were approximately $92,440,000, and the total
liquidation preference of all outstanding shares of Series S
preferred stock was approximately $3,562,000.
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 outcome in such events 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.
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. Federal Income Tax Considerations: Under the current
Federal Income Tax Code, 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 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. See
"DESCRIPTION OF PREFERRED STOCK-Federal Income Tax Consequences of
Distributions".
<PAGE>
DESCRIPTION OF SECURITIES
Description of Certificates
The Certificates will be issued under an 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 available for
inspection at the principal office of Summit.
General
The Certificates will represent general unsecured obligations
of Summit and will be issued in fully registered form without
coupons, in fractional denominations of $0.01 or more. 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.
Summit is currently exploring an alternative means of
certificate registration commonly known as "book entry". A book
entry method of registration eliminates the need for a negotiable
certificate. Instead, a receipt for the investment would be issued
and record of the investment would be maintained by Summit.
Certificates may be transferred or exchanged for other
Certificates of the same series of a like aggregate principal
amount, subject to the limitations set forth 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 the 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 financial hardship, 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 in the order received
and are subject to review by Summit's executive management.
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 completed 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, 1995,
(including compound and accrued interest) was approximately
$38,546,000. There are no limitations on Summit's ability to incur
collateralized debt. Collateralized debt outstanding on that date
of approximately $105,000 (principal and accrued interest) consisted
primarily of senior liens on the real estate collateral for Summit's
real estate Receivables.
Concerning the Trustee
West One Bank is the Indenture Trustee (the "Trustee"). 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, with a combined capital
and surplus in excess of $350,000,000. Summit and certain of its
affiliates may maintain deposit accounts with and may, from time to
time, borrow money from the bank and conduct other banking
transactions with it. At September 30, 1995 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. West One has informed Summit of its
intent to withdraw as Trustee. Summit is currently negotiating with
several qualified businesses to substitute for West One as Trustee.
It is not anticipated that this change will have any impact on
Summit or its Certificates.
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
The authorized capital of Summit consists of 2,000,000 shares
of Common Stock ($10.00 par value), and 10,000,000 shares of Series
S Preferred Stock ($10.00 par value), from which 185,000 shares of
Series S-1 and 150,000 shares of Series S-2 have been authorized.
See "Consolidated Financial Statements".
Relative Rights of Common 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 preferred shareholders', 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-2 (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 this 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"). Preferred Stock is
issued in Book Entry form. Investments in Preferred Stock are
evidenced by receipts and not by negotiable stock certificates.
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 Authorizing Resolution, a copy of
which has been filed with the Commission as an exhibit to the
Registration Statement of which this Prospectus is a part, and is
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. 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
three-month U.S. Treasury Bill Rate, the Ten-Year Constant Maturity
Rate and the Twenty-Year Constant Maturity Rate (each as more fully
described in the Authorizing Resolution), (ii) plus one half of one
percentage point. Each of the above three rates shall be calculated
as the arithmetic average of the two most recent weekly per annum
yields 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.
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 3-month U.S.
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 two
percentage points higher than the Applicable Rate. Such higher
distribution rate will continue from month to month until the Board
elects to terminate it. The Board may increase, decrease or
eliminate the additional points at any time, in its sole discretion.
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,
1995, the total liabilities of Summit ranking senior in liquidation
preference to Preferred Stock were approximately $92,440,000. See
"BUSINESS-Regulation". There are no limitations on Summit's ability
to incur additional secured indebtedness. See "CAPITALIZATION" &
"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 affecting
redemptions during an offering, and subject to the limitations
described below, accept such shares for redemption. Such redemption
requests are reviewed in the order received, and are subject to
review by Summit's executive management. 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, in the
opinion of Summit's management, 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.
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, MIS, maintains a trading list to match buyers and
sellers 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 Stock
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 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 Authorizing Resolution provides that holders of Preferred
Stock, together with the holders of Summit's other preferred stock
hereafter 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 or more 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 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).
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
currently unable to predict the character of its distributions for
calendar 1995, or for future years.
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.
Transfer Agent and Registrar
Metropolitan acts as Transfer Agent and Registrar for Summit's
Certificates and capital stock, including its Preferred 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 MIS, and also employed by
Metropolitan as its Assistant Corporate Counsel and Vice President.
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 balance sheets of Summit and its subsidiaries
as of September 30, 1995 and 1994 and the consolidated statements of
income, stockholder's equity and cash flows for each of the three
years in the period ended September 30, 1995 included in this
Prospectus, have been included herein in reliance on the report,
which includes an explanatory paragraph describing changes in the
methods of accounting for repossessed real property and income taxes
in fiscal 1993, 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 September 30,
1994 and December 31, 1993 and for the periods 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 methods of 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.
<PAGE>
PLAN OF DISTRIBUTION
The Certificates and Preferred Stock are offered directly to
the public on a continuing best efforts basis through MIS which is a
subsidiary 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 in
the maximum amount of 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. MIS will transmit such funds or other consideration
directly to Summit by noon of the next business day after receipt.
Summit will also pay certain other expenses in connection with the
offering. During the three fiscal years ended September 30, 1995,
MIS received commissions of $662,299 from Summit on sales of
approximately $29,343,000 of Summit's certificates and preferred
stock. Preferred Stock was sold for the first time during 1994.
MIS is a member of the National Association of Securities
Dealers, Inc. (NASD). As such, Schedule E of the Bylaws 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 $45,000 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 undertakes to
maintain 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 . . . . If all of the Certificates are sold,
Summit expects net proceeds from this Certificate offering of
$37,600,000 to $40,000,000 before deducting offering expenses
estimated at $173,000 (combined total for both Certificates and
Preferred Stock) and after sales commissions. There can be no
assurance, however, that any of the Certificates can be sold. Sales
commissions will range up to $2,400,000 (6%) depending on maturities
of Certificates sold and whether sales are reinvestments or new
purchases. See "BUSINESS-Method of Financing".
Preferred Stock Proceeds . . . .If all of the Preferred Stock is
sold, Summit expects net proceeds from this Preferred Stock offering
of $14,100,000 to $15,000,000 before deducting offering expenses
estimated at $173,000 (combined total for both Certificates and
Preferred Stock) 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.
See "BUSINESS-Method of Financing".
In conjunction with the other funds available to it through
operations and/or borrowings, Summit will utilize the proceeds of
the Certificates and Preferred Stock offerings for funding
investments in Receivables, and other investments, which may include
investments in subsidiaries and the acquisition of other companies,
and the commencement of new business ventures. The Consolidated
Group continues to evaluate possible acquisition candidates, but
presently is only in preliminary discussions with any such
candidates. To the extent internally generated funds are
insufficient or unavailable for the retirement of maturing
certificates through the period ending January 31, 1997, 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 $7,851,000 in principal
amount of debt securities will mature between February 1, 1996 and
January 31, 1997 with interest rates ranging from 6.5% to 10% and
averaging approximately 9.5% per annum. See Note 7 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 1
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the
Consolidated Group at September 30, 1995:
<TABLE>
<CAPTION>
<S> <C>
DEBT PAYABLE
Real estate contracts and
mortgage notes payable
7% to 9.5%, due 1995 to 2009 $ 104,636
-----------
INVESTMENT CERTIFICATES
Investment Certificates,
Maturing 1995 to 2000,
at 6% to 11% 33,724,658
Compound and accrued interest 4,821,238
-----------
Total Investment Certificates 38,545,896
-----------
STOCKHOLDERS' EQUITY
Preferred Stock, $10 par:
10,000,000 shares authorized;
35,622 shares issued and
outstanding (liquidation preference
$3,562,220) 356,222
Common Stock, $10 par:
2,000,000 shares authorized;
10,000 shares issued and
outstanding 100,000
Additional paid-in capital 1,786,991
Retained earnings 1,675,738
Net unrealized losses
on investments (11,884)
----------
Total Stockholders' Equity 3,907,067
----------
Total Capitalization $42,557,599
==========
</TABLE>
<PAGE> SUMMIT SECURITIES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
The consolidated financial data shown below as of September 30, 1995 and 1994 and for the years
ended September 30, 1995, 1994 and 1993(other than the ratio of earnings to fixed charges and
preferred stock dividends) 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, 1993, 1992 and 1991 and for the year ended September 30, 1992 and 1991 have been
derived from audited financial statements not included herein. The consolidated financial statements
as of and for the years ended September 30, 1995, 1994 and 1993 have been audited by Coopers &
Lybrand L.L.P. The consolidated financial statements as of and for the years ended September 30,
1992, and 1991 have been audited by BDO Seidman.
Year Ended Year Ended Year Ended Year Ended Year Ended
September 30, September 30, September 30, September 30, September, 30
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Revenues $ 9,576,615 $3,395,252 $ 2,815,624 $ 2,435,843 $1,026,405
=========== ========== ========== ========== ==========
Income before
extraordinary item $ 587,559 $ 264,879 $ 283,107 $ 611,595 $ 238,205
Extraordinary item (1) -- -- -- 49,772 --
----------- ---------- ---------- ---------- ----------
Net Income 587,559 264,879 283,107 661,367 238,205
Preferred Stock Dividends (309,061) (2,930) -- -- --
----------- ---------- ---------- ---------- ----------
Income Applicable to Common
Stockholders $ 278,498 $ 261,949 $ 283,107 $ 661,367 $ 238,205
=========== ========== ========== ========== ==========
Per Common Share:
Income before
extraordinary
item $ 27.85 $ 13.47 $ 14.15 $ 30.58 $ 11.91
Extraordinary item (1) -- -- -- 2.49 --
----------- ---------- ---------- ---------- ----------
Income applicable to
common stockholders $ 27.85 $ 13.47 $ 14.15 $ 33.07 $ 11.91
=========== ========== ========== ========== ==========
Weighted average number
of common shares
outstanding 10,000 19,445 20,000 20,000 20,000
=========== ========== ========== ========== ==========
Ratio of Earnings
to Fixed Charges and
Preferred Stock Dividends 1.11 1.16 1.24 1.53 1.37
BALANCE SHEET DATA:
Due from/(to) affiliated
companies, net $ 1,960,104 $ 267,735 $ 1,710,743 $ (400,365) $(5,528,617)
Total Assets $96,346,572 $35,101,988 $25,441,605 $17,696,628 $16,718,823
Debt Securities
and Other
Debt Payable $38,650,532 $31,212,718 $21,982,078 $14,289,648 $ 8,451,106
Stockholders' Equity $ 3,907,067 $3,321,230 $3,188,024 $2,904,917 $2,243,550
<FN>
(1) Benefit from utilization of net operating loss carryforwards.
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
For the Three Fiscal Years Ended September 30, 1995
Introduction
Summit's operations for the fiscal year ended September 30,
1995 benefited from the acquisition of and start-up of several new
operating subsidiaries. MIS was acquired from Summit's former
parent company in January, 1995. At the same time, Summit
established a property development subsidiary. Summit acquired Old
Standard from Summit's former parent company on May 31, 1995. Of
these transactions, the largest was the acquisition of Old Standard.
As of September 30, 1995, Old Standard had total assets of
approximately $54.1 million. See Note 1 to the Financial
Statements. During the fiscal year ended September 30, 1995, MIS,
Summit Property Development and Old Standard contributed gross
revenues of $1.2 million, $1.3 million, and $1.4 million,
respectively, to the Consolidated Group. For the same period,
Summit Property Development and Old Standard contributed operating
income of approximately $118,000 and $86,000 ,respectively, to the
Consolidated Group. The operating income of MIS was not significant
after intercompany eliminations.
Results of Operations
Revenues of the Consolidated Group increased to approximately
$9.6 million in 1995 from approximately $3.4 million in 1994, and
approximately $2.8 million in 1993. The growth in revenues from
1994 to 1995 is attributable to an increase in investment earnings
on outstanding Receivables due largely to the acquisition of Old
Standard along with gains realized on the sale of a portion of the
Receivable portfolio. Additionally in 1995, the Consolidated Group
realized approximately $2.6 million in fee, commission and service
revenues from its newly acquired and newly formed subsidiaries. The
growth in revenues 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 Consolidated Group has increased its investment in
Receivables, collateralized by real estate, to approximately $60.1
million at September 30, 1995 from $27.3 million at September 30,
1994, and $19.5 million at September 30, 1993. Additionally, the
Consolidated Group has begun investing in annuities and lottery
prizes with a total outstanding investment as of September 30, 1995
of $ 16.9 million.
Net income before preferred stock dividends for the fiscal year
ended September 30, 1995 was approximately $588,000 compared to
$265,000 in 1994 and $283,000 in 1993. The increase from 1994 to
1995 was primarily the result of increased gains on the sale of
Receivables, an increase in the margin between interest sensitive
income and interest sensitive expense caused largely by the
acquisition of Old Standard, and increased fees, commissions and
service revenues from MIS and Summit Property Development, Inc.
which were only partially offset by increases in salaries and
benefits, commissions and other operating expenses. The relatively
small decrease in net income from 1993 to 1994 was the result of
Summit being able to realize gains on the sale 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
an increase in the provision for losses on real estate assets.
Since the date of its incorporation through approximately the
end of calendar year 1993 and again in 1995, Summit generally
benefited 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 1995 and 1994 as Summit was able
to realize gains of $512,500 and $171,756, respectively, from the
sale of Receivables. Higher levels of prepayments in the Receivable
portfolio were experienced during the years 1992 through 1995,
allowing Summit to recognize unamortized discounts on Receivables at
an accelerated rate. During 1994 and continuing in 1995,
Metropolitan, Summit's former parent and the primary supplier of
Receivables, began charging the Consolidated Group underwriting fees
associated with Receivable acquisitions. The charging of the
underwriting fee results in a somewhat lower yield over the life of
the newly acquired Receivables. However, management believes the
yield to be favorable in comparison to other investment
opportunities. See "BUSINESS-Investment in Receivables".
Maintaining efficient collection efforts and minimizing
delinquencies in the Consolidated Group's Receivable portfolio are
ongoing management goals. During 1995, the Consolidated Group
realized a gain on the sale of repossessed real estate of
approximately $6,300 compared to a gain of $12,300 in 1994 and a
loss of $18,400 in 1993. In recognition of the increased size of
the Consolidated Group's Receivable and real estate portfolios,
principally associated with the purchase of Old Standard, the
Consolidated Group has increased its provision for losses on assets
collateralized by real estate. Provisions for losses were
approximately $445,000, $155,000, and $51,000 for 1995, 1994, and
1993, respectively. At September 30, 1995, the Consolidated Group
had an allowance for losses on real estate assets of $765,000
compared to $251,000, and $97,000 at September 30, 1994 and 1993,
respectively. The increase in 1995 was in part attributable to the
acquisition of Old Standard. At September 30, 1995, 1994 and 1993,
the allowance for losses represented approximately 1.2%, 0.9% and
0.5%, respectively, of the face value of Receivables collateralized
by real estate.
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 cost 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 for fiscal 1993.
Interest Sensitive Income and Expense
Management continually monitors the interest sensitive income
and expense of the Consolidated Group. Interest sensitive expense
is predominantly related to annuity benefits and the interest costs
of Certificates, while interest sensitive income includes interest
and earned discounts on Receivables, dividends and other investment
income.
The excess of interest sensitive income over interest sensitive
expense was approximately $1,075,000 in 1995, $543,000 in 1994, and
$696,000 in 1993. The increase from 1994 to 1995 of $532,000 was
attributable to the following: (1) increased investment in the
Receivable portfolio largely due to the acquisition of Old Standard;
(2) a lower cost of funds, influenced in part by the acquisition of
Old Standard, and; (3) additional dividend income from preferred
stock of Metropolitan held by Summit. The decrease from 1993 to
1994 of approximately $153,000 was attributable to several factors
including: (1) the 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 utilized for the
September 1994 payment of $3.6 million to Metropolitan to redeem its
outstanding common stock. See Note 11 to the Consolidated Financial
Statements.
Fees, Commissions, Service and Other Income
Other income grew to approximately $2,580,000 in 1995 from
$60,700 in 1994, and $42,700 in 1993. In 1995, the significant
increase in other income was the result of commissions earned by the
Consolidated Group's broker/dealer subsidiary, MIS, of approximately
$1.12 million and approximately $1.25 million of service fees earned
by its property development subsidiary, offset, in part, from the
increase in other expenses. Other income in 1993 and 1994 resulted
predominantly from miscellaneous fees and charges related to
Receivables.
Other Expenses
Operating expenses increased significantly in 1995 to
$2,900,000 from relatively stable amounts of $231,400 for 1994 and
$244,600 for 1993. The 1995 increase in operating expense was
principally the result of the acquisition and establishment of new
subsidiaries, including the insurance, broker/dealer and the
property development subsidiaries. The 1995 increase in operating
expenses encompassed the addition of employees for each of the new
subsidiaries, commissions paid to agents as a result of the
insurance company acquisition, and occupancy and administrative
expenses associated with the various subsidiaries. See "BUSINESS-
Recent Developments-Subsidiary Acquisitions".
Provision for Losses on Real Estate Assets
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 to provide for what Management
believes are adequate allowances for anticipated losses. The
following table summarizes the Consolidated Group's allowance for
losses on Receivables and repossessed real estate:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Beginning Balance $250,572 $ 96,654 $59,244
Increase due to:
Acquisition of
life insurance
affiliate 310,957
Provision 103,950 103,000 15,000
Charge-Offs (34,276) (49,921) (7,894)
Recoveries 133,927 100,839 30,304
-------- -------- --------
Ending Balance $765,130 $250,572 $96,654
======= ======= =======
<FN>
These allowances are in addition to unamortized acquisition
discounts of approximately $2.6 million at September 30, 1995, $1.3
million at September 30, 1994, and $1.1 million at September 30,
1993.
</TABLE>
Gain/Loss on Other Real Estate Owned
During 1995, the Consolidated Group experienced a gain on the
sale of real estate of approximately $6,300. At the end of fiscal
1995, the Consolidated Group had approximately $836,000 in real
estate held for sale, less than 1% of total assets.
Effect of Inflation
During the three year period ended September 30, 1995,
inflation has had a generally positive impact on the Consolidated
Group's operations. This impact has primarily been indirect in that
the level of inflation tends to be reflected in the current level of
interest rates which impact interest returns and costs on the
Consolidated Group's assets and liabilities. See "BUSINESS-Interest
Sensitive Income and Expense". However, both interest rate levels
in general and the cost of the Consolidated Group's funds and the
return on it investments are influenced by additional factors such
as the level of economic activity and competitive or strategic
product pricing issues. The net effect of the combined factors on
the earnings of the Consolidated Group has been a slight improvement
over the three year period in the positive spread between the rate
of return on interest earning assets less the cost of interest
paying liabilities. Inflation has not had a material effect on the
Consolidated Group's operating expenses. Increases in operating
expenses have resulted principally from increased product volumes or
other business considerations including the acquisition of
additional companies and the start-up of new businesses.
Revenues from real estate sold are influenced in part by
inflation, as, historically, real estate values have fluctuated with
the rate of inflation. However, the effect of inflation in this
regard has not had a material effect on the operations of the
Consolidated Group nor is it expected to have a material effect in
the near future.
Asset/Liability Management
As most of the Consolidated Group's assets and liabilities are
financial in nature, the Consolidated Group is subject to interest
rate risk. In fiscal 1996, more of the Consolidated Group's
financial liabilities (primarily annuities and certificates) will
reprice or mature more quickly than its financial assets (primarily
Receivables and fixed income investments). In a decreasing interest
rate environment, this factor will tend to increase earnings as
liabilities will generally be repriced at lower rates of interest
while financial assets maintain their existing rates of interest.
This effect is mitigated to the extent that receivables are reduced
when debtors increase their level of early repayments to the
Consolidated Group in a decreasing rate environment.
The Consolidated Group may 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 Consolidated Group may 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 take a
trading position in an attempt to benefit from an anticipated
movement in the financial markets. The Consolidated Group had not
employed any such strategies prior to or through September 30, 1995.
Also See "BUSINESS-Securities Investments".
During fiscal 1996, approximately $15.0 million of interest
sensitive assets (cash, Receivables and fixed income investments)
are expected to reprice or mature. Interest sensitive liabilities,
including annuity reserves of approximately $49.6 million reprice
during fiscal 1996, and approximately $10.2 million of Certificates
and other debt will mature during fiscal 1996. These estimates
result in repricing of interest sensitive liabilities in excess of
interest sensitive assets of approximately $44.8 million, or a ratio
of interest sensitive liabilities to interest sensitive assets of
approximately 400%.
New Accounting Rules
In the fourth quarter of fiscal 1993, the Consolidated Group
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 the Consolidated Group's financial position. Prior to fiscal
1993, the Consolidated Group accounted for income taxes as required
by Accounting Principles Board Opinion No. 11. See Note 9 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. The Consolidated Group is required to adopt this
new standard by October 1, 1995. The Consolidated Group does not
anticipate that the adoption of SFAS No. 114 will have a material
effect on the financial statements.
Old Standard 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
stockholders' equity by $59,311, which is net of a $30,554 income
tax effect. At September 30, 1995, the Consolidated Group had net
unrealized losses on investments of $11,884. This amount is
reported as a reduction in stockholders' equity.
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
(the Consolidated Group'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
Consolidated Group's financial statements.
Liquidity and Capital Resources
As a financial institution, the Consolidated Group's liquidity
is largely linked to its ability to renew, maintain or obtain
additional sources of cash. The Consolidated Group has successfully
maintained liquidity, as necessary, during the past four years to
allow it to continue to invest funds generated by operations and
financing activities.
The Consolidated Group generated cash from operations of
approximately $4.0 million in 1995, $2.3 million in 1994, and $1.4
million in 1993. Cash utilized by the Consolidated Group in its
investing activities was approximately $13.7 million in 1995, $6.3
million in 1994, and $9.2 million in 1993. Cash provided by the
Consolidated Group's financing activities was approximately $9.1
million in 1995, $4.1 million in 1994, and $5.8 million in 1993.
These cash flows have resulted in year end cash and cash equivalent
balances of approximately $3.0 million in 1995, and $3.6 million in
both 1994 and 1993.
During 1995, the cash provided by operating activities of
approximately $4.0 million plus cash provided by financing
activities of $9.1 million was used entirely to support the net
investing activities of $13.7 million. Cash from operating
activities of $4.0 million resulted primarily from net income of
$600,000, increases in annuity reserves of $1.0 million, increases
in compound and accrued interest on Certificates of $1.7 million
plus other adjustments of $.7 million. Cash used in investing
activities of $13.7 million primarily included acquisition of real
estate receivables and other receivable investments, net of payments
and sales, of $16.1 million, offset by $1.0 million from the sale of
investment securities and the $1.4 million of cash received upon the
acquisition of various subsidiaries. Cash from financing activities
of $9.1 million resulted primarily from: (1) issuances of
Certificates, net of repayments and related debt issue costs, of
$5.3 million; (2) issuance of insurance annuities, net of
surrenders, of approximately $4.0 million; (3) issuances of
preferred stock of $.4 million; less (4) debt repayments to banks
and others of $.2 million; and (5) dividend payments from
subsidiaries of $.4 million.
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 the
Consolidated Group's former parent, of $3.6 million.
During 1993, a $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.
Management believes that cash flow from operating activities
and financing activities and the liquidity provided from current
investments will be sufficient for the Consolidated Group to conduct
its business and meet its anticipated obligations as they mature
during fiscal 1996. Summit has not defaulted on any of its
obligations since its founding in 1990.
<PAGE>
BUSINESS
INTRODUCTION
The Consolidated Group is a financial institution which
consists of Summit, and several subsidiaries including insurance
companies, a securities broker/dealer, and a property development
services company. Summit and Old Standard, are engaged in the
business of investing in Receivables and other assets through funds
provided by annuity sales, Receivable investment proceeds,
certificate sales, preferred stock sales, and the resale of
repossessed real estate. Their goal is to achieve a positive spread
between the return on their Receivables, and other investments and
their 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, a Washington corporation. On September 9, 1994,
Metropolitan and C. Paul Sandifur, Jr. completed a sale of the
common stock of Summit to National Summit Corp. National Summit
Corp. is a holding company wholly-owned by C. Paul Sandifur Jr.
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 continues to hold
effective control of Summit through National Summit Corp. There
were not and are not any plans to make any material changes in the
business, operations or administration of Summit as a result of the
sale. See "CERTAIN TRANSACTIONS".
Recent Developments-Subsidiary Acquisitions
On January 31, 1995, Summit acquired a securities
broker/dealer, MIS, from Metropolitan. Also, on January 31, 1995,
Summit Property Development, Inc. commenced operations, providing
real estate development services to Metropolitan and its
subsidiaries. See "CERTAIN TRANSACTIONS".
On May 31, 1995, Summit, through a wholly-owned holding
company, purchased Old Standard from Metropolitan. See "CERTAIN
TRANSACTIONS".
On June 1, 1995, Old Standard entered into a Stock Purchase
Agreement to acquire Arizona Life, an insurance company domiciled in
Arizona. The acquisition was completed on December 28, 1995.
Arizona Life has been inactive since approximately August 1994,
except to the extent necessary to retain its licenses. Arizona Life
holds licenses to engage in insurance sales in seven states.
Obtaining access to these additional markets is the principal
purpose for the purchase. Approval of the acquisition was obtained
from the State of Arizona Department of Insurance. As of January 1,
1996, approval is pending in the remaining six states where Arizona
Life currently holds insurance licenses. Management anticipates
obtaining approval from the remaining six states. However, there is
no assurance such approvals will be obtained. During 1996, Arizona
Life is expected to commence annuity sales, and to invest in
Receivables, similar to the activities of Old Standard. See
"CERTAIN TRANSACTIONS".
MANAGEMENT
As of September 30, 1995, Summit's personnel consisted of its
officers and directors, an accountant and an attorney. See
"MANAGEMENT". Most of those individuals are also employed by
Metropolitan. It is anticipated that the Metropolitan employees
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 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 Summit employees are expected to be
necessary or hired during the foreseeable future.
As of September 30, 1995, Old Standard had four employees who
perform the annuity processing and servicing activities. On that
same date, Summit Property Development's staff consisted of twenty-
three employees, while MIS had four staff employees, and independent
contractor agreements with twenty-one registered representatives.
Most of the officers and directors of these subsidiaries are also
employees of Metropolitan, and/or its subsidiaries. It is
anticipated that they will continue to devote substantial amounts of
time to their duties related to their respective positions with
Metropolitan and its subsidiaries, subject to the necessary
commitment of time to conduct the business of the Consolidated
Group's subsidiaries.
The Consolidated Group is currently developing and evaluating
the possible expansion into direct lending, principally residential
lending. The Consolidated Group is also evaluating the possible
securitization and sale of pools of loans, principally to be sold to
institutional investors. Neither of these activities is expected to
have a material impact on the business of the Consolidated Group in
fiscal 1996.
Metropolitan provides management, Receivable acquisition and
Receivable collection services for a fee to Summit and to Old
Standard pursuant to the terms of Management, Receivable Acquisition
and Servicing Agreements. The Receivable acquisition fees are based
upon yield requirements established by Summit and by Old Standard.
Each company 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 1995, Summit and Old Standard incurred service fees for
Receivable acquisitions from Metropolitan of approximately
$1,967,000. Management believes that the terms and conditions of
the agreements with Metropolitan are at least as favorable to Summit
and Old Standard 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 collateralized by
real estate mortgages, deeds of trust and conditional real estate
sales contracts. To a lesser extent, Summit and Old Standard also
acquire 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. Old Standard's investments in Receivables
are financed primarily by the cash flows from Receivables, the sale
of annuities, and income from securities investments.
Sources of Receivables
Summit and Old Standard acquire their Receivables through the
services of Metropolitan. See "BUSINESS-Management". Approximately
90% of these Receivables are acquired by Metropolitan 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 Metropolitan's 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 and Old Standard
have acquired Receivables from all such sources through
Metropolitan.
In order to enhance its position in the Receivables market,
Metropolitan has developed a broker software program called
BrokerNet. BrokerNet is a menu driven program which assists brokers
in preparing and completing proposals to sell Receivables to
Metropolitan. In addition, the program assists in analyzing the
quality of the Receivable, and provides online quotes for the
purchase price for the Receivable. It is planned that this software
will be further developed to assist in preparing the legal documents
needed to purchase a Receivable, assist in monitoring the closing of
a Receivable purchase, and ultimately, transfer the Receivable data
directly into Metropolitan's Receivable servicing and collection
system. All of these efforts are intended to streamline the
decision making process, make the closing time quicker, and continue
to enhance Metropolitan's position in the Receivable purchasing
industry. Although the initial response from the Receivable brokers
appears positive, there can be no assurance that this software
program will create a competitive advantage.
Metropolitan's Receivable acquisition activities (total
activities for itself and for others), grew from approximately
$156.6 million and $142.5 million in 1993 and 1994, respectively, to
$259.8 million in 1995. At the same time, Metropolitan's average
closing time has ranged from 23 days in 1995, to 24 days in 1994,
and 27 days in 1993. Management considers closing time to be an
important factor in a seller's decision to sell a Receivable to
Metropolitan.
Yield and Discount Considerations
Summit and Old Standard each establish their own yield
requirements for Receivable acquisitions. 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". Each company's yield
requirements are provided to Metropolitan, which negotiates
Receivable purchases at prices calculated to provide the desired
yield. Often this results in a purchase price less than the
Receivable's unpaid balance. The difference between the unpaid
contractual balance and the purchase price is the "discount." The
amount of the discount will vary in any given transaction depending
upon the yield requirements at the time of the purchase and the
terms and nature of the Receivable.
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 Receivables, the amortization period, which is
approximately 78 months, is based on an estimated constant
prepayment rate of 10-12 percent per year on scheduled balances,
which is consistent with Summit's and Old Standard's prior
experience with similar loans and their expectations.
YIELD CHART: REFER TO GRAPH APPENDIX ITEM 2
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 1995). During fiscal
1995, the Consolidated Group's average initial yield requirement was
10.5% to 11%, for Receivables collateralized by real estate.
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. In addition,
extensions of additional credit and/or refinancing of the Receivable
may be negotiated. 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 being considered for acquisition
(underwriting) is performed for Summit and Old Standard 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 the Consolidated Group'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 the purchaser. 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 and Old Standard
for Receivables collateralized by real estate include a requirement
that the ratio of their investment in a Receivable compared to the
appraised value of the property which collateralizes the Receivable
may not exceed 75-80% (depending upon company, collateral type and
collateral quality) on Receivables collateralized by single family
residences; and that the ratio of the investment to the property's
appraised value may not exceed 70% on Receivables collateralized by
other types of improved property; and 55% on unimproved land.
These investment to collateral ratio requirements generally provide
higher than conventional levels of collateral to protect the
purchaser's investment in the event of a default on a Receivable.
For each Receivable collateralized by real estate, a current
market value appraisal of the real estate providing collateral is
obtained. These appraisals are obtained through licensed
independent appraisers or through one of Metropolitan's licensed
staff appraisers. These appraisals are generally based on visual
drive-by inspections, and comparative sales analysis. Each
independent appraisal is also subject to review by a staff
appraiser.
Additionally, every proposed investment in a Receivable
collateralized by real estate is evaluated by Metropolitan's
demography department utilizing computerized data which identifies
local trends in property values, personal income, population and
economic indicators. Other underwriting functions related to
Receivables collateralized 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 and Old Standard also acquire Receivables, through
Metropolitan, which are not collateralized 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 generally
require that Metropolitan review the settlement agreement. In the
case of all annuity purchases, underwriting guidelines generally
require that Metropolitan review the annuity policy, related
documents, the credit rating of the payor (frequently an insurance
company), determine the existence of any state insurance fund
designed to protect annuity holders, and review other factors
relevant to the risk of purchasing a particular annuity as deemed
appropriate by management 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 receipt of
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, a certified copy of the court order is
required.
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. Receivable purchases
which involve investments greater than specified amounts are
submitted to an additional special risk evaluation committee, and
are subject to legal department review. The investment amount which
gives rise to special risk evaluation is dependent upon the type and
quality of collateral, ranging from $250,000 for conventionally
financiable residential property to $100,000 for residential
property which is not owner occupied. In addition, transactions
involving investments of more than $500,000 are subject to Board of
Director's approval.
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 and Old Standard's acquisition of Receivables
collateralized 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
The Consolidated Group's investments in Receivables includes
Receivables collateralized by first or second liens, primarily on
single family residential property. Management believes that these
Receivables present lower credit risks than a portfolio of mortgages
collateralized by commercial property or unimproved 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 consolidated information about the
Consolidated Group's investments in Receivables collateralized by
real estate, as of September 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Face value of discounted
Receivables $51,768,999 $21,931,395
Face value of originated
and non-discounted
Receivables 10,560,249 6,473,183
Unrealized discounts,
net of unamortized
acquisition costs (2,614,937) (1,337,365)
Allowance for losses (765,130) (250,572)
Accrued interest
receivable 1,168,038 466,350
----------- -----------
Carrying value $60,117,219 $27,282,991
=========== ===========
</TABLE>
As of September 30, 1995, approximately 82% of the Consolidated
Group's investments in Receivables are collateralized by first lien
positions on real estate and 18% in second lien positions. The
Receivables are collateralized by residential, business and
commercial properties with residential collateral representing
approximately 83% of such investments as of September 30, 1995. The
Receivables are primarily generated by private individuals or
businesses and are therefore not government insured loans.
The Consolidated Group's Receivable investments in real estate
loans at September 30, 1995 were collateralized by properties
located throughout the United States with not more than 3% (by
dollar amount) in any single state except as follows:
Arizona . . . . . . 9%
California . . . . 11%
Oregon . . . . . . 7%
Texas . . . . . . . 13%
Washington . . . . 12%
Florida . . . . . . 5%
Georgia . . . . . . 3%
New Mexico. . . . . 5%
<PAGE>
SUMMIT SECURITIES, INC.
and subsidiaries
RECEIVABLES COLLATERALIZED BY REAL ESTATE
September 30, 1995
<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 segregates the Consolidated Group's Receivable portfolio by type, size and
lien position.
Number Carrying Delinquent Number of
of Interest Amount of Principal Delinquent
Description Receivables Rates Receivables Amount Receivables
---------- -------- -------- ----------- ----------
RESIDENTIAL Principally
<S> <C> <C> <C> <C> <C> <C>
First Mortgage > $75,000 103 7%-12% $10,750,067 $602,699 5
First Mortgage > $40,000 268 7%-12% 14,265,052 797,198 14
First Mortgage < $40,000 924 7%-12% 18,514,619 750,304 46
Second or Lower> $75,000 13 9%-12% 1,358,974 -- --
Second or Lower> $40,000 38 8%-12% 2,022,634 226,881 4
Second or Lower< $40,000 236 8%-11% 5,074,103 49,146 3
COMMERCIAL
First Mortgage > $75,000 24 9%-11% 2,757,580 -- --
First Mortgage > $40,000 17 8%-11% 975,626 -- --
First Mortgage < $40,000 35 8%-11% 739,072 16,855 2
Second or Lower> $75,000 8 9%-11% 1,087,947 -- --
Second or Lower> $40,000 9 9%-11% 537,240 -- --
Second or Lower< $40,000 15 9%-11% 383,437 -- --
FARM, LAND AND OTHER
First Mortgage > $75,000 7 10%-12% 1,395,643 -- --
First Mortgage > $40,000 13 8%-11% 648,812 -- --
First Mortgage < $40,000 65 9%-11% 1,111,652 14,526 1
Second or Lower> $75,000 1 0% 217,391 217,391 1
Second or Lower> $40,000 4 5%-12% 223,881 -- --
Second or Lower< $40,000 14 8%-10 265,518 -- --
Unrealized discounts, net
of unamortized acquisition
costs, on Receivables
purchased at a discount (2,614,937)
Accrued Interest Receivable 1,168,038
Allowance for Losses (765,130)
___________ ___________
TOTAL $ 60,117,219 $ 2,675,000
============ ===========
<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 1995 - September 1998 $ 6,935,045 $ 1,524,281 $ 1,494,409 $ 9,953,735
October 1998 - September 2000 5,091,289 1,210,602 434,447 6,736,338
October 2000 - September 2002 3,895,987 680,842 270,919 4,847,748
October 2002 - September 2005 6,444,955 731,814 440,803 7,617,572
October 2005 - September 2010 10,504,342 1,490,854 939,390 12,934,586
October 2010 - September 2015 6,142,677 192,069 123,111 6,457,857
October 2015 - Thereafter 12,971,154 650,440 159,818 13,781,412
---------- ---------- ---------- ----------
$51,985,449 $6,480,902 $3,862,897 $62,329,248
=========== ========== ========== ==========
</TABLE>
The Consolidated Group held 1,794 Receivables collateralized by
real estate, as of September 30, 1995. The average stated interest
rate (weighted by principal balances) on these Receivables on that
date was approximately 9.3%. See Note 2 to Consolidated Financial
Statements.
Delinquency Experience & Collection Procedures
The principal amount of Receivables collateralized by real
estate, held by the Consolidated Group (as a percentage of the total
outstanding principal amount of such Receivables) which was in arrears
for more than ninety days at September 30, 1995 was 4.3% compared to
3.8% and 8.0% at September 30, 1994 and 1993, respectively. The
increase in 1995 is attributable to the increased investment in this
type of Receivable particularly in conjunction with the acquisition of
Old Standard. The decrease in 1994 is attributable to the sale of the
timeshare receivables to Metropolitan and improved collection efforts.
Because Receivables purchased by the Consolidated Group are typically
not of the same quality as mortgages that are originated for sale to
agencies such as the Federal National Mortgage Association (Fannie
Mae), higher delinquency rates are expected. However, because these
Receivables are purchased at a discount, the aggregate loss to the
Consolidated Group on sales after repossession are generally lower
than might otherwise be expected given these higher delinquency rates.
Metropolitan provides Receivable collection services for Summit
and Old Standard, pursuant to the following guidelines. When a
Receivable becomes delinquent, the payor is initially contacted by
letter approximately seven days after the delinquency date. If the
delinquency is not cured, the payor is contacted by telephone
(generally on or about the 17th day following the payment due date).
If the default is still not cured (generally within three to six days
after the initial call), then additional collection activity,
including further 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 collateral for the
Receivable. Collection activity may also involve the initiation of
legal proceedings against the Receivable payor. 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
The Consolidated Group 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, an appraisal policy was adopted which requires annual appraisals
on properties collateralizing delinquent receivables when the
Receivable balance exceeds a threshold equal to .5% of total assets of
the respective company. Biannual appraisals are required on all other
delinquent Receivables with balances in excess of $50,000. The
allowance for losses was 1.2%, 0.9%, and 0.5% of the face value of
Receivables collateralized by real estate at September 30, 1995, 1994,
and 1993, respectively.
Repossessed Properties
Summit and Old Standard own various repossessed properties held
for sale. At September 30, 1995, 16 properties, acquired in
satisfaction of debt, with a combined carrying amount of approximately
$836,000 were held.
ANNUITY OPERATIONS
Introduction
The Consolidated Group raises significant funds through its
insurance company, Old Standard. Old Standard was incorporated in
Idaho in 1990, and acquired by the Consolidated Group on May 31, 1995.
Old Standard had total assets of approximately $54.1 million at
September 30, 1995.
Old Standard markets its annuity products through approximately
100 independent sales representatives under contract. These
representatives may also sell insurance products for other companies.
Old Standard is licensed as an insurer in Idaho, and has applied for
licenses in Hawaii, Montana, North Dakota, Oregon and Utah.
Additionally, the Company has pending applications for the states of
Texas and Arizona. During calendar 1994, the most recent year for
which statistical information is available, Old Standard's annuity
market share was 4.17%, and it was ranked 7th as a producer of
annuities in Idaho.
Management intends to expand the insurance operations into other
states as opportunities arise, which may include the acquisition of
other insurance companies.
There is no specific regulatory limitation imposed by Idaho on
the percent of assets which Old Standard may invest in Receivables
collateralized by real estate. As of September 30, 1995, 55.1% of Old
Standard's assets were invested in Receivables collateralized by real
estate, 21.1% in lotteries, and 0.5% in annuities (issued by unrelated
insurance companies). As of September 30, 1995, the balance of Old
Standard's investments were invested in principally investment grade
corporate and government securities, but may be invested into a
variety of other areas as permitted by applicable insurance
regulations. See "BUSINESS-REGULATION".
Annuities
During the last three years, Old Standard has derived 100% of its
premiums from annuity sales. Management believes that annuity
balances have continued to grow due to market acceptance of the
products (due largely to a competitive rate and a reputation for
superior service), and changes in tax laws that removed the
attractiveness of competing tax-advantaged products.
Old Standard's annuities also qualify for use as either
Individual Retirement Annuities, Simplified Employee Pensions,
Qualified Corporate Pension Plans or Tax-Sheltered Annuities for
teachers and certain other nonprofit organizations' retirement plans.
Under these qualified plans, the interest is tax deferred and the
principal contributions, within the limits specifically established by
the Internal Revenue Code, are tax deductible during the accumulation
period. These annuities are subject to income tax only upon actual
receipt of proceeds, usually at retirement when an individual's tax
rate is anticipated to be lower.
During 1996, the Consolidated Group anticipates matching premium
flow substantially with the availability of Receivable investments, in
order to maximize the earnings from the interest spread.
Additionally, the premium flow and resulting asset growth will be
influenced by the ability of Summit to make additional capital
contributions to Old Standard.
Flexible and single premium annuities are offered with short,
intermediate and traditional surrender fee periods. At September 30,
1995, deferred policy acquisition costs were approximately 5.6% of
annuity reserves. Since surrender charges typically do not exceed 5%,
increasing termination rates may have an adverse impact on the
insurance subsidiary's earnings, requiring faster amortization of
these costs. Management believes that this potentially adverse impact
is mitigated by higher annuity interest spreads, which are estimated
to be approximately 250 basis points in future years. During the four
months ended September 30, 1995, amortization of deferred policy
acquisition costs was $198,000. The calculation has been reviewed by
an independent actuary.
Annuity lapse rates are calculated by dividing cash outflows
related to benefits and payments by average annuity reserves. For the
four months ended September 30, 1995 (the period since Old Standard's
acquisition by Summit), withdrawals and benefits were approximately
$1.9 million. Based upon results for the four months ended September
30, 1995, the annualized lapse rate was approximately 12%. Management
believes a reasonable estimate for future lapse rates to be 10%
(including 4% for death and partial withdrawal and 6% for basic
surrenders and surrenders occurring in the year the surrender charge
expires).
Reserves
State law requires that the reserve be sufficient to meet Old
Standard's future obligations under annuity contracts currently in
force. Reserves are recalculated each year to reflect amounts of
insurance in force, issue ages of new contract holders, duration of
contracts and variations in contract terms. Since such reserves are
based on certain actuarial assumptions, no representation is made that
the ultimate liability will not exceed these reserves. Old Standard
utilizes the services of a consulting actuary to review the reserve
amount for compliance with applicable statutes.
The actuarially determined reserve is reported in statutory
financial statements as required by state insurance regulatory
authorities. Accounting principles used to prepare these statutory
financial statements differ from generally accepted accounting
principles (GAAP). Annuity reserves amounted to approximately $49.6
million at September 30, 1995 based on GAAP financial reporting.
Securities Investments
At September 30, 1995, 100% of the Consolidated Group's
securities investments were held by Old Standard. The following table
outlines the nature and carrying value of securities investments held
by Old Standard at September 30, 1995:
<TABLE>
<CAPTION>
Available Held To Total Percent
For Sale Maturity
Portfolio Portfolio
---------- ---------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total Amount $ - $ 8,270 $ 8,270 100.0%
======= ======== ======== ======
Invested In:
Fixed Income/Taxable $ - $ 8,270 $ 8,270 100.0%
======= ======== ======== ======
Taxable:
Government Agency $ - $ 5,230 $ 5,230 63.2%
Corporate - 3,040 3,040 36.8%
------- -------- -------- ------
$ - $ 8,270 $ 8,270 100.0%
======= ======== ======== =====
Corporate Bonds:
AAA $ - $ 1,032 $ 1,032 33.9%
AA - 1,003 1,003 33.0%
A - 1,005 1,005 33.1%
------- -------- -------- ------
$ - $ 3,040 $ 3,040 100.0%
======= ======== ======== ======
Corporate:
Finance $ - $ 2,008 $ 2,008 66.1%
Industrial - 1,032 1,032 33.9%
------- -------- -------- ------
$ - $ 3,040 $ 3,040 100.0%
======= ======== ======== ======
</TABLE>
Investments of the insurance subsidiary are subject to the
direction and control of an investment committee appointed by the
Board of Directors of each insurance subsidiary. All such investments
must comply with applicable state insurance laws and regulations. See
"BUSINESS-REGULATION". Investments currently include corporate,
government agency, and direct government obligations.
Old Standard is authorized to use financial futures instruments
for the purpose of hedging interest rate risk relative to the
securities portfolio or potential trading situations. In both cases,
the futures transaction is intended to reduce the risk associated with
price movements for a balance sheet asset. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS-Asset/Liability Management".
In the held to maturity portfolio, gross unrealized losses were
$198,000 at September 30, 1995.
METHOD OF FINANCING
The Consolidated Group's continued growth is expected to depend
on its ability to market its securities and annuities 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 annuities,
Certificates and Preferred Stock. Such funds may be supplemented by
short-term bank financing and borrowing from affiliates. Old Standard
has established secured lines of credit through several lending
institutions, principally consisting of Brokerage Firms. As of
September 30, 1995, there were no borrowings outstanding.
The availability of Receivables offered for investment in the
national market is believed by management to be adequate to meet the
needs of the Consolidated Group.
COMPETITION
Summit's and Old Standard'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 Financial Services Company, Inc.,
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 and Old Standard 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. To
the extent other competing Receivable investors may develop faster
closing times or more flexible investment policies, they may
experience a competitive advantage.
Summit's and MIS's securities products face competition for
investors from other securities issuers many of which are much larger,
and from other types of financial institutions.
The life insurance and annuity business is highly competitive.
Premium rates, annuity yields and commissions to agents are
particularly sensitive to competitive forces. Old Standard's
management believes that it is in an advantageous position in this
regard because of its earning capability through investments in
Receivables compared to that of most other life insurance companies.
Old Standard has also been assigned an A.M. Best Co. (Best) rating of
"B (good)". Best bases its rating on a number of complex financial
ratios, the length of time a company has been in business, the nature
and quality of investments in its portfolio, depth and experience of
management and various other factors. Best's ratings are supplied
primarily for the benefit of policyholders and insurance agents.
BROKER DEALER ACTIVITIES
Metropolitan Investment Securities, Inc. (MIS) is a securities
broker/dealer, and member of the National Association of Securities
Dealers. It markets the securities products of Summit and of
Metropolitan, Summit's former parent company. In addition, MIS
currently markets several families of mutual funds, and it anticipates
adding additional products offered by unrelated entities such as
variable annuities. MIS's sales efforts are currently focused in the
states of Washington, Oregon, Idaho and Montana. It is licensed in
several other Western states and plans to expand its sales and
marketing efforts into additional states in the near future. After
the elimination of transactions conducted among the Consolidated
Group, MIS contributed an immaterial operating loss to the
Consolidated Group during the fiscal year ended September 30, 1995 on
revenues of approximately $1.2 million, after intercompany
eliminations. See Note 11 to Consolidated Financial Statement.
PROPERTY DEVELOPMENT SERVICES
Summit Property Development, Inc. provides real estate
development services for a fee. Currently its principal client is
Metropolitan. Such services may include, but are not limited to the
following: sales, marketing, market analysis, architectural services,
design services, subdividing properties, and coordination with
regulatory groups to obtain the approvals which are necessary to
develop a particular property. Summit Property Development does not
own any real estate itself. Summit Property Development, Inc.
produced operating income for the Consolidated Group during the fiscal
year ended September 30, 1995 of approximately $118,000 on revenues of
approximately $1,250,000. See Note 11 to Consolidated Financial
Statement.
REGULATION
Old Standard and Summit are subject to the Insurance Holding
Company Act as administered by the Office of the State Insurance
Commissioner of the State of Idaho. The act regulates transactions
between insurance companies and their affiliates. It requires that
Summit provide prior notification to the Idaho Insurance Commissioner
of certain transactions between the insurance company and affiliates.
In certain instances, the Idaho Insurance Commissioner's approval is
required.
The purchase of Arizona Life required approval from the Office
of the State Insurance Commissioner of the State of Arizona, and each
state in which Arizona Life is authorized to do business. Approval
from the State of Arizona was obtained December 28, 1995. As of that
date, formal approval from the other states wherein Arizona Life is
licensed was pending. Arizona Life and Old Standard are subject to the
Insurance Holding Company Act as administered in Arizona. The Act
regulates transactions between insurance companies and their
affiliates. It requires that Old Standard provide notification to the
Insurance Commissioner of certain transactions between the insurance
company and affiliates. In certain instances, the Commissioner's
approval is required before a transaction with an affiliate can be
consummated.
Old Standard and Arizona Life are subject to extensive regulation
and supervision by the Office of the State Insurance Commissioner of
their states of domicile, which are Idaho and Arizona, respectively.
To a lesser extent they are also subject to regulation by each of the
other states in which they operate. These regulations are directed
toward supervision of such things as granting and revoking licenses to
transact business on both the insurance company and agency levels,
approving policy forms, prescribing the nature and amount of permitted
investments, establishing solvency standards and conducting extensive
periodic examinations of insurance company records. Such regulation
is intended to protect annuity contract and policy owners, rather than
investors in an insurance company. Old Standard and Arizona Life are
required to file detailed annual and quarterly reports with their
respective states of domicile.
All states in which the insurance subsidiaries operate have laws
requiring solvent life insurance companies to pay assessments to
protect the interests of policyholders of insolvent life insurance
companies. Assessments are levied on all member insurers in each
state based on a proportionate share of premiums written by member
insurers in the lines of business in which the insolvent insurer
engaged. A portion of these assessments can be offset against the
payment of future premium taxes. However, future changes in state
laws could decrease the amount available for offset. The economy and
other factors have caused failures of substantially larger companies
which could result in substantially increased future assessments.
The net amounts expensed by Old Standard for guaranty fund
assessments and charged to operations for the four month period ended
September 30, 1995 was $25,000. This estimate was based on updated
information provided by the National Organization of Life and Health
Insurance Guaranty Associations regarding insolvencies occurring
during 1990 through 1992. Management does not believe that the amount
of future assessments associated with known insolvencies after 1992
will be material to its financial condition or results of operations.
These estimates are subject to future revisions based upon the
ultimate resolution of the insolvencies and resultant losses.
Management cannot reasonably estimate the additional effects, if any,
upon its future assessments pending the resolution of the above
described insolvencies. The amount of guaranty fund assessment has
been recorded net of a 7% discount rate applied to the estimated
payment term of approximately seven years.
Old Standard is subject to regulatory restrictions on its ability
to pay dividends. Such restrictions affect Summit's ability to
receive dividends from Old Standard. The unrestricted statutory
surplus of Old Standard totaled approximately $249,000 as of September
30, 1995.
For statutory purposes, Old Standard's capital and surplus and
its ratio of capital and surplus to admitted assets were as follows as
of the dates indicated:
<TABLE>
<CAPTION>
As of As of December 31,
September 30, 1995 1994 1993 1992
------------------ ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Capital and Surplus $2,249 $2,431 $2,069 $2,078
Ratio of Capital and
Surplus to Admitted
Assets 4.2% 5.4% 5.0% 6.5%
</TABLE>
Although the State of Idaho requires only $2.0 million in capital
and surplus to conduct insurance business, Old Standard has attempted
to maintain a capital and surplus ratio of at least 5% of total
admitted assets which management considers adequate for regulatory and
rating purposes.
Idaho has enacted the Risk Based Capital Model law which requires
an insurance company to maintain minimum amounts of capital and
surplus based on complex calculations of risk factors that encompass
the invested assets and business activities. The insurance
subsidiary's capital and surplus levels exceed the calculated minimum
requirements.
MIS is subject to extensive regulation and supervision by the
National Association of Securities Dealers and the Securities and
Exchange Commission. These regulations include licensing
requirements, record keeping requirements, net capital requirements,
supervision requirements and sales practice standards.
<PAGE>
MANAGEMENT
Directors and Executive Officers
(As of December 31, 1995)
Name Age Position
Tom Turner 45 President/Director
Philip Sandifur 24 Vice President/Director
Greg Gordon 42 Secretary/Treasurer/Director
Ernest Jurdana 51 Principal Accounting Officer
Robert Potter 68 Director
Tom Turner was elected President on October 31, 1995. Prior to
serving as President, he had served as Secretary/Treasurer since
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.
Philip Sandifur is the son of C. Paul Sandifur Jr., who is the
sole shareholder of National Summit Corp., the parent company of
Summit and also the controlling shareholder of Metropolitan. 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. Philip Sandifur is principally active as the
President of Summit Trade Services Inc., a wholly-owned subsidiary of
Summit's parent company, National Summit Corp.
Greg Gordon was elected Secretary/Treasurer on October 31, 1995.
He joined Metropolitan in April of 1989 and started the company's
demography department. From 1985 to 1989, he was employed as the
Northeastern US division, Market Analyst for Mortgage Guarantee
Insurance Corporation. From 1984 to 1985, he was employed as a
limited partnership underwriter with Reliance Insurance Company.
Ernest Jurdana joined Metropolitan as its Principal Accounting
Officer in June of 1994. Since that date, he has also been the
Principal Accounting 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.
Robert Potter was elected a Director of Summit on March 14, 1995.
He is an outside director, not active in the day-to-day business of
Metropolitan or Summit. From 1987 to present, Mr. Potter has served
as President of Jobs Plus, Inc., a non-profit corporation formed to
diversify and broaden the economic base of Kootenai County Idaho.
Prior to 1987, Mr. Potter was employed for approximately 6 months as
Chief Operating Officer of Incomnet Inc., and prior to that he worked
for approximately 30 years with AT&T.
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 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 (the "Act")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 common
stock as of September 30, 1995.
<TABLE>
<CAPTION>
SHARES OF
NAME AND ADDRESS COMMON STOCK % OF CLASS
<S> <C> <C>
National Summit Corp. 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 has continued to provide, for a fee, principally
all the management 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 continues to control
Summit through National Summit Corp.
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 current officers and
all but one of the directors are employees of Metropolitan. No
officer or director of Summit is an officer or director of
Metropolitan.
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 January 31, 1995, Summit acquired MIS from Metropolitan. The
purchase price was $288,950 paid in cash. MIS is a limited-purpose
broker/dealer and the exclusive broker/dealer for the securities sold
by Metropolitan and Summit. This sale has not materially affected the
business of MIS. Also see "CERTAIN INVESTMENT CONSIDERATIONS-RISK
FACTORS" & "BUSINESS-BROKER DEALER ACTIVITIES". Also on January 31,
1995, Metropolitan discontinued its property development division,
which consisted of a group of employees experienced in real estate
development. On the same date, Summit commenced the operation of a
property development subsidiary, Summit Property Development Inc.,
employing those same individuals who had previously been employed by
Metropolitan. Summit Property Development has entered into an
agreement with Metropolitan to provide property development services
to Metropolitan. Also see "CERTAIN INVESTMENT CONSIDERATIONS-RISK
FACTORS" & "BUSINESS-ANNUITY OPERATIONS".
Through a wholly-owned subsidiary, Summit Group Holding Company,
Summit acquired Old Standard on May 31, 1995 from Metropolitan. The
purchase price was $2.722 million, plus 20% of Old Standard's
statutory earnings for the subsequent three years. The purchase price
was established based upon an actuarial valuation of Old Standard.
Summit and Old Standard obtain substantially all of their
Receivable management and servicing support from Metropolitan through
a Management, Receivable Acquisition and Servicing Agreement. It is
anticipated that Arizona Life will execute a similar Agreement during
the first quarter of calendar 1996. Also see "BUSINESS-RECEIVABLE
INVESTMENTS" & "CERTAIN INVESTMENT CONSIDERATIONS-RISK FACTORS" & Note
11 to Consolidated Financial Statements. Management believes that
such Agreements are on terms at least as favorable as could be
obtained from non-affiliated parties.
In addition, transactions between Metropolitan and companies
within the Consolidated Group take place in the normal course of
business. Such transactions include rental of office space, provision
of administrative and data processing support, accounting and legal
services. See Note 11 to Financial Statements.
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 up to a maximum of 6% of the investment
amount in each transaction. During the fiscal year ended September
30, 1995, Summit paid or accrued commissions to MIS in the amount of
$297,106 upon the sale of $8,585,470 of certificates and commissions
of $19,557 upon the sale of $390,280 of preferred stock. MIS also
maintains, on behalf of Summit, certain investor files and information
pertaining to investments in Summit's Certificates.
Summit Property Development has entered into an Agreement with
Metropolitan to provide property development services to Metropolitan
for a fee. See "BUSINESS-PROPERTY DEVELOPMENT SERVICES".
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
Summit Securities, Inc. and Subsidiary:
Historical:
Report of Independent Accountants...................
Consolidated Balance Sheets.........................
Consolidated Statements of Income...................
Consolidated Statements of Stockholders' Equity.....
Consolidated Statements of Cash Flows...............
Notes to Consolidated Financial Statements..........
Proforma Unaudited Financial Statements:
Condensed Consolidated Balance Sheet................
Condensed Consolidated Statements of Income.........
Notes to Condensed Consolidated Balance Sheet
and Statements of Income............................
Old Standard Life Insurance Company Historical
Financial Statements:
Report of Independent Accountants...................
Balance Sheets......................................
Statements of Income................................
Statements of Stockholder's Equity..................
Statements of Cash Flows............................
Notes to Financial Statements.......................
SUMMIT SECURITIES INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated 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 subsidiaries as of September 30, 1995 and
1994, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
September 30, 1995. 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 subsidiaries as of
September 30, 1995 and 1994 and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended September 30, 1995 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 fiscal 1993.
Spokane, Washington
November 20, 1995
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1995 and 1994
1995 1994
----------- -----------
ASSETS
Cash and cash equivalents $ 2,979,362 $ 3,608,764
Investments:
Investments in affiliated company
(Note 4) 3,022,425 3,022,425
Held-to-maturity securities, at
amortized cost (Note 5) 8,269,541
Accrued interest on investments 46,209
----------- -----------
Total cash and investments 14,317,537 6,631,189
Real estate contracts and mortgage
notes receivable, net
(Notes 2, 6 and 11) 60,117,219 27,282,991
Other receivable investments (Notes 3
and 11) 16,895,902
Real estate held for sale (Note 6) 836,291 452,700
Deferred costs (Note 8) 3,582,202 705,994
Other assets, net 597,421 29,114
----------- -----------
Total assets $96,346,572 $35,101,988
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Annuity reserves (Note 12) $49,559,589
Investment certificates and accrued
interest (Note 7) 38,545,896 $31,092,830
Debt payable (Note 6) 104,636 119,888
Accounts payable and accrued expenses
(Note 11) 2,938,182 416,262
Deferred income taxes (Note 9) 1,291,202 151,778
----------- -----------
Total liabilities 92,439,505 31,780,758
----------- -----------
Commitments and contingencies (Notes 1,
10 and 12)
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30, 1995 and 1994
1995 1994
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY,
CONTINUED
Stockholders' equity (Note 10):
Preferred stock, $10 par (liquidation
preference $3,562,220 and $3,171,940) 356,222 317,194
Common stock, $10 par 100,000 100,000
Additional paid-in capital 1,786,991 1,454,063
Retained earnings 1,675,738 1,449,973
Net unrealized loss on investments, net
of income taxes of $6,122 (11,884)
----------- -----------
Total stockholders' equity 3,907,067 3,321,230
----------- -----------
Total liabilities and
stockholders' equity $96,346,572 $35,101,988
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30, 1995, 1994 and 1993
1995 1994 1993
---------- ---------- ----------
Revenues:
Annuity fees and charges $ 14,179
Interest on receivables 3,901,113 $2,422,484 $1,938,206
Earned discount on receivables 777,659 373,003 428,482
Other investment interest 410,568 275,180 120,998
Dividends (Note 11) 256,991
Real estate sales 1,123,500 88,000 280,500
Fees, commissions, service
and other income (Note 11) 2,580,105 60,677 42,714
Realized net gains on sales
of investments 4,252 4,724
Realized net gains on sales
of real estate contracts and
mortgage notes and other
receivable investments 512,500 171,756
---------- ---------- ----------
Total revenues 9,576,615 3,395,352 2,815,624
---------- ---------- ----------
Expenses:
Annuity benefits 1,034,082
Interest expense 3,251,334 2,527,945 1,792,059
Cost of real estate sold 1,117,233 75,656 298,900
Provision for losses on
real estate assets 445,381 155,042 51,012
Salaries and employee benefits 907,690
Commissions to agents 1,395,994
Other operating and under-
writing expenses (Note 11) 738,380 231,423 244,595
Less amount capitalized as
deferred costs, net of
amortization (Note 8) (140,745)
---------- ---------- ----------
Total expenses 8,749,349 2,990,066 2,386,566
---------- ---------- ----------
Income before income taxes 827,266 405,286 429,058
Income tax provision (Note 9) (239,707) (140,407) (145,951)
---------- ---------- ----------
Net income 587,559 264,879 283,107
Preferred stock dividends (309,061) (2,930)
---------- ---------- ----------
Income applicable to common
stockholders $ 278,498 $ 261,949 $ 283,107
========== ========== ==========
Net income per common share $ 27.85 $ 13.47 $ 14.15
========== ========== ==========
Weighted average number of
shares of common stock
outstanding 10,000 19,445 20,000
========== ========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Net
Unrealized
Gains
Additional (Losses)
Preferred Common Paid-In on Invest- Retained
Stock Stock Capital ments Earnings Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 pre-
ferred stock, net of offer-
ing 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
Net income 587,559 587,559
Cash dividends on preferred
stock (variable rate) (309,061) (309,061)
Sale of variable rate preferred
stock, net of offering costs
(3,903 shares) 39,028 332,928 371,956
Net change in unrealized gains
(losses) on investment
securities, net of income
taxes of $6,122 $ (11,884) (11,884)
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
For the Years Ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Net
Unrealized
Gains
Additional (Losses)
Preferred Common Paid-In on Invest- Retained
Stock Stock Capital ments Earnings Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Excess cost over book value of
subsidiaries purchased from
related parties (Note 1) (52,733) (52,733)
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1995 $ 356,222 $ 100,000 $1,786,991 $ (11,884) $1,675,738 $3,907,067
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION> 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $ 587,559 $ 264,879 $ 283,107
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 real estate contracts and
mortgage notes and other receivable
investments (512,500) (171,756)
(Gain) loss on sale of real estate (6,267) (12,344) 18,400
Provision for losses on real estate assets 445,381 155,042 51,012
Amortization of deferred costs 519,280 262,484 151,763
Deferred income tax provision 164,249 136,500 145,951
Changes in:
Annuity reserves 1,031,720
Compound and accrued interest on investment
certificates and debt payable 1,714,943 1,229,371 955,322
Accrued interest receivable (306,978) 107,423 (175,460)
Other 365,111 312,110 7,383
----------- ----------- -----------
Net cash provided by operating activities 4,002,498 2,283,750 1,437,129
----------- ----------- -----------
Investing activities:
Purchase of subsidiaries, net of cash received 1,406,873
Advances to parent and affiliated companies (1,710,743)
Collection of advances to parent and affiliated
companies 1,710,743 471,383
Proceeds from sales of available-for-sale
investments 992,370
Principal payments on real estate contracts and
mortgage notes receivable 6,567,102 1,829,515 4,039,074
Principal payments on other receivable investments 393,942
Purchases of real estate contracts and mortgage
notes receivable (26,130,804) (20,177,705) (15,667,120)
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED CASH FLOWS, Continued
For the Years Ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION> 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Investing activities, continued:
Purchases of other receivable investments (18,316,371)
Proceeds from real estate sales 163,687 6,200 75,008
Additions to real estate held for sale (141,336) (82,135) (24,155)
Proceeds from sale of real estate contracts and
mortgage notes and other receivable investments 21,350,848 10,393,131 4,044,423
----------- ----------- -----------
Net cash used in investing activities (13,713,689) (6,320,251) (9,243,513)
----------- ----------- -----------
Financing activities:
Repayment of amounts due to parent company (400,365)
Receipts from annuity products 5,903,808
Withdrawals of annuity products (1,934,898)
Proceeds from investment certificates 8,585,470 10,539,684 9,677,843
Repayments of investment certificates (2,847,347) (2,635,649) (2,300,088)
Repayments to banks and others (193,631) (48,170) (890,247)
Debt issuance costs (441,775) (444,102) (333,489)
Excess cost over book value of subsidiaries
purchased from related parties (52,733)
Issuance of preferred stock 371,956 141,960
Issuance of common stock 100,000
Redemption and retirement of common stock (3,600,000)
Dividends paid on preferred stock (309,061) (2,930)
----------- ----------- -----------
Net cash provided by financing activities 9,081,789 4,050,793 5,753,654
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (629,402) 14,292 (2,052,730)
Cash and cash equivalents, beginning of year 3,608,764 3,594,472 5,647,202
----------- ----------- -----------
Cash and cash equivalents, end of year $ 2,979,362 $ 3,608,764 $ 3,594,472
=========== =========== ===========
</TABLE>
See Note 14 for supplemental cash flow information.
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
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 4).
On January 31, 1995, the Company consummated an agreement with
Metropolitan, whereby it acquired Metropolitan Investment
Securities, Inc. (MIS) effective January 31, 1995 at a purchase
price of $288,950, which approximated the book value of MIS at
date of purchase. This acquisition was recorded under the
purchase method of accounting. Due to the common control of
Metropolitan and Summit, the historical cost bases of the assets
and liabilities of MIS were recorded by the Company.
On May 31, 1995, the Company consummated an agreement with
Metropolitan, whereby it acquired Old Standard Life Insurance
Company (OSL) effective May 31, 1995, at a purchase price of
$2,722,000, which approximated the book value of OSL at date of
purchase, with future contingency payments equal to 20% of
statutory income prior to the accrual of income tax for the
fiscal years ending December 31, 1995, 1996 and 1997. The
purchase price plus estimated future contingency payments
approximate the actuarial appraised valuation of OSL. The
acquisition was recorded under the purchase method of
accounting. Due to the common control of Metropolitan and
Summit, the historical cost bases of assets and liabilities of
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
BUSINESS AND REORGANIZATION, CONTINUED
OSL were recorded by the Company. Total purchase price of MIS
and OSL exceeded the fair value of the net assets of the
companies by approximately $53,000. Due to the common control
of Metropolitan and Summit, this excess purchase price has been
recorded as a dividend through a reduction of retained earnings.
Pro forma summary financial information of the Company, assuming
the acquisitions of MIS and OSL occurred as of October 1, 1992,
are as follows:
Years Ended September 30,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
Revenues $13,704,000 $ 9,930,000 $ 8,602,000
Net income 1,184,000 874,000 550,000
Net income per common
share 87.50 44.80 27.50
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 subsidi-
aries, Old Standard Life Insurance Company (since May 31, 1995),
Metropolitan Investment Securities, Inc. (since January 31,
1995) and 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 and other receivable investments, with funds
generated from the public issuance of debt securities in the
form of investment certificates, annuity products, cash flow
from receivable payments and sales of real estate.
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
depository financial institutions. Substantially all cash and
cash equivalents are on deposit with one financial institution
and balances periodically exceed the FDIC insurance limit.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
INVESTMENTS IN AFFILIATED COMPANIES
Investments in equity securities of Metropolitan are carried at
cost, which approximates market.
INVESTMENTS
The Company has classified its investments in debt and equity
securities, other than those of affiliated companies, as
"available-for-sale," "held-to-maturity" or "trading." The
accounting policies related to these investments are as follows:
AVAILABLE-FOR-SALE SECURITIES: Available-for-sale securities,
consisting primarily of government-backed securities, public
utility 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
consolidated statements of income in the period the securities
are sold. Unrealized gains and losses are presented as a
separate component of stockholders' equity, net of related
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.
TRADING SECURITIES: Trading securities, consisting primarily
of government-backed securities and corporate bonds, are
bought and held principally for the purpose of selling them in
the near term and are recorded at market value. Realized and
unrealized gains and losses are included in the consolidated
statements of income.
NET REALIZABLE VALUE: For other than a temporary decline in
the value of a common stock, preferred stock or publicly
traded bonds below their cost or amortized cost, the
investment is reduced to its net realizable value, which
becomes the new cost basis of the investment. The amount of
the reduction is reported as a loss. Any recovery of market
value in excess of the investment's new cost basis is
recognized as a realized gain only upon sale, maturity or
other disposition of the investment. Factors which the
Company evaluates in determining the existence of an other
than temporary decline in value include the length of time and
extent to which market value has been less than cost; the
financial condition and near-term prospects of the issuers;
and the intent and ability of the Company to retain its
investment for the anticipated period of recovery in market
value.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
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 consolidated financial statements.
OTHER RECEIVABLE INVESTMENTS
Other receivables 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 on an individual receivable basis
over the remaining contractual term of the receivable.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
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.
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 expense and other annuity policy and investment
certificates issuance costs are deferred. For investment
certificates, amortization is computed over the expected term
which ranges from 6 months to 5 years, using the level yield
(interest) method. 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 (both realized and unrealized)
associated with the policies in force.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
ANNUITY RESERVES
Reserves for annuities are equal to the sum of the account
balances including deferred revenue charges. Based on past
experience, consideration is given in actuarial calculations to
the number of policyholder and annuitant deaths that might be
expected, policy lapses, surrenders and terminations.
RECOGNITION OF INSURANCE REVENUES
Premiums for annuities are not reported as revenue but as
annuity reserves. Revenues for these annuities are recognized
either upon assessment or over the estimated term. These
revenues generally include mortality expenses, if applicable,
policy fees and charges and surrender charges.
GUARANTY FUND ASSESSMENTS
The Company is subject to insurance guaranty laws in the states
in which it writes business. These laws provide for assessments
against insurance companies for the benefit of policyholders and
claimants in the event of insolvency of other life insurance
companies. A portion of these assessments can be offset against
the payment of future premium taxes. However, future changes in
state laws could decrease the amount available for offset. As
of September 30, 1995, the Company has accrued for guaranty fund
assessments for known insolvencies net of estimated recoveries
through premium tax offsets.
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 association with the disaffiliation with
Metropolitan in 1994, the Company received certain income tax
benefits, principally associated with the allocation of the
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES, CONTINUED
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.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by deducting preferred
stock dividends from net income and dividing the result by the
weighted averaged number of shares of common stock outstanding.
There were no common stock equivalents or potentially dilutive
securities outstanding during any of the three years in the
period ended September 30, 1995.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1993 financial statements have
been reclassified to conform with the 1995 presentation. These
reclassifications had no effect on net income or retained
earnings as previously reported.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 1995, the Company held first position
liens associated with contracts and mortgage notes receivable with
a face value of approximately $51,100,000 and second position
liens of approximately $11,230,000. Approximately 18% of the face
value of the Company's real estate contracts and mortgage notes
receivable are collateralized by property located in the Southwest
(Texas, Louisiana and New Mexico), approximately 21% by property
located in the Pacific Southwest (California, Nevada and Arizona),
approximately 22% by property located in the Pacific Northwest
(Washington, Alaska, Idaho, Montana and Oregon) and approximately
10% by property located in the Southeast (Florida, Georgia, North
Carolina and South Carolina).
The face value of the Company's real estate contracts and mortgage
notes receivable as of September 30, 1995 and 1994 are grouped by
the following dollar ranges:
1995 1994
----------- -----------
Under $15,001 $ 3,399,194 $ 1,262,236
$15,001 to $40,000 22,777,987 10,555,623
$40,001 to $80,000 20,210,801 9,970,820
$80,001 to $150,000 11,883,730 4,684,026
Greater than $150,000 4,057,536 1,931,873
----------- -----------
$62,329,248 $28,404,578
=========== ===========
Contractual interest rates on the face value of the Company's real
estate contracts and mortgage notes receivable as of September 30,
1995 and 1994 are as follows:
1995 1994
----------- -----------
Less than 8.00% $ 7,003,736 $ 3,072,262
8.00% to 8.99% 9,430,059 3,682,307
9.00% to 9.99% 13,741,811 6,489,889
10.00% to 10.99% 20,058,197 10,242,985
11.00% to 11.99% 7,687,561 2,868,603
12.00% to 12.99% 2,957,362 1,533,520
13% or higher 1,450,522 515,012
----------- -----------
$62,329,248 $28,404,578
=========== ===========
The weighted average contractual interest rate on these receiv-
ables at September 30, 1995 is approximately 9.3%. Maturity dates
range from 1995 to 2025. The constant effective yield on
contracts purchased in fiscal 1995 and 1994 was approximately
10.9% and 11.5%, respectively.
<PAGE>
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, 1995 and 1994:
1995 1994
----------- -----------
Face value of discounted receivables $51,768,999 $21,931,395
Face value of originated and non-
discounted receivables 10,560,249 6,473,183
Unrealized discounts, net of
unamortized acquisition costs (2,614,937) (1,337,365)
Allowance for losses (765,130) (250,572)
Accrued interest receivable 1,168,038 466,350
----------- -----------
Carrying value $60,117,219 $27,282,991
=========== ===========
The principal amount of receivables with required principal or
interest payments being in arrears for more than three months was
approximately $2,675,000 and $1,085,000 at September 30, 1995 and
1994, respectively. During the years ended September 30, 1995 and
1994, the Company sold approximately $20,000,000 and $10,400,000
of real estate contracts and mortgage notes receivables without
recourse and recognized gains of approximately $384,000 and
$172,000, respectively. The sales during 1995 were primarily made
to affiliated companies at estimated fair value which resulted in
a gain of approximately $335,000.
Aggregate amounts of receivables (face amount) expected to be
received, based upon estimated prepayment patterns, are as
follows:
Fiscal years ending
September 30,
-------------------
1996 $ 7,328,000
1997 6,666,000
1998 6,063,000
1999 5,515,000
2000 5,015,000
Thereafter 31,742,248
-----------
Total $62,329,248
===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. OTHER RECEIVABLE INVESTMENTS:
Other receivable investments include various cash flow investments
which are not secured by real estate, such as annuities and
lottery prizes. Annuities are backed by the credit rating of the
payor, generally an insurance company. Lottery prizes are backed
by the credit rating of the insurance company or other entity
making the lottery prize payments. Additionally, when the lottery
prizes are from a state-run lottery, the lottery is often backed
by the general credit of the state.
These forms of cash flow receivable investments normally are
principal-only obligations and are purchased at a discount
sufficient to meet the Company's investment yield requirements.
The weighted average constant effective yield on these receivables
at September 30, 1995 is approximately 9.1%. Maturities range
from 1995 to 2035.
The following is a reconciliation of the face value of the other
receivable investments to the Company's carrying value at
September 30, 1995:
Face value of receivables $28,618,310
Unrealized discounts, net of unamortized
acquisition costs (11,722,408)
-----------
Carrying values $16,895,902
===========
All such receivables held at September 30, 1995 were performing in
accordance with their terms.
During the year ended September 30, 1995, the Company sold
approximately $1,260,000 of these receivables without recourse and
recognized a gain of approximately $128,500.
The following individual other receivable investments were in
excess of ten percent of stockholders' equity at September 30,
1995:
Aggregate
Carrying
Issuer Amount
----------------------- ----------
Arizona State Agency $3,344,695
California State Agency 2,036,041
Michigan State Agency 906,801
New Jersey State Agency 2,933,380
New York State Agency 2,364,728
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. OTHER RECEIVABLE INVESTMENTS, CONTINUED:
Aggregate amounts of receivables (face amounts) expected to be
received are as follows:
Fiscal years ending
September 30,
-------------------
1996 $ 2,128,000
1997 2,205,000
1998 2,153,000
1999 2,348,000
2000 2,393,000
Thereafter 17,391,310
-----------
Total $28,618,310
===========
4. INVESTMENTS IN AFFILIATED COMPANIES:
At September 30, 1995 and 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, 1995 and 1994, Summit
owned 7.09% and 7.12%, respectively, of the outstanding Class A
common stock.
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 annum. At
September 30, 1995, the preferred Series C, D and E-1 had dividend
rates of 7.97%. The preferred Series E-4 had a dividend rate of
8.47%. 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 Investment
Securities, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INVESTMENTS:
A summary of carrying and estimated market values of investments
at September 30, 1995 is as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Held-to-Maturity Cost Gains Losses Value
---------------- ---------- ---------- ---------- ----------
U.S. Government
Bonds $5,229,949 $ 0 $ (144,091) $5,085,858
Corporate Bonds 3,039,592 0 (53,985) 2,985,607
---------- ---------- ---------- ----------
Total $8,269,541 $ 0 $ (198,076) $8,071,465
========== ========== ========== ==========
All bonds held at September 30, 1995 were performing in accordance
with their terms.
All investments are held by the Company's life insurance
affiliate. During the year ended September 30, 1994, this
affiliate transferred approximately $6,000,000 of investments
from its available-for-sale portfolio to its held-to-maturity
portfolio. At the date of transfer, these investments had net
unrealized losses of approximately $29,000 before income taxes.
These unrealized losses are being amortized over the remaining
term of the investments transferred using the interest method.
At September 30, 1995, the remaining unamortized loss of
approximately $12,000, net of income taxes, is reported as a
reduction of stockholders' equity.
The following individual investments (excluding U.S. government
bonds) held by the Company at September 30, 1995 were in excess of
ten percent of stockholders' equity:
Carrying
Issuer Amount
------------------------------------- ----------
Corporate Bonds:
Countrywide Funding $ 999,164
General Electric Credit Corporation 1,031,930
Wal-Mart Stores 1,003,136
There were no individual investments held by the Company at
September 30, 1994 in excess of ten percent of stockholders'
equity.
At September 30, 1995, the contractual maturity of the debt
securities are due from one year through five years. Expected
maturities will differ from contractual maturities because issuers
may have the right to call or pre-pay obligations with or without
call or pre-payment penalties.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INVESTMENTS, CONTINUED:
Upon the acquisition of OSL, the Company transferred and
subsequently sold approximately $1 million of the investments
which were previously classified by Metropolitan as held-to-
maturity to available-for-sale.
6. DEBT PAYABLE:
At September 30, 1995 and 1994, debt payable consists of:
1995 1994
-------- --------
Real estate contracts and mortgage notes
payable, interest rates ranging from 7%
to 9.5%, due in installments through 2009,
collateralized by senior liens on certain
of the Company's real estate contracts,
mortgage notes receivable and real estate
held for sale $104,067 $119,573
Accrued interest payable 569 315
-------- --------
$104,636 $119,888
======== ========
Aggregate amounts of principal payments due on debt payable, with
interest ranging from 7% to 9.5%, at September 30, 1995 are as
follows:
Fiscal years ending
September 30,
-------------------
1996 $ 13,818
1997 14,413
1998 15,679
1999 15,198
2000 6,630
Thereafter 38,898
--------
Total $104,636
========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INVESTMENT CERTIFICATES:
At September 30, 1995 and 1994, investment certificates consist
of:
Annual
Interest Principally
Rates Maturing in 1995 1994
---------- ------------------- ----------- -----------
6% to 7% 1996 and 1997 $ 810,558 $ 1,732,000
7% to 8% 1996 and 1997 1,789,822 1,083,000
8% to 9% 1998, 1999 and 2000 22,070,089 15,808,000
9% to 10% 1997 and 1998 2,831,765 3,202,000
10% to 11% 1996 6,222,424 6,161,535
----------- -----------
33,724,658 27,986,535
Compound and accrued interest 4,821,238 3,106,295
----------- -----------
Totals $38,545,896 $31,092,830
=========== ===========
The weighted average interest rate on outstanding investment
certificates at both September 30, 1995 and 1994 was approximately
8.8%.
Investment certificates and compound and accrued interest at
September 30, 1995 mature as follows:
Fiscal years ending
September 30,
-------------------
1996 $10,152,000
1997 4,816,000
1998 8,844,000
1999 7,932,000
2000 6,463,000
Thereafter 338,896
-----------
Total $38,545,896
===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. DEFERRED COSTS:
An analysis of deferred costs related to annuity policy
acquisition and investment certificates issuance for the years
ended September 30, 1995 and 1994 is as follows:
Policy Investment
1995 Acquisition Certificates Total
-------------------------- ----------- ------------ ----------
Balance, beginning of year $ 705,994 $ 705,994
Increase due to acquisi-
tion of life insurance
affiliate $2,614,778 2,614,778
Deferred during the year:
Commissions 291,050 259,633 550,683
Other expense 47,885 182,142 230,027
---------- ---------- ----------
Total deferred costs 2,953,713 1,147,769 4,101,482
Amortized during the year (198,190) (321,090) (519,280)
---------- ---------- ----------
Balance, end of year $2,755,523 $ 826,679 $3,582,202
========== ========== ==========
1994
--------------------------
Balance, beginning of year $ 524,376 $ 524,376
Deferred during the year:
Commissions 299,748 299,748
Other expense 144,354 144,354
---------- ----------
Total deferred costs 968,478 968,478
Amortized during the year (262,484) (262,484)
---------- ----------
Balance, end of year $ 705,994 $ 705,994
========== ==========
9. 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, 1995 and 1994 is as follows:
1995 Assets Liabilities
------------------------------------ ---------- -----------
Mark to market for investment
securities $ 73,468
Guaranty fund assessments $ 150,045
Annuity reserves 597,743
Management fee payable 402,101
Allowance for losses on real estate 31,493
Allowance for losses on receivables 164,709
Deferred acquisition costs 2,423,035
Net operating loss carryforwards 535,500
Other 127,907
---------- ----------
Total deferred income taxes $1,607,402 $2,898,604
========== ==========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. INCOME TAXES, CONTINUED:
1994 Assets Liabilities
------------------------------------ ---------- -----------
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
========== ==========
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, 1995, the Company's
net operating loss carryforwards of approximately $1,575,000
expire from 2006 through 2010.
The provision for income taxes is computed by applying the
statutory federal income tax rate to income before income taxes as
follows:
1995 1994 1993
-------- -------- --------
Federal income tax at statutory
rate $281,270 $137,797 $145,880
Affiliate corporate dividend
received deduction (49,921)
Other 8,358 2,610 71
-------- -------- --------
Income tax provision $239,707 $140,407 $145,951
======== ======== ========
The components of the provision for income taxes are as follows:
1995 1994 1993
-------- -------- --------
Current $ 75,458 $ 3,907
Deferred 164,249 136,500 $145,951
-------- -------- --------
$239,707 $140,407 $145,951
======== ======== ========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCKHOLDERS' EQUITY:
A summary of preferred and common shares at September 30, 1995 and
1994 is as follows:
<TABLE>
<CAPTION>
Issued and Outstanding Shares
-----------------------------------------
1995 1994
Authorized ------------------- -------------------
Shares Amount Shares Amount Shares
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Registered preferred stock,
Series S-1 150,000 $356,222 35,622 $317,194 31,719
========== ======== ======== ======== ========
Common stock 2,000,000 $100,000 10,000 $100,000 10,000
========== ======== ======== ======== ========
</TABLE>
The Company has authorized 10,000,000 total shares of Series S
preferred stock, of which 150,000 shares were registered at
September 30, 1995 and 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 $100 per
share.
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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCKHOLDERS' EQUITY, CONTINUED:
The payment of dividends by the Company's wholly-owned life
insurance subsidiary is subject to certain restrictions imposed by
statute. Dividends can only be paid out of earned surplus.
Earned surplus includes accumulated statutory basis earnings of
the Company and surplus arising from unrealized capital gains or
revaluation of assets. The Idaho Insurance Code requires the life
insurance subsidiary to maintain $1 million in common stock and $1
million in contributed surplus.
11. 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 and $97,000 in
fiscal 1993 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. Charges assessed
to Summit and its subsidiaries by Metropolitan during fiscal 1995
were approximately $315,000.
Management believes that these charges are reasonable and result
in the reimbursement to Metropolitan of all significant direct
expenses incurred on behalf of Summit and its subsidiaries.
Currently, management anticipates that Metropolitan will continue
to supply these services in the future.
Summit had the following related party transactions with
Metropolitan and affiliates during fiscal years 1995, 1994 and
1993:
1995 1994 1993
----------- ----------- -----------
Real estate contracts and
mortgage notes receivable
and other receivable
investments purchased
through Metropolitan or
affiliates $42,479,766 $19,495,714 $15,423,706
Contract acquisition costs
charged to Summit on
purchased real estate
contracts and mortgage
notes receivable, includ-
ing management under-
writing fees 1,967,409 681,991 243,414
----------- ----------- -----------
Total cost of real estate
contracts and mortgage
notes and other receivable
investments purchased
through Metropolitan $44,447,175 $20,177,705 $15,667,120
=========== =========== ===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. RELATED-PARTY TRANSACTIONS, CONTINUED:
1995 1994 1993
----------- ----------- -----------
Real estate contracts and
mortgage notes receivable
and other receivable in-
vestments sold to Metro-
politan or its affiliates $17,098,581 $10,122,544 $ 4,044,423
Gains on real estate con-
tracts and mortgage notes
receivable and other
receivable investments
sold to Metropolitan or
its affiliates 335,469
Service fees charged to
Metropolitan for property
development assistance 1,250,017
Commissions and service
fees charged to Metro-
politan on sale of in-
vestment certificates
and preferred stock 1,124,481
Interest expense paid to
Metropolitan and its
affiliated companies 11,684 6,000
Commissions capitalized as
deferred costs, paid to
a Metropolitan affiliate
on sale of investment
certificates 86,491 299,748 276,060
Commissions deducted from
additional paid-in capital,
paid to a Metropolitan
affiliate on sale of
preferred stock 13,249 7,552
In addition to the above, prior to its acquisition, Old Standard
had other related-party transactions with Metropolitan and its
affiliates.
Advances due Metropolitan or its affiliates in the amount of
$1,960,104 and $267,735 at September 30, 1995 and 1994,
respectively, represent real estate contracts and mortgage notes
and related costs advanced by Metropolitan on behalf of Summit and
are included in accounts payable.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. RELATED-PARTY TRANSACTIONS, CONTINUED:
The Company's employees are included in the Metropolitan Mortgage
& Securities Co., Inc. Retirement Savings Plan (the Plan),
authorized under Section 401(k) of the Tax Reform Act of 1986, as
amended. This Plan is available to all employees over the age of
21 upon completion of six months of service in which he or she has
500 hours of service. Employees may defer from 1% to 15% of their
compensation in multiples of whole percentages. The Company
matches contributions equal to 25% of pre-tax contributions up to
a maximum of 6% of compensation. This match is made only if the
Company has a net profit during the preceding fiscal year. No
contribution was made by the Company during the years ended
September 30, 1995, 1994 or 1993.
12. ANNUITY RESERVES:
Annuity reserves are based on the annuity contract terms. Such
terms call for reserves covering all principal paid plus accrued
interest. Annuity contract interest rates ranged from 5.75% to
10.65% during the four-month period ended September 30, 1995.
All states in which the Company's insurance subsidiary operates
have laws requiring solvent life insurance companies to pay
assessments to protect the interests of policyholders of insolvent
life insurance companies. Assessments are levied on all member
insurers in each state based on a proportionate share of premiums
written by member insurers in the lines of business in which the
insolvent insurers engaged. A portion of these assessments can be
offset against the payment of future premium taxes. However,
future changes in state laws could decrease the amount available
for offset.
The net amount expensed by the Company's life insurance subsidiary
for guaranty fund assessments and charged to operations for the
four-month period ended September 30, 1995 was $25,000. The
Company's estimate of these losses is based upon updated
information from the National Organization of Life and Health
Insurance Guaranty Associations regarding insolvencies occurring
during the years 1988 through 1992. These estimates are subject
to future revisions based upon the ultimate resolution of the
insolvencies and resultant losses. The Company cannot reasonably
estimate the additional effects, if any, upon its future
assessments pending the resolution of the above-described
insolvencies. Additionally, the Company does not believe that the
amount of future assessments associated with known insolvencies
after 1992 will be material to its financial condition or results
of operations. The amount of guaranty fund assessment has been
recorded net of a 7% discount rate applied to the estimated
payment term of approximately seven years.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. STATUTORY ACCOUNTING (UNAUDITED):
The life insurance subsidiary of the Company is required to file
statutory financial statements with state insurance regulatory
authorities. Accounting principles used to prepare these
statutory financial statements differ from generally accepted
accounting principles (GAAP). Selected differences between the
statutory and the GAAP financial statements for the insurance
subsidiary as of and for the four-month period ended September 30,
1995 are as follows:
Statutory GAAP
---------- ----------
Stockholders' equity at September 30,
1995 $2,248,969 $2,743,415
Net income for the four-month period
from May 31, 1995 to September 30,
1995 43,574 86,031
Unassigned statutory surplus and
retained earnings at September 30,
1995 248,969 755,299
Written approval was received from the Insurance Department of the
state of Idaho to capitalize the underwriting fee charged to the
Company by Metropolitan and to amortize this fee as an adjustment
of the yield on acquired mortgage notes. Statutory accounting
practices prescribed by Idaho State do not describe the accounting
required for this type of transaction. As of September 30, 1995,
this permitted accounting practice increased statutory surplus by
approximately $692,000 over what it would have been had prescribed
practices disallowed this accounting treatment.
14. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS:
Supplemental information on interest and income taxes paid during
the years ended September 30, 1995, 1994 and 1993 is as follows:
1995 1994 1993
---------- ---------- ----------
Interest paid $1,536,137 $1,298,248 $ 836,737
Income taxes paid 128,190 3,907 101
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS, CONTINUED:
Non-cash investing and financing activities of the Company during
the years ended September 30, 1995, 1994 and 1993 are as follows:
1995 1994 1993
---------- ---------- ----------
Assumption of other debt
payable in conjunction
with purchase of real
estate contracts and
mortgage notes receivable $ 162,597 $ 81,451 $ 235,374
Assumption of other debt
payable in conjunction
with acquisition of real
estate held for sale 15,528 63,650 14,225
Real estate held for sale
acquired through fore-
closure 1,232,732 437,448 276,573
Loans to facilitate the sale
of real estate 959,813 81,800 205,492
Exchange of Summit Securi-
ties, Inc. preferred
stock as full consider-
ation for Metropolitan
preferred and common
stock 3,022,425
Additional paid-in capital
resulting from income tax
benefits associated with
disaffiliation 206,872
Increase in assets and
liabilities associated
with purchase of subsidi-
aries:
Investment securities 9,401,577
Real estate contracts
and mortgage notes
receivable 32,080,899
Real estate held for
sale 503,298
Deferred costs 2,614,778
Other assets 205,504
Annuity reserves 44,558,959
Accounts payable and
other liabilities 1,653,970
<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 statements and related notes thereto reflect the purchase of
all of the outstanding common stock of Old Standard Life Insurance
Company by Summit Securities, Inc. The business combination was
accounted for using the purchase method, but due to the entities being
under common control, the historical cost bases of the assets and
liabilities of Old Standard Life Insurance Company have been retained.
<PAGE>
SUMMIT SECURITIES, INC. AND OLD STANDARD LIFE INSURANCE COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, 1995
<TABLE>
<CAPTION>
Purchase
of Old Consolidation Consolidation
Summit Standard of Old Adjustments
Historical Dr. (Cr.) Standard Dr. (Cr.) ProForma
----------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equiva-
lents $ 1,075,468 $(2,722,000) (a) $ 2,228,824 $ 582,292
Investments:
Investments in affili-
ated company 3,022,425 2,722,000 (a) $(2,722,000)(b) 3,022,425
Held-to-maturity
securities, at
amortized cost 9,276,473 9,276,473
Accrued interest on
investments 52,888 52,888
Real estate contracts
and mortgage notes
receivable, net 33,188,824 32,489,699 65,678,523
Real estate held for
sale 400,050 553,973 954,023
Deferred costs 800,212 2,590,702 3,390,914
Office equipment, net
of accumulated
depreciation 13,605 13,605
Income tax receivable 94,974 94,974
Other assets, net 12,104 413,408 425,512
----------- ----------- ----------- ----------- -----------
Total assets $38,499,083 $ 0 $47,714,546 $(2,722,000) $83,491,629
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND OLD STANDARD LIFE INSURANCE COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED), CONTINUED
March 31, 1995
<TABLE>
<CAPTION>
Purchase
of Old Consolidation Consolidation
Summit Standard of Old Adjustments
Historical Dr. (Cr.) Standard Dr. (Cr.) Pro Forma
----------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Liabilities:
Annuity reserves $43,217,612 $43,217,612
Investment certifi-
cates and accrued
interest $33,898,903 33,898,903
Debt payable 51,168 51,168
Accounts payable and
accrued expenses 647,983 543,724 1,191,707
Due to affiliated
companies 26,107 26,107
Dividends payable to
affiliated company 400,000 400,000
Deferred income taxes 259,548 1,161,807 1,421,355
----------- ----------- ----------- ----------- -----------
Total liabilities 34,857,602 0 45,349,250 0 80,206,852
----------- ----------- ----------- ----------- -----------
Stockholders' equity:
Preferred stock, $10
par (liquidation
preference
$3,453,630) 345,363 345,363
Common stock, $10 par 100,000 1,000,000 $(1,000,000) (b) 100,000
Additional paid-in
capital 1,694,036 1,000,000 (1,000,000) (b) 1,694,036
Retained earnings 1,502,082 379,410 (722,000) (b) 1,159,492
Net unrealized loss
on investments, net
of deferred income
taxes (14,114) (14,114)
----------- ----------- ----------- ----------- -----------
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND OLD STANDARD LIFE INSURANCE COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED), CONTINUED
March 31, 1995
<TABLE>
<CAPTION>
Purchase
of Old Consolidation Consolidation
Summit Standard of Old Adjustments
Historical Dr. (Cr.) Standard Dr. (Cr.) Pro Forma
----------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCK-
HOLDERS' EQUITY,
CONTINUED
Total stock-
holders' equity 3,641,481 0 2,365,296 (2,722,000) 3,284,777
----------- ----------- ----------- ----------- -----------
Total liabilities
and stockholders'
equity $38,499,083 $ 0 $47,714,546 $(2,722,000) $83,491,629
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this pro forma
balance sheet.
<PAGE>
SUMMIT SECURITIES, INC. AND OLD STANDARD LIFE INSURANCE COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
for the year ended September 30, 1995
<TABLE>
<CAPTION>
Reduction Consolidation
Summit in Earnings of
Historical Dr. (Cr.) Old Standard(i) Pro Forma
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Interest and earned discounts $ 5,103,519 $ (299,420) (g) $ 2,879,249 $ 7,683,348
Realized net gains on sales of
receivables 512,500 512,500
Real estate sales 1,123,500 477,500 1,601,000
Dividend income 256,991 256,991
Other income 2,580,105 83,996 2,664,101
----------- ----------- ----------- -----------
Total revenues 9,576,615 (299,420) 3,440,745 12,717,940
----------- ----------- ----------- -----------
Expenses:
Annuity benefits 1,034,082 1,784,626 2,818,708
Interest expense 3,251,334 (157) 3,251,177
Cost of real estate sold 1,117,233 480,242 1,597,475
Provision for losses on real estate
contracts and real estate held 445,381 64,937 510,318
Salaries and benefits 907,690 29,409 937,099
Commissions to agents 1,395,994 222,447 1,618,441
Other operating and underwriting
expenses 738,380 328,963 1,067,343
Less amount capitalized as deferred
costs, net of amortization (140,745) (188,549) (329,294)
----------- ----------- ----------- -----------
Total expenses 8,749,349 0 2,721,918 11,471,267
----------- ----------- ----------- -----------
Income before income taxes 827,266 (299,420) 718,827 1,246,673
Income tax provision (239,707) 101,802 (h) (127,729) (265,634)
----------- ----------- ----------- -----------
Net income 587,559 (197,618) 591,098 981,039
Preferred stock dividends (309,061) (309,061)
----------- ----------- ----------- -----------
Income applicable to common stockholders $ 278,498 $ (197,618) $ 591,098 $ 671,978
=========== =========== =========== ===========
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND OLD STANDARD LIFE INSURANCE COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED),
CONTINUED
for the year ended September 30, 1994
<TABLE>
<CAPTION> Reduction Consolidation
Summitin Earnings of
Historical Dr. (Cr.) Old Standard Pro Forma
----------- ----------- ------------- -----------
<S> <C> <C> <C>
Revenues:
Interest and earned discounts $ 3,070,667 $ (299,420) (c) $ 4,000,138 $ 6,771,385
Realized net gains on sale of invest-
ment securities 4,252 33,143 37,395
Realized net gains on sales of
receivables 171,756 51,842 223,598
Real estate sales 88,000 621,950 709,950
Other income 60,677 62,581 123,258
----------- ----------- ----------- -----------
Total revenues 3,395,352 (299,420) 4,769,654 7,865,586
----------- ----------- ----------- -----------
Expenses:
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
contracts and real estate held 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 0 3,815,996 6,806,062
----------- ----------- ----------- -----------
Income before income taxes 405,286 (299,420) 953,658 1,059,524
Income tax provision (140,407) 101,802 (d) (328,302) (366,907)
----------- ----------- ----------- -----------
Net income 264,879 (197,618) 625,356 692,617
Preferred stock dividends (2,930) (2,930)
----------- ----------- ----------- -----------
Income applicable to common stockholders $ 261,949 $ (197,618) $ 625,356 $ 689,687
=========== =========== =========== ===========
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND OLD STANDARD LIFE INSURANCE COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED),
CONTINUED
for the six months ended March 31, 1995
<TABLE>
<CAPTION> Reduction Consolidation
Summit in Earnings of
Historical Dr. (Cr.) Old Standard Pro Forma
----------- ----------- ------------- -----------
<S> <C> <C> <C>
Revenues:
Interest and earned discounts $ 1,813,581 $ (149,710) (e) $ 2,109,367 $ 3,773,238
Realized net gains on sale of invest-
ment securities 49,103 49,103
Realized net gains on sales of
receivables 511,500 226,000 737,500
Real estate sales 152,078 152,078
Other income 843,427 65,206 908,633
----------- ----------- ----------- -----------
Total revenues 3,369,689 (149,710) 2,400,573 5,620,552
----------- ----------- ----------- -----------
Expenses:
Annuity benefits 1,323,779 1,323,779
Interest expense 1,536,182 (581) 1,535,601
Cost of real estate sold 503,258 228,916 732,174
Provision for losses on real estate
contracts and real estate held 167,821 110,938 278,759
Salaries and benefits 228,772 21,876 250,648
Commissions to agents 399,236 147,811 547,047
Other operating and underwriting
expenses 216,443 267,129 483,572
Less amount capitalized as deferred
costs, net of amortization (164,473) (164,473)
----------- ----------- ----------- -----------
Total expenses 3,051,712 0 1,935,395 4,987,107
----------- ----------- ----------- -----------
Income before income taxes 317,977 (149,710) 465,178 633,445
Income tax provision (108,877) 50,901 (f) (163,939) (221,915)
----------- ----------- ----------- -----------
Net income 209,100 (98,809) 301,239 411,530
Preferred stock dividends (156,991) (156,991)
----------- ----------- ----------- -----------
Income applicable to common stockholders $ 52,109 $ (98,809) $ 301,239 $ 254,539
=========== =========== =========== ===========
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND OLD STANDARD LIFE INSURANCE COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AND STATEMENTS OF INCOME
NOTE 1:
The pro forma condensed consolidated balance sheet at March 31, 1995
assumes the purchase of all of the outstanding common stock of Old
Standard Life Insurance Company (OSL) as if it occurred on March 31,
1995 through the payment of $2,722,000 to Metropolitan. As additional
consideration for the purchase of OSL, the Company will make
contingency payments equal to 20% of statutory income prior to the
accrual of income tax for the fiscal years ending December 31, 1995,
1996 and 1997. Due to the fact that these entities are under common
control, any amounts paid under this provision will be accounted for
as dividends. This business combination was accounted for using the
purchase method, but due to the fact that the Company, Metropolitan
and OSL are all entities under the common control of one individual,
the Company 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 (March 31, 1995)
----------------------------------------
(a) To record the acquisition of OSL by the Company through the
payment of $2,722,000 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 $343,000 to retained earnings.
Pro Forma Statement of Income (September 30, 1994)
--------------------------------------------------
(c) To reflect the reduction in investment income associated with
the $2,722,000 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>
Pro Forma Statement of Income (March 31, 1995)
----------------------------------------------
(e) To reflect the reduction in investment income associated with
the $2,722,000 adjusted purchase price paid to Metropolitan,
calculated at an assumed net yield of 11% per annum, for the six-
month period.
(f) To record the income tax effects of adjustment (e).
Pro Forma Statement of Income (September 30, 1995)
--------------------------------------------------
(g) To reflect the reduction in investment income associated with
the $2,722,000 adjusted purchase price paid to Metropolitan,
calculated at an assumed net yield of 11% per annum.
(h) To record the income tax effects of adjustment (g).
(i) This column reflects the statement of income of Old Standard for
the period October 1, 1994 to May 31, 1995, the date of acquisition
by Summit. The results of operations of Old Standard for the period
June 1, 1995 to September 30, 1995 are included in Summit's
historical consolidated statement of income for the year ended
September 30, 1995.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Directors and Stockholder
Old Standard Life Insurance Company
We have audited the accompanying balance sheets of Old Standard Life
Insurance Company, a wholly-owned subsidiary of Metropolitan Mortgage
& Securities Co., Inc., as of September 30, 1994 and December 31,
1993, and the related statements of income, stockholder's equity and
cash flows for the periods 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
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 September 30, 1994 and
December 31, 1993, and the results of its operations and its cash
flows for the periods 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, except for the first
paragraph of Note 1, as to which the
date is May 31, 1995
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Directors and Stockholder
Old Standard Life Insurance Company
We have audited the accompanying statement of income, stockholder's
equity and cash flows of Old Standard Life Insurance Company, a
wholly-owned subsidiary of Metropolitan Mortgage Securities Co., Inc.
for the year ended December 31, 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 of Old Standard Life Insurance Company and for the year ended
December 31, 1992 in conformity with generally accepted accounting
principles.
BDO SEIDMAN
Spokane, Washington
March 19, 1993
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
BALANCE SHEETS
March 31, September 30, December 31,
1995 1994 1993
------------ ------------ ------------
(Unaudited)
ASSETS
Invested assets:
Investments (Note 2):
Held-to-maturity secur-
ities, at amortized
cost $ 9,276,473 $ 9,283,204 $ 3,323,735
Available-for-sale
securities, at market 5,908,968
Real estate contracts and
mortgage notes receiv-
able, net (Note 3) 32,093,603 28,506,656 23,542,397
Real estate held for sale
(Note 4) 553,973 447,413 372,301
Policy loans 13,833 14,614 5,468
Cash and cash equivalents 2,228,824 5,829,278 5,051,110
------------ ------------ -----------
Total invested
assets 44,166,706 44,081,165 38,203,979
------------ ------------ -----------
Receivables, net 3,585 20,746 34,127
------------ ------------ -----------
Other assets:
Deferred acquisition costs
(Note 5) 2,590,702 2,426,229 2,283,615
Accrued investment income 448,984 462,921 515,613
Furniture and equipment,
net 13,605 14,235 15,179
Due from affiliated com-
panies (Note 8) 210,542 1,456,431
Income tax receivable
(Note 7) 94,974
Other 395,990 159,480 159,480
------------ ------------ -----------
Total other assets 3,544,255 3,273,407 4,430,318
------------ ------------ -----------
Total assets $ 47,714,546 $ 47,375,318 $ 42,668,424
============ ============ ============
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
BALANCE SHEETS, Continued
March 31, September 30, December 31,
1995 1994 1993
------------ ------------ ------------
(Unaudited)
LIABILITIES AND STOCK-
HOLDER'S EQUITY
Liabilities:
Annuity reserves (Note 6) $ 43,217,612 $ 43,396,028 $ 39,344,173
Due to affiliated com-
panies (Note 8) 26,107
Dividends payable to
affiliate company
(Note 8) 400,000
Income taxes payable
(Note 7) 254,435
Deferred income taxes
(Note 7) 1,161,807 737,040 801,650
Advance annuity deposit
funds 13,207 7,532 14,222
Accounts payable and
accrued expenses 530,517 518,471 492,673
------------ ------------ ------------
Total liabilities 45,349,250 44,913,506 40,652,718
------------ ------------ ------------
Stockholder's equity
(Notes 9 and 10):
Common stock, $10 par
value, 250,000 shares
authorized; 100,000
and 40,000 shares
issued and outstanding 1,000,000 400,000 400,000
Additional paid-in
capital 1,000,000 800,000 800,000
Retained earnings 379,410 1,278,171 875,017
Net unrealized losses on
investments,net of de-
ferred income taxes of
$7,271 at March 31,
1995, $8,429 at
September 30, 1994 and
$30,554 at December 31,
1993 (Note 2) (14,114) (16,359) (59,311)
------------ ------------ ------------
Total stockholder's
equity 2,365,296 2,461,812 2,015,706
------------ ------------ ------------
Total liabilities
and stockholder's
equity $ 47,714,546 $ 47,375,318 $ 42,668,424
============ ============ ============
The accompanying notes are an integral part of the financial
statements.
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Nine Months
Ended Ended
March 31, September 30, Year Ended December 31,
------------ ------------- --------------------------
1995 1994 1993 1992
------------ ------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Net investment income $ 2,043,352 $ 2,964,109 $ 3,615,585 $ 2,922,996
Net realized investment gains (losses)
(Note 2) (2,916) 66,378 77,936 55,454
Other insurance revenues 21,794 39,324 28,143 25,596
------------ ------------- ------------ ------------
Total revenues 2,062,230 3,069,811 3,721,664 3,004,046
------------ ------------- ------------ ------------
Benefits and expenses:
Annuity benefits 1,345,573 2,040,286 2,377,835 1,655,550
Commissions (Note 5) 147,811 316,012 652,077 856,090
General expenses (Note 8) 58,939 90,276 96,529 87,120
Provision for losses (recoveries) on
real estate contracts and mortgage
notes 110,938 166,476 263,697 (23,762)
Insurance taxes, licenses and fees 98,264 (17,338) 518,920 11,548
Increase in deferred acquisition costs
(Note 5) (164,473) (142,615) (615,992) (907,488)
------------ ------------- ------------ ------------
Total benefits and expenses 1,597,052 2,453,097 3,293,066 1,679,058
------------ ------------- ------------ ------------
Income before income taxes 465,178 616,714 428,598 1,324,988
Provision for income taxes (Note 7) 163,939 213,560 146,804 450,400
------------ ------------- ------------ ------------
Net income $ 301,239 $ 403,154 $ 281,794 $ 874,588
============ ============= ============ ============
Net income per share $ 4.30 $ 10.08 $ 7.04 $ 21.86
============ ============= ============ ============
Weighted average number of shares
outstanding 70,000 40,000 40,000 40,000
============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of the financial
statements.<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
for the years ended December 31, 1992 and 1993,
the nine months ended September 30, 1994
and for the six months ended March 31, 1995
<TABLE>
<CAPTION>
Net
Additional Unrealized
Common Paid-in Retained Losses on
Stock Capital Earnings Investments
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1991 $ 400,000 $ 800,000 $ 418,635
Net income 874,588
------------ ------------ ------------ ------------
Balance, December 31, 1992 400,000 800,000 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, 1993 400,000 800,000 875,017 (59,311)
Net income 403,154
Net change in unrealized losses
on available-for-sale securities,
net of deferred income taxes of
$22,125 (Notes 2 and 7) 42,952
------------ ------------ ------------ ------------
Balance, September 30, 1994 400,000 800,000 1,278,171 (16,359)
Net income (unaudited) 301,239
Cash dividends (unaudited) (400,000)
Stock dividends (unaudited) 600,000 200,000 (800,000)
Net change in unrealized losses
on available-for-sale securities,
net of deferred income taxes of
$1,158 (Notes 2 and 7)
(unaudited) 2,245
------------ ------------ ------------ ------------
Balance, March 31, 1995 (unaudited) $ 1,000,000 $ 1,000,000 $ 379,410 $ (14,114)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial
statements.<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Nine Months
Ended Ended
March 31, September 30, Year Ended December 31,
------------ ------------- --------------------------
1995 1994 1993 1992
------------ ------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 301,239 $ 403,154 $ 281,794 $ 874,588
Adjustments to reconcile net income
to net cash provided by operating
activities:
Net realized investment (gain) loss 2,916 (66,378) (77,936) (55,454)
Provision for losses (recoveries)
on real estate contracts and
mortgage notes 110,938 166,476 263,697 (23,762)
Depreciation and amortization 630 944 1,769 3,151
Deferred income tax provision
(benefit) 423,609 (86,736) 143,254 449,600
Changes in assets and liabilities:
Deferred acquisition costs (164,473) (142,614) (615,992) (907,488)
Accrued investment income (13,937) 52,692 (242,299) (157,366)
Other accruals and adjustments (699,685) 236,172 348,678 (24,173)
Annuity reserves 1,326,233 2,000,962 2,349,839 1,679,807
------------ ------------ ------------ ------------
Net cash provided by operating
activities 1,287,470 2,564,672 2,452,804 1,838,903
------------ ------------ ------------ ------------
Cash flows from investing activities:
Principal payments on real estate
contracts and mortgage notes
receivable 2,352,639 4,034,423 4,554,827 2,637,228
Proceeds from sale of real estate
contracts and mortgage notes
receivable 22,336 633,650
Proceeds from sale of real estate held
for sale 18,900 77,218 56,378 12,050
Acquisition of furniture and equipment (172)
</TABLE>
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
Six Months Nine Months
Ended Ended
March 31, September 30, Year Ended December 31,
------------ ------------- --------------------------
1995 1994 1993 1992
------------ ------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from investing activities,
continued:
Purchase of held-to-maturity
investments (3,030,000)
Proceeds from sales of trading
investments 3,076,172
Proceeds from maturities of held-
to-maturity investments 200,000
Purchase of available-for-sale
investments (58,768,357)
Proceeds from sales of available-
for-sale investments 49,529,844
Purchase of real estate contracts
and mortgage notes receivable (5,997,771) (9,776,499) (3,473,576) (16,053,302)
Net change in policy loans 781 (9,146) (5,468)
Change in due to/from affiliated
companies 236,649 1,245,889 (3,831,065) 2,220,281
Additions to real estate held for
sale (22,484) (36,242) (49,808) (18,378)
------------ ------------ ------------ ------------
Net cash used in investing
activities (3,388,950) (3,830,707) (11,787,225) (11,156,121)
------------ ------------ ------------ ------------
</TABLE>
<PAGE>
OLD STANDARD LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS, Continued
<TABLE>
<CAPTION>
Six Months Nine Months
Ended Ended
March 31, September 30, Year Ended December 31,
------------ ------------- --------------------------
1995 1994 1993 1992
------------ ------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Receipts from annuity products 2,835,246 5,902,105 12,228,314 15,484,747
Withdrawals on annuity products (4,339,895) (3,851,212) (3,289,837) (1,597,048)
Change in advance annuity deposits 5,675 (6,690) (181,721) (202,452)
Dividends paid (700,000)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities (1,498,974) 2,044,203 8,056,756 13,685,247
------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (3,600,454) 778,168 (1,277,665) 4,368,029
Cash and cash equivalents:
Beginning of period 5,829,278 5,051,110 6,328,775 1,960,746
------------ ------------ ------------ ------------
End of period $ 2,228,824 $ 5,829,278 $ 5,051,110 $ 6,328,775
============ ============= ============= ============
</TABLE>
See Note 11 for supplemental cash flow information.
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 March 31, 1995 and for
the six months ended March 31, 1995 is unaudited)
1. SUMMARY OF ACCOUNTING POLICIES:
Nature of Business
------------------
Old Standard Life Insurance Company (Old Standard or the
Company) is engaged primarily in the offering, issuance and
sale of variable rate annuity contracts and life insurance
policies. Old Standard was a wholly-owned subsidiary of
Metropolitan Mortgage & Securities Co., Inc. (Metropolitan)
until May 31, 1995 when it was acquired by Summit Securities,
Inc., an affiliate of Metropolitan.
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 7). 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>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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 October 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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.
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.
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. 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, Continued:
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 benefitted using the same
assumptions as are used to amortize deferred acquisition costs.
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, 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.
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
March 31, 1995 and the results of operations and changes in
cash flows for the six-month period ended March 31, 1995. The
results of operations for the six-month period ended March 31,
1995 are not necessarily indicative of the results to be
expected for the full year.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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.
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 March 31,
1995, the Company was not a party to any derivative financial
instruments.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
A summary of carrying and estimated market values of investments
at March 31, 1995, September 30, 1994 and December 31, 1993 is as
follows:
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------
Gross Gross
Amortized Cost Unrealized Unrealized Estimated
Held-to-Maturity (Carrying Value) Gain Loss Market Value
-------------------------- ---------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Government-backed bonds $ 5,226,541 $ -- $ 326,462 $ 4,900,079
Corporate bonds 4,049,932 -- 156,190 3,893,742
------------ ------------ ------------ ------------
Total $ 9,276,473 $ -- $ 482,652 $ 8,793,821
============ ============ ============ ============
<CAPTION>
1994
--------------------------------------------------------------
Gross Gross
Amortized Cost Unrealized Unrealized Estimated
Held-to-Maturity (Carrying Value) Gain Loss Market Value
-------------------------- ---------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Government-backed bonds $ 5,223,122 $ -- $ 389,995 $ 4,833,127
Corporate bonds 4,060,082 -- 186,479 3,873,603
------------ ------------ ------------ ------------
Total $ 9,283,204 $ -- $ 576,474 $ 8,706,730
============ ============ ============ ============
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
1993
--------------------------------------------------------------
Gross Gross
Amortized Cost Unrealized Unrealized Estimated
Held-to-Maturity (Carrying Value) Gain Loss Market Value
-------------------------- ---------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Government-backed bonds $ 255,351 $ -- $ 3,867 $ 251,484
Corporate bonds 3,068,384 4,861 1,225 3,072,020
------------ ------------ ------------ ------------
Total $ 3,323,735 $ 4,861 $ 5,092 $ 3,323,504
============ ============ ============ ============
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Market Value
Available-for-Sale Amortized Cost Gain Loss (Carrying Value)
-------------------------- ---------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
The government-backed securities above include investments
on deposit for regulatory authorities (as required by law)
of $250,000 at March 31, 1995, September 30, 1994 and
December 31, 1993.
There were no sales or maturities of bonds for the six
months ended March 31, 1995 or during the nine months ended
September 30, 1994. Proceeds from sales and maturities of
bonds for the year ended December 31, 1993 were $49,529,844.
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 year ended December 31, 1992 were
$3,076,172. Gross gains of $47,190 were realized during 1992.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
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 and the six months ended
March 31, 1995, $0, $4,563 and $3,052, respectively, of these
losses were amortized. At March 31, 1995, September 30, 1994 and
December 31, 1993, the remaining unamortized loss, net of
deferred income taxes, is reported as a reduction of
stockholder's equity.
The amortized costs and estimated market values of debt
securities at March 31, 1995, 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 March 31, 1995:
Estimated
Amortized Market
Cost Values
---------- ----------
Due after one year through five
Years $9,276,473 $8,793,821
========== ==========
Held-to-maturity debt securities at September 30, 1994:
Estimated
Amortized Market
Cost Values
---------- ----------
Due after one year through five
years $9,283,204 $8,706,730
========== ==========
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
Held-to-maturity debt secuirites at December 31, 1993:
Estimated
Amortized Market
Cost Values
---------- ----------
Due after one year
through five years $3,323,735 $3,323,504
=========== ===========
Available-for-sale debt securities at December 31, 1993:
Estimated
Amortized Market
Cost Values
---------- ----------
Due after one year
through five years $5,000,000 $4,918,750
Due after five years
through 10 years 998,833 990,218
---------- ----------
$5,998,833 $5,908,968
========== ==========
The following individual investments (excluding U.S. government
bonds) held by the Company were in excess of ten percent of
stockholder's equity at March 31, 1995, September 30, 1994 and
December 31, 1993:
Carrying
Issuer Amount
--------------------------------- ----------
1995
----
Corporate bonds:
General Electric Credit Corp. $1,041,186
Countrywide Funding 1,005,054
Wal-Mart Stores 1,003,734
MCA Funding Corp. 999,960
1994
----
Corporate bonds:
General Electric Credit Corp. 1,050,288
Countrywide Funding 1,005,562
Wal-Mart Stores 1,004,320
MCA Funding Corp. 999,912
1993
----
Corporate bonds:
General Electric Credit Corp. 1,063,376
Countrywide Funding 990,218
Wal-Mart Stores 1,005,163
MCA Funding Corp. 999,845
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
Upon the sale of the Company to Summit, the Company transferred
and subsequently sold approximately $1 million of the investments
which were previously classified by Metropolitan as held-to-
maturity to available-for-sale.
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
excess of $300,000. Interest rates principally range from 5% to
13.125%. The weighted average interest rate on these receivables
at March 31, 1995, September 30, 1994 and December 31, 1993 is
approximately 9.6%, 10.0% and 9.8%, respectively. Maturity dates
range from 1995 to 2025.
The following is a reconciliation of the face value of the real
estate contracts and mortgage notes to the Company's carrying
value.
March 31, September 30, December 31,
1995 1994 1993
----------- ------------- ------------
Face value $33,824,750 $29,870,460 $25,325,877
Unrealized dis-
counts, net of
unamortized acqui-
sition costs (1,424,642) (1,135,582) (1,537,425)
Allowance for
losses (306,505) (228,222) (246,055)
----------- ----------- -----------
Carrying value $32,093,603 $28,506,656 $23,542,397
=========== =========== ===========
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
$1,350,000 at March 31, 1995, $1,010,000 at September 30, 1994
and $1,139,000 at December 31, 1993.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. REAL ESTATE HELD FOR SALE:
Real estate held for sale consists of the following:
March 31, September 30, December 31,
1995 1994 1993
----------- ------------- ------------
Single-family
dwelling $ 325,260 $ 218,700 $ 372,301
Land - residential
improved 202,500 202,500
Commercial 26,213 26,213
----------- ------------- -----------
$ 553,973 $ 447,413 $ 372,301
=========== ============= ===========
5. DEFERRED ACQUISITION COSTS:
An analysis of deferred costs related to annuity acquisitions is
as follows:
March 31, September 30, December 31,
1995 1994 1993
----------- ------------- ------------
Balance at beginning
of period $ 2,426,229 $ 2,283,615 $ 1,667,623
Deferred during
period:
Commissions 147,811 316,012 652,077
General expenses 136,385 62,035 96,096
----------- ------------- -----------
Total deferred 2,710,425 2,661,662 2,415,796
Amortized during
period (119,723) (235,433) (132,181)
----------- ------------- -----------
Balance at end of
period $ 2,590,702 $ 2,426,229 $ 2,283,615
=========== ============= ============
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 5.0% to
10.65% during the six months ended March 31, 1995, 5.0% to 10.65%
during the nine months ended September 30, 1994, 5% to 9% during
the year ended December 31, 1993 and 5.5% to 8.5% during the year
ended December 31, 1992.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES:
The Company files a separate tax return from its parent company
under specific provisions which require life insurance entities
to file a separate federal income tax return for the first full
five years under a new parent. The Company is taxed as a life
insurance company under Part I of Subchapter L of the Internal
Revenue Code.
The components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
Six Months Nine Months
Ended Ended
March 31, September 30, Year Ended December31,
------------ ------------- --------------------------
1995 1994 1993 1992
------------ ------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Current $ (259,670) $ 300,296 $ 3,550 $ 800
Deferred 423,609 (86,736) 143,254 449,600
------------ ------------- ------------ ------------
$ 163,939 $ 213,560 $ 146,804 $ 450,400
============ ============= ============ ============
</TABLE>
The effective income tax rate differs from the statutory income
tax rate due to state income taxes.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, Continued:
The deferred income tax provision (benefit) results from the
following:
<TABLE>
<CAPTION>
Six Months Nine Months
Ended Ended
March 31, September 30, Year Ended December 31,
------------ ------------- --------------------------
1995 1994 1993 1992
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Deferred policy acquisition costs $ 55,921 $ 41,976 $ 180,304 $ 252,630
Reserves on repossessed real estate (4,112) (4,815) (14,707)
Amortization of discounts on pur-
chased real estate contracts,
net of contract acquisition costs
and underwriting fees (97,211) 16,135 (64,481) 819,036
Annuity reserves 63,510 (74,683) (281,460) (247,901)
Allowance for losses (29,615) 761 (69,266) 8,419
Operating loss carryover (68,000) (165,573) 433,362 (382,584)
Guaranty fund 214,488 (30,059) (160,609)
Other 288,628 129,522 120,111
------------ ------------- ------------ ------------
Provision (benefit) for income
taxes $ 423,609 $ (86,736) $ 143,254 $ 449,600
============ ============= ============ ============
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, Continued:
The income tax effect of the temporary differences giving rise to
the Company's deferred tax assets and liabilities is as follows:
<TABLE>
<CAPTION>
March 31, 1995 September 30, 1994 December 31, 1993
----------------------- ----------------------- -----------------------
Assets Liabilities Assets Liabilities Assets Liabilities
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for
contract losses $ 127,100 $ 97,485 $ 98,246
Reserves on re-
possessed real
estate 23,634 19,522 14,707
Deferred loan fees $ 1,008,772 $ 1,105,983 $ 1,089,848
Deferred acquisi-
tion costs 748,132 692,211 650,235
Annuity reserves 643,266 706,776 632,093
Guaranty fund
reserve 23,800 190,688 160,609
Investments and
other 243,103 46,683 132,795
Net operating loss
carryforwards 68,000 165,573
---------- ----------- ---------- ----------- ---------- -----------
$ 862,000 $ 2,023,807 $1,061,154 $ 1,798,194 $1,071,228 $ 1,872,878
========== =========== ========== =========== ========== ===========
</TABLE>
No valuation allowance has been established 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, Continued:
At March 31, 1995 and September 30, 1994, the Company had
unused net operating loss carryforwards, for income tax
purposes, of approximately $200,000 and $____________,
respectively. These carryforwards have been utilized to
reduce the deferred income tax provision for the six monthsended
March 31, 1995.
8. RELATED-PARTY TRANSACTIONS:
The Company had the following related-party transactions with
Metropolitan:
<TABLE>
<CAPTION>
Six Months Nine Months
Ended Ended
March 31, September 30, Year Ended December 31,
------------ ------------- --------------------------
1995 1994 1993 1992
------------ ------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Real estate contracts and
mortgage notes purchased
through Metropolitan $ 5,397,985 $ 9,827,000 $ 603,465 $ 13,620,522
Contract acquisition cost
and underwriting fees charged
to the Company on purchases of
real estate contracts and
mortgage notes 586,520 52,729 33,575 2,432,780
Investment and general expenses
paid to Metropolitan 62,694 95,955 62,677 53,496
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. RELATED-PARTY TRANSACTIONS, CONTINUED:
Additionally, the Company paid commission of $18,820, $30,667,
$31,332 and $12,803 during 1995, 1994, 1993 and 1992,
respectively, to Beacon Properties, Inc. (Beacon) for acting as
broker on real estate sold. The Company also received rent from
Summit Securities, Inc. (Summit) of $900, $1,350, $1,800 and $0
during 1995, 1994, 1993 and 1992, respectively. Beacon is a
wholly-owned subsidiary of Metropolitan and Summit was a wholly-
owned subsidiary of Metropolitan until September 9, 1994. Old
Standard declared a common stock cash dividend of $400,000 and a
stock dividend of $800,000 to Metropolitan during the six-month
period ended March 31, 1995. Old Standard declared a common stock
cash 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.
9. STOCKHOLDER'S EQUITY:
Old Standard is required to file statutory financial statements
with state insurance regulatory authorities. Accounting
principles used to prepare the statutory financial statements
differ from generally accepted accounting principles. See Note 10
for a reconciliation of statutory stockholder's equity to
stockholder's equity in accordance with generally accepted
accounting principles (GAAP).
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>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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 GAAP is as follows:
<TABLE>
<CAPTION>
Six Months Nine Months
Ended Ended
March 31, September 30, Year Ended December31,
------------ ------------- --------------------------
1995 1994 1993 1992
------------ ------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Net income per statutory
statements $ 387,600 $ 515,235 $ 900,085 $ 809,272
Adjustments for:
Change in annuity reserves (31,490) (175,563) (682,476) (561,297)
Change in deferred acquisition
costs 44,750 142,614 615,992 907,488
Deferred tax expense (423,609) 86,736 (143,254) (449,600)
Interim current tax adjustment 217,670 (258,296)
State guaranty fund provision (30,000) 71,070 (472,379)
Interest maintenance reserves 6,706 45,337 58,642 14,867
Policy contract benefits 323,822 (31,703) 180,604 129,096
Adjustment to loss reserves (110,938) (6,649)
Unrealized gains (losses) on
mortgage loans and real estate
contracts (106,405) (25,521) (173,420) 24,762
Other expense (income) adjustments 23,133 39,894 (2,000)
------------ ------------- ------------ ------------
Net income in accordance
with GAAP $ 301,239 $ 403,154 $ 281,794 $ 874,588
============ ============= ============ ============
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. RECONCILIATION OF GAAP AND STATUTORY ACCOUNTING, CONTINUED:
<TABLE>
<CAPTION>
March 31, September 30, December 31,
Stockholder's Equity 1995 1994 1993
------------ ------------- ------------
<S> <C> <C> <C>
Stockholder's equity per
statutory statements $ 2,265,503 $ 2,527,464 $ 2,069,030
Adjustments for:
Deferred acquisition costs 2,590,702 2,426,229 2,283,615
Annuity reserves (1,634,856) (1,603,336) (1,427,803)
Deferred income taxes (1,161,807) (737,040) (801,650)
Interim current tax adjustment (258,296)
Nonadmitted assets 22,515 16,204 5,442
Interest maintenance reserve 75,764 104,310 73,510
Asset valuation reserve 202,902 218,910 188,548
State guaranty fund provision (431,304) (401,309) (472,379)
Adjustment of real estate
related assets to statutory
values (69,353) (70,129) (130,650)
Securities valuation reserves (14,114) (16,359) (59,311)
Policy and contract benefits 501,436 283,640 309,700
Other 17,908 (28,476) (22,346)
------------ ------------- ------------
Stockholder's equity in
accordance with GAAP $ 2,365,296 $ 2,461,812 $ 2,015,706
============ ============= ============
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
11. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS:
The following table summarizes income taxes paid during the
periods:
<TABLE>
<CAPTION>
Six Months Nine Months
Ended Ended
March 31, September 30, Year Ended December 31,
------------ ------------- --------------------------
1995 1994 1993 1992
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Income taxes $ 89,739 $ 45,860 $ 3,550 $ 800
</TABLE>
Non-cash investing and financing activities of the Company
during the periods are as follows:
<TABLE>
<CAPTION>
Six Months Nine Months
Ended Ended
March 31, September 30, Year Ended December 31,
------------ ------------- --------------------------
1995 1994 1993 1992
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Loans to facilitate the sale of
real estate held $ 207,100 $ 370,732 $ 440,372 $ 170,850
Real estate held for sale and
development acquired through
foreclosure 378,685 615,260 976,668 64,000
Debt assumed upon foreclosure of
real estate contracts -- 10,598 -- --
</TABLE>
<PAGE>
Inside Back Cover Page: This page intentionally left blank
GRAPHS APPENDIX
1. 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.
2. 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.
