UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to ________
Commission file number 33-36775.
SUMMIT SECURITIES, INC.
(Exact name of registrant as specified in its charter)
IDAHO 82-0438135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WEST 929 SPRAGUE AVENUE, SPOKANE, WASHINGTON 99204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (509)838-3111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [x]
State the aggregate market value of the voting stock held by non-
affiliates of the registrant: Not Applicable
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of September 30, 1995
Single Class: 10,000 shares
Documents incorporated by reference: None.
PART I
Item 1. Business
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>
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 Trading Company, 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".
PART I (cont.)
Item 2. Properties
See Item 1.
Item 3. Legal Proceedings.
There are no material legal proceedings or actions pending or
threatened against Summit Securities, Inc., or to which its property
is subject.
Item 4. Submission of Matters to a vote of Security Holders.
None
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.
(a) There is no market for the registrant's common stock
(b) There was one Common Stockholder at September 30, 1995
(c) See "Item 6. Selected Financial Data."
Item 6. Selected Financial Data
<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>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
<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.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
Page
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...................
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 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.
COOPERS & LYBRAND L.L.P.
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
including payables to affiliates
(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
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
(Note 11) 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
========== ==========
==========
Income per share applicable to
common stockholders $ 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 preferred
stock, net of offering costs
(1,495 shares) $ 14,952 127,008
141,960
Issuance of variable rate
preferred stock (30,224
shares) (Note 1) 302,242 2,720,183
3,022,425
Income tax benefit associated
with disaffiliation (Note 1) 206,872
206,872
---------- ---------- ----------
---------- ---------- ----------
Balance, September 30, 1994 317,194 100,000 1,454,063
1,449,973 3,321,230
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 (Note 5)
$ (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> <C>
Excess cost over historical
cost basis 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)
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)
(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 assets and liabilities, net of
effects from purchase of subsidiaries:
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:
Payments for 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
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 historical cost basis 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 (the Company), was
incorporated on July 25, 1990. Prior to September 9, 1994,
the
Company was a wholly-owned subsidiary of Metropolitan
Mortgage &
Securities Co., Inc. (Metropolitan). On September 9, 1994,
the
controlling interest in the Company 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 the Company redeemed all the common
shares held by its former parent company, Metropolitan,
which
consisted of 100% of the outstanding common stock of the
Company
for $3,600,000, which approximated the net book value of
the
Company at the transaction date. Contemporaneously with
this
redemption, the Company issued 10,000 shares of common
stock to
National Summit Corp. for $100,000. In addition, various
investors holding Metropolitan's common and preferred
stock,
including members of Mr. Sandifur's immediate family,
acquired
30,224 shares of the Company'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 as a
purchase.
However, due to the common control of Metropolitan and the
Company, 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 historical cost basis 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.
Future contingent payments, if any, will be accounted for
as
dividends. The purchase price plus estimated future
contingency
payments approximate the appraised valuation of OSL. The
acquisition was recorded as a purchase. However, due to
the
common control of Metropolitan and the Company, the
historical
cost bases of assets and liabilities of OSL were recorded
by
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
BUSINESS AND REORGANIZATION, CONTINUED
the Company. The total purchase price of MIS and OSL
exceeded
the historical cost basis of the net assets of the
companies by
approximately $53,000. Due to the common control of
Metropolitan and the Company, this excess purchase price
has
been recorded as a dividend through a reduction of retained
earnings.
Pro forma summary financial information of the Company, as
if
the acquisitions of MIS and OSL occurred as of October 1,
1993,
is as follows:
Years Ended
September 30,
--------------------
- ----
1995 1994
----------- -------
- ----
Revenues $13,704,000 $
9,930,000
Net income 1,184,000
874,000
Net income per common share 87.50
44.80
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.
does not have any operations or activities other than the
acquisition of the Company. The consolidated financial
statements include the accounts of the Company and its
wholly-
owned subsidiaries, 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.
The Company purchases contracts and mortgage notes
collater-
alized 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
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 COMPANY
Investments in equity securities of Metropolitan are
carried at
the lower of cost or estimated net realizable value.
INVESTMENTS
The Company has classified its investments in debt and
equity
securities, other than those of an affiliated company, 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 statement 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.
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 receivable 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 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 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 on 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 stated at the lower of cost or fair value
less
costs to sell. 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.
ALLOWANCE FOR LOSSES ON REAL ESTATE RECEIVABLES
The established allowances for losses on real estate
receivables
include amounts for estimated probable losses on real
estate
contracts and mortgage notes receivable. Specific
allowances
are established for delinquent contract receivables, as
necessary, with net carrying values in excess of $100,000.
Additionally, the Company establishes allowances, based on
prior
delinquency and loss experience, for currently performing
receivables and smaller delinquent receivables. Allowances
for
losses are based 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 exceeds the
fair
value of the collateral, net of estimated selling costs.
The
Company obtains new or updated appraisals on collateral for
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
certificate 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
percentage of the estimated gross profits (both realized
and
unrealized) associated with the annuities.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
ANNUITY RESERVES
Premiums for annuities are recorded as annuity reserves.
Reserves for annuities are equal to the sum of the account
balances including deferred service 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 ANNUITY REVENUES
Annuity revenues consist of the charges assessed against
the
account balance for expense and surrender charges. Charges
for
future services are assessed; however, the related revenue
is
deferred and recognized in income over the period
benefitted
using the same assumptions as are used to amortize deferred
acquisition costs.
GUARANTY FUND ASSESSMENTS
OSL is subject to insurance guaranty laws in the states in
which
it operates. 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 a liability
for
guaranty fund assessments for known insolvencies net of
estimated recoveries through premium tax offsets.
INCOME TAXES
The Company was included in the consolidated income tax
return
with Metropolitan, its former parent through September 9,
1994.
Subsequent to that date, the Company is included in the
consoli-
dated income tax return with National Summit Corp. The
Company
is allocated a current and deferred tax provision from
Metro-
politan or National Summit Corp. as if the Company filed a
separate tax return. Effective October 1, 1992, Summit
adopted
the provisions of Statement of Financial Accounting
Standards
No. 109 (SFAS No. 109), "Accounting for Income Taxes."
There
was no effect on the Company's financial statements of
adopting
SFAS No. 109.
In association with the disaffiliation from Metropolitan in
1994, the Company received certain income tax benefits,
principally associated with the allocation of the
Metropolitan
consolidated group's net operating loss carryforwards and a
reduction in amounts payable to Metropolitan, which
resulted in
a reduction of deferred taxes payable of approximately
$207,000.
This benefit has been recorded as additional paid-in
capital due
to the affiliation between Metropolitan and the Company.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
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 (the Company'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.
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).
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE,
CONTINUED:
The face value of the Company's real estate contracts and
mortgage
notes receivable as of September 30, 1995 and 1994 is 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 Year 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, primarily annuities and
lottery prizes. Annuities are general obligations of the
payor,
generally an insurance company. Lottery prizes are general
obligations 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 prize is often backed
by the
general credit of the state.
These investments normally are non-interest bearing 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 at September 30, 1995 were performing in
accordance with their contractual 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 Year 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 COMPANY:
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,
the
Company owned 7.09% and 7.12%, respectively, of the
outstanding
Class A common stock.
The preferred stock has a par value of $10 per share and has
liquidation preferences equal to its 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 nor preferred shares are traded in
a
public market.
<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:
Amortized
Cost Gross Gross
Estimated
(Carrying Unrealized Unrealized
Market
Held-to-Maturity Value) 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 $1,004,526
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 maturities of the debt
securities are 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 an
investment
with an amortized cost of approximately $992,000 which was
previously classified by Metropolitan as held-to-maturity to
available-for-sale. The investment was subsequently sold at
a
loss of approximately $8,000 when the issuer called the bond.
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
at
September 30, 1995 are as follows:
Fiscal Year 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 Year 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 acquisition
and
investment certificates issued for the years ended September
30,
1995, 1994 and 1993 is as follows:
Annuity Investment
Acquisition Certificates
Total
----------- ------------ ------
- ----
Balance, September 30, 1992 $ 342,650 $
342,650
Deferred during the period:
Commissions 276,060
276,060
Other expenses 57,429
57,429
---------- ------
- ----
Total deferred costs 676,139
676,139
Amortized during the period (151,763)
(151,763)
---------- ------
- ----
Balance, September 30, 1993 524,376
524,376
Deferred during the period:
Commissions 299,748
299,748
Other expense 144,354
144,354
---------- ------
- ----
Total deferred costs 968,478
968,478
Amortized during the period (262,484)
(262,484)
---------- ------
- ----
Balance, September 30, 1994 705,994
705,994
Increase due to acquisition
of life insurance
affiliate $2,614,778
2,614,778
Deferred during the period:
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 period (198,190) (321,090)
(519,280)
----------- ---------- ------
- ----
Balance, September 30, 1995 $2,755,523 $ 826,679
$3,582,202
========== ==========
==========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
and receivables 196,202
Deferred policy acquisition costs
936,878
Deferred contract acquisition costs
and discount yield recognition
1,486,157
Net operating loss carryforwards 535,500
Other 127,912
---------- -------
- ---
Total deferred income taxes $1,607,402
$2,898,604
==========
==========
1994
------------------------------------
Management fee payable $ 20,400
Allowance for losses on real estate
and receivables 103,675
Deferred contract acquisition costs
and discount yield recognition $
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.
Due to the Company's previous change in ownership,
approximately
$1,000,000 of the above net operating losses are subject to
the
provisions of Internal Revenue Code Section 382, which limits
the
annual utilization of net operating losses to approximately
$200,000 per year.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. INCOME TAXES, CONTINUED:
The provision for income taxes is computed by applying the
statutory federal income tax rate to income before income
taxes as
follows:
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
-------
- -----------------------------
Authorized Shares
1995 1994
-------------------- -------
- ---------- -----------------
1995 1994 Amount
Shares Amount Shares
--------- --------- -------
- - ------- -------- -------
<S> <C> <C> <C>
<C> <C> <C>
Registered preferred
stock, Series S-1 185,000 150,000
$356,222 35,622 $317,194 31,719
========= =========
======== ======= ======== =======
Common stock 2,000,000 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 185,000 and 150,000 shares of
Series S-1
were registered at September 30, 1995 and 1994, respectively.
The
Company has the right, without further stockholder approval,
to
establish additional series of preferred stock with
provisions
different than those described below for the Series S-1
preferred
stock.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCKHOLDERS' EQUITY, CONTINUED:
All preferred shares have 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.
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
the 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:
The Company receives accounting, data processing, contract
servicing and other administrative services from
Metropolitan.
Charges for these services were approximately $315,000 in
fiscal
1995, $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 the Company's
behalf.
Other indirect services provided by Metropolitan to the
Company,
such as management and regulatory compliance, were not
directly
charged to the Company.
Management believes that these charges are reasonable and
result
in the reimbursement to Metropolitan of all significant
direct
expenses incurred on behalf of the Company and its
subsidiaries.
Currently, management anticipates that Metropolitan will
continue
to supply these services in the future.
The Company 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 the Company on
purchased real estate
contracts and mortgage
notes receivable, includ-
ing management under-
writing fees 1,967,409 681,991
243,414
----------- ----------- ------
- -----
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. RELATED-PARTY TRANSACTIONS, CONTINUED:
1995 1994
1993
----------- ----------- ------
- -----
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
=========== ===========
===========
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
Metropolitan's debentures
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 debentures 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
Dividends received on
Metropolitan's preferred
stock investments 256,991
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 the
Company 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 AND GUARANTY FUND ASSESSMENTS:
Annuity reserves are based upon contractual amounts due the
annuity holder including 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 amounts estimated to be
assessed
for the four-month period ended September 30, 1995 was
$25,000.
The Company's estimate of these liabilities is based upon
updated
information from the National Organization of Life and Health
Insurance Guaranty Associations regarding insolvencies
occurring
during the years 1990 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. 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 estimated future 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 fees charged to
the
Company by Metropolitan and to amortize these fees as an
adjustment of the yield on acquired mortgage notes.
Statutory
accounting practices prescribed by Idaho 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 the Company's
preferred stock as full
consideration for Metro-
politan preferred and
common stock 3,022,425
Additional paid-in capital
resulting from income tax
benefits associated with
the change in tax
affiliation 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
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
N/A
PART III
Item 10. Directors and Executive Officers of Registrant.
See "Executive Compensation" under Item 1.
Item 11. Executive Compensation.
See "Executive Compensation" under Item 1.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
See "Principal Shareholders" under Item 1.
Item 13. Certain Relationships and Related Transactions.
See "Certain Transactions" under Item 1.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a) 1. Financial Statements
Included in Part II, Item 8 of this report:
Report of Independent Accountants
Consolidated Balance Sheets at September 30, 1995, and 1994
Consolidated Statements of Income for the Years Ended
September 30, 1995, 1994 and 1993.
Consolidated Statements of Stockholders' Equity for the
years Ended September 30, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
(b) 2. Financial Statements Schedules
Included in Part IV of this report:
Report of Independent Accountants on Financial
Statement Schedules.
Schedule II Valuation and Qualifying Accounts
and Reserves
Schedule IV Mortgage Loans on Real Estate
Schedule XV -- Summary of Investments other than
Investments in Related Parties
Schedule XVI Summary Insurance Information
Other Schedules are omitted because of the absence
of conditions under which they are required or
because the required information is given in the
financial statements or notes thereto.
(c) 3. Exhibits
3(a). Articles of Incorporation of the Company. (Exhibit 3(a)
to (Registration No. 33-36775).
3(b). Bylaws of the Company. (Exhibit 3(b) to Registration
No. 33-36775).
4. Reports on Form 8-k. No reports on Form 8-K were filed
in the quarter ended September 30, 1995.
4(a). Indenture dated as of November 15, 1990 between Summit
and West One Bank, Idaho, N.A., Trustee. (Exhibit 4(a)
to Registration No. 33-36775).
4(b). Amendment to Indenture dated as of November 15, 1990
between Summit and West One Bank, Idaho, N.A., Trustee.
(Exhibit 4(b) to Registration No. 33-36775).
4(c). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-1.
(Exhibit 4.c to Registration No. 33-57619)
*4(d). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-2
*10(a). Receivable Management, Acquisition and Service Agreement
between Summit Securities, Inc. and Metropolitan
Mortgage & Securities Co., Inc. dated September 9, 1994.
*10(b). Receivable Management, Acquisition and Service Agreement
between Old Standard Life Insurance Company and
Metropolitan Mortgage & Securities Co., Inc. dated
December 31, 1994.
11. Computation of Earnings Per Common Share. (See Financial
Statements.)
*27. Financial Data Schedule
*Filed herewith
(d). Reports on Form 8-K
N/A
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
The Directors and Stockholder
Summit Securities, Inc.
Our report on the consolidated financial statements of Summit
Securities, Inc. and subsidiaries is included in Item 8 herein. In
connection with our audits of such financial statements, we have also
audited the related financial statement schedules listed in Item 14 of
this Form 10-K.
In our opinion, these 1995 financial statement schedules, when
considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information
required to be included therein.
/s/ COOPERS & LYBRAND
Coopers & Lybrand
Spokane, Washington
November 20, 1995
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES Schedule II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
Additions Additions Deductions
Balance at from (Reductions) and Balance
Beginning Acquisition Charged to Accounts at end of
of Year of Costs and Written Year
Subsidiaries Expenses Off
Description (Recovery)
<S> <C> <C> <C> <C> <C>
Allowances for
Losses Deducted from
Real Estate Contracts
and Mortgage Notes
Receivable on
Balance Sheet
1995 $250,572 $310,957 $103,950 $(99,651) $765,130
1994 96,654 --- 103,000 (50,918) 250,572
1993 59,244 --- 15,000 (22,410) 96,654
Allowances for
Losses Deducted
from Real Estate
Held for Sale on
Balance Sheet
1995 $ 50,300 $11,591 $341,431 $312,183 $91,139
1994 6,757 --- 52,042 8,499 50,300
1993 --- --- 36,012 29,255 6,757
Allowance for
Losses on Accounts and
Notes Receivable
Deducted from
Other Assets on
Balance Sheet
1995 $4,055 $320 $7,200 $11,167 $408
1994 --- --- 5,500 1,445 4,055
1993 --- --- --- --- ---
</TABLE>
<PAGE>
<PAGE> Schedule IV
SUMMIT SECURITIES, INC.
MORTGAGE LOANS ON REAL ESTATE
September 30, 1995
<TABLE>
<CAPTION>
Real estate contracts and mortgage notes ("Receivables") are located throughout the United
States. Approximately 22% of the face value of Summit's real estate contracts and mortgage
notes receivable are collateralized by property located in the Pacific Northwest
(Washington, Alaska, Idaho, Montana and Oregon), approximately 21% by property located in
the Pacific Southwest (California, Nevada and Arizona), approximately 10% by property
located in the Southeast (Florida, Georgia, North Carolina and South Carolina) and
approximately 18% by property located in the Southwest (Texas, Louisiana and New Mexico).
Less than 1% of the contracts are subject to variable interest rates. Interest rate range
from 0% to 20% with rate principally (87%) within the range of 7% to 12%.
Number Carrying Delinquent Number of
of Interest Amount of Principal Delinquent
Description Receivables Rates Receivables Amount Receivables
---------- -------- ----------- ---------- -----------
RESIDENTIAL Principally
<S> <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>
<PAGE> Schedule IV Continued
SUMMIT SECURITIES, INC.
MORTGAGE LOANS ON REAL ESTATE
September 30, 1995
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning
of period $27,282,991 $19,527,225 $11,596,730
---------- ---------- ----------
Additions during period
New Subsidiary Acquisition 32,080,899 --- ---
New Receivable - Cash 26,130,804 20,177,705 15,667,120
Loans to facilitate the
sale of real estate
held - non cash 959,813 81,800 205,492
Assumption of other debt
payable in conjunction with
acquisition of new
receivables - non cash 162,597 81,451 235,374
Increase in Accrued Interest 388,167 --- 175,460
--------- --------- ---------
Total Additions 59,722,280 20,340,956 16,283,446
---------- ---------- ----------
Deductions During Period
Collections of Principal
cash 6,567,012 1,829,515 4,039,074
Cost of Receivables Sold 19,578,720 10,221,375 4,044,423
Foreclosures - non cash 1,083,277 272,959 232,044
Decrease in Accrued Interest --- 107,423 --
Discount Amortization (544,558) --- ---
Increase in Allowances
for Losses 203,601 153,918 37,410
---------- ---------- ---------
Total Deductions 26,888,052 12,585,190 8,352,951
---------- ---------- ---------
Balance at End of Period $60,117,219 $27,282,991 $19,527,225
========== ========== ==========
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. Schedule XV
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
September 30, 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Column A Column B Column C Column D
Amount at Which
Amortized Market Shown on Balance
Cost Value Sheet
TYPE OF INVESTMENTS
FIXED MATURITIES
(Insurance Subsidiary)
Investments:
U.S. Government and
Government Agencies
and Authorities $5,229,949 $5,085,858 $5,229,949
Corporate Bonds 3,039,592 2,985,607 3,039,592
---------- ---------- ----------
TOTAL FIXED MATURITIES $8,269,541 $8,071,465 $8,269,541
========== ========== ==========
Real Estate Contracts
and Mortgage Notes
Receivable $60,117,219 $60,117,219
========== ==========
Other Investment
Receivables $16,895,902 $16,895,902
========== ==========
Real Estate Held
for Sale $ 836,291 $ 836,291
========== ==========
Other Assets -
Policy Loans $ 13,122 $ 13,122
========== ==========
TOTAL INVESTMENTS $86,132,075 $86,132,075
========== ==========
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES Schedule XVI
SUMMARY INSURANCE INFORMATION
AS OF FOUR MONTHS ENDED
September 30, 1995
<TABLE>
<CAPTION>
Future
Policy
Benefits Other
Deferred Losses Policy
Policy Claims Claims and
Acquisition and Loss Unearned Benefits
Cost Expense Premiums Payable
<S>
September 30, 1995
<C> <C> <C> <C>
Annuities $2,755,523 $49,559,589 $ - $ --
========== =========== ======== =========
<CAPTION>
Benefits Amortization
Claims of Deferred
Net Losses and Policy Other
Premium Investment Settlement Acquisition Operating
Revenue Income Expenses Costs Expenses
<S>
September 30, 1995
<C> <C> <C> <C> <C>
Annuities $14,179 $1,344,850 $1,034,082 $198,190 $73,715
====== ========= ========= ======= ======
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SUMMIT SECURITIES, INC.
/S/ TOM TURNER
By_______________________________________________
Tom Turner, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/S/TOM TURNER
_________________________ President/Director/ ________
Tom Turner
/S/PHILIP SANDIFUR
_________________________ Vice President/Director ________
Philip Sandifur
/S/ GREG GORDON
_________________________ Secretary/Treasurer ________
Greg Gordon Director
/S/ERNEST JURDANA
_________________________Principal Financial _________
Ernest Jurdana Officer
/S/ ROBERT POTTER
________________________ Director _________
Robert Potter
STATEMENT OF RIGHTS, DESIGNATIONS AND PREFERENCES OF VARIABLE
RATE
CUMULATIVE PREFERRED STOCK, SERIES S-2
1. Name of Corporation: Summit Securities, Inc.
2. Copy of resolution establishing and designating Variable Rate
Cumulative Preferred Stock, Series S-2, and determining the
relative rights and preferences thereof: Attached hereto.
3. The undersigned does hereby certify that the attached resolution
was duly adopted by the Board of Directors of the corporation
on December 13, 1995.
/S/ GREG GORDON
______________________________________
Greg Gordon, Secretary
SUMMIT SECURITIES, INC.
PREFERRED STOCK SERIES S-2 AUTHORIZING RESOLUTION
Resolved, that pursuant to the authority expressly granted
and vested in the Board of Directors (the "Board") of this
Corporation by its Articles of Incorporation, as amended, a
sub-series of Preferred Stock, Series S-2 of the Corporation be,
and is hereby, established which will consist of 150,000 shares of
the par value of $10.00 per share ($15,000,000), shall be
designated "Variable Rate Cumulative Preferred Stock, Series S-2"
(hereafter called "Preferred Stock"), shall be offered at $100.00
per share and which shall have rights, preferences, qualifications
and restrictions as follows:
1. DIVIDENDS.
a) Dividends (or other distributions deemed dividends
for purposes of this resolution) on the issued and outstanding
shares of Preferred Stock shall be declared and paid monthly at a
percentage rate per annum of the liquidation preference of $100.00
per share equal to the "Applicable Rate," as hereinafter defined,
or such greater rate as may be determined by the Board.
Notwithstanding the foregoing, the Applicable Rate for any monthly
dividend period shall, in no event, be less than 6% per annum or
greater than 14% per annum. Such dividends shall be cumulative
from the date of original issue of such shares and shall be
payable, when and as declared by the Board, on such dates as the
Board deems advisable, but at least once a year, commencing June
1, 1993. Each such dividend shall be paid to the holders of
record of shares of Preferred Stock as they appear on the stock
register of the Corporation on such record date as shall be fixed
by the Board in advance of the payment date thereof. Dividends on
account of arrears for any past Dividend Periods may be declared
and paid at any time, without reference to any regular dividend
payment date, to holders of record on such date as shall be fixed
by the Board in advance of the payment date thereof.
b) Except as provided below in this section, the
Applicable Rate for any monthly dividend period shall be the
highest of the Treasury Bill Rate, the Ten Year Constant Maturity
Rate and the Twenty Year Constant Maturity Rate (each as defined
in Exhibit A attached hereto and incorporated by reference herein)
plus one half of one percentage point. In the event that the Board
determines in good faith that for any reason one or more of such
rates cannot be determined for any dividend period, than the
Applicable Rate for such dividend period shall be the higher of
whichever of such rates can be so determined. In the event that
the Board determines in good faith that none of such rates can be
determined for any dividend period, then the Applicable Rate in
effect for the preceding dividend period shall be continued for
such dividend period. The Treasury Bill Rate, the Ten Year
Constant Maturity Rate and the Twenty Year Constant Maturity Rate
shall each be rounded to the nearest five hundredths of a
percentage point.
c) No dividend shall be paid upon, or declared or set
apart for, any share of Preferred Stock for any Dividend Period
unless at the same time a like dividend shall be paid upon, or be
declared and set apart for, all shares of Preferred Stock then
issued and outstanding and all shares of all other series of
preferred stock then issued and outstanding and entitled to
receive dividends. Holders of Preferred Stock shall not be
entitled to any dividend, whether payable in cash, property or
stock, in excess of full cumulative dividends as herein provided.
No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments which may
be in arrears on Preferred Stock.
d) Dividends payable for each full monthly Dividend
Period shall be computed by dividing the Applicable Rate for such
monthly Dividend Period by twelve and applying such rate against
the liquidation preference of $100.00 per share. Dividends shall
be rounded to the nearest whole cent. Dividends payable for any
period less than a full monthly Dividend Period shall be computed
on the basis of 30 day months and a 360 day year. The Applicable
Rate with respect to each monthly Dividend Period shall be
calculated as promptly as practicable by the Corporation according
to the method provided herein. The Corporation will cause notice
of such Applicable Rate to be enclosed with the dividend payment
check next mailed to the holders of shares of Preferred Stock.
e) So long as any shares of Preferred Stock are
outstanding, (i) no 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 section 1(c)) shall be declared or paid or set aside
for payment; (ii) no other distribution shall be declared or made
upon common stock or upon any other stock ranking junior to or on
a parity with Preferred Stock as to dividends or upon liquidation;
and (iii) no common stock or any other stock of the Corporation
ranking junior to or on a parity with Preferred Stock as to
dividends or upon liquidation shall be redeemed, purchased or
otherwise acquired by the Corporation for any consideration (or
any monies paid to or made available for a sinking fund for the
redemption of any shares of any such stock) except by conversion
into or exchange for stock of the Corporation ranking junior to
Preferred Stock as to dividends and upon liquidation unless, in
each case, the full cumulative dividends on all outstanding shares
of Preferred Stock shall have been paid or declared and set apart
for all past dividend payment periods.
f) The holders of Preferred Stock shall be entitled to
receive, when and as declared by the Board, dividend distributions
out of the funds of the Corporation legally available therefor.
Any distribution made which may be deemed to have been made out of
the capital surplus of Preferred Stock shall not reduce either the
redemption process or the liquidation rights as hereafter
specified.
2. REDEMPTION.
a) The Corporation, at its option, may redeem shares of
Preferred Stock, in whole or in part, at any time or from time to
time, at redemption prices hereafter set forth plus accrued and
unpaid dividends to the date fixed for redemption.
i) In the event of a redemption of shares pursuant
to this subsection prior to January 1, 1995, the redemption price
shall be $102.00 per share; and the redemption price shall be
$100.00 per share in the event of redemption anytime after
December 31, 1994.
ii) 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 the
Corporation and the shares to be redeemed shall be determined by
lot, or pro rata, or by any other method, as may be determined by
the Corporation in its sole discretion to be equitable.
iii) In the event that the Corporation shall
redeem shares hereunder, notice of such redemption shall be given
by first class mail, postage prepaid, mailed not less than 30 days
or more than 60 days prior to he redemption date, to each holder
of record of the shares to be redeemed, at such holder's address
as it appears on the stock register of the Corporation. Each such
notice shall state: (i) the redemption date; (ii) the number of
shares to be redeemed and, if fewer than all shares held by such
holder are to be redeemed, the number of such shares to be
redeemed from such holder; (iii) the redemption price; (iv) the
place or places where certificates for such shares are to be
surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on
such redemption date.
iv) Notice having been mailed as aforesaid, from
and after the redemption date (unless default shall be made by the
Corporation in providing money for the payment of the redemption
price), dividends on the shares so called for redemption shall no
longer be deemed to be outstanding, and all rights of the holders
thereof as stockholders of the Corporation (except the right to
receive from the Corporation the redemption price) shall cease.
Upon surrender in accordance with said notice of the certificates
representing shares redeemed (properly endorsed or assigned for
transfer, if the Board shall so require and the notice shall so
state), such shares shall be redeemed by the Corporation at the
redemption price aforesaid. In case fewer than all of the shares
represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares
without cost to the holder thereof.
b) Discretionary Redemption Upon Request of the Holder:
The shares of Preferred Stock are not redeemable at the option of
the holder. If, however, the Corporation receives an unsolicited
written request for redemption of a block of shares from any
holder, the Corporation may, in its sole discretion and subject to
the limitations described below, accept such shares for
redemption. Any shares so tendered, which the Corporation in its
discretion, allows for redemption, shall be redeemed by the
Corporation 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. The Corporation may
change such optional redemption prices at any time with respect to
unissued shares.
The Corporation may not redeem any such shares tendered for
redemption if to do so would be unsafe or unsound in light of the
Corporation'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 the Company ranking at least on a parity therewith is in
arrears as to dividends.
c) Any shares of Preferred Stock which shall at any
time have been redeemed shall, after such redemption, have the
status of authorized but unissued shares of Preferred Stock,
without designation as to series until such shares are designated
as part of a particular series by the Board.
d) Notwithstanding the foregoing provisions of this
Section 2, if any dividends on Preferred Stock are in arrears, no
shares of Preferred Stock shall be redeemed unless all outstanding
shares of Preferred Stock are simultaneously redeemed, and the
Corporation shall not purchase or otherwise acquire any shares of
Preferred Stock; provided, however, that the foregoing shall not
prevent the purchase or acquisition of shares of Preferred Stock
pursuant to a purchase or exchange offer made on the same terms to
holders of all of the outstanding shares of Preferred Stock.
3. CONVERSION OR EXCHANGE. The holders of shares of
Preferred Stock shall not have any rights to convert such shares
into or exchange such shares for shares of any other class or
series of any class of securities of the Corporation.
4. VOTING. Except as required from time to time by law,
the shares of Preferred Stock shall have no voting powers.
Provided, however, not withstanding the foregoing, that whenever
and as often as dividends 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, the holders of Preferred Stock
together with the holders of any 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 the
Corporation. Such right shall continue until all dividends in
arrears on preferred stock have been paid in full.
5. LIQUIDATION RIGHTS.
a) Upon the dissolution, liquidation or winding up of
the Corporation, the holders of the shares of Preferred Stock
shall be entitled to receive out of the assets of the Corporation,
before any payment or distribution shall be made on the Common
Stock, or on any other class of stock ranking junior to Preferred
Stock, upon liquidation, the amount of $100.00 per share, plus a
sum equal to all dividends (whether or not earned or declared) on
such shares accrued and unpaid thereon to the date of final
distribution.
b) Neither the sale, lease or conveyance of all or
substantially all the property or business of the Corporation, nor
the merger or consolidation of the Corporation into or with any
other corporation or the merger or consolidation of any other
corporation into or with the Corporation, shall be deemed to be a
dissolution, liquidation or winding up, voluntary or involuntary,
for the purposes of this Section.
c) After the payment to the holders of the shares of
Preferred Stock of the full preferential amounts provided for in
this Section, the holders of Preferred Stock as such shall have no
right or claim to any of the remaining assets of the Corporation.
d) In the event the assets of the Corporation available
for distribution to the holders of shares of Preferred Stock upon
any dissolution, liquidation or winding up of the Corporation,
whether voluntary or involuntary, shall be insufficient to pay in
full all amounts to which such holders are entitled pursuant to
this Section, no such distribution shall be made on account of any
shares or any other series of Preferred Stock or any other class
of stock ranking on a parity with the shares of Preferred Stock
upon such dissolution, liquidation or winding up, unless
proportionate distributive amounts shall be paid on account of the
shares of Preferred Stock, ratably in accordance with the sums
which would be payable in such distribution if all sums payable in
respect of the shares of all series of Preferred Stock and any
such other class of stock as aforesaid were discharged in full.
6. PRIORITIES. For purposes of this Resolution, any stock
of any class or classes of the Corporation shall be deemed to
rank:
a) Prior to the shares of Preferred Stock, either as to
dividends or upon liquidation if the holders of such class or
classes shall be entitled to the receipt of dividends or of
amounts distributable upon dissolution, liquidation or winding up
of the Corporation, as the case may be, in preference or priority
to the holders of shares of Preferred Stock.
b) On a parity with shares of Preferred Stock, either
as to dividends or upon liquidation, whether or not the dividend
rates, dividend payment dates or redemption or liquidation prices
per share or sinking fund provisions, if any, are different from
those of Preferred Stock, if the holder of such stock shall be
entitled to the receipt of dividends or of amounts distributable
upon dissolution, liquidation or winding up of the Corporation, as
the case may be, in proportion to their respective dividend rates
or liquidation prices, without preference or priority, one over
the other, as between the holder of such stock and the holders of
Preferred Stock; and
c) Junior to shares of Preferred Stock, either as to
dividends or upon liquidation, if the holders of shares of
Preferred Stock shall be entitled to receipt of dividends or of
amounts distributable upon dissolution, liquidation or winding up
of the Corporation, as the case may be, in preference or priority
to the holders of shares of such class or classes.
7. SHARES NON-ASSESSABLE. Any and all shares of Preferred
Stock issued, and for which the full consideration has been paid
or delivered, shall be deemed fully paid stock and the holder of
such shares shall not be liable for any further call or assessment
or any other payment thereon.
8. PRE-EMPTIVE RIGHTS. Holders of Preferred Stock shall
have no pre-emptive rights to acquire additional shares of
Preferred Stock.
EXHIBIT A
Treasury Bill Rate
Except as provided below in this paragraph, the "Treasury
Bill Rate" for each dividend period will be the arithmetic average
of the two most recent weekly per annum market discount rates (or
the one weekly per annum market discount rate, if only one such
rate shall be published during the relevant Calendar Period (as
defined below)) for three-month U.S. Treasury bills, as published
weekly by the Federal Reserve Board during the Calendar Period
immediately prior to the ten calendar days immediately preceding
the first day of the dividend period for which the dividend rate
on Preferred Stock Series E-5, is being determined. In the event
that the Federal Reserve Board does not publish such a weekly per
annum market discount rate during any such Calendar Period, then
the Treasury Bill Rate for the related dividend period shall be
the arithmetic average of the two most recent weekly per annum
market discount rates (or the one weekly per annum market discount
rate, if only one such rate shall be published during the relevant
Calendar Period) for three-month U.S. Treasury bills, as published
weekly during such Calendar Period by any Federal Reserve Bank or
by any U.S. Government department or agency selected by the
Company. In the event that a per annum market discount rate for
three-month U.S Treasury bills shall not be published by the
Federal Reserve Board or by any Federal Reserve Bank or by any
U.S. Government department or agency during such Calendar Period,
then the Treasury Bill Rate for such dividend period shall be the
arithmetic average of the two most recent weekly per annum market
discount rates (or the one weekly per annum market discount rate,
if only one such rate shall be published during the relevant
Calendar Period) for all of the U.S. Treasury bills then having
maturities of not less than 80 nor more than 100 days, as
published during such Calendar Period by the Federal Reserve Board
or, if the Federal Reserve Board shall not publish such rates, by
any Federal Reserve Bank or by any U.S. Government department or
agency selected by the Company. In the event that the Company
determines in good faith that for any reason no such U.S. Treasury
bill rates are published as provided above during such Calendar
Period, then the Treasury Bill Rate for such dividend period shall
be the arithmetic average of the per annum market discount rates
based upon bids during such Calendar Period for each of the issues
of marketable non-interest bearing U.S. Treasury securities with a
maturity of not less than 80 nor more than 100 days from the date
of each such quotation, as quoted daily for each business day in
New York City (or less frequently if daily quotations shall not be
generally available) to the Company by at least three recognized
primary U.S. Government securities dealers selected by the
Company. In the event that the Company determines in good faith
that for any reason the Company cannot determine the Treasury Bill
Rate for any dividend period as provided above in this paragraph,
the Treasury Bill Rate for such dividend period shall be the
arithmetic average of the per annum market discount rates based
upon the closing bids during such Calendar Period for each of the
issues of marketable interest-bearing U.S. Treasury securities
with a maturity of not less than 80 nor more than 100 days from
the date of each such quotation, as quoted daily for each business
day in New York City (or less frequently if daily quotations shall
not be generally available) to the Company by at least three
recognized primary U.S. Government securities dealers selected by
the Company.
Ten Year Constant Maturity Rate
Except as provided below in this paragraph, the "Ten Year
Constant Maturity Rate" for each dividend period shall be the
arithmetic average of the two most recent weekly per annum Ten
Year Average Yields (or the one weekly per annum Ten Year Average
Yield, if only one such Yield shall be published during the
relevant Calendar Period as provided below, as published weekly by
the Federal Reserve Board during the Calendar Period immediately
prior to the ten calendar days immediately preceding the first day
of the dividend period for which the dividend rate on Preferred
Stock, Series E-5 is being determined. In the event that the
Federal Reserve Board does not publish such a weekly per annum Ten
Year Average Yield during such Calendar Period, then the Ten Year
Constant Maturity Rate for such dividend period shall be the
arithmetic average of the two most recent weekly per annum Ten
Year Average Yields (or the one weekly per annum Ten Year Average
Yield, if only one such Yield shall be published during such
Calendar Period), as published weekly during such Calendar Period
by any Federal Reserve Bank or by any U.S. Government department
or agency selected by the Company. In the event that a per annum
Ten Year Average Yield shall not be published by the Federal
Reserve Board or by any Federal Reserve Bank or by any U.S.
Government department or agency during such Calendar Period, then
the Ten Year Constant Maturity Rate for such dividend period shall
be the arithmetic average of the two most recent weekly per annum
average yields to maturity (or the one weekly average yield to
maturity, if only one such yield shall be published during the
relevant Calendar Period) for all of the actively traded
marketable U.S. Treasury fixed interest rate securities (other
than Special Securities (as defined below)) then having maturities
of not less tan eight nor more than twelve years, as published
during such Calendar Period by the Federal Reserve Board or, if
the Federal Reserve Board shall not publish such yields, by any
Federal Reserve Bank o by any U.S. Government department or agency
selected by the Company. In the event that the Company determines
in good faith that for any reason the Company cannot determine the
Ten Year Constant Maturity Rate for any dividend period as
provided above in this paragraph, then the Ten Year Constant
Maturity Rate for such dividend period shall be the arithmetic
average of the per annum average yields to maturity based upon the
closing bids during such Calendar Period for each of the issues of
actively traded marketable U.S. Treasury fixed interest rate
securities (other than Special Securities) with a final maturity
date not less than eight nor more than twelve years from the date
of each such quotation, as quoted daily for each business day in
New York City (or less frequently if daily quotations shall not be
generally available) to the Company by at least three recognized
primary U.S. Government securities dealers selected by the
Company.
Twenty Year Constant Maturity Rate
Except as provided below in this paragraph, the "Twenty Year
Constant Maturity Rate" for each dividend period shall be the
arithmetic average of the two most recent weekly per annum Twenty
Year Average Yields (or the one weekly per annum Twenty year
Average Yield, if only one such Yield shall be published during
the relevant Calendar Period), as published weekly by the Federal
Reserve Board during the Calendar Period immediately prior to the
ten calendar days immediately preceding the first day of the
dividend period for which the dividend rate on Preferred Stock,
Series E-5 is being determined. In the event that the Federal
Reserve Board does not publish such a weekly per annum Twenty Year
Average Yield during such Calendar Period, then the Twenty Year
Constant Maturity Rate for such dividend period shall be the
arithmetic average of the two most recent weekly per annum Twenty
Year Average Yields (or the one weekly per annum Twenty Year
Average Yield, if only one such Yield shall be published during
such Calendar Period), as published weekly during such Calendar
Period by any Federal Reserve Bank or by any U.S. Government
department or agency selected by the Company. In the event that a
per annum Twenty Year Average Yield shall not be published by the
Federal Reserve Board or by any Federal Reserve Bank or by any
U.S. Government department or agency during such Calendar Period,
then the Twenty Year Constant Maturity Rate for such dividend
period shall be the arithmetic average of the two most recent
weekly per annum average yields to maturity (or the one weekly
average yield to maturity, if only one such yield shall be
published during such Calendar Period) for all of the actively
traded marketable U.S. Treasury fixed interest rate securities
(other than Special Securities) then having maturities of not less
than eighteen nor more than twenty-two years, as published during
such Calendar Period by the Federal Reserve Board or, if the
Federal Reserve Board shall not publish such yields, by any
Federal Reserve Bank or by any U.S. Government department or
agency selected by the Company. In the event that the Company
determines in good faith that for any reason the Company cannot
determine the Twenty Year Constant Maturity Rate for any dividend
period as provided above in this paragraph, then the Twenty Year
Constant Maturity Rate for such dividend period shall be the
arithmetic average of the per annum average yields to maturity
based upon the closing bids during such Calendar Period for each
of the issues of actively traded marketable U.S. Treasury fixed
interest rate securities (other than Special Securities) with a
final maturity date not less than eighteen nor more than
twenty-two years from the date of each such quotation, as quoted
daily for each business day in New York City (or less frequently
if daily quotations shall not be generally available) to the
Company by at least three recognized primary U.S. Government
securities dealers selected by the Company.
As used herein, the term "Calendar Period" means a period of
14 calendar days; the term "Special Securities" means securities
which may, at the option of the holder, be surrendered at face
value in payment of any federal estate tax or which provide tax
benefits to the holder and are priced to reflect such tax benefits
or which were originally issued at a deep or substantial discount;
the term "Ten Year Average Yield" means the average yield to
maturity for actively traded marketable U.S. Treasury fixed
interest rate securities (adjusted to constant maturities of ten
years); and the term "Twenty Year Average Yield" means the average
yield to maturity for actively traded marketable U.S. Treasury
fixed interest rate securities (adjusted to constant maturities of
20 years).
MANAGEMENT, ACQUISITION AND SERVICING AGREEMENT
Agreement made this 9th day of September, 1994 by and between Summit
Securities, Inc. (hereinafter "SUMMIT"), a Washington corporation with
principal offices at 1000 West Hubbard, Suite 140, Coeur d'Alene, ID 83814, and
Metropolitan Mortgage & Securities Co., Inc. (hereinafter "METROPOLITAN"), a
Washington corporation with its principal office at W. 929 Sprague Ave.,
Spokane, Washington 99204, (also hereinafter referred to jointly as the
"Parties".)
WITNESSETH
WHEREAS, METROPOLITAN engages in the business of purchasing and servicing
receivables, and maintains subsidiaries, internal staff, and operations to
support such activities, and;
WHEREAS, SUMMIT also engages in the business of investing in receivables,
but SUMMIT does not maintain internal staff or operations to support the
purchasing and servicing of receivables, and;
WHEREAS, METROPOLITAN has the personnel, systems and expertise to provide
to SUMMIT general support services, receivable acquisition services and
receivable collection and management services, and;
WHEREAS, SUMMIT desires to obtain from METROPOLITAN general support
services, receivable acquisition services and receivable collection and
management services;
NOW THEREFORE, for the foregoing reasons and in consideration of the
mutual promises, covenants and agreements set forth herein, the parties
promise, covenant and agree as follows:
I. REPRESENTATIONS AND WARRANTIES OF METROPOLITAN:
METROPOLITAN REPRESENTS AND WARRANTS TO SUMMIT THAT:
1. METROPOLITAN is a corporation duly organized, validly existing and
in good standing under the laws of the State of Washington.
2. METROPOLITAN is licensed, or qualified, and in good standing in
each of the states where the laws require licensing or qualification in order
to conduct METROPOLITAN'S receivable acquisition, collection and management
activities, or METROPOLITAN is exempt under applicable law from such licensing
or qualification.
3. The consummation of the transactions contemplated herein have been
validly authorized and all requisite corporate action has been taken by
METROPOLITAN to make this agreement binding upon METROPOLITAN in accordance
with its terms.
4. The consummation of the transactions contemplated by this agreement
are in the ordinary course of business of METROPOLITAN.
5. The execution and delivery of this agreement, the servicing of
receivables by METROPOLITAN, the other services and transactions contemplated
hereby, and the fulfillment of and compliance with the terms and conditions of
this agreement, will not conflict with or result in a breach of any of the
terms of METROPOLITAN's articles of incorporation, bylaws or any other
agreement, instrument, law, regulation, rule, order, or judgment to which
METROPOLITAN is now a party or by which it is bound. METROPOLITAN is not
subject to any agreement, instrument, law, regulation, rule, order or judgment
which would impair the ability of SUMMIT to collect its receivables or impair
the value of SUMMIT'S receivables.
6. METROPOLITAN does not believe, nor does it have any reason or cause
to believe, that it cannot perform each and every covenant contained in this
agreement.
7. There is no action, suit, proceeding or investigation pending or
threatened against METROPOLITAN which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of METROPOLITAN, or in
any material impairment of the right or ability of METROPOLITAN to carry on its
business substantially as now conducted, or which would draw into question the
validity of this agreement or of any action taken or to be taken in connection
with the obligations of METROPOLITAN contemplated herein, or which would be
likely to impair materially the ability of METROPOLITAN to perform under the
terms of this agreement.
8. No consent, approval, authorization or order of any court or
governmental agency or body is required for METROPOLITAN'S execution, delivery
and performance of or compliance with this agreement.
9. The receivables acquisition practices, receivable collection
practices and other services provided hereunder shall each be conducted in
accordance with generally accepted business practices in all respects, as
applicable to each respective activity.
II. REPRESENTATIONS AND WARRANTIES OF SUMMIT
SUMMIT REPRESENTS AND WARRANTS TO METROPOLITAN THAT:
1. SUMMIT is a corporation duly organized, validly existing and in
good standing under the laws of the State of Idaho.
2. SUMMIT is licensed or qualified, and in good standing in each of
the states where the laws require licensing or qualification in order to hold
and enforce the terms of its receivables and conduct its business, or SUMMIT
is exempt under applicable law from such licensing or qualification.
3. The consummation of the transactions contemplated herein have been
validly authorized and all requisite corporate action has been taken by SUMMIT
to make this agreement binding upon SUMMIT in accordance with its terms.
4. The consummation of the transactions contemplated by this agreement
are in the ordinary course of business of SUMMIT.
5. The execution and delivery of this agreement, the fulfillment of
and compliance with the terms and conditions of this agreement, will not
conflict with or result in a breach of any of the terms of SUMMITS articles of
incorporation, bylaws or any other agreement, instrument, law, regulation,
rule, order, or judgment to which SUMMIT is a party, by which it is bound or
its property is subject, which would impair the ability of METROPOLITAN to
service and collect the receivables in accordance with the terms of this
Agreement.
6. SUMMIT does not believe, nor does it have any reason or cause to
believe, that it cannot perform each and every covenant contained in this
agreement.
7. There is no action, suit or proceeding or investigation pending or
threatened against SUMMIT which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of SUMMIT, or in any
material impairment of the right or ability of SUMMIT to carry on its business
substantially as now conducted, or which would draw into question the validity
of this agreement or of any action taken or to be taken in connection with the
obligations of SUMMIT contemplated herein, or which would be likely to impair
materially the ability of SUMMIT to perform under the terms of this agreement.
8. No consent, approval, authorization or order of any court or
governmental agency or body is required for SUMMIT's execution, delivery and
performance of or compliance with this agreement.
III. GENERAL SUPPORT SERVICES:
1. DESCRIPTION OF SERVICES
a. Administrative Support Services:
METROPOLITAN shall provide SUMMIT administrative support services
including but not limited to Transfer Agent, Registrar, Human Resources,
Information Systems, Art & Advertising, Accounting, legal, check
processing, and cashiering services.
b. Financial Services:
METROPOLITAN shall provide financial advice to SUMMIT.
c. Office Space:
METROPOLITAN shall lease or sublease to SUMMIT sufficient office space
for SUMMIT'S business needs at METROPOLITAN'S headquarters facility in
Spokane, Washington and/or such other location as agreed to by the
parties. Any such lease may include lease of office furnishing and
equipment.
2. FEES FOR GENERAL SUPPORT SERVICES
SUMMIT will pay METROPOLITAN monthly fees for General Support Services
provided by METROPOLITAN to SUMMIT. Fees for General Support Services shall be
determined by mutual agreement of the parties.
IV. RECEIVABLE ACQUISITION SERVICES
1. GENERAL DUTIES AND AUTHORITY
METROPOLITAN shall provide receivable acquisition services to SUMMIT
which shall be performed substantially in compliance with the following:
a. METROPOLITAN shall secure opportunities for SUMMIT to purchase
receivables through the use of METROPOLITAN's branch office system,
industry contacts and the other methods developed by METROPOLITAN for its
own receivable purchases.
b. In reviewing the receivables offered to SUMMIT, METROPOLITAN shall
review, among other things, the receivable loan to value ratio, security
value, security condition, payment record, payor's credit, security title
reports and legal documents, taking into account the investment
guidelines provided by SUMMIT.
c. METROPOLITAN or its agent, shall close the receivable purchase in a
manner and using practices which are consistent with industry standards
for the location where the receivable is closed.
d. Loans resulting from financing that may be provided by METROPOLITAN
as a means to induce the purchase of property (e.g. for the financing of
repossession resales or other seller financing) may be placed in SUMMIT's
receivable portfolio if such receivables are consistent with SUMMIT's
investment guidelines.
e. METROPOLITAN shall prepare and maintain such books, records,
computer systems and procedures as shall be required and necessary to
maintain control over the day to day activities regarding offers to
purchase and closing of receivable purchases.
f. METROPOLITAN shall furnish to SUMMIT such periodic, special or
other reports or information as requested by SUMMIT including reports of
total receivables purchased, closing periods and closing costs. All such
reports, documents or information shall be provided by and in accordance
with all reasonable instructions and directions which SUMMIT may give.
g. METROPOLITAN may carry out any other activity or procedure, which
in METROPOLITAN's discretion, is necessary or appropriate in connection
with the acquisition and closing of the receivables for the benefit of
SUMMIT.
2. RECEIVABLE ACQUISITION SERVICES FEE:
SUMMIT shall pay METROPOLITAN fees for Receivable Acquisition and Support
Services provided by METROPOLITAN to SUMMIT. Fees shall be determined by
mutual agreement of the parties.
3. RIGHT TO REJECT.
SUMMIT shall have the right at anytime to review the receivables acquired
pursuant to this agreement and to reject any receivables which in SUMMIT's
opinion are not consistent with its investment guidelines as such guidelines
existed at the time of the acquisition. Any receivables not rejected within
three months of acquisition are deemed accepted. Any receivable which is
rejected shall be purchased by METROPOLITAN at its face amount or such other
amount as agreed to by the parties.
V. RECEIVABLE COLLECTION AND MANAGEMENT SERVICES
1. SERVICING:
METROPOLITAN or its agents shall perform collection and management
services for SUMMIT substantially in compliance with the following:
a. Hold and safe keep all original receivable documents and files.
b. Prepare and maintain such books, records, computer systems and
procedures as shall be required and necessary to maintain control over
the day to day activities regarding the collection and enforcement of the
rights, obligations and performance of each receivable subject to this
agreement.
c. Furnish to SUMMIT such periodic, special, or other reports,
documents or information as requested by SUMMIT including, but not
limited to, cash receipt reports, aging of all receivables balances on a
contractual basis, and itemizations of unearned or deferred income all in
accordance with generally accepted accounting and statutory accounting
principles. All such reports, documents or information shall be provided
by and in accordance with all reasonable instructions and directions
which SUMMIT may give.
d. METROPOLITAN shall manage the receipt of receivable payments
substantially as follows:
i. Deposit all monies received from the receivable payors into a
general collection account maintained by METROPOLITAN, or its
agent, which account may contain other monies and funds which may
be held for others. Within a reasonable time the amounts collected
and deposited on behalf of SUMMIT shall be transferred to an
account designated by SUMMIT.
ii. For the purposes of this subparagraph d, reasonable time
shall mean two to three business days, unless extraordinary
circumstances beyond METROPOLITAN'S control, such as computer
failure, makes such time frame unreasonable, in which case the
reasonable time shall be two to three days following elimination of
the circumstances causing the delay.
e. Accept and remit to appropriate parties any amounts designated as
reserves for the payment of real estate taxes, insurance premiums or
similar items as may be provided by the receivable documents;
f. Monitor the tax, insurance and other payments required to be paid
directly by receivable payor to third parties, or collect from the
receivable payors and remit to the appropriate third parties any amounts
due for any taxes imposed upon the real estate securing any receivable,
any insurance premiums and any other sums required to be paid by the
receivable payor pursuant to the terms of any receivable. Any funds so
collected by METROPOLITAN or subsidiaries shall be held in escrow if
required by the receivable documents or applicable regulations, or
METROPOLITAN shall pay such sums to SUMMIT as provided in Paragraph
V.1.d. hereinabove. METROPOLITAN shall pay out such monies to such
taxing authorities or other parties or persons as shall be authorized to
receive such payments.
g. Implement routine collection procedures (including telephone calls
and the preparation and mailing of written notices) as METROPOLITAN may,
in its discretion, deem to be reasonable or appropriate and in accordance
with its customary practice and procedure in the servicing of its own
accounts, on delinquent receivables;
h. When appropriate, in METROPOLITAN's discretion, METROPOLITAN or its
agent may undertake any legal action, whether judicial or non-judicial,
to enforce the payment of any sums due or other performance required by
the terms of any receivable documents or to foreclose upon or forfeit any
real estate or other security securing a receivable.
i. Whenever METROPOLITAN shall commence suit to enforce the terms of a
receivable which is subject to this agreement, METROPOLITAN shall be
deemed to be the authorized legal agent and representative of SUMMIT in
any court of law in any federal, state, or commonwealth, or other court
of competent jurisdiction, and to so act, without receiving any other
prior authority of SUMMIT, to enforce, sue, settle, compromise, and/or
collect such monies and recover any and all such real estate security
which shall be the subject of any receivable. Any such action may be
maintained in the name of "SUMMIT" or "METROPOLITAN", at METROPOLITAN's
discretion.
j. Carry out any other activity or procedure which, in METROPOLITAN'S
discretion, is necessary or appropriate in connection with the
maintenance and enforcement of the receivables for the benefit of SUMMIT.
2. COOPERATION BY SUMMIT
SUMMIT agrees to cooperate with METROPOLITAN in the enforcement of all
receivables, make personnel available to METROPOLITAN and cause such personnel
to execute documents, and to make such documents, records, papers, or other
items of evidence available as needed to assist METROPOLITAN in the collection
and servicing of the receivables subject to this agreement.
3. RECEIVABLE COLLECTION AND MANAGEMENT SERVICES FEES
SUMMIT agrees to compensate METROPOLITAN for its duties performed
hereunder in the following manner and amounts:
a. SUMMIT agrees to pay in addition to any applicable taxes a monthly
management and servicing fee. Such sum shall be due whether or not a
receivable is in default. The Receivable Collection and Management
Services Fee shall be determined by mutual agreement of the parties.
b. In addition, SUMMIT shall reimburse METROPOLITAN for all outside
attorney costs and all third party fees and charges which may be incurred
in performance of the collections services.
c. SUMMIT agrees that as additional compensation to METROPOLITAN for
such management and collection efforts that METROPOLITAN shall be
entitled to retain any and all late charges, extension charges, and any
other charges or costs imposed upon a delinquent obligor that do not
relate to changing the terms or conditions of the loan to effect a
restructuring or otherwise.
VI. GENERAL TERMS AND CONDITIONS
1. ADJUSTMENTS TO FEES
METROPOLITAN may, from time to time, change the method for determining
any or all of the fees charged pursuant to this agreement so long as the new
method conforms with the intent of the parties, is reasonable and reflects
changes in market rates and/or the cost for providing such services.
2. REVIEW OF FEES
SUMMIT shall have the right at any time to review the method for
determining the fees charged pursuant to this Agreement. If, in SUMMIT's
opinion, any fee is unacceptable SUMMIT may request a review by the officers of
SUMMIT and METROPOLITAN, who shall use their best efforts to resolve any
objection in consideration of the best interests of both parties.
3. NON-EXCLUSIVITY OF AGREEMENT
a. This agreement is non-exclusive. SUMMIT reserves the right and
privilege to employ and engage, from time to time, any other entity or
person to perform any of the services which are the subject of this
agreement, or may itself perform any such services. Such actions by
SUMMIT shall not be construed as an event of termination of this
agreement.
b. SUMMIT may withdraw any receivable at any time from those being
serviced pursuant to this agreement, which action shall not be a breach
or termination of this agreement.
4. DELEGATION
METROPOLITAN may utilize, delegate to or subcontract with any of its
subsidiaries, divisions, affiliates or third parties in connection with its
performance of the terms of this agreement, in full or in part, as deemed
appropriate at METROPOLITAN's discretion.
5. RIGHT TO EXAMINE METROPOLITAN'S RECORDS
SUMMIT shall have the right to examine and audit any and all of the
books, records, or other information of METROPOLITAN, with respect to or
concerning this agreement or the receivables during business hours or at such
other times as may be reasonable under applicable circumstances.
6. EVENT OF DEFAULT
The following shall be construed as an event of default:
a. The failure by METROPOLITAN to deliver any and all monies received
by METROPOLITAN which METROPOLITAN is obligated to pay to SUMMIT pursuant
to the terms of this agreement;
b. The failure by SUMMIT to deliver any sums required to be paid to
METROPOLITAN pursuant to the terms of this agreement.
c. The failure of either party to perform in accordance with the terms
and conditions of this agreement to the extent that such failure to
perform shall constitute a material breach of a term or condition of this
agreement.
d. In the event that METROPOLITAN shall file bankruptcy or otherwise
be determined to be insolvent, this agreement may be terminated by SUMMIT
and SUMMIT may take immediate steps to employ another entity to collect
and service the receivables then being serviced by METROPOLITAN.
7. TERMINATION
a. Either party may terminate this agreement by providing written
notice of termination to the other party, in which event this agreement
shall terminate immediately upon receipt of such notice or at such later
date as provided in said notice.
b. In the event of a default as defined in paragraph VI.6.
hereinabove, the non-defaulting party may, in lieu of immediately
terminating this agreement, provide written notice of default to the
defaulting party, which notice shall set forth the time-period for cure,
which shall be no less than ten (10) days from receipt of the notice by
the defaulting party. If the breaching party does not cure the default
within the time period set forth in the notice, this agreement shall
terminate upon expiration of said time period.
8. NOTICE
Notice under this agreement shall be in writing, and delivered by hand,
receipt acknowledged, or delivered by registered certified United States mail,
return receipt requested, and if refused, by regular United States mail,
addressed to the parties as stated below:
a. ATTN: PRESIDENT
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
W. 929 Sprague Ave.
Spokane, WA 99204.
b. ATTN: PRESIDENT
SUMMIT SECURITIES INC.
1000 W. Hubbard, Suite 140
Coeur d'Alene, ID 83814
9. BINDING EFFECT
This agreement sets forth the entire agreement between the parties, and
shall be binding upon all successors and assigns of both of the parties hereto,
and shall be construed under the laws of the State of Washington.
10. PRIOR AGREEMENTS
This agreement replaces and supersedes each and every prior agreement
executed by the parties related to the management, Receivable acquisition and
Receivable collection services provided by METROPOLITAN to SUMMIT.
This agreement is executed the day, month, and year first above written by
the duly authorized officers of each party.
METROPOLITAN MORTGAGE & SUMMIT SECURITIES, INC.
SECURITIES CO., INC.
/S/ C. PAUL SANDIFUR, JR. /S/ JOHN TRIMBLE
By: By:
C. Paul Sandifur, Jr. John Trimble
President President
/S/ SUSAN THOMSON /S/ TOM TURNER
Attest Attest
Susan Thomson Tom Turner
Assistant Secretary Secretary/Treasurer
ADDENDUM TO MANAGEMENT, ACQUISITION AND SERVICING AGREEMENT
BETWEEN
SUMMIT SECURITIES, INC.
AND
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
DATE OF Amended ORIGINAL AGREEMENT: September 9, 1994
DATE OF THIS ADDENDUM: September 9, 1994
ADDENDUM NUMBER: 1
1. FEES FOR GENERAL SUPPORT SERVICES
a. Administrative Support Fees:
i. SUMMIT will pay METROPOLITAN a monthly fee for general
office services provided by METROPOLITAN to SUMMIT. It is the
intent of the parties hereto that the Administrative Support Fees
be calculated at a fair and equitable rate that reflects the
current market cost for comparable services.
ii. METROPOLITAN has developed and shall continue to maintain a
cost-allocation system designed to measure the activity of the
general support services departments used by both parties, to
provide a basis for allocation of the costs generated by those
departments. The cost allocation system shall be expressed in
terms of labor hours, machine hours, square footage, and/or other
appropriate measures. The cost allocation system will be used to
support charges found in the market place for comparable services
and may be used as an approximation for market charges when the
market cost for such services cannot be determined and as agreed to
by the parties.
b. Financial Services Fees:
i. SUMMIT shall pay to METROPOLITAN an agreed amount to
METROPOLITAN for METROPOLITAN providing financial consultation and
advice.
ii. The financial consultation and advice, when provided, shall be
charged at a fee negotiated by the parties in each instance and
based upon the expertise and hours required to provide the service.
c. Office Space Rental Fees:
i. SUMMIT shall also pay to METROPOLITAN an agreed amount of
rent for the real and personal property utilized by SUMMIT during
the term hereof, which amount shall be determined on the basis of a
triple net lease.
ii. The lease for office space and related triple net charges
shall be determined on a square foot basis, based upon a percentage
of the building's total expenses, or such other appropriate measure
as determined by the parties.
2. RECEIVABLE ACQUISITION SERVICES FEE:
a. METROPOLITAN shall acquire receivables for SUMMIT, which, after
deduction of METROPOLITAN'S fee, earn a minimum net yield equivalent to
the yield obtainable in the market place for assets of comparable credit
quality (estimated to approximate 400 basis points over the average
Treasury Mortgage Equivalent Yield). Calculation of this fee shall be
determined by mutual agreement of the parties.
b. The minimum fee to METROPOLITAN will be no less than 100 basis
points for all receivables purchased through its origination network.
c. The following formula sets forth the initial method for calculating
the fee and corresponds to the sample calculation set forth in Exhibit A.
i. Determine the net carrying value (net book value) of the
receivables(s) by decreasing its/their face amount by the purchase
discount, and adding back the capitalized closing costs. For the
purposes of this paragraph, purchase discount is the difference
between the face value of the receivable and its purchase price
paid to the third party seller.
ii. Determine the weighted average remaining contractual term of
the receivable(s).
iii. Set forth the expected average remaining life for the
receivable(s), which expectation shall be determined after applying
the prepayment assumption set forth in paragraph v. The average
remaining life is equal to the life in which the average balanced
is reached.
iv. Determine the weighted average coupon (weighted average
interest rate) for the receivable(s).
v. Set forth the expected prepayment assumption for the
receivable(s) which shall be determined by considering the weighted
average coupon (set forth in iv. hereinabove) in light of the
current interest rate environment.
vi. Determine the average weekly treasury yield for the expected
average time to maturity of the receivable(s) as set forth in
paragraph IV.2.c.iii. over the time period that the receivable(s)
was/were acquired. The weekly yield shall be a weekly average
calculated on a consistent basis, such as the average weekly rate
published by the Bloomberg Investment System. The rate used may
reflect an interpolation between proximate treasury yields and
terms. The rate may be the result of rounding to the nearest whole
year, e.g. an expected receivable average term of 4.6 years may be
rounded to 5.0 years.
vii. Determine the mortgage equivalent (monthly payment
equivalent) for the average weekly treasury yield set forth in vi.
hereinabove.
viii. Add the appropriate spread to the mortgage yield equivalent
(IV.2.a.). The result is the receivable yield to SUMMIT (subject
to IV.2.b.).
ix. Determine the percent of the face value of the receivable
which SUMMIT can pay to achieve its yield requirement as set forth
in viii. hereinabove.
x. Set forth the dollar amount which results from applying the
percent in paragraph ix, to the face amount of the receivable.
xi. The difference between the amount SUMMIT can pay to obtain
its desired yield (ix.) and the net carrying value (i.), is the
acquisition services fee.
xii. Determine that the fee prescribed in (xi.) is equal to or
greater than the minimum fee prescribed in IV>2.b. If the fee
derived from the above formula is less than the minimum then
recalculate the fee at the prescribed minimum.
d. The receivable acquisition services fee may be calculated by
METROPOLITAN, at its discretion, on an individual receivable basis, or on
a pooled basis.
3. RECEIVABLE COLLECTION AND MANAGEMENT SERVICES FEES
SUMMIT agrees to compensate METROPOLITAN for its duties performed
hereunder in the following manner and amounts:
a. SUMMIT agrees to pay in addition to any applicable taxes a monthly
management and servicing fee. Such sum shall be due whether or not a
receivable is in default. The fee shall be calculated based on the cost
for similar services in the market place. The charge will be derived
based generally on the following methodology: The standard servicing
charge in the market place for conventional residential receivables
(currently 25 basis points) will be applied to the average Washington,
regional, or national average receivable balance. The parties may agree
to further segregate the charges between residential, commercial or other
receivable types. The resulting annual per receivable charge will be
divided by the recent average SUMMIT receivable balance and multiplied by
one plus a factor that considers the additional servicing cost attendant
to the types of receivables generally acquired SUMMIT.
METROPOLITAN MORTGAGE & SUMMIT SECURITIES, INC.
SECURITIES CO., INC.
/S/ C. PAUL SANDIFUR, JR. /S/ JOHN TRIMBLE
By: By:
C. Paul Sandifur, Jr. John Trimble
President President
/S/ SUSAN THOMSON /S/ TOM TURNER
Attest Attest
Susan Thomson Tom Turner
Assistant Secretary Secretary/Treasurer
MANAGEMENT, ACQUISITION AND SERVICING AGREEMENT
Agreement made this 31st day of December, 1994 by and between Old
Standard Life Insurance Company (hereinafter "OLD STANDARD"), an Idaho
corporation with principal offices at 1000 West Hubbard, Coeur d'Alene, ID
83814, and Metropolitan Mortgage & Securities Co., Inc. (hereinafter
"METROPOLITAN"), a Washington corporation with its principal office at W. 929
Sprague Ave., Spokane, Washington 99204, (also hereinafter referred to jointly
as the "Parties".)
WITNESSETH
WHEREAS, METROPOLITAN engages in the business of purchasing and servicing
receivables, and maintains subsidiaries, internal staff, and operations to
support such activities, and;
WHEREAS, OLD STANDARD also engages in the business of investing in
receivables, but OLD STANDARD does not maintain internal staff or operations to
support the purchasing and servicing of receivables, and;
WHEREAS, METROPOLITAN has the personnel, systems and expertise to provide
to OLD STANDARD general support services, receivable acquisition services and
receivable collection and management services, and;
WHEREAS, OLD STANDARD desires to obtain from Metropolitan general support
services, receivable acquisition services and account receivable and management
services;
NOW THEREFORE, for the foregoing reasons and in consideration of the
mutual promises, covenants and agreements set forth herein, the parties
promise, covenant and agree as follows:
I. REPRESENTATIONS AND WARRANTIES OF METROPOLITAN:
METROPOLITAN REPRESENTS AND WARRANTS TO OLD STANDARD THAT:
1. METROPOLITAN is a corporation duly organized, validly existing and
in good standing under the laws of the State of Washington.
2. METROPOLITAN is licensed, or qualified, and in good standing in
each of the states where the laws require licensing or qualification in order
to conduct METROPOLITAN'S receivable acquisition, collection and management
activities, or METROPOLITAN is exempt under applicable law from such licensing
or qualification.
3. The consummation of the transactions contemplated herein have been
validly authorized and all requisite corporate action has been taken by
METROPOLITAN to make this agreement binding upon METROPOLITAN in accordance
with its terms.
4. The consummation of the transactions contemplated by this agreement
are in the ordinary course of business of METROPOLITAN.
5. The execution and delivery of this agreement, the servicing of
receivables by METROPOLITAN, the other services and transactions contemplated
hereby, and the fulfillment of and compliance with the terms and conditions of
this agreement, will not conflict with or result in a breach of any of the
terms of METROPOLITAN's articles of incorporation, bylaws or any other
agreement, instrument, law, regulation, rule, order, or judgment to which
METROPOLITAN is now a party or by which it is bound. METROPOLITAN is not
subject to any agreement, instrument, law, regulation, rule, order or judgment
which would impair the ability of OLD STANDARD to collect its receivables or
impair the value of OLD STANDARD'S receivables.
6. METROPOLITAN does not believe, nor does it have any reason or cause
to believe, that it cannot perform each and every covenant contained in this
agreement.
7. There is no action, suit, proceeding or investigation pending or
threatened against METROPOLITAN which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of METROPOLITAN, or in
any material impairment of the right or ability of METROPOLITAN to carry on its
business substantially as now conducted, or which would draw into question the
validity of this agreement or of any action taken or to be taken in connection
with the obligations of METROPOLITAN contemplated herein, or which would be
likely to impair materially the ability of METROPOLITAN to perform under the
terms of this agreement.
8. No consent, approval, authorization or order of any court or
governmental agency or body is required for METROPOLITAN'S execution, delivery
and performance of or compliance with this agreement.
9. The receivables acquisition practices, receivable collection
practices and other services provided hereunder shall each be conducted in
accordance with generally accepted business practices in all respects, as
applicable to each respective activity.
II. REPRESENTATIONS AND WARRANTIES OF OLD STANDARD
OLD STANDARD REPRESENTS AND WARRANTS TO METROPOLITAN THAT:
1. OLD STANDARD is a corporation duly organized, validly existing and
in good standing under the laws of the State of Idaho.
2. OLD STANDARD is licensed or qualified, and in good standing in each
of the states where the laws require licensing or qualification in order to
hold and enforce the terms of its receivables and conduct its business, or OLD
STANDARD is exempt under applicable law from such licensing or qualification.
3. The consummation of the transactions contemplated herein have been
validly authorized and all requisite corporate action has been taken by OLD
STANDARD to make this agreement binding upon OLD STANDARD in accordance with
its terms.
4. The consummation of the transactions contemplated by this agreement
are in the ordinary course of business of OLD STANDARD.
5. The execution and delivery of this agreement, the fulfillment of
and compliance with the terms and conditions of this agreement, will not
conflict with or result in a breach of any of the terms of OLD STANDARDS
articles of incorporation, bylaws or any other agreement, instrument, law,
regulation, rule, order, or judgment to which OLD STANDARD is a party, by which
it is bound or its property is subject, which would impair the ability of
METROPOLITAN to service and collect the receivables in accordance with the
terms of this Agreement.
6. OLD STANDARD does not believe, nor does it have any reason or
cause to believe, that it cannot perform each and every covenant contained in
this agreement.
7. There is no action, suit or proceeding or investigation pending or
threatened against OLD STANDARD which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of OLD STANDARD, or in
any material impairment of the right or ability of OLD STANDARD to carry on
its business substantially as now conducted, or which would draw into question
the validity of this agreement or of any action taken or to be taken in
connection with the obligations of OLD STANDARD contemplated herein, or which
would be likely to impair materially the ability of OLD STANDARD to perform
under the terms of this agreement.
III. GENERAL SUPPORT SERVICES:
1. DESCRIPTION OF SERVICES
a. Administrative Support Services:
METROPOLITAN shall provide OLD STANDARD administrative support services
including but not limited to Human Resources, Information Systems, Art &
Advertising, Accounting, legal, check processing, and cashiering
services.
b. Financial Services:
METROPOLITAN shall provide financial advice and investment portfolio
management services to OLD STANDARD.
c. Office Space:
Metropolitan shall lease or sublease to OLD STANDARD sufficient office
space for OLD STANDARD'S business needs at METROPOLITAN'S headquarters
facility in Spokane, Washington and/or such other location as agreed to
by the parties. Any such lease may include lease of office furnishings
and equipment.
2. FEES FOR GENERAL SUPPORT SERVICES
OLD STANDARD will pay METROPOLITAN monthly fees for General Support
Services provided by METROPOLITAN to OLD STANDARD. Fees for General Support
Services shall be determined by mutual agreement of the parties.
IV. RECEIVABLE ACQUISITION SERVICES
1. GENERAL DUTIES AND AUTHORITY
METROPOLITAN shall provide receivable acquisition services to OLD
STANDARD which shall be performed substantially in compliance with the
following:
a. METROPOLITAN shall secure opportunities for OLD STANDARD to
purchase receivables through the use of METROPOLITAN's branch office
system, industry contacts and the other methods developed by METROPOLITAN
for its own receivable purchases.
b. In reviewing the receivables offered to OLD STANDARD, METROPOLITAN
shall review, among other things, the receivable loan to value ratio,
security value, security condition, payment record, payor's credit,
security title reports and legal documents, taking into account the
investment guidelines provided by OLD STANDARD.
c. METROPOLITAN or its agent, shall close the receivable purchase in a
manner and using practices which are consistent with industry standards
for the location where the receivable is closed.
d. Loans resulting from financing that may be provided by METROPOLITAN
as a means to induce the purchase of property (e.g. for the financing of
repossession resales or other seller financing) may be placed in OLD
STANDARD's receivable portfolio if such receivables are consistent with
OLD STANDARD's investment guidelines.
e. METROPOLITAN shall prepare and maintain such books, records,
computer systems and procedures as shall be required and necessary to
maintain control over the day to day activities regarding offers to
purchase and closing of receivable purchases.
f. METROPOLITAN shall furnish to OLD STANDARD such periodic, special
or other reports or information as requested by OLD STANDARD including
reports of total receivables purchased, closing periods and closing
costs. All such reports, documents or information shall be provided by
and in accordance with all reasonable instructions and directions which
OLD STANDARD may give.
g. METROPOLITAN may carry out any other activity or procedure, which
in METROPOLITAN's discretion, is necessary or appropriate in connection
with the acquisition and closing of the receivables for the benefit of
OLD STANDARD.
2. RECEIVABLE ACQUISITION SERVICES FEE:
OLD STANDARD shall pay METROPOLITAN fees for Receivable Acquisition and
Support Services provided by METROPOLITAN to OLD STANDARD. Fees shall be
determined by mutual agreement of the parties.
3. RIGHT TO REJECT.
OLD STANDARD shall have the right at anytime to review the receivables
acquired pursuant to this agreement and to reject any receivables which in OLD
STANDARD's opinion are not consistent with its investment guidelines as such
guidelines existed at the time of the acquisition. Any receivables not
rejected within three months of acquisition are deemed accepted. Any
receivable which is rejected shall be purchased by Metropolitan at its face
amount or such other amount as agreed to by the parties.
V. RECEIVABLE COLLECTION AND MANAGEMENT SERVICES
1. SERVICING:
METROPOLITAN or its agents shall perform collection and management
services for OLD STANDARD substantially in compliance with the following:
a. Hold and safe keep all original receivable documents and files.
b. Prepare and maintain such books, records, computer systems and
procedures as shall be required and necessary to maintain control over
the day to day activities regarding the collection and enforcement of the
rights, obligations and performance of each receivable subject to this
agreement.
c. Furnish to OLD STANDARD such periodic, special, or other reports,
documents or information as requested by OLD STANDARD including, but not
limited to, cash receipt reports, aging of all receivables balances on a
contractual basis, and itemizations of unearned or deferred income all in
accordance with generally accepted accounting and statutory accounting
principles. All such reports, documents or information shall be provided
by and in accordance with all reasonable instructions and directions
which OLD STANDARD may give.
d. METROPOLITAN shall manage the receipt of receivable payments
substantially as follows:
i. Deposit all monies received from the receivable payors into a
general collection account maintained by METROPOLITAN, or its
agent, which account may contain other monies and funds which may
be held for others. Within a reasonable time the amounts collected
and deposited on behalf of OLD STANDARD shall be transferred to an
account designated by OLD STANDARD.
ii. For the purposes of this subparagraph d, reasonable time
shall mean two to three business days, unless extraordinary
circumstances beyond METROPOLITAN'S control, such as computer
failure, makes such time frame unreasonable, in which case the
reasonable time shall be two to three days following elimination of
the circumstances causing the delay.
e. Accept and remit to appropriate parties any amounts designated as
reserves for the payment of real estate taxes, insurance premiums or
similar items as may be provided by the receivable documents;
f. Monitor the tax, insurance and other payments required to be paid
directly by receivable payor to third parties, or collect from the
receivable payors and remit to the appropriate third parties any amounts
due for any taxes imposed upon the real estate securing any receivable,
any insurance premiums and any other sums required to be paid by the
receivable payor pursuant to the terms of any receivable. Any funds so
collected by METROPOLITAN or subsidiaries shall be held in escrow if
required by the receivable documents or applicable regulations, or
METROPOLITAN shall pay such sums to OLD STANDARD as provided in Paragraph
V.1.d. hereinabove. METROPOLITAN shall pay out such monies to such
taxing authorities or other parties or persons as shall be authorized to
receive such payments.
g. Implement routine collection procedures (including telephone calls
and the preparation and mailing of written notices) as METROPOLITAN may,
in its discretion, deem to be reasonable or appropriate and in accordance
with its customary practice and procedure in the servicing of its own
accounts, on delinquent receivables;
h. When appropriate, in METROPOLITAN's discretion, METROPOLITAN or its
agent may undertake any legal action, whether judicial or non-judicial,
to enforce the payment of any sums due or other performance required by
the terms of any receivable documents or to foreclose upon or forfeit any
real estate or other security securing a receivable.
i. Whenever METROPOLITAN shall commence suit to enforce the terms of a
receivable which is subject to this agreement, METROPOLITAN shall be
deemed to be the authorized legal agent and representative of OLD
STANDARD in any court of law in any federal, state, or commonwealth, or
other court of competent jurisdiction, and to so act, without receiving
any other prior authority of OLD STANDARD, to enforce, sue, settle,
compromise, and/or collect such monies and recover any and all such real
estate security which shall be the subject of any receivable. Any such
action may be maintained in the name of "OLD STANDARD" or "METROPOLITAN",
at METROPOLITAN's discretion.
j. Carry out any other activity or procedure which, in METROPOLITAN'S
discretion, is necessary or appropriate in connection with the
maintenance and enforcement of the receivables for the benefit of OLD
STANDARD.
2. COOPERATION BY OLD STANDARD
OLD STANDARD agrees to cooperate with METROPOLITAN in the enforcement of
all receivables, make personnel available to METROPOLITAN and cause such
personnel to execute documents, and to make such documents, records, papers, or
other items of evidence available as needed to assist METROPOLITAN in the
collection and servicing of the receivables subject to this agreement.
3. RECEIVABLE COLLECTION AND MANAGEMENT SERVICES FEES
OLD STANDARD agrees to compensate METROPOLITAN for its duties performed
hereunder in the following manner and amounts:
a. OLD STANDARD agrees to pay in addition to any applicable taxes a
monthly management and servicing fee. Such sum shall be due whether or
not a receivable is in default. The Receivable Collection and Management
Services Fee shall be determined by mutual agreement of the parties.
b. In addition, OLD STANDARD shall reimburse METROPOLITAN for all
outside attorney costs and all third party fees and charges which may be
incurred in performance of the collections services.
c. OLD STANDARD agrees that as additional compensation to METROPOLITAN
for such management and collection efforts that METROPOLITAN shall be
entitled to retain any and all late charges, extension charges, and any
other charges or costs imposed upon a delinquent obligor that do not
relate to changing the terms or conditions of the loan to effect a
restructuring or otherwise.
VI. GENERAL TERMS AND CONDITIONS
1. ADJUSTMENTS TO FEES
METROPOLITAN may, from time to time, change the method for determining
any or all of the fees charged pursuant to this agreement so long as the new
method conforms with the intent of the parties, is reasonable and reflects
changes in market rates and/or the cost for providing such services.
2. REVIEW OF FEES
OLD STANDARD shall have the right at any time to review the method for
determining the fees charged pursuant to this Agreement. If, in OLD STANDARD's
opinion, any fee is unacceptable OLD STANDARD may request a review by the
officers of OLD STANDARD and METROPOLITAN, who shall use their best efforts to
resolve any objection in consideration of the best interests of both parties.
3. NON-EXCLUSIVITY OF AGREEMENT
a. This agreement is non-exclusive. OLD STANDARD reserves the right
and privilege to employ and engage, from time to time, any other entity
or person to perform any of the services which are the subject of this
agreement, or may itself perform any such services. Such actions by OLD
STANDARD shall not be construed as an event of termination of this
agreement.
b. OLD STANDARD may withdraw any receivable at any time from those
being serviced pursuant to this agreement, which action shall not be a
breach or termination of this agreement.
4. DELEGATION
METROPOLITAN may utilize, delegate to or subcontract with any of its
subsidiaries, divisions, affiliates or third parties in connection with its
performance of the terms of this agreement, in full or in part, as deemed
appropriate at Metropolitan's discretion.
5. RIGHT TO EXAMINE METROPOLITAN'S RECORDS
OLD STANDARD shall have the right to examine and audit any and all of the
books, records, or other information of METROPOLITAN, with respect to or
concerning this agreement or the receivables during business hours or at such
other times as may be reasonable under applicable circumstances.
6. EVENT OF DEFAULT
The following shall be construed as an event of default:
a. The failure by METROPOLITAN to deliver any and all monies received
by METROPOLITAN which METROPOLITAN is obligated to pay to OLD STANDARD
pursuant to the terms of this agreement;
b. The failure by OLD STANDARD to deliver any sums required to be paid
to METROPOLITAN pursuant to the terms of this agreement.
c. The failure of either party to perform in accordance with the terms
and conditions of this agreement to the extent that such failure to
perform shall constitute a material breach of a term or condition of this
agreement.
d. In the event that METROPOLITAN shall file bankruptcy or otherwise
be determined to be insolvent, this agreement may be terminated by OLD
STANDARD and OLD STANDARD may take immediate steps to employ another
entity to collect and service the receivables then being serviced by
METROPOLITAN.
7. TERMINATION
a. Either party may terminate this agreement by providing written
notice of termination to the other party, in which event this agreement
shall terminate immediately upon receipt of such notice or at such later
date as provided in said notice.
b. In the event of a default as defined in paragraph VI.6.
hereinabove, the non-defaulting party may, in lieu of immediately
terminating this agreement, provide written notice of default to the
defaulting party, which notice shall set forth the time-period for cure,
which shall be no less than ten (10) days from receipt of the notice by
the defaulting party. If the breaching party does not cure the default
within the time period set forth in the notice, this agreement shall
terminate upon expiration of said time period.
8. NOTICE
Notice under this agreement shall be in writing, and delivered by hand,
receipt acknowledged, or delivered by registered certified United States mail,
return receipt requested, and if refused, by regular United States mail,
addressed to the parties as stated below:
a. ATTN: PRESIDENT
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
W. 929 Sprague Ave.
Spokane, WA 99204.
b. ATTN: PRESIDENT
OLD STANDARD LIFE INSURANCE COMPANY
1000 West Hubbard
Coeur d'Alene, ID 83814.
9. BINDING EFFECT
This agreement sets forth the entire agreement between the parties, and
shall be binding upon all successors and assigns of both of the parties hereto,
and shall be construed under the laws of the State of Washington.
10. PRIOR AGREEMENT
This Agreement replaces and supersedes each and every prior agreement
executed by the parties related to the management, receivable acquisition and
receivable collection services provided by METROPOLITAN to OLD STANDARD.
This agreement is executed the day, month, and year first above written by
the duly authorized officers of each party.
METROPOLITAN MORTGAGE & OLD STANDARD LIFE INSURANCE COMPANY
SECURITIES CO., INC.
/s/ C. PAUL SANDIFUR, JR. /S/ M. DAVID GORTON
By: By:
C. Paul Sandifur, Jr. M. David Gorton
President Vice-President
/S/ SUSAN THOMSON /S/ THOMAS TURNER
Attest Attest
Susan Thomson Thomas Turner
Assistant Secretary Secretary/Treasurer
ADDENDUM TO MANAGEMENT, ACQUISITION AND SERVICING AGREEMENT
BETWEEN
OLD STANDARD LIFE INSURANCE COMPANY
AND
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
DATE OF ORIGINAL AGREEMENT: 12/31/94
DATE OF THIS ADDENDUM: 12/31/94
ADDENDUM NUMBER: 1
1. FEES FOR GENERAL SUPPORT SERVICES
a. Administrative Support Fees:
i. OLD STANDARD will pay METROPOLITAN a monthly fee for general
office services provided by METROPOLITAN to OLD STANDARD. It is
the intent of the parties hereto that the Administrative Support
Fees be calculated at a fair and equitable rate that reflects the
current market cost for comparable services.
ii. METROPOLITAN has developed and shall continue to maintain a
cost-allocation system designed to measure the activity of the
general support services departments used by both parties, to
provide a basis for allocation of the costs generated by those
departments to be allocated to OLD STANDARD. The cost allocation
system shall be expressed in terms of labor hours, machine hours,
square footage, and/or other appropriate measures. The cost
allocation system will be used to support charges found in the
market place for comparable services and may be used as an
approximation for market charges when the market cost for such
services cannot be determined and as agreed to by the parties.
b. Financial Services Fees:
i. OLD STANDARD shall pay to METROPOLITAN an agreed amount to
METROPOLITAN for METROPOLITAN providing financial consultation and
advice, and for managing OLD STANDARD'S investment portfolio.
ii. The financial consultation and advice, when provided, shall be
charged at a fee negotiated by the parties in each instance and
based upon the expertise and hours required to provide the service.
The portfolio management services shall be charged to OLD STANDARD
as a percentage of the portfolio size and payable monthly.
c. Office Space Rental Fees:
i. OLD STANDARD shall also pay to METROPOLITAN an agreed amount
of rent for the real and personal property utilized by OLD STANDARD
during the term hereof, which amount shall be determined on the
basis of a triple net lease.
ii. The lease for office space and related triple net charges
shall be determined on a square foot basis, based upon a percentage
of the building's total expenses, or such other appropriate measure
as determined by METROPOLITAN.
2. RECEIVABLE ACQUISITION SERVICES FEE:
a. METROPOLITAN shall acquire receivables for OLD STANDARD, which,
after deduction of METROPOLITAN'S fee, earn a minimum net yield
equivalent to the yield obtainable in the market place for assets of
comparable credit quality (estimated to approximate 400 basis points over
the average Treasury Mortgage Equivalent Yield). Calculation of this fee
shall be determined by mutual agreement of the parties.
b. The minimum fee to METROPOLITAN will be no less than 100 basis
points.
c. The following formula sets forth the initial method for calculating
the fee and corresponds to the sample calculation set forth in Exhibit A.
i. Determine the net carrying value (net book value) of the
receivables(s) by decreasing its/their face amount by the purchase
discount, and adding back the capitalized closing costs. For the
purposes of this paragraph, purchase discount is the difference
between the face value of the receivable and its purchase price
paid to the third party seller.
ii. Determine the weighted average remaining contractual term of
the receivable(s).
iii. Set forth the expected average remaining life for the
receivable(s), which expectation shall be determined after applying
the prepayment assumption set forth in paragraph v. The average
remaining life is equal to the life in which the average balanced
is reached.
iv. Determine the weighted average coupon (weighted average
interest rate) for the receivable(s).
v. Set forth the expected prepayment assumption for the
receivable(s) which shall be determined by considering the weighted
average coupon (set forth in iv. hereinabove) in light of the
current interest rate environment.
vi. Determine the average weekly treasury yield for the expected
average time to maturity of the receivable(s) as set forth in
paragraph IV.2.c.iii. over the time period that the receivable(s)
was/were acquired. The weekly yield shall be a weekly average
calculated on a consistent basis, such as the average weekly rate
published by the Bloomberg Investment System. The rate used may
reflect an interpolation between proximate treasury yields and
terms. The rate may be the result of rounding to the nearest whole
year, e.g. an expected receivable average term of 4.6 years may be
rounded to 5.0 years.
vii. Determine the mortgage equivalent (monthly payment
equivalent) for the average weekly treasury yield set forth in vi.
hereinabove.
viii. Add the appropriate spread to the mortgage yield equivalent
(IV.2.a.). The result is the receivable yield to OLD STANDARD
(subject to IV.2.b.).
ix. Determine the percent of the face value of the receivable
which OLD STANDARD can pay to achieve its yield requirement as set
forth in viii. hereinabove.
x. Set forth the dollar amount which results from applying the
percent in paragraph ix, to the face amount of the receivable.
xi. The difference between the amount OLD STANDARD can pay to
obtain its desired yield (ix.) and the net carrying value (i.), is
the acquisition services fee.
xii. Determine that the fee prescribed in (xi.) is equal to or
greater than the minimum fee prescribed in IV>2.b. If the fee
derived from the above formula is less than the minimum then
recalculate the fee at the prescribed minimum.
d. The receivable acquisition services fee may be calculated by
METROPOLITAN, at its discretion, on an individual receivable basis, or on
a pooled basis.
3. RECEIVABLE COLLECTION AND MANAGEMENT SERVICES FEES
OLD STANDARD agrees to compensate METROPOLITAN for its duties performed
hereunder in the following manner and amounts:
a. OLD STANDARD agrees to pay in addition to any applicable taxes a
monthly management and servicing fee. Such sum shall be due whether or
not a receivable is in default. The fee shall be calculated based on the
cost for similar services in the market place. The charge will be
derived based generally on the following methodology: The standard
servicing charge in the market place for conventional residential
receivables (currently 25 basis points) will be applied to the average
Washington, regional, or national average receivable balance. The
parties may agree to further segregate the charges between residential,
commercial or other receivable types. The resulting annual per
receivable charge will be divided by the recent average OLD STANDARD
receivable balance and multiplied by one plus a factor that considers the
additional servicing cost attendant to the types of receivables generally
acquired OLD STANDARD.
METROPOLITAN MORTGAGE & OLD STANDARD LIFE INSURANCE COMPANY
SECURITIES CO., INC.
/S/ C. PAUL SANDIFUR, JR. /S/ M. DAVID GORTON
By: By:
C. Paul Sandifur, Jr. M. David Gorto
President Vice President
/S/ SUSAN THOMSON /S/ THOMAS TURNER
Attest Attest
Susan Thomson Thomas Turner
Assistant Secretary Secretary/Treasurer
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