<PAGE> Page 2
As filed with the Securities and Exchange Commission on April 15,
1997. Registration No.333-19787
AMENDMENT NO. 2 TO
FORM S-2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
SUMMIT SECURITIES, INC.
an Idaho Corporation - IRS Employer No. 82-0438135
929 W. Sprague Avenue
Spokane, WA 99204
(509) 838-3111
Agent for Service
Tom Turner, President
Summit Securities, Inc.
929 W. Sprague Ave.
Spokane, WA 99204
(509) 838-3111
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the Registration Statement
becomes effective.
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933 check the following box. /X/
If the registrant elects to deliver its latest annual report
to security holders, or a complete and legible facsimile thereof,
pursuant to Item 11(a)(1) of this form, check the following box. /
/
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
<PAGE> Page 3
statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
Title of each Proposed Proposed
class of maximum maximum
securities to offering aggregate Amount of
be registered Amount to price per offering registratio
be unit price n fee
registered
Preferred
Stock 150,000 $ 100 $15,000,000 $5,133
Shares
Investment
Certificates $40,000,000 $1 $40,000,000 $14,577
</TABLE>
The Registrant is hereby proposing to register a new offering
of Investment Certificates, Series A, in the amount of $17,500,000
and 9,500 Shares of Preferred Stock Series S-2. The amount of the
filing fee associated with such newly registered securities is
$6,818 and $288, respectively. The Registrant is hereby amending
Registration No. 333-115 pursuant to Rule 429 of which
approximately $22,500,000 of Investment Certificates, Series A, and
approximately 140,500 shares of Preferred Stock Series S-2 remain
unsold. The amount of the filing fee associated with such
previously registered securities which fee was previously paid with
prior Registration Statements was $7,759 and $4,845, respectively
(which fee was based upon prior filing fee amount). The amount of
registration fee shown above is the combined fee for the previously
registered securities (based on prior filing fees) and the fee for
the newly registered securities.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the
<PAGE> Page 4
Securities Act of 1933, as amended, or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE> Page 5
PART I
SUMMIT SECURITIES, INC.
Cross Reference Sheet
Showing Location in Prospectus of Items of the Form
1. Forepart of the Registration Statement
and outside Front Cover Page of Prospectus.Outside Front Cover
Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front Cover
Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........ Prospectus Summary;
Summary Consolidated
Financial
Data;
Risk Factors;
4. Use of Proceeds............................Use of Proceeds
5. Determination of Offering Price............ *
6. Dilution................................... *
7. Selling Security Holders................... *
8. Plan of Distribution.......................Plan of
Distribution
9. Description of Securities to be Registered.Description of
Securities;
Description
of Certificates;
Summary of Capital
Stock; Description
of Common Stock;
Description of
Preferred Stock
10. Interest of Named Experts and Counsel.....Legal Matters;
Experts
11. Information with Respect to Registrant....Front Cover Page;
Prospectus
Summary;
Capitalization;
Selected Consolidated
Financial Data;
Management's
Discussion and
Analysis of Financial
<PAGE> Page 6
Condition and Results
of Operations;
Business; Management;
Principal
Shareholders;
Certain Relationships
and Related
Transactions;
Financial Statements
12. Incorporation of Certain Information
by Reference........................... Available
Information;
Incorporation of
Certain Information
by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. Indemnification
*Not applicable or negative.
<PAGE> Page 7
SUBJECT TO COMPLETION DATED April 15, 1997
PROSPECTUS
SUMMIT SECURITIES, INC.
$40,000,000 Investment Certificates, Series A
150,000 Shares Variable Rate Cumulative
Preferred Stock, Series S-2
($100 Per Share Offering Price
and Liquidation Preference)
The Investment Certificates, Series A ("Certificates") and the
shares of Variable Rate Cumulative Preferred Stock, Series S-2
("Preferred Stock") of Summit Securities, Inc. ("Summit") are being
offered separately and not as units. A Certificateholder may elect
to receive interest monthly, quarterly, semi-annually or annually,
without compounding; or, at the election of a Certificateholder, if
interest is left with Summit it will compound semi-annually until
maturity; or, at the election of the Certificateholder the
Certificates will pay equal monthly installments of principal and
interest until maturity according to an amortization schedule
selected by the owner. The Certificates are unsecured debt
instruments, senior in liquidation to outstanding equity
securities, subordinated to collateralized debt, on parity with
unsecured accounts payable and accrued liabilities and on parity
with all previously issued and outstanding investment certificates.
At September 30, 1996 the Consolidated Group had approximately
$67,717,000 of debt senior to and approximately $1,367,000 of debt
in parity with the approximately $42,824,000 of outstanding
Certificates. The Certificates will be issued in fully registered
form in fractional denominations of $0.01 or multiples thereof at
100% of the principal amount paid. Summit reserves the right to
change (by way of supplement or post-effective amendment to this
Prospectus) prospectively the interest rates, maturities, and
minimum investment amounts on unsold Certificates. The current
provisions are set forth below. See "DESCRIPTION OF CERTIFICATES".
<TABLE>
<CAPTION>
MINIMUM TERM TO ANNUAL
INVESTMENT MATURITY INTEREST RATE
---------- ---------------------- -------------
(Investment Certificates, Series A)
<S> <C>
$
$
<PAGE> Page 8
$
$
$
$
(Installment Certificates)
$
</TABLE>
<TABLE>
<CAPTION> PREFERRED STOCK, SERIES S-2
PRICE DISTRIBUTION
PER SHARE FORMULA (Applicable Rate)
<S> <C>
$100 The greater of the per annum rate of
the Three-month U.S. Treasury Bill Rate, or
the Ten Year Constant Maturity Rate, or
the Twenty Year Constant Maturity Rate,
plus .5% (Minimum 6%/Maximum 14%)
</TABLE>
The Preferred Stock offered hereunder will be sold in whole or
fractional units. Preferred Stock distributions are cumulative and
are to be declared and paid monthly. See "DESCRIPTION OF PREFERRED
STOCK-Distributions". Preferred Stock may be redeemed, in whole or
in part, at the option of Summit at the redemption prices set forth
herein. Under certain limited circumstances, the Board of
Directors may, in its sole discretion and without any obligation to
do so, redeem shares tendered for redemption by stockholders at the
redemption prices set forth herein. See "DESCRIPTION OF PREFERRED
STOCK-Redemption of Shares". In liquidation, Preferred Stock is
subordinate to all debts of Summit including Summit's Certificates,
on parity with other preferred stock and senior to Summit's common
stock. See "DESCRIPTION OF PREFERRED STOCK-Liquidation Rights".
There is no trading market for the Certificates or the
Preferred Stock and none is expected to be established in the
future. See " RISK FACTORS". A list of persons willing to sell or
purchase Summit's issued and outstanding shares of preferred stock
is maintained by Metropolitan Investment Securities, Inc., ("MIS")
as a convenience to holders of Summit's preferred stock. See
"DESCRIPTION OF PREFERRED STOCK-Redemption of Shares". This
offering of Certificates and Preferred Stock is subject to
<PAGE> Page 9
withdrawal or cancellation by Summit without notice. No minimum
amount of Certificates or Preferred Stock must be sold.
FOR A DISCUSSION OF MATERIAL RISKS ASSOCIATED WITH THE
CERTIFICATES AND PREFERRED STOCK OFFERED HEREBY SEE RISK FACTORS ON
PAGE _____OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO ISSUER
DISCOUNTS AND OR OTHER PERSONS (2)
PRICE TO COMMISSIONS
PUBLIC (1)
<S> <C> <C> <C>
Per 100% 0% to 6% 100% to 94%
Certificate
Total: $40,00,000 None- $40,000,000-
$2,400,000 37,600,000
Per Preferred $100 0% to 6% 100% to 94%
Share
Total: $15,000,000 None - $15,000,000-
$900,000 $14,000,000
</TABLE>
(1) There is no direct sales charge to the investor.
Certificates earn interest, and Preferred Stock distributions are
calculated on their full respective offering prices, without
deduction. Summit will reimburse MIS, a wholly-owned subsidiary,
for commissions paid to licensed securities sales representatives.
Sales commission rates on the sale of Certificates depend upon the
terms of the sale and upon whether the sales are reinvestments or
new purchases. See "PLAN OF DISTRIBUTION".
(2) Before deducting other expenses estimated at $570,000.
The Certificates and Preferred Stock are being offered for
sale on a continuous, best efforts basis. There are no minimum
amounts of securities that must be sold. No offering will be made
pursuant to this Prospectus subsequent to January 31, 1998. The
offering is subject to NASD Rule 2720 (formerly Schedule E). See
"PLAN OF DISTRIBUTION".
The date of this Prospectus is __________________.
<PAGE> Page 10
No person has been authorized to give any information or to make
any representations not contained or incorporated by reference in
this Prospectus and any Pricing Supplement. Neither the delivery
of this Prospectus and any Pricing Supplement nor any sale made
thereunder shall, under any circumstances, create any implication
that the information therein is correct at any time subsequent to
the date thereof. This Prospectus and any Pricing Supplement shall
not constitute an offer to sell or a solicitation of an offer to
buy any of the Certificates or Preferred Stock offered hereby by
anyone in any jurisdiction in which such offer or solicitation is
not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom it
is unlawful to make such offer or solicitation.
AVAILABLE INFORMATION
Summit is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, (the "Exchange
Act")and, in accordance therewith, files periodic reports and other
information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed by Summit
with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission in Washington,
D.C. at 450 Fifth Street, N.W., Washington, DC 20549 and at certain
of its regional offices which are located in the New York Regional
Office, Seven World Trade Center, Suite 1300, New York, NY 10048,
and the Chicago Regional Office, CitiCorp Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661-2511. In addition, the
Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding
registrants, such as the Issuer, that file electronically with the
Commission at the following address: (http:\\www.sec.gov).
Summit has filed with the Securities and Exchange Commission
in Washington, D.C., a Registration Statement on Form S-2 under the
Securities Act of 1933, as amended, with respect to the securities
offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, as permitted
by the rules and regulations of the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are
incorporated herein by reference in this prospectus:
<PAGE> Page 11
(a) Annual report on Form 10-K for the fiscal year ended September
30, 1996 (filed January 13, 1997);
(b) Quarterly report on Form 10-Q for the three month period ended
December 31, 1996 (filed February 19, 1997).
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a
statement contained herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this
Prospectus.
Summit will provide without charge to each person, including
to whom a Prospectus is delivered, upon written or oral request of
such person, a copy of any and all of the information that has
been referenced in this Prospectus other than exhibits to such
documents. Requests for such copies should be directed to
Corporate Secretary, Summit Securities, Inc., PO Box 2162, Spokane,
WA 99210-2162, telephone number (509) 838-3111.
<PAGE> Page 12
TABLE OF CONTENTS
Page
Available Information.............................
Incorporation of Certain Documents by Reference...
Prospectus Summary ...............................
Summary Consolidated Financial Data...............
Risk
Factors...........................................
Description of Securities.........................
Description of Certificates..................
Description of Capital and Common Stock......
Description of Preferred Stock...............
Relative Rights of Common Stock..............
Legal Matters.....................................
Legal Opinion................................
Legal Proceedings............................
Experts...........................................
Plan of Distribution..............................
Use of Proceeds...................................
Capitalization....................................
Selected Consolidated Financial Data..............
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................
Business..........................................
<PAGE> Page 13
Management........................................
Executive Compensation.......................
Indemnification...................................
Principal Shareholders............................
Certain Relationships and Related Transactions.
Index to Consolidated Financial Statements........
<PAGE> Page 14
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to, and
should be read in conjunction with, the detailed information and
financial statements appearing elsewhere in this Prospectus. This
offering involves certain investment considerations for prospective
investors which are set forth in "DESCRIPTION OF SECURITIES" & "
RISK FACTORS".
The Summit Consolidated Group of Companies
Summit Securities, Inc.(Summit) was incorporated under the
laws of the State of Idaho on July 25, 1990. Its principal
executive offices are located at 929 West Sprague Avenue, Spokane
WA 99210-2162. Its mailing address is PO Box 2162, Spokane WA
99210-2162 and its telephone number is (509) 838-3111. Summit also
maintains an office at 8601 W. Emerald, Ste. 150, Boise, Idaho
83704 and its telephone number is (208)376-8260.
Where reference herein is intended to include Summit
Securities, Inc. and its subsidiaries, they are jointly referred to
as the "Consolidated Group". Where reference herein is intended to
refer to Summit Securities, Inc. as the parent company only, it is
referred to individually as "Summit".
Summit was founded in 1990 by Metropolitan Mortgage &
Securities Co., Inc. (Metropolitan) as a wholly-owned subsidiary.
On September 9, 1994, Summit was acquired by National Summit Corp.,
which is wholly-owned by C. Paul Sandifur, Jr. Mr. Sandifur is
President and controlling shareholder of Metropolitan.
Accordingly, the change in ownership altered the form of control,
but did not result in a change of the individual in control. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
Between January and June of 1995, Summit acquired MIS and a
wholly-owned holding company acquired Old Standard Life Insurance
Company (Old Standard) from Metropolitan. In addition, Summit
commenced operation of a property development company, Summit
Property Development Inc. On December 28, 1995, Old Standard
acquired Arizona Life Insurance Company ("Arizona Life"). See
"BUSINESS" & "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
The Consolidated Group is engaged, nationwide, in the business
of acquiring, holding and selling receivables (hereinafter
Receivables). These Receivables include real estate contracts, and
<PAGE> Page 15
promissory notes collateralized by first position liens on
residential real estate. The Consolidated Group also invests in
Receivables consisting of real estate contracts and promissory
notes collateralized by second and lower position liens, structured
settlements, annuities, lottery prizes, and other investments. The
Receivables collateralized by real estate are typically non-
conventional in that they were originated as the result of seller
financing, or they were originated by institutional lenders who
specialize in borrowers with impaired credit histories. See
"BUSINESS-Receivable Investments". In addition to Receivables, the
Consolidated Group invests in U.S. Treasury obligations, corporate
bonds and other securities. See "BUSINESS-Securities Investments".
The Consolidated Group invests in Receivables using funds
generated from Receivable cash flows, the sale of annuities, the
sale and securitization of Receivables, the sale of certificates
and preferred stock, collateralized borrowing, and securities
portfolio earnings. See "BUSINESS-Method of Financing".
Metropolitan provides Receivable acquisition services, and Metwest
Mortgage Services, Inc. (Metwest) provides Receivable collection
and servicing to Summit, Old Standard and to Arizona Life. See
"BUSINESS-Receivable Investments" & "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS".
Definitions:
For ease of reading, the following is a compilation of several
of the defined terms which appear regularly within this document.
Also, See "BUSINESS".
Arizona Life: Arizona Life Insurance Company
Certificates: Where this term is capitalized it refers to the
Investment Certificates being offered herein. Where not
capitalized, it refers to certificates generally.
Consolidated Group: This term refers to the combined businesses
consisting of Summit and all subsidiaries.
MIS: Metropolitan Investment Securities, Inc.
Metropolitan: Metropolitan Mortgage & Securities Co., Inc.,
Summit's former parent company. Also See "BUSINESS" & "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS".
<PAGE> Page 16
Metwest: Metwest Mortgage Services Inc., a subsidiary of
Metropolitan. Also See "BUSINESS" & "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS".
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.
Western United: Western United Life Assurance Company, a subsidiary
of Metropolitan.
<PAGE> Page 17
ORGANIZATIONAL CHART FOR SUMMIT SECURITIES, INC.
(including subsidiaries, effective December 31, 1996)
National Summit Corp.
|
|
|
Summit Securities,
Inc.
|
|
- -----------------------------------------------
| | |
Metropolitan Summit Summit Group Holding
Investment Property Company
Securities , Development, |
Inc. Inc. |
Old Standard Life
Insurance Company
|
|
Arizona Life
Insurance Company
National Summit Corp.: Parent Company, inactive except as owner of
Summit Securities, Inc., Metropolitan Asset Funding, Inc.* and
Summit Trading Co.* Wholly-Owned by C. Paul Sandifur, Jr.,
President of Metropolitan.
Summit Securities, Inc.: Invests in Receivables and other
investments principally funded by proceeds from investments and
securities offerings.
Metropolitan Investment Securities, Inc.: Broker/dealer marketing
securities offered by Summit and Metropolitan, mutual funds, and
general securities.
Summit Property Development, Inc.: Provides real estate
development services to others, with the principal clients being
Metropolitan and its subsidiaries.
Summit Group Holding Company: Inactive except as owner of Old
Standard Life Insurance Company.
<PAGE> Page 18
Old Standard Life Insurance Company: Invests in Receivables and
other investments principally funded by proceeds from Receivable
investments and from annuity sales.
Arizona Life Insurance Company: Old Standard purchased this
insurance company effective December 28, 1995. Invests in
Receivables and other investments principally funded by proceeds
from Receivable investments, and from annuity sales. See "BUSINESS-
Recent Developments-Subsidiary Acquisitions".
* Other Subsidiaries:
In addition to the companies shown above, the parent company of
Summit, National Summit Corp., has two additional wholly-owned
subsidiaries:
Summit Trade Services, Inc.: This company was established in 1995.
It operates as a new business venture company. Revenues to date
have been negligible. It is principally managed by Philip
Sandifur, son of C. Paul Sandifur Jr.
Metropolitan Asset Funding Inc.: This company was established
during 1996, as a special purpose subsidiary for the sole purpose
of facilitating the transfer of Receivables when they are sold
through a securitization.
<PAGE> Page 19
The Offering
INVESTMENT CERTIFICATES:
The Offering . . . . This Certificate offering consists of
$40,000,000 in principal of Investment Certificates, Series A,
issued at minimum investment amounts, terms, and rates set forth on
the cover page of this Prospectus. There is no minimum amount of
Certificates which must be sold. Certificates are issued in fully
negotiable form. See "DESCRIPTION OF CERTIFICATES".
The Certificates . . . . The Certificates are unsecured
indebtedness of Summit. At September 30, 1996, Summit had
outstanding approximately $42,824,000 (principal and accrued
interest) of certificates and similar obligations and approximately
$3,851,000 (principal and accrued interest) of collateralized debt.
See "CAPITALIZATION".
Use of Proceeds . . . . The proceeds of this Certificate offering
will provide funds (in descending order of priority) for Receivable
investments, other investments (which may include investments in
existing subsidiaries, the commencement of new business ventures,
or the acquisition of other companies), retiring maturing
certificates, preferred stock dividends, and general corporate
purposes. See "USE OF PROCEEDS".
Principal and Interest Payments . . . . Certificateholders may
elect to receive interest monthly, quarterly, semiannually or
annually (without compounding); or at the election of the
Certificateholder, if interest is left with Summit it will compound
semiannually until maturity; or, Certificateholders may elect to be
paid equal monthly installments of principal and interest pursuant
to an amortization schedule. The minimum investment amounts, terms
and interest rates on unissued Certificates offered hereby may be
changed from time to time (by way of supplement or post effective
amendment to this Prospectus) by Summit, but any such change shall
not affect any Certificates issued prior to the change. See
"DESCRIPTION OF CERTIFICATES-Payment of Principal and Interest".
PREFERRED STOCK:
Offering . . . . This Preferred Stock offering consists of 150,000
shares of Variable Rate Cumulative Preferred Stock, Series S-2 (the
<PAGE> Page 20
"Preferred Stock"), offered at $100 per share, and sold in whole
and fractional shares. There is no minimum amount of Preferred
Stock which must be sold. Preferred Stock is issued in book entry
form.
Distributions . . . . Distributions on Preferred Stock offered
hereunder are cumulative from the date of issuance, and, when and
as declared, are payable monthly at the annual rates described on
the cover page of this Prospectus based on the price of $100 per
share. All preferred stock of Summit including this Preferred Stock
is entitled to receive distributions on the same basis. See
"DESCRIPTION OF PREFERRED STOCK-Distributions".
Liquidation Rights . . . . In the event of liquidation of Summit,
the Preferred Stock liquidation rights are $100 per share of
Preferred Stock, plus declared and unpaid dividends. The
liquidation rights of the Preferred Stock are senior to the common
stock of Summit, on parity with the liquidation rights of all other
previously issued and outstanding preferred stock and junior to all
debts of Summit including Summit's previously issued certificates
and the Certificates offered herein. See "DESCRIPTION OF PREFERRED
STOCK-Liquidation Rights".
Redemption: Upon Call by Summit . . . . The shares of Preferred
Stock are redeemable, in whole or in part, at the option of Summit,
upon not less than 30 nor more than 60 days notice by mail, at a
redemption price of $100 per share plus any declared but unpaid
dividends to the date fixed for redemption. See "DESCRIPTION OF
PREFERRED STOCK-Redemption of Shares".
Redemption: Upon Request of Holder . . . . Subject to certain
limitations, Summit may, in its sole discretion and without any
obligation to do so, accept share(s) of Preferred Stock for
redemption upon the receipt of unsolicited written requests for
redemption of share(s) from any holder. Redemption prices in such
event will be $97 per share if the redemption occurs during the
first twelve months after the date of original issuance of the
shares and $99 per share thereafter plus, in each case, any
declared but unpaid dividends. Any such discretionary redemptions
will also depend on Summit's financial condition, including its
liquidity position. See "DESCRIPTION OF PREFERRED STOCK-Redemption
of Shares". Summit, through MIS, intends to use its best efforts
to maintain a trading list for holders of Preferred Stock. See
"DESCRIPTION OF PREFERRED STOCK-Redemption of Shares" & " RISK
FACTORS".
<PAGE> Page 21
Voting Rights . . . . The holders of Preferred Stock have no voting
rights except (i) as expressly granted by the laws of the State of
Idaho and (ii) in the event distributions payable on Preferred
Stock are in arrears in an amount equal to twenty-four full monthly
distributions or more, per share. See "DESCRIPTION OF PREFERRED
STOCK-Voting Rights".
Use of Proceeds . . . . The proceeds of this Preferred Stock
offering will provide funds (in descending order of priority) for
Receivable investments, other investments (which may include
investments in existing subsidiaries, and the commencement of new
business ventures, or the acquisition of other companies) retiring
maturing certificates, preferred stock dividends, and for general
corporate purposes. See "USE OF PROCEEDS".
Federal Income Tax Considerations. . . . In the event the
Consolidated Group has earnings and profits for federal income tax
purposes in any future year, the distributions paid on Preferred
Stock in that year will constitute taxable income to the recipient
to the extent of such earnings and profits. Management is unable
to predict the future character of its distributions. Purchasers
are advised to consult their own tax advisors with respect to the
federal income tax treatment of distributions made. See
"DESCRIPTION OF PREFERRED STOCK-Federal Income Tax Consequences of
Distributions".
<PAGE> Page 22
SUMMIT SECURITIES, INC.
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
The consolidated financial data shown below as of September 30, 1996 and
1995 and for the years ended September 30, 1996, 1995 and 1994 (other than the
ratio of earnings to fixed charges and preferred stock dividends) have been
derived from, and should be read in conjunction with, the consolidated financial
statements, related notes, and Management's Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere herein. The financial
data shown as of September 30, 1994, 1993 and 1992 and for the years ended
September 30, 1993 and 1992 have been derived from audited financial statements
not included herein. The consolidated financial statements as of and for the
years ended September 30, 1996, 1995, 1994 and 1993 have been audited by Coopers
& Lybrand L.L.P. The consolidated financial statements as of and for the year
ended September 30, 1992 have been audited by BDO Seidman.
Three Months Ended Year Ended
September 30,
December 31,
(Unaudited)
------------------ ---------------------------
- ---------------------------------
1996 1995 1996 1995
1994 1993 1992
<S> <C> <C> <C> <C>
<C> <C> <C>
INCOME STATEMENT
DATA:
Revenues $4,207,683 $3,198,207 $ 14,536,449 $ 9,576,615 $
3,395,252 $ 2,815,624 $ 2,435,843
========== ========== ============ ===========
=========== =========== ===========
Income before
extraordinary item 393,421 120,483 1,244,522 $ 587,559 $
264,879 $ 283,107 $ 611,595
Extraordinary item (1) -- -- -- --
- -- -- 49,772
---------- --------- ----------- ----------- --
- --------- ---------- -----------
Net Income 393,421 120,483 1,244,522 587,559
264,879 283,107 661,367
Preferred Stock
Dividends (103,186) (70,996) (333,606) (309,061)
(2,930) -- --
<PAGE> Page 23
---------- --------- ----------- ---------- ---
- -------- ---------- -----------
Income Applicable to
Common Stockholders $ 290,235 $ 49,487 $ 910,916 $ 278,498 $
261,949 $ 283,107 $ 661,367
========== ========= ============ ===========
=========== =========== ===========
Per Common Share:
Income before
extraordinary
item $ 29.02 $ 4.95 $ 91.09 $ 27.85 $
13.47 $ 14.15 $ 30.58
Extraordinary item (1) -- -- -- --
- -- -- 2.49
---------- ------- ------------ ---------- --
- --------- ----------- ----------
Income applicable to
common stockholders $ 29.02 $ 4.95 $ 91.09 $ 27.85 $
13.47 $ 14.15 $ 33.07
========== ======= ============ ===========
=========== =========== ===========
Weighted average number
of common shares
outstanding 10,000 10,000 10,000 10,000
19,445 20,000 20,000
========== ======= ============ ===========
=========== =========== ==========
Ratio of Earning
to Fixed Changes 1.45 1.18 1.40 1.25
1.16 1.24 1.53
Ratio of Earnings
to Fixed Charges
and Preferred Stock
Dividends 1.29 1.07 1.26 1.11
1.16 1.24 1.53
BALANCE SHEET DATA:
Due from/(to)
affiliated
companies, net $ (326) $ (737,362) $ 1,296,290 $(1,960,104) $
267,735 $ 1,710,743 $ (400,365)
Total Assets $118,649,570 $100,558,330 $117,266,680 $96,346,572
$35,101,988 $25,441,605 $17,696,628
Debt Securities
and Other
Debt Payable $ 45,172,441 $ 39,938,628 $ 46,674,841 $38,650,532
$31,212,718 $21,982,078 $14,289,648
Stockholders' Equity $ 6,101,623 $ 3,977,424 $ 5,358,774 $ 3,907,067 $
3,321,230 $ 3,188,024 $ 2,904,917
<PAGE> Page 24
<FN>
(1) Benefit from utilization of net operating loss carryforwards.
</TABLE>
<PAGE> Page 25
RISK FACTORS
Investment in the Certificates and Preferred Stock offered
hereby involves a certain degree of risk. All material risks are
discussed below. Each prospective investor should carefully
consider the following risk factors inherent in and affecting the
business of the Consolidated Group and this offering before making
an investment decision. This Prospectus contains forward-looking
statements which involve risk and uncertainties. Discussions
containing such forward-looking statements may be found in the
material set forth under the "Prospectus Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" as well as in the Prospectus
generally. Actual events or results may differ as a result of
various factors including, without limitation, the risk factors set
forth below and the matters set forth in the Prospectus generally.
General
1. Risk of Fluctuation in Interest Rates: During the twelve
month period ending September 30, 1997, more of the Consolidated
Group's financial liabilities, principally annuities and
certificates, are scheduled to reprice or mature than are its
financial assets, principally Receivables and fixed income
investments. Consequently, in a falling interest rate environment
such as has recently been experienced, the current level of
profitability and the fair value of the Consolidated Group's equity
would be expected to improve. Conversely, in a rising interest
rate environment, the net interest income and the fair value of
equity for the Consolidated Group would likely decline. The fair
value of equity (as opposed to book value) is the difference
between the fair value of all assets less the fair value of all
liabilities. The impact of a change in interest rates will be
reflected to the greatest extent in the fair value of assets and
liabilities with the longest maturities or time to their scheduled
repricing date. Additionally, borrowers tend to repay Receivable
loans when interest rates decline and they are able to refinance
such loans at lower rates of interest. This factor reduces the
amount of interest to be received over time as loans with higher
rates of interest are prepaid more rapidly. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Asset/Liability Management". While interest rates
evidenced a fairly stable trend as
<PAGE> Page 25
of the date of this Prospectus, management is unable to forecast
with any certainty the fluctuations in interest rates in the
future.
2. Dependence upon Securitization and Direct Sales of
Receivables: Summit and Old Standard sold pools of Receivables
through direct sales in increased volumes during fiscal 1996
compared to prior years. Also, Summit and Old Standard sold first
lien position residential and commercial real estate loan
Receivables through a securitization for the first time during
1996. The Consolidated Group's profits for fiscal 1996 were
substantially benefited by these sales. See "BUSINESS-Receivable
Sales". The Consolidated Group's future profits may be
substantially impacted by its ability to sell Receivables. Adverse
changes in the markets for the Consolidated Group's Receivables,
including but not limited to fluctuations in interest rates,
increased competition and regulatory changes could impair its
ability to sell Receivables. Any such adverse changes could have a
material adverse effect upon the Consolidated Group's results of
operations and financial condition, including its profitability and
liquidity position.
As a result of securitizations, the Consolidated Group has
acquired residual interests in the May and November securitized
loan pools. At the close of the November 1996 secuitization the
Consolidated Group held residual interests aggregating
approximately $570,000. These residual interests are valued by the
Consolidated Group, and accrue interest, based upon assumptions
regarding anticipated prepayments, defaults and losses on the
securitized Receivables. Although Management believes that it has
made reasonable assumptions, actual experience may vary from its
estimates. The value of the residual interests and the amount of
interest accrued will have been overstated if prepayments or losses
are greater than anticipated. See "BUSINESS-Sale of Receivables".
3. Dependence Upon Metropolitan: All decisions with respect
to the day-to-day management of the Consolidated Group will be made
exclusively by the officers of the respective companies, many of
whom are also employees of Metropolitan and/or its subsidiaries.
The Consolidated Group has contracted with Metropolitan and Metwest
to provide principally all of the administrative services related
to their Receivable acquisition, servicing and sales. Metropolitan
and Metwest charge fees for their services. The fee charged to the
Consolidated Group relating to Receivable acquisition activities
during the fiscal years ended September 30, 1996, 1995 and 1994 was
$1,753,206, $1,967,409 and $681,991, respectively. See "BUSINESS"
& "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
<PAGE> Page 27
Management considers these contractual arrangements to be more
beneficial to the Consolidated Group than incurring the cost to
duplicate these services internally. These contracts do not
restrict any of the companies from obtaining these services from
other sources and they may be terminated at any time. However, it
is anticipated that these contracts will continue indefinitely.
See "BUSINESS" & "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
The success of the Consolidated Groups operations depends to a
large degree on the business skills of Metropolitan's senior
management (C. Paul Sandifur, Jr., President, CEO; Bruce J.
Blohowiak, Executive Vice President, COO; Michael Kirk, Senior Vice
President-Production; Steven Crooks, Vice President, Controller,
Acting CFO; officer titles refer to titles held with Metropolitan)
in, among other things, underwriting, servicing and selling
Receivables. If for some reason significant members of
Metropolitan's management were unable to perform their functions,
or left Metropolitan's employ, there can be no assurance that the
Consolidated Group could locate capable replacement(s) in a timely
fashion. Currently, Metropolitan does not carry key-man insurance
coverage, nor does it have any employment agreements with any of
the above identified senior management.
4. Conflicts of Interest: Many of the officers and directors
of Summit and its subsidiaries are also employees of Metropolitan,
therefore certain conflicts of interest may arise between the
companies. The officers and directors expect to devote as much time
as necessary to the affairs of Summit and its subsidiaries.
Summit, Old Standard and Arizona Life may compete with
Metropolitan and its subsidiaries in the acquisition of
Receivables. Summit may compete with Metropolitan for the sale of
securities, and Old Standard and Arizona Life may compete with
Metropolitan's insurance subsidiary for the sale of annuities. See
"BUSINESS" & "COMPETITION" & "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS".
On September 9, 1994, Metropolitan sold Summit to National
Summit Corp., a holding company wholly-owned by C. Paul Sandifur
Jr. During fiscal 1995, Summit purchased MIS and Old Standard from
Metropolitan, and commenced operations of Summit Property
Development, Inc. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS". Mr. Sandifur is the President and has voting
control of Metropolitan. Prior to these transactions, Mr. Sandifur
had effective control of Summit and its subsidiaries through his
control of Metropolitan. Following these transactions, Mr.
Sandifur through
<PAGE> Page 27
National Summit Corp. continues to control Summit, and through
Summit controls Summit's subsidiaries.
Conflicts of interest are not anticipated to be substantially
different from those which existed prior to these sales, such as
conflicts in the time available to devote to Summit or its
subsidiaries and conflicts with respect to securities sales and
with respect to the selection of Receivables. Other conflicts may
arise in the normal course of business transactions. Such
potential additional conflicts cannot currently be identified with
any certainty and therefore cannot be quantified at this time.
Purchasers of Certificates and Preferred Stock must, to a great
extent, rely on the integrity and corporate fiduciary
responsibilities of Summit's current and future officers and
directors to assure themselves that they will not abuse their
discretion in selecting Receivables for purchase by each company,
and in making other business decisions.
5. Dependence upon Insurance Subsidiary Earnings and
Restriction on Subsidiary Dividends: At September 30, 1996, 68% of
the Consolidated Group's assets were invested in insurance related
assets. Insurance company regulations restrict transfers of assets
and the amount of dividends that the insurance subsidiaries may
pay. Accordingly, to the extent of such restrictions, assets and
earnings of the insurance subsidiaries are not available to Summit
without special permission from the respective insurance
commissioner in the insurance subsidiary's state of domicile. This
restriction on dividends could affect Summit's ability to pay
interest, retire certificates and pay Preferred Stock
distributions. The total unrestricted statutory surplus of Old
Standard was approximately $194,000 as of September 30, 1996 while
Arizona Life had a statutory deficit of approximately $1,196,000 as
of September 30, 1996. See "BUSINESS-Regulation" & "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
6. Dependence upon Leverage and The Need for Additional
Financing: The Consolidated Group's primary sources of new
financing for its operations are the sale of annuities, sale and
securitization of Receivables and the sale of certificates and
preferred stock. See "BUSINESS-Method of Financing" & "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS". The Consolidated Group's principal sources of cash
flow include Receivable payments, the sale of annuities, the sale
of Receivables and the sale of certificates and preferred stock. To
the extent Summit's cash flow is insufficient or unavailable for
payment of certificates which mature during the period ending
January 31, 1998, portions of the net proceeds from this
Certificate and
<PAGE> Page 28
Preferred Stock offering may be used for such purpose. See "USE OF
PROCEEDS". Approximately $7,175,000 in principal amount of
certificates will mature between February 1, 1997 and January 31,
1998. The majority of Summit's certificates have been sold with a
five year maturity. During the fiscal year ended September 30,
1996, its sixth full year of operation, 61% of Summit's maturing
certificates were reinvested. The cash flow from the existing
assets has been adequate during the past five years to satisfy the
demand for payment of maturing certificates. Summit's ability to
repay its other outstanding obligations, including those created by
the sale of the securities described herein, may be contingent in
part upon the success of future public offerings of certificates
and preferred stock.
The following table summarizes anticipated cash requirements
for principal and interest obligations of Summit's Certificates and
other debts payable; and anticipated cash dividend requirements on
its preferred stock for the five-year period ending September 30,
2001 based on amounts outstanding at September 30, 1996 and
assuming no reinvestment of maturing debentures:
<TABLE>
<CAPTION>
OTHER PREFERRED
Fiscal Year Ending DEBENTURE DEBT STOCK
September 30, BONDS PAYABLE DIVIDENDS TOTAL
___________________ _________ _______ _________ ______
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1997 $7,748 $3,828 $ 392 $11,968
1998 11,501 14 392 11,907
1999 10,582 13 392 10,987
2000 8,779 2 392 9,173
2001 15,062 2 392 15,456
-------- ------ ------ -------
$53,672 $3,859 $1,960 $59,491
======= ====== ====== =======
</TABLE>
7. Risk of Fluctuation in Life Insurance and Annuity Termination
Rates: An increase in the number of annuity policy terminations
will tend to negatively impact the insurance subsidiaries' earnings
(and in turn the Consolidated Group's earnings) by requiring the
expensing of unamortized deferred costs related to policy
surrenders. At September 30, 1996, deferred policy acquisition
<PAGE> Page 29
costs on annuities were approximately 6.2% of annuity reserves.
Surrender charges typically do not exceed 1% times the years of the
initial annuity contract times the annuity contract balance at the
contract's inception, and such surrender charges decline annually
from that rate. Annuity termination rates adjusted for internal
rollovers were 11.7% during fiscal 1996. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" & "Note 13, Consolidated Financial Statements".
8. Risks Related to Investments in Receivables:
Receivables Collateralized by Real Estate, Risk of Fluctuation
in Collateral Value and Economic Conditions: The Consolidated Group
is engaged in the purchase of Receivables which include Receivables
collateralized by real estate. See "BUSINESS-Receivable
Investments". All such Receivable investments are subject to a
risk of payment default and loss in the event of foreclosure. The
risk of default and loss can be affected by changes in economic
conditions, property values, changes in zoning, land use,
environmental laws and other legal restrictions, including
restrictions on timing and methods of foreclosure. There is no
assurance that these Receivables will be paid according to their
terms, or that property values will be adequate to preclude loss in
the event of a foreclosure. The Consolidated Group's underwriting
is currently provided through Metropolitan. Metropolitan's
investment underwriting procedure includes a review of
demographics, market trends, property value, economy, and the
buyer's credit. Through Metropolitan, the Consolidated Group buys
these Receivables nationwide, allowing it to diversify its
investments geographically into areas where the market trends and
economic conditions may be favorable. Management believes that
these procedures minimize the risk of default or loss in the event
of foreclosure. However, there is no assurance that these
procedures will be effective.
Investments in Other Receivables Risks of Default: In
addition to the purchase of Receivables collateralized by real
estate, the Consolidated Group, through Metropolitan, is engaged
nationwide in the purchase of other types of Receivables including
the purchase of annuities issued in the settlement of disputes,
other types of annuities, lottery prizes, and other investments.
All such Receivables are subject to the risk of default by the
payor (frequently an unrelated insurance company, or in the case of
lotteries, a state government). Unlike Receivables collateralized
by real estate, these Receivables are generally not collateralized
by a specific asset. The Consolidated Group's underwriting is
currently provided through Metropolitan. Metropolitan's investment
<PAGE> Page 30
underwriting procedures vary with the type of investment and
generally include: a review of the credit rating of the payor and
other relevant factors designed to evaluate the risk of the
particular investment. Management believes that these procedures
minimize the risk of default and loss in the event of a default.
However, there is no assurance that these procedures will be
effective to minimize the occurrence of any default. See "BUSINESS-
Receivable Investments".
As of September 30, 1996, the Consolidated Group's Receivable
investments consisted of the following:
<TABLE>
<S> <C>
Percent Type of Receivable
_______ __________________
87% Receivables collateralized by Real Estate
8% Annuities
5% Lotteries and Loans collateralized by
Lotteries
</TABLE>
As of September 30, 1996, the Consolidated Group's Receivable
investments collateralized by real estate were principally located
in the following regions:
<TABLE>
<S> <C>
Percent Region
------- ------
22% Pacific Northwest (Washington, Alaska, Oregon,
Idaho and Montana)
25% Pacific Southwest (California, Nevada and
Arizona)
15% Southwest (Texas, Louisiana and New Mexico)
9% Southeast (Florida, Georgia, North Carolina
and South Carolina)
29% Other areas (of which no more than 3% were
located in any one state)
</TABLE>
9. Risk Related to Environmental Conditions and Regulations: In
the course of its business, the Consolidated Group acquires
properties, generally through foreclosure. Various state and
federal laws and regulations impose liability upon the owner and
previous owner of property on account of hazardous waste or
<PAGE> Page 31
substances released onto or disposed of on property. As a result,
the owner or former owner may be liable to the government or a
third party for the clean up costs. The costs of investigation,
remediation and removal can be substantial. While the Consolidated
Group endeavors to avoid the acquisition of Receivables or
properties which may be contaminated, there can be no assurance
that significant losses could not be incurred due to environmental
contamination.
Relative to Certificates
1. Lack of Indenture Restrictions on Operations and Ability
to Incur Additional Indebtedness: The Indenture pursuant to which
the Certificates are issued does not restrict Summit's ability to
issue additional certificates or to incur other unsecured or
collateralized debt. Neither does the Indenture require Summit to
maintain any specified financial ratios, minimum net worth, minimum
working capital or a sinking fund. The Certificates are senior in
liquidation to all outstanding equity securities of Summit, are
subordinate to Summit's collateralized debt and are on a parity
with all other outstanding certificates, unsecured accounts payable
and other unsecured accrued liabilities. As of September 30, 1996,
Summit had approximately $3,851,000 of collateralized debt and
related accrued interest. Also as of September 30, 1996, the
principal and compound and accrued interest on Summit's outstanding
certificates was approximately $42,824,000.
2. Absence of Insurance and Guarantees: The Certificates are
not insured by any governmental agency (as are certain investments
in financial institutions such as banks, savings and loans or
credit unions) nor are they guaranteed by any public agency or
private entity. It should also be noted that Summit is not subject
to any generally applicable governmental limitations on its own
borrowing. In these respects, Summit is similar to other commercial
enterprises which sell debt to public investors, but dissimilar to
those financial institutions providing insurance against the risk
of loss to investors. The investment risk of the Certificates is
thus higher than the risk incurred by investors in such insured
financial institutions.
3. Term Investment/Absence of a Trading Market/Lack of
Liquidity: There is no trading market for the Certificates, and it
is not anticipated that one will develop. The Certificates are not
subject to redemption prior to maturity. Prepayments pursuant to
the "prepayment on death" provision or upon mutual agreement
between Summit and a Certificateholder will not constitute
redemptions.
<PAGE> Page 32
Prospective investors should carefully consider their needs for
liquidity before investing in the Certificates and upon investing,
should be prepared to hold the Certificates until maturity. See
"DESCRIPTION OF SECURITIES-Description of Certificates".
Relative to Preferred Stock
1. Risks Related to Lack of Liquidity and Limited
Marketability of Shares: The Preferred Stock is not listed, nor
does management anticipate applying for a listing on any national
or regional stock exchange and no independent public market for
Preferred Stock is anticipated. The broker/dealer for this
offering, MIS, operates a trading list to match buyers and sellers
of Summit's preferred stock. Summit will use its best efforts to
maintain the availability of this listing for the Preferred Stock
offered hereunder. With limited exceptions, Summit has established
a policy that all preferred shareholders must place their shares
for sale on the trading list for 60 consecutive days before Summit
will entertain a request for redemption. There is no assurance
that the shares will be sold within the 60 day period. There is no
assurance that Summit will redeem the shares if they have not sold
within the 60 day period. Therefore, a prospective purchaser
should not rely on this trading list or Summit's discretionary
redemption provisions as assurance that such shares could ever be
sold or redeemed. There can be no assurance that this system will
continue to operate, or that it will provide liquidity comparable
to securities traded on a recognized public stock exchange. See
"DESCRIPTION OF PREFERRED STOCK-Redemption of Shares".
2. Limitations on Redemption and Restrictions on
Distributions: Preferred Stock is designed as a long-term
investment in the equity of Summit, not as a short-term, liquid
investment. The Preferred Stock is redeemable under limited
circumstances solely at the option of Summit. In addition, Summit
may not purchase or acquire any shares of Preferred Stock in the
event that cumulative dividends thereon have not been paid in full
except pursuant to a purchase or exchange offer made on the same
terms to all holders of Preferred Stock. See "DESCRIPTION OF
PREFERRED STOCK-Redemption of Shares". Summit is restricted from
making distributions on Preferred Stock in the event that any
distributions to which the holders of other Series of preferred
stock are entitled to and have not been paid. See "DESCRIPTION OF
PREFERRED STOCK-Distribution".
3. Subordination and Liquidation Rights: The liquidation
preference of Preferred Stock offered herein is $100 per share. In
<PAGE> Page 33
the event of liquidation of Summit, all shares of Series S
Preferred Stock, including shares of additional sub-series which
may subsequently be authorized and sold, are on a parity.
Preferred Stock is subordinate to all outstanding debt of Summit
including its Certificates. Preferred Stock is preferred in
liquidation to Summit's common stock. As of September 30, 1996,
total assets of Summit were approximately $117,267,000 and the
total liabilities of Summit ranking senior in liquidation
preference to Preferred Stock were approximately $111,908,000, and
the total liquidation preference of all outstanding shares of
Series S preferred stock was approximately $4,131,000.
The preference in liquidation would not necessarily be
applicable to terms afforded Preferred Stock in the event of other
extraordinary corporate events such as the sale of substantially
all its assets, capital restructuring, merger, reorganization and
bankruptcy. The outcome in such events could be subject to
negotiation among all interested parties and/or court
determinations and are not presently determinable. In such
circumstances, Preferred Stock would not necessarily enjoy any
preference over terms available to common stock, or even be as
favorable.
4. Control by Common Shareholders/Lack of Voting Rights: The
Common Stock is the only class of Summit's stock carrying voting
rights. Common stockholders now hold, and upon completion of this
offering will continue to hold, effective control of Summit except
as described below. The Board resolution authorizing the Preferred
Stock provides that in the event distributions payable on any
shares of preferred stock, including the Preferred Stock offered
hereunder, are in arrears in an amount equal to twenty-four full
monthly dividends or more per share, then the holders of Preferred
Stock and all other outstanding preferred stock shall be entitled
to elect a majority of the Board of Directors of Summit. Preferred
Stock shareholders may also become entitled to certain other voting
rights as required by law. See "DESCRIPTION OF PREFERRED
STOCK-Voting Rights".
5. Possible Redemption/Call of Preferred Shares by Summit:
The Preferred Stock is redeemable upon call by Summit, in its sole
discretion, at any time at a price of $100 per share plus any
declared and unpaid dividends. If fewer than all of the
outstanding shares are redeemed, Summit may determine the Shares to
redeem in its sole discretion. See "DESCRIPTION OF PREFERRED STOCK-
Redemption of Shares".
<PAGE> Page 34
6. Federal Income Tax Considerations: Under the current
Federal Income Tax Code, to the extent that Summit may not have
current or accumulated earnings and profits as computed for federal
income tax purposes, Summit believes that distributions made with
respect to Preferred Stock would be characterized as tax free
returns of capital for federal income tax purposes. Summit is
unable to predict the future character of its distributions, but
will report annually to shareholders regarding the tax character of
the prior years distributions. In addition, as each Preferred
Shareholders' individual tax circumstance is unique, Preferred
Shareholders are advised to consult their own tax advisors each
year with respect to their individual federal income tax treatment
of distributions. See "DESCRIPTION OF PREFERRED STOCK-Federal
Income Tax Consequences of Distributions".
DESCRIPTION OF SECURITIES
Description of Certificates
The Certificates will be issued under an Indenture, as
amended, dated as of November 15, 1990. The following statements
under this caption relating to the Certificates and the Indenture
are summaries and do not purport to be complete. Such summaries are
subject to the detailed provisions of the Indenture and are
qualified in their entirety by reference to the Indenture. A copy
of the Indenture is filed as an exhibit to the Registration
Statement of which this Prospectus is a part and is available for
inspection at the principal office of Summit.
General
The Certificates will represent general unsecured obligations
of Summit and will be issued in fully negotiable form without
coupons, in fractional denominations of $0.01 or more. The
Certificates will have the minimum investment amounts, maturities
and the interest rates set forth on the cover page of this
Prospectus. The stated interest rates, maturities, and minimum
investment amounts of unissued Certificates may be changed at any
time by Summit (by way of supplement or post effective amendment to
this Prospectus). Any such change will have no effect on the terms
of the previously sold Certificates.
Certificates may be transferred or exchanged for other
Certificates of the same series of a like aggregate principal
<PAGE> Page 35
amount, subject to the limitations set forth in the Indenture. No
service charge will be made for any transfer or exchange of
Certificates. Summit may require payment of taxes or other
governmental charges imposed in connection with any such transfer
or exchange. Interest will accrue at the stated rate from the date
of issue until maturity. The Certificates are not convertible into
capital stock or other securities of Summit.
The Certificates are not subject to redemption prior to
maturity, but may be prepaid pursuant to the prepayment on death
provision described below or in limited circumstances involving an
investor's demonstrated financial hardship, subject to regulatory
restrictions affecting redemptions and exchanges of securities
during an offering. Summit may, in its sole discretion, entertain a
request for an early payout of a Certificate upon terms mutually
agreed to by the holder of the Certificate and Summit. Such early
payout requests, when received, are reviewed in the order received
and are subject to review by Summit's executive management.
Payment of Principal and Interest
Interest will be payable to the Certificateholder(s) under one
of several plans of interest payment. The purchaser may elect to
have interest paid on a monthly, quarterly, semiannual or annual
basis, without compounding; or may elect to leave the accrued
interest with Summit in which case it will compound semiannually at
the stated interest rate. Certificateholders make the interest
payment election at the time of purchase of the Certificates. The
interest payment election may be changed at any time by written
notice to Summit. Under the compounding option, the
Certificateholder(s), upon written notice to Summit, may withdraw
the interest accumulated during the last two completed semiannual
compounding periods as well as the interest accrued from the end of
the last compounding period to the date Summit receives the notice.
Amounts compounded prior to the last two completed compounding
periods are available only at maturity.
Alternatively, at the election of the Certificateholder at the
time of investment, and subject to the minimum term and investment
requirements set forth on the cover page of this Prospectus, level
monthly installments comprised of principal and interest will be
paid to the Certificateholder commencing 30 days from the issue
date of the Certificate until maturity. The amount of each
installment will be determined by the amortization term designated
by the Certificateholder at the time the Certificate is purchased.
<PAGE> Page 37
Certificateholders will be notified in writing approximately
30 days prior to the date their Certificates will mature. The
amounts due on maturity are placed in a separate bank trust account
until paid to the Certificateholder(s). Certificates do not earn
interest after the maturity date. Unless otherwise requested by
the Certificateholder, Summit will pay the principal and
accumulated interest due on the matured certificate to the
Certificateholder(s) at Summit's main office, or by mail to the
address designated by the Certificateholder(s).
Prepayment on Death
In the event of the death of a registered owner of a
Certificate, any party entitled to receive some or all of the
proceeds of the Certificate may elect to have his or her portion of
the principal and any accrued but unpaid interest prepaid in full
in five consecutive equal monthly installments. Interest will
continue to accrue on the declining principal balance of such
portion. No interest penalties will be assessed. Any request for
prepayment shall be made to Summit in writing and shall be
accompanied by the Certificate and evidence satisfactory to Summit
of the death of the registered owner or joint registered owner.
Before prepayment, Summit may require the submission of additional
documents or other material which it may consider necessary to
determine the portion of the proceeds the requesting party is
entitled to receive, or assurances which, in Summit's discretion,
it considers necessary to the fulfillment of its obligations.
Related Indebtedness
The Indenture pursuant to which the Certificates are issued
does not restrict Summit's ability to issue additional Certificates
or to incur other debt. The Indenture does not require Summit to
maintain any specified financial ratios, minimum net worth or
minimum working capital. Certificates will not be guaranteed or
insured by any governmental or private agency. The Certificates
offered hereby are senior in liquidation to all outstanding equity
securities of Summit. They are subordinate to Summit's
collateralized debt and are on a parity with all other outstanding
certificates, unsecured accounts payable and accrued liabilities.
The amount of outstanding certificates on September 30, 1996,
(including compound and accrued interest) was approximately
$42,824,000. There are no limitations on Summit's ability to incur
collateralized debt. Collateralized debt outstanding on that date
of approximately $3,851,000 (principal and accrued interest)
<PAGE> Page 37
consisted primarily of reverse repurchase agreements, with various
securities brokers, collateralized by U.S. Treasury bonds.
Concerning the Trustee
West One Bank ("West One")was the Indenture Trustee until
April 24, 1996, when West One resigned and First Trust National
Association was appointed successor Trustee ( "First Trust" or the
"Trustee"). Management has been informed by West One that the
reason for the resignation was its business decision to discontinue
Trust services. First Trust has assumed all of the duties and
obligations of the trustee as set forth in the Trust Indenture, as
amended. The Trustee, is obligated under the Indenture to oversee,
and if necessary, to take action to enforce fulfillment of Summit's
obligations to Certificateholders. The Trustee is a national
banking association headquartered in Seattle, with a combined
capital and surplus in excess of $100 million. Summit and certain
of its affiliates may maintain deposit accounts with and may, from
time to time, borrow money from the Trustee and conduct other
banking transactions with it. At September 30, 1996 and as of the
date of this Prospectus, no loans from the Trustee were
outstanding. In the event of default, the Indenture permits the
Trustee to become a creditor of Summit and does not preclude the
Trustee from enforcing its rights as a creditor, including rights
as a holder of collateralized indebtedness.
Rights and Procedures in the Event of Default
Events of default include the failure of Summit to pay
interest on any Certificate for a period of 30 days after it
becomes due and payable; the failure to pay the principal or any
required installment thereof of any Certificate when due; the
failure to perform any other covenant in the Indenture for 60 days
after notice; and certain events in bankruptcy, insolvency or
reorganization with respect to Summit. Upon the occurrence of an
event of default, either the Trustee or the holders of 25% or more
in principal amount of Certificates then outstanding may declare
the principal of all the Certificates to be due and payable
immediately.
The Trustee must give the Certificateholders notice by mail of
any default within 90 days after the occurrence of the default,
unless it has been cured or waived. The Trustee may withhold such
notice if it determines in good faith that such withholding is in
the best interest of the Certificateholders, except if the default
consists of failure to pay principal or interest on any
Certificate.
<PAGE> Page 39
Subject to certain conditions, any such default, except
failure to pay principal or interest when due, may be waived by the
holders of a majority (in aggregate principal amount) of the
Certificates then outstanding. Such holders will have the right to
direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or of exercising any power
conferred on the Trustee, except as otherwise provided in the
Indenture. The Trustee may require reasonable indemnity from
holders of Certificates before acting at their direction.
Within 120 days after the end of each fiscal year Summit must
furnish to the Trustee a statement of certain officers of Summit
concerning their knowledge as to whether or not Summit is in
default under the Indenture.
Modification of the Trust Indenture
Certificateholders' rights may be modified with the consent of
the holders of 66 2/3% of the outstanding principal amounts of
Certificates, and 66 2/3% of each series affected. In general, no
adverse modification of the terms of payment and no modification
reducing the percentage of Certificates required for modification
is effective against any Certificateholder without his or her
consent.
Restrictions on Consolidation, Merger, etc.
Summit may not consolidate with or merge into any other
corporation or transfer substantially all its assets unless either
Summit is the continuing corporation formed by such consolidation,
or into which Summit is merged, or the person acquiring by
conveyance or transfer of such assets shall be a corporation
organized and existing under the laws of the United States or any
state thereof which assumes the performance of every covenant of
Summit under the Indenture and certain other conditions precedent
are fulfilled. The Indenture contains no other provisions or
covenants which afford holders of the Certificates special
protection in the event of a highly leveraged buyout transaction.
DESCRIPTION OF CAPITAL AND COMMON STOCK
As of the date of this prospectus the authorized capital of
Summit consists of 2,000,000 shares of Common Stock ($10 par
value), and 10,000,000 shares of Series S Preferred Stock ($10 par
value), from which 185,000 shares of Series S-1, 159,500 shares of
Series S-
<PAGE> Page 39
2 and 80,000 shares of Series S-RP have been authorized. See
"Consolidated Financial Statements".
DESCRIPTION OF PREFERRED STOCK
This offering consists of 150,000 shares of Variable Rate
Cumulative Preferred Stock, Series S-2 (hereinafter referred to as
"Preferred Stock"). All of the shares of Preferred Stock offered
by Summit, hereby, when issued and sold against the consideration
set forth in this Prospectus will be validly issued, fully paid and
nonassessable. The relative rights and preferences of Preferred
Stock have been fixed and determined by the Board of Directors of
Summit and are set forth in the Preferred Stock Authorizing
Resolution (the "Authorizing Resolution"). Preferred Stock is
issued in Book Entry form. Investments in Preferred Stock are
evidenced by receipts and not by negotiable stock certificates.
The following statements relating to the Preferred Stock are
summaries and do not purport to be complete and are qualified in
their entirety by reference to the Authorizing Resolution, a copy
of which has been filed with the Commission as an exhibit to the
Registration Statement of which this Prospectus is a part, and is
available for inspection at the principal office of Summit.
Distributions
Distributions on Preferred Stock are cumulative and are to be
declared monthly on the first business day of the month payable to
the shareholders of record as of the fifth calendar day of each
month. Distributions are to be paid in cash on the twentieth
calendar day of each month in an amount equal to the offering price
of $100 per share multiplied by the distribution rate divided by
twelve. The distribution rate will be the "Applicable Rate" as
defined herein subject to the authority of Summit's Board of
Directors to authorize, by resolution, a higher rate.
The Applicable Rate for any monthly distribution period cannot
be less than 6% or greater than 14% per annum. The Applicable Rate
for any monthly distribution period shall be (i) the highest of the
three-month U.S. Treasury Bill Rate, the Ten-Year Constant Maturity
Rate and the Twenty-Year Constant Maturity Rate (each as more fully
described in the Authorizing Resolution), (ii) plus one half of one
percentage point. Each of the above three rates shall be
calculated as the arithmetic average of the two most recent weekly
per annum yields as published weekly by the Federal Reserve Board
during the Calendar Period immediately prior to the ten calendar
days immediately preceding the first day of the distribution period
for
<PAGE> Page 40
which the distribution rate on Preferred Stock is being determined.
Should Summit determine in good faith that one or more of such
rates cannot be determined for any distribution period, then the
Applicable Rate of such period shall be the higher of whichever of
such rates can be so determined, plus one half of one percentage
point. Should Summit determine in good faith that none of such
rates can be determined for any distribution period, then the
Applicable Rate in effect for the preceding distribution period
shall be continued for such distribution period. The distribution
rate for each monthly distribution period shall be calculated as
promptly as practical by Summit. Summit will cause notice of the
distribution rate to be enclosed with the next mailed distribution
payment check. In making such calculation, the 3-month U.S.
Treasury Bill Rate, Ten-Year Constant Maturity Rate and Twenty-Year
Constant Maturity Rate shall each be rounded to the nearest five
hundredths of a percentage point.
Prior to the effective date of this Prospectus, Summit's Board
of Directors had adopted a resolution to authorize a distribution
rate on the Preferred Stock at two percentage points higher than
the Applicable Rate. Such higher distribution rate will continue
from month to month until the Board elects to terminate it. The
Board may increase, decrease or eliminate the additional points at
any time, in its sole discretion.
Restrictions on Distributions
Summit may not declare or pay a distribution on any share of
Preferred Stock for any distribution period unless, at the same
time, a like distribution shall be declared or paid on all shares
of preferred stock then issued and outstanding and entitled to
receive distributions. See "CAPITALIZATION".
So long as any shares of Preferred Stock are outstanding, and
unless the full cumulative dividends on all outstanding preferred
shares shall have been paid or declared and set apart for all past
dividend periods, Summit may not: (i) declare or pay or set aside
for payment any dividend (other than a dividend in common stock or
in any other stock ranking junior to Preferred Stock as to
dividends and upon liquidation and other than as provided in the
foregoing paragraph); (ii) declare or pay any other distribution
upon common stock or upon any other stock ranking junior to or on a
parity with Preferred Stock as to dividends or upon liquidation; or
(iii) redeem, purchase or otherwise acquire common stock or any
other stock of Summit ranking junior to or on a parity with
Preferred Stock as to dividends or upon liquidation for any
consideration (or
<PAGE> Page 41
pay or make available any funds for a sinking fund for the
redemption of any shares of any such stock) except by conversion
into or exchange for stock of Summit ranking junior to Preferred
Stock as to dividends and upon liquidation.
Summit may make distributions ratably on the shares of
Preferred Stock and shares of any stock of Summit ranking on a
parity therewith with regard to the payment of dividends, in
accordance with the sums which would be payable on such shares if
all dividends, including accumulations, if any, were declared and
paid in full. As of the date hereof, no dividends on Summit's
preferred stock are in arrears. No interest will be paid for or on
account of any unpaid dividends.
Liquidation Rights
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of Summit, the holders of shares of
Preferred Stock will be entitled to receive out of the assets of
Summit available for distribution to stockholders, before any
distribution of assets is made to holders of common stock or any
stock of Summit ranking, upon liquidation, junior to Preferred
Stock, liquidating distributions in the amount of $100 per share
plus declared and unpaid dividends. Preferred Stock is junior in
liquidation to outstanding debt of Summit. As of September 30,
1996, the total liabilities of Summit ranking senior in liquidation
preference to Preferred Stock were approximately $111,908,000.
Obligations ranking on a parity with Preferred Stock upon
liquidation (i.e. the total liquidation preference of the
outstanding shares of all previously issued series of preferred
stock) as of September 30, 1996 were approximately $4,131,000.
There are no limitations on Summit's ability to incur additional
secured or unsecured indebtedness. See "CAPITALIZATION" & " Risk
Factors".
The Preferred Stock Authorizing Resolution provides that,
without limitation, the voluntary sale, lease or conveyance of all
or substantially all of Summit's property or assets to, or its
consolidation or merger with, any other corporation shall not be
deemed to be a liquidation, dissolution or winding up of Summit.
If, upon any voluntary or involuntary liquidation, dissolution or
winding up of Summit, the amounts payable with respect to Preferred
Stock and any other shares of stock of Summit ranking as to any
such distribution on a parity with Preferred Stock are not paid in
full, the holders of Preferred Stock and of such other shares will
share ratably in any such distribution of assets of Summit in
proportion
<PAGE> Page 42
to the full respective preferential amounts to which they are
entitled. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of shares of
Preferred Stock will not be entitled to any further participation
in any distribution of assets by Summit.
Redemption of Shares
Upon call by Summit: . . . Subject to regulatory restrictions
affecting redemptions during an offering, the shares of Preferred
Stock are redeemable, in whole or in part, only at the option of
Summit at a redemption price of $100 per share plus declared and
unpaid dividends to the date fixed for redemption. In the event
that fewer than all of the outstanding shares of Preferred Stock
are to be redeemed, the number of shares to be redeemed shall be
determined by Summit and the shares to be redeemed shall be
determined by such method as Summit, in its sole discretion, deems
to be equitable.
Discretionary Redemption Upon Request of the Holder: . . . As
provided in the Preferred Stock Authorizing Resolution, the shares
of Preferred Stock are not redeemable at the option of the holder.
If, however, Summit receives an unsolicited written request for
redemption of a block of shares from any holder, Summit may, in its
sole discretion, subject to regulatory restrictions affecting
redemptions during an offering, and subject to the limitations
described below, accept such shares for redemption. Such redemption
requests are reviewed in the order received, and are subject to
review by Summit's executive management. Any shares so tendered,
which Summit in its discretion, allows for redemption shall be
redeemed by Summit directly, (and not from or through a broker or
dealer), at a price equal to $97 per share, plus any declared but
unpaid dividends to date if redeemed during the first year after
the date of original issuance and $99 per share plus any declared
but unpaid dividends if redeemed thereafter. Summit may change
such optional redemption prices at anytime with respect to unissued
shares of Series S.
There can be no assurance that Summit's financial condition
will allow it to exercise its discretion to accept any particular
request for redemption of Preferred Stock. Summit will not redeem
any such shares tendered for redemption if to do so would, in the
opinion of Summit's management, be unsafe or unsound in light of
Summit's financial condition (including its liquidity position); if
payment of interest or principal on any outstanding instrument of
indebtedness is in arrears or in default; or if payment of any
dividend on Preferred Stock or share of any stock of Summit ranking
<PAGE> Page 43
at least on a parity therewith is in arrears as to dividends. In
the event that cumulative dividends on Preferred Stock have not
been paid in full, Summit may not purchase or acquire any shares of
Preferred Stock otherwise than pursuant to a purchase or exchange
offer made on the same terms to all holders of Preferred Stock.
The Preferred Stock is not expected to be traded on any
national or regional stock exchange and no independent public
market for Preferred Stock is anticipated. Management does not
anticipate applying for a listing for such public trading. The
broker-dealer for this offering, MIS, maintains a trading list to
match buyers and sellers of preferred stock. Summit will use its
best efforts to maintain the availability of this listing for the
Preferred Stock offered hereunder following completion of this
offering. With limited exceptions, Summit has established a policy
that all preferred shareholders including holders of the Preferred
Stock offered herein, must place their shares for sale on the
trading list for 60 consecutive days before Summit will entertain a
request for redemption. See "RISK FACTORS".
Voting Rights
The Preferred Stock has no voting rights except as provided in
the Authorizing Resolution and except as required by Idaho State
Law regarding amendments to Summit's Articles of Incorporation
which adversely affect holders of such shares as a class and
requires approval of a majority of the outstanding shares entitled
to vote.
The Authorizing Resolution provides that holders of Preferred
Stock, together with the holders of Summit's other preferred stock
hereafter authorized, voting separately and as a single class,
shall be entitled to elect a majority of the Board of Directors of
Summit in the event that distributions payable on any shares of
Preferred Stock shall be in arrears in an amount equal to
twenty-four full monthly dividends or more per share. Such right
will continue until all distributions in arrears have been paid in
full.
Federal Income Tax Consequences of Distributions
The following discussion of the federal income tax
consequences of distributions is based upon the Internal Revenue
Code of 1986 as amended (the "Code"), existing Treasury
regulations, current published administrative positions of the
Internal Revenue Service (the "Service") contained in revenue
rulings, revenue procedures and notes and existing judicial
decisions. No assurance can be given that legislative or
administrative changes or court decisions may
<PAGE> Page 44
not be forthcoming that could significantly modify the statements
in this discussion. Any such changes may or may not be retroactive
with respect to transactions effected prior to the date of such
changes.
Distributions made to the holders of Preferred Stock will
either be taxable or not depending, in part, on the extent to which
they are made out of current or accumulated earnings and profits of
Summit as calculated for federal income tax purposes. To the
extent, if any, that distributions made by Summit to the holders of
Preferred Stock exceed current and accumulated earnings and profits
of Summit, such distributions will be treated first as a tax-free
return of capital, reducing the holder's basis in Preferred Stock
(not below zero) and thereafter as capital gains (provided
Preferred Stock is held by the holder as a capital asset).
Summit believes that the majority of the distributions on its
outstanding common and preferred stock were tax free returns of
capital for federal income tax purposes in calendar 1994, and were
taxable for 1995 and 1996. Summit is currently unable to predict
the character of its distributions for future years, but as
required by the Code, will report annually to shareholders
regarding the tax character of the prior years distributions.
Each Preferred Shareholder's individual tax circumstance is
unique; accordingly, Preferred Shareholders are advised to consult
their own tax advisor with respect to the income tax treatment or
any distribution made with respect to the Preferred Stock.
Distributions paid with respect to Preferred Stock, whether
deemed to be dividends, return of capital, or capital gains for
federal income tax purposes will result in the same federal income
tax consequences to Summit as other payments of dividends. These
distributions are not deductible by Summit under current tax law.
Additionally, distributions to foreign taxpayers are subject to
special rules not discussed herein.
Relative Rights of Common Stock
Holders of shares of Common Stock are entitled to one vote per
share on all matters to be voted on by the shareholders. Subject
to the rights of preferred shareholders, if any, the holders of
Common Stock are entitled to receive such dividends, if any, as may
be declared from time to time by the Board of Directors in its
discretion from funds legally available, and upon liquidation or
dissolution of Summit are entitled to receive all assets available
for distribution to common shareholders. The Common Stock has no
<PAGE> Page 45
preemptive or other subscription rights, and there are no
conversion rights or redemption or sinking fund provisions with
respect to such shares. All outstanding shares of Common Stock are
fully paid and nonassessable. Currently, National Summit Corp.
holds 100% of the Common Stock of Summit. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS".
Transfer Agent and Registrar
Metropolitan acts as Transfer Agent and Registrar for Summit's
Certificates and capital stock, including its Preferred Stock.
LEGAL MATTERS
LEGAL OPINION
The legality of the Certificates and Preferred Stock being
offered hereby is being passed upon for Summit by Susan A. Thomson,
Esq., who is Assistant Corporate Counsel for Summit and also
employed by Metropolitan as its Assistant Corporate Counsel and
Vice President.
LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or
threatened against Summit, or to which its property is subject.
EXPERTS
The consolidated balance sheets of Summit and its subsidiaries
as of September 30, 1996 and 1995 and the consolidated statements
of income, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 1996 included in this
Prospectus, have been included herein in reliance on the report,
which includes an explanatory paragraph describing changes in the
method of accounting for impaired loans in fiscal 1996, of Coopers
& Lybrand L.L.P., independent accountants, given on the authority
of that firm as experts in accounting and auditing.
<PAGE> Page 47
PLAN OF DISTRIBUTION
The Certificates and Preferred Stock are offered directly to
the public on a continuing best efforts basis through MIS which is
a subsidiary of Summit. Accordingly, the offering has not received
the independent selling agent review customarily made when an
unaffiliated selling agent offers securities. No commission or
other expense of the offering will be paid by the purchasers of the
Certificates or Preferred Stock. A commission will, however, be
paid by Summit on most Certificate purchases in the maximum amount
of 6% of the Certificate price, depending on the term of the
Certificate and whether or not the transaction is a reinvestment or
new purchase. A commission in the maximum amount of 6% of the
offering price will also be paid by Summit on most Preferred Stock
purchases. Summit also pays certain advertising and marketing
costs related to the sales of Certificates and Preferred Stock.
Such costs are not expected to exceed approximately $400,000.
Certificates are offered only for cash or cash equivalents.
Preferred Stock is offered for cash or other consideration
acceptable to Summit as determined by the Board of Directors. MIS
will transmit such funds or other consideration directly to Summit
by noon of the next business day after receipt. Summit will also
pay certain other expenses in connection with the offering. During
the three fiscal years ended September 30, 1996, MIS received
commissions of $1,005,887 from Summit on sales of approximately
$33,470,000 of Summit's certificates and preferred stock.
MIS is a member of the National Association of Securities
Dealers, Inc. (NASD). As such, NASD Rule 2720 (formerly Schedule
E) applies and requires, in part, that a qualified independent
underwriter be engaged to render an opinion regarding the fairness
of the interest rates to be paid on the Certificates and the
fairness of the pricing of the Preferred Stock offered through this
Prospectus. Accordingly, MIS has obtained an opinion from Welco
Securities, Inc., an NASD member, ("Welco") that the interest rates
on the Certificates using a formula tied to corresponding interest
rates paid by the U.S. Treasury and regional financial institutions
meets this fairness objective based on conditions and circumstances
existing as of the date of the Prospectus. A similar opinion has
been obtained from Welco, which states that the offering price of
the Preferred Stock meets the fairness objective based on
conditions and circumstances, existing as of the date of the
Prospectus. Summit undertakes to maintain the interest rates on
Certificates no lower than those recommended by Welco based on the
formula. Accordingly, the yield at which the Certificates will be
distributed
<PAGE> Page 48
will be no lower than that recommended by Welco and the price
offered for the Preferred Stock will be no higher than Welco would
have independently recommended. Welco has assumed the
responsibilities of acting as the qualified independent underwriter
in pricing the offering and conducting due diligence. For
performing its functions as a qualified independent underwriter
with respect to the Certificates and Preferred Stock offered
hereunder, Welco is to be paid $45,000 in fees and $10,000 in non-
accountable expenses plus its accountable expenses, which are not
expected to exceed $2,500.
The Registrant has agreed to indemnify Welco, against or make
contributions to Welco with respect to certain liabilities under
the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended.
There is not now and Summit does not expect that there will be
a public trading market for the Certificates or Preferred Stock in
the future. MIS does not intend to make a market for the
Certificates or Preferred Stock. However, MIS undertakes to
maintain a list of persons willing to sell or purchase outstanding
series of preferred stock of Summit. Summit will use its best
efforts to maintain the availability of this listing for Preferred
Stock offered hereunder following completion of this offering. See
" RISK FACTORS- Risk Related to Lack of Liquidity and Limited
Marketability of Shares".
MIS may enter into selected dealer agreements with and reallow
to certain dealers who are members of the NASD, and certain foreign
dealers who are not eligible for membership in the NASD, a
commission of up to 6% of the principal amount of Certificates and
Preferred Stock sold by such dealers. After the commencement of
the offering, the commissions and reallowances, if any, may be
lowered.
USE OF PROCEEDS
Certificate Proceeds . . . . If all of the Certificates are sold,
Summit expects net proceeds from this Certificate offering of
$37,600,000 to $40,000,000 before deducting offering expenses
estimated at $570,000 (combined total for both Certificates and
Preferred Stock) and after sales commissions. There can be no
assurance, however, that any of the Certificates can be sold. Sales
commissions will range up to $2,400,000 (6%) depending on
maturities of Certificates sold and whether sales are reinvestments
or new purchases. See "BUSINESS-Method of Financing".
<PAGE> Page 49
Preferred Stock Proceeds . . . .If all of the Preferred Stock is
sold, Summit expects net proceeds from this Preferred Stock
offering of $14,100,000 to $15,000,000 before deducting offering
expenses estimated at $570,000 (combined total for both
Certificates and Preferred Stock) and after sales commissions of up
to $900,000 (6%), assuming all of the Preferred Stock is sold.
There can be no assurance, however, that any of the Preferred Stock
can be sold. See "BUSINESS-Method of Financing".
In conjunction with the other funds available to it through
operations and/or borrowings, Summit will utilize the proceeds of
the Certificates and Preferred Stock offerings for the following
purposes, which are shown in their descending order of priority:
Funding investments in Receivables, and other investments, which
may include investments in existing subsidiaries, the commencement
of new business ventures and the acquisition of other companies.
The Consolidated Group continues to evaluate possible acquisition
candidates. Presently there are no commitments or agreements for
material acquisitions. To the extent internally generated funds
are insufficient or unavailable for the retirement of maturing
certificates through the period ending January 31, 1998, proceeds
of this offering may be used for retiring maturing certificates,
preferred stock dividends and for general corporate purposes (debt
service, and other general operating expenses). Approximately
$7,175,000 in principal amount of debt securities will mature
between February 1, 1997 and January 31, 1998 with interest rates
ranging from 6.5% to 10% and averaging approximately 8.5% per
annum. See Note 8 to the Consolidated Financial Statements & "
RISK FACTORS".
Management anticipates that some of the proceeds of this
offering will be invested in money market funds, bank repurchase
agreements, commercial paper, U.S. Treasury Bills and similar short-
term investments until used as stated above. Due to Summit's
inability to accurately forecast the total amount of Certificates
or Preferred Stock to be sold pursuant to this offering, no
specific amounts have been allocated for any of the foregoing
purposes.
In the event substantially less than the maximum proceeds are
obtained, Summit does not anticipate any material changes to its
planned use of proceeds from those described above.
<PAGE> Page 50
CAPITALIZATION
The following table sets forth the capitalization of the
Consolidated Group at September 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
DEBT PAYABLE
Reverse repurchase agreements
with various securities brokers,
interest at 5.9% per annum; due
on October 1, 1996; collateralized
by $3,900,000 in U.S. Treasury bonds $ 3,802,500
Real estate contracts and
mortgage notes payable
7% to 8.5%, due 1996 to 2002 37,875
-----------
Total Debt Payable 3,840,375
-----------
INVESTMENT CERTIFICATES
Investment Certificates,
Maturing 1996 to 2001,
at 6% to 10% 38,444,707
Compound and accrued interest 4,379,164
-----------
Total Investment Certificates 42,823,871
-----------
STOCKHOLDERS' EQUITY
Preferred Stock, $10 par:
10,000,000 shares authorized;
41,312 shares issued and
outstanding (liquidation preference
$4,131,170) 413,117
Common Stock, $10 par:
2,000,000 shares authorized;
10,000 shares issued and
outstanding 100,000
<PAGE> Page 51
Additional paid-in capital 2,269,137
Retained earnings 2,586,654
Net unrealized losses
on investments (10,134)
----------
Total Stockholders' Equity 5,358,774
----------
Total Capitalization $52,023,020
==========
</TABLE>
<PAGE> Page 52
SUMMIT SECURITIES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
The consolidated financial data shown below as of September 30, 1996 and
1995 and for the years ended September 30, 1996, 1995 and 1994 (other than the
ratio of earnings to fixed charges and preferred stock dividends) have been
derived from, and should be read in conjunction with, the consolidated financial
statements, related notes, and Management's Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere herein. The financial
data shown as of September 30, 1994, 1993 and 1992 and for the years ended
September 30, 1993 and 1992 have been derived from audited financial statements
not included herein. The consolidated financial statements as of and for the
years ended September 30, 1996, 1995, 1994 and 1993 have been audited by Coopers
& Lybrand L.L.P. The consolidated financial statements as of and for the year
ended September 30, 1992 have been audited by BDO Seidman.
Three Months Ended Year Ended
September 30,
December 31,
(Unaudited)
------------------ ---------------------------
- ---------------------------------
1996 1995 1996 1995
1994 1993 1992
<S> <C> <C> <C> <C>
<C> <C> <C>
INCOME STATEMENT
DATA:
Revenues $4,207,683 $3,198,207 $ 14,536,449 $ 9,576,615 $
3,395,252 $ 2,815,624 $ 2,435,843
========== ========== ============ ===========
=========== =========== ===========
Income before
extraordinary item 393,421 120,483 1,244,522 $ 587,559 $
264,879 $ 283,107 $ 611,595
Extraordinary item (1) -- -- -- --
- -- -- 49,772
---------- --------- ----------- ----------- --
- --------- ---------- -----------
Net Income 393,421 120,483 1,244,522 587,559
264,879 283,107 661,367
Preferred Stock
Dividends (103,186) (70,996) (333,606) (309,061)
(2,930) -- --
<PAGE> Page 53
---------- --------- ----------- ---------- ---
- -------- ---------- -----------
Income Applicable to
Common Stockholders $ 290,235 $ 49,487 $ 910,916 $ 278,498 $
261,949 $ 283,107 $ 661,367
========== ========= ============ ===========
=========== =========== ===========
Per Common Share:
Income before
extraordinary
item $ 29.02 $ 4.95 $ 91.09 $ 27.85 $
13.47 $ 14.15 $ 30.58
Extraordinary item (1) -- -- -- --
- -- -- 2.49
---------- ------- ------------ ---------- --
- --------- ----------- ----------
Income applicable to
common stockholders $ 29.02 $ 4.95 $ 91.09 $ 27.85 $
13.47 $ 14.15 $ 33.07
========== ======= ============ ===========
=========== =========== ===========
Weighted average number
of common shares
outstanding 10,000 10,000 10,000 10,000
19,445 20,000 20,000
========== ======= ============ ===========
=========== =========== ==========
Ratio of Earning
to Fixed Changes 1.45 1.18 1.40 1.25
1.16 1.24 1.53
Ratio of Earnings
to Fixed Charges
and Preferred Stock
Dividends 1.29 1.07 1.26 1.11
1.16 1.24 1.53
BALANCE SHEET DATA:
Due from/(to)
affiliated
companies, net $ (326) $ (737,362) $ 1,296,290 $(1,960,104) $
267,735 $ 1,710,743 $ (400,365)
Total Assets $118,649,570 $100,558,330 $117,266,680 $96,346,572
$35,101,988 $25,441,605 $17,696,628
Debt Securities
and Other
Debt Payable $ 45,172,441 $ 39,938,628 $ 46,674,841 $38,650,532
$31,212,718 $21,982,078 $14,289,648
Stockholders' Equity $ 6,101,623 $ 3,977,424 $ 5,358,774 $ 3,907,067 $
3,321,230 $ 3,188,024 $ 2,904,917
<PAGE> Page 54
<FN>
(1) Benefit from utilization of net operating loss carryforwards.
</TABLE>
<PAGE> Page 55
Management's Discussion and Analysis of Financial
Condition and Results of Operations
For the Three Fiscal Years Ended September 30, 1996
Introduction
Summit's operations for the current fiscal year ended
September 30, 1996 continued to benefit from the acquisition of and
start-up of several new operating subsidiaries acquired during
1995. MIS was acquired from Summit's former parent company in
January, 1995. At the same time, Summit established a property
development subsidiary, Summit Property Development. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS". Summit acquired Old
Standard from Summit's former parent company on May 31, 1995 and
acquired Arizona Life from ILA Financial Services Inc. in December
1995. Of these transactions, the largest was the acquisition of
Old Standard. As of September 30, 1996, Old Standard had total
assets of approximately $76.5 million. During the fiscal year
ended September 30, 1996, MIS, Summit Property Development, Old
Standard and Arizona Life contributed gross revenues of
approximately $1.1 million, $2.0 million, $6.9 million and $69,000,
respectively, to the Consolidated Group. For the same period,
Summit Property Development, Old Standard and Arizona Life
contributed operating income of approximately $141,000, $1,279,000
and $6,000, respectively, to the Consolidated Group. MIS sustained
an operating loss of approximately $137,000 during the current
fiscal year.
Results of Operations
Revenues of the Consolidated Group increased to approximately
$14.5 million in 1996 from $9.6 million in 1995 and $3.4 million in
1994. The growth in revenues from 1995 to 1996 is attributable to
the continuing increase in investment earnings (interest and earned
discounts) on outstanding Receivables due largely to the continuing
growth of Old Standard along with gains realized on the sale of a
portion of the Receivable portfolio. Additionally in 1996, the
Consolidated Group realized an increase in fee, commission and
service revenues primarily from its service orientated
subsidiaries, MIS and Summit Property Development. The growth in
revenues from 1994 to 1995 was primarily 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
<PAGE> Page 56
from its newly acquired and newly formed subsidiaries. The
Consolidated Group has increased its investment in Receivables,
collateralized by real estate, to approximately $80.0 million at
September 30, 1996 from $60.1 million at September 30, 1995 and
$27.3 million at September 30, 1994. Additionally, the
Consolidated Group continued to invest in annuities and lottery
prizes ending the year at September 30, 1996 with a total
outstanding investment of $11.8 million, which is a decrease from
the $16.9 million investment at September 30, 1995 primarily as a
result of selling approximately $11.7 million of its portfolio
during fiscal 1996. Currently, yields available for lottery
acquisitions have decreased due primarily to increased competition
in this market. As a result the Consolidated Group anticipates its
acquisition volume in 1997 will be lower than in fiscal 1996.
Net income before preferred stock dividends for the fiscal
year ended September 30, 1996 was approximately $1,245,000 compared
to approximately $588,000 in 1995 and $265,000 in 1994. The
increase from 1995 to 1996 was primarily the result of an increase
in the margin between interest sensitive income and interest
sensitive expense caused largely by the continued growth in Old
Standard's Receivable portfolios, increased gains on the sale of
Receivables, and increased fees, commissions and service income,
all of which were only partially offset by increases in its
provision for losses on real estate assets, a reduction in
dividends received and an increase in salaries and benefits,
commissions and other operating expenses. 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 Consolidated Group strives to maximize its risk adjusted
return by investing in non-conventional real estate receivables.
Non-conventional receivables are typically receivables not
originated by a regulated financial institution and not
underwritten to FNMA or FHA underwriting guidelines. Normally,
either the borrower or the collateral will not meet sufficient FNMA
or FHA underwriting guidelines to qualify for conventional
financing and the seller will be required to provide the financing
to complete the sale. These "seller financed receivables" or
"seller take-back receivables" are the types of non-conventional
receivables normally acquired by the
<PAGE> Page 57
Consolidated Group. Because borrowers in this market generally
have blemished credit records, the Consolidated Group's
underwriting practices focus more strongly on the collateral value
as the ultimate source for repayment. In conjunction with its
investment in non-conventional receivables, while higher
delinquency rates are expected, the Consolidated Group believes
this risk is generally offset by the value of the underlying
collateral and the superior yields over normal conventional
financing.
Since the date of its incorporation through approximately the
end of calendar year 1993 and again in 1995 and 1996, Summit has
generally benefited from a declining interest rate environment with
lower money costs and relatively consistent yields on Receivables.
In addition, a declining interest rate environment positively
impacted earnings by increasing the value of the portfolio of
predominantly fixed rate Receivables. This situation was evident
in 1996, 1995 and 1994 as Summit was able to realize gains of
approximately $977,000, $513,000 and $172,000, respectively, from
the sale of Receivables. Higher than anticipated levels of
prepayments in the Receivable portfolio were experienced during the
years 1992 through 1996, allowing Summit to recognize unamortized
discounts on Receivables at an accelerated rate. During 1994 and
continuing in 1995 and 1996, 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-Introduction".
Although the national economy has experienced relatively slow
growth over the past three years, the Consolidated Group's
financial results were not adversely impacted in any material way
because of: (1) the wide geographic dispersion of its Receivables;
(2) the relatively small average size the each Receivable; (3) the
primary concentration of investments in residential Receivables
where market values have been more stable than in commercial
properties; and (4) a continuing strong demand for tax-advantaged
products, such as annuities.
Maintaining efficient collection efforts and minimizing
delinquencies in the Consolidated Group's Receivable portfolio are
ongoing management goals. During 1996, the Consolidated Group
realized a slight loss on the sale of repossessed real estate of
approximately $40,000 as compared to a gain of $6,300 in 1995 and a
<PAGE> Page 58
gain of $12,300 in 1994. 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 $490,000, $455,000, and $155,000 for 1996, 1995, and
1994, respectively. At September 30, 1996, the Consolidated Group
had an allowance for losses on real estate assets of approximately
$974,000 compared to $765,000, and $251,000 at September 30, 1995
and 1994, respectively. The increase in 1995 was in part
attributable to the acquisition of Old Standard, while the increase
in 1996 was primarily due to increases in the various Receivable
portfolios. At September 30, 1996, 1995 and 1994, the allowance
for losses represented approximately 1.2%, 1.2% and 0.9%,
respectively, of the face value of Receivables collateralized by
real estate.
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 Consolidated Group is in a "liability sensitive" position
in that its interest sensitive liabilities reprice or mature more
quickly than do its interest sensitive assets. Consequently, in a
rising interest rate environment, the net return from interest
sensitive assets and liabilities will tend to decrease, thus rising
interest rates will have a negative impact on results of
operations. Conversely, in a falling interest rate environment,
the net return from interest sensitive assets and liabilities will
tend to improve, thus falling interest rates will have a positive
impact on results of operations. As with the impact on operations
from changes in interest rates, the Company's NPV (the Net Present
Value) of financial liabilities is subject to fluctuations in
interest rates. The Company continually monitors the sensitivity
of net interest income and NPV to changes in interest rates.
<PAGE> Page 59
The following table presents, as of September 30, 1996, the Consolidated
Group's estimate of the change in its NPV of financial assets and liabilities if
interest rate levels generally were to increase or decrease by 1% and 2%,
respectively. These calculations, which are highly subjective and technical,
may differ from actual results. See "Asset/ Liability Management".
<TABLE>
<CAPTION>
Interest Rate Change
Carrying Fair Decrease Decrease Increase Increase
Amounts Value 1% 2% 1% 2%
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $4,461 $4,461 $4,461 $4,461 $4,461 $4,461
Investments:
affiliated companies 4,522 4,522 4,522 4,522 4,522 4,522
Available-for-sale 269 269 279 290 258 249
Held-to-maturity 7,750 7,622 7,780 7,938 7,477 7,331
Real estate contracts
and mortgage notes 78,932 79,427 82,287 85,337 76,740 74,214
Other receivable investments 11,788 12,404 12,937 13,504 11,903 11,431
------ ------ ------ ------ ------ ------
$107,722 $108,705 $112,266 $116,052 $105,361 $102,208
======== ======== ======== ======== ======== ========
Financial Liabilities:
Annuity reserves $62,440 $62,440 $64,412 $66,629 $60,273 $58,342
Investment certificates 42,149 42,545 43,655 44,731 41,610 40,638
Debt payable 3,840 3,840 3,840 3,840 3,840 3,840
------ ------ ------ ------ ------ ------
$108,429 $108,825 $111,907 $115,200 $105,723 $102,820
<PAGE> ======== ======== ======== ======== ======== ========
Page 60
<PAGE> Page 61
The excess of interest sensitive income over interest sensitive
expense was approximately $2,172,000 in 1996, $1,075,000 in 1995, and
$543,000 in 1994. The increase from 1995 to 1996 of $1,097,000 was
attributable to the following: (1) increased investment in the
Receivable portfolio largely due to the continued growth of Old
Standard; and (2) a lower cost of funds, influenced in part by the
acquisition of the insurance subsidiaries, Old Standard and Arizona
Life. The increase from 1994 to 1995 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 and common stock of Metropolitan held by Summit.
See Note 12 to the Consolidated Financial Statements.
Fees, Commissions, Service and Other Income
Other income grew to approximately $2,850,000 in 1996 from
$2,580,000 in 1995 and $60,700 in 1994. Revenues in 1996, consisted
primarily of commissions earned by the Consolidated Group's
broker/dealer subsidiary, MIS, of approximately $595,500 (after
elimination of commissions received from Summit) and approximately $2.0
million of service fees earned by its property development subsidiary.
The increase in 1996 of approximately $270,000 resulted from an increase
in property development fees of $800,000 being offset by a decrease in
commissions earned by MIS of approximately $530,000.
Other Expenses
Operating expenses increased to approximately $3,988,000 in 1996 as
compared to $2,901,000 in 1995 and $231,000 in 1994. The 1996 increase
in operating expenses was principally the result of the continued growth
of the Consolidated Group, in particular Old Standard and Summit
Property Development. In 1996, Summit Property Development's increase
in service fees were offset by approximately $763,000 in increased
expenses, while Old Standard's growth resulted in expense increases of
approximately $185,000 and MIS also incurred increased expenses of
approximately $111,000. The 1995 increase in operating expense was
principally the result of the acquisition and establishment of new
subsidiaries, including the insurance,
<PAGE> Page 62
broker/dealer and the property development 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, however there
can be no assurance that actual losses will not exceed management's
expectations. The following table summarizes the Consolidated Group's
allowance for losses on Receivables and repossessed real estate:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Beginning Balance $765,130 $250,572 $ 96,654
Increase due to:
Acquisition of
life insurance
affiliate 310,957
Provision 212,600 103,950 103,000
Charge-Offs (18,896) (34,276) (49,921)
Recoveries 15,653 133,927 100,839
-------- -------- --------
Ending Balance $974,487 $765,130 $250,572
======== ======= =======
<FN>
These allowances are in addition to unamortized acquisition
discounts of approximately $4.7 million at September 30, 1996, $2.6
million at September 30, 1995 and $1.3 million at September 30, 1994.
</TABLE>
Gain/Loss on Other Real Estate Owned
During 1996, the Consolidated Group experienced a loss on the sale
of real estate of approximately $39,600. At the end of fiscal 1996, the
Consolidated Group had approximately $1,191,000 in real estate held for
sale, just over 1% of total assets.
Effect of Inflation
<PAGE> Page 63
During the three year period ended September 30, 1996, 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 its 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 1997, 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
<PAGE> Page 64
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 economically
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, 1996. Also See "BUSINESS-Securities Investments".
During fiscal 1997, approximately $13.8 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 $62.4 million reprice during
fiscal 1997, and approximately $10.9 million of Certificates and other
debt will mature during fiscal 1997. These estimates result in
repricing of interest sensitive liabilities in excess of interest
sensitive assets of approximately $59.5 million, or a ratio of interest
sensitive liabilities to interest sensitive assets of approximately
530%. See " RISK FACTORS."
The Consolidated Group is able to manage this liability to asset
mismatch of approximately 5.3:1 by the fact that approximately 85% of
the interest sensitive liabilities are annuity contracts which are
subject to surrender charges. These contracts have maturities which
extend for as long as nine years with surrender charges of decreasing
amounts during their term. At the option of the Consolidated Group,
these contracts are subject to annual repricing. In periods of
declining interest rates, this feature is beneficial as it allows the
Consolidated Group to reprice its liabilities at lower market rates of
interest. In periods of increasing interest rates, such liabilities
were protected by surrender charges. Depending on the remaining
surrender charges, the Consolidated Group has the option to extend any
interest rate increase over a two to three year period, thereby making
it not generally economical for an annuitant to pay the surrender charge
in order to receive payment in lieu of accepting a rate of interest that
is lower than current market rates of interest. As a result, the
Consolidated Group may respond more slowly to increases in market
interest rate levels thereby diminishing the impact of the current
mismatch in the interest sensitivity ratio. Additionally, through
Receivable securitizations, the Company has increased its ability to
raise necessary liquidity to manage the liability to asset
<PAGE> Page 65
mismatch. If necessary, the proceeds from the securitization could be
used to payoff maturing liabilities.
New Accounting Rules
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,
net of selling costs. The Consolidated Group adopted this new standard
on October 1, 1995. The adoption of SFAS No. 114 did not have a material
effect on the financial statements.
In June 1996, Statement of Financial Accounting Standards No. 125
(SFAS 125), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" was issued. SFAS 125 provides
accounting and reporting standards based on a consistent application of
a financial components approach that focuses on control. Under this
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered and derecognizes liabilities when extinguished. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996. The Company does not expect that the application of
the provisions of SFAS 125 will have a material effect on the Company's
financial condition, results of operations or cash flows.
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's increased liquidity position has
been enhanced due to its ability to securitize its Receivables
collateralized by real estate.
<PAGE> Page 66
The Consolidated Group utilized cash from operations of
approximately $.6 million in 1996, and generated $4.0 million in 1995
and $2.3 million in 1994. Cash used by the Consolidated Group in its
investing activities totaled approximately $15.2 million in 1996, $13.7
million in 1995 and $6.3 million in 1994. Cash provided by the
Consolidated Group's financing activities totaled approximately $17.2
million in 1996, $9.1 million in 1995 and $4.1 million in 1994. These
cash flows have resulted in year end cash and cash equivalent balances
of approximately $4.5 million in 1996, $3.0 million in 1995, and $3.6
million in 1994.
During 1996, approximately $17.2 million was provided by financing
activities, approximately $.6 million was used in operating activities,
and $15.2 million was used in investing activities which resulted in a
$1.5 million increase in available cash and cash equivalents. The cash
from financing activities of $17.2 million resulted primarily from: (1)
issuance of Certificates, net of repayments and related debt issue
costs, of $4.1 million; (2) issuance of insurance annuities, net of
surrenders, of approximately $9.2 million; (3) issuance of preferred
stock of approximately $.5 million; (4) borrowings from banks and
others, net of debt repayments, of $3.7 million; less (5) dividend
payments of $.3 million. Cash used in operating activities of $.6
million resulted primarily from net income of $1.2 million, increases in
annuity reserves of $3.7 million being offset by changes in various
assets and liabilities of approximately $5.5 million. Cash used in
investing activities of $15.2 million primarily included acquisition of
real estate Receivables and other Receivable investments, net of
payments and sales, of $13.4 million, $1.5 million invested in the
common stock of an affiliated company and $760,000 used in the purchase
of Arizona Life.
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
<PAGE> Page 67
from: (1) issuance 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) issuance of preferred
stock of $.4 million; less (4) debt repayments to banks and others of
$.2 million; and (5) dividend payments of $.3 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 1997, anticipated principal, interest and dividend payments
on outstanding debentures, other debt payments and preferred stock
distributions are expected to be approximately $12.0 million. During
1996, the principal portion of the payments received on the Consolidated
Group's Receivables and proceeds from sales of real estate and
Receivables was $34.1 million. A decrease in the prepayment rate on
these Receivables or the ability to sell or securitize Receivables would
reduce future cash flows from Receivables and might adversely affect the
Consolidated Group's ability to meet its principal, interest and
dividend payments.
The Consolidated Group expects to maintain high levels of liquidity
in the foreseeable future by continuing its securities offerings,
annuity sales and the sale and securitization of Receivables. At
September 30, 1996, cash or cash equivalents were $4.5 million, or 3.8%
of assets. Including securities that are available for sale total
liquidity was $4.7 million, $3.0 million and $3.6 million as of
September 30, 1996, 1995 and 1994, respectively, or 3.8%, 3.1% and 10.3%
of total assets, respectively.
Access to new "capital markets" through Receivable securitizations
has allowed the Company to both increase liquidity and
<PAGE> Page 68
accelerate earnings through the gains recorded on the securitizations.
The increased ability to raise liquidity will enable the Company to
accept certain asset/liability mismatches which have historically been
beneficial to the Company when they have been able to finance higher
earning longer term assets with lower cost of funds associated with
shorter term liabilities.
For statutory purposes, Old Standard performs cash flow testing
under several different rate scenarios as required by the State of
Idaho. The results of these tests are filed annually with the Insurance
Commissioner of the State of Idaho. At the end of calendar year 1995,
the results of this cash flow testing process was satisfactory.
At September 30, 1996, the Company had no material commitments for
any capital expenditures outside of commitments related to its normal
investing activities. Additionally, the Company had no knowledge of any
environmental liabilities associated with any of its real estate asset
investments.
Management believes that cash flow from operating activities and
financing activities, liquidity provided from current investments and
the Consolidated Group's ability to securitize its Receivables
collateralized by real estate will be sufficient for the Consolidated
Group to conduct its business and meet its anticipated obligations as
they mature during fiscal 1997. Summit has not defaulted on any of its
obligations since its founding in 1990.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
For the Interim Periods Ended December 31, 1996 and 1995
Significant Transactions:
In November 1996, Summit and Old Standard Life Insurance
Consolidated Group (OSL) participated as two of the four co-sellers in a
receivable securitization sponsored by Metropolitan Asset Funding, Inc.,
an affiliated Consolidated Group. Approximately $126.7 million of
receivables, with $11.2 million from Summit and OSL, were sold in the
securitization with proceeds, after costs, of approximately $121.1
million, with $10.8 million allocated to Summit and OSL. With an
amortized carrying value of approximately $10.5 million in the
receivables sold in the securitization, Summit and OSL
<PAGE> Page 69
recorded approximately $.3 million in pre-tax gains from their portion
of the sale. Metropolitan Asset Funding, Inc. sold in a public offering
approximately $113.4 million in varying classes of mortgage pass-through
certificates. In addition to the certificates sold in the public
offering, approximately $13.3 million in subordinate class certificates
and residual class certificates were returned to the various co-sellers
of the collateral included in the securitization. Summit and OSL
received approximately $9.6 million, after costs, from the
securitization and also received approximately $1.2 million in
subordinate class and residual class certificates.
On January 31, 1995, the Consolidated Group consummated an
agreement with Metropolitan, the Consolidated Group's former parent
Consolidated Group, 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. On May 31, 1995, the Consolidated Group consummated an
agreement with Metropolitan, whereby it acquired Old Standard Life
Insurance Consolidated Group (OSL) effective May 31, 1995, at a purchase
price of $2,722,000, which approximated the current book value of OSL at
date of purchase, with future contingency payments bases on the earnings
of OSL. The purchase price plus estimated future contingency payments
approximate the actuarial appraised valuation of OSL.
On December 28, 1995, Summit and ILA Financial Services Inc. (ILA)
completed a purchase/sale transaction whereby 100% of the outstanding
common stock of Arizona Life (AZL), an insurance Consolidated Group
domiciled in Arizona, was sold to a wholly owned subsidiary of Summit.
The cash purchase price was approximately $1,234,000, which approximated
the book value of AZL at date of purchase. AZL holds licenses to engage
in insurance sales in seven states and the purchase price included
approximately $268,000 in value assigned to these state licenses. AZL
is anticipated to be in the business of acquiring receivables using
funds derived from the sale of annuities and funds derived from
receivable cash flows. At date of purchase, AZL had no outstanding
insurance business or other liabilities. The addition of AZL had no
affect on total assets or liabilities of Summit.
Financial Condition and Liquidity:
<PAGE> Page 70
At December 31, 1996, the Consolidated Group had cash and cash
equivalents of approximately $7.6 million as compared to $4.5 million at
September 30, 1996. Management believes that cash, cash equivalents and
liquidity provided by other investments are adequate to meet planned
asset additions, required debt retirements or other business
requirements during the next twelve months. At December 31, 1996, the
Consolidated Group's receivable portfolio totaled $88.3 million as
compared to $91.8 million at September 30, 1996. Real estate held for
sale and development, acquired through receivable foreclosures and
direct purchases, totaled $2.4 million at December 31, 1996 as compared
to $1.2 million at September 31, 1996. Total assets were $118.6 million
at December 31, 1996 as compared to $117.3 million at September 30,
1996.
At December 31, 1996, the Consolidated Group had outstanding
insurance annuity reserve liabilities of $64.6 million as compared to
$62.4 million at September 30, 1996. The Consolidated Group had
outstanding investment certificate liabilities of $45.1 million at
December 31, 1996 as compared to $42.8 million at September 30, 1996.
Total liabilities were $112.5 million at December 31, 1996 as compared
to $111.9 million at September 30, 1996. Total stockholders' equity was
$6.1 million or 5.1% of total assets at December 31, 1996 compared to
$5.4 million or 4.6% of total assets at September 30, 1996.
Sales of Investment Certificates, net of repayments, and Preferred
Stock generated approximately $2.4 million in net cash flow during the
three months ended December 31, 1996, while sales of insurance annuity
products, net of withdrawals, generated approximately $1.1 million net
cash flow during the same period. Sales and maturities of investments,
along with sales of real estate and sales and principal payments on
receivables added additional cash flow of approximately $14.5 million
during the three month period ended December 31, 1996. The cash flows
from these sources along with cash of $2.7 million provided by
operating activities were used to invest approximately $10.2 million in
receivables, approximately $2.2 million in securities investments,
approximately $1.3 million for the acquisition of real estate held for
sale and development and fund the repayment of approximately $3.8
million in short-term broker borrowings. At December 31, 1996, the
Consolidated Group had cash and cash equivalents of approximately $7.6
million.
Results of Operations:
<PAGE> Page 71
Net income was $393,000 on revenues of approximately $4.2 million
for the three months ended December 31, 1996. For the similar period in
the prior year, the Consolidated Group reported net income of $120,000
on revenues of approximately $3.2 million.
Net income for the comparative three month periods has
significantly increased as result of improvements from (1) an increased
spread between interest sensitive income and interest sensitive expense,
due principally to the increased investment in the receivable portfolio,
(2) an increase in overall gains from the sale of investments,
receivables and real estate and (3) a reduced effective income tax rate
due primarily to the effects of the dividend exclusion benefits and the
small life insurance tax benefits; which were only partially offset by
(1) a reduction in fees, commission and service revenues, (2) an
increase in other operating expenses and (3) an increase in the
provision for loss on receivables and other real estate assets.
For the three months ended December 31, 1996, the interest spread
was $703,000, while in the prior year's period the spread was $355,000.
The increase of $348,000 is the result of additional investments in the
receivable portfolio coupled with a slight decrease in the weighted
average interest rate on the outstanding Investment Certificates issued
by the Consolidated Group and the lower cost of insurance annuity funds
generated by OSL.
During the three months ended December 31, 1996, the Consolidated
Group realized gains on the sale of real estate of $1,300 and gains on
the sale of receivables of $317,200 for a total of $318,500. In the
prior year's period, the Consolidated Group realized gains from the
sales of investments, real estate and receivables of less than $1,000.
The current year's gain on the sale of receivables is primarily from
Summit's participation as a co-seller in a securitization sponsored by
Metropolitan Asset Funding, Inc.
In the current year's period, the Consolidated Group received
approximately $51,800 in dividends from its preferred stock investment
in Metropolitan, its former parent Consolidated Group, compared to
approximately $48,600 in the prior year's period. The Consolidated
Group acquired this investment in September 1994 through
<PAGE> Page 72
the exchange of its own preferred stock for a similar preferred and
common stock investment in Metropolitan.
Commencing January 31, 1995, with the purchase of MIS and the
creation of a property development subsidiary, the Consolidated Group
began to generate significant fee revenues along with increased
operating expenses associated with these revenues. Additionally,
commencing May 28, 1995, with the purchase of OSL, and December 28,
1995, with the purchase of AZL, the Consolidated Group began to incur
significant operating expenses relative to its insurance operations.
During the three months ended December 31, 1996, the Consolidated Group
generated approximately $665,000 of fee revenues while incurring $1.0
million in other operating expenses. In the prior year, the
Consolidated Group realized $802,000 of fee revenues offset by $818,000
of other operating expenses. This increased net cost, of approximately
$365,000, is primarily the result of costs associated with its insurance
operations and a reduction in fees generated by its property development
subsidiary.
In conjunction with increased investments in its receivable
portfolio, along with the valuation of foreclosed real estate, the
Consolidated Group provided for losses on receivables and real estate
assets of $230,000 in the current year's period as compared to $220,000
in the prior year's period. At December 31, 1996, the Consolidated
Group's carrying value for its receivable portfolio and its real estate
held for sale and development was approximately $90.6 million as
compared to $76.9 million at December 31, 1995.
New Accounting Rules Issued Subsequent to September 30, 1996:
In February 1997, Statement of Financial Accounting Standards
No.128 (SFAS 128), "Earnings per Share" was issued. SFAS 128
establishes standards for computing and presenting earnings per share
(EPS) and simplifies the existing standards. This standard replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires the dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted
EPS computation. SFAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods
and requires restatement of all prior-period EPS date presented. The
Consolidated Group does not
<PAGE> Page 73
believe the application of this standard will have a material effect on
the presentation of its earning per share disclosures.
BUSINESS
INTRODUCTION
The Consolidated Group consists of Summit, and several subsidiaries
including insurance companies (Old Standard and Arizona Life), a
securities broker/dealer (MIS), and a property development services
company (Summit Property Development). Summit, Old Standard and Arizona
Life 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, sales of Receivables
and the resale of repossessed real estate. The Consolidated Group's
goal is to achieve a positive spread between the return on its
Receivable investments, and other investments and its cost of funds.
Summit may also engage in other businesses or activities without
restriction in accordance with the provisions of its Articles of
Incorporation.
Summit was originally organized as a wholly-owned subsidiary of
Metropolitan. 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. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
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
RELATIONSHIPS AND RELATED TRANSACTIONS".
On May 31, 1995, Summit, through a wholly-owned holding company,
purchased Old Standard from Metropolitan. See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS".
On June 1, 1995, Old Standard entered into a Stock Purchase
Agreement with ILA Financial Services, Inc. to acquire Arizona Life,
<PAGE> Page 74
an insurance company domiciled in Arizona. The acquisition was
completed on December 28, 1995. Arizona Life had 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 was the
principal purpose for the purchase. During 1996, Arizona Life commenced
annuity sales and investing in Receivables, similar to the activities of
Old Standard. See "BUSINESS-Annuity Operations" & "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS".
As of September 30, 1996, 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 December 31, 1996, Old Standard had six employees who perform
the annuity processing and servicing activities. On that same date,
Summit Property Development's staff consisted of nineteen employees,
while MIS had eleven staff employees, and thirty registered
representatives.
RECEIVABLE INVESTMENTS
Metropolitan provides management and Receivable acquisition
services for a fee to Summit, Old Standard, and Arizona Life.
Metropolitan has been investing in Receivables for its own account for
over forty years. The evaluation, underwriting, and closing is performed
at Metropolitan's headquarters in Spokane, Washington. The Receivable
acquisition fees are based upon yield requirements established by each
company. 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
1996, the Consolidated Group incurred fees for Receivable acquisitions
from Metropolitan of approximately $1,753,000.
<PAGE> Page 75
Metwest, a subsidiary of Metropolitan, provides Receivable
collection and servicing for a fee to Summit, Old Standard Life and
Arizona Life. During 1996, the Consolidated Group paid Receivable
collection and servicing fees of approximately $290,000.
Management believes that the terms and conditions of the agreements
with Metropolitan and Metwest are at least as favorable to members of
the Consolidated Group 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 prior written notice to the other party.
The Consolidated Group's Receivable acquisitions include two
principal types of Receivables: 1)Receivables collateralized by real
estate and 2)lotteries, structured settlements and annuities. The
majority of the real estate Receivables are collateralized by first
position liens on single family residences, including land with mobile
homes, and condominiums. To a lesser extent, the Consolidated Group
acquires Receivables collateralized by commercial real estate and
undeveloped land. In addition, it acquires Receivables collateralized
by second and lower lien positions.
The market for the acquisition of existing real estate Receivables
is commonly referred to as the secondary mortgage market. The private
secondary mortgage market consists of individual Receivables or small
pools of Receivables which are held and sold by individual investors.
These Receivables are typically the result of seller financed sales of
real estate. The institutional secondary mortgage market consists of
the sale and resale of Receivables which were originated or acquired by
a financial institution and which are sold in groups, commonly called
pools. The Consolidated Group acquires Receivables through both the
private and the institutional secondary mortgage markets.
The Consolidated Group's real estate Receivable and other
Receivable investment acquisition activities, grew from approximately
$20.2 million in 1994, to $44.4 million in 1995, to $47.5 million in
1996. During 1996, the average monthly acquisition volume was in excess
of $3.9 million.
Metropolitan's Receivable Acquisitions: Sources, Strategies and
Underwriting
<PAGE> Page 76
The following information describes Metropolitan's Receivable
acquisition and underwriting procedures as of the date of this
prospectus. These practices may be amended, supplemented and changed at
any time at the discretion of Metropolitan and the Consolidated Group.
Generally, the real estate Receivables acquired by Metropolitan
consist of non conventional, "B/C" credit loans. These types of
Receivables possess characteristics which differ from the conventional
lending market in that either the borrower or the property would not
qualify for "A" credit grade lending. The "B/C" credit market requires
that the lender focus not only on the borrowers' ability to pay, but
also the quality of the collateral as the ultimate recourse in the event
of the borrower's default.
Private Secondary Mortgage Market Sources
Currently, the majority of Metropolitan's Receivables are acquired
through the private secondary mortgage market. See "Business-Current
Mix of Receivable Investment" This market principally consists of loans
which were originated through the seller of a property financing the
purchaser's acquisition. Metropolitan's principal source for private
market Receivables are independent brokers located throughout the United
States. These independent brokers typically deal directly with private
individuals or organizations who own and wish to sell a Receivable.
Private Market Acquisition Strategies
Metropolitan's private secondary market acquisition strategy is
designed to provide flexible structuring and pricing alternatives to the
Receivable seller, and quick closing times. Metropolitan believes these
are key factors to Metropolitan's ability to attract and purchase
quality Receivables. In order to enhance its position in this market
Metropolitan is implementing the following acquisition strategies:
1)centralizing of acquisition activities, 2) expanding the use of
Metropolitan's Receivable submission software, BrokerNet, 3) designing
and implementing flexible Receivable acquisition pricing options, 4)
designing and implementing fast closing programs, and 5) designing and
implementing broker incentive programs.
1) Centralization of acquisition activities:
<PAGE> Page 77
Currently, the Receivable brokers contact one of Metropolitan's
branch offices to submit the Receivable for evaluation. During the
first two quarters of fiscal 1997, Metropolitan plans to close all of
its branch offices and in turn plans to expand the Receivable
acquisition staff at its home office, in Spokane Washington, which will
be called the Contract Negotiation Center. This change is being made to
decrease contract costs, as branch offices are no longer necessary for
identification of appropriate contracts to acquire due to existing
contacts with brokers; to increase the closing speed due to the ability
to centralize acquisition decisions; and to further decrease
acquisition costs through the use of technological advances including
the newly developed BrokerNet software.
2) BrokerNet software:
BrokerNet was developed by Metropolitan to enhance its position in
the private secondary mortgage market, principally through streamlining
submissions, underwriting and the closing process. It is a menu driven
software program which assists brokers in preparing accurate and
complete Receivable submissions. It is designed to meet Metropolitan's
submission requirements. In addition, the program assists in analyzing
the characteristics of the Receivable, and provides online purchase
price quotes based upon the Receivable's characteristics and
Metropolitan's yield requirements.
This software was first available for online use by brokers in
March 1996. Current plans for enhancing the software include: preparing
the legal documents used to purchase a Receivable, providing internet
compatibility, providing submission status tracking (expected to be
available mid 1997), assist in monitoring the closing of a Receivable
purchase and ultimately, transfer the Receivable data directly into the
Receivable servicing and collection system.
Currently, approximately 35% of the privately purchased Receivables
are submitted to Metropolitan through BrokerNet. It is currently used
by approximately 15% of the Metropolitan's brokers. Management believes
that this system is more cost effective than paper submissions.
Metropolitan plans to encourage broker use of BrokerNet through various
financial incentive programs. The current goal is to have 50% of the
brokers submitting through BrokerNet by the end of fiscal 1997.
<PAGE> Page 78
3) Development of flexible sales options:
Occasionally, a Receivable seller desires a flexible pricing
structure, does not wish to sell the entire Receivable, or the purchase
of the entire Receivable exceeds Metropolitan's investment to collateral
value underwriting standards. In these circumstances, Metropolitan has
developed several options. Currently, the principal options include
1)"partial" acquisitions, 2) multiple stage payouts, and 3) the short
life yield programs.
Partial purchases are purchases of the right to receive a portion
of the Receivable's balance where the seller's right to the unsold
portion of the Receivable is subordinated to the interest of
Metropolitan or the company for which Metropolitan negotiated the
purchase. Partials include the purchase of the next series of payments
(an immediate partial), the purchase of future payments or a balloon
payment (a reverse partial) or the purchase of a portion of each payment
(a split partial). Partials generally result in a reduced level of
investment and commensurate reduction in the risk to the purchaser than
if the entire Receivable cash flow is purchased.
The multiple stage payout and short yield life programs are pricing
programs designed to satisfy variations in seller needs. The multiple
stage payout involves the payment of the Receivable purchase price
through installment payments over time. The short life yield program is
available for "A" credit quality Receivables collateralized by owner
occupied single family residences. This program prices the acquisition
assuming that the loan will balloon with a full payoff in ten years.
4) Development of faster closing programs:
Metropolitan has developed several submission programs which are
designed to reduce closing times. The principal program consists of the
Fast Track submission program which requires that the broker obtain and
submit a Receivable with a current appraisal, title policy, and all
other documents and verifications required to analyze, evaluate and
close the transaction. Metropolitan attempts to close all accepted Fast
Track submissions within seven days.
5) Broker Incentive Programs:
<PAGE> Page 79
In order to maintain strong professional ties with its independent
brokers, Metropolitan held its first annual Broker's Convention during
the summer of 1994. The second such convention is currently planned for
mid 1997. In addition, various bonus commission and incentive programs
as well as streamlined Receivable submission procedures have been
developed and continue to be developed in order to reduce closing times.
Currently, the principal incentive programs are the wholesale
pricing program and the Premier Broker Program. The wholesale pricing
program requires that brokers pay the cost of the Receivable's title
policy and appraisal. In return, Metropolitan reduces its yield
requirement (currently by .25%). Through the Premier Broker program,
Metropolitan pays volume brokers a bonus for every $250,000 in closed
Receivable acquisitions. For Brokers whose volume exceeds one million
annually, Metropolitan reduces its yield requirement (currently by .25%)
for all future acquisitions from the qualifying premier broker. Both of
these programs are designed to provide an incentive to the volume broker
to submit their Receivables to Metropolitan. Volume brokers are often
efficient in the Receivable packaging and submission, which can result
in a lower acquisition processing cost.
Private Secondary Mortgage Market Underwriting
Because Receivables in the private market are generally seller
financed transactions, these Receivables are typically subject to terms
and conditions which were negotiated to satisfy the unique needs of the
particular private buyer and seller. Therefore, the underwriting of
these loans requires careful evaluation of the loan documentation and
terms. Metropolitan's acquisition of these Receivables should be
distinguished from the conventional mortgage lending business which
involves standardized documentation and terms, substantial first-hand
contact by lenders with each borrower and the ability to obtain an
interior inspection appraisal prior to granting a loan. Management
believes that the underwriting functions that are employed in its
private secondary mortgage market acquisitions are as thorough as
reasonably possible considering the characteristics of the Receivables,
and considering the volume of Receivables submitted for review.
When Metropolitan is offered a Receivable through the private
secondary mortgage market, the Receivable information is transmitted to
one of Metropolitan's contract buyers either through an online BrokerNet
submission or a traditional paper submission. Paper
<PAGE> Page 80
submissions are input by the contract buyers into the BrokerNet system.
The contract buyer makes an initial evaluation of the Receivable's
characteristics to verify that it satisfies the requirements for the
particular type of submission.
If the Receivable appears acceptable, it is entered into
Metropolitan's submissions tracking system, and forwarded to the
demography department. The demography department uses a national
computerized database to identify local trends in property values,
personal income, population and other economic indicators.
The Receivable is then forwarded to the Underwriting Committee.
Metropolitan's underwriting team currently consists of six individuals
with a combined experience of ninety years evaluating seller financed
Receivables. Receivables of $100,000 or less are evaluated by
individual underwriters. Loans exceeding that amount are reviewed by a
committee of at least three underwriters. Additionally, underwriters
may obtain a team review of any Receivable.
The underwriters evaluate the proposed investment to collateral
value, the payor's credit and payment history, the interest rate, the
demographics of the region where the collateral is located, and the
potential for environmental risks. Currently, the ratio of the
investment in a Receivable compared to the value of the property which
collateralizes the Receivable generally does not exceed 70%-80%
(depending upon acquiring company, collateral type and collateral
quality) on Receivables collateralized by single family residences; 30-
70% on Receivables collateralized by other types of improved property
such as commercial property; and 55% on unimproved land. Management
believes these collateral ratio requirements generally provide higher
than conventional levels of collateral to protect the purchasing
company's investment in the event of a default on a Receivable.
Receivable investments which the Underwriting Committee identifies
for legal review are referred to Metropolitan's in-house legal
department which currently includes a staff of five attorneys.
Receivables which exceed specified amounts are submitted to an
additional special risk evaluation 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
financable residential property to $100,000 for residential property
which is not owner occupied, and $150,000 for Receivables collateralized
by commercial property.
<PAGE> Page 81
Based upon Metropolitan's underwriting guidelines, the underwriters
may approve the acquisition or change the terms of the acquisition, such
as limiting the acquisition to a partial purchase in order to decrease
the acquiring company's investment risk. If the terms are changed, the
contract buyer is notified, who in turn contacts the broker to
renegotiate the purchase terms. The underwriters may also approve the
loan subject to certain closing criteria. If the broker and/or seller
accepts the proposed transaction, a written agreement to purchase is
executed, which is subject to Metropolitan's full underwriting
requirements.
Once the Receivable has been approved in principle, a current
market valuation of the collateral is obtained in order to verify the
investment to collateral value. These valuations can consist of 1)a
valuation from a statistical valuation service, 2) an appraisal by a
licensed independent appraiser or 3) an appraisal by one of
Metropolitan's licensed staff appraisers.
Statistical valuations are available in the majority of counties in
the United States. They are based upon property characteristics and
sales trends which can be analyzed through computer modeling. The cost
of statistical valuations average approximately $35 and are available
virtually instantly, compared to a cost of approximately $250 for
standard appraisals and a wait of generally seven to ten working days
before the appraisal is completed. Metropolitan began using statistical
valuations in 1996. Metropolitan limits its use of statistical
valuations to properties with low investment to value ratios and single
family residential properties. Currently, Metropolitan is monitoring
the quality of the statistical services through obtaining post closing
traditional appraisals on a minimum of 10% of the acquisitions.
When traditional appraisals are obtained, they are generally based
on a drive-by inspection of the collateral and comparative sales
analysis. The appraiser generally does not have access to the property
for an interior inspection. Each statistical valuation and independent
appraisal is also subject to review by a staff appraiser.
The approved Receivable is provided to Metropolitan's closing
department where the property title is evaluated, the legal documents
are reviewed and the appraisal is reviewed. If the closer discovers any
material discrepancies during the closing review, or if the
<PAGE> Page 82
Receivable does not satisfy any specified closing contingencies, the
Receivable is re-submitted to the underwriting committee for re-
evaluation. Upon completion of the underwriting process and the
closer's review, appropriate closing and transfer documents are executed
by the seller and/or broker, transfer documents are recorded, and the
transaction is funded.
Institutional Secondary Mortgage Market Sources
During fiscal 1996, the Consolidated Group invested an immaterial
amount in institutional acquisitions (approximately $70,000). However,
as profitable opportunities arise, the Consolidated Group may make such
acquisitions in increasing amounts in the future. These portfolios of
real estate Receivables are acquired from banks, savings and loan
organizations, the Resolution Trust Corporation and the Federal Deposit
Insurance Corporation and other financial institutions.
An institutional seller typically offers a loan pool for sale in
order to provide liquidity, to meet regulatory requirements, to
liquidate assets, or other business reasons. Over the years,
Metropolitan has built relationships with several brokers and lenders
who provide a regular flow of potential acquisitions to the
institutional secondary department. In addition, other brokers learn
about Metropolitan through word of mouth and contact Metropolitan
directly. Finally, some leads on loan pools are generated by cold
calling lending institutions or brokers.
These acquisitions are typically negotiated through direct contact
with the portfolio departments at the various selling institutions, or
acquired through bidding at an auction. The closing costs per loan for
institutional acquisitions is generally lower than private secondary
mortgage market acquisitions. However, the investment yield is also
generally lower than yields available in the private market. During
fiscal 1996, approximately 25% of the institutional purchases were
acquired from FSB Mortgage Company (a subsidiary of Federal Savings Bank
of Rogers, Arkansas.)
Institutional Secondary Mortgage Market Underwriting
Receivables acquired through the institutional mortgage market
differ from those acquired in the private market in that these
Receivables were generally originated by a financial institution,
applying standard underwriting practices and standardized
<PAGE> Page 83
documentation. Generally, the seller provides an initial summary of the
pool which typically includes the pool balance, the number of loans, the
weighted average interest rate, the weighted average maturity, weighted
average loan-to-value ratio, delinquency status, collateral addresses,
collateral types, and lien positions. Receivable pools are initially
reviewed by the institutional secondary market staff who determine
whether the pool yield and characteristics are within the current
acquisition guidelines and yield requirements.
The pool characteristics and yield are then reviewed by the
Underwriting Committee. If approved by the Underwriting Committee, a
letter of intent is executed and the institutional secondary marketing
staff perform a due diligence review of the loan pool which generally
includes: 1) review of the documentation in each individual loan file,
2) determination of the payment history and delinquency pattern of the
loans, 3) determination of the individual and pool loan-to-value ratios,
and maturity characteristics and 4) determination of the economics and
demography for the geographic area where the collateral is located. If
the appraisal is over one year old, a new statistical valuation or
traditional appraisal of the collateral is generally obtained. Any
exceptions in the documentation or Receivable characteristics are noted
during the due diligence review. A summary of exceptions, as determined
from the due diligence, is provided to the seller to resolve prior to
closing. If the exception(s) cannot be resolved, the corresponding
loan(s) may be removed from the pool, the terms of the acquisition
renegotiated, or the transaction canceled. Following completion of its
due diligence, and acceptable resolution of any exceptions, a purchase
and sale agreement is executed and the acquisition is funded and closed.
Generally, these acquisitions are acquired with servicing released.
Loan Originations Sources
During the last quarter of fiscal 1996, Metropolitan's subsidiary,
Metwest, began originating residential loans and small commercial loans.
The commercial lending focuses on loans of $1,500,000 or smaller.
Metwest is currently licensed as a lender in twenty six states. Metwest
plans to expand its activities throughout the United States during
fiscal 1997. Metwest originates loans through licensed mortgage brokers
who submit loan applications on behalf of the borrower. Before Metwest
will enter into a broker agreement, the mortgage broker must demonstrate
that it is properly licensed, experienced and knowledgeable in lending.
The volume of Metwest's lending activities were immaterial in fiscal
1996. Actual
<PAGE> Page 84
growth of this new venture cannot be predicted with certainty; however,
Metwest is currently originating $2-3 million in residential loans per
month. It is currently projected that Metwest could originate as much
as approximately $8-10 million in residential loans per month by fiscal
year end which, could amount to as much as approximately 30% of the
Consolidated Group's Receivable investing activities by the end of in
fiscal 1997. Metwest's commercial lending activities are currently in
the initial phases, and management is unable to predict with any level
of certainty the volume of commercial loans which may be originated
during fiscal 1997.
During fiscal 1996, the Consolidated Group did not invest in any
loans originated by Metwest. However, as profitable opportunities
arise, the Consolidated Group may make such acquisitions in the future.
Loan Originations Underwriting
Loans originated by Metwest are underwritten applying criteria
which include the following: evaluation of the borrower's credit,
obtaining a current appraisal of the collateral, and obtaining title
insurance. The borrower's credit determines the down payment and
interest rate which Metwest will require. A lower credit rating would
result in a higher required down payment and higher interest rate.
Metwest will lend up to 90% of the collateral's value on "A" credit
borrowers, which decreases to 70% for "D" credit borrowers. Unlike the
Receivables purchased in the private secondary mortgage market, the
loans originated by Metwest have standard documentation and terms.
Currently, Metwest originates fixed rate loans. Residential loans up to
$207,000 are evaluated by an individual loan underwriter. Loans in
excess of $207,000 require the approval of two approved underwriters.
Lotteries, Structured Settlements and Annuities Sources
Metropolitan also negotiates the purchase of Receivables which are
not collateralized by real estate, such as structured settlements,
annuities and lottery prizes. The lottery prizes generally arise out of
state operated lottery games which are typically paid in annual
installments to the prize winner. The structured settlements generally
arise out of the settlement of legal disputes where the prevailing party
is awarded a sum of money, payable over a period of time, generally
through the creation of an annuity. Other annuities generally consist
of investments which cannot be cashed in directly with the issuing
insurance company. Metropolitan's source for these
<PAGE> Page 85
investments is generally private brokers who specialize in these types
of Receivables.
Lottery, Structured Settlement and Annuity Underwriting
In the case of structured settlement annuity purchases, the
underwriting guidelines of Metropolitan generally include a review of
the settlement agreement. In the case of all annuity purchases,
Metropolitan's underwriting guidelines generally include a review of the
annuity policy, related documents, the credit rating of the annuity
seller, the credit rating of the annuity payor (generally an insurance
company), and a review of other factors relevant to the risk of
purchasing a particular annuity as deemed appropriate by management in
each circumstance. Typically, Metropolitan limits its acquisition of
structured settlements and annuities to the purchase of a maximum of the
next seven year's payments.
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 confirmation with the respective lottery commission of the
prize winner's 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, Metropolitan requires
a certified copy of the court order.
Yield and Discount Considerations
Summit, Old Standard and Arizona Life 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. If the Receivable is
purchased at a price below its face amount, the difference is the
"discount".
For Receivables of all types, the discounts originating at the time
of purchase, net of capitalized acquisition costs, are amortized
<PAGE> Page 86
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.
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 (13% for fiscal 1996). During fiscal 1996, the
Consolidated Group's average initial yield requirement was 9.5% to
12.75%, 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.
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
<PAGE> Page 87
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, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Face value of discounted
Receivables $73,226,348 $51,768,999
Face value of originated
and non-discounted
Receivables 10,439,736 10,560,249
Unrealized discounts,
net of unamortized
acquisition costs (4,733,938) (2,614,937)
Allowance for losses (974,487) (765,130)
Accrued interest
receivable 2,051,094 1,168,038
----------- -----------
Carrying value $80,008,753 $60,117,219
=========== ===========
</TABLE>
As of September 30, 1996, approximately 87% of the Consolidated
Group's investments in Receivables are collateralized by first lien
positions on real estate and 13% in second lien positions. The
Receivables are collateralized by residential, business and commercial
properties with residential collateral representing approximately 69% of
such investments as of September 30, 1996.
The Consolidated Group's Receivable investments in real estate
loans at September 30, 1996 were collateralized by properties located
throughout the United States with not more than 3% (by dollar amount) in
any single state except as follows:
<PAGE> Page 88
Arizona . . . . . . 9%
California . . . . 15%
Oregon . . . . . . 7%
Texas . . . . . . . 10%
Washington . . . . 11%
Florida . . . . . . 6%
New Mexico. . . . . 4%
<PAGE> Page 89
SUMMIT SECURITIES, INC.
and subsidiaries
RECEIVABLES COLLATERALIZED BY REAL ESTATE
September 30, 1996
<TABLE>
<CAPTION>
Less than 1% of the contracts are subject to variable interest rates. Interest
rates range from 0% to 19% with rates principally (74% of face value) within the
range of 8% to 12%. The following table segregates the Consolidated Group's
Receivable portfolio by type, size and lien position.
Number Carrying Delinquent Number
of Non accrual Number of
of Interest Amount of Principal
Delinquent Principal Non Accrual
Description Receivables Rates Receivables Amount
Receivables Amount Receivables
---------------------------------------------------------
- -----------------------------------
RESIDENTIAL Principally
<S> <C> <C> <C> <C> <C>
<C> <C> <C>
First Mortgage >$75,000 145 8%-11% $15,930,198 $828,311 7
$106,799 1
First Mortgage >$40,000 320 8%-11% 17,166,794 803,473 14
- -- --
First Mortgage <$40,000 874 8%-11% 16,824,319 1,079,313 45
- -- --
Second or Lower>$75,000 8 7%-12% 855,475 -- --
- -- --
Second or Lower>$40,000 44 8%-11% 2,256,793 159,931 3
- -- --
Second or Lower<$40,000 246 8%-11% 4,940,151 162,486 10
- -- --
COMMERCIAL
First Mortgage >$75,000 72 8%-11% 10,626,674 95,843 1
- -- --
First Mortgage >$40,000 42 8%-10% 2,371,163 139,722 2
- -- --
First Mortgage <$40,000 83 8%-18% 1,110,029 8,389 --
- -- --
Second or Lower>$75,000 9 8%-11% 819,760 -- --
- -- --
Second or Lower>$40,000 9 9%-11% 520,949 -- --
- -- --
Second or Lower<$40,000 17 9%-11% 415,212 38,314 1
- -- --
FARM, LAND AND OTHER
<PAGE> Page 90
First Mortgage >$75,000 26 8%-12% 3,577,173 -- --
- -- --
First Mortgage >$40,000 56 8%-11% 2,946,202 59,218 1
- -- --
First Mortgage <$40,000 100 8%-11% 2,363,282 -- --
- -- --
Second or Lower>$75,000 3 7%-12% 416,737 -- --
- -- --
Second or Lower>$40,000 5 7%-12% 241,564 -- --
- -- --
Second or Lower<$40,000 13 8%-10% 283,609 -- --
- -- --
Unrealized discounts, net
of unamortized acquisition
costs, on Receivables
purchased at a discount (4,733,938)
Accrued Interest Receivable 2,051,094
Allowance for Losses (974,487)
----------- -----------
- --------
TOTAL $80,008,753 $3,375,000
$106,799
=========== ===========
========
<FN>
The principal amount of Receivables subject to delinquent principal or
interest is defined as being in arrears for more than three months but which
are still accruing interest. The principal amount of Receivables subject to
the nonaccrual of interest represents those on which the outstanding principal
and interest exceeds the fair value of the collateral, net of selling costs.
</TABLE>
<TABLE>
<CAPTION>
The contractual maturities of the aggregate amounts of Receivables (face
amount) are as follows:
Residential Commercial Farm, Land,
Other Total
<PAGE> Page 91
Principal Principal Principal
Principal
-------- ------- --------
- ---------
<S> <C> <C> <C> <C> <C>
October 1996 - September 1999 $ 5,120,711 $ 2,156,175 $ 1,987,478
$ 9,264,364
October 1999 - September 2001 4,740,273 3,048,183 2,170,013
9,958,469
October 2001 - September 2003 5,297,759 1,497,998 939,294
7,735,051
October 2003 - September 2006 8,976,772 3,068,355 1,472,159
13,517,286
October 2006 - September 2011 12,348,635 4,287,359 1,829,649
18,465,643
October 2011 - September 2016 7,034,413 793,847 371,051
8,199,311
October 2016 - Thereafter 14,455,167 1,011,870 1,058,923
16,525,960
----------- ----------- ----------
- -----------
$57,973,730 $15,863,787 $9,828,567
$83,666,084
=========== =========== ==========
===========
</TABLE>
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 Non accrual Number of
of Interest Amount of Principal
Delinquent Principal Non Accrual
Description Receivables Rates Receivables Amount
Receivables Amount Receivables
---------------------------------------------------------
- -----------------------------------
<PAGE> Page 92
RESIDENTIAL Principally
<S> <C> <C> <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>
<PAGE> Page 93
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> Page 94
The Consolidated Group held 2072 Receivables collateralized by real
estate, as of September 30, 1996. The average stated interest rate
(weighted by principal balances) on these Receivables on that date was
approximately 8.5%. 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, 1996 was 4.0% compared to 4.2% and 3.8% at
September 30, 1995 and 1994, respectively. 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, which management believes are generally offset by the value of
the underlying collateral. In addition, the Consolidated Group
maintains an allowance for losses on delinquent real estate Receivables,
as described below. As a result, management believes losses from
resales of repossessed properties are generally lower than might
otherwise be expected given the delinquency rates. In addition, the
Consolidated Group is compensated for the risk associated with
delinquencies through Receivable yields that are greater than typically
available through the conventional, "A", credit lending markets.
Metwest provides Receivable collections and servicing to Summit,
Old Standard Life and Arizona Life pursuant to the following practices:
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 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),
additional collection activity, including further written correspondence
and further telephone contact, is pursued. If these collection
procedures are unsuccessful, the account is referred to a committee who
analyzes the basis for default, the economics of the Receivable 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
<PAGE> Page 95
Receivable. Collection activity may also involve the initiation of
legal proceedings against the Receivable obligor. 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 Receivables
The Consolidated Group establishes an allowance for losses on
Receivables based on an evaluation of delinquent Receivables. 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%, 1.2% and 0.9% of the face value of
Receivables collateralized by real estate at September 30, 1996, 1995
and 1994, respectively.
The established allowances for losses on real estate contracts and
mortgage notes receivable include amounts for estimated probable losses
on receivables determined in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan." The Company adopted this new
standard on October 1, 1995, which did not have a material effect on the
consolidated financial statements. Specific allowances are established
for delinquent 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 receivables, including
accrued interest. Accordingly, the Company continues interest accruals
on delinquent receivables until foreclosure, unless the principal and
accrued interest on the receivables exceed 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.
The following is an analysis of the allowance for losses on real estate
contacts and mortgage notes receivable.
<PAGE> Page 96
September 30,
---------------------
1996 1995
------ ------
Balance, beginning of year $ 765,130 $ 250,572
Provision for losses on real
estate contracts and mortgage
notes receivable 212,600 130,950
Additions from acquisition
of subsidiary 310,957
Recoveries/(write-offs) (3,243) 99,651
----------- ----------
$ 974,487 $ 765,130
=========== ==========
At September 30, 1996, the net investment in real estate contracts and
mortgage notes receivable for which impairment has been recognized in
accordance with SFAS 114 was approximately $110,000, of which
approximately $27,000, representing the amounts by which the net
carrying value of the receivable exceeds the fair value of the
collateral, has been specifically included in the allowance for losses
on real estate assets. Had these receivables performed in accordance
with their terms, interest income of approximately $2,300 would have
been recognized during the period of impairment.
The provision for losses on real estate contracts and mortgage notes
receivable is determined as the amount required to establish the
allowance at the level determined in accordance with the policy
described above. Because primarily all of the receivables are
collateralized by real estate, the Company considers its delinquency and
loss experience in determining the likelihood that receivables that are
currently performing may become delinquent, and the loss that may be
experienced should foreclosure become the means of satisfaction. The
Company manages its risk of loss upon default through the underwriting
process, which is performed by Metropolitan, and requires a review of
demographics, real estate market trends, property value and overall
economic conditions related to the real estate property collateralizing
a receivable. Management does not expect that the loss experience
related to the receivables will increase materially during the next full
year of operations.
Repossessed Properties
<PAGE> Page 97
Summit, Old Standard and Arizona Life own various repossessed
properties held for sale. At September 30, 1996, 23 properties, acquired
in satisfaction of debt, with a combined carrying amount of
approximately $1,191,000 were held, of which the largest single property
had a carrying value of approximately $175,000.
Receivable Sales
The Consolidated Group sells pools of Receivables when it considers
it profitable to do so. Such sales generally occur through one of two
methods: (1) securitization or (2) direct sales. Management believes
that the sale of Receivables provides a number of benefits by allowing
the Consolidated Group to diversify its funding base, provide liquidity
and lower its cost of funds. In addition to providing liquidity and
profits, the sale of Receivables is a source of cash which can be
reinvested into additional Receivables. The sale of Receivables in turn
allows the Consolidated Group to continue to expand its investing
activities without increasing its asset size.
During May 1996, Summit and Old Standard participated with
Metropolitan and Western United as sellers in the securitization of
approximately $122.9 million in Receivables collateralized by real
estate, principally consisting of seller financed first lien residential
Receivables. The second such securitization of approximately $126.7
million of first lien residential and commercial real estate loan
Receivables, of which approximately 54% were seller financial
Receivables, occurred in November 1996. Currently, it is proposed that
the next securitization of Receivables collateralized by real estate
will not occur until the second half of fiscal 1997. The Consolidated
Group is also evaluating the market, economic and legal implications of
selling its non real estate Receivables through securitizations. There
can be no assurance that such securitizations will be pursued, or if
pursued, that they will be profitable.
Generally, a securitization involves the transfer of certain
specified Receivables to a single purpose trust. The trust issues
certificates which represent an undivided ownership interest in the
Receivables transferred to the trust. The certificates consist of
different classes, which include classes of senior certificates, and a
residual interest and may also include intermediate classes of
subordinated certificates. The rights of the senior certificate holders
can be enhanced through several methods which include
<PAGE> Page 98
subordination of the rights of the subordinate certificate holders
to receive distributions, or the establishment of a reserve fund. In
connection with securitizations, the senior certificates and subordinate
certificates are sold to investors, generally institutional investors.
The companies which sold their Receivables to the trust receive a cash
payment representing their respective interest in the sales price for
the senior certificates and any subordinate certificates sold. The
selling companies receive an interest in any unsold subordinate
certificates, and also typically receive an interest in the residual
interest. Such interests are generally apportioned based upon the
respective companies' contribution of Receivables to the pool of
Receivables sold to the trust.
In the typical securitization structure, the Receivable payments
are distributed first to the senior certificates, next to the
subordinated certificates, if any, and last to the residual interests.
As a result, the residual interest is the interest first affected by any
loss due to the failure of the Receivables to pay as scheduled. The
holders of the residual interest values such interest on their
respective financial statements based upon certain assumptions regarding
the anticipated losses and prepayments. To the extent actual
prepayments and losses are greater or less than the assumptions, the
companies holding the residual interest will experience a loss or gain.
In the securitizations which occurred in May and November 1996, the
rights of the senior certificate holders were enhanced though
subordinating the right of subordinate certificate holders to receive
distributions with respect to the mortgage loans to such rights of
senior certificate holders. The selling companies retained their
respective residual interests. At September 30, 1996, the residual
interests held by Summit and Old Standard from the May 1996
securitization aggregated approximately $233,000. At the close of the
November 1996 securitization the Consolidated Group held residual
interests aggregating approximately $570,000.
In addition to sales through securitizations, the Consolidated
Group may sell pools of Receivables directly to purchasers. These sales
are typically without recourse, except that for a period of time the
selling company is generally required to repurchase or replace any
Receivables which do not conform to the representations and warranties
made at the time of sale. During fiscal 1996, Summit and Old Standard
received proceeds of approximately $7 million from the sale of
<PAGE> Page 99
portfolios of real estate Receivables through securitization and
proceeds of $12.4 million from the direct sale of lotteries. During
fiscal 1996, gains on these securitization and direct sales were
approximately $977,000.
ANNUITY OPERATIONS
Introduction
The Consolidated Group raises significant funds through its
insurance subsidiaries, Old Standard and Arizona Life.
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 $76.5 million at September 30, 1996. 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, Montana, North Dakota, Oregon and has applied for
licenses in Hawaii, Washington and Utah. During calendar 1995, the most
recent year for which statistical information is available, In Idaho,
Old Standard's individual annuity market share was 10.2%, ranking it the
number one producer of annuities in Idaho during the period.
The Consolidated Group acquired Arizona Life on December 28, 1995.
Arizona Life had total assets of approximately $2.9 million at September
30, 1996. Arizona Life is licensed in seven western states and has
applications pending in three additional states. It commenced annuity
sales and Receivable investing activities during fiscal 1996.
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, 1996, 73.9% of Old
Standard's assets were invested in Receivables collateralized by real
estate, and 5.4% in lotteries. As of September 30, 1996, 52.3% of
Arizona Life's assets were invested in Receivables collateralized by
real estate. As of September 30, 1996, the balance of Old Standard's
and Arizona Life's investments were invested in principally investment
grade corporate and government securities, but may be
<PAGE> Page 100
invested into a variety of other areas as permitted by applicable
insurance regulations. See "BUSINESS-REGULATION".
Generally, loans which are acquired through the institutional
secondary mortgage market qualify as "mortgage related securities"
pursuant to the Secondary Mortgage Market Enhancement Act (SMMEA).
SMMEA generally provides that qualifying loans may be acquired to the
same extent that obligations which are issued by or guaranteed as to
principal and interest by the United States government, its agencies or
instrumentalities can be acquired. Such acquisitions are exempt from
certain state insurance regulations including loan to value and
appraisal regulations.
Annuities
During the last three years, Old Standard and Arizona Life have
derived 100% of their 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 1997, 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 and Arizona Life.
Flexible and single premium annuities are offered with short,
intermediate and traditional surrender fee periods. At September 30,
1996, deferred policy acquisition costs were approximately 6.2% of
annuity reserves. Since surrender charges typically do not exceed 5%,
<PAGE> Page 101
increasing termination rates may have an adverse impact on the insurance
subsidiary's earnings, requiring faster amortization of these costs.
During the four months ended September 30, 1995 and the year ended
September 30, 1996, amortization of deferred policy acquisition costs
were $198,000 and $85,000, respectively. 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
year ended September 30, 1996, withdrawals and benefits were
approximately $6.5 million. The annualized lapse rate was approximately
11.7%. 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).
The life insurance subsidiaries of the Consolidated Group are
required to file statutory financial statements with state insurance
regulatory authorities in their states of domicile. Accounting
principles used to prepare these statutory financial statements differ
from generally accepted accounting principles (GAAP). A reconciliation
of GAAP net income to statutory net income for the years ended September
30, 1996 and 1995, respectively, are as follows:
1996
1995
Net Income - GAAP $1,285,135 $
86,031
Adjustments to reconcile:
Deferred policy acquisition cost (1,097,613)
(116,136)
State insurance guaranty fund (28,261)
(8,333)
Annuity reserves and benefits 244,358
16,170
Capital gains and IMR amortization (779,523)
(132,147)
Allowance for losses 486,125
196,024
Federal income taxes 258,888
(145)
Other (5,594)
2,110
---------- -
- --------
Net Income - Statutory $ 374,703 $
43,574
==========
========
Reinsurance
Reinsurance is the practice whereby an insurance company enters
into agreements (termed "treaties") with other insurance companies in
order to assign some of its insured risk, for which a premium is paid,
while retaining the remaining risk. Although reinsurance treaties
provide a contractual basis for shifting a portion of the insured risk
<PAGE> Page 102
to other insurers, the primary liability for payment of claims remains
with the original insurer. Most life insurers obtain reinsurance on a
portion of their risks in the ordinary course of business. The amount
of mortality risk that a company is willing to retain is based primarily
on considerations of the amount of insurance it has in force and upon
its ability to sustain unusual mortality fluctuations.
Western United has negotiated a reinsurance agreement with Old
Standard whereby 75% of the risk on six different annuity products will
be reinsured through Old Standard. It is presently anticipated that
this will result in reinsurance of up to approximately $5 million in
premiums per month. This procedure will allow Old Standard to acquire
annuity premiums with credited interest rate which are more favorable
than those offered directly from Old Standard. The level of reinsurance
that Old Standard can participate in will be dependent upon the
sufficiency of its statutory capital to sustain such growth.
Reserves
State law requires that the annuity 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 $62.4
million at September 30, 1996 based on GAAP financial reporting.
Securities Investments
At September 30, 1996 and 1995, 99.0% and 100.0% of the
Consolidated Group's securities, excluding stock investment in non-
consolidated affiliate, were held by its insurance subsidiaries.
<PAGE> Page 103
The following table outlines the nature and carrying value of
securities investments held by Old Standard and Arizona Life at
September 30, 1996:
<PAGE> Page 104
<TABLE>
<CAPTION>
Available Held To Total Percent
For Sale Maturity
Portfolio Portfolio
---------- ---------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total Amount $ 187 $ 7,750 $ 7,937 100.0%
========= ======== ======== ======
% Invested In:
Fixed Income $ 187 $ 7,750 $ 7,937 100.0%
Equities -- -- -- 0.0%
--------- -------- -------- ------
$ 187 $ 7,750 $ 7,937 100.0%
========= ======== ======== ======
% Fixed Income:
Taxable $ 187 $ 7,750 $ 7,937 100.0%
Non-taxable -- -- -- 0.0%
--------- -------- -------- ------
$ 187 $ 7,750 $ 7,937 100.0%
========= ======== ======== ======
% Taxable:
U.S.Government $ -- $ 5,736 $ 5,736 72.3%
Corporate 187 2,014 2,201 27.7%
--------- -------- -------- ------
$ 187 $ 7,750 $ 7,937 100.0%
========= ======== ======== =====
% Corporate:
AAA $ -- $ 1,012 $ 1,012 46.0%
AA -- 1,002 1,002 45.5%
A 187 -- 187 8.5%
--------- -------- -------- ------
$ 187 $ 2,014 $ 2,201 100.0%
========= ======== ======== ======
% Corporate:
Mortgage-backed $ 187 $ -- $ 187 8.5%
Finance -- 1,012 1,012 46.0%
Industrial -- 1,002 1,002 45.5%
--------- -------- -------- ------
$ 187 $ 2,014 $ 2,201 100.0%
<PAGE> Page 105
========= ======== ======== ======
</TABLE>
<PAGE> Page 106
Investments of the insurance subsidiaries are subject to the
direction and control of investment committees appointed by their
respective Board of Directors. All such investments must comply with
applicable state insurance laws and regulations. See "BUSINESS-
REGULATION". Investments primarily include corporate, government
agency, and direct government obligations.
Old Standard and Arizona Life are authorized by their respective
investment policies 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
approximately $128,000 at September 30, 1996.
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, sales and
securitizations of Receivables, sales of 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, 1996, there was approximately
$3.8 million of short-term collateralized 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.
BROKER DEALER ACTIVITIES
Metropolitan Investment Securities, Inc. (MIS) is a securities
broker/dealer, and member of the National Association of Securities
Dealers, Inc.-Regulation. 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
<PAGE> Page 107
general securities. MIS's sales efforts were previously focused in the
states of Washington, Oregon, Idaho and Montana. MIS is licensed in
several other Western states and has expanded its sales and marketing
efforts into California, Utah, Nevada and Colorado. MIS sustained a
loss of approximately $137,000 during the current fiscal year. See
"MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" & Note 12 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, 1996
of approximately $141,000 on revenues of approximately $2,047,000. See
"MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" & Note 12 to Consolidated Financial Statement.
COMPETITION
Summit, Old Standard and Arizona Life's ability to compete for
Receivable investments is currently dependent upon Metropolitan's
Receivable acquisition network. 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 which may have
access to greater resources and better name recognition than
Metropolitan. The largest group of individual competitors are a
multitude of individual investors. Management believe its 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,
Old Standard and Arizona Life include access to Metropolitan's
Receivable acquisition network, which allows their access to markets
throughout the United States; their ability to purchase long-term
Receivables; their flexibility in structuring Receivable acquisitions;
its availability of funds; and their in-house capabilities for
<PAGE> Page 108
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, Old Standard and Arizona Life compete in the secondary
mortgage market as sellers of pools of Receivables (both direct sales
and sales through securitizations). This market is a multi billion
dollar industry and includes many financial institutions and government
participants. Competitors generally have access to larger resources,
greater transaction volumes and economies of scale, and better name
recognition.
Summit's and MIS's securities products face competition for
investors from other securities issuers, other broker/dealers and from
other types of financial institutions, many of which are much larger,
and have greater name recognition than MIS.
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.
REGULATION
Old Standard and Arizona Life are subject to the Insurance Holding
Company Act as administered by the Office of the State Insurance
Commissioner of the State of Idaho and Arizona, respectively. Each act
regulates transactions between insurance companies and their affiliates.
It requires that the insurance companies provide prior notification to
the respective Insurance Commissioners of certain transactions between
an insurance company and Summit or any other affiliate. In certain
instances, respective Insurance Commissioner's approval is required.
Old Standard and Arizona Life are subject to extensive regulation
and supervision by the Office of the State Insurance Commissioner of
<PAGE> Page 109
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 agent 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 financial 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 net amounts expensed by Old Standard and Arizona Life for
guaranty fund assessments and charged to operations for the year ended
September 30, 1996 and the four month period ended September 30, 1995
were $90,000 and $25,000, respectively. 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 1993. Management does not believe that the amount
of future assessments associated with known insolvencies after 1993 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 and Arizona Life are subject to regulatory
restrictions on their ability to pay dividends. Such restrictions
affect Summit's and Old Standard's ability to receive dividends. The
<PAGE> Page 110
unrestricted statutory deficit of the insurance subsidiaries totaled
approximately $1,002,000 as of September 30, 1996.
For statutory purposes, Old Standard's and Arizona Life's capital
and surplus and their ratio of capital and surplus to admitted assets
were as follows as of the dates indicated:
<PAGE> Page 111
<TABLE>
<CAPTION>
As of As of December 31,
September 30, 1996 1995 1994 1993
------------------- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Old Standard:
Capital and Surplus $7,994 $3,007 $2,431 $2,069
Ratio of Capital and
Surplus to Admitted
Assets 10.9% 5.4% 5.4% 5.0%
Arizona Life:
Capital and Surplus $1,511 $1,214 -- --
Ratio of Capital and
Surplus to Admitted
Assets 53.1% 99.2% -- --
</TABLE>
Although the States of Idaho and Arizona require only $2.0 million
and $450,000, respectively, in capital and surplus to conduct insurance
business, the insurance companies have 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 and Arizona have 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
subsidiaries' capital and surplus levels exceed the calculated minimum
requirements.
MIS is subject to extensive regulation and supervision by the
National Association of Securities Dealers, Inc. - Regulation, and the
Securities and Exchange Commission and various state regulatory
authorities. These regulations include licensing requirements, record
keeping requirements, net capital requirements, supervision requirements
and sales practice standards.
<PAGE> Page 112
MANAGEMENT
Directors and Executive Officers
(As of December 31, 1996)
Name Age Position
Tom Turner 46 President/Director
Philip Sandifur 25 Vice President/Director
Greg Gordon 43
Secretary/Treasurer/Director
Robert Potter 69 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 Services, Inc., a wholly-owned
subsidiary of Summit's parent company, National Summit Corp.
</R<
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.
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
<PAGE> Page 113
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 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. Other than Robert
Potter, the directors do not receive any compensation for services
rendered on behalf of Summit. Robert Potter, receives $500 per
year and $100 per meeting plus travel expenses.
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.
PRINCIPAL SHAREHOLDERS
<PAGE> Page 114
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, 1996.
<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 RELATIONSHIPS AND RELATED TRANSACTIONS
Names and relationship of parties/persons involved in related party
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. Contemporaneous 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. 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.
Contemporaneous with the sale, the officers and directors resigned
and new officers and directors were elected. Currently, no officer
or director of Summit is an officer or director of Metropolitan.
<PAGE> Page 115
Description of Related Party Transactions
Transactions between Metropolitan, its subsidiaries 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 12 to Financial
Statements. In addition, Metropolitan and its subsidiaries provide
services to various companies within the Consolidated Group, as
described more fully hereinbelow.
Summit, Old Standard and Arizona Life obtain substantially all
of their Receivable management and servicing support from
Metropolitan through a Management, Receivable Acquisition and
Servicing Agreement. In 1996, the Consolidated Group incurred fees
for Receivable acquisitions from Metropolitan of approximately
$1,753,000 and fees for servicing by Metwest of approximately
$290,000. See "BUSINESS-RECEIVABLE INVESTMENTS" & " RISK FACTORS"
& Note 12 to Consolidated Financial Statements. Management
believes that such Agreements are on terms at least as favorable as
could be obtained from non-affiliated parties.
Old Standard has negotiated a reinsurance agreement with
Western United, Metropolitan's insurance subsidiary. It is
presently anticipated that approximately $5 million in premiums per
month will be reinsured. See "BUSINESS-Annuity Operations-
Reinsurance"
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, 1996, Summit paid or accrued commissions to MIS
in the amount of $463,477 upon the sale of $13,291,967 of
certificates and commissions of $31,764 upon the sale of $568,950
of preferred stock. MIS also maintains, on behalf of Summit,
certain investor files and information pertaining to investments in
Summit's certificates and preferred stock.
Summit Property Development has entered into an Agreement with
Metropolitan to provide property development services to
Metropolitan for a fee. During the year ended September 30, 1996
the fee was approximately $2.0 million. See "BUSINESS-PROPERTY
DEVELOPMENT SERVICES".
<PAGE> Page 116
During April 1996, C. Paul Sandifur, Jr. President of
Metropolitan and controlling shareholder of Metropolitan and the
Consolidated Group, sold to Summit nineteen shares of stock in
Consumers Group Holding Company (a subsidiary of Metropolitan) for
$1.5 million. The purchase price was paid in cash.
<PAGE> Page 117
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 1996, 1995 and 1994
Report of Independent Accounts
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
Consolidated Condensed Balance Sheets
Consolidated Condensed Statement of Operations
Consolidated Condensed Statements of Changes in Cash Flows
Notes to Consolidated Condensed 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, 1996 and 1995,
and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
September 30, 1996. 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, 1996
and 1995, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended September
30, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1, the Company changed its method of accounting
for impaired loans in fiscal 1996.
/s/ COOPERS & LYBRAND L.L.P.
Spokane, Washington
December 6, 1996
F-1
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
1996 1995
------------ ------------
ASSETS
Cash and cash equivalents $ 4,461,315 $ 2,979,362
Investments:
Investments in affiliated companies 4,522,425 3,022,425
Available-for-sale securities, at
market 269,305
Held-to-maturity securities, at
amortized cost 7,750,078 8,269,541
Accrued interest on investments 34,244 46,209
------------ ------------
Total cash and investments 17,037,367 14,317,537
Real estate contracts and mortgage
notes receivable, net, including real
estate contracts and mortgage notes
receivable held for sale of approxi-
mately $10,408,000 in 1996 80,008,753 60,117,219
Other receivable investments 11,788,130 16,895,902
Real estate held for sale 1,191,495 836,291
Deferred costs, net 4,862,046 3,582,202
Other assets, net, including receivables
from affilites 2,378,889 597,421
------------ ------------
Total assets $117,266,680 $ 96,346,572
============ ============
F-2
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30, 1996 and 1995
1996 1995
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Annuity reserves $ 62,439,855 $ 49,559,589
Investment certificates and accrued
interest 42,823,871 38,545,896
Debt payable 3,850,970 104,636
Accounts payable and accrued expenses,
including payables to affiliates 1,367,131 2,938,182
Deferred income taxes 1,426,079 1,291,202
------------ ------------
Total liabilities 111,907,906 92,439,505
------------ ------------
Commitments and contingencies (Notes 1
and 13)
Stockholders' equity:
Preferred stock, $10 par (liquidation
preference $4,131,170 and $3,562,220) 413,117 356,222
Common stock, $10 par 100,000 100,000
Additional paid-in capital 2,269,137 1,786,991
Retained earnings 2,586,654 1,675,738
Net unrealized loss on investments,
net of income taxes of $5,221
and $6,122 (10,134) (11,884)
------------ ------------
Total stockholders' equity 5,358,774 3,907,067
------------ ------------
Total liabilities and stockholders'
equity $117,266,680 $ 96,346,572
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Annuity fees and charges $ 45,348 $ 14,179
Interest on receivables 6,018,615 3,901,113 $ 2,422,484
Earned discount on receivables 2,598,306 777,659 373,003
Other investment interest 753,163 410,568 275,180
Dividends 200,256 256,991
Real estate sales 1,093,000 1,123,500 88,000
Fees, commissions, service and other
income 2,849,737 2,580,105 60,677
Realized net gains on sales of
investments 583 4,252
Realized net gains on sales of real
estate contracts and mortgage notes
and other receivable investments 977,441 512,500 171,756
----------- ----------- -----------
Total revenues 14,536,449 9,576,615 3,395,352
Expenses:
Annuity benefits 3,702,324 1,034,082
Interest expense 3,741,095 3,251,334 2,527,945
Cost of real estate sold 1,132,552 1,117,233 75,656
Provision for losses on real estate
assets 490,082 445,381 155,042
Salaries and employee benefits 1,636,773 907,690
Commissions to agents 1,673,279 1,395,994
Other operating and underwriting
expenses 1,775,484 738,380 231,423
Less amount capitalized as deferred
costs, net of amortization (1,097,613) (140,745)
----------- ----------- -----------
Total expenses 13,053,976 8,749,349 2,990,066
----------- ----------- -----------
Income before income taxes 1,482,473 827,266 405,286
Income tax provision (237,951) (239,707) (140,407)
----------- ----------- -----------
Net income 1,244,522 587,559 264,879
Preferred stock dividends (333,606) (309,061) (2,930)
----------- ----------- -----------
Income applicable to common stockholder $ 910,916 $ 278,498 $ 261,949
=========== =========== ===========
Income per share applicable to common
stockholder $ 91.09 $ 27.85 $ 13.47
=========== =========== ===========
Weighted average number of shares of
common stock outstanding 10,000 10,000 19,445
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net
Unrealized
Additional Gains
Preferred Common Paid-In (Losses) on Retained
Stock Stock Capital Investments Earnings Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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) (200,000) (3,400,000) (3,600,000)
Sale of common stock (10,000 shares) 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) 302,242 2,720,183 3,022,425
Income tax benefit associated with
disaffiliation 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 (losses)
on investment securities, net
of income taxes of $6,122 $ (11,884) (11,884)
Excess cost over historical cost
basis of subsidiaries purchased
from related parties (52,733) (52,733)
----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 1995 356,222 100,000 1,786,991 (11,884) 1,675,738 3,907,067
</TABLE>
F-5
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net
Unrealized
Additional Gains
Preferred Common Paid-In (Losses) on Retained
Stock Stock Capital Investments Earnings Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995 356,222 100,000 1,786,991 (11,884) 1,675,738 3,907,067
Net income 1,244,522 1,244,522
Cash dividends on preferred
stock (variable rate) (333,606) (333,606)
Sale of variable rate preferred
stock, net of offering costs
(5,690 shares) 56,895 482,146 539,041
Net change in unrealized gains
on investment securities, net
of income taxes of $901 1,750 1,750
----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 1996 $ 413,117 $ 100,000 $ 2,269,137 $ (10,134) $ 2,586,654 $ 5,358,774
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,244,522 $ 587,559 $ 264,879
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Proceeds from sale of trading
securities 20,077,343
Purchase of trading securities (20,073,050)
Realized net gains on sales of
investments (583) (4,252)
Realized net gains on sales of
real estate contracts and mort-
gage notes and other receivable
investments (977,441) (512,500) (171,756)
(Gain) loss on sales of real estate 39,552 (6,267) (12,344)
Provision for losses on real estate
assets 490,082 445,381 155,042
Amortization of deferred costs 487,740 519,280 262,484
Deferred income tax provision 134,877 164,249 136,500
Changes in assets and liabilities,
net of effects from purchases of
subsidiaries:
Annuity reserves 3,713,490 1,031,720
Compound and accrued interest
on investment certificates and
debt payable (432,048) 1,714,943 1,229,371
Accrued interest on real estate
contracts and mortgage notes
receivable (1,005,273) (306,978) 107,423
Other (4,263,513) 365,111 312,110
----------- ----------- -----------
Net cash provided by (used
in) operating activities (568,595) 4,002,498 2,283,750
----------- ----------- -----------
Investing activities:
Net cash paid or received associated
with purchases of subsidiaries (761,739) 1,406,873
Collection of advances to parent and
affiliated companies 1,710,743
Purchase of investment in affiliated
company (1,500,000)
Proceeds from sales of available-for-
sale investments 999,790 992,370
Purchase of available-for-sale
investments (275,641)
Proceeds from maturities of held-to-
maturity investments 500,000
Purchase of held-to-maturity investments (486,753)
Principal payments on real estate
contracts and mortgage notes
receivable 13,874,707 6,567,102 1,829,515
</TABLE>
F-7
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Investing activities, Continued:
Principal payments on other receivable
investments 753,892 393,942
Purchases of real estate contracts and
mortgage
notes receivable (40,100,330) (26,130,804) (20,177,705)
Purchases of other receivable
investments (7,387,117) (18,316,371)
Proceeds from real estate sales 79,686 163,687 6,200
Additions to real estate held for sale (292,494) (141,336) (82,135)
Proceeds from sale of real estate
contracts and mortgage notes and other
receivable investments 19,430,000 21,350,848 10,393,131
----------- ----------- -----------
Net cash used in investing
activities (15,165,999) (13,713,689) (6,320,251)
----------- ----------- -----------
Financing activities:
Receipts from annuity products 15,632,116 5,903,808
Withdrawals of annuity products (6,465,340) (1,934,898)
Proceeds from investment certificates 13,291,967 8,585,470 10,539,684
Repayments of investment certificates (8,571,918) (2,847,347) (2,635,649)
Borrowings from banks and others 5,752,500
Repayments to banks and others (2,043,015) (193,631) (48,170)
Debt issuance costs (585,198) (441,775) (444,102)
Excess cost over historical cost basis
of subsidiaries purchased from
related parties (52,733)
Issuance of preferred stock 539,041 371,956 141,960
Issuance of common stock 100,000
Redemption and retirement of common
stock (3,600,000)
Dividends paid on preferred stock (333,606) (309,061) (2,930)
----------- ----------- -----------
Net cash provided by
financing activities 17,216,547 9,081,789 4,050,793
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 1,481,953 (629,402) 14,292
Cash and cash equivalents, beginning
of year 2,979,362 3,608,764 3,594,472
----------- ----------- -----------
Cash and cash equivalents, end of year $ 4,461,315 $ 2,979,362 $ 3,608,764
=========== =========== ===========
</TABLE>
See Note 15 for supplemental cash flow information.
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
<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 incor-
porated on July 25, 1990. Prior to September 9, 1994, the
Company was a wholly owned subsidiary of Metropolitan Mortgage
& Securities Co., Inc. (Metropolitan). Metropolitan is
controlled by C. Paul Sandifur, Jr. and his immediate family.
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 trans-
action date. Contemporaneous with this redemption, the Company
issued 10,000 shares of common stock to National Summit Corp.
for $100,000. In addition, various investors holding Metro-
politan'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 5).
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 net book value of MIS
at the 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, for $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 taxes for the
fiscal years ending December 31, 1995, 1996 and 1997. Future
contingency payments, if any, will be accounted for as
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
BUSINESS AND REORGANIZATION, CONTINUED
dividends. The initial purchase price plus estimated future
contingency payments approximated 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 the Company. The total purchase price of MIS and
OSL exceeded the historical cost bases 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.
On December 28, 1995, the Company consummated an agreement with
ILA Financial Services, Inc., whereby 100% of the outstanding
common stock of Arizona Life Insurance Company (AZL), an
insurance company domiciled in Arizona, was sold to a wholly
owned subsidiary of the Company. The purchase price of
$1,234,000, approximated the net book value of AZL at date of
purchase. AZL holds licenses to engage in insurance sales in
seven states and the purchase price included approximately
$268,000 in value assigned to these state licenses. At the date
of purchase, AZL was dormant and had no outstanding insurance
business or other liabilities. AZL's future business activities
will be the acquisition of real estate mortgage notes and
contracts using funds derived from the sale of annuities and
funds derived from receivable cash flows. The acquisition of
AZL had an immaterial effect on the financial condition and
operations of the Company.
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
holding of the Company.
The Company purchases contracts and mortgage notes
collateralized by real estate and other receivable invest-
ments with funds generated from the public issuance of debt
securities in the form of investment certificates, annuity
products, cash flows from receivable payments, sales of real
estate and securitization of receivables held for sale.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
PRINCIPLES OF CONSOLIDATION
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), Arizona
Life Insurance Company (since December 28, 1995) and Summit
Property Development, Inc. All significant intercompany
transactions and balances have been eliminated in
consolidation.
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.
INVESTMENTS IN AFFILIATED COMPANIES
Investments in equity securities of affiliated companies 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 affiliated companies, as
"available-for-sale," "held-to-maturity" or "trading." The
accounting policies related to these investments are as
follows:
AVAILABLE-FOR-SALE SECURITIES: Available-for-sale
securities, consisting primarily of mortgage-backed
securities are carried at market value. 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.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
INVESTMENTS, CONTINUED
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.
Realized gains and losses on investments are calculated on the
specific-identification method and are recognized in the
consolidated statements of income in the period in which the
investment is sold.
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 receivables acquired after September 30,
1992, net purchase discounts are amortized on an individual
receivable basis using the interest method over the remaining
contractual term of the receivable. For receivables acquired
before October 1, 1992, the Company accounts for its portfolio
of discounted receivables using anticipated prepayment patterns
to apply the interest method of amortizing discounts. Dis-
counted receivables are pooled by the fiscal year of purchase
and by similar receivable 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 on similar
receivables and the Company's expectations.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD
FOR SALE
Real estate contracts and mortgage notes receivable held for
sale are carried at the lower of cost (outstanding principal
adjusted for net discounts and capitalized acquisition costs)
or market value, determined on an aggregate basis by major type
of loan. Gains or losses on such sales are recognized utilizing
the aggregation method for financial reporting and income tax
purposes at the time of sale. Interest on these receivables is
included in interest income. Deferred net discounts and
capitalized acquisition costs are recognized at the time the
related receivables are sold to third-party investors or
securitized through transfer to a real estate investment trust.
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.
ALLOWANCES FOR LOSSES ON REAL ESTATE CONTRACTS AND MORTGAGE
NOTES RECEIVABLE
The established allowances for losses on real estate contracts
and mortgage notes receivable include amounts for estimated
probable losses on receivables determined in accordance with
the provisions of Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended. The Company adopted this new standard on
October 1, 1995, which did not have a material effect on the
consolidated financial statements. Specific allowances are
established for delinquent 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 receivables, including
accrued interest. Accordingly, the Company continues interest
accruals on delinquent receivables until foreclosure, unless
the principal and accrued interest on the receivables exceed
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.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE HELD FOR SALE
Real estate is stated at the lower of cost or fair value less
estimated 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 (net unpaid receivable carrying value).
Periodically, the Company reviews the 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. As a result of changes in the
real estate markets in which these properties are located, it
is reasonably possible that these carrying values could change
in the near term.
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.
DEFERRED COSTS
Commission expense and other annuity policy and investment
certificate issuance costs are deferred. For investment
certificate costs, amortization is computed over the expected
certificate term which ranges from 6 months to 5 years, using
the level yield (interest) method. For annuity costs, 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. Changes in the amount or timing of estimated gross
profits will result in adjustments in the cumulative
amortization of these costs.
ANNUITY RESERVES
Premiums for annuities are recorded as annuity reserves under
the deposit method. 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. As a result in changes in the factors included in
the actuarial calculations, it is reasonably possible that the
reserves for annuities could change in the near term.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
RECOGNITION OF ANNUITY REVENUES
Annuity revenues consist of the charges assessed against the
annuity account balance for services 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 policy acquisition costs.
GUARANTY FUND ASSESSMENTS
The Company's life insurance subsidiaries are subject to
insurance guaranty laws in the states in which they operate.
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. At September 30, 1996
and 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 accounts for income taxes using the asset and
liability method. This method requires the Company to recognize
deferred tax assets and liabilities for the expected future
income tax consequences of events that have been recognized in
the financial statements. Deferred tax assets and liabilities
are determined based on the temporary differences between the
financial statement carrying amounts and tax bases of assets
and liabilities using enacted tax rates in effect in the years
in which the temporary differences are expected to reverse.
The Company, subsequent to September 9, 1994, is included in
the consolidated income tax return with National Summit Corp.
Prior to that date, the Company was included in the consoli-
dated income tax return with Metropolitan, its former parent.
The Company was allocated a current and deferred tax provision
from National Summit Corp. or Metropolitan as if the Company
filed a separate tax return.
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.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
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, 1996.
INTEREST RATE RISK
The results of operations of the Company may be materially and
adversely affected by changes in prevailing economic
conditions, including rapid changes in interest rates. The
Company's financial assets (primarily real estate contracts and
mortgage notes receivable, other receivables and investment
securities) and liabilities (primarily annuity contracts and
investment certificates) are subject to interest rate risk. In
the year ending September 30, 1997, approximately $73,300,000
of the Company's financial liabilities will reprice or mature
as compared to approximately $13,800,000 of its financial
assets, resulting in a mismatch of approximately $59,500,000.
This structure is beneficial in periods of declining interest
rates; however, may result in declining net interest income
during periods of rising interest rates. Of the financial
liabilities scheduled to reprice or mature, approximately 97%
are annuity contracts which are subject to surrender charges.
Management is aware of the sources of interest rate risk and
endeavors to actively monitor and manage its interest rate
risk, although there can be no assurance regarding the
management of interest rate risk in future periods.
ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 financial statements have
been reclassified to conform with the 1996 presentation. These
reclassifications had no effect on net income or retained
earnings as previously reported.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE:
Real estate contracts and mortgage notes receivable include
receivables collateralized by property located throughout the
United States. At September 30, 1996, the Company held first
position liens associated with real estate contracts and mortgage
notes receivable with a face value of approximately $72,916,000
and second position liens of approximately $10,750,000. The
Company's real estate contracts and mortgage notes receivable at
September 30, 1996 are collateralized by property concentrated in
the following geographic regions:
Pacific Southwest (California, Nevada and Arizona) 25%
Pacific Northwest (Washington, Alaska, Idaho, Montana
and Oregon) 22
Southwest (Texas, Louisiana and New Mexico) 15
Southeast (Florida, Georgia, North Carolina and
South Carolina) 9
Other 29
---
100%
===
The value of real estate properties in these geographic regions
will be affected by changes in the economic environment of that
region. It is reasonably possible that these values could change
in the near term, which would affect the Company's estimate of
its allowance for losses associated with these receivables.
The face value of the Company's real estate contracts and
mortgage notes receivable as of September 30, 1996 and 1995 is
grouped by the following dollar ranges:
1996 1995
----------- -----------
Under $15,001 $ 3,718,664 $ 3,399,194
$15,001 to $40,000 22,297,937 22,777,987
$40,001 to $80,000 28,746,046 20,210,801
$80,001 to $150,000 17,852,524 11,883,730
Greater than $150,000 11,050,913 4,057,536
----------- -----------
$83,666,084 $62,329,248
=========== ===========
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
Contractual interest rates on the face value of the Company's
real estate contracts and mortgage notes receivable as of
September 30, 1996 and 1995 are as follows:
1996 1995
----------- -----------
Less than 8.00% $17,315,968 $ 7,003,736
8.00% to 8.99% 18,387,426 9,430,059
9.00% to 9.99% 19,139,440 13,741,811
10.00% to 10.99% 18,781,971 20,058,197
11.00% to 11.99% 5,660,121 7,687,561
12.00% to 12.99% 2,092,243 2,957,362
13% or higher 2,288,915 1,450,522
----------- -----------
$83,666,084 $62,329,248
=========== ===========
The weighted average contractual interest rate on these
receivables at September 30, 1996 is approximately 8.5%. Maturity
dates range from 1996 to 2026. The constant effective yield on
contracts purchased in fiscal 1996 and 1995 was approximately
10.6% and 10.9%, respectively.
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, 1996 and 1995.
1996 1995
----------- -----------
Face value of discounted receiv-
ables $73,226,348 $51,768,999
Face value of originated and
nondiscounted receivables 10,439,736 10,560,249
Unrealized discounts, net of
unamortized acquisition costs (4,733,938) (2,614,937)
Allowance for losses (974,487) (765,130)
Accrued interest receivable 2,051,094 1,168,038
----------- -----------
Carrying value $80,008,753 $60,117,219
=========== ===========
The following is an analysis of the allowance for losses on real
estate contracts and mortgage notes receivable.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
September 30,
------------------------------
1996 1995 1994
-------- -------- --------
Balance, beginning of year $765,130 $250,572 $ 96,654
Provision for losses on real
estate contracts and
mortgage notes receivable 212,600 103,950 103,000
Additions from acquisition of
subsidiary 310,957
Recoveries/(write-offs) (3,243) 99,651 50,918
-------- -------- --------
$974,487 $765,130 $250,572
======== ======== ========
At September 30, 1996, the net investment in real estate
contracts and mortgage notes receivable for which impairment has
been recognized in accordance with SFAS 114 was approximately
$110,000, of which approximately $27,000, representing the
amounts by which the net carrying value of the receivable exceeds
the fair value of the collateral, has been specifically included
in the allowance for losses on real estate assets.
During the year ended September 30, 1996, the average recorded
investment in impaired receivables was approximately $82,000.
Interest income in the approximate amount of $7,000 was
recognized on these receivables during the period in which they
were impaired.
The principal amount of receivables with required principal or
interest payments being in arrears for more than three months was
approximately $3,375,000 and $2,675,000 at September 30, 1996 and
1995, respectively.
During the year ended September 30, 1995, the Company sold
approximately $19,600,000 of real estate contracts and mortgage
notes receivables without recourse and recognized gains of
approximately $384,000. These sales were primarily made to
affiliated companies at estimated fair value which resulted in
the recognition of approximately $212,000 of the gain.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
Aggregate amounts of the face value of the Company's real estate
contracts and mortgage notes receivable at September 30, 1996
expected to be received, based upon contractual payments, are as
follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 2,704,968
1998 3,140,885
1999 3,418,511
2000 3,720,676
2001 4,049,550
Thereafter 66,631,494
-----------
Total $83,666,084
===========
3. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD FOR
SALE:
Real estate contracts and mortgage notes receivable, held for
sale consist of a pool of receivables which are intended to be
securitized and sold without recourse in a private placement. On
November 26, 1996, the Company securitized and sold all real
estate contracts and mortgage notes receivable held for sale at
September 30, 1996, which resulted in a pretax gain of
approximately $348,000.
The Company entered into a securitization transaction during the
year ended September 30, 1996. The Company participates in these
securitization transactions with its subsidiaries, Metropolitan
and Metropolitan's subsidiaries. These receivables are structured
in classes by credit rating and transferred to a real estate
trust, which sells pass-through certificates to third parties.
These securitizations are recorded as sales of receivables and
gains, net of transaction expenses, and are recognized in the
consolidated statements of income as each class is sold.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD FOR
SALE, CONTINUED:
During the year ended September 30, 1996, proceeds from
securitization transactions were approximately $7,009,000 and
resulted in gains of approximately $297,300. The gain realized
included approximately $99,000 associated with the estimated fair
value of the mortgage servicing rights retained on the pool. The
fair value of these rights was determined based on the estimated
present value of future net servicing cash flows, including float
interest and late fees, adjusted for anticipated prepayments. The
Company evaluates possible impairment in its mortgage servicing
rights by similar type of loan and to the extent that carrying
value for a stratum exceeds its estimated fair value, an
impairment loss is recognized. These mortgage servicing rights
were subsequently sold to an affiliated entity prior to September
30, 1996 at the Company's carrying value.
Of the receivables securitized, the Company has retained an
investment in certain classes of the securities having a fair
value of approximately $269,000 at September 30, 1996. These
securities were transferred to the Company's investment portfolio
and classified as available-for-sale. These certificates are the
B-4 rated and residual certificate classes and are subordinate to
the other offered classes of certificates. These classes receive
the lowest priority of principal and interest distributions and
thus bear the highest credit risk. The Company provides for this
risk by reducing the interest yield on these securities and by
providing a reserve for the principal distributions due on these
subordinate classes which may not be received due to default or
loss. The weighted average constant effective yield recognized by
the Company on these securities was 13.2% at September 30, 1996.
In June 1996, Statement of Financial Accounting Standards No. 125
(SFAS 125), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued. SFAS 125
provides accounting and reporting standards based on a consistent
application of a financial-components approach that focuses on
control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets
it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered and
derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring
after December 31, 1996. The Company does not expect that the
application of the provisions of SFAS 125 will have a material
effect on the Company's financial condition, results of
operations or cash flows.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. OTHER RECEIVABLE INVESTMENTS:
Other receivable investments include various cash flow invest-
ments primarily comprised of annuities and lottery prizes.
Annuities are general obligations of the payor, which is
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 prizes are 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, 1996 is
approximately 12.4%. Maturities range from 1996 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, 1996 and 1995.
1996 1995
----------- -----------
Face value of receivables $19,103,098 $28,618,310
Unrealized discounts, net of
unamortized acquisition costs (7,314,968) (11,722,408)
----------- -----------
Carrying value $11,788,130 $16,895,902
=========== ===========
All such receivables at September 30, 1996 were performing in
accordance with their contractual terms.
During the years ended September 30, 1996 and 1995, the Company
sold approximately $11,741,000 and $1,260,000, respectively, of
these receivables without recourse and recognized gains of
approximately $680,100 and $128,500, respectively.
The following individual other receivable investments were in
excess of ten percent of stockholders' equity at September 30,
1996 and 1995.
Aggregate
Carrying
Issuer Amount
------------------------------------- -----------
1996:
Michigan State Agency $ 1,738,909
Safeco Life Insurance Company 977,150
New York State Agency 966,639
Arizona State Agency 949,675
Transamerica Life Insurance Company 666,994
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. OTHER RECEIVABLE INVESTMENTS, CONTINUED:
Aggregate
Carrying
Issuer Amount
------------------------------------- -----------
1995:
Arizona State Agency 3,344,695
New Jersey State Agency 2,933,380
New York State Agency 2,364,728
California State Agency 2,036,041
Michigan State Agency 906,801
Aggregate amounts of contractual maturities of other receivables
(face amounts) at September 30, 1996 are as follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 2,549,061
1998 2,553,440
1999 2,106,077
2000 2,296,522
2001 1,599,414
Thereafter 7,998,584
-----------
Total $19,103,098
===========
5. INVESTMENTS IN AFFILIATED COMPANIES:
At September 30, 1996 and 1995, investments in affiliated
companies consisted of:
Cost and Carrying Value
Number of -----------------------
Type of Shares Shares 1996 1995
------------------------- --------- ---------- ----------
Metropolitan Mortgage &
Securities Co., Inc.:
Class A common 9 $ 420,205 $ 420,205
Preferred:
Series C 116,094 1,160,942 1,160,942
Series D 24,328 243,278 243,278
Series E-1 105,800 1,058,000 1,058,000
Series E-4 1,400 140,000 140,000
---------- ----------
3,022,425 3,022,425
Consumers Group Holding
Co., Inc.:
Common 19 1,500,000
---------- ----------
$4,522,425 $3,022,425
========== ==========
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INVESTMENTS IN AFFILIATED COMPANIES, CONTINUED:
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, 1996 and 1995, the
Company owned 7.09% of Metropolitan's outstanding Class A common
stock.
The preferred stock of Metropolitan 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, 1996, the preferred Series C, D and
E-1 had dividend rates of 7.95%. The preferred Series E-4 had a
dividend rate of 8.45%. Neither the common nor preferred shares
are traded in a public market.
At September 30, 1996, the Company owned 3.49% of the outstanding
common stock of Consumers Group Holding Co., Inc. The Company
acquired the stock investment in April 1996 in a cash purchase
from C. Paul Sandifur, Jr. The remaining outstanding shares of
common stock of Consumers Group Holding Co., Inc. are owned
by Metropolitan. Consumers Group Holding Co., Inc. owns
approximately 74.5% of Western United Life Insurance Company
(Western), a life insurer domiciled in the state of Washington.
Western had total assets of approximately $1.1 billion at
September 30, 1996.
6. INVESTMENTS:
A summary of carrying and estimated market values of investments
at September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996
-------------------------------------------------
Estimated
Market
Gross Gross Value
Amortized Unrealized Unrealized (Carrying
Available-for-Sale Cost Gains Losses Value)
------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Pass-Through Certificates $ 269,305 $ 0 $ 0 $ 269,305
========== ========== ========== ==========
</TABLE>
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
1996
-------------------------------------------------
Amortized
Cost Gross Gross Estimated
(Carrying Unrealized Unrealized Market
Held-to-Maturity Value) Gains Losses Value
------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Bonds $5,735,579 $ 0 $ (111,140) $5,624,439
Corporate Bonds 2,014,499 0 (16,744) 1,997,755
---------- ---------- ---------- ----------
$7,750,078 $ 0 $ (127,884) $7,622,194
========== ========== ========== ==========
<CAPTION>
1995
-------------------------------------------------
Amortized
Cost Gross Gross Estimated
(Carrying Unrealized Unrealized Market
Held-to-Maturity Value) Gains Losses Value
------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Bonds $5,229,949 $ 0 $ (144,091) $5,085,858
Corporate Bonds 3,039,592 0 (53,985) 2,985,607
---------- ---------- ---------- ----------
$8,269,541 $ 0 $ (198,076) $8,071,465
========== ========== ========== ==========
</TABLE>
All bond held at September 30, 1996 were performing in accordance
with their terms.
During the year ended September 30, 1996, in accordance with a
Special Report issued by the Financial Accounting Standards Board,
OSL reassessed and reclassified held-to-maturity debt securities
with a carrying value of approximately $999,000 to the available-
for-sale classification. At the date of the transfer, the debt
securities were valued at fair value of approximately $999,000.
During the year ended September 30, 1995, upon the acquisition of
OSL, the Company reclassified an investment with an amortized cost
of approximately $992,000 from held-to-maturity to available-for-
sale. The investment was subsequently sold in 1995 at a loss of
approximately $8,000 when the issuer called the bond.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. INVESTMENTS, CONTINUED:
During the year ended September 30, 1994, prior to its
acquisition, OSL 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 recognized over the
remaining term of the investments transferred using the interest
method. At September 30, 1996, the remaining unamortized loss of
$10,134, 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, 1996 and 1995 were in
excess of ten percent of stockholders' equity:
Aggregate
Carrying
Issuer Amount
--------------------------------------- -----------
1996:
Corporate Bonds:
General Electric Credit Corporation $ 1,012,613
Wal-Mart Stores 1,001,886
1995:
Corporate Bonds:
Countrywide Funding 1,004,526
General Electric Credit Corporation 1,031,930
Wal-Mart Stores 1,003,136
At September 30, 1996, the contractual maturities of the held-to-
maturity securities are shown below. Expected maturities will
differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or pre-
payment penalties.
Estimated
Amortized Market
Held-to-Maturity Securities Cost Value
----------------------------------- ----------- -----------
Due in one year or less $ 1,511,471 $ 1,506,609
Due after one year through five
years 6,238,607 6,115,585
----------- -----------
$ 7,750,078 $ 7,622,194
=========== ===========
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. DEBT PAYABLE:
At September 30, 1996 and 1995, debt payable consists of:
1996 1995
----------- -----------
Reverse repurchase agreements with
various securities brokers,
interest at 5.9% per annum; due
on October 1, 1996; collateral-
ized by $3,900,000 in U.S.
Treasury bonds $ 3,802,500
Real estate contracts and mortgage
notes payable, interest rates
ranging from 7% to 8.5%, due in
installments through 2002,
collateralized by senior liens
on certain of the Company's real
estate contracts, mortgage notes
receivable and real estate held
for sale 37,875 $ 104,067
Accrued interest payable 10,595 569
----------- -----------
$ 3,850,970 $ 104,636
=========== ===========
Aggregate amounts of principal and accrued interest due on debt
payable at September 30, 1996 are as follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 3,823,744
1998 11,553
1999 11,612
2000 1,806
2001 1,760
Thereafter 495
-----------
Total $ 3,850,970
===========
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INVESTMENT CERTIFICATES:
At September 30, 1996 and 1995, investment certificates consist
of:
Annual
Interest Principally
Rates Maturing in 1996 1995
---------- ------------------- ----------- -----------
6% to 7% 1997 and 1998 $ 1,547,283 $ 810,558
7% to 8% 1997, 1998 and 1999 1,946,646 1,789,822
8% to 9% 1999, 2000 and 2001 26,380,522 22,070,089
9% to 10% 1997 and 2001 8,370,330 2,831,765
10% to 11% 1997 and 2001 199,926 6,222,424
----------- -----------
38,444,707 33,724,658
Compound and accrued interest 4,379,164 4,821,238
----------- -----------
Totals $42,823,871 $38,545,896
=========== ===========
The weighted average interest rate on outstanding investment
certificates at September 30, 1996 and 1995 was approximately
8.5% and 8.8%, respectively.
Investment certificates (including principal and compound and
accrued interest) at September 30, 1996 mature as follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 7,085,000
1998 9,834,000
1999 8,361,000
2000 6,822,000
2001 10,528,000
Thereafter 193,871
-----------
Total $42,823,871
===========
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. DEFERRED COSTS:
An analysis of deferred costs related to annuity acquisition and
investment certificates for the years ended September 30, 1996,
1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Annuity Investment
Acquisition Certificates Total
----------- ------------ ----------
<S> <C> <C> <C>
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
Deferred during the period:
Commissions 722,861 390,713 1,113,574
Other expense 459,525 194,485 654,010
----------- ------------ ----------
Total deferred costs 3,937,909 1,411,877 5,349,786
Amortized during the period (84,773) (402,967) (487,740)
----------- ------------ ----------
Balance, September 30, 1996 $ 3,853,136 $ 1,008,910 $4,862,046
=========== ============ ==========
</TABLE>
The amortization of deferred annuity acquisition costs, which is
based on the estimated gross profits of the underlying annuity
products, could be changed significantly in the near term due to
changes in the interest rate environment. As a result, the
recoverability of these costs may be adversely affected in the
near term.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES:
The tax effect of the temporary differences giving rise to the
Company's deferred tax assets and liabilities as of September 30,
1996 and 1995 is as follows:
1996 Assets Liabilities
----------------------------------- ---------- -----------
Mark to market for investment
securities $ 5,238
Guaranty fund assessments 180,645
Annuity reserves 734,150
Management fee payable $ 215,686
Allowance for losses on real estate
and receivables 362,436
Deferred policy acquisition costs 1,724,548
Deferred contract acquisition costs
and discount yield recognition 958,473
Net operating loss carryforwards 189,416
Other 743
---------- ----------
Total deferred income taxes $1,472,628 $2,898,707
========== ==========
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
========== ==========
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. At September 30, 1996, the
Company's remaining net operating loss carryforwards of
approximately $560,000 expire in years 2006 through 2010.
Realization is dependent on the generation of sufficient taxable
income prior to expiration of the net operating loss
carryforwards. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period
are reduced.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES, CONTINUED:
Due to the Company's previous change in ownership, 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.
Following is a reconiliation of the provision for income taxes to
an amount computed by applying the statutory federal income tax
rate to income before income taxes as follows:
1996 1995 1994
-------- -------- --------
Federal income tax at statu-
tory rate $504,041 $281,270 $137,797
Affiliate corporate dividend
received deduction (47,661) (49,921)
Small life insurance company
deduction (225,669)
Other 7,240 8,358 2,610
-------- -------- --------
Income tax provision $237,951 $239,707 $140,407
======== ======== ========
The components of the provision for income taxes are as follows:
1996 1995 1994
-------- -------- --------
Current $103,074 $ 75,458 $ 3,907
Deferred 134,877 164,249 136,500
-------- -------- --------
$237,951 $239,707 $140,407
======== ======== ========
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. STOCKHOLDERS' EQUITY:
A summary of preferred and common stock at September 30, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
Issued and Outstanding Shares
----------------------------------
Authorized Shares 1996 1995
-------------------- ---------------- ----------------
1996 1995 Shares Amount Shares Amount
--------- --------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Registered
preferred stock:
Series S-1 185,000 185,000 36,460 $364,603 35,622 $356,222
Series S-2 150,000 4,852 48,514
Series S-RP 80,000
--------- --------- ------ -------- ------ --------
415,000 185,000 41,312 $413,117 35,622 $356,222
========= ========= ====== ======== ====== ========
Common stock 2,000,000 2,000,000 10,000 $100,000 10,000 $100,000
========= ========= ====== ======== ====== ========
</TABLE>
The Company has authorized 10,000,000 total shares of Series S
preferred stock, of which varying amounts of shares of Series S-1,
S-2 and S-RP were registered at September 30, 1996. 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, S-2 and
S-RP preferred stock.
Series S-1, S-2 and S-RP 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 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, S-2 and S-RP preferred stock have a par value of
$10 per share and were or will be sold to the public at $100
per share. Series S-1 and S-2 shares are callable at the sole
option of the board of directors at $100 per share. Series S-RP
shares are callable at the sole option of the board of directors
at $102 per share before October 1, 1997 and at $100 per share
after September 30, 1997.
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.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. STOCKHOLDERS' EQUITY, CONTINUED:
The payment of dividends by the Company's wholly owned life
insurance subsidiaries are subject to certain restrictions imposed
by statute (see Note 14). 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 presently requires the life insurance
subsidiary domiciled in the state of Idaho to maintain $1
million in common stock and $1 million in contributed surplus.
This restriction on the payment of dividends by this life
insurance subsidiary provided that $194,000 was available for
the payment of dividends at September 30, 1996.
The Arizona Insurance Code presently requires the life insurance
subsidiary domiciled in the state of Arizona to maintain $450,000
in common stock and contributed surplus. This life insurance
subsidiary had earned surplus (deficit) of $(1,196,000) at
September 30, 1996 and thus is currently restricted from
paying dividends.
12. RELATED-PARTY TRANSACTIONS:
The Company receives accounting, data processing, contract
servicing and other administrative services from Metropolitan.
Charges for these services were approximately $586,000,
$315,000 and $58,000 in fiscal 1996, 1995 and 1994, respectively,
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.
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. RELATED-PARTY TRANSACTIONS, CONTINUED:
The Company had the following related-party transactions with
Metropolitan and affiliates during fiscal years 1996, 1995
and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Real estate contracts and mort-
gage notes receivable and
other receivable investments
purchased through Metropolitan
or affiliates $45,734,241 $42,479,766 $19,495,714
Capitalized acquisition costs
charged to the Company on pur-
chased real estate contracts
and mortgage notes receivable,
including management under-
writing fees 1,753,206 1,967,409 681,991
----------- ----------- -----------
Total cost of real estate con-
tracts and mortgage notes and
other receivable investments
purchased through Metropolitan $47,487,447 $44,447,175 $20,177,705
=========== =========== ===========
Real estate contracts and mort-
gage notes receivable and other
receivable investments sold to
Metropolitan or its affiliates $17,098,581 $10,122,544
Gains on real estate contracts and
mortgage notes receivable and
other receivable investments
sold to Metropolitan or its
affiliates 335,469
Service fees charged to Metro-
politan for property develop-
ment assistance $ 2,038,202 1,250,017
Commissions and service fees
charged to Metropolitan on
sale of Metropolitan's
debentures and preferred stock 369,080 1,124,481
Interest expense paid to Metro-
politan and its affiliated
companies 11,684
</TABLE>
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. RELATED-PARTY TRANSACTIONS, CONTINUED:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Commissions capitalized as
deferred costs, paid to a
Metropolitan affiliate on sale
of debentures 86,491 299,748
Commissions deducted from addi-
tional paid-in capital, paid to
a Metropolitan affiliate on
sale of preferred stock 13,249 7,552
Dividends received on Metro-
politan's preferred stock
investments 200,256 256,991
</TABLE>
Receivables from Metropolitan or its affiliates of $1,296,290 at
September 30, 1996 represent amounts owed to the Company related
primarily to collections on real estate contract and mortgage note
receivables and are included in other assets. Advances due
Metropolitan or its affiliates in the amount of $1,960,104 at
September 30, 1995 represent real estate contracts and mortgage
notes receivable and related costs advanced by Metropolitan on
behalf of the Company and are included in accounts payable.
The Company receives management, receivable acquisition and
receivable collections services from Metropolitan for a fee
pursuant to the terms of the Management, Receivable Acquisition
and Servicing Agreement. The receivable acquisition fees are based
upon yield requirements established by the Company. The 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. During the
year ended September 30, 1996, 1995 and 1994, the Company incurred
service fees for receivable acquisition from Metropolitan of
approximately $1,753,000, $1,967,000 and $682,000, respectively.
The agreements are non-exclusive and may be terminated in whole or
part by either party upon notice to the other party.
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. MIS charges commissions
ranging from .25% to 6% of the face value of the security sold.
The commission rate depends on the type of security sold, its
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. RELATED-PARTY TRANSACTIONS, CONTINUED:
stated term and whether the security sale involved a reinvestment
by a prior investor or a new investment. Commissions and service
fees charged to Metropolitan during the years ended September 30,
1996 and 1995 were approximately $369,000 and $1,125,000,
respectively.
Summit Property Development, Inc., a wholly owned subsidiary of
Summit, 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. The fees charged to Metropolitan for these services were
approximately $2,038,000 and $1,250,000 during the years ended
September 30, 1996 and 1995, respectively.
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
earned 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. In lieu
of services performed, the contribution relating to the Company's
employees was made by Metropolitan during the years ended
September 30, 1996, 1995 and 1994.
13. 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 5.4% to 10.4% during the year ended
September 30, 1996 and 5.75% to 10.65% during the four-month
period ended September 30, 1995.
All states in which the Company's 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 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.
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. ANNUITY RESERVES AND GUARANTY FUND ASSESSMENTS, CONTINUED:
The net amount expensed by the Company's life insurance
subsidiaries for guaranty fund assessments and amounts estimated
to be assessed for the year ended September 30, 1996 and the four-
month period ended September 30, 1995 were $90,000 and $25,000,
respectively. 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 1994. 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. As a result of these uncertainties, the Company's
estimate of future assessments could change in the near term. The
Company does not believe that the amount of future assessments
associated with known insolvencies after 1994 will be material to
its financial condition or results of operations. At September 30,
1996, an estimated future guaranty fund assessment of
approximately $334,000 has been recorded, which is net of a 7%
discount rate applied to the estimated payment term of
approximately seven years.
14. STATUTORY ACCOUNTING:
The life insurance subsidiaries of the Company are required to
file statutory financial statements with state insurance
regulatory authorities in their states of domicile. 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 subsidiaries as of and for the years
ended September 30, 1996 and 1995, respectively, are as follows:
Statutory GAAP
----------- -----------
Stockholders' equity:
1996 $ 9,505,116 $11,396,286
1995 2,248,969 2,743,415
Net income:
1996 374,703 1,285,135
1995 (four-month period ended
September 30, 1995) 43,574 86,031
Unassigned statutory funds and
retained earnings/(deficit):
1996 (1,002,284) 1,138,886
1995 248,969 755,299
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. STATUTORY ACCOUNTING, CONTINUED:
The National Association of Insurance Commissioners (NAIC)
currently is in the process of codifying statutory accounting
practices, the result of which is expected to constitute the only
source of "prescribed" statutory accounting practices.
Accordingly, that project, which is expected to be completed in
1997, will likely change, to some extent, prescribed statutory
accounting practices that insurance enterprises use to prepare
their statutory financial statements. Written approval was
received from the Insurance Department of the state of Idaho to
capitalize the underwriting fees charged to OSL by Metropolitan
and to amortize these fees as an adjustment of the yield on
acquired receivables. Statutory accounting practices prescribed by
the state of Idaho do not describe the accounting required for
this type of transaction. As of September 30, 1996, this permitted
accounting practice increased statutory surplus by approximately
$435,000 over what it would have been had prescribed practices
disallowed this accounting treatment.
The regulatory authorities impose minimum risk-based capital
requirements on insurance enterprises that were developed by the
NAIC. The formulas for determining the amount of risk-based
capital (RBC) specify various weighting factors that are applied
to financial balances or various levels of activity based on
perceived degree of risk. Regulatory compliance is determined by a
ratio of the enterprise's regulatory total adjusted capital, as
defined by the NAIC, to its authorized control level, RBC, as
defined by the NAIC. Enterprises below specific trigger points or
ratios are classified within certain levels, each of which
requires specified corrective action. The RBC measure of the
insurance subsidiaries at September 30, 1996 and 1995 was above
the minimum standards.
15. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS:
Supplemental information on interest and income taxes paid during
the years ended September 30, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Interest paid $ 3,914,390 $ 1,536,137 $ 1,298,248
Income taxes paid (refunded) (62,591) 128,190 3,907
</TABLE>
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS, CONTINUED:
Non-cash investing and financing activities of the Company during
the years ended September 30, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Assumption of other debt payable
in conjunction with purchase of
real estate contracts and mort-
gage notes receivable $ 26,823 $ 162,597 $ 81,451
Assumption of other debt payable
in conjunction with acquisition
of real estate held for sale 15,528 63,650
Real estate held for sale acquired
through foreclosure 1,474,233 1,232,732 437,448
Loans to facilitate the sale of
real estate 1,013,314 959,813 81,800
Exchange of the Company's pre-
ferred stock as full considera-
tion for Metropolitan 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
Transfer of securities from held-to-
maturity to available-for-sale 999,204
Increase in assets and liabilities
associated with purchase of
subsidiaries:
Held-to-maturity investment
securities 493,695 9,401,577
Real estate contracts and mort-
gage notes receivable 32,080,899
Real estate held for sale 503,298
Deferred costs 2,614,778
Other assets 268,044 205,504
Annuity reserves 44,558,959
Accounts payable and other
liabilities 1,653,970
</TABLE>
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined using available market
information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market
data and to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange.
The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair
value amounts.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value. Potential income tax
ramifications related to the realization of unrealized gains and
losses that would be incurred in an actual sale and/or settlement
have not been taken into consideration.
INVESTMENTS IN AFFILIATED COMPANIES - Fair value is estimated by
management to equal carrying amounts. The preferred shares are
not publicly traded; however, preferred share dividends are paid
at variable rates.
PUBLICLY TRADED INVESTMENT SECURITIES - Fair value is determined
by quoted market prices.
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE - For loans,
the discount rate is estimated using rates currently offered for
loans of similar characteristics that reflect the credit and
interest rate risk inherent in the loan. For residential
mortgage loans, fair value is estimated by discounting
contractual cash flows adjusted for prepayment estimates. The
prepayment estimates are based upon internal historical data.
OTHER RECEIVABLE INVESTMENTS - The fair value of other
receivable investments is based on the discounted value of
contractual cash flows. The discount rate is estimated using the
rates currently offered for investments with similar credit
ratings and similar remaining maturities.
INVESTMENT CERTIFICATES AND DEBT PAYABLE - The fair value of
debenture bonds and debt payable is based on the discounted
value of contractual cash flows. The discount rate is estimated
using the rates currently offered for debt with similar
remaining maturities.
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
The estimated fair values of the following financial instruments
as of September 30, 1996 are as follows:
Carrying
Amounts Fair Value
----------- -----------
Financial assets:
Cash and cash equivalents $ 4,461,315 $ 4,461,315
Investments:
Affiliated companies 4,522,475 4,522,475
Available-for-sale securities 269,305 269,305
Held-to-maturity securities 7,750,078 7,622,194
Real estate contracts and
mortgage notes receivable 78,932,146 79,426,539
Other receivable investments 11,788,130 12,404,341
Financial liabilities:
Investment certificates -
principal and compound
interest 42,148,886 42,545,085
Debt payable - principal 3,840,375 3,840,375
LIMITATIONS - The fair value estimates are made at a discrete
point in time based on relevant market information and information
about the financial instruments. Because no market exists for a
significant portion of these financial instruments, fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates
are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates. Accordingly, the estimates presented herein are not
necessarily indicative of what the Company could realize in a
current market exchange.
17. BUSINESS SEGMENT REPORTING:
The Company principally operates in one industry segment which
encompasses the investing in real estate contracts and mortgage
notes receivable, other receivables and investment securities with
funds generated from the issuance of investment certificates,
preferred stock and annuity contracts. Additionally, the Company,
through a wholly owned subsidiary, operates a property development
division, which provides services related to the selling,
marketing, designing, subdividing and coordinating of real estate
development properties.
F-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. BUSINESS SEGMENT REPORTING, CONTINUED:
Information about the Company's separate business segments and in
total as of and for the year ended September 30, 1996 is as
follows:
Property
Primary Development
Operations Operations Total
------------ ------------ ------------
Revenues $ 12,309,367 $ 2,047,082 $ 14,356,449
Income from opera-
tions 1,269,143 213,330 1,482,473
Identifiable assets,
net 116,817,327 449,353 117,266,680
Depreciation and
amortization 3,150 2,616 5,766
Capital expendi-
tures 26,063 47,528 73,591
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS:
The condensed balance sheets of Summit Securities ("Summit "or the
"parent company") at September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,466,892 $ 1,673,584
Investments 4,605,199 3,022,425
Real estate contracts and mortgage notes
receivable and other receivable investments 29,540,599 34,294,855
Real estate held for sale 761,980 269,632
Equity in subsidiary companies 10,338,846 3,203,359
Deferred costs, net 1,118,781 861,601
Other assets, net 95,953 30,698
Receivables from affiliates 513,176
------------ ------------
Total assets $ 48,441,426 $ 43,356,154
============ ============
</TABLE>
F-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES
Investment certificates and accrued interest $ 42,823,871 $ 38,545,896
Debt payable 38,417 104,636
Accounts payable and accrued expenses 65,961 170,689
Payable to affiliates 400,964
Deferred income taxes 154,403 226,902
------------ ------------
Total liabilities 43,082,652 39,449,087
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $10 par (liquidation
preference, $4,131,170 and $3,562,220) 413,117 356,222
Common stock, $10 par 100,000 100,000
Additional paid-in capital 2,269,137 1,786,991
Retained earnings 2,586,654 1,675,738
Net unrealized losses on investments (10,134) (11,884)
------------ ------------
Total stockholders' equity 5,358,774 3,907,067
------------ ------------
Total liabilities and stockholders' equity $ 48,441,426 $ 43,356,154
============ ============
</TABLE>
Summit's condensed statements of income for the years ended
September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Revenues:
Interest and earned discounts $ 4,006,818 $ 3,709,749
Dividends 200,256 256,991
Fees, commissions, service and other income 83,375 104,571
Real estate sales 434,500 941,500
Realized net gains on sales of investments
and receivables 167,301 318,989
------------ -----------
Total revenues 4,892,250 5,331,800
------------ -----------
</TABLE>
F-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Expenses:
Interest, net 3,710,164 3,251,334
Cost of real estate sold 479,038 929,481
Provision for losses on real estate assets 7,353 305,850
Salaries and employee benefits 70,368
Other operating expenses 665,204 335,356
------------ -----------
Total expenses 4,932,127 4,822,021
------------ -----------
Income (loss) from operations before income
taxes and equity in net income of
subsidiaries (39,877) 509,779
Income tax benefit (provision) 55,956 (128,014)
------------ -----------
Income (loss) before equity in net income
of subsidiaries 16,079 381,785
Equity in net income of subsidiaries 1,228,443 205,794
------------ -----------
Net income $ 1,244,522 $ 587,559
============ ===========
</TABLE>
Summit's condensed statements of cash flows for the years ended
September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,244,522 $ 587,559
Adjustments to reconcile net income to net
cash provided by operating activities (2,343,987) 1,198,232
------------ -----------
Net cash provided by (used in)
operating activities (1,099,465) 1,785,791
------------ -----------
</TABLE>
F-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from investing activities:
Principal payments on real estate contracts
and mortgage notes receivable and other
receivable investments 7,334,388 4,534,137
Proceeds from sales of real estate contracts
and mortgage notes receivable and other
receivable investments 11,684,033 14,996,805
Acquisition of real estate contracts and
mortgage notes and other receivable
investments (13,719,365) (25,763,742)
Proceeds from real estate sales 37,323 117,710
Purchase of investments (1,582,774)
Additions to real estate held for sale (211,464) (75,353)
Net change in investment in and advances to
subsidiaries (6,819,434) (2,661,218)
------------ -----------
Net cash used in investing activities (3,277,293) (8,851,661)
------------ -----------
</TABLE>
F-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from financing activities:
Net borrowings (repayments) from banks and
others (93,016) (193,631)
Debt issuance costs (662,402) (476,697)
Issuance of investment certificates 13,291,967 8,585,470
Repayment of investment certificates (8,571,918) (2,847,347)
Issuance of preferred stock 539,041 371,956
Cash dividends (333,606) (309,061)
------------ -----------
Net cash provided by financing
activities 4,170,066 5,130,690
------------ -----------
Net decrease in cash and cash equivalents (206,692) (1,935,180)
Cash and cash equivalents at beginning of year 1,673,584 3,608,764
------------ -----------
Cash and cash equivalents at end of year $ 1,466,892 $ 1,673,584
=========== ===========
</TABLE>
Non-cash investing and financing activities not included in
Summit's condensed statements of cash flows for the years ended
September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Loans to facilitate the sale of real estate $ 297,177 $ 823,790
Real estate acquired through foreclosure 901,175 933,534
Debt assumed with acquisition of real estate
contracts and mortgage notes and debt assumed
upon foreclosure of real estate contracts 26,823 178,125
Change in net unrealized gains (losses) on
investments 1,750 (11,884)
</TABLE>
Accounting policies followed in the preparation of the preceding
condensed financial statements of Summit (parent company only) are
the same as those policies described in the consolidated financial
statements except that the equity method was used in accounting
for the investments in and net income from subsidiaries.
F-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
At September 30, 1996 and 1995, Summit's debt payable consists of
the following:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Real estate contracts and mortgage notes
payable, interest rates ranging from 7%
to 8.5%, due in installments through
2002; collateralized by senior liens
on certain of the Company's real estate
contracts, mortgage notes and real estate
held for sale $ 37,875 $ 104,067
Accrued interest payable 542 569
----------- -----------
$ 38,417 $ 104,636
=========== ===========
</TABLE>
Aggregate amounts of principal payments due on the parent
company's debt payable are expected to be as follows:
Fiscal Year Ending
September 30,
------------------
1997 $11,200
1998 11,600
1999 11,600
2000 1,800
2001 1,800
Thereafter 417
-------
$38,417
=======
F-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
At September 30, 1996 and 1995, Summit's investment certificates
consisted of the following:
<TABLE>
<CAPTION>
Principally
Annual Interest Rates Maturing in 1996 1995
--------------------- ------------------- ------------ ------------
<S> <C> <C> <C>
6% to 7% 1997 and 1998 $ 1,547,283 $ 810,558
7% to 8% 1997, 1998 and 1999 1,946,646 1,789,822
8% to 9% 1999, 2000 and 2001 26,380,522 22,070,089
9% to 10% 1997 and 2001 8,370,330 2,831,765
10% to 11% 1997 and 2001 199,926 6,222,424
------------ ------------
38,444,707 33,724,658
Compound and accrued interest 4,379,164 4,821,238
------------ ------------
$ 42,823,871 $ 38,545,896
============ ============
</TABLE>
Maturities of the parent company's investment certificates are as
follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 7,085,000
1998 9,834,000
1999 8,361,000
2000 6,822,000
2001 10,528,000
Thereafter 193,871
------------
$ 42,823,871
============
F-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Summit had the following related party transactions with its
various subsidiaries and affiliated entities:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Real estate contracts, mortgage notes and
other receivable investments purchased
through Metropolitan or affiliates $12,098,944 $27,624,227
Contract acquisition costs charged to the
Company on purchased real estate contracts,
mortgage notes and other receivable
investments, including management under-
writing fees 531,643 1,177,978
----------- -----------
Total costs of real estate contracts,
mortgage notes and other receivable
investments purchased through Metropolitan $12,630,587 $28,802,205
=========== ===========
Proceeds on sales of real estate contracts,
mortgage notes and other receivable
investments to Metropolitan affiliates $ 555,633 $13,345,563
Realized net gains on sale of receivables
to Metropolitan affiliates -- 206,947
Commissions capitalized as deferred costs,
paid to a Metropolitan affiliate on sale
of investment certificates -- 86,491
Commissions deducted from additional paid-in
capital, paid to a Metropolitan affiliate
on sale of preferred stock -- 13,249
Dividends received on Metropolitan's
preferred stock investments 200,256 256,991
</TABLE>
F-49
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The interim condensed financial statements for the Company as
of December 31, 1996 and 1995 are prepared by management of the
Company, and reflect all adjustments which, in the opinion of
management, are necessary for a fair presentation of the results
of operations and cash flows for the three-month periods ended
December 31, 1996 and 1995, as well as the financial position as
of December 31, 1995.
SUMMIT SECURITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31
September 30,
1996
1996
------------ -----
- -------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 7,583,409 $
4,461,315
Investments in Affiliated Companies 4,522,425
4,522,425
Available-for-Sale Securities,
at Market 1,482,893
269,305
Held-to-Maturity Securities,
at Amortized Cost (Market
Value $8,156,702 and $7,622,194 8,386,679
7,784,322
Real Estate Contracts and Mortgage
Notes and Other Receivables,
Net of Unrealized Discounts
and Allowance for Losses 88,250,024
91,796,883
<PAGE> Page F-51
Real Estate Held For Sale 2,351,069
1,191,495
Deferred Acquisition Costs, Net 5,122,351
4,862,046
Other Assets, Net 950,720
2,378,889
------------ ------
- ------
TOTAL ASSETS $118,649,570
$117,266,680
============
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Annuity Reserves $ 64,595,713 $
62,439,855
Investment Certificates and Accrued
Interest 45,085,528
42,823,871
Debt Payable 86,913
3,850,970
Accounts Payable and Accrued Expenses 1,094,256
1,367,131
Deferred Income Taxes 1,685,537
1,426,079
------------ ------
- ------
TOTAL LIABILITIES 112,547,947
111,907,906
------------ ------
- ------
STOCKHOLDER'S EQUITY:
Common Stock, $10 Par Value:
2,000,000 Shares Authorized:
10,000 Shares Issued and Outstanding 100,000
100,000
Preferred Stock, $10 Par Value:
10,000,000 Shares Authorized:
45,757 and 41,312 Shares Issued and
Outstanding (Liquidation Preference
$4,574,700 and $4,131,170
respectively) 457,470
413,117
Additional Paid-In Capital 2,644,482
2,269,137
Retained Earnings 2,876,909
2,586,654
Net Unrealized Gains (Losses)
on Investments 22,762
(10,134)
------------ -----
- ------
TOTAL STOCKHOLDERS' EQUITY 6,101,623
5,358,774
------------ -----
- ------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $118,649,570
$117,266,680
=============
============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE> Page F-52
SUMMIT SECURITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended
December 31,
1996
1995
<S> <C>
<C>
REVENUES:
Interest and Earned Discounts $ 2,742,088 $
2,126,616
Annuity Fees and Charges 12,000
7,800
Realized Net Gains on Sales of
Investment Securities
583
Realizes Net Gains on Sales of
Receivables 317,219
Real Estate Sales 419,300
213,000
Dividend Income 51,833
48,623
Fees, Commissions Services
and Other Income 665,243
801,585
------------ --
- ---------
TOTAL REVENUES 4,207,683
3,198,207
------------ --
- ---------
EXPENSES:
Annuity Benefits 1,015,397
861,364
Interest 1,035,862
917,680
Cost of Real Estate Sold 418,018
213,350
Provision for Losses on Real
Estate Contracts and Real
Estate Held 229,526
220,043
Salaries and Employee Benefits 433,409
408,027
Commissions to Agents 358,511
429,362
Other Operating and Underwriting
Expenses 514,182
397,890
Less Increase in Deferred Acquisition
Costs (259,503)
(417,555)
------------ --
- ----------
TOTAL EXPENSES 3,745,402
3,030,161
------------ --
- ----------
Income Before Income Taxes 462,281
168,046
Provision for Income Taxes (68,860)
(47,563)
------------ --
- ----------
NET INCOME 393,421
120,483
Preferred Stock Dividends (103,186)
(70,996)
------------ --
- ----------
Income Applicable to Common
<PAGE> Page F-53
Stockholder $ 290,235 $
49,487
==============
============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE> Page F-54
SUMMIT SECURITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended
December
31,
1996
1995
-----
- -----
<S> <C>
<C>
CASH PROVIDED BY OPERATING ACTIVITIES $ 2,728,864
$ 491,070
-----------
- ----------
INVESTING ACTIVITIES:
Purchase of Subsidiaries Net of
Cash Received
(757,868)
Purchase of Available-for-Sale
Securities (1,167,568)
Purchase of Held-to-Maturity
Investments (995,469)
Proceeds from Sale of Available-
for-Sale Securities
999,790
Proceeds from Maturities of Held-to
Maturity Investments 500,000
Principal Payments on Real Estate
Contracts and Mortgage Notes
and Other Receivables 2,056,484
3,271,865
Purchase of Real Estate Contracts
and Mortgage Notes and
Other Receivables (10,152,412)
(2,336,634)
Proceeds From Real Estate Sales 214,537
60,000
Additions to Real Estate Held (1,270,616)
(30,886)
Proceeds from Sale of Receivables 11,739,777
------------
- -----------
NET CASH PROVIDED BY INVESTING
ACTIVITIES 924,733
1,206,267
------------
- -----------
FINANCING ACTIVITIES:
Receipts from Annuity Products 3,220,925
3,871,563
Withdrawals of Annuity Products (2,074,646)
(1,293,196)
Proceeds From Sales of Investment
Certificates 3,273,047
1,389,970
Repayment of Investment Certificates (1,340,450)
(558,779)
Repayment to Banks and Others (3,805,426)
(59,903)
Debt Issuance Costs (121,485)
(58,787)
Issuance of Preferred Stock 419,698
23,086
<PAGE> Page F-55
Preferred Stock Dividends (103,166)
(70,996)
------------
- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (531,503)
3,242,958
------------
- ----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 3,122,094
4,940,295
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 4,461,315
2,979,362
------------
- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 7,583,409
$7,919,657
===========
==========
NON CASH INVESTING AND FINANCING
ACTIVITIES OF THE COMPANY:
Assumption of Other Debt Payable in
Conjunction with Purchase of Real
Estate Contracts and Mortgage Notes $ 51,098
$ 26,823
Real Estate Held for Sale and
Development Acquired Through
Foreclosure 484,577
229,176
Loans to Facilitate the Sale of
Real Estate 204,763
693,892
Increase in Assets and Liabilities
Associated with Purchase of
Subsidiaries:
Investments
497,868
Other Assets
260,000
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE> Page F-56
SUMMIT SECURITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments necessary to present fairly the financial
position as of December 31, 1996, the results of operations
for the three months ended December 31, 1996 and 1995 and
changes in cash flows for the three months ended December
31, 1996 and 1995. The results of operations for the three
month period ended December 31, 1996 and 1995 are not
necessarily indicative of the results to be expected for the
full year. As provided for in regulations promulgated by the
Securities and Exchange Commission, all financial statements
included herein are unaudited; however, the condensed
consolidated balance sheet at September 30, 1996 has been
derived from the audited consolidated balance sheet. These
financial statements should be read in conjunction with the
consolidated financial statements including notes thereto
included in the Company's fiscal 1996 Form 10-K.
2. The principal amount of receivables as to which payments
were in arrears more than three months was $3,275,000 at
December 31, 1996 and $3,375,000 at September 30, 1996.
3. Summit Securities, Inc. is a wholly-owned subsidiary of
National Summit Corp. The Company files consolidated
federal income tax returns with its parent. The Company is
allocated a current and deferred tax provision from National
Summit Corp. as if the Company filed a separate tax return.
4. Summit Securities, Inc. had no outstanding material
legal proceedings other than normal proceedings associated
with receivable foreclosures.
5. Certain amounts in the prior years' condensed financial
statements have been reclassified to conform with the
current years' presentation.
6. In November 1996, Summit and Old Standard Life
Insurance Company (OSL) participated as two of the four co-
sellers in a receivable securitization sponsored by
Metropolitan Asset Funding, Inc., an affiliated company.
Approximately $126.7 million of receivables, with $11.2
million from Summit and OSL, were sold in the securitization
with proceeds, after costs, of approximately $121.1 million,
with $10.8 million allocated to Summit and OSL. With an
amortized carrying value of approximately $10.5 million in
the receivables sold in the securitization, Summit and OSL
recorded approximately $.3 million in pre-tax gains from
their portion of the sale. Metropolitan Asset Funding, Inc.
sold in a public offering approximately $113.4 million in
varying classes of mortgage pass-through certificates. In
addition to
<PAGE> Page F-57
the certificates sold in the public offering,
approximately $13.3 million in subordinate class
certificates and residual class certificates were returned
to the various co-sellers of the collateral included in the
securitization. Summit and OSL received approximately $9.6
million, after costs, from the securitization and also
received approximately $1.2 million in subordinate class and
residual class certificates.
7. The preparation of financial statement in conformity with
generally accepted accounting principles require management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results
could differ from those estimates.
<PAGE> Page 118
Inside Back Cover Page: This page intentionally left blank
<PAGE> Page 119
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in
connection with the issuance and distribution of the Certificates,
other than selling commissions:
SEC Registration Fee ....................$7,106
NASD Filing Fee .........................6,000
Independent Underwriter Fee..............55,000
*Printing ...............................10,000
*Legal Fees and Expenses ................10,000
*Accounting Fees and Expenses ...........45,000
*Trustee's Fees and Expenses ............5,000
*Blue Sky Fees and Expenses .............30,000
*Advertising and Marketing Expenses ....400,000
*Miscellaneous ..........................3,587
TOTAL .............................$570,000
*Estimated
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Summit has no contractual or other arrangement with its
controlling persons, directors or officers regarding
indemnification, other than as set forth in its Articles of
Incorporation. Summit's Articles of Incorporation permits
indemnification of a director, officers or employee up to the
indemnification limits permitted by Idaho state law which permits
indemnification for judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with an action, suit
or proceeding if the indemnified person acted in good faith and in
a manner reasonable believed to be in and not opposed in the best
interest of the corporation.
<PAGE> Page 119
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a). Exhibits:
1.a.i. Form of Selling Agreement between Summit
and Metropolitan Investment Securities, Inc. with
respect to Certificates (Exhibit 1.a.i. to
Registration No. 333-19787).
1.a.ii. Form of Selling Agreement between Summit
and Metropolitan Investment Securities, Inc. with
respect to Preferred Stock Series S-2 (Exhibit
1.a.ii. to Registration No. 333-19787).
1.b.i. Form of Agreement to Act as Qualified
Independent Underwriter between Summit, Metropolitan
Investment Securities, Inc. and Welco Securities,
Inc. with respect to Certificates to be registered
(Exhibit 1.b.i. to Registration No. 333-19787).
1.b.ii. Form of Agreement to Act as Qualified
Independent Underwriter between Summit, Metropolitan
Investment Securities, Inc. and Welco Securities,
Inc. with respect to Preferred Stock to be
registered (Exhibit 1.b.ii. to Registration No.
333-19787).
<PAGE> Page 121
1.c.i. Form of Pricing Opinion of Welco
Securities, Inc. with respect to Certificates to be
registered (Exhibit 1.c.i. to Registration No.
333-19787).
1.c.ii. Form of Pricing Opinion of Welco
Securities, Inc. with respect to Preferred Stock to
be registered (Exhibit 1.c.ii. to Registration No.
333-19787).
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. Tri-Party Agreement dated as of April 24, 1996
between West One Bank, First Trust and Summit,
appointing First Trust as successor Trustee (Exhibit
4.c. to Registration No. 333-19787).
4.d. Statement of Rights, Designations and
Preferences of Variable Rate Cumulative Preferred
Stock Series S-2. (Exhibit 4.c to Registration No
333-115.)
5.a. Opinion of Susan A. Thomson, Attorney at Law,
as to validity of Investment Certificates.(Exhibit
5.a. to Registration No. 333-19787)
5.b. Opinion of Susan A. Thomson, Attorney at Law,
as to validity of Preferred Stock. (Exhibit 5.b. to
Registration No. 333-19787)
7. Opinion Regarding Liquidation Preference. See
Exhibit 5.b.
10.a. Management Receivable Acquisition and
Servicing Agreement between Summit Securities Inc.
and Metropolitan Mortgage & Securities Co., Inc.
dated September 9, 1994. (Exhibit 10.a. to
Registration No. 33-57619)
10.b. Stock Purchase Agreement between Summit and
Metropolitan regarding the purchase of
Metropolitan Investment Securities, dated January
31, 1995. (Exhibit 10.b to Registration No.
33-57619)
10.c. Receivable Acquisition, Management and
Services Agreement between Old Standard Life
Insurance Company and Metropolitan Mortgage &
Securities Co., Inc., dated December 31, 1994.
(Exhibit 10.d. to Registration No. 333-115).
<PAGE> Page 122
10.d. Receivable Acquisition, Management and
Services Agreement between Arizona Life Insurance
Company and Metropolitan Mortgage & Securities Co.,
Inc. dated October 10, 1996 (Exhibit 10.d. to
Registration No. 333-19787).
11. Statement of Computation of Earnings Per Common
Share. (See Financial Statements.)
12. Statement of Computation of Ratio of Earnings to
Fixed Charges (Exhibit 12 to Registration No.
333-19787).
*23.i. Consent of Coopers & Lybrand L.L.P.,
Independent Accountants.
23.ii. Consent of Susan Thomson, Attorney at Law.
See Exhibit 5.b.
*24.i Power of Attorney
*24.ii Certified Resolution of the Board of Directors
authorizing board signatures pursuant to a Power of
Attorney.
25. Statement on Form T-1 of eligibility of Trustee,
First Trust National Association (Exhibit 25 to
Registration No. 333-19787). (The Exhibits to this
Exhibit have been filed in paper pursuant to a
continuing hardship exemption granted January 24,
1994.)
27. Financial Data Schedule (Exhibit 27 to
Registration No. 333-19787).
*Filed herewith
Item 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which
offers or sales are being made, a
post-effective amendment to this registration
statement:
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
<PAGE> Page 123
(ii) To reflect in the prospectus any
facts or events arising after the effective
date of the registration statement (or the most
recent post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers, and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised 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. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling persons of the
registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(c) For the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
<PAGE> Page 124
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
<PAGE> Page 125
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-2 and has
duly caused Pre-Effective Amendment No. 1 to this registration
statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Spokane, State of Washington, on
this 15th day of April, 1997.
SUMMIT SECURITIES, INC.
/S/ Tom Turner
By:
_________________________________________________
Tom Turner,
President/Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
**
_________________________
President/Director April 15, 1997
Tom Turner
**
_________________________ Vice
President/Director April 15, 1997
Philip Sandifur
**
_________________________
Secretary/Treasurer April 15, 1997
Greg Gordon Director
**
________________________ Director
April 15, 1997
Robert Potter
/S/ Steven Crooks
________________________ Principal Accounting
<PAGE> Page 126
Officer, Principal
Financial Officer April 15, 1997
/S/ SUSAN THOMSON
_________________
** Susan Thomson, by signing her name hereto, signs this document
on behalf of Messrs. Turner, Sandifur, Gordon and Potter, indicated
above, pursuant to a power of attorney duly executed by such
persons and previously filed herewith.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 2 to Registration
Statement on Form S-2 (File No. 333-19787) of our reports, which
include an explanatory paragraph describing changes in the method
of accounting for impaired loans in fiscal 1996, dated December 6,
1996 on our audits of the consolidated financial statements and
financial statement schedules of Summit Securities, Inc. and
Subsidiaries.
We also consent to the reference of our firm under the caption
"Experts".
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Spokane, Washington
April 11, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Susan Thomson and
Reuel Swanson and each of them, his true and lawful attorney-in-
fact and agent with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement on Form S-2
and file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission,
granting unto such attorney-in-fact and agents full power and
authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, to all intents
and purposes and as full as they might or could do in person,
hereby ratifying and confirming all that such attorneys-in-fact and
agents, or their substitutes may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1993,
this registration statement has been signed by the following person
in the capacities and on the dates indicated.
Signature Title Date
/S/ TOM TURNER
_________________________
President/Director January 2, 1997
Tom Turner
/S/ PHILIP SANDIFUR
_________________________ Vice
President/Director January 2, 1997
Philip Sandifur
/S/ GREG GORDON
_________________________
Secretary/Treasurer January 2, 1997
Greg Gordon Director
/S/ ROBERT POTTER
<PAGE> Page 129
________________________ Director January
2, 1997
Robert Potter
CERTIFICATE OF ADOPTION OF CORPORATE RESOLUTION
I, Greg Gordon, hereby certify that I am the Secretary of
Summit Securities, Inc. As such officer I have custody of the
records of meetings of the Board of Directors of said corporation
and I hereby certify that the following resolution was unanimously
adopted by the Board of Directors of the corporation at the Board
meeting held on January 2, 1997. I further certify that the Power
of Attorney referred to in the resolution is the Power of Attorney
attached hereto which grants a Power of Attorney to Susan Thomson
and Reuel Swanson to execute any and all amendments (including post-
effective amendments) to this Registration Statement on Form S-2
and file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission.
WHEREAS, each of the Board members has received a copy of the
power of attorney form for his review and approval;
RESOLVED, the Board hereby authorizes each member of the Board
of Directors of the corporation to execute the power of attorney.
I further certify that said resolution is still in full force
and effect and is not contrary to any provision of the charter or
bylaws of said corporation.
IN WITNESS WHEREOF, this certification is executed as of this
15th of April, 1997.
/S/ Greg Gordon
_____________________
Greg Gordon, Secretary
State of Washington )
County of Spokane )
<PAGE> Page 131
Personally appeared before me the above-named, Greg Gordon,
personally known to me, who, being duly sworn, deposes and says
that he executed the above instrument.
Subscribed and sworn before me this 15th day of April, 1997.
/S/Jill C. Arnold
_______________________________
(Notary Public)
Residing at Spokane, WA.
My Commission Expires 2/26/2000
