UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to ________
Commission file number 33-36775.
SUMMIT SECURITIES, INC.
(Exact name of registrant as specified in its charter)
IDAHO 82-0438135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WEST 929 SPRAGUE AVENUE, SPOKANE, WASHINGTON 99204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (509)838-3111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [x]
State the aggregate market value of the voting stock held by non-
affiliates of the registrant: Not Applicable
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of September 30, 1996
Single Class: 10,000 shares
Documents incorporated by reference: None.
PART I
Item 1. Business
Definitions:
For ease of reading, the following is a compilation of several of the
defined terms which appear regularly within this document. Also, See
"Business".
Arizona Life: Arizona Life Insurance Company
Certificates: Where this term is capitalized it refers to the
Investment Certificates being offered herein. Where not capitalized,
it refers to certificates generally.
Consolidated Group: This term refers to the combined businesses
consisting of Summit and all subsidiaries.
MIS: Metropolitan Investment Securities, Inc.
Metropolitan: Metropolitan Mortgage & Securities Co., Inc., Summit's
former parent company. Also See "BUSINESS" & "CERTAIN TRANSACTIONS".
Metwest: Metwest Mortgage Services Inc., a subsidiary of
Metropolitan. Also See "BUSINESS" & "CERTAIN 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>
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.
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>
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 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 TRANSACTIONS".
On May 31, 1995, Summit, through a wholly-owned holding company,
purchased Old Standard from Metropolitan. See "CERTAIN TRANSACTIONS".
On June 1, 1995, Old Standard entered into a Stock Purchase
Agreement with ILA Financial Services, Inc. to acquire Arizona Life,
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 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.
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
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:
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
intended to increase the closing speed, and decrease acquisition costs
through, among other things, 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.
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:
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
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.
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
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
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
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
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
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
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:
Arizona . . . . . . 9%
California . . . . 15%
Oregon . . . . . . 7%
Texas . . . . . . . 10%
Washington . . . . 11%
Florida . . . . . . 6%
New Mexico. . . . . 4%
<PAGE>
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
of Interest Amount of Principal Delinquent
Description Receivables Rates Receivables Amount Receivables
---------- -------- -------- ----------- ----------
RESIDENTIAL Principally
<S> <C> <C> <C> <C> <C> <C>
First Mortgage >$75,000 145 8%-11% $15,930,198 $828,311 7
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 1
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
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
=========== ===========
<FN>
The principal amount of Receivables subject to delinquent principal or interest is defined as being in arrears
for more than three months.
</TABLE>
<TABLE>
<CAPTION>
The contractual maturities of the aggregate amounts of Receivables (face amount) are as follows:
Residential Commercial Farm, Land, Other Total
Principal Principal Principal Principal
-------- ------- -------- ---------
<S> <C> <C> <C> <C> <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
=========== =========== ========== ===========
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
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.
Repossessed Properties
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
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
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
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%,
increasing termination rates may have an adverse impact on the
insurance subsidiary's earnings, requiring faster amortization of
these costs. Management believes that this potentially adverse impact
is mitigated by higher annuity interest spreads, which are estimated
to be approximately 250 basis points in future years. During the four
months ended September 30, 1995 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).
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
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.
The following table outlines the nature and carrying value of
securities investments held by Old Standard and Arizona Life at
September 30, 1996:
</TABLE>
<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 $ 7,650 $ 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%
========= ======== ======== ======
</TABLE>
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
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
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
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
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:
<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% -- --
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>
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 Company, a wholly-owned subsidiary
of Summit's parent company, National Summit Corp.
Greg Gordon was elected Secretary/Treasurer on October 31,
1995. He joined Metropolitan in April of 1989 and started the
company's demography department. From 1985 to 1989, he was employed
as the Northeastern US division, Market Analyst for Mortgage
Guarantee Insurance Corporation. From 1984 to 1985, he was employed
as a limited partnership underwriter with Reliance Insurance
Company.
Robert Potter was elected a Director of Summit on March 14,
1995. He is an outside director, not active in the day-to-day
business of Metropolitan or Summit. From 1987 to present, Mr.
Potter has served as President of Jobs Plus, Inc., a non-profit
corporation formed to diversify and broaden the economic base of
Kootenai County Idaho. Prior to 1987, Mr. Potter was employed for
approximately 6 months as Chief Operating Officer of Incomnet Inc.,
and prior to that he worked for approximately 30 years with AT&T.
The directors of Summit are elected for one-year terms at
annual shareholder meetings. The officers of Summit serve at the
direction of the Board of Directors.
Summit's officers and directors continue to hold their
respective positions with Metropolitan and do not anticipate that
their responsibilities with Summit will involve a significant amount
of time. They will, however, devote such time to the business and
affairs of Summit as may be necessary for the proper discharge of
their duties.
EXECUTIVE COMPENSATION
The officers 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
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>
<TABLE>
<CAPTION>
SHARES OF
NAME AND ADDRESS COMMON STOCK % OF CLASS
<S> <C> <C>
National Summit Corp. 10,000 100%
W. 929 Sprague Ave.,
Spokane, Washington
</TABLE>
CERTAIN TRANSACTIONS
Summit was originally organized as a wholly-owned subsidiary of
Metropolitan. On September 9, 1994, the controlling interest in
Summit was acquired by National Summit Corp., a Delaware corporation
which is wholly-owned by C. Paul Sandifur, Jr. The change in
control was made pursuant to a reorganization wherein Summit
redeemed all the common shares held by its former parent company,
Metropolitan, which consisted of 100% of the outstanding common
stock of Summit. 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.
Summit considered the sale to be in its best interest due to
regulatory considerations and other business considerations. The
regulatory considerations include the impact of regulations imposed
upon Metropolitan by its state of domicile. In the opinion of
management, these regulations hampered Summit's growth in its prior
corporate structure.
On January 31, 1995, Summit acquired MIS from Metropolitan.
The purchase price was $288,950 paid in cash. MIS is a
broker/dealer. This sale has not materially affected the business
of MIS. See "BUSINESS-Broker Dealer Activites". Also on January
31, 1995, Metropolitan discontinued its property development
division, which consisted of a group of employees experienced in
real estate development. On the same date, Summit commenced the
operation of a property development subsidiary, Summit Property
Development Inc., employing those same individuals who had
previously been employed by Metropolitan. Summit Property
Development has entered into an agreement with Metropolitan to
provide property development services to Metropolitan. See
"BUSINESS-ANNUITY OPERATIONS".
Through a wholly-owned subsidiary, Summit Group Holding
Company, Summit acquired Old Standard on May 31, 1995 from
Metropolitan. The purchase price was $2.722 million, plus 20% of
Old Standard's statutory earnings for the subsequent three years.
The purchase price was established based upon an actuarial valuation
of Old Standard.
Summit, 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. See 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. See "BUSINESS-
Annuity Operations-Reinsurance"
In addition, 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.
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".
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.
Item 2. Properties
See Item 1.
Item 3. Legal Proceedings.
There are no material legal proceedings or actions pending or
threatened against Summit Securities, Inc., or to which its property
is subject.
Item 4. Submission of Matters to a vote of Security Holders.
None
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.
(a) There is no market for the registrant's common stock
(b) There was one Common Stockholder at September 30, 1996
(c) See "Item 6. Selected Financial Data."
Item 6. Selected Financial Data
<PAGE>
<TABLE>
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.
Year Ended September 30,
--------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Revenues $ 14,536,449 $ 9,576,615 $ 3,395,252 $ 2,815,624 $ 2,435,843
============ =========== =========== =========== ===========
Income before
extraordinary item 1,244,522 $ 587,559 $ 264,879 $ 283,107 $ 611,595
Extraordinary item (1) -- -- -- -- 49,772
------------ ----------- ----------- ----------- -----------
Net Income 1,244,522 587,559 264,879 283,107 661,367
Preferred Stock
Dividends (333,606) (309,061) (2,930) -- --
------------ ----------- ----------- ----------- -----------
Income Applicable to
Common Stockholders $ 910,916 $ 278,498 $ 261,949 $ 283,107 $ 661,367
============ =========== =========== =========== ===========
Per Common Share:
Income before
extraordinary
item $ 91.09 $ 27.85 $ 13.47 $ 14.15 $ 30.58
Extraordinary item (1) -- -- -- -- 2.49
------------ ----------- ----------- ----------- -----------
Income applicable to
common stockholders $ 91.09 $ 27.85 $ 13.47 $ 14.15 $ 33.07
============ =========== =========== =========== ===========
Weighted average number
of common shares
outstanding 10,000 10,000 19,445 20,000 20,000
============ =========== =========== =========== ===========
Ratio of Earnings
to Fixed Charges
and Preferred Stock
Dividends 1.26 1.11 1.16 1.24 1.53
BALANCE SHEET DATA:
Due from/(to)
affiliated
companies, net $ 1,296,290 $(1,960,104) $ 267,735 $ 1,710,743 $ (400,365)
Total Assets $117,266,680 $96,346,572 $35,101,988 $25,441,605 $17,696,628
Debt Securities
and Other
Debt Payable $ 46,674,841 $38,650,532 $31,212,718 $21,982,078 $14,289,648
Stockholders' Equity $ 5,358,774 $ 3,907,067 $ 3,321,230 $ 3,188,024 $ 2,904,917
<FN>
(1) Benefit from utilization of net operating loss carryforwards.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 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
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.
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
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. Conversely, in a
falling interest rate environment, the net return from interest
sensitive assets and liabilities will tend to improve. See
"Asset/Liability Management". 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,
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>
<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
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
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 $21.0 million of interest
sensitive assets (cash, Receivables and fixed income investments) are
expected to reprice or mature. Interest sensitive liabilities,
including annuity reserves of approximately $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 $52.3 million, or a ratio of
interest sensitive liabilities to interest sensitive assets of
approximately 350%.
The Consolidated Group is able to manage this liability to asset
mismatch of approximately 3.5:1 by the fact that approximately 96..74%
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
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.
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.
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
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
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.
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.
Item 8. Financial Statements and Supplementary Data
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Years Ended September 30, 1996, 1995 and 1994
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
The Directors and Stockholders
Summit Securities, Inc.
We have audited the accompanying consolidated balance sheets of
Summit Securities, Inc. and subsidiaries as of September 30, 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
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
============ ============
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.
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.
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>
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.
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>
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.
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
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.
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.
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.
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. 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." 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.
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.
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.
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.
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.
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.
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%
===
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
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
=========== ===========
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
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.
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
======== ======== ========
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.
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 estimated prepayment
patterns, are as follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 9,868,257
1998 9,029,249
1999 8,290,824
2000 7,644,576
2001 7,083,125
Thereafter 41,750,053
-----------
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.
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.
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.
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
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
========== ==========
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>
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.
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
=========== ===========
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
===========
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
===========
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.
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.
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
======== ======== ========
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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. STOCKHOLDERS' EQUITY, CONTINUED:
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.
The payment of dividends by the Company's wholly owned life
insurance subsidiary is 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
to maintain $1 million in common stock and $1 million in
contributed surplus.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. RELATED-PARTY TRANSACTIONS, CONTINUED:
Management believes that these charges are reasonable and result
in the reimbursement to Metropolitan of all significant direct
expenses incurred on behalf of the Company and its subsidiaries.
Currently, management anticipates that Metropolitan will
continue to supply these services in the future.
The Company had the following related-party transactions with
Metropolitan and affiliates during fiscal years 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>
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
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.
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. The amount of estimated
future guaranty fund assessment has been recorded net of a 7%
discount rate applied to the estimated payment term of
approximately seven years.
14. STATUTORY ACCOUNTING (UNAUDITED):
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) 435,574 86,031
Unassigned statutory funds and
retained earnings/(deficit):
1996 (1,002,284) 1,138,886
1995 248,969 755,299
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. STATUTORY ACCOUNTING (UNAUDITED), 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>
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>
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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. 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
============ ============
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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
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
------------ -----------
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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
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
------------ -----------
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)
------------ -----------
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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
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.
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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
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
=======
At September 30, 1996 and 1995, Summit's investment certficiates
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
============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. 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 realestate 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>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
N/A
PART III
Item 10. Directors and Executive Officers of Registrant.
See "Management" under Item 1.
Item 11. Executive Compensation.
See "Executive Compensation" under Item 1.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
See "Principal Shareholders" under Item 1.
Item 13. Certain Relationships and Related Transactions.
See "Certain Transactions" under Item 1.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a).1. Financial Statements
Included in Part II, Item 8 of this report:
Report of Independent Accountants
Consolidated Balance Sheets at September 30, 1996, and 1995
Consolidated Statements of Income for the Years Ended
September 30, 1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a).2. Financial Statements Schedules
Included in Part IV of this report:
Report of Independent Accountants on Financial
Statement Schedules.
Schedule II Valuation and Qualifying Accounts
and Reserves
Schedule IV Mortgage Loans on Real Estate
Schedule XV -- Summary of Investments other than
Investments in Related Parties
Schedule XVI Summary Insurance Information
Other Schedules are omitted because of the absence of
conditions under which they are required or because
the required information is given in the financial
statements or notes thereto.
(a).3. Exhibits
3. Articles of Incorporation of the Company. (Exhibit 3(a)
to (Registration No. 33-36775).
3(b). Bylaws of the Company. (Exhibit 3(b) to Registration
No. 33-36775).
4(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.
4(d). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-1.
(Exhibit 4.c to Registration No. 33-57619)
4(e). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-2.
(Exhibit 4.c to Registration No. 333-115)
*4(f). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-RP.
10(a). Receivable Management, Acquisition and Service 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). Receivable Management, Acquisition and Service Agreement
between Old Standard Life Insurance Company and
Metropolitan Mortgage & Securities Co., Inc. dated
December 31, 1994. (Exhibit 10(b) to Registration No.
33-57619).
*10(c). Receivable Management, Acquisition and Service Agreement
between Arizona Life Insurance Company and Metropolitan
Mortgage & Securities Co., Inc. dated October 10, 1996.
11. Statement Re Computation of Earnings Per Common Share.
(See Financial Statements.)
*12. Statement re computation of ratios
*21. Subsidiaries of Registrant
23. Consent of Experts, See Item 14(a)2. Report of
Independent Accountants on Finanical Statement
Schedules.
*27. Financial Data Schedule
*Filed herewith
(d). Reports on Form 8-K
No Form 8-K filings were made during the last quarter of
the period covered by this report. A Form 8-K was filed
December 10, 1996 subsequent to the period covered by
this report which disclosed the sale through a
securitization of approximately 11.25 million in first
line residential mortgages, as more fully described in
such Form 8-K.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
The Directors and Stockholder
Summit Securities, Inc.
Our report on the consolidated financial statements of Summit
Securities, Inc. and subsidiaries is included in Item 8 herein. In
connection with our audits of such financial statements, we have also
audited the related financial statement schedules listed in Item 14 of
this Form 10-K.
In our opinion, these 1996 financial statement schedules, when
considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information
required to be included therein.
/s/ COOPERS & LYBRAND
Coopers & Lybrand
Spokane, Washington
December 6, 199
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES Schedule II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
Additions Additions Deductions
Balance at from (Reductions) and Balance
Beginning Acquisition Charged to Accounts at end of
of Year of Costs and Written Year
Subsidiaries Expenses Off
Description (Recovery)
<S> <C> <C> <C> <C> <C>
Allowances for
Losses Deducted from
Real Estate Contracts
and Mortgage Notes
Receivable on
Balance Sheet
1996 $765,130 $ -- $212,600 $ 3,243 $974,487
1995 250,572 310,957 103,950 (99,651) 765,130
1994 96,654 --- 103,000 (50,918) 250,572
Allowances for
Losses Deducted
from Real Estate
Held for Sale on
Balance Sheet
1996 $91,139 $ -- $277,482 $161,836 $206,785
1995 50,300 11,591 341,431 312,183 91,139
1994 6,757 --- 52,042 8,499 50,300
Allowance for
Losses on Accounts and
Notes Receivable
Deducted from
Other Assets on
Balance Sheet
1996 $ 408 $ -- $12,000 $ 2,033 $10,375
1995 4,055 320 7,200 11,167 408
1994 --- --- 5,500 1,445 4,055
</TABLE>
<PAGE>
<PAGE> Schedule IV
SUMMIT SECURITIES, INC.
MORTGAGE LOANS ON REAL ESTATE
September 30, 1996
<TABLE>
<CAPTION>
Real estate contracts and mortgage notes ("Receivables") are located throughout the United States.
Approximately 22% of the face value of Summit's real estate contracts and mortgage notes receivable
are collateralized by property located in the Pacific Northwest (Washington, Alaska, Idaho, Montana
and Oregon), approximately 25% by property located in the Pacific Southwest (California, Nevada and
Arizona), approximately 9% by property located in the Southeast (Florida, Georgia, North Carolina and
South Carolina) and approximately 15% by property located in the Southwest (Texas, Louisiana and New
Mexico). Less than 1% of the contracts are subject to variable interest rates. Interest rate range
from 0% to 19% with rate principally (77%) within the range of 8% to 13%.
Number Carrying Delinquent Number of
of Interest Amount of Principal Delinquent
Description Receivables Rates Receivables Amount Receivables
---------- -------- ----------- ---------- -----------
RESIDENTIAL Principally
<S> <C> <C> <C> <C> <C> <C>
First Mortgage >$75,000 145 8%-11% $15,930,198 $828,311 7
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 1
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
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
=========== ===========
<FN>
The principal amount of Receivables subject to delinquent principal or interest is defined as being
in arrears for more than three months.
</TABLE>
<TABLE>
<CAPTION>
The contractual maturities of the aggregate amounts of Receivables (face amount) are as follows:
Residential Commercial Farm, Land, other Total
Principal Principal Principal Principal
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
October 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>
<PAGE> Schedule IV Continued
SUMMIT SECURITIES, INC.
MORTGAGE LOANS ON REAL ESTATE
September 30, 1996
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning
of period $60,117,219 $27,282,991 $19,527,225
----------- ---------- ----------
Additions during period
New Subsidiary Acquisition --- 32,080,899 ---
New Receivable - Cash 40,100,330 26,130,804 20,177,705
Loans to facilitate the
sale of real estate
held - non cash 1,013,314 959,813 81,800
Assumption of other debt
payable in conjunction with
acquisition of new
receivables - non cash 26,823 162,597 81,451
Increase in Accrued Interest 1,005,273 388,167 ---
--------- --------- ---------
Total Additions 42,145,740 59,722,280 20,340,956
---------- ---------- ----------
Deductions During Period
Collections of Principal
cash 13,874,707 6,567,012 1,829,515
Cost of Receivables Sold 6,711,562 19,578,720 10,221,375
Foreclosures - non cash 1,458,580 1,083,277 272,959
Decrease in Accrued Interest --- --- 107,423
Discount Amortization --- (544,558) ---
Increase in Allowances
for Losses 209,357 203,601 153,918
---------- ---------- ---------
Total Deductions 22,254,206 26,888,052 12,585,190
---------- ---------- ---------
Balance at End of Period $80,008,753 $60,117,219 $27,282,991
========== ========== ==========
</TABLE>
<PAGE>
Schedule XV
SUMMIT SECURITIES, INC.
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
September 30, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Column A Column B Column C Column D
Amount at Which
Amortized Market Shown on Balance
Cost Value Sheet
TYPE OF INVESTMENTS
FIXED MATURITIES
Investments:
U.S. Government and
Government Agencies
and Authorities $ 5,735,579 $5,624,439 $ 5,735,579
Corporate Bonds 2,014,499 1,997,755 2,014,499
Mortgage Backed Bond 269,305 269,305 269,305
---------- ---------- ----------
TOTAL FIXED MATURITIES $ 8,019,383 $7,891,499 $ 8,019,383
========== ========== ==========
Real Estate Contracts
and Mortgage Notes
Receivable $ 80,008,753 $ 80,008,753
========== ==========
Other Investment
Receivables $ 11,788,130 $ 11,788,130
========== ==========
Real Estate Held
for Sale $ 1,191,495 $ 1,191,495
========== ==========
Other Assets -
Policy Loans $ 9,066 $ 9,066
=========== ===========
TOTAL INVESTMENTS $101,016,827 $101,016,827
=========== ===========
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES Schedule XVI
SUMMARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Future
Policy
Benefits Other
Deferred Losses Policy
Policy Claims Claims and
Acquisition and Loss Unearned Benefits
Cost Expense Premiums Payable
<S>
September 30, 1996
<C> <C> <C> <C>
Annuities $3,853,136 $62,439,855 $ -- $ --
========== =========== ======== =========
September 30, 1995
Annuities $2,755,523 $49,559,589 $ -- $ --
========== =========== ======== =========
<CAPTION>
Benefits Amortization
Claims of Deferred
Net Losses and Policy Other
Premium Investment Settlement Acquisition Operating
Revenue Income Expenses Costs Expenses
<S>
September 30, 1996
<C> <C> <C> <C> <C>
Annuities $45,348 $5,163,811 $3,702,324 $84,733 $345,892
====== ========= ========= ======= ========
September 30, 1995
Annuities $14,179 $1,344,850 $1,034,082 $198,190 $73,715
======= ========== ========== ======== =======
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SUMMIT SECURITIES, INC.
/S/ TOM TURNER
By_______________________________________________
Tom Turner, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
/S/TOM TURNER
_________________________ President/Director January 13, 1997
Tom Turner
/S/PHILIP SANDIFUR
_________________________ Vice President/Director January 13, 1997
Philip Sandifur
/S/ GREG GORDON
January 13, 1997
_________________________ Secretary/Treasurer
Greg Gordon Director
/S/ ROBERT POTTER
________________________ Director January 13, 1997
Robert Potter
TRI-PARTY AGREEMENT
This TRI-PARTY AGREEMENT (this "Instrument"), dated as of (April
24, 1996) by and among Summit Securities, INC., an Idaho
Corporation (the "Company"), WESTONE BANK, IDAHO, an Idaho
Banking Corporation (formerly WESTONE BANK, IDAHO, N.A.) (the
"Prior Trustee"), and FIRST TRUST WASHINGTON, a trust company
duly organized and existing under the laws of the State of
Washington (the Successor Trustee").
WITNESSETH
WHEREAS, the Company and the Prior Trustee entered into an
Indenture dated as of November 15, 1990, providing for the
establishment Summit Securities Inc. Investment Certificates (the
"Trust"); and
WHEREAS, the Prior Trustee has been acting as Trustee under the
Indenture; and
WHEREAS, Section 6-10 of the Indenture provides that the Prior
Trustee may resign at any time upon notice to the Company; and
WHEREAS, Section 6-10 of the Indenture further provides that in
case the trustee shall resign, the Company may appoint a
successor trustee; and
WHEREAS, Section 6-11 of the Indenture further provides that any
successor trustee appointed under the Indenture shall execute,
acknowledge and deliver to the Company and to the Prior Trustee
an instrument accepting such appointment, thereupon the removal
of the Prior Trustee shall become effective and the Successor
Trustee without any further act, deed or conveyance, shall become
fully vested with all the rights, powers, duties and
responsibilities of the Prior Trustee;
NOW, THEREFORE, pursuant to the Indenture and in consideration of
the covenants herein contained, it is agreed as follows:
1. Pursuant to the terms of the Indenture, the Prior Trustee has
notified the Company of its intention to resign as Trustee under
the Indenture.
2. Effective as of April 24,1996 (the "Effective Date"), the
Prior Trustee hereby assigns, transfers, delivers and confirms to
the Successor Trustee all of its rights, title, interest under
the Indenture and all of its rights, title, interests,
capacities, privileges, duties and responsibilities as Trustee
under the Indenture, except as set forth in paragraph 19 hereof.
3. The Prior Trustee agrees to execute and deliver such further
instruments and shall take such further actions as the Successor
Trustee or the Company may reasonably request so as to more fully
and certainly vest and confirm in the Successor Trustee all of
the rights, title, interests, capacities, privileges, duties and
responsibilities hereby assigned, transferred, delivered and
confirmed to the Successor Trustee, including without limitation,
the execution and delivery of any instruments required to assign
all liens in the name of the Successor Trustee.
4. Effective as of the Effective Date, the Company hereby accepts
the resignation of the Prior Trustee and the Company appoints the
Successor Trustee as successor trustee and confirms that by Board
Resolution it has appointed the Successor Trustee under the
Indenture and the Company confirms to the Successor Trustee all
of the rights, title, interest, capacities, privileges, duties
and responsibilities of the Trustee under the Indenture except as
set forth in paragraph 19 hereof.
5. The Company agrees to execute and deliver such further
instruments and to take such further action as the Successor
Trustee may reasonably request so as to more fully and certainly
vest and confirm in the Successor Trustee all the rights, title,
interests, capacities, privileges, duties and responsibilities
hereby assigned, transferred, delivered and confirmed to the
Successor Trustee.
6. Effective as of the Effective Date, the Successor Trustee
hereby accepts its appointment as Successor Trustee under the
Indenture and shall be vested with all of the rights, title,
interests, capacities, privileges, duties and responsibilities of
the Trustee under the Indenture.
7. The Successor Trustee hereby represents that it is qualified
and eligible under the provisions of Section 6-9 of the Indenture
to be appointed Successor Trustee and hereby accepts the
appointment as Successor Trustee and agrees that upon the signing
of this Instrument it shall become vested with all the rights,
title interests, capacities, privileges, duties and
responsibilities of the Prior Trustee with like effect as if
originally named as Trustee under the Indenture.
8. Effective as of the Effective Date, the Successor Trustee
shall serve as trustee as set forth in the Indenture at its
principal corporate trust office in Seattle, Washington or such
other address as may be specified, where notices and demands to
or upon the Company in respect of the Trust may be served. 9. The
Prior Trustee hereby represents and warrants to the Successor
Trustee that:
a) To the best of its knowledge no Event of Default and no
event which, after notice or lapse of time or both, would become
an Event of Default has occurred and is continuing under the
Indenture.
b) No covenant or condition contained in the Indenture has
been waived by the Prior Trustee or to the best of its knowledge
by the Company, the beneficiaries of the Trust of any other
interested party required by the Indenture to effect any such
waiver.
c) There is no action, suit or proceeding pending or
threatened against the Prior Trustee before any court or
government authority arising out of any action or omission by the
Prior Trustee as Trustee under the Indenture.
d) The Prior Trustee has entered into no other supplement
or amendment to the Indenture or any other document executed by
the Prior Trustee in connection with the Trust except as noted
herein.
e) As of the Effective Date, the Prior Trustee holds no
monies in any fund or account established by it as trustee under
the Indenture.
10) Each of the parties hereto hereby represents and warrants for
itself that as of the date hereof, and the Effective Date:
a) It has power and authority to execute and deliver this
instrument and to perform its obligations hereunder, and all such
action has been duly and validly authorized by all necessary
proceedings on its part; and
b) This Instrument has been duly authorized, executed and
delivered by it, and constitutes a legal, valid and binding
agreement enforceable against it in accordance with its terms,
except as the enforceability of this Instrument may be limited by
bankruptcy, insolvency or other similar laws of general
application affecting the enforcement of creditors' rights or by
general principles of equity limiting the availability of
equitable remedies.
11. The parties hereto agree that this Instrument does not
constitute an assumption by the Successor Trustee of any
liability of the Prior Trustee arising out of any actions or
inaction by the Prior Trustee under the Indenture.
12. The parties hereto agree that as of the Effective Date, all
references to the Prior Trustee as Trustee in the Indenture shall
be deemed to refer to the Successor Trustee. From and after the
Effective Date, all notices or payments which were required by
the terms of the Indenture to be given or paid to the Trustee
shall be delivered to: First Trust Washington, Two Union Square,
601 Union Street, Suite 2120, Seattle, WA 98101.
13. The Prior Trustee agrees to indemnify the Successor Trustee
and defend and save the Successor Trustee harmless from and
against any and all costs, claims, liabilities, expenses, losses
or damages whatsoever (including all reasonable fees, expenses,
and disbursements of its counsel and agents) which the Successor
Trustee may incur or have incurred as a result of or arising out
of any of the Prior Trustee's actions or omissions, during the
term of the Prior Trustee's service as Trustee.
However, the indemnity provided by the Prior Trustee hereunder
shall not extend to fees, charges or liability arising out of:
a) The Successor Trustee's own willful misconduct, bad
faith, or negligence, as determined on the basis of the
provisions contained in the Indenture; or
b) The Successor Trustee's failure to execute properly its
duties as Trustee, as determined on the basis of the provisions
contained in the Indenture.
14. The resignation, appointment and acceptance effected hereby
shall become effective as of the opening of business on the
Effective Date.
15. This instrument shall be governed by and construed in
accordance with the laws of the State of Washington.
16. This instrument may be executed in any number of
counterparts, each of which shall be an original, but which
counterparts shall together constitute but one and the same
instrument.
17. This instrument shall be binding upon and inure to the
benefit of the Company, the Prior Trustee and the Successor
Trustee and their respective successors and assigns.
18. All fees paid to the Prior Trustee in advance but unearned
for the period from and after the Effective Date shall be
credited to any current fees owed the Prior Trustee with balance,
if any, remitted to the Company and the fees payable by the
Company on and after the Effective Date under the Indenture shall
henceforth be invoiced by and paid to the Successor Trustee at
such address and account as shall hereafter be provided by the
Successor Trustee to the Company.
19. Nothing contained in this instrument shall in any way affect
the obligations of the Company to the Prior Trustee under Section
6-13 of the Indenture or any lien created thereunder.
20. The Company certifies that it has filed the reports, if any,
required under Section 7 - and delivered the Statements of
Compliance required under Section 10-6 of the Indenture, and it
confirms that it will in the future provide such reports and
Statements.
21. Notices to the Successor Trustee, as provided in Section 1-5,
shall be delivered and filed in writing with the Successor
Trustee at First Trust Washington, Two Union Square, 601 Union
Street, Suite 2120, Seattle, Washington, 98101, Attention: Mr.
Michael A. Jones.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be duly executed and attested by their duly
authorized of ricers, as of the date and year first above
written.
SUMMIT SECURITIES, INC.
By: /S/ Tom Turner
Tom Turner
Title: President
WESTONE BANK, IDAHO, as Prior Trustee
By: /S/Roger Wright
Title: Vice President & Manager
FIRST TRUST WASHINGTON, as Successor Trustee
By: /S/ Mary Bator
Title:Trust Officer
STATEMENT OF RIGHTS, DESIGNATIONS AND PREFERENCES OF VARIABLE RATE
CUMULATIVE PREFERRED STOCK, SERIES S-RP
1. Name of Corporation: Summit Securities, Inc.
2. Copy of resolution establishing and designating Variable Rate Cumulative
Preferred Stock, Series S-RP, and determining the relative rights and
preferences thereof: Attached hereto.
3. The undersigned does hereby certify that the attached resolution was duly
adopted by the Board of Directors of the corporation on September 30,
1996.
/S/ C. PAUL SANDIFUR., JR.
______________________________________
C. Paul Sandifur, Jr., President
/S/ REUEL SWANSON
______________________________________
Reuel Swanson, Secretary
SUMMIT SECURITIES, INC.
PREFERRED STOCK SERIES S-RP AUTHORIZING RESOLUTION
Resolved, that pursuant to the authority expressly granted and vested in
the Board of Directors (the "Board") of this Corporation by its Articles of
Incorporation, as amended, a sub-series of Preferred Stock, Series S of the
Corporation be, and is hereby, established which will consist of 80,000 shares
of the par value of $10.00 per share ($800,000), shall be designated "Variable
Rate Cumulative Preferred Stock, Series S-RP" (hereafter called "Preferred
Stock"), and which shall have rights, preferences, qualifications and
restrictions as follows:
1. DIVIDENDS.
a) Dividends (or other distributions deemed dividends for purposes
of this resolution) on the issued and outstanding shares of Preferred Stock
shall be declared and paid monthly at a percentage rate per annum of the
liquidation preference of $100.00 per share equal to the "Applicable Rate," as
hereinafter defined, or such greater rate as may be determined by the Board.
Notwithstanding the foregoing, the Applicable Rate for any monthly dividend
period shall, in no event, be less than 6% per annum or greater than 14% per
annum. Such dividends shall be cumulative from the date of original issue of
such shares and shall be payable, when and as declared by the Board, on such
dates as the Board deems advisable, but at least once a year, commencing
November 1, 1996. Each such dividend shall be paid to the holders of record of
shares of Preferred Stock as they appear on the stock register of the
Corporation on such record date as shall be fixed by the Board in advance of
the payment date thereof. Dividends on account of arrears for any past
Dividend Periods may be declared and paid at any time, without reference to any
regular dividend payment date, to holders of record on such date as shall be
fixed by the Board in advance of the payment date thereof.
b) Except as provided below in this section, the Applicable Rate
for any monthly dividend period shall be the highest of the Treasury Bill Rate,
the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate
(each as defined in Exhibit A attached hereto and incorporated by reference
herein) plus one half of one percentage point. In the event that the Board
determines in good faith that for any reason one or more of such rates cannot
be determined for any dividend period, than the Applicable Rate for such
dividend period shall be the higher of whichever of such rates can be so
determined. In the event that the Board determines in good faith that none of
such rates can be determined for any dividend period, then the Applicable Rate
in effect for the preceding dividend period shall be continued for such
dividend period. The Treasury Bill Rate, the Ten Year Constant Maturity Rate
and the Twenty Year Constant Maturity Rate shall each be rounded to the nearest
five hundredths of a percentage point.
c) No dividend shall be paid upon, or declared or set apart for,
any share of Preferred Stock for any Dividend Period unless at the same time a
like dividend shall be paid upon, or be declared and set apart for, all shares
of Preferred Stock then issued and outstanding and all shares of all other
series of preferred stock then issued and outstanding and entitled to receive
dividends. Holders of Preferred Stock shall not be entitled to any dividend,
whether payable in cash, property or stock, in excess of full cumulative
dividends as herein provided. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments which
may be in arrears on Preferred Stock.
d) Dividends payable for each full monthly Dividend Period shall
be computed by dividing the Applicable Rate for such monthly Dividend Period by
twelve and applying such rate against the liquidation preference of $100.00 per
share. Dividends shall be rounded to the nearest whole cent. Dividends
payable for any period less than a full monthly Dividend Period shall be
computed on the basis of 30 day months and a 360 day year. The Applicable Rate
with respect to each monthly Dividend Period shall be calculated as promptly as
practicable by the Corporation according to the method provided herein. The
Corporation will cause notice of such Applicable Rate to be enclosed with the
dividend payment check next mailed to the holders of shares of Preferred Stock.
e) So long as any shares of Preferred Stock are outstanding, (i)
no dividend (other than a dividend in common stock or in any other stock
ranking junior to Preferred Stock as to dividends and upon liquidation and
other than as provided in the foregoing section 1(c)) shall be declared or paid
or set aside for payment; (ii) no other distribution shall be declared or made
upon common stock or upon any other stock ranking junior to or on a parity with
Preferred Stock as to dividends or upon liquidation; and (iii) no common stock
or any other stock of the Corporation ranking junior to or on a parity with
Preferred Stock as to dividends or upon liquidation shall be redeemed,
purchased or otherwise acquired by the Corporation for any consideration (or
any monies paid to or made available for a sinking fund for the redemption of
any shares of any such stock) except by conversion into or exchange for stock
of the Corporation ranking junior to Preferred Stock as to dividends and upon
liquidation unless, in each case, the full cumulative dividends on all
outstanding shares of Preferred Stock shall have been paid or declared and set
apart for all past dividend payment periods.
f) The holders of Preferred Stock shall be entitled to receive,
when and as declared by the Board, dividend distributions out of the funds of
the Corporation legally available therefor. Any distribution made which may be
deemed to have been made out of the capital surplus of Preferred Stock shall
not reduce either the redemption process or the liquidation rights as hereafter
specified.
2. REDEMPTION.
a) The Corporation, at its option, may redeem shares of Preferred
Stock, in whole or in part, at any time or from time to time, at redemption
prices hereafter set forth plus accrued and unpaid dividends to the date fixed
for redemption.
i) In the event of a redemption of shares pursuant to this
subsection prior to October 1, 1997, the redemption price shall be $102.00 per
share; and the redemption price shall be $100.00 per share in the event of
redemption anytime after September 30, 1997.
ii) In the event that fewer than all of the outstanding
shares of Preferred Stock are to be redeemed, the number of shares to be
redeemed shall be determined by the Corporation and the shares to be redeemed
shall be determined by lot, or pro rata, or by any other method, as may be
determined by the Corporation in its sole discretion to be equitable.
iii) In the event that the Corporation shall redeem shares
hereunder, notice of such redemption shall be given by first class mail,
postage prepaid, mailed not less than 30 days or more than 60 days prior to he
redemption date, to each holder of record of the shares to be redeemed, at such
holder's address as it appears on the stock register of the Corporation. Each
such notice shall state: (i) the redemption date; (ii) the number of shares to
be redeemed and, if fewer than all shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (iii) the
redemption price; (iv) the place or places where certificates for such shares
are to be surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on such redemption
date.
iv) Notice having been mailed as aforesaid, from and after
the redemption date (unless default shall be made by the Corporation in
providing money for the payment of the redemption price), dividends on the
shares so called for redemption shall no longer be deemed to be outstanding,
and all rights of the holders thereof as stockholders of the Corporation
(except the right to receive from the Corporation the redemption price) shall
cease. Upon surrender in accordance with said notice of the certificates
representing shares redeemed (properly endorsed or assigned for transfer, if
the Board shall so require and the notice shall so state), such shares shall be
redeemed by the Corporation at the redemption price aforesaid. In case fewer
than all of the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof.
b) Discretionary Redemption Upon Request of the Holder: The shares
of Preferred Stock are not redeemable at the option of the holder. If,
however, the Corporation receives an unsolicited written request for redemption
of a block of shares from any holder, the Corporation may, in its sole
discretion and subject to the limitations described below, accept such shares
for redemption. Any shares so tendered, which the Corporation in its
discretion, allows for redemption, shall be redeemed by the Corporation
directly, and not from or through a broker or dealer, at a price equal to $97
per share, plus any declared but unpaid dividends to date if redeemed during
the first year after the date of original issuance and $99 per share plus any
declared but unpaid dividends if redeemed thereafter. The Corporation may
change such optional redemption prices at any time with respect to unissued
shares.
The Corporation may not redeem any such shares tendered for redemption if
to do so would be unsafe or unsound in light of the Corporation's financial
condition (including its liquidity position); if payment of interest or
principal on any outstanding instrument of indebtedness is in arrears or in
default; or if payment of any dividend on Preferred Stock or share of any stock
of the Company ranking at least on a parity therewith is in arrears as to
dividends.
c) Any shares of Preferred Stock which shall at any time have been
redeemed shall, after such redemption, have the status of authorized but
unissued shares of Preferred Stock, without designation as to series until such
shares are designated as part of a particular series by the Board.
d) Notwithstanding the foregoing provisions of this Section 2, if
any dividends on Preferred Stock are in arrears, no shares of Preferred Stock
shall be redeemed unless all outstanding shares of Preferred Stock are
simultaneously redeemed, and the Corporation shall not purchase or otherwise
acquire any shares of Preferred Stock; provided, however, that the foregoing
shall not prevent the purchase or acquisition of shares of Preferred Stock
pursuant to a purchase or exchange offer made on the same terms to holders of
all of the outstanding shares of Preferred Stock.
3. CONVERSION OR EXCHANGE. The holders of shares of Preferred Stock
shall not have any rights to convert such shares into or exchange such shares
for shares of any other class or series of any class of securities of the
Corporation.
4. VOTING. Except as required from time to time by law, the shares of
Preferred Stock shall have no voting powers. Provided, however, not
withstanding the foregoing, that whenever and as often as dividends payable on
any shares of Preferred Stock shall be in arrears in an amount equal to twenty
four full monthly dividends or more per share, the holders of Preferred Stock
together with the holders of any other preferred stock hereafter authorized,
voting separately and as a single class shall be entitled to elect a majority
of the Board of Directors of the Corporation. Such right shall continue until
all dividends in arrears on preferred stock have been paid in full.
5. LIQUIDATION RIGHTS.
a) Upon the dissolution, liquidation or winding up of the
Corporation, the holders of the shares of Preferred Stock shall be entitled to
receive out of the assets of the Corporation, before any payment or
distribution shall be made on the Common Stock, or on any other class of stock
ranking junior to Preferred Stock, upon liquidation, the amount of $100.00 per
share, plus a sum equal to all dividends (whether or not earned or declared) on
such shares accrued and unpaid thereon to the date of final distribution.
b) Neither the sale, lease or conveyance of all or substantially
all the property or business of the Corporation, nor the merger or
consolidation of the Corporation into or with any other corporation or the
merger or consolidation of any other corporation into or with the Corporation,
shall be deemed to be a dissolution, liquidation or winding up, voluntary or
involuntary, for the purposes of this Section.
c) After the payment to the holders of the shares of Preferred
Stock of the full preferential amounts provided for in this Section, the
holders of Preferred Stock as such shall have no right or claim to any of the
remaining assets of the Corporation.
d) In the event the assets of the Corporation available for
distribution to the holders of shares of Preferred Stock upon any dissolution,
liquidation or winding up of the Corporation, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to this Section, no such distribution shall be made on
account of any shares or any other series of Preferred Stock or any other class
of stock ranking on a parity with the shares of Preferred Stock upon such
dissolution, liquidation or winding up, unless proportionate distributive
amounts shall be paid on account of the shares of Preferred Stock, ratably in
accordance with the sums which would be payable in such distribution if all
sums payable in respect of the shares of all series of Preferred Stock and any
such other class of stock as aforesaid were discharged in full.
6. PRIORITIES. For purposes of this Resolution, any stock of any
class or classes of the Corporation shall be deemed to rank:
a) Prior to the shares of Preferred Stock, either as to dividends
or upon liquidation if the holders of such class or classes shall be entitled
to the receipt of dividends or of amounts distributable upon dissolution,
liquidation or winding up of the Corporation, as the case may be, in preference
or priority to the holders of shares of Preferred Stock.
b) On a parity with shares of Preferred Stock, either as to
dividends or upon liquidation, whether or not the dividend rates, dividend
payment dates or redemption or liquidation prices per share or sinking fund
provisions, if any, are different from those of Preferred Stock, if the holder
of such stock shall be entitled to the receipt of dividends or of amounts
distributable upon dissolution, liquidation or winding up of the Corporation,
as the case may be, in proportion to their respective dividend rates or
liquidation prices, without preference or priority, one over the other, as
between the holder of such stock and the holders of Preferred Stock; and
c) Junior to shares of Preferred Stock, either as to dividends or
upon liquidation, if the holders of shares of Preferred Stock shall be entitled
to receipt of dividends or of amounts distributable upon dissolution,
liquidation or winding up of the Corporation, as the case may be, in preference
or priority to the holders of shares of such class or classes.
7. SHARES NON-ASSESSABLE. Any and all shares of Preferred Stock
issued, and for which the full consideration has been paid or delivered, shall
be deemed fully paid stock and the holder of such shares shall not be liable
for any further call or assessment or any other payment thereon.
8. PRE-EMPTIVE RIGHTS. Holders of Preferred Stock shall have no
pre-emptive rights to acquire additional shares of Preferred Stock.
9. CONSIDERATION FOR PREFERRED STOCK. Shares of Preferred Stock shall
be offered for sale solely in exchange for Real Property Interests (as
hereinafter defined). Shares of Preferred Stock shall be issued in exchange
for Real Property Interests at the rate of one (1) share of Preferred Stock for
each one hundred dollars ($100.00) in Real Property Interests conveyed to the
Corporation. The dollar value of the Real Property Interests conveyed to the
Corporation shall be equal to the fair market value thereof on the date of
conveyance, as determined in the sole and absolute discretion of the Board.
The term "Real Property Interest" shall mean any fee simple,
leasehold, life estate or other possessory interest in real property and/or
improvements thereon, whether direct or indirect, present or future, including,
without limitation, interests in limited liability companies, partnerships,
joint ventures, corporations, trusts or other entities possessing any of the
foregoing interests.
EXHIBIT A
Treasury Bill Rate
Except as provided below in this paragraph, the "Treasury Bill Rate" for
each dividend period will be the arithmetic average of the two most recent
weekly per annum market discount rates (or the one weekly per annum market
discount rate, if only one such rate shall be published during the relevant
Calendar Period (as defined below)) for three-month U.S. Treasury bills, as
published weekly by the Federal Reserve Board during the Calendar Period
immediately prior to the ten calendar days immediately preceding the first day
of the dividend period for which the dividend rate on Preferred Stock, is being
determined. In the event that the Federal Reserve Board does not publish such
a weekly per annum market discount rate during any such Calendar Period, then
the Treasury Bill Rate for the related dividend period shall be the arithmetic
average of the two most recent weekly per annum market discount rates (or the
one weekly per annum market discount rate, if only one such rate shall be
published during the relevant Calendar Period) for three-month U.S. Treasury
bills, as published weekly during such Calendar Period by any Federal Reserve
Bank or by any U.S. Government department or agency selected by the Company.
In the event that a per annum market discount rate for three-month U.S Treasury
bills shall not be published by the Federal Reserve Board or by any Federal
Reserve Bank or by any U.S. Government department or agency during such
Calendar Period, then the Treasury Bill Rate for such dividend period shall be
the arithmetic average of the two most recent weekly per annum market discount
rates (or the one weekly per annum market discount rate, if only one such rate
shall be published during the relevant Calendar Period) for all of the U.S.
Treasury bills then having maturities of not less than 80 nor more than 100
days, as published during such Calendar Period by the Federal Reserve Board or,
if the Federal Reserve Board shall not publish such rates, by any Federal
Reserve Bank or by any U.S. Government department or agency selected by the
Company. In the event that the Company determines in good faith that for any
reason no such U.S. Treasury bill rates are published as provided above during
such Calendar Period, then the Treasury Bill Rate for such dividend period
shall be the arithmetic average of the per annum market discount rates based
upon bids during such Calendar Period for each of the issues of marketable
non-interest bearing U.S. Treasury securities with a maturity of not less than
80 nor more than 100 days from the date of each such quotation, as quoted daily
for each business day in New York City (or less frequently if daily quotations
shall not be generally available) to the Company by at least three recognized
primary U.S. Government securities dealers selected by the Company. In the
event that the Company determines in good faith that for any reason the Company
cannot determine the Treasury Bill Rate for any dividend period as provided
above in this paragraph, the Treasury Bill Rate for such dividend period shall
be the arithmetic average of the per annum market discount rates based upon the
closing bids during such Calendar Period for each of the issues of marketable
interest-bearing U.S. Treasury securities with a maturity of not less than 80
nor more than 100 days from the date of each such quotation, as quoted daily
for each business day in New York City (or less frequently if daily quotations
shall not be generally available) to the Company by at least three recognized
primary U.S. Government securities dealers selected by the Company.
Ten Year Constant Maturity Rate
Except as provided below in this paragraph, the "Ten Year Constant
Maturity Rate" for each dividend period shall be the arithmetic average of the
two most recent weekly per annum Ten Year Average Yields (or the one weekly per
annum Ten Year Average Yield, if only one such Yield shall be published during
the relevant Calendar Period as provided below, as published weekly by the
Federal Reserve Board during the Calendar Period immediately prior to the ten
calendar days immediately preceding the first day of the dividend period for
which the dividend rate on Preferred Stock is being determined. In the event
that the Federal Reserve Board does not publish such a weekly per annum Ten
Year Average Yield during such Calendar Period, then the Ten Year Constant
Maturity Rate for such dividend period shall be the arithmetic average of the
two most recent weekly per annum Ten Year Average Yields (or the one weekly per
annum Ten Year Average Yield, if only one such Yield shall be published during
such Calendar Period), as published weekly during such Calendar Period by any
Federal Reserve Bank or by any U.S. Government department or agency selected by
the Company. In the event that a per annum Ten Year Average Yield shall not be
published by the Federal Reserve Board or by any Federal Reserve Bank or by any
U.S. Government department or agency during such Calendar Period, then the Ten
Year Constant Maturity Rate for such dividend period shall be the arithmetic
average of the two most recent weekly per annum average yields to maturity (or
the one weekly average yield to maturity, if only one such yield shall be
published during the relevant Calendar Period) for all of the actively traded
marketable U.S. Treasury fixed interest rate securities (other than Special
Securities (as defined below)) then having maturities of not less tan eight nor
more than twelve years, as published during such Calendar Period by the Federal
Reserve Board or, if the Federal Reserve Board shall not publish such yields,
by any Federal Reserve Bank o by any U.S. Government department or agency
selected by the Company. In the event that the Company determines in good
faith that for any reason the Company cannot determine the Ten Year Constant
Maturity Rate for any dividend period as provided above in this paragraph, then
the Ten Year Constant Maturity Rate for such dividend period shall be the
arithmetic average of the per annum average yields to maturity based upon the
closing bids during such Calendar Period for each of the issues of actively
traded marketable U.S. Treasury fixed interest rate securities (other than
Special Securities) with a final maturity date not less than eight nor more
than twelve years from the date of each such quotation, as quoted daily for
each business day in New York City (or less frequently if daily quotations
shall not be generally available) to the Company by at least three recognized
primary U.S. Government securities dealers selected by the Company.
Twenty Year Constant Maturity Rate
Except as provided below in this paragraph, the "Twenty Year Constant
Maturity Rate" for each dividend period shall be the arithmetic average of the
two most recent weekly per annum Twenty Year Average Yields (or the one weekly
per annum Twenty year Average Yield, if only one such Yield shall be published
during the relevant Calendar Period), as published weekly by the Federal
Reserve Board during the Calendar Period immediately prior to the ten calendar
days immediately preceding the first day of the dividend period for which the
dividend rate on Preferred Stock is being determined. In the event that the
Federal Reserve Board does not publish such a weekly per annum Twenty Year
Average Yield during such Calendar Period, then the Twenty Year Constant
Maturity Rate for such dividend period shall be the arithmetic average of the
two most recent weekly per annum Twenty Year Average Yields (or the one weekly
per annum Twenty Year Average Yield, if only one such Yield shall be published
during such Calendar Period), as published weekly during such Calendar Period
by any Federal Reserve Bank or by any U.S. Government department or agency
selected by the Company. In the event that a per annum Twenty Year Average
Yield shall not be published by the Federal Reserve Board or by any Federal
Reserve Bank or by any U.S. Government department or agency during such
Calendar Period, then the Twenty Year Constant Maturity Rate for such dividend
period shall be the arithmetic average of the two most recent weekly per annum
average yields to maturity (or the one weekly average yield to maturity, if
only one such yield shall be published during such Calendar Period) for all of
the actively traded marketable U.S. Treasury fixed interest rate securities
(other than Special Securities) then having maturities of not less than
eighteen nor more than twenty-two years, as published during such Calendar
Period by the Federal Reserve Board or, if the Federal Reserve Board shall not
publish such yields, by any Federal Reserve Bank or by any U.S. Government
department or agency selected by the Company. In the event that the Company
determines in good faith that for any reason the Company cannot determine the
Twenty Year Constant Maturity Rate for any dividend period as provided above in
this paragraph, then the Twenty Year Constant Maturity Rate for such dividend
period shall be the arithmetic average of the per annum average yields to
maturity based upon the closing bids during such Calendar Period for each of
the issues of actively traded marketable U.S. Treasury fixed interest rate
securities (other than Special Securities) with a final maturity date not less
than eighteen nor more than twenty-two years from the date of each such
quotation, as quoted daily for each business day in New York City (or less
frequently if daily quotations shall not be generally available) to the Company
by at least three recognized primary U.S. Government securities dealers
selected by the Company.
As used herein, the term "Calendar Period" means a period of 14 calendar
days; the term "Special Securities" means securities which may, at the option
of the holder, be surrendered at face value in payment of any federal estate
tax or which provide tax benefits to the holder and are priced to reflect such
tax benefits or which were originally issued at a deep or substantial discount;
the term "Ten Year Average Yield" means the average yield to maturity for
actively traded marketable U.S. Treasury fixed interest rate securities
(adjusted to constant maturities of ten years); and the term "Twenty Year
Average Yield" means the average yield to maturity for actively traded
marketable U.S. Treasury fixed interest rate securities (adjusted to constant
maturities of 20 years).
MANAGEMENT, ACQUISITION AND SERVICING AGREEMENT
Agreement made this 10th day of October, 1996 by and between Arizona Life
Insurance Company (hereinafter "ARIZONA LIFE"), an Arizona corporation with
principal administrative offices at 8601 W. Emerald Street, Suite 150, Boise,
Idaho 83704, and Metropolitan Mortgage & Securities Co., Inc. (hereinafter
"METROPOLITAN"), a Washington corporation with its principal office at W. 929
Sprague Ave., Spokane, Washington 99204, (also hereinafter referred to jointly
as the "Parties".)
WITNESSETH
WHEREAS, METROPOLITAN engages in the business of purchasing and servicing
receivables, and maintains subsidiaries, internal staff, and operations to
support such activities, and; WHEREAS, ARIZONA LIFE also engages in the
business of investing in receivables, but ARIZONA LIFE does not maintain
internal staff or operations to support the purchasing and servicing of
receivables, and;
WHEREAS, METROPOLITAN has the personnel, systems and expertise to provide
to ARIZONA LIFE general support services, receivable acquisition services and
receivable collection and management services, and;
WHEREAS, ARIZONA LIFE desires to obtain from Metropolitan general support
services, receivable acquisition services and account receivable and management
services;
NOW THEREFORE, for the foregoing reasons and in consideration of the
mutual promises, covenants and agreements set forth herein, the parties
promise, covenant and agree as follows:
I. REPRESENTATIONS AND WARRANTIES OF METROPOLITAN:
METROPOLITAN REPRESENTS AND WARRANTS TO ARIZONA LIFE THAT:
1. METROPOLITAN is a corporation duly organized, validly existing and
in good standing under the laws of the State of Washington.
2. METROPOLITAN is licensed, or qualified, and in good standing in
each of the states where the laws require licensing or qualification in order
to conduct METROPOLITAN'S receivable acquisition, collection and management
activities, or METROPOLITAN is exempt under applicable law from such licensing
or qualification.
3. The consummation of the transactions contemplated herein have been
validly authorized and all requisite corporate action has been taken by
METROPOLITAN to make this agreement binding upon METROPOLITAN in accordance
with its terms.
4. The consummation of the transactions contemplated by this agreement
are in the ordinary course of business of METROPOLITAN.
5. The execution and delivery of this agreement, the servicing of
receivables by METROPOLITAN, the other services and transactions contemplated
hereby, and the fulfillment of and compliance with the terms and conditions of
this agreement, will not conflict with or result in a breach of any of the
terms of METROPOLITAN's articles of incorporation, bylaws or any other
agreement, instrument, law, regulation, rule, order, or judgment to which
METROPOLITAN is now a party or by which it is bound. METROPOLITAN is not
subject to any agreement, instrument, law, regulation, rule, order or judgment
which would impair the ability of ARIZONA LIFE to collect its receivables or
impair the value of ARIZONA LIFE'S receivables.
6. METROPOLITAN does not believe, nor does it have any reason or cause
to believe, that it cannot perform each and every covenant contained in this
agreement.
7. There is no action, suit, proceeding or investigation pending or
threatened against METROPOLITAN which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of METROPOLITAN, or in
any material impairment of the right or ability of METROPOLITAN to carry on its
business substantially as now conducted, or which would draw into question the
validity of this agreement or of any action taken or to be taken in connection
with the obligations of METROPOLITAN contemplated herein, or which would be
likely to impair materially the ability of METROPOLITAN to perform under the
terms of this agreement.
8. No consent, approval, authorization or order of any court or
governmental agency or body is required for METROPOLITAN'S execution, delivery
and performance of or compliance with this agreement.
9. The receivables acquisition practices, receivable collection
practices and other services provided hereunder shall each be conducted in
accordance with generally accepted business practices in all respects, as
applicable to each respective activity.
II. REPRESENTATIONS AND WARRANTIES OF ARIZONA LIFE
ARIZONA LIFE REPRESENTS AND WARRANTS TO METROPOLITAN THAT:
1. ARIZONA LIFE is a corporation duly organized, validly existing and
in good standing under the laws of the State of Arizona.
2. ARIZONA LIFE is licensed or qualified, and in good standing in each
of the states where the laws require licensing or qualification in order to
hold and enforce the terms of its receivables and conduct its business, or
ARIZONA LIFE is exempt under applicable law from such licensing or
qualification.
3. The consummation of the transactions contemplated herein have been
validly authorized and all requisite corporate action has been taken by ARIZONA
LIFE to make this agreement binding upon ARIZONA LIFE in accordance with its
terms.
4. The consummation of the transactions contemplated by this agreement
are in the ordinary course of business of ARIZONA LIFE.
5. The execution and delivery of this agreement, the fulfillment of
and compliance with the terms and conditions of this agreement, will not
conflict with or result in a breach of any of the terms of ARIZONA LIFE'S
articles of incorporation, bylaws or any other agreement, instrument, law,
regulation, rule, order, or judgment to which ARIZONA LIFE is a party, by which
it is bound or its property is subject, which would impair the ability of
METROPOLITAN to service and collect the receivables in accordance with the
terms of this Agreement.
6. ARIZONA LIFE does not believe, nor does it have any reason or
cause to believe, that it cannot perform each and every covenant contained in
this agreement.
7. There is no action, suit or proceeding or investigation pending or
threatened against ARIZONA LIFE which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of ARIZONA LIFE, or in
any material impairment of the right or ability of ARIZONA LIFE to carry on
its business substantially as now conducted, or which would draw into question
the validity of this agreement or of any action taken or to be taken in
connection with the obligations of ARIZONA LIFE contemplated herein, or which
would be likely to impair materially the ability of ARIZONA LIFE to perform
under the terms of this agreement.
III. GENERAL SUPPORT SERVICES:
1. DESCRIPTION OF SERVICES
a. Administrative Support Services:
METROPOLITAN shall provide ARIZONA LIFE administrative support services
including but not limited to Human Resources, Information Systems, Art &
Advertising, Accounting, legal, check processing, and cashiering
services. Such services shall not include third party administrator
services, as that term is defined under the laws of the State of Arizona.
b. Financial Services:
METROPOLITAN shall provide financial advice and securities portfolio
management services to ARIZONA LIFE pursuant to the investment policies
and guidelines of ARIZONA LIFE, as set forth in Exhibit A. Such
guidelines may be changed and amended at any time and from time to time
at the sole discretion of ARIZONA LIFE.
2. FEES FOR GENERAL SUPPORT SERVICES
ARIZONA LIFE will pay METROPOLITAN monthly fees for General Support
Services provided by METROPOLITAN to ARIZONA LIFE. Fees for General Support
Services shall be determined by mutual agreement of the parties.
IV. RECEIVABLE ACQUISITION SERVICES
1. GENERAL DUTIES AND AUTHORITY
METROPOLITAN shall provide receivable acquisition services to ARIZONA
LIFE which shall be performed substantially in compliance with the following:
a. METROPOLITAN shall secure opportunities for ARIZONA LIFE to
purchase receivables through the use of METROPOLITAN's branch office
system, industry contacts and the other methods developed by METROPOLITAN
for its own receivable purchases.
b. In reviewing the receivables offered to ARIZONA LIFE, METROPOLITAN
shall review, among other things, the receivable loan to value ratio,
security value, security condition, payment record, payor's credit,
collateral title reports and legal documents, taking into account the
investment guidelines provided by ARIZONA LIFE.
c. METROPOLITAN or its agent, shall close the receivable purchase in a
manner and using practices which are consistent with industry standards
for the location where the receivable is closed.
d. Loans resulting from financing that may be provided by METROPOLITAN
as a means to induce the purchase of property (e.g. for the financing of
repossession resales or other seller financing) may be placed in ARIZONA
LIFE's receivable portfolio if such receivables are consistent with
ARIZONA LIFE's investment guidelines, as set forth in Exhibit A.
e. METROPOLITAN shall prepare and maintain such books, records,
computer systems and procedures as shall be required and necessary to
maintain control over the day to day activities regarding offers to
purchase and closing of receivable purchases.
f. METROPOLITAN shall furnish to ARIZONA LIFE such periodic, special
or other reports or information as requested by ARIZONA LIFE including
reports of total receivables purchased, closing periods and closing
costs. All such reports, documents or information shall be provided by
and in accordance with all reasonable instructions and directions which
ARIZONA LIFE may give.
g. METROPOLITAN may carry out any other activity or procedure, which
in METROPOLITAN's discretion, is necessary or appropriate in connection
with the acquisition and closing of the receivables for the benefit of
ARIZONA LIFE.
2. RECEIVABLE ACQUISITION YIELD REQUIREMENT:
ARIZONA LIFE shall purchase receivables from METROPOLITAN at the yield
requirement established by ARIZONA LIFE. Such yield requirement may be changed
by ARIZONA LIFE at any time and from time to time in its sole discretion. Such
changes will apply prospectively for all acquisitions made subsequent to the
change.
3. RIGHT TO REJECT.
ARIZONA LIFE shall have the right at anytime to review the receivables
acquired pursuant to this agreement and to reject any receivables which in
ARIZONA LIFE's opinion are not consistent with its investment guidelines as
such guidelines existed at the time of the acquisition. Any receivables not
rejected within three months of acquisition are deemed accepted. Any
receivable which is rejected shall be purchased by Metropolitan at its face
amount or such other amount as agreed to by the parties.
V. RECEIVABLE COLLECTION AND MANAGEMENT SERVICES
1. SERVICING:
METROPOLITAN or its agents shall perform collection and management
services for ARIZONA LIFE substantially in compliance with the following:
a. Hold and safe keep all original receivable documents and files.
b. Prepare and maintain such books, records, computer systems and
procedures as shall be required and necessary to maintain control over
the day to day activities regarding the collection and enforcement of the
rights, obligations and performance of each receivable subject to this
agreement.
c. Furnish to ARIZONA LIFE such periodic, special, or other reports,
documents or information as requested by ARIZONA LIFE including, but not
limited to, cash receipt reports, aging of all receivables balances on a
contractual basis, and itemizations of unearned or deferred income all in
accordance with generally accepted accounting and statutory accounting
principles. All such reports, documents or information shall be provided
by and in accordance with all reasonable instructions and directions
which ARIZONA LIFE may give.
d. METROPOLITAN shall manage the receipt of receivable payments
substantially as follows:
i. Deposit all monies received from the receivable payors into a
general collection account maintained by METROPOLITAN, or its
agent, which account may contain other monies and funds which may
be held for others. Within a reasonable time the amounts collected
and deposited on behalf of ARIZONA LIFE shall be transferred to an
account designated by ARIZONA LIFE.
ii. For the purposes of this subparagraph d, reasonable time
shall mean two to three business days, unless extraordinary
circumstances beyond METROPOLITAN'S control, such as computer
failure, makes such time frame unreasonable, in which case the
reasonable time shall be two to three days following elimination of
the circumstances causing the delay.
e. Accept and remit to appropriate parties any amounts designated as
reserves for the payment of real estate taxes, insurance premiums or
similar items as may be provided by the receivable documents;
f. Monitor the tax, insurance and other payments required to be paid
directly by receivable payor to third parties, or collect from the
receivable payors and remit to the appropriate third parties any amounts
due for any taxes imposed upon the real estate securing any receivable,
any insurance premiums and any other sums required to be paid by the
receivable payor pursuant to the terms of any receivable. Any funds so
collected by METROPOLITAN or subsidiaries shall be held in escrow if
required by the receivable documents or applicable regulations, or
METROPOLITAN shall pay such sums to ARIZONA LIFE as provided in Paragraph
V.1.d. hereinabove. METROPOLITAN shall pay out such monies to such
taxing authorities or other parties or persons as shall be authorized to
receive such payments.
g. Implement routine collection procedures (including telephone calls
and the preparation and mailing of written notices) as METROPOLITAN may,
in its discretion, deem to be reasonable or appropriate and in accordance
with its customary practice and procedure in the servicing of its own
accounts, on delinquent receivables;
h. When appropriate, in METROPOLITAN's discretion, METROPOLITAN or its
agent may undertake any legal action, whether judicial or non-judicial,
to enforce the payment of any sums due or other performance required by
the terms of any receivable documents or to foreclose upon or forfeit any
real estate or other security securing a receivable.
i. Whenever METROPOLITAN shall commence suit to enforce the terms of a
receivable which is subject to this agreement, METROPOLITAN shall be
deemed to be the authorized legal agent and representative of ARIZONA
LIFE in any court of law in any federal, state, or commonwealth, or other
court of competent jurisdiction, and to so act, without receiving any
other prior authority of ARIZONA LIFE, to enforce, sue, settle,
compromise, and/or collect such monies and recover any and all such real
estate security which shall be the subject of any receivable. Any such
action may be maintained in the name of "ARIZONA LIFE" or "METROPOLITAN",
at METROPOLITAN's discretion.
j. Carry out any other activity or procedure which, in METROPOLITAN'S
discretion, is necessary or appropriate in connection with the
maintenance and enforcement of the receivables for the benefit of ARIZONA
LIFE.
2. COOPERATION BY ARIZONA LIFE
ARIZONA LIFE agrees to cooperate with METROPOLITAN in the enforcement of
all receivables, make personnel available to METROPOLITAN and cause such
personnel to execute documents, and to make such documents, records, papers, or
other items of evidence available as needed to assist METROPOLITAN in the
collection and servicing of the receivables subject to this agreement.
3. RECEIVABLE COLLECTION AND MANAGEMENT SERVICES FEES
ARIZONA LIFE agrees to compensate METROPOLITAN for its duties performed
hereunder in the following manner and amounts:
a. ARIZONA LIFE agrees to pay in addition to any applicable taxes a
monthly management and servicing fee. Such sum shall be due whether or
not a receivable is in default. The Receivable Collection and Management
Services Fee shall be determined by mutual agreement of the parties.
b. In addition, ARIZONA LIFE shall reimburse METROPOLITAN for all
outside attorney costs and all third party fees and charges which may be
incurred in performance of the collections services.
c. ARIZONA LIFE agrees that as additional compensation to METROPOLITAN
for such management and collection efforts that METROPOLITAN shall be
entitled to retain any and all late charges, extension charges, and any
other charges or costs imposed upon a delinquent obligor that do not
relate to changing the terms or conditions of the loan to effect a
restructuring or otherwise.
VI. GENERAL TERMS AND CONDITIONS
1. ADJUSTMENTS TO FEES
METROPOLITAN may, from time to time, change the method for determining
any or all of the fees charged pursuant to this agreement so long as the new
method conforms with the intent of the parties, is reasonable and reflects
changes in market rates and/or the cost for providing such services.
2. REVIEW OF FEES
ARIZONA LIFE shall have the right at any time to review the method for
determining the fees charged pursuant to this Agreement. If, in ARIZONA LIFE's
opinion, any fee is unacceptable ARIZONA LIFE may request a review by the
officers of ARIZONA LIFE and METROPOLITAN, who shall use their best efforts to
resolve any objection in consideration of the best interests of both parties.
3. NON-EXCLUSIVITY OF AGREEMENT
a. This agreement is non-exclusive. ARIZONA LIFE reserves the right
and privilege to employ and engage, from time to time, any other entity
or person to perform any of the services which are the subject of this
agreement, or may itself perform any such services. Such actions by
ARIZONA LIFE shall not be construed as an event of termination of this
agreement.
b. ARIZONA LIFE may withdraw any receivable at any time from those
being serviced pursuant to this agreement, which action shall not be a
breach or termination of this agreement.
4. DELEGATION
METROPOLITAN may utilize, delegate to or subcontract with any of its
subsidiaries, divisions, affiliates or third parties in connection with its
performance of the terms of this agreement, in full or in part, as deemed
appropriate at Metropolitan's discretion.
5. RIGHT TO EXAMINE METROPOLITAN'S RECORDS
ARIZONA LIFE shall have the right to examine and audit any and all of the
books, records, or other information of METROPOLITAN, with respect to or
concerning this agreement or the receivables during business hours or at such
other times as may be reasonable under applicable circumstances.
6. EVENT OF DEFAULT
The following shall be construed as an event of default:
a. The failure by METROPOLITAN to deliver any and all monies received
by METROPOLITAN which METROPOLITAN is obligated to pay to ARIZONA LIFE
pursuant to the terms of this agreement;
b. The failure by ARIZONA LIFE to deliver any sums required to be paid
to METROPOLITAN pursuant to the terms of this agreement.
c. The failure of either party to perform in accordance with the terms
and conditions of this agreement to the extent that such failure to
perform shall constitute a material breach of a term or condition of this
agreement.
d. In the event that METROPOLITAN shall file bankruptcy or otherwise
be determined to be insolvent, this agreement may be terminated by
ARIZONA LIFE and ARIZONA LIFE may take immediate steps to employ another
entity to collect and service the receivables then being serviced by
METROPOLITAN.
7. TERM AND TERMINATION
a. The term of this Agreement shall be monthly. It shall
automatically renew each month unless terminated by either party as set
forth below.
b. Either party may terminate this agreement by providing written
notice of termination to the other party, in which event this agreement
shall terminate immediately upon receipt of such notice or at such later
date as provided in said notice.
c. In the event of a default as defined in paragraph VI.6.
hereinabove, the non-defaulting party may, in lieu of immediately
terminating this agreement, provide written notice of default to the
defaulting party, which notice shall set forth the time-period for cure,
which shall be no less than ten (10) days from receipt of the notice by
the defaulting party. If the breaching party does not cure the default
within the time period set forth in the notice, this agreement shall
terminate upon expiration of said time period.
8. NOTICE
Notice under this agreement shall be in writing, and delivered by hand,
receipt acknowledged, or delivered by registered certified United States mail,
return receipt requested, and if refused, by regular United States mail,
addressed to the parties as stated below:
a. ATTN: PRESIDENT
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
W. 929 Sprague Ave.
Spokane, WA 99204.
b. ATTN: PRESIDENT
ARIZONA LIFE INSURANCE COMPANY
8601 Emerald, Suite 150
Boise ID 83704
9. BINDING EFFECT
This agreement sets forth the entire agreement between the parties, and
shall be binding upon all successors and assigns of both of the parties hereto,
and shall be construed under the laws of the State of Washington.
10. CONTROL, RESPONSIBILITY AND CUSTODY
ARIZONA LIFE retains the ultimate control and responsibility for all
functions delegated. ARIZONA LIFE retains the ownership and custody of all
its general corporate accounts and records.
11. ASSIGMENT
This Agreement shall not be assignable by either party.
This agreement is executed the day, month, and year first above written
by the duly authorized officers of each party.
METROPOLITAN MORTGAGE & ARIZONA LIFE INSURANCE COMPANY
SECURITIES CO., INC.
By: /S/ C. PAUL SANDIFUR, JR. By: /S/ M. DAVID GORTON
C. Paul Sandifur, Jr. M. David Gorton
President Vice President
Attest /S/ SUAN THOMSON Attest /S/ TOM TURNER
Susan Thomson Tom Turner
Secretary/Treasurer Secretary
Exhibit A
Arizona Life Insurance Company
Investment Guidelines
ADDENDUM TO MANAGEMENT, ACQUISITION AND SERVICING AGREEMENT
BETWEEN
ARIZONA LIFE INSURANCE COMPANY
AND
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
DATE OF ORIGINAL AGREEMENT: October 10, 1996
DATE OF THIS ADDENDUM: October 10, 1996
ADDENDUM NUMBER: 1
1. FEES FOR GENERAL SUPPORT SERVICES
a. Administrative Support Fees:
i. ARIZONA LIFE will pay METROPOLITAN a monthly fee for general
office services provided by METROPOLITAN to ARIZONA LIFE. It is
the intent of the parties hereto that the Administrative Support
Fees be calculated at a fair and equitable rate that reflects the
actual cost of the services.
ii. METROPOLITAN has developed and shall continue to maintain a
cost-allocation system designed to measure the activity of the
general support services departments used by both parties, to
provide a basis for allocation of the costs generated by those
departments to be allocated to ARIZONA LIFE. The cost allocation
system shall be expressed in terms of labor hours, machine hours,
square footage, and/or other appropriate measures. The cost
allocation system will be used to support charges found in the
market place for comparable services and may be used as an
approximation for market charges when the market cost for such
services cannot be determined and as agreed to by the parties. The
current fee schedule, which approximates actual costs, is set forth
in Exhibit A.
b. Financial Services Fees:
i. ARIZONA LIFE shall pay to METROPOLITAN an agreed amount to
METROPOLITAN for METROPOLITAN providing financial consultation and
advice, and for managing ARIZONA LIFE's investment portfolio.
ii. The financial consultation and advice, when provided, shall be
charged at a fee negotiated by the parties in each instance and
based upon the expertise and hours required to provide the service.
The current fee schedule, which approximates actual costs is set
forth in Exhibit A.
2. RECEIVABLE COLLECTION AND MANAGEMENT FEES
ARIZONA LIFE agrees to compensate METROPOLITAN for its duties performed
hereunder in the following manner and amounts:
a. ARIZONA LIFE agrees to pay in addition to any applicable taxes, a
monthly management and servicing fee. Such sum shall be due whether or not a
receivable is in default. The fee shall be calculated based on an
approximation of the cost to provide the services, which currently is $12 per
month per receivable outstanding as of each month end. Such fee is payable or
subject to settlement through offset as of the 10th day following each month
end.
METROPOLITAN MORTGAGE & ARIZONA LIFE INSURANCE COMPANY
SECURITIES CO., INC.
By: /S/ C. PAUL SANDIFUR, JR. By: /S/ M. DAVID GORTON
C. Paul Sandifur, Jr. M. David Gorton
President Vice President
Attest /S/ SUSAN THOMSON Attest /S/ TOM TURNER
Susan Thomson Tom Turner
Assistant Secretary Secretar
EXHIBIT A
Administrative
Fees
Accounting 250
Data Processing 250
G & A 250
Shared System Amortization 250
1,000
The financial consultation and advice, when provided, shall be charged at a fee
of .5% per annum of the average monthly balance managed.
SUMMIT SECURITIES, INC.
RATIO OF EARNING TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
The ratio of adjusted earnings to fixed charges and Preferred Stock dividends was computed
using the following tabulations to compute adjusted earnings and the defined fixed charges
and Preferred Stock dividends.
Year Ended
September 30,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C>
Income before extraordinary
item $1,244,522 $ 587,559 $ 264,879 $ 283,107 $ 611,595
Add:
Interest 3,741,095 3,251,334 2,527,945 1,792,059 1,390,968
Taxes on
income 237,951 239,707 140,407 145,951 127,989
---------- ---------- ----------- ---------- ---------
Adjusted Earnings $5,223,568 $4,078,600 $2,933,231 $2,221,117 $2,130,552 ========== ========== ========== ========== =========
Preferred Stock Dividend
Requirements $333,606 $ 309,061 $ 2,930
Ratio Factor of Income
after provision for income
taxes to income before
provision for income taxes 84% 71% 65%
Preferred Stock Dividend
Factor on Pretax Basis 397,387 435,297 4,508
Fixed Charges
Interest 3,741,095 3,251,334 $2,527,945 $1,792,059 $1,390,968
---------- ---------- ---------- ---------- ----------
Fixed Charges and Preferred
Stock Dividends $4,138,482 $3,686,631 $2,532,453 $1,792,059 $1,390,968
========== ========== ========== ========== ==========
Ratio of Adjusted Earnings
to Fixed Charges and
Preferred Stock Dividends 1.26 1.11 1.16 1.24 1.53
==== ==== ==== ==== ====
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
State of
Company Name Incorporation
- --------------------------------------------------------------------
Metropolitan Investment Securities, Inc.* Washington
Summit Group Holding Co., Inc. Delaware
Summit Property Development, Inc. Washington
Old Standard Life Insurance** Idaho
Arizona Life Insurance Company Arizona
*Metropolitan Investment Securities, Inc., in some states uses
the following DBA:
Washington Metropolitan Investment Securities, Inc. and National
Metropolitan Investment Securities, Inc.
**Old Standard Life Insurance, in some states uses the following
DBA:
Old Standard Company; Old Standard and Old Standard Life.
Summit Securities, Inc., in some states uses a DBA of National
Summit Securities, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,461
<SECURITIES> 12,576
<RECEIVABLES> 92,771
<ALLOWANCES> 974
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 117,267
<CURRENT-LIABILITIES> 0
<BONDS> 42,824
<COMMON> 100
0
413
<OTHER-SE> 4,846
<TOTAL-LIABILITY-AND-EQUITY> 117,267
<SALES> 0
<TOTAL-REVENUES> 14,536
<CGS> 0
<TOTAL-COSTS> 8,823
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 490
<INTEREST-EXPENSE> 3,741
<INCOME-PRETAX> 1,482
<INCOME-TAX> 238
<INCOME-CONTINUING> 1,244
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,244
<EPS-PRIMARY> 91.09
<EPS-DILUTED> 91.09
