As filed with the Securities and Exchange Commission on January 14
1997. Registration No. __________________
FORM S-2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
SUMMIT SECURITIES, INC.
an Idaho Corporation - IRS Employer No. 82-0438135
929 W. Sprague Avenue
Spokane, WA 99204
(509) 838-3111
Agent for Service
Tom Turner, President
Summit Securities, Inc.
929 W. Sprague Ave.
Spokane, WA 99204
(509) 838-3111
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the Registration Statement
becomes effective.
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933 check the following box. /X/
If the registrant elects to deliver its latest annual report to
security holders, or a complete and legible facsimile thereof,
pursuant to Item 11(a)(1) of this form, check the following box. / /
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for
the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each Amount Proposed Proposed Amount of
class of to be maximum maximum registration
securities to registered offering aggregate fee
be registered price per offering
unit price
<S> <C> <C> <C> <C>
Preferred
Stock Shares 150,000 $ 100 $15,000,000 $288
Investment
Certificate $40,000,000 $1 $40,000,000 $6,818
</TABLE>
The Registrant is hereby proposing to register a new offering
of Investment Certificates, Series A, in the amount of $17,500,000
and 9,500 Shares of Preferred Stock Series S-2 and is hereby
amending Registration No. 333-115 pursuant to Rule 429 of which
approximately $22,500,000 of Investment Certificates, Series A, and
approximately 140,500 shares of Preferred Stock Series S-2 remain
unsold. The registration fee is calculated on the amount being
registered hereunder.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
PART I
SUMMIT SECURITIES, INC.
Cross Reference Sheet
Showing Location in Prospectus of Items of the Form
1. Forepart of the Registration Statement
and outside Front Cover Page of Prospectus.Outside Front Cover
Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front Cover
Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........ Prospectus Summary;
Summary Consolidated
Financial Data;
Certain Investment
Considerations/
Risk Factor;
4. Use of Proceeds............................Use of Proceeds
5. Determination of Offering Price............ *
6. Dilution................................... *
7. Selling Security Holders................... *
8. Plan of Distribution.......................Plan of
Distribution
9. Description of Securities to be Registered.Description of
Securities;
Description
of Certificates;
Summary of Capital
Stock; Description
of Common Stock;
Description of
Preferred Stock
10. Interest of Named Experts and Counsel.....Legal Matters;
Experts
11. Information with Respect to Registrant....Front Cover Page;
Prospectus
Summary;
Capitalization;
Selected Consolidated
Financial Data;
Management's
Discussion and
Analysis of Financial
Condition and Results
of Operations;
Business; Management;
Principal
Shareholders;
Certain Transactions;
Financial Statements
12. Incorporation of Certain Information
by Reference........................... Available Information;
Incorporation of
Certain Information
by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. Indemnification
*Not applicable or negative.
<PAGE>
SUBJECT TO COMPLETION DATED January 14, 1997
PROSPECTUS
SUMMIT SECURITIES, INC.
$40,000,000 Investment Certificates, Series A
150,000 Shares Variable Rate Cumulative
Preferred Stock, Series S-2
($100 Per Share Offering Price
and Liquidation Preference)
The Investment Certificates, Series A ("Certificates") and the
shares of Variable Rate Cumulative Preferred Stock, Series S-2
("Preferred Stock") of Summit Securities, Inc. ("Summit") are being
offered separately and not as units. Certificates will pay simple
interest monthly, quarterly, semi-annually or annually, or if left
with the issuer, interest will compound semi-annually; or, will pay
equal monthly installments of principal and interest until maturity
according to an amortization schedule selected by the owner. The
Certificates are unsecured, senior in liquidation to outstanding
equity securities, subordinated to collateralized debt, on parity
with unsecured accounts payable and accrued liabilities and on
parity with all previously issued and outstanding investment
certificates. The Certificates will be issued in fully registered
form in fractional denominations of $0.01 or multiples thereof at
100% of the principal amount paid. Summit reserves the right to
change prospectively the interest rates, maturities, and minimum
investment amounts on unsold Certificates. The current provisions
are set forth below. See "DESCRIPTION OF CERTIFICATES".
<TABLE>
<CAPTION>
MINIMUM TERM TO ANNUAL
INVESTMENT MATURITY INTEREST RATE
---------- ---------------------- -------------
(Investment Certificates, Series A)
<S> <C>
$
$
$
$
$
$
(Installment Certificates)
$
</TABLE>
<TABLE>
<CAPTION> PREFERRED STOCK, SERIES S-2
PRICE DISTRIBUTION
PER SHARE FORMULA (Applicable Rate)
<S> <C>
$100 The greater of the per annum rate of
the Three-month U.S. Treasury Bill Rate, or
the Ten Year Constant Maturity Rate, or
the Twenty Year Constant Maturity Rate,
plus .5% (Minimum 6%/Maximum 14%)
</TABLE>
The Preferred Stock offered hereunder will be sold in whole or
fractional units. Preferred Stock distributions are cumulative and
are to be declared and paid monthly. See "DESCRIPTION OF PREFERRED
STOCK-Distributions". Preferred Stock may be redeemed, in whole or
in part, at the option of Summit at the redemption prices set forth
herein. Under certain limited circumstances, the Board of Directors
may, in its sole discretion and without any obligation to do so,
redeem shares tendered for redemption by stockholders at the
redemption prices set forth herein. See "DESCRIPTION OF PREFERRED
STOCK-Redemption of Shares". In liquidation, Preferred Stock is
subordinate to all debts of Summit including Summit's Certificates,
on parity with other preferred stock and senior to Summit's common
stock. See "DESCRIPTION OF PREFERRED STOCK-Liquidation Rights".
There is no trading market for the Certificates or the
Preferred Stock and none is expected to be established in the
future. See "CERTAIN INVESTMENT CONSIDERATIONS-RISK FACTORS". A
list of persons willing to sell or purchase Summit's issued and
outstanding shares of preferred stock is maintained by Metropolitan
Investment Securities, Inc., ("MIS") as a convenience to holders of
Summit's preferred stock. See "DESCRIPTION OF PREFERRED STOCK-
Redemption of Shares". This offering of Certificates and Preferred
Stock is subject to withdrawal or cancellation by Summit without
notice. No minimum amount of Certificates or Preferred Stock must
be sold. The Certificates and Preferred Stock offered hereby
involve significant investor considerations and risks which should
be analyzed prior to any investment. See "CERTAIN INVESTMENT
CONSIDERATIONS-RISK FACTORS".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE SALES PROCEEDS TO
TO PUBLIC COMMISSIONS (1) SUMMIT (2)
<S> <C> <C> <C>
Per
Certificate 100% 0% to 6% 100% to 94%
Total: $40,000,000 None-$2,400,000 $40,000,000-37,600,000
Per
Preferred
Share $100 0% to 6% 100% to 94%
Total: $15,000,000 None - $900,000 $15,000,000-$14,100,000
</TABLE>
(1) There is no sales charge to the investor. Summit will
reimburse MIS, a wholly-owned subsidiary, for commissions paid to
licensed securities sales representatives. Sales commission rates on
the sale of Certificates depend upon the terms of the sale and upon
whether the sales are reinvestments or new purchases. See "PLAN OF
DISTRIBUTION".
(2) Before deducting other expenses estimated at $570,000.
The Certificates and Preferred Stock are being offered for sale
on a continuous, best efforts basis. There are no minimum amounts
of securities that must be sold. No offering will be made pursuant
to this Prospectus subsequent to January 31, 1998. The offering is
subject to NASD Rule 2720 (formerly Schedule E). See "PLAN OF
DISTRIBUTION".
The date of this Prospectus is __________________.
<PAGE>
No person has been authorized to give any information or to
make any representations not contained or incorporated by reference
in this Prospectus and any Pricing Supplement. Neither the delivery
of this Prospectus and any Pricing Supplement nor any sale made
thereunder shall, under any circumstances, create any implication
that the information therein is correct at any time subsequent to
the date thereof. This Prospectus and any Pricing Supplement shall
not constitute an offer to sell or a solicitation of an offer to buy
any of the Certificates or Preferred Stock offered hereby by anyone
in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation
is not qualified to do so or to any person to whom it is unlawful to
make such offer or solicitation.
AVAILABLE INFORMATION
Summit is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, (the "Exchange
Act")and, in accordance therewith, files periodic reports and other
information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed by Summit
with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission in Washington,
D.C. at 450 Fifth Street, N.W., Washington, DC 20549 and at certain
of its regional offices which are located in the New York Regional
Office, Seven World Trade Center, Suite 1300, New York, NY 10048,
and the Chicago Regional Office, CitiCorp Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661-2511. In addition, the
Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding
registrants, such as the Issuer, that file electronically with the
Commission at the following address: (http:\\www.sec.gov).
Summit has filed with the Securities and Exchange Commission in
Washington, D.C., a Registration Statement on Form S-2 under the
Securities Act of 1933, as amended, with respect to the securities
offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, as permitted by
the rules and regulations of the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by Summit with the Commission pursuant to
the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Certificates and Preferred
Stock shall be deemed to be incorporated by reference in this
Prospectus and to be a part thereof from the date of filing of such
documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
Summit will provide without charge to each person, including to
whom a Prospectus is delivered, upon written or oral request of such
person, a copy of any and all of the information that has been
referenced in this Prospectus other than exhibits to such documents.
Requests for such copies should be directed to Corporate Secretary,
Summit Securities, Inc., PO Box 2162, Spokane, WA 99210-2162,
telephone number (509) 838-3111.
<PAGE>
TABLE OF CONTENTS
Page
Available Information.............................
Incorporation of Certain Documents by Reference...
Prospectus Summary ...............................
Summary Consolidated Financial Data...............
Certain Investment Considerations-Risk
Factors...........................................
Description of Securities.........................
Description of Certificates..................
Description of Capital and Common Stock......
Description of Preferred Stock...............
Legal Matters.....................................
Legal Opinion................................
Legal Proceedings............................
Experts...........................................
Plan of Distribution..............................
Use of Proceeds...................................
Capitalization....................................
Selected Consolidated Financial Data..............
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................
Business..........................................
Management........................................
Executive Compensation.......................
Indemnification...................................
Principal Shareholders............................
Certain Transactions..............................
Index to Consolidated Financial Statements........
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to, and
should be read in conjunction with, the detailed information and
financial statements appearing elsewhere in this Prospectus. This
offering involves certain investment considerations for prospective
investors which are set forth in "DESCRIPTION OF SECURITIES" &
"CERTAIN INVESTMENT CONSIDERATIONS-RISK FACTORS".
The Summit Consolidated Group of Companies
Summit Securities, Inc.(Summit) was incorporated under the laws
of the State of Idaho on July 25, 1990. Its principal executive
offices are located at 929 West Sprague Avenue, Spokane WA 99210-
2162. Its mailing address is PO Box 2162, Spokane WA 99210-2162 and
its telephone number is (509) 838-3111. Summit also maintains an
office at 8601 W. Emerald, Ste. 150, Boise, Idaho 83704 and its
telephone number is (208)376-8260.
Where reference herein is intended to include Summit
Securities, Inc. and its subsidiaries, they are jointly referred to
as the "Consolidated Group". Where reference herein is intended to
refer to Summit Securities, Inc. as the parent company only, it is
referred to individually as "Summit".
Summit was founded in 1990 by Metropolitan Mortgage &
Securities Co., Inc. (Metropolitan) as a wholly-owned subsidiary.
On September 9, 1994, Summit was acquired by National Summit Corp.,
which is wholly-owned by C. Paul Sandifur, Jr. Mr. Sandifur is
President and controlling shareholder of Metropolitan. Accordingly,
the change in ownership altered the form of control, but did not
result in a change of the individual in control. See "CERTAIN
TRANSACTIONS".
Between January and June of 1995, Summit acquired MIS and a
wholly-owned holding company acquired Old Standard Life Insurance
Company (Old Standard) from Metropolitan. In addition, Summit
commenced operation of a property development company, Summit
Property Development Inc. On December 28, 1995, Old Standard
acquired Arizona Life Insurance Company ("Arizona Life"). See
"BUSINESS" & "CERTAIN TRANSACTIONS".
The Consolidated Group is engaged, nationwide, in the business
of acquiring, holding and selling receivables (hereinafter
Receivables). These Receivables include real estate contracts, and
promissory notes collateralized by first position liens on
residential real estate. The Consolidated Group also invests in
Receivables consisting of real estate contracts and promissory notes
collateralized by second and lower position liens, structured
settlements, annuities, lottery prizes, and other investments. The
Receivables collateralized by real estate are typically non-
conventional in that they were originated as the result of seller
financing, or they were originated by institutional lenders who
specialize in borrowers with impaired credit histories. See
"BUSINESS-Receivable Investments". In addition to Receivables, the
Consolidated Group invests in U.S. Treasury obligations, corporate
bonds and other securities. See "BUSINESS-Securities Investments".
The Consolidated Group invests in Receivables using funds
generated from Receivable cash flows, the sale of annuities, the
sale and securitization of Receivables, the sale of certificates and
preferred stock, collateralized borrowing, and securities portfolio
earnings. See "BUSINESS-Method of Financing". Metropolitan
provides Receivable acquisition services, and Metwest Mortgage
Services, Inc. (Metwest) provides Receivable collection and
servicing to Summit, Old Standard and to Arizona Life. See
"BUSINESS-Receivable Investments" & "CERTAIN TRANSACTIONS".
Definitions:
For ease of reading, the following is a compilation of several
of the defined terms which appear regularly within this document.
Also, See "BUSINESS".
Arizona Life: Arizona Life Insurance Company
Certificates: Where this term is capitalized it refers to the
Investment Certificates being offered herein. Where not
capitalized, it refers to certificates generally.
Consolidated Group: This term refers to the combined businesses
consisting of Summit and all subsidiaries.
MIS: Metropolitan Investment Securities, Inc.
Metropolitan: Metropolitan Mortgage & Securities Co., Inc.,
Summit's former parent company. Also See "BUSINESS" & "CERTAIN
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>
The Offering
INVESTMENT CERTIFICATES:
The Offering . . . . This Certificate offering consists of
$40,000,000 in principal of Investment Certificates, Series A,
issued at minimum investment amounts, terms, and rates set forth on
the cover page of this Prospectus. There is no minimum amount of
Certificates which must be sold. Certificates are issued in fully
registered form. See "DESCRIPTION OF CERTIFICATES".
The Certificates . . . . The Certificates are unsecured indebtedness
of Summit. At September 30, 1996, Summit had outstanding
approximately $42,824,000 (principal and accrued interest) of
certificates and similar obligations and approximately $3,851,000
(principal and accrued interest) of collateralized debt. See
"CAPITALIZATION".
Use of Proceeds . . . . The proceeds of this Certificate offering
will provide funds for Receivable investments, retiring maturing
certificates, preferred stock dividends, other investments (which
may include investments in existing subsidiaries and the acquisition
of other companies, or the commencement of new business ventures),
and general corporate purposes. See "USE OF PROCEEDS".
Principal and Interest Payments . . . . At the option of the holders
of Certificates, interest is paid monthly, quarterly, semiannually
or annually (without compounding) or if left with Summit, interest
will compound semiannually; or, holders may be paid equal monthly
installments of principal and interest pursuant to an amortization
schedule. The minimum investment amounts, terms and interest rates
on unissued Certificates offered hereby may be changed from time to
time by Summit, but any such change shall not affect any
Certificates issued prior to the change. See "DESCRIPTION OF
CERTIFICATES".
PREFERRED STOCK:
Offering . . . . This Preferred Stock offering consists of 150,000
shares of Variable Rate Cumulative Preferred Stock, Series S-2 (the
"Preferred Stock"), offered at $100 per share, and sold in whole and
fractional shares. There is no minimum amount of Preferred Stock
which must be sold. Preferred Stock is issued in book entry form.
Distributions . . . . Distributions on Preferred Stock offered
hereunder are cumulative from the date of issuance, and, when and as
declared, are payable monthly at the annual rates described on the
cover page of this Prospectus based on the price of $100 per share.
All preferred stock of Summit including this Preferred Stock is
entitled to receive distributions on the same basis. See
"DESCRIPTION OF PREFERRED STOCK-Distributions".
Liquidation Rights . . . . In the event of liquidation of Summit,
the Preferred Stock liquidation rights are $100 per share of
Preferred Stock, plus declared and unpaid dividends. The
liquidation rights of the Preferred Stock are senior to the common
stock of Summit, on parity with the liquidation rights of all other
previously issued and outstanding preferred stock and junior to all
debts of Summit including Summit's previously issued certificates
and the Certificates offered herein. See "DESCRIPTION OF PREFERRED
STOCK-Liquidation Rights".
Redemption: Upon Call by Summit . . . . The shares of Preferred
Stock are redeemable, in whole or in part, at the option of Summit,
upon not less than 30 nor more than 60 days notice by mail, at a
redemption price of $100 per share plus any declared but unpaid
dividends to the date fixed for redemption. See "DESCRIPTION OF
PREFERRED STOCK-Redemption of Shares".
Redemption: Upon Request of Holder . . . . Subject to certain
limitations, Summit may, in its sole discretion and without any
obligation to do so, accept share(s) of Preferred Stock for
redemption upon the receipt of unsolicited written requests for
redemption of share(s) from any holder. Redemption prices in such
event will be $97 per share if the redemption occurs during the
first twelve months after the date of original issuance of the
shares and $99 per share thereafter plus, in each case, any declared
but unpaid dividends. Any such discretionary redemptions will also
depend on Summit's financial condition, including its liquidity
position. See "DESCRIPTION OF PREFERRED STOCK-Redemption of
Shares". Summit, through MIS, intends to use its best efforts to
maintain a trading list for holders of Preferred Stock. See
"DESCRIPTION OF PREFERRED STOCK-Redemption of Shares" & "CERTAIN
INVESTMENT CONSIDERATIONS-RISK FACTORS".
Voting Rights . . . . The holders of Preferred Stock have no voting
rights except (i) as expressly granted by the laws of the State of
Idaho and (ii) in the event distributions payable on Preferred Stock
are in arrears in an amount equal to twenty-four full monthly
distributions or more, per share. See "DESCRIPTION OF PREFERRED
STOCK-Voting Rights".
Use of Proceeds . . . . The proceeds of this Preferred Stock
offering will provide funds for Receivable investments, retiring
maturing certificates, preferred stock dividends, other investments
(which may include investments in existing subsidiaries and the
acquisition of other companies or the commencement of new business
ventures) and for general corporate purposes. See "USE OF
PROCEEDS".
Federal Income Tax Considerations. . . . In the event the
Consolidated Group has earnings and profits for federal income tax
purposes in any future year, the distributions paid on Preferred
Stock in that year will constitute taxable income to the recipient
to the extent of such earnings and profits. Management is unable to
predict the future character of its distributions. Purchasers are
advised to consult their own tax advisors with respect to the
federal income tax treatment of distributions made. See
"DESCRIPTION OF PREFERRED STOCK-Federal Income Tax Consequences of
Distributions".
<PAGE> SUMMIT SECURITIES, INC.
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
The consolidated financial data shown below as of September 30, 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>
<PAGE>
CERTAIN INVESTMENT CONSIDERATIONS - RISK FACTORS
Investment in the Certificates and Preferred Stock offered
hereby involves a certain degree of risk, including the risks
described below. Each prospective investor should carefully
consider the following risk factors inherent in and affecting the
business of the Consolidated Group and this offering before making
an investment decision. This Prospectus contains forward-looking
statements which involve risk and uncertainties. Discussions
containing such forward-looking statements may be found in the
material set forth under the "Prospectus Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" as well as in the Prospectus
generally. Actual events or results may differ as a result of
various factors including, without limitation, the risk factors set
forth below and the matters set forth in the Prospectus generally.
General
1. Impact of Interest Rates and Economic Conditions: During
the twelve month period ending September 30, 1997, more of the
Consolidated Group's financial liabilities, principally annuities
and certificates, are scheduled to reprice or mature than are its
financial assets, principally Receivables and fixed income
investments. Consequently, in a falling interest rate environment
such as has recently been experienced, the current level of
profitability and the fair value of the Consolidated Group's equity
would be expected to improve. Conversely, in a rising interest rate
environment, the net interest income and the fair value of equity
for the Consolidated Group would likely decline. The fair value of
equity (as opposed to book value) is the difference between the fair
value of all assets less the fair value of all liabilities. The
impact of a change in interest rates will be reflected to the
greatest extent in the fair value of assets and liabilities with the
longest maturities or time to their scheduled repricing date.
Additionally, borrowers tend to repay Receivable loans when interest
rates decline and they are able to refinance such loans at lower
rates of interest. This factor reduces the amount of interest to be
received over time as loans with higher rates of interest are
prepaid more rapidly. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset/Liability
Management". A decline in economic conditions could cause an
increase in the number of foreclosures on properties that
collateralize the Receivables and a reduction in the probable sales
prices for property obtained through such action which could
adversely affect the results of operations and financial position of
the Consolidated Group. While interest rates evidenced a fairly
stable trend as of the date of this Prospectus, management is unable
to forecast with any certainty the fluctuations in interest rates in
the future.
2. Securitization and Direct Sales of Receivables: Summit and
Old Standard sold pools of Receivables through direct sales in
increased volumes during fiscal 1996 compared to prior years.
Also, Summit and Old Standard sold first lien position residential
and commercial real estate loan Receivables through a
securitization for the first time during 1996. The Consolidated
Group's profits for fiscal 1996 were substantially benefited by
these sales. See "BUSINESS-Receivable Sales". The Consolidated
Group's future profits may be substantially impacted by its ability
to sell Receivables. Adverse changes in the markets for the
Consolidated Group's Receivables, including but not limited to
fluctuations in interest rates, increased competition and
regulatory changes could impair its ability to sell Receivables.
Any such adverse changes could have a material adverse effect upon
the Consolidated Group's results of operations and financial
condition, including its profitability and liquidity position.
As a result of securitizations, the Consolidated Group has
acquired residual interests in the May and November securitized
loan pools. At the close of the November 1996 secuitization the
Consolidated Group held residual interests aggregating
approximately $570,000. These residual interests are valued by the
Consolidated Group, and accrue interest, based upon assumptions
regarding anticipated prepayments, defaults and losses on the
securitized Receivables. Although Management believes that it has
made reasonable assumptions, actual experience may vary from its
estimates. The value of the residual interests and the amount of
interest accrued will have been overstated if prepayments or losses
are greater than anticipated. See "BUSINESS-Sale of Receivables".
3. Dependence Upon Metropolitan: All decisions with respect
to the day-to-day management of the Consolidated Group will be made
exclusively by the officers of the respective companies, many of
whom are also employees of Metropolitan and/or its subsidiaries.
The Consolidated Group has contracted with Metropolitan and Metwest
to provide principally all of the administrative services related to
their Receivable acquisition, servicing and sales. Metropolitan and
Metwest charge fees for their services. The fee charged to the
Consolidated Group relating to Receivable acquisition activities
during the fiscal years ended September 30, 1996, 1995 and 1994 was
$1,753,206, $1,967,409 and $681,991, respectively. See "BUSINESS" &
"CERTAIN TRANSACTIONS".
Management considers these contractual arrangements to be more
beneficial to the Consolidated Group than incurring the cost to
duplicate these services internally. These contracts do not
restrict any of the companies from obtaining these services from
other sources and they may be terminated at any time. However, it
is anticipated that these contracts will continue indefinitely. See
"BUSINESS" & "CERTAIN TRANSACTIONS".
The success of the Consolidated Groups operations depends to a
large degree on the business skills of Metropolitan's senior
management in, among other things, underwriting, servicing and
selling Receivables. If for some reason significant members of
Metropolitan's management were unable to perform their functions, or
left Metropolitan's employ, there can be no assurance that the
Consolidated Group could locate capable replacement(s) in a timely
fashion. Currently, Metropolitan does not carry key-man insurance
coverage, nor does it have any employment agreements with any of its
executive officers or managers.
4. Conflicts of Interest: Many of the officers and directors
of Summit and its subsidiaries are also employees of Metropolitan,
therefore certain conflicts of interest may arise between the
companies. The officers and directors expect to devote as much time
as necessary to the affairs of Summit and its subsidiaries. Summit,
Old Standard and Arizona Life may compete with Metropolitan and its
subsidiaries in the acquisition of Receivables. Summit may compete
with Metropolitan for the sale of securities, and Old Standard and
Arizona Life may compete with Metropolitan's insurance subsidiary
for the sale of annuities. See "BUSINESS" & "COMPETITION" &
"CERTAIN TRANSACTIONS".
On September 9, 1994, Metropolitan sold Summit to National
Summit Corp., a holding company wholly-owned by C. Paul Sandifur Jr.
During fiscal 1995, Summit purchased MIS and Old Standard from
Metropolitan, and commenced operations of Summit Property
Development, Inc. See "CERTAIN TRANSACTIONS". Mr. Sandifur is the
President and has voting control of Metropolitan. Prior to these
transactions, Mr. Sandifur had effective control of Summit and its
subsidiaries through his control of Metropolitan. Following these
transactions, Mr. Sandifur through National Summit Corp. continues
to control Summit, and through Summit controls Summit's
subsidiaries.
Conflicts of interest are not anticipated to be substantially
different from those which existed prior to these sales, such as
conflicts in the time available to devote to Summit or its
subsidiaries and conflicts with respect to securities sales and with
respect to the selection of Receivables. Other conflicts may arise
in the normal course of business transactions. Such potential
additional conflicts cannot currently be identified with any
certainty and therefore cannot be quantified at this time.
Purchasers of Certificates and Preferred Stock must, to a great
extent, rely on the integrity and corporate fiduciary
responsibilities of Summit's current and future officers and
directors to assure themselves that they will not abuse their
discretion in selecting Receivables for purchase by each company,
and in making other business decisions.
5. Effect of Certain Insurance Regulations: At September 30,
1996, 68% of the Consolidated Group's assets were invested in
insurance related assets. Insurance company regulations restrict
transfers of assets and the amount of dividends that the insurance
subsidiaries may pay. Accordingly, to the extent of such
restrictions, assets and earnings of the insurance subsidiaries are
not available to Summit without special permission from the
respective insurance commissioner in the insurance subsidiary's
state of domicile. This restriction on dividends could affect
Summit's ability to pay interest, retire certificates and pay
Preferred Stock distributions. The total unrestricted statutory
surplus of Old Standard was approximately $194,000 as of September
30, 1996 while Arizona Life had a statutory deficit of approximately
$1,196,000 as of September 30, 1996. See "BUSINESS-Regulation" &
"CERTAIN TRANSACTIONS."
6. Use of Leverage and Related Indebtedness: The Consolidated
Group's primary sources of new financing for its operations are the
sale of annuities, sale and securitization of Receivables and the
sale of certificates and preferred stock. See "BUSINESS-Method of
Financing" & "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS". The Consolidated Group's
principal sources of cash flow include Receivable payments, the sale
of annuities, the sale of Receivables and the sale of certificates
and preferred stock. To the extent Summit's cash flow is
insufficient or unavailable for payment of certificates which mature
during the period ending January 31, 1998, portions of the net
proceeds from this Certificate and Preferred Stock offering may be
used for such purpose. See "USE OF PROCEEDS". Approximately
$7,175,000 in principal amount of certificates will mature between
February 1, 1997 and January 31, 1998. The majority of Summit's
certificates have been sold with a five year maturity. During the
fiscal year ended September 30, 1996, its sixth full year of
operation, 61% of Summit's maturing certificates were reinvested.
The cash flow from the existing assets has been adequate during the
past five years to satisfy the demand for payment of maturing
certificates. Summit's ability to repay its other outstanding
obligations, including those created by the sale of the securities
described herein, may be contingent in part upon the success of
future public offerings of certificates and preferred stock.
The following table summarizes anticipated cash requirements
for principal and interest obligations of Summit's Certificates and
other debts payable; and anticipated cash dividend requirements on
its preferred stock for the five-year period ending September 30,
2001 based on amounts outstanding at September 30, 1996 and assuming
no reinvestment of maturing debentures:
<TABLE>
<CAPTION>
OTHER PREFERRED
Fiscal Year Ending DEBENTURE DEBT STOCK
September 30, BONDS PAYABLE DIVIDENDS TOTAL
___________________ _________ _______ _________ ______
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1997 $7,748 $3,828 $ 392 $11,968
1998 11,501 14 392 11,907
1999 10,582 13 392 10,987
2000 8,779 2 392 9,173
2001 15,062 2 392 15,456
-------- ------ ------ -------
$53,672 $3,859 $1,960 $59,491
======= ====== ====== =======
</TABLE>
7. Effect of Life Insurance and Annuity Termination Rates: An
increase in the number of annuity policy terminations will tend to
negatively impact the insurance subsidiaries' earnings (and in turn
the Consolidated Group's earnings) by requiring the expensing of
unamortized deferred costs related to policy surrenders. At
September 30, 1996, deferred policy acquisition costs on annuities
were approximately 6.2% of annuity reserves. Surrender charges
typically do not exceed 1% times the years of the initial annuity
contract times the annuity contract balance at the contract's
inception, and such surrender charges decline annually from that
rate. Annuity termination rates adjusted for internal rollovers were
11.7% during fiscal 1996. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" & "Note 13,
Consolidated Financial Statements".
8. Investments in Receivables:
Receivables Collateralized by Real Estate: The Consolidated
Group is engaged in the purchase of Receivables which include
Receivables collateralized by real estate. See "BUSINESS-Receivable
Investments". All such Receivable investments are subject to a risk
of payment default and loss in the event of foreclosure. The risk
of default and loss can be affected by changes in economic
conditions, property values, changes in zoning, land use,
environmental laws and other legal restrictions, including
restrictions on timing and methods of foreclosure. There is no
assurance that these Receivables will be paid according to their
terms, or that property values will be adequate to preclude loss in
the event of a foreclosure. The Consolidated Group's underwriting
is currently provided through Metropolitan. Metropolitan's
investment underwriting procedure includes a review of demographics,
market trends, property value, economy, and the buyer's credit.
Through Metropolitan, the Consolidated Group buys these Receivables
nationwide, allowing it to diversify its investments geographically
into areas where the market trends and economic conditions may be
favorable. Management believes that these procedures minimize the
risk of default or loss in the event of foreclosure. However, there
is no assurance that these procedures will be effective.
Investments in Other Receivables: In addition to the purchase
of Receivables collateralized by real estate, the Consolidated
Group, through Metropolitan, is engaged nationwide in the purchase
of other types of Receivables including the purchase of annuities
issued in the settlement of disputes, other types of annuities,
lottery prizes, and other investments. All such Receivables are
subject to the risk of default by the payor (frequently an unrelated
insurance company, or in the case of lotteries, a state government).
Unlike Receivables collateralized by real estate, these Receivables
are generally not collateralized by a specific asset. The
Consolidated Group's underwriting is currently provided through
Metropolitan. Metropolitan's investment underwriting procedures
vary with the type of investment and generally include: a review of
the credit rating of the payor and other relevant factors designed
to evaluate the risk of the particular investment. Management
believes that these procedures minimize the risk of default and loss
in the event of a default. However, there is no assurance that
these procedures will be effective to minimize the occurrence of any
default. See "BUSINESS-Receivable Investments".
As of September 30, 1996, the Consolidated Group's Receivable
investments consisted of the following:
<TABLE>
<S> <C>
Percent Type of Receivable
_______ __________________
87% Receivables collateralized by Real Estate
8% Annuities
5% Lotteries and Loans collateralized by
Lotteries
</TABLE>
As of September 30, 1996, the Consolidated Group's Receivable
investments collateralized by real estate were principally located
in the following regions:
<TABLE>
<S> <C>
Percent Region
------- ------
22% Pacific Northwest (Washington, Alaska, Oregon,
Idaho and Montana)
25% Pacific Southwest (California, Nevada and
Arizona)
15% Southwest (Texas, Louisiana and New Mexico)
9% Southeast (Florida, Georgia, North Carolina and
South Carolina)
29% Other areas (of which no more than 3% were located
in any one state)
</TABLE>
Environmental Considerations: In the course of its business,
the Consolidated Group acquires properties, generally through
foreclosure. Various state and federal laws and regulations impose
liability upon the owner and previous owner of property on account
of hazardous waste or substances released onto or disposed of on
property. As a result, the owner or former owner may be liable to
the government or a third party for the clean up costs. The costs
of investigation, remediation and removal can be substantial. While
the Consolidated Group endeavors to avoid the acquisition of
Receivables or properties which may be contaminated, there can be no
assurance that significant losses could not be incurred due to
environmental contamination.
Relative to Certificates
1. Lack of Indenture Restrictions and Related Indebtedness:
The Indenture pursuant to which the Certificates are issued does not
restrict Summit's ability to issue additional certificates or to
incur other unsecured or collateralized debt. Neither does the
Indenture require Summit to maintain any specified financial ratios,
minimum net worth, minimum working capital or a sinking fund. The
Certificates are senior in liquidation to all outstanding equity
securities of Summit, are subordinate to Summit's collateralized
debt and are on a parity with all other outstanding certificates,
unsecured accounts payable and other unsecured accrued liabilities.
As of September 30, 1996, Summit had approximately $3,851,000 of
collateralized debt and related accrued interest. Also as of
September 30, 1996, the principal and compound and accrued interest
on Summit's outstanding certificates was approximately $42,824,000.
2. Absence of Insurance and Guarantees: The Certificates are
not insured by any governmental agency (as are certain investments
in financial institutions such as banks, savings and loans or credit
unions) nor are they guaranteed by any public agency or private
entity. It should also be noted that Summit is not subject to any
generally applicable governmental limitations on its own borrowing.
In these respects, Summit is similar to other commercial enterprises
which sell debt to public investors, but dissimilar to those
financial institutions providing insurance against the risk of loss
to investors. The investment risk of the Certificates is thus
higher than the risk incurred by investors in such insured financial
institutions.
3. Term Investment/Absence of Trading Market/Liquidity: There
is no trading market for the Certificates, and it is not anticipated
that one will develop. The Certificates are not subject to
redemption prior to maturity. Prepayments pursuant to the
"prepayment on death" provision or upon mutual agreement between
Summit and a Certificateholder will not constitute redemptions.
Prospective investors should carefully consider their needs for
liquidity before investing in the Certificates and upon investing,
should be prepared to hold the Certificates until maturity. See
"DESCRIPTION OF SECURITIES-Description of Certificates".
Relative to Preferred Stock
1. Limited Marketability of Shares: The Preferred Stock is
not listed, nor does management anticipate applying for a listing on
any national or regional stock exchange and no independent public
market for Preferred Stock is anticipated. The broker/dealer for
this offering, MIS, operates a trading list to match buyers and
sellers of Summit's preferred stock. Summit will use its best
efforts to maintain the availability of this listing for the
Preferred Stock offered hereunder. With limited exceptions, Summit
has established a policy that all preferred shareholders must place
their shares for sale on the trading list for 60 consecutive days
before Summit will entertain a request for redemption. There is no
assurance that the shares will be sold within the 60 day period.
There is no assurance that Summit will redeem the shares if they
have not sold within the 60 day period. Therefore, a prospective
purchaser should not rely on this trading list or Summit's
discretionary redemption provisions as assurance that such shares
could ever be sold or redeemed. There can be no assurance that this
system will continue to operate, or that it will provide liquidity
comparable to securities traded on a recognized public stock
exchange. See "DESCRIPTION OF PREFERRED STOCK-Redemption of
Shares".
2. Limitations on Redemption and Restrictions on
Distributions: Preferred Stock is designed as a long-term
investment in the equity of Summit, not as a short-term, liquid
investment. The Preferred Stock is redeemable under limited
circumstances solely at the option of Summit. In addition, Summit
may not purchase or acquire any shares of Preferred Stock in the
event that cumulative dividends thereon have not been paid in full
except pursuant to a purchase or exchange offer made on the same
terms to all holders of Preferred Stock. See "DESCRIPTION OF
PREFERRED STOCK-Redemption of Shares". Summit is restricted from
making distributions on Preferred Stock in the event that any
distributions to which the holders of other Series of preferred
stock are entitled to and have not been paid. See "DESCRIPTION OF
PREFERRED STOCK-Distribution".
3. Effect of Certain Subordination and Liquidation Rights:
The liquidation preference of Preferred Stock offered herein is $100
per share. In the event of liquidation of Summit, all shares of
Series S Preferred Stock, including shares of additional sub-series
which may subsequently be authorized and sold, are on a parity.
Preferred Stock is subordinate to all outstanding debt of Summit
including its Certificates. Preferred Stock is preferred in
liquidation to Summit's common stock. As of September 30, 1996,
total assets of Summit were approximately $117,267,000 and the total
liabilities of Summit ranking senior in liquidation preference to
Preferred Stock were approximately $111,908,000, and the total
liquidation preference of all outstanding shares of Series S
preferred stock was approximately $4,131,000.
The preference in liquidation would not necessarily be
applicable to terms afforded Preferred Stock in the event of other
extraordinary corporate events such as the sale of substantially all
its assets, capital restructuring, merger, reorganization and
bankruptcy. The outcome in such events could be subject to
negotiation among all interested parties and/or court determinations
and are not presently determinable. In such circumstances,
Preferred Stock would not necessarily enjoy any preference over
terms available to common stock, or even be as favorable.
4. Control by Common Shareholders: The Common Stock is the
only class of Summit's stock carrying voting rights. Common
stockholders now hold, and upon completion of this offering will
continue to hold, effective control of Summit except as described
below. The Board resolution authorizing the Preferred Stock
provides that in the event distributions payable on any shares of
preferred stock, including the Preferred Stock offered hereunder,
are in arrears in an amount equal to twenty-four full monthly
dividends or more per share, then the holders of Preferred Stock and
all other outstanding preferred stock shall be entitled to elect a
majority of the Board of Directors of Summit. Preferred Stock
shareholders may also become entitled to certain other voting rights
as required by law. See "DESCRIPTION OF PREFERRED STOCK-Voting
Rights".
5. Federal Income Tax Considerations: Under the current
Federal Income Tax Code, to the extent that Summit may not have
current or accumulated earnings and profits as computed for federal
income tax purposes, Summit believes that distributions made with
respect to Preferred Stock would be characterized as tax free
returns of capital for federal income tax purposes. Summit is
unable to predict the future character of its distributions.
Purchasers are advised to consult their own tax advisors with
respect to the federal income tax treatment of distributions. See
"DESCRIPTION OF PREFERRED STOCK-Federal Income Tax Consequences of
Distributions".
DESCRIPTION OF SECURITIES
Description of Certificates
The Certificates will be issued under an Indenture, as amended,
dated as of November 15, 1990. The following statements under this
caption relating to the Certificates and the Indenture are summaries
and do not purport to be complete. Such summaries are subject to the
detailed provisions of the Indenture and are qualified in their
entirety by reference to the Indenture. A copy of the Indenture is
filed as an exhibit to the Registration Statement of which this
Prospectus is a part and is available for inspection at the
principal office of Summit.
General
The Certificates will represent general unsecured obligations
of Summit and will be issued in fully registered form without
coupons, in fractional denominations of $0.01 or more. The
Certificates will have the minimum investment amounts, maturities
and the interest rates set forth on the cover page of this
Prospectus. The stated interest rates, maturities, and minimum
investment amounts of unissued Certificates may be changed at any
time by Summit. Any such change will have no effect on the terms of
the previously sold Certificates.
Certificates may be transferred or exchanged for other
Certificates of the same series of a like aggregate principal
amount, subject to the limitations set forth in the Indenture. No
service charge will be made for any transfer or exchange of
Certificates. Summit may require payment of taxes or other
governmental charges imposed in connection with any such transfer or
exchange. Interest will accrue at the stated rate from the date of
issue until maturity. The Certificates are not convertible into
capital stock or other securities of Summit.
The Certificates are not subject to redemption prior to
maturity, but may be prepaid pursuant to the prepayment on death
provision described below or in limited circumstances involving an
investor's demonstrated financial hardship, subject to regulatory
restrictions affecting redemptions and exchanges of securities
during an offering. Summit may, in its sole discretion, entertain a
request for an early payout of a Certificate upon terms mutually
agreed to by the holder of the Certificate and Summit. Such early
payout requests, when received, are reviewed in the order received
and are subject to review by Summit's executive management.
Payment of Principal and Interest
Interest will be payable in cash to the Certificateholder(s)
under one of several plans of interest payment. The purchaser may
elect to have interest paid on a monthly, quarterly, semiannual or
annual basis, without compounding or elect to accumulate interest
with compounding semiannually at the stated interest rate.
Certificateholders make the interest payment election at the time of
purchase of the Certificates. The interest payment election may be
changed at any time by written notice to Summit. Under the
compounding option, the Certificateholder(s), upon written notice to
Summit, may withdraw the interest accumulated during the last two
completed semiannual compounding periods as well as the interest
accrued from the end of the last compounding period to the date
Summit receives the notice. Amounts compounded prior to the last
two completed compounding periods are available only at maturity.
At the election of the Certificateholder at the time of
investment, and subject to the minimum term and investment
requirements set forth on the cover page of this Prospectus, level
monthly installments comprised of principal and interest will be
paid to the Certificateholder commencing 30 days from the issue date
of the Certificate until maturity. The amount of each installment
will be determined by the amortization term designated by the
Certificateholder at the time the Certificate is purchased.
Certificateholders will be notified in writing approximately 30
days prior to the date their Certificates will mature. The amounts
due on maturity are placed in a separate bank trust account until
paid to the Certificateholder(s). Certificates do not earn interest
after the maturity date. Unless otherwise requested by the
Certificateholder, Summit will pay the principal and accumulated
interest due on the matured certificate to the Certificateholder(s)
at Summit's main office, or by mail to the address designated by the
Certificateholder(s).
Prepayment on Death
In the event of the death of a registered owner of a
Certificate, any party entitled to receive some or all of the
proceeds of the Certificate may elect to have his or her portion of
the principal and any accrued but unpaid interest prepaid in full in
five consecutive equal monthly installments. Interest will continue
to accrue on the declining principal balance of such portion. No
interest penalties will be assessed. Any request for prepayment
shall be made to Summit in writing and shall be accompanied by the
Certificate and evidence satisfactory to Summit of the death of the
registered owner or joint registered owner. Before prepayment,
Summit may require the submission of additional documents or other
material which it may consider necessary to determine the portion of
the proceeds the requesting party is entitled to receive, or
assurances which, in Summit's discretion, it considers necessary to
the fulfillment of its obligations.
Related Indebtedness
The Indenture pursuant to which the Certificates are issued
does not restrict Summit's ability to issue additional Certificates
or to incur other debt. The Indenture does not require Summit to
maintain any specified financial ratios, minimum net worth or
minimum working capital. Certificates will not be guaranteed or
insured by any governmental or private agency. The Certificates
offered hereby are senior in liquidation to all outstanding equity
securities of Summit. They are subordinate to Summit's
collateralized debt and are on a parity with all other outstanding
certificates, unsecured accounts payable and accrued liabilities.
The amount of outstanding certificates on September 30, 1996,
(including compound and accrued interest) was approximately
$42,824,000. There are no limitations on Summit's ability to incur
collateralized debt. Collateralized debt outstanding on that date
of approximately $3,851,000 (principal and accrued interest)
consisted primarily of reverse repurchase agreements, with various
securities brokers, collateralized by U.S. Treasury bonds.
Concerning the Trustee
West One Bank ("West One")was the Indenture Trustee until April
24, 1996, when West One resigned and First Trust National
Association was appointed successor Trustee ( "First Trust" or the
"Trustee"). Management has been informed by West One that the
reason for the resignation was its business decision to discontinue
Trust services. First Trust has assumed all of the duties and
obligations of the trustee as set forth in the Trust Indenture, as
amended. The Trustee, is obligated under the Indenture to oversee,
and if necessary, to take action to enforce fulfillment of Summit's
obligations to Certificateholders. The Trustee is a national
banking association headquartered in Seattle, with a combined
capital and surplus in excess of $100 million. Summit and certain
of its affiliates may maintain deposit accounts with and may, from
time to time, borrow money from the Trustee and conduct other
banking transactions with it. At September 30, 1996 and as of the
date of this Prospectus, no loans from the Trustee were outstanding.
In the event of default, the Indenture permits the Trustee to become
a creditor of Summit and does not preclude the Trustee from
enforcing its rights as a creditor, including rights as a holder of
collateralized indebtedness.
Rights and Procedures in the Event of Default
Events of default include the failure of Summit to pay interest
on any Certificate for a period of 30 days after it becomes due and
payable; the failure to pay the principal or any required
installment thereof of any Certificate when due; the failure to
perform any other covenant in the Indenture for 60 days after
notice; and certain events in bankruptcy, insolvency or
reorganization with respect to Summit. Upon the occurrence of an
event of default, either the Trustee or the holders of 25% or more
in principal amount of Certificates then outstanding may declare the
principal of all the Certificates to be due and payable immediately.
The Trustee must give the Certificateholders notice by mail of
any default within 90 days after the occurrence of the default,
unless it has been cured or waived. The Trustee may withhold such
notice if it determines in good faith that such withholding is in
the best interest of the Certificateholders, except if the default
consists of failure to pay principal or interest on any Certificate.
Subject to certain conditions, any such default, except failure
to pay principal or interest when due, may be waived by the holders
of a majority (in aggregate principal amount) of the Certificates
then outstanding. Such holders will have the right to direct the
time, method and place of conducting any proceeding for any remedy
available to the Trustee, or of exercising any power conferred on
the Trustee, except as otherwise provided in the Indenture. The
Trustee may require reasonable indemnity from holders of
Certificates before acting at their direction.
Within 120 days after the end of each fiscal year Summit must
furnish to the Trustee a statement of certain officers of Summit
concerning their knowledge as to whether or not Summit is in default
under the Indenture.
Modification of the Trust Indenture
Certificateholders' rights may be modified with the consent of
the holders of 66 2/3% of the outstanding principal amounts of
Certificates, and 66 2/3% of each series affected. In general, no
adverse modification of the terms of payment and no modification
reducing the percentage of Certificates required for modification is
effective against any Certificateholder without his or her consent.
Restrictions on Consolidation, Merger, etc.
Summit may not consolidate with or merge into any other
corporation or transfer substantially all its assets unless either
Summit is the continuing corporation formed by such consolidation,
or into which Summit is merged, or the person acquiring by
conveyance or transfer of such assets shall be a corporation
organized and existing under the laws of the United States or any
state thereof which assumes the performance of every covenant of
Summit under the Indenture and certain other conditions precedent
are fulfilled. The Indenture contains no other provisions or
covenants which afford holders of the Certificates special
protection in the event of a highly leveraged buyout transaction.
DESCRIPTION OF CAPITAL AND COMMON STOCK
As of the date of this prospectus the authorized capital of
Summit consists of 2,000,000 shares of Common Stock ($10 par value),
and 10,000,000 shares of Series S Preferred Stock ($10 par value),
from which 185,000 shares of Series S-1, 159,500 shares of Series S-
2 and 80,000 shares of Series S-RP have been authorized. See
"Consolidated Financial Statements".
Relative Rights of Common Stock
Holders of shares of Common Stock are entitled to one vote per
share on all matters to be voted on by the shareholders. Subject to
the rights of preferred shareholders, if any, the holders of Common
Stock are entitled to receive such dividends, if any, as may be
declared from time to time by the Board of Directors in its
discretion from funds legally available, and upon liquidation or
dissolution of Summit are entitled to receive all assets available
for distribution to common shareholders. The Common Stock has no
preemptive or other subscription rights, and there are no conversion
rights or redemption or sinking fund provisions with respect to such
shares. All outstanding shares of Common Stock are fully paid and
nonassessable. Currently, National Summit Corp. holds 100% of the
Common Stock of Summit. See "CERTAIN TRANSACTIONS".
DESCRIPTION OF PREFERRED STOCK
This offering consists of 150,000 shares of Variable Rate
Cumulative Preferred Stock, Series S-2 (hereinafter referred to as
"Preferred Stock"). All of the shares of Preferred Stock offered by
Summit, hereby, when issued and sold against the consideration set
forth in this Prospectus will be validly issued, fully paid and
nonassessable. The relative rights and preferences of Preferred
Stock have been fixed and determined by the Board of Directors of
Summit and are set forth in the Preferred Stock Authorizing
Resolution (the "Authorizing Resolution"). Preferred Stock is
issued in Book Entry form. Investments in Preferred Stock are
evidenced by receipts and not by negotiable stock certificates.
The following statements relating to the Preferred Stock are
summaries and do not purport to be complete and are qualified in
their entirety by reference to the Authorizing Resolution, a copy of
which has been filed with the Commission as an exhibit to the
Registration Statement of which this Prospectus is a part, and is
available for inspection at the principal office of Summit.
Distributions
Distributions on Preferred Stock are cumulative and are to be
declared monthly on the first business day of the month payable to
the shareholders of record as of the fifth calendar day of each
month. Distributions are to be paid in cash on the twentieth
calendar day of each month in an amount equal to the offering price
of $100 per share multiplied by the distribution rate divided by
twelve. The distribution rate will be the "Applicable Rate" as
defined herein subject to the authority of Summit's Board of
Directors to authorize, by resolution, a higher rate.
The Applicable Rate for any monthly distribution period cannot
be less than 6% or greater than 14% per annum. The Applicable Rate
for any monthly distribution period shall be (i) the highest of the
three-month U.S. Treasury Bill Rate, the Ten-Year Constant Maturity
Rate and the Twenty-Year Constant Maturity Rate (each as more fully
described in the Authorizing Resolution), (ii) plus one half of one
percentage point. Each of the above three rates shall be calculated
as the arithmetic average of the two most recent weekly per annum
yields as published weekly by the Federal Reserve Board during the
Calendar Period immediately prior to the ten calendar days
immediately preceding the first day of the distribution period for
which the distribution rate on Preferred Stock is being determined.
Should Summit determine in good faith that one or more of such rates
cannot be determined for any distribution period, then the
Applicable Rate of such period shall be the higher of whichever of
such rates can be so determined, plus one half of one percentage
point. Should Summit determine in good faith that none of such
rates can be determined for any distribution period, then the
Applicable Rate in effect for the preceding distribution period
shall be continued for such distribution period. The distribution
rate for each monthly distribution period shall be calculated as
promptly as practical by Summit. Summit will cause notice of the
distribution rate to be enclosed with the next mailed distribution
payment check. In making such calculation, the 3-month U.S.
Treasury Bill Rate, Ten-Year Constant Maturity Rate and Twenty-Year
Constant Maturity Rate shall each be rounded to the nearest five
hundredths of a percentage point.
Prior to the effective date of this Prospectus, Summit's Board
of Directors had adopted a resolution to authorize a distribution
rate on the Preferred Stock at two percentage points higher than the
Applicable Rate. Such higher distribution rate will continue from
month to month until the Board elects to terminate it. The Board
may increase, decrease or eliminate the additional points at any
time, in its sole discretion.
Restrictions on Distributions
Summit may not declare or pay a distribution on any share of
Preferred Stock for any distribution period unless, at the same
time, a like distribution shall be declared or paid on all shares of
preferred stock then issued and outstanding and entitled to receive
distributions. See "CAPITALIZATION".
So long as any shares of Preferred Stock are outstanding, and
unless the full cumulative dividends on all outstanding preferred
shares shall have been paid or declared and set apart for all past
dividend periods, Summit may not: (i) declare or pay or set aside
for payment any dividend (other than a dividend in common stock or
in any other stock ranking junior to Preferred Stock as to dividends
and upon liquidation and other than as provided in the foregoing
paragraph); (ii) declare or pay any other distribution upon common
stock or upon any other stock ranking junior to or on a parity with
Preferred Stock as to dividends or upon liquidation; or (iii)
redeem, purchase or otherwise acquire common stock or any other
stock of Summit ranking junior to or on a parity with Preferred
Stock as to dividends or upon liquidation for any consideration (or
pay or make available any funds for a sinking fund for the
redemption of any shares of any such stock) except by conversion
into or exchange for stock of Summit ranking junior to Preferred
Stock as to dividends and upon liquidation.
Summit may make distributions ratably on the shares of
Preferred Stock and shares of any stock of Summit ranking on a
parity therewith with regard to the payment of dividends, in
accordance with the sums which would be payable on such shares if
all dividends, including accumulations, if any, were declared and
paid in full. As of the date hereof, no dividends on Summit's
preferred stock are in arrears. No interest will be paid for or on
account of any unpaid dividends.
Liquidation Rights
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of Summit, the holders of shares of
Preferred Stock will be entitled to receive out of the assets of
Summit available for distribution to stockholders, before any
distribution of assets is made to holders of common stock or any
stock of Summit ranking, upon liquidation, junior to Preferred
Stock, liquidating distributions in the amount of $100 per share
plus declared and unpaid dividends. Preferred Stock is junior in
liquidation to outstanding debt of Summit. As of September 30,
1996, the total liabilities of Summit ranking senior in liquidation
preference to Preferred Stock were approximately $111,908,000.
Obligations ranking on a parity with Preferred Stock upon
liquidation (i.e. the total liquidation preference of the
outstanding shares of all previously issued series of preferred
stock) as of September 30, 1996 were approximately $4,131,000.
There are no limitations on Summit's ability to incur additional
secured or unsecured indebtedness. See "CAPITALIZATION" & "CERTAIN
INVESTMENT CONSIDERATIONS-Risk Factors".
The Preferred Stock Authorizing Resolution provides that,
without limitation, the voluntary sale, lease or conveyance of all
or substantially all of Summit's property or assets to, or its
consolidation or merger with, any other corporation shall not be
deemed to be a liquidation, dissolution or winding up of Summit.
If, upon any voluntary or involuntary liquidation, dissolution or
winding up of Summit, the amounts payable with respect to Preferred
Stock and any other shares of stock of Summit ranking as to any such
distribution on a parity with Preferred Stock are not paid in full,
the holders of Preferred Stock and of such other shares will share
ratably in any such distribution of assets of Summit in proportion
to the full respective preferential amounts to which they are
entitled. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of shares of
Preferred Stock will not be entitled to any further participation in
any distribution of assets by Summit.
Redemption of Shares
Upon call by Summit: . . . Subject to regulatory restrictions
affecting redemptions during an offering, the shares of Preferred
Stock are redeemable, in whole or in part, only at the option of
Summit at a redemption price of $100 per share plus declared and
unpaid dividends to the date fixed for redemption. In the event that
fewer than all of the outstanding shares of Preferred Stock are to
be redeemed, the number of shares to be redeemed shall be determined
by Summit and the shares to be redeemed shall be determined by such
method as Summit, in its sole discretion, deems to be equitable.
Discretionary Redemption Upon Request of the Holder: . . . As
provided in the Preferred Stock Authorizing Resolution, the shares
of Preferred Stock are not redeemable at the option of the holder.
If, however, Summit receives an unsolicited written request for
redemption of a block of shares from any holder, Summit may, in its
sole discretion, subject to regulatory restrictions affecting
redemptions during an offering, and subject to the limitations
described below, accept such shares for redemption. Such redemption
requests are reviewed in the order received, and are subject to
review by Summit's executive management. Any shares so tendered,
which Summit in its discretion, allows for redemption shall be
redeemed by Summit directly, (and not from or through a broker or
dealer), at a price equal to $97 per share, plus any declared but
unpaid dividends to date if redeemed during the first year after the
date of original issuance and $99 per share plus any declared but
unpaid dividends if redeemed thereafter. Summit may change such
optional redemption prices at anytime with respect to unissued
shares of Series S.
There can be no assurance that Summit's financial condition
will allow it to exercise its discretion to accept any particular
request for redemption of Preferred Stock. Summit will not redeem
any such shares tendered for redemption if to do so would, in the
opinion of Summit's management, be unsafe or unsound in light of
Summit's financial condition (including its liquidity position); if
payment of interest or principal on any outstanding instrument of
indebtedness is in arrears or in default; or if payment of any
dividend on Preferred Stock or share of any stock of Summit ranking
at least on a parity therewith is in arrears as to dividends. In
the event that cumulative dividends on Preferred Stock have not been
paid in full, Summit may not purchase or acquire any shares of
Preferred Stock otherwise than pursuant to a purchase or exchange
offer made on the same terms to all holders of Preferred Stock.
The Preferred Stock is not expected to be traded on any
national or regional stock exchange and no independent public market
for Preferred Stock is anticipated. Management does not anticipate
applying for a listing for such public trading. The broker-dealer
for this offering, MIS, maintains a trading list to match buyers and
sellers of preferred stock. Summit will use its best efforts to
maintain the availability of this listing for the Preferred Stock
offered hereunder following completion of this offering. With
limited exceptions, Summit has established a policy that all
preferred shareholders including holders of the Preferred Stock
offered herein, must place their shares for sale on the trading list
for 60 consecutive days before Summit will entertain a request for
redemption. See "CERTAIN INVESTMENT CONSIDERATIONS - RISK FACTORS".
Voting Rights
The Preferred Stock has no voting rights except as provided in
the Authorizing Resolution and except as required by Idaho State Law
regarding amendments to Summit's Articles of Incorporation which
adversely affect holders of such shares as a class and requires
approval of a majority of the outstanding shares entitled to vote.
The Authorizing Resolution provides that holders of Preferred
Stock, together with the holders of Summit's other preferred stock
hereafter authorized, voting separately and as a single class, shall
be entitled to elect a majority of the Board of Directors of Summit
in the event that distributions payable on any shares of Preferred
Stock shall be in arrears in an amount equal to twenty-four full
monthly dividends or more per share. Such right will continue until
all distributions in arrears have been paid in full.
Federal Income Tax Consequences of Distributions
The following discussion of the federal income tax consequences
of distributions is based upon the Internal Revenue Code of 1986 as
amended (the "Code"), existing Treasury regulations, current
published administrative positions of the Internal Revenue Service
(the "Service") contained in revenue rulings, revenue procedures and
notes and existing judicial decisions. No assurance can be given
that legislative or administrative changes or court decisions may
not be forthcoming that could significantly modify the statements in
this discussion. Any such changes may or may not be retroactive with
respect to transactions effected prior to the date of such changes.
Distributions made to the holders of Preferred Stock will
either be taxable or not depending, in part, on the extent to which
they are made out of current or accumulated earnings and profits of
Summit as calculated for federal income tax purposes. To the
extent, if any, that distributions made by Summit to the holders of
Preferred Stock exceed current and accumulated earnings and profits
of Summit, such distributions will be treated first as a tax-free
return of capital, reducing the holder's basis in Preferred Stock
(not below zero) and thereafter as capital gains (provided Preferred
Stock is held by the holder as a capital asset).
Summit believes that the majority of the distributions on its
outstanding common and preferred stock were tax free returns of
capital for federal income tax purposes in calendar 1994, and were
taxable for 1995 and 1996. Summit is currently unable to predict
the character of its distributions for future years.
Prospective purchasers are advised to consult their own tax
advisor with respect to the income tax treatment or any distribution
made with respect to the Preferred Stock.
Distributions paid with respect to Preferred Stock, whether
deemed to be dividends, return of capital, or capital gains for
federal income tax purposes will result in the same federal income
tax consequences to Summit as other payments of dividends. These
distributions are not deductible by Summit under current tax law.
Additionally, distributions to foreign taxpayers are subject to
special rules not discussed herein.
Transfer Agent and Registrar
Metropolitan acts as Transfer Agent and Registrar for Summit's
Certificates and capital stock, including its Preferred Stock.
<PAGE>
LEGAL MATTERS
LEGAL OPINION
The legality of the Certificates and Preferred Stock being
offered hereby is being passed upon for Summit by Susan A. Thomson,
Esq., who is Assistant Corporate Counsel for Summit and also
employed by Metropolitan as its Assistant Corporate Counsel and Vice
President.
LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or
threatened against Summit, or to which its property is subject.
EXPERTS
The consolidated balance sheets of Summit and its subsidiaries
as of September 30, 1996 and 1995 and the consolidated statements of
income, stockholders' equity and cash flows for each of the three
years in the period ended September 30, 1996 included in this
Prospectus, have been included herein in reliance on the report,
which includes an explanatory paragraph describing changes in the
method of accounting for impaired loans in fiscal 1996, of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
<PAGE>
PLAN OF DISTRIBUTION
The Certificates and Preferred Stock are offered directly to
the public on a continuing best efforts basis through MIS which is a
subsidiary of Summit. Accordingly, the offering has not received
the independent selling agent review customarily made when an
unaffiliated selling agent offers securities. No commission or
other expense of the offering will be paid by the purchasers of the
Certificates or Preferred Stock. A commission will, however, be
paid by Summit on most Certificate purchases in the maximum amount
of 6% of the Certificate price, depending on the term of the
Certificate and whether or not the transaction is a reinvestment or
new purchase. A commission in the maximum amount of 6% of the
offering price will also be paid by Summit on most Preferred Stock
purchases. Summit also pays certain advertising and marketing costs
related to the sales of Certificates and Preferred Stock. Such
costs are not expected to exceed approximately $400,000.
Certificates are offered only for cash or cash equivalents.
Preferred Stock is offered for cash or other consideration
acceptable to Summit as determined by the Board of Directors. MIS
will transmit such funds or other consideration directly to Summit
by noon of the next business day after receipt. Summit will also
pay certain other expenses in connection with the offering. During
the three fiscal years ended September 30, 1996, MIS received
commissions of $1,005,887 from Summit on sales of approximately
$33,470,000 of Summit's certificates and preferred stock.
MIS is a member of the National Association of Securities
Dealers, Inc. (NASD). As such, NASD Rule 2720 (formerly Schedule E)
applies and requires, in part, that a qualified independent
underwriter be engaged to render an opinion regarding the fairness
of the interest rates to be paid on the Certificates and the
fairness of the pricing of the Preferred Stock offered through this
Prospectus. Accordingly, MIS has obtained an opinion from Welco
Securities, Inc., an NASD member, ("Welco") that the interest rates
on the Certificates using a formula tied to corresponding interest
rates paid by the U.S. Treasury and regional financial institutions
meets this fairness objective based on conditions and circumstances
existing as of the date of the Prospectus. A similar opinion has
been obtained from Welco, which states that the offering price of
the Preferred Stock meets the fairness objective based on conditions
and circumstances, existing as of the date of the Prospectus.
Summit undertakes to maintain the interest rates on Certificates no
lower than those recommended by Welco based on the formula.
Accordingly, the yield at which the Certificates will be distributed
will be no lower than that recommended by Welco and the price
offered for the Preferred Stock will be no higher than Welco would
have independently recommended. Welco has assumed the
responsibilities of acting as the qualified independent underwriter
in pricing the offering and conducting due diligence. For
performing its functions as a qualified independent underwriter with
respect to the Certificates and Preferred Stock offered hereunder,
Welco is to be paid $45,000 in fees and $10,000 in non-accountable
expenses plus its accountable expenses, which are not expected to
exceed $2,500.
There is not now and Summit does not expect that there will be
a public trading market for the Certificates or Preferred Stock in
the future. MIS does not intend to make a market for the
Certificates or Preferred Stock. However, MIS undertakes to
maintain a list of persons willing to sell or purchase outstanding
series of preferred stock of Summit. Summit will use its best
efforts to maintain the availability of this listing for Preferred
Stock offered hereunder following completion of this offering. See
"CERTAIN INVESTMENT CONSIDERATIONS-RISK FACTORS-Limited
Marketability of Shares".
MIS may enter into selected dealer agreements with and reallow
to certain dealers who are members of the NASD, and certain foreign
dealers who are not eligible for membership in the NASD, a
commission of up to 6% of the principal amount of Certificates and
Preferred Stock sold by such dealers. After the commencement of the
offering, the commissions and reallowances, if any, may be lowered.
USE OF PROCEEDS
Certificate Proceeds . . . . If all of the Certificates are sold,
Summit expects net proceeds from this Certificate offering of
$37,600,000 to $40,000,000 before deducting offering expenses
estimated at $570,000 (combined total for both Certificates and
Preferred Stock) and after sales commissions. There can be no
assurance, however, that any of the Certificates can be sold. Sales
commissions will range up to $2,400,000 (6%) depending on maturities
of Certificates sold and whether sales are reinvestments or new
purchases. See "BUSINESS-Method of Financing".
Preferred Stock Proceeds . . . .If all of the Preferred Stock is
sold, Summit expects net proceeds from this Preferred Stock offering
of $14,100,000 to $15,000,000 before deducting offering expenses
estimated at $570,000 (combined total for both Certificates and
Preferred Stock) and after sales commissions of up to $900,000 (6%),
assuming all of the Preferred Stock is sold. There can be no
assurance, however, that any of the Preferred Stock can be sold.
See "BUSINESS-Method of Financing".
In conjunction with the other funds available to it through
operations and/or borrowings, Summit will utilize the proceeds of
the Certificates and Preferred Stock offerings for funding
investments in Receivables, and other investments, which may include
investments in subsidiaries and the acquisition of other companies,
and the commencement of new business ventures. The Consolidated
Group continues to evaluate possible acquisition candidates.
Presently there are no commitments or agreements for material
acquisitions. To the extent internally generated funds are
insufficient or unavailable for the retirement of maturing
certificates through the period ending January 31, 1998, and for
payment of general expenses, debt service, and preferred stock
dividend requirements, portions of the net proceeds of this offering
may also be used for such purposes. Approximately $7,175,000 in
principal amount of debt securities will mature between February 1,
1997 and January 31, 1998 with interest rates ranging from 6.5% to
10% and averaging approximately 8.5% per annum. See Note 8 to the
Consolidated Financial Statements & "CERTAIN INVESTMENT
CONSIDERATIONS-RISK FACTORS".
Management anticipates that some of the proceeds of this
offering will be invested in money market funds, bank repurchase
agreements, commercial paper, U.S. Treasury Bills and similar short-
term investments until used as stated above. Due to Summit's
inability to accurately forecast the total amount of Certificates or
Preferred Stock to be sold pursuant to this offering, no specific
amounts have been allocated for any of the foregoing purposes.
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the
Consolidated Group at September 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
DEBT PAYABLE
Reverse repurchase agreements
with various securities brokers,
interest at 5.9% per annum; due
on October 1, 1996; collateralized
by $3,900,000 in U.S. Treasury bonds $ 3,802,500
Real estate contracts and
mortgage notes payable
7% to 8.5%, due 1996 to 2002 37,875
-----------
Total Debt Payable 3,840,375
-----------
INVESTMENT CERTIFICATES
Investment Certificates,
Maturing 1996 to 2001,
at 6% to 10% 38,444,707
Compound and accrued interest 4,379,164
-----------
Total Investment Certificates 42,823,871
-----------
STOCKHOLDERS' EQUITY
Preferred Stock, $10 par:
10,000,000 shares authorized;
41,312 shares issued and
outstanding (liquidation preference
$4,131,170) 413,117
Common Stock, $10 par:
2,000,000 shares authorized;
10,000 shares issued and
outstanding 100,000
Additional paid-in capital 2,269,137
Retained earnings 2,586,654
Net unrealized losses
on investments (10,134)
----------
Total Stockholders' Equity 5,358,774
----------
Total Capitalization $52,023,020
==========
</TABLE>
<PAGE> SUMMIT SECURITIES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
The consolidated financial data shown below as of September 30, 1996 and 1995 and for the years
ended September 30, 1996, 1995 and 1994 (other than the ratio of earnings to fixed charges and
preferred stock dividends) have been derived from, and should be read in conjunction with, the
consolidated financial statements, related notes, and Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing elsewhere herein. The financial data shown
as of September 30, 1994, 1993 and 1992 and for the years ended September 30, 1993 and 1992 have
been derived from audited financial statements not included herein. The consolidated financial
statements as of and for the years ended September 30, 1996, 1995, 1994 and 1993 have been audited
by Coopers & Lybrand L.L.P. The consolidated financial statements as of and for the year ended
September 30, 1992 have been audited by BDO Seidman.
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>
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%. See "CERTAIN INVESTMENT CONSIDERATIONS-RISK
FACTORS."
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.
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
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
=========== =========== ========== ===========
</TABLE>
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>
<CAPTION>
Available Held To Total Percent
For Sale Maturity
Portfolio Portfolio
---------- ---------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total Amount $ 187 $ 7,750 $ 7,937 100.0%
========= ======== ======== ======
% Invested In:
Fixed Income $ 187 $ 7,750 $ 7,937 100.0%
Equities -- -- -- 0.0%
--------- -------- -------- ------
$ 187 $ 7,750 $ 7,937 100.0%
========= ======== ======== ======
% Fixed Income:
Taxable $ 187 $ 7,750 $ 7,937 100.0%
Non-taxable -- -- -- 0.0%
--------- -------- -------- ------
$ 187 $ 7,750 $ 7,937 100.0%
========= ======== ======== ======
% Taxable:
U.S.Government $ -- $ 5,736 $ 5,736 72.3%
Corporate 187 2,014 2,201 27.7%
--------- -------- -------- ------
$ 187 $ 7,750 $ 7,937 100.0%
========= ======== ======== =====
% Corporate:
AAA $ -- $ 1,012 $ 1,012 46.0%
AA -- 1,002 1,002 45.5%
A 187 -- 187 8.5%
--------- -------- -------- ------
$ 187 $ 2,014 $ 2,201 100.0%
========= ======== ======== ======
% Corporate:
Mortgage-backed $ 187 $ -- $ 187 8.5%
Finance -- 1,012 1,012 46.0%
Industrial -- 1,002 1,002 45.5%
--------- -------- -------- ------
$ 187 $ 2,014 $ 2,201 100.0%
========= ======== ======== ======
</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% -- --
</TABLE>
Although the States of Idaho and Arizona require only $2.0
million and $450,000, respectively, in capital and surplus to conduct
insurance business, the insurance companies have attempted to maintain
a capital and surplus ratio of at least 5% of total admitted assets
which management considers adequate for regulatory and rating
purposes.
Idaho and Arizona have enacted the Risk Based Capital Model law
which requires an insurance company to maintain minimum amounts of
capital and surplus based on complex calculations of risk factors that
encompass the invested assets and business activities. The insurance
subsidiaries' capital and surplus levels exceed the calculated minimum
requirements.
MIS is subject to extensive regulation and supervision by the
National Association of Securities Dealers, Inc. - Regulation, and the
Securities and Exchange Commission and various state regulatory
authorities. These regulations include licensing requirements, record
keeping requirements, net capital requirements, supervision
requirements and sales practice standards.
<PAGE>
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>
<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
"CERTAIN INVESTMENT CONSIDERATIONS-RISK FACTORS" & "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
"CERTAIN INVESTMENT CONSIDERATIONS-RISK FACTORS" & "BUSINESS-ANNUITY
OPERATIONS".
Through a wholly-owned subsidiary, Summit Group Holding Company,
Summit acquired Old Standard on May 31, 1995 from Metropolitan. The
purchase price was $2.722 million, plus 20% of Old Standard's
statutory earnings for the subsequent three years. The purchase price
was established based upon an actuarial valuation of Old Standard.
Summit, 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 "BUSINESS-RECEIVABLE INVESTMENTS" & "CERTAIN INVESTMENT
CONSIDERATIONS-RISK FACTORS" & Note 12 to Consolidated Financial
Statements. Management believes that such Agreements are on terms at
least as favorable as could be obtained from non-affiliated parties.
Old Standard has negotiated a reinsurance agreement with Western
United, Metropolitan's insurance subsidiary. 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.
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
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Directors and Stockholders
Summit Securities, Inc.
We have audited the accompanying consolidated balance sheets of Summit
Securities, Inc. and subsidiaries as of September 30, 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
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
1996 1995
------------ ------------
ASSETS
Cash and cash equivalents $ 4,461,315 $ 2,979,362
Investments:
Investments in affiliated companies 4,522,425 3,022,425
Available-for-sale securities, at
market 269,305
Held-to-maturity securities, at
amortized cost 7,750,078 8,269,541
Accrued interest on investments 34,244 46,209
------------ ------------
Total cash and investments 17,037,367 14,317,537
Real estate contracts and mortgage
notes receivable, net, including real
estate contracts and mortgage notes
receivable held for sale of approxi-
mately $10,408,000 in 1996 80,008,753 60,117,219
Other receivable investments 11,788,130 16,895,902
Real estate held for sale 1,191,495 836,291
Deferred costs, net 4,862,046 3,582,202
Other assets, net, including receivables
from affilites 2,378,889 597,421
------------ ------------
Total assets $117,266,680 $ 96,346,572
============ ============
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30, 1996 and 1995
1996 1995
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Annuity reserves $ 62,439,855 $ 49,559,589
Investment certificates and accrued
interest 42,823,871 38,545,896
Debt payable 3,850,970 104,636
Accounts payable and accrued expenses,
including payables to affiliates 1,367,131 2,938,182
Deferred income taxes 1,426,079 1,291,202
------------ ------------
Total liabilities 111,907,906 92,439,505
------------ ------------
Commitments and contingencies (Notes 1
and 13)
Stockholders' equity:
Preferred stock, $10 par (liquidation
preference $4,131,170 and $3,562,220) 413,117 356,222
Common stock, $10 par 100,000 100,000
Additional paid-in capital 2,269,137 1,786,991
Retained earnings 2,586,654 1,675,738
Net unrealized loss on investments,
net of income taxes of $5,221
and $6,122 (10,134) (11,884)
------------ ------------
Total stockholders' equity 5,358,774 3,907,067
------------ ------------
Total liabilities and stockholders'
equity $117,266,680 $ 96,346,572
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Annuity fees and charges $ 45,348 $ 14,179
Interest on receivables 6,018,615 3,901,113 $ 2,422,484
Earned discount on receivables 2,598,306 777,659 373,003
Other investment interest 753,163 410,568 275,180
Dividends 200,256 256,991
Real estate sales 1,093,000 1,123,500 88,000
Fees, commissions, service and other
income 2,849,737 2,580,105 60,677
Realized net gains on sales of
investments 583 4,252
Realized net gains on sales of real
estate contracts and mortgage notes
and other receivable investments 977,441 512,500 171,756
----------- ----------- -----------
Total revenues 14,536,449 9,576,615 3,395,352
Expenses:
Annuity benefits 3,702,324 1,034,082
Interest expense 3,741,095 3,251,334 2,527,945
Cost of real estate sold 1,132,552 1,117,233 75,656
Provision for losses on real estate
assets 490,082 445,381 155,042
Salaries and employee benefits 1,636,773 907,690
Commissions to agents 1,673,279 1,395,994
Other operating and underwriting
expenses 1,775,484 738,380 231,423
Less amount capitalized as deferred
costs, net of amortization (1,097,613) (140,745)
----------- ----------- -----------
Total expenses 13,053,976 8,749,349 2,990,066
----------- ----------- -----------
Income before income taxes 1,482,473 827,266 405,286
Income tax provision (237,951) (239,707) (140,407)
----------- ----------- -----------
Net income 1,244,522 587,559 264,879
Preferred stock dividends (333,606) (309,061) (2,930)
----------- ----------- -----------
Income applicable to common stockholder $ 910,916 $ 278,498 $ 261,949
=========== =========== ===========
Income per share applicable to common
stockholder $ 91.09 $ 27.85 $ 13.47
=========== =========== ===========
Weighted average number of shares of
common stock outstanding 10,000 10,000 19,445
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net
Unrealized
Additional Gains
Preferred Common Paid-In (Losses) on Retained
Stock Stock Capital Investments Earnings Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1993 200,000 $ 1,800,000 $ 1,188,024 $ 3,188,024
Net income 264,879 264,879
Cash dividends on preferred stock
(variable rate) (2,930) (2,930)
Common stock redeemed and retired
(20,000 shares) (200,000) (3,400,000) (3,600,000)
Sale of common stock (10,000 shares) 100,000 100,000
Sale of variable rate preferred
stock, net of offering costs
(1,495 shares) $ 14,952 127,008 141,960
Issuance of variable rate preferred
stock (30,224 shares) 302,242 2,720,183 3,022,425
Income tax benefit associated with
disaffiliation 206,872 206,872
----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 1994 317,194 100,000 1,454,063 1,449,973 3,321,230
Net income 587,559 587,559
Cash dividends on preferred stock
(variable rate) (309,061) (309,061)
Sale of variable rate preferred
stock, net of offering costs
(3,903 shares) 39,028 332,928 371,956
Net change in unrealized (losses)
on investment securities, net
of income taxes of $6,122 $ (11,884) (11,884)
Excess cost over historical cost
basis of subsidiaries purchased
from related parties (52,733) (52,733)
----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 1995 356,222 100,000 1,786,991 (11,884) 1,675,738 3,907,067
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net
Unrealized
Additional Gains
Preferred Common Paid-In (Losses) on Retained
Stock Stock Capital Investments Earnings Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995 356,222 100,000 1,786,991 (11,884) 1,675,738 3,907,067
Net income 1,244,522 1,244,522
Cash dividends on preferred
stock (variable rate) (333,606) (333,606)
Sale of variable rate preferred
stock, net of offering costs
(5,690 shares) 56,895 482,146 539,041
Net change in unrealized gains
on investment securities, net
of income taxes of $901 1,750 1,750
----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 1996 $ 413,117 $ 100,000 $ 2,269,137 $ (10,134) $ 2,586,654 $ 5,358,774
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,244,522 $ 587,559 $ 264,879
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Proceeds from sale of trading
securities 20,077,343
Purchase of trading securities (20,073,050)
Realized net gains on sales of
investments (583) (4,252)
Realized net gains on sales of
real estate contracts and mort-
gage notes and other receivable
investments (977,441) (512,500) (171,756)
(Gain) loss on sales of real estate 39,552 (6,267) (12,344)
Provision for losses on real estate
assets 490,082 445,381 155,042
Amortization of deferred costs 487,740 519,280 262,484
Deferred income tax provision 134,877 164,249 136,500
Changes in assets and liabilities,
net of effects from purchases of
subsidiaries:
Annuity reserves 3,713,490 1,031,720
Compound and accrued interest
on investment certificates and
debt payable (432,048) 1,714,943 1,229,371
Accrued interest on real estate
contracts and mortgage notes
receivable (1,005,273) (306,978) 107,423
Other (4,263,513) 365,111 312,110
----------- ----------- -----------
Net cash provided by (used
in) operating activities (568,595) 4,002,498 2,283,750
----------- ----------- -----------
Investing activities:
Net cash paid or received associated
with purchases of subsidiaries (761,739) 1,406,873
Collection of advances to parent and
affiliated companies 1,710,743
Purchase of investment in affiliated
company (1,500,000)
Proceeds from sales of available-for-
sale investments 999,790 992,370
Purchase of available-for-sale
investments (275,641)
Proceeds from maturities of held-to-
maturity investments 500,000
Purchase of held-to-maturity investments (486,753)
Principal payments on real estate
contracts and mortgage notes
receivable 13,874,707 6,567,102 1,829,515
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Investing activities, Continued:
Principal payments on other receivable
investments 753,892 393,942
Purchases of real estate contracts and
mortgage
notes receivable (40,100,330) (26,130,804) (20,177,705)
Purchases of other receivable
investments (7,387,117) (18,316,371)
Proceeds from real estate sales 79,686 163,687 6,200
Additions to real estate held for sale (292,494) (141,336) (82,135)
Proceeds from sale of real estate
contracts and mortgage notes and other
receivable investments 19,430,000 21,350,848 10,393,131
----------- ----------- -----------
Net cash used in investing
activities (15,165,999) (13,713,689) (6,320,251)
----------- ----------- -----------
Financing activities:
Receipts from annuity products 15,632,116 5,903,808
Withdrawals of annuity products (6,465,340) (1,934,898)
Proceeds from investment certificates 13,291,967 8,585,470 10,539,684
Repayments of investment certificates (8,571,918) (2,847,347) (2,635,649)
Borrowings from banks and others 5,752,500
Repayments to banks and others (2,043,015) (193,631) (48,170)
Debt issuance costs (585,198) (441,775) (444,102)
Excess cost over historical cost basis
of subsidiaries purchased from
related parties (52,733)
Issuance of preferred stock 539,041 371,956 141,960
Issuance of common stock 100,000
Redemption and retirement of common
stock (3,600,000)
Dividends paid on preferred stock (333,606) (309,061) (2,930)
----------- ----------- -----------
Net cash provided by
financing activities 17,216,547 9,081,789 4,050,793
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 1,481,953 (629,402) 14,292
Cash and cash equivalents, beginning
of year 2,979,362 3,608,764 3,594,472
----------- ----------- -----------
Cash and cash equivalents, end of year $ 4,461,315 $ 2,979,362 $ 3,608,764
=========== =========== ===========
</TABLE>
See Note 15 for supplemental cash flow information.
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES:
BUSINESS AND REORGANIZATION
Summit Securities, Inc., d/b/a National Summit Securities, Inc.
in the states of New York and Ohio (the Company), was incor-
porated on July 25, 1990. Prior to September 9, 1994, the
Company was a wholly owned subsidiary of Metropolitan Mortgage
& Securities Co., Inc. (Metropolitan). Metropolitan is
controlled by C. Paul Sandifur, Jr. and his immediate family.
On September 9, 1994, the controlling interest in the Company
was acquired by National Summit Corp., a Delaware corporation
which is wholly owned by C. Paul Sandifur, Jr. The change in
control was made pursuant to a reorganization wherein the
Company redeemed all the common shares held by its former
parent company, Metropolitan, which consisted of 100% of the
outstanding common stock of the Company for $3,600,000, which
approximated the net book value of the Company at the trans-
action date. Contemporaneous with this redemption, the Company
issued 10,000 shares of common stock to National Summit Corp.
for $100,000. In addition, various investors holding Metro-
politan's common and preferred stock, including members of Mr.
Sandifur's immediate family, acquired 30,224 shares of the
Company's preferred stock Series S-1 for $100 per share in
exchange for preferred and common shares of Metropolitan. The
preferred shares issued for the Metropolitan shares were
recorded at their face value which approximated recent
issuances to unrelated parties. The face value of the preferred
shares approximates fair value due to the variable dividend
rate associated with such shares (see Note 5).
On January 31, 1995, the Company consummated an agreement with
Metropolitan, whereby it acquired Metropolitan Investment
Securities, Inc. (MIS) effective January 31, 1995 at a purchase
price of $288,950, which approximated the net book value of MIS
at the date of purchase. This acquisition was recorded as a
purchase. However, due to the common control of Metropolitan
and the Company, the historical cost bases of the assets and
liabilities of MIS were recorded by the Company.
On May 31, 1995, the Company consummated an agreement with
Metropolitan, whereby it acquired Old Standard Life Insurance
Company (OSL) effective May 31, 1995, for $2,722,000, which
approximated the historical cost basis of OSL at date of
purchase, with future contingency payments equal to 20% of
statutory income prior to the accrual of income taxes for the
fiscal years ending December 31, 1995, 1996 and 1997. Future
contingency payments, if any, will be accounted for as
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
BUSINESS AND REORGANIZATION, CONTINUED
dividends. The initial purchase price plus estimated future
contingency payments approximated the appraised valuation of
OSL. The acquisition was recorded as a purchase. However, due
to the common control of Metropolitan and the Company, the
historical cost bases of assets and liabilities of OSL were
recorded by the Company. The total purchase price of MIS and
OSL exceeded the historical cost bases of the net assets of the
companies by approximately $53,000. Due to the common control
of Metropolitan and the Company, this excess purchase price has
been recorded as a dividend through a reduction of retained
earnings.
On December 28, 1995, the Company consummated an agreement with
ILA Financial Services, Inc., whereby 100% of the outstanding
common stock of Arizona Life Insurance Company (AZL), an
insurance company domiciled in Arizona, was sold to a wholly
owned subsidiary of the Company. The purchase price of
$1,234,000, approximated the net book value of AZL at date of
purchase. AZL holds licenses to engage in insurance sales in
seven states and the purchase price included approximately
$268,000 in value assigned to these state licenses. At the date
of purchase, AZL was dormant and had no outstanding insurance
business or other liabilities. AZL's future business activities
will be the acquisition of real estate mortgage notes and
contracts using funds derived from the sale of annuities and
funds derived from receivable cash flows. The acquisition of
AZL had an immaterial effect on the financial condition and
operations of the Company.
Metropolitan is effectively controlled by C. Paul Sandifur, Jr.
through his common stock ownership and voting control. National
Summit Corp. is wholly owned by C. Paul Sandifur, Jr. through
ownership of 100% of the voting stock. National Summit Corp.
does not have any operations or activities other than the
holding of the Company.
The Company purchases contracts and mortgage notes
collateralized by real estate and other receivable invest-
ments with funds generated from the public issuance of debt
securities in the form of investment certificates, annuity
products, cash flows from receivable payments, sales of real
estate and securitization of receivables held for sale.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Old Standard
Life Insurance Company (since May 31, 1995), Metropolitan
Investment Securities, Inc. (since January 31, 1995), Arizona
Life Insurance Company (since December 28, 1995) and Summit
Property Development, Inc. All significant intercompany
transactions and balances have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments
purchased with a remaining maturity of three months or less to
be cash equivalents. Cash includes all balances on hand and on
deposit in banks and financial institutions. The Company
periodically evaluates the credit quality of its depository
financial institutions. Substantially all cash and cash
equivalents are on deposit with one financial institution and
balances periodically exceed the FDIC insurance limit.
INVESTMENTS IN AFFILIATED COMPANIES
Investments in equity securities of affiliated companies are
carried at the lower of cost or estimated net realizable value.
INVESTMENTS
The Company has classified its investments in debt and equity
securities, other than those of affiliated companies, as
"available-for-sale," "held-to-maturity" or "trading." The
accounting policies related to these investments are as
follows:
AVAILABLE-FOR-SALE SECURITIES: Available-for-sale
securities, consisting primarily of mortgage-backed
securities are carried at market value. Unrealized gains and
losses are presented as a separate component of stockholders'
equity, net of related income taxes.
HELD-TO-MATURITY SECURITIES: Held-to-maturity securities,
consisting primarily of government-backed securities and
corporate bonds having fixed maturities, are carried at
amortized cost. The Company has the ability and intent to
hold these investments until maturity.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
INVESTMENTS, CONTINUED
TRADING SECURITIES: Trading securities, consisting primarily
of government-backed securities and corporate bonds, are
bought and held principally for the purpose of selling them
in the near term and are recorded at market value. Realized
and unrealized gains and losses are included in the
consolidated statements of income.
For other than a temporary decline in the value of a common
stock, preferred stock or publicly traded bonds below their
cost or amortized cost, the investment is reduced to its net
realizable value, which becomes the new cost basis of the
investment. The amount of the reduction is reported as a loss.
Any recovery of market value in excess of the investment's new
cost basis is recognized as a realized gain only upon sale,
maturity or other disposition of the investment. Factors which
the Company evaluates in determining the existence of an other
than temporary decline in value include the length of time and
extent to which market value has been less than cost; the
financial condition and near-term prospects of the issuers; and
the intent and ability of the Company to retain its investment
for the anticipated period of recovery in market value.
Realized gains and losses on investments are calculated on the
specific-identification method and are recognized in the
consolidated statements of income in the period in which the
investment is sold.
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE
Real estate contracts and mortgage notes receivable held for
investment purposes are carried at amortized cost. Discounts
originating at the time of purchase, net of capitalized
acquisition costs, are amortized using the level yield
(interest) method. For receivables acquired after September 30,
1992, net purchase discounts are amortized on an individual
receivable basis using the interest method over the remaining
contractual term of the receivable. For receivables acquired
before October 1, 1992, the Company accounts for its portfolio
of discounted receivables using anticipated prepayment patterns
to apply the interest method of amortizing discounts. Dis-
counted receivables are pooled by the fiscal year of purchase
and by similar receivable types. The amortization period, which
is approximately 78 months, estimates a constant prepayment
rate of 10-12 percent per year and scheduled payments, which is
consistent with the Company's prior experience on similar
receivables and the Company's expectations.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD
FOR SALE
Real estate contracts and mortgage notes receivable held for
sale are carried at the lower of cost (outstanding principal
adjusted for net discounts and capitalized acquisition costs)
or market value, determined on an aggregate basis. 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE HELD FOR SALE
Real estate is stated at the lower of cost or fair value less
estimated costs to sell. The Company principally acquires real
estate through foreclosure or forfeiture. Cost is determined by
the purchase price of the real estate or, for real estate
acquired by foreclosure, at the lower of (a) the fair value of
the property at the date of foreclosure less estimated selling
costs, or (b) cost (net unpaid receivable carrying value).
Periodically, the Company reviews the carrying values of real
estate held for sale by obtaining new or updated appraisals,
and adjusts its carrying values to the lower of cost or net
realizable value, as necessary. As a result of changes in the
real estate markets in which these properties are located, it
is reasonably possible that these carrying values could change
in the near term.
Profit on sales of real estate is recognized when the buyers'
initial and continuing investment is adequate to demonstrate
that (1) a commitment to fulfill the terms of the transaction
exists, (2) collectibility of the remaining sales price due is
reasonably assured, and (3) the Company maintains no continuing
involvement or obligation in relation to the property sold and
transfers all the risks and rewards of ownership to the buyer.
DEFERRED COSTS
Commission expense and other annuity policy and investment
certificate issuance costs are deferred. For investment
certificate costs, amortization is computed over the expected
certificate term which ranges from 6 months to 5 years, using
the level yield (interest) method. For annuity costs, the
portion of the deferred policy acquisition cost that is
estimated not to be recoverable from surrender charges is
amortized as a constant percentage of the estimated gross
profits (both realized and unrealized) associated with the
annuities.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
RECOGNITION OF ANNUITY REVENUES
Annuity revenues consist of the charges assessed against the
annuity account balance for services and surrender charges.
Charges for future services are assessed; however, the related
revenue is deferred and recognized in income over the period
benefitted using the same assumptions as are used to amortize
deferred policy acquisition costs.
GUARANTY FUND ASSESSMENTS
The Company's life insurance subsidiaries are subject to
insurance guaranty laws in the states in which they operate.
These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of
insolvency of other life insurance companies. A portion of
these assessments can be offset against the payment of future
premium taxes. However, future changes in state laws could
decrease the amount available for offset. At September 30, 1996
and 1995, the Company has accrued a liability for guaranty fund
assessments for known insolvencies, net of estimated recoveries
through premium tax offsets.
INCOME TAXES
The Company accounts for income taxes using the asset and
liability method. This method requires the Company to recognize
deferred tax assets and liabilities for the expected future
income tax consequences of events that have been recognized in
the financial statements. Deferred tax assets and liabilities
are determined based on the temporary differences between the
financial statement carrying amounts and tax bases of assets
and liabilities using enacted tax rates in effect in the years
in which the temporary differences are expected to reverse.
The Company, subsequent to September 9, 1994, is included in
the consolidated income tax return with National Summit Corp.
Prior to that date, the Company was included in the consoli-
dated income tax return with Metropolitan, its former parent.
The Company was allocated a current and deferred tax provision
from National Summit Corp. or Metropolitan as if the Company
filed a separate tax return.
In association with the disaffiliation from Metropolitan in
1994, the Company received certain income tax benefits,
principally associated with the allocation of the Metropolitan
consolidated group's net operating loss carryforwards and a
reduction in amounts payable to Metropolitan, which resulted in
a reduction of deferred taxes payable of approximately
$207,000. This benefit has been recorded as additional paid-in
capital due to the affiliation between Metropolitan and the
Company.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
EARNINGS PER COMMON SHARE
Earnings per common share are computed by deducting preferred
stock dividends from net income and dividing the result by the
weighted averaged number of shares of common stock outstanding.
There were no common stock equivalents or potentially dilutive
securities outstanding during any of the three years in the
period ended September 30, 1996.
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%
===
<PAGE>
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.
<PAGE>
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
Aggregate amounts of the face value of the Company's real estate
contracts and mortgage notes receivable at September 30, 1996
expected to be received, based upon 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD
FOR SALE, CONTINUED:
During the year ended September 30, 1996, proceeds from
securitization transactions were approximately $7,009,000 and
resulted in gains of approximately $297,300. The gain realized
included approximately $99,000 associated with the estimated fair
value of the mortgage servicing rights retained on the pool. The
fair value of these rights was determined based on the estimated
present value of future net servicing cash flows, including float
interest and late fees, adjusted for anticipated prepayments.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. OTHER RECEIVABLE INVESTMENTS:
Other receivable investments include various cash flow invest-
ments primarily comprised of annuities and lottery prizes.
Annuities are general obligations of the payor, which is
generally an insurance company. Lottery prizes are general
obligations of the insurance company or other entity making the
lottery prize payments. Additionally, when the lottery prizes are
from a state-run lottery, the lottery prizes are often backed by
the general credit of the state.
These investments normally are non-interest bearing and are
purchased at a discount sufficient to meet the Company's
investment yield requirements. The weighted average constant
effective yield on these receivables at September 30, 1996 is
approximately 12.4%. Maturities range from 1996 to 2035.
The following is a reconciliation of the face value of the other
receivable investments to the Company's carrying value at
September 30, 1996 and 1995.
1996 1995
----------- -----------
Face value of receivables $19,103,098 $28,618,310
Unrealized discounts, net of
unamortized acquisition costs (7,314,968) (11,722,408)
----------- -----------
Carrying value $11,788,130 $16,895,902
=========== ===========
All such receivables at September 30, 1996 were performing in
accordance with their contractual terms.
During the years ended September 30, 1996 and 1995, the Company
sold approximately $11,741,000 and $1,260,000, respectively, of
these receivables without recourse and recognized gains of
approximately $680,100 and $128,500, respectively.
The following individual other receivable investments were in
excess of ten percent of stockholders' equity at September 30,
1996 and 1995.
Aggregate
Carrying
Issuer Amount
------------------------------------- -----------
1996:
Michigan State Agency $ 1,738,909
Safeco Life Insurance Company 977,150
New York State Agency 966,639
Arizona State Agency 949,675
Transamerica Life Insurance Company 666,994
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. OTHER RECEIVABLE INVESTMENTS, CONTINUED:
Aggregate
Carrying
Issuer Amount
------------------------------------- -----------
1995:
Arizona State Agency 3,344,695
New Jersey State Agency 2,933,380
New York State Agency 2,364,728
California State Agency 2,036,041
Michigan State Agency 906,801
Aggregate amounts of contractual maturities of other receivables
(face amounts) at September 30, 1996 are as follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 2,549,061
1998 2,553,440
1999 2,106,077
2000 2,296,522
2001 1,599,414
Thereafter 7,998,584
-----------
Total $19,103,098
===========
5. INVESTMENTS IN AFFILIATED COMPANIES:
At September 30, 1996 and 1995, investments in affiliated
companies consisted of:
Cost and Carrying Value
Number of -----------------------
Type of Shares Shares 1996 1995
------------------------- --------- ---------- ----------
Metropolitan Mortgage &
Securities Co., Inc.:
Class A common 9 $ 420,205 $ 420,205
Preferred:
Series C 116,094 1,160,942 1,160,942
Series D 24,328 243,278 243,278
Series E-1 105,800 1,058,000 1,058,000
Series E-4 1,400 140,000 140,000
---------- ----------
3,022,425 3,022,425
Consumers Group Holding
Co., Inc.:
Common 19 1,500,000
---------- ----------
$4,522,425 $3,022,425
========== ==========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INVESTMENTS IN AFFILIATED COMPANIES, CONTINUED:
Class A common stock is the only voting class of Metropolitan's
stock. Class A common stock is junior to Class B common stock as
to liquidation preference. At September 30, 1996 and 1995, the
Company owned 7.09% of Metropolitan's outstanding Class A common
stock.
The preferred stock of Metropolitan has a par value of $10 per
share and has liquidation preferences equal to its issue price.
They are non-voting and are senior to the common shares as to
dividends. Dividends are cumulative and at variable rates;
however, dividends shall be no less than 6% or greater than 14%
per annum. At September 30, 1996, the preferred Series C, D and
E-1 had dividend rates of 7.95%. The preferred Series E-4 had a
dividend rate of 8.45%. Neither the common nor preferred shares
are traded in a public market.
At September 30, 1996, the Company owned 3.49% of the outstanding
common stock of Consumers Group Holding Co., Inc. The Company
acquired the stock investment in April 1996 in a cash purchase
from C. Paul Sandifur, Jr. The remaining outstanding shares of
common stock of Consumers Group Holding Co., Inc. are owned
by Metropolitan. Consumers Group Holding Co., Inc. owns
approximately 74.5% of Western United Life Insurance Company
(Western), a life insurer domiciled in the state of Washington.
Western had total assets of approximately $1.1 billion at
September 30, 1996.
6. INVESTMENTS:
A summary of carrying and estimated market values of investments
at September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996
-------------------------------------------------
Estimated
Market
Gross Gross Value
Amortized Unrealized Unrealized (Carrying
Available-for-Sale Cost Gains Losses Value)
------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Pass-Through Certificates $ 269,305 $ 0 $ 0 $ 269,305
========== ========== ========== ==========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
1996
-------------------------------------------------
Amortized
Cost Gross Gross Estimated
(Carrying Unrealized Unrealized Market
Held-to-Maturity Value) Gains Losses Value
------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Bonds $5,735,579 $ 0 $ (111,140) $5,624,439
Corporate Bonds 2,014,499 0 (16,744) 1,997,755
---------- ---------- ---------- ----------
$7,750,078 $ 0 $ (127,884) $7,622,194
========== ========== ========== ==========
<CAPTION>
1995
-------------------------------------------------
Amortized
Cost Gross Gross Estimated
(Carrying Unrealized Unrealized Market
Held-to-Maturity Value) Gains Losses Value
------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Bonds $5,229,949 $ 0 $ (144,091) $5,085,858
Corporate Bonds 3,039,592 0 (53,985) 2,985,607
---------- ---------- ---------- ----------
$8,269,541 $ 0 $ (198,076) $8,071,465
========== ========== ========== ==========
</TABLE>
All bond held at September 30, 1996 were performing in accordance
with their terms.
During the year ended September 30, 1996, in accordance with a
Special Report issued by the Financial Accounting Standards Board,
OSL reassessed and reclassified held-to-maturity debt securities
with a carrying value of approximately $999,000 to the available-
for-sale classification. At the date of the transfer, the debt
securities were valued at fair value of approximately $999,000.
During the year ended September 30, 1995, upon the acquisition of
OSL, the Company reclassified an investment with an amortized cost
of approximately $992,000 from held-to-maturity to available-for-
sale. The investment was subsequently sold in 1995 at a loss of
approximately $8,000 when the issuer called the bond.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. INVESTMENTS, CONTINUED:
During the year ended September 30, 1994, prior to its
acquisition, OSL transferred approximately $6,000,000 of
investments from its available-for-sale portfolio to its held-to-
maturity portfolio. At the date of transfer, these investments
had net unrealized losses of approximately $29,000 before income
taxes. These unrealized losses are being recognized over the
remaining term of the investments transferred using the interest
method. At September 30, 1996, the remaining unamortized loss of
$10,134, net of income taxes, is reported as a reduction of
stockholders' equity.
The following individual investments (excluding U.S. government
bonds) held by the Company at September 30, 1996 and 1995 were in
excess of ten percent of stockholders' equity:
Aggregate
Carrying
Issuer Amount
--------------------------------------- -----------
1996:
Corporate Bonds:
General Electric Credit Corporation $ 1,012,613
Wal-Mart Stores 1,001,886
1995:
Corporate Bonds:
Countrywide Funding 1,004,526
General Electric Credit Corporation 1,031,930
Wal-Mart Stores 1,003,136
At September 30, 1996, the contractual maturities of the held-to-
maturity securities are shown below. Expected maturities will
differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or pre-
payment penalties.
Estimated
Amortized Market
Held-to-Maturity Securities Cost Value
----------------------------------- ----------- -----------
Due in one year or less $ 1,511,471 $ 1,506,609
Due after one year through five
years 6,238,607 6,115,585
----------- -----------
$ 7,750,078 $ 7,622,194
=========== ===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. DEBT PAYABLE:
At September 30, 1996 and 1995, debt payable consists of:
1996 1995
----------- -----------
Reverse repurchase agreements with
various securities brokers,
interest at 5.9% per annum; due
on October 1, 1996; collateral-
ized by $3,900,000 in U.S.
Treasury bonds $ 3,802,500
Real estate contracts and mortgage
notes payable, interest rates
ranging from 7% to 8.5%, due in
installments through 2002,
collateralized by senior liens
on certain of the Company's real
estate contracts, mortgage notes
receivable and real estate held
for sale 37,875 $ 104,067
Accrued interest payable 10,595 569
----------- -----------
$ 3,850,970 $ 104,636
=========== ===========
Aggregate amounts of principal and accrued interest due on debt
payable at September 30, 1996 are as follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 3,823,744
1998 11,553
1999 11,612
2000 1,806
2001 1,760
Thereafter 495
-----------
Total $ 3,850,970
===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INVESTMENT CERTIFICATES:
At September 30, 1996 and 1995, investment certificates consist
of:
Annual
Interest Principally
Rates Maturing in 1996 1995
---------- ------------------- ----------- -----------
6% to 7% 1997 and 1998 $ 1,547,283 $ 810,558
7% to 8% 1997, 1998 and 1999 1,946,646 1,789,822
8% to 9% 1999, 2000 and 2001 26,380,522 22,070,089
9% to 10% 1997 and 2001 8,370,330 2,831,765
10% to 11% 1997 and 2001 199,926 6,222,424
----------- -----------
38,444,707 33,724,658
Compound and accrued interest 4,379,164 4,821,238
----------- -----------
Totals $42,823,871 $38,545,896
=========== ===========
The weighted average interest rate on outstanding investment
certificates at September 30, 1996 and 1995 was approximately
8.5% and 8.8%, respectively.
Investment certificates (including principal and compound and
accrued interest) at September 30, 1996 mature as follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 7,085,000
1998 9,834,000
1999 8,361,000
2000 6,822,000
2001 10,528,000
Thereafter 193,871
-----------
Total $42,823,871
===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. DEFERRED COSTS:
An analysis of deferred costs related to annuity acquisition and
investment certificates for the years ended September 30, 1996,
1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Annuity Investment
Acquisition Certificates Total
----------- ------------ ----------
<S> <C> <C> <C>
Balance, September 30, 1993 $ 524,376 $ 524,376
Deferred during the period:
Commissions 299,748 299,748
Other expense 144,354 144,354
----------- ------------ ----------
Total deferred costs 968,478 968,478
Amortized during the period (262,484) (262,484)
----------- ------------ ----------
Balance, September 30, 1994 705,994 705,994
Increase due to acquisition of
life insurance affiliate $ 2,614,778 2,614,778
Deferred during the period:
Commissions 291,050 259,633 550,683
Other expense 47,885 182,142 230,027
----------- ------------ ----------
Total deferred costs 2,953,713 1,147,769 4,101,482
Amortized during the period (198,190) (321,090) (519,280)
----------- ------------ ----------
Balance, September 30, 1995 2,755,523 826,679 3,582,202
Deferred during the period:
Commissions 722,861 390,713 1,113,574
Other expense 459,525 194,485 654,010
----------- ------------ ----------
Total deferred costs 3,937,909 1,411,877 5,349,786
Amortized during the period (84,773) (402,967) (487,740)
----------- ------------ ----------
Balance, September 30, 1996 $ 3,853,136 $ 1,008,910 $4,862,046
=========== ============ ==========
</TABLE>
The amortization of deferred annuity acquisition costs, which is
based on the estimated gross profits of the underlying annuity
products, could be changed significantly in the near term due to
changes in the interest rate environment. As a result, the
recoverability of these costs may be adversely affected in the
near term.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES:
The tax effect of the temporary differences giving rise to the
Company's deferred tax assets and liabilities as of September 30,
1996 and 1995 is as follows:
1996 Assets Liabilities
----------------------------------- ---------- -----------
Mark to market for investment
securities $ 5,238
Guaranty fund assessments 180,645
Annuity reserves 734,150
Management fee payable $ 215,686
Allowance for losses on real estate
and receivables 362,436
Deferred policy acquisition costs 1,724,548
Deferred contract acquisition costs
and discount yield recognition 958,473
Net operating loss carryforwards 189,416
Other 743
---------- ----------
Total deferred income taxes $1,472,628 $2,898,707
========== ==========
1995 Assets Liabilities
----------------------------------- ---------- -----------
Mark to market for investment
securities $ 73,468
Guaranty fund assessments $ 150,045
Annuity reserves 597,743
Management fee payable 402,101
Allowance for losses on real estate
and receivables 196,202
Deferred policy acquisition costs 936,878
Deferred contract acquisition costs
and discount yield recognition 1,486,157
Net operating loss carryforwards 535,500
Other 127,912
---------- ----------
Total deferred income taxes $1,607,402 $2,898,604
========== ==========
No valuation allowance has been established to reduce the
deferred tax assets, as it is more likely than not that these
assets will be realized due to the future reversals of existing
taxable temporary differences. At September 30, 1996, the
Company's remaining net operating loss carryforwards of
approximately $560,000 expire in years 2006 through 2010.
Realization is dependent on the generation of sufficient
taxable income prior to expiration of the net operating loss
carryforwards. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward
period are reduced.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES, CONTINUED:
Due to the Company's previous change in ownership, the above net
operating losses are subject to the provisions of Internal
Revenue Code Section 382, which limits the annual utilization of
net operating losses to approximately $200,000 per year.
Following is a reconiliation of the provision for income taxes to
an amount computed by applying the statutory federal income tax
rate to income before income taxes as follows:
1996 1995 1994
-------- -------- --------
Federal income tax at statu-
tory rate $504,041 $281,270 $137,797
Affiliate corporate dividend
received deduction (47,661) (49,921)
Small life insurance company
deduction (225,669)
Other 7,240 8,358 2,610
-------- -------- --------
Income tax provision $237,951 $239,707 $140,407
======== ======== ========
The components of the provision for income taxes are as follows:
1996 1995 1994
-------- -------- --------
Current $103,074 $ 75,458 $ 3,907
Deferred 134,877 164,249 136,500
-------- -------- --------
$237,951 $239,707 $140,407
======== ======== ========
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>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES, 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.
<PAGE>
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>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. RELATED-PARTY TRANSACTIONS, CONTINUED:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Commissions capitalized as
deferred costs, paid to a
Metropolitan affiliate on sale
of debentures 86,491 299,748
Commissions deducted from addi-
tional paid-in capital, paid to
a Metropolitan affiliate on
sale of preferred stock 13,249 7,552
Dividends received on Metro-
politan's preferred stock
investments 200,256 256,991
</TABLE>
Receivables from Metropolitan or its affiliates of $1,296,290 at
September 30, 1996 represent amounts owed to the Company related
primarily to collections on real estate contract and mortgage
note receivables and are included in other assets. Advances due
Metropolitan or its affiliates in the amount of $1,960,104 at
September 30, 1995 represent real estate contracts and mortgage
notes receivable and related costs advanced by Metropolitan on
behalf of the Company and are included in accounts payable.
The Company receives management, receivable acquisition and
receivable collections services from Metropolitan for a fee
pursuant to the terms of the Management, Receivable Acquisition
and Servicing Agreement. The receivable acquisition fees are
based upon yield requirements established by the Company. The
Company pays, as its receivable acquisition service fee, the
difference between the yield requirement and the yield which
Metropolitan actually negotiates when the receivable is acquired.
During the year ended September 30, 1996, 1995 and 1994, the
Company incurred service fees for receivable acquisition from
Metropolitan of approximately $1,753,000, $1,967,000 and
$682,000, respectively. The agreements are non-exclusive and may
be terminated in whole or part by either party upon notice to the
other party.
MIS is a securities broker/dealer and member of the National
Association of Securities Dealers. It markets the securities
products of Summit and of Metropolitan. MIS charges commissions
ranging from .25% to 6% of the face value of the security sold.
The commission rate depends on the type of security sold, its
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. RELATED-PARTY TRANSACTIONS, CONTINUED:
stated term and whether the security sale involved a reinvestment
by a prior investor or a new investment. Commissions and service
fees charged to Metropolitan during the years ended September 30,
1996 and 1995 were approximately $369,000 and $1,125,000,
respectively.
Summit Property Development, Inc., a wholly owned subsidiary of
Summit, provides real estate development services for a fee.
Currently its principal client is Metropolitan. Such services may
include, but are not limited to the following: sales, marketing,
market analysis, architectural services, design services,
subdividing properties and coordination with regulatory groups to
obtain the approvals which are necessary to develop a particular
property. The fees charged to Metropolitan for these services
were approximately $2,038,000 and $1,250,000 during the years
ended September 30, 1996 and 1995, respectively.
The Company's employees are included in the Metropolitan Mortgage
& Securities Co., Inc. Retirement Savings Plan (the Plan),
authorized under Section 401(k) of the Tax Reform Act of 1986, as
amended. This Plan is available to all employees over the age of
21 upon completion of six months of service in which he or she
has earned 500 hours of service. Employees may defer from 1% to
15% of their compensation in multiples of whole percentages. The
Company matches contributions equal to 25% of pre-tax
contributions up to a maximum of 6% of compensation. This match
is made only if the Company has a net profit during the preceding
fiscal year. In lieu of services performed, the contribution
relating to the Company's employees was made by Metropolitan
during the years ended September 30, 1996, 1995 and 1994.
13. ANNUITY RESERVES AND GUARANTY FUND ASSESSMENTS:
Annuity reserves are based upon contractual amounts due the
annuity holder including accrued interest. Annuity contract
interest rates ranged from 5.4% to 10.4% during the year ended
September 30, 1996 and 5.75% to 10.65% during the four-month
period ended September 30, 1995.
All states in which the Company's insurance subsidiaries operate
have laws requiring solvent life insurance companies to pay
assessments to protect the interests of policyholders of
insolvent life insurance companies. Assessments are levied on all
member insurers in each state based on a proportionate share of
premiums written by member insurers in the lines of business in
which the insolvent insurers engaged. A portion of these
assessments can be offset against the payment of future premium
taxes. However, future changes in state laws could decrease the
amount available for offset.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. ANNUITY RESERVES AND GUARANTY FUND ASSESSMENTS, CONTINUED:
The net amount expensed by the Company's life insurance
subsidiaries for guaranty fund assessments and amounts estimated
to be assessed for the year ended September 30, 1996 and the
four-month period ended September 30, 1995 were $90,000 and
$25,000, respectively. The Company's estimate of these
liabilities is based upon updated information from the National
Organization of Life and Health Insurance Guaranty Associations
regarding insolvencies occurring during the years 1990 through
1994. These estimates are subject to future revisions based upon
the ultimate resolution of the insolvencies and resultant losses.
The Company cannot reasonably estimate the additional effects, if
any, upon its future assessments pending the resolution of the
above-described insolvencies. As a result of these uncertainties,
the Company's estimate of future assessments could change in the
near term. The Company does not believe that the amount of
future assessments associated with known insolvencies after 1994
will be material to its financial condition or results of
operations. 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
<PAGE>
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>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS, CONTINUED:
Non-cash investing and financing activities of the Company during
the years ended September 30, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Assumption of other debt payable
in conjunction with purchase of
real estate contracts and mort-
gage notes receivable $ 26,823 $ 162,597 $ 81,451
Assumption of other debt payable
in conjunction with acquisition
of real estate held for sale 15,528 63,650
Real estate held for sale acquired
through foreclosure 1,474,233 1,232,732 437,448
Loans to facilitate the sale of
real estate 1,013,314 959,813 81,800
Exchange of the Company's pre-
ferred stock as full considera-
tion for Metropolitan preferred
and common stock 3,022,425
Additional paid-in capital resulting
from income tax benefits associated
with the change in tax affiliation 206,872
Transfer of securities from held-to-
maturity to available-for-sale 999,204
Increase in assets and liabilities
associated with purchase of
subsidiaries:
Held-to-maturity investment
securities 493,695 9,401,577
Real estate contracts and mort-
gage notes receivable 32,080,899
Real estate held for sale 503,298
Deferred costs 2,614,778
Other assets 268,044 205,504
Annuity reserves 44,558,959
Accounts payable and other
liabilities 1,653,970
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined using available market
information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market
data and to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange.
The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair
value amounts.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value. Potential income tax
ramifications related to the realization of unrealized gains and
losses that would be incurred in an actual sale and/or settlement
have not been taken into consideration.
INVESTMENTS IN AFFILIATED COMPANIES - Fair value is estimated
by management to equal carrying amounts. The preferred shares
are not publicly traded; however, preferred share dividends are
paid at variable rates.
PUBLICLY TRADED INVESTMENT SECURITIES - Fair value is
determined by quoted market prices.
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE - For
loans, the discount rate is estimated using rates currently
offered for loans of similar characteristics that reflect the
credit and interest rate risk inherent in the loan. For
residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment
estimates. The prepayment estimates are based upon internal
historical data.
OTHER RECEIVABLE INVESTMENTS - The fair value of other
receivable investments is based on the discounted value of
contractual cash flows. The discount rate is estimated using
the rates currently offered for investments with similar credit
ratings and similar remaining maturities.
INVESTMENT CERTIFICATES AND DEBT PAYABLE - The fair value of
debenture bonds and debt payable is based on the discounted
value of contractual cash flows. The discount rate is estimated
using the rates currently offered for debt with similar
remaining maturities.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
The estimated fair values of the following financial instruments
as of September 30, 1996 are as follows:
Carrying
Amounts Fair Value
----------- -----------
Financial assets:
Cash and cash equivalents $ 4,461,315 $ 4,461,315
Investments:
Affiliated companies 4,522,475 4,522,475
Available-for-sale securities 269,305 269,305
Held-to-maturity securities 7,750,078 7,622,194
Real estate contracts and
mortgage notes receivable 78,932,146 79,426,539
Other receivable investments 11,788,130 12,404,341
Financial liabilities:
Investment certificates -
principal and compound
interest 42,148,886 42,545,085
Debt payable - principal 3,840,375 3,840,375
LIMITATIONS - The fair value estimates are made at a discrete
point in time based on relevant market information and
information about the financial instruments. Because no market
exists for a significant portion of these financial instruments,
fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. Accordingly, the estimates
presented herein are not necessarily indicative of what the
Company could realize in a current market exchange.
<PAGE>
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>
<PAGE>
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>
<PAGE>
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>
<PAGE>
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>
<PAGE>
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
============
<PAGE>
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 $13,345,563
Realized net gains on sale of receivables
to Metropolitan affiliates -- 206,947
Commissions capitalized as deferred costs,
paid to a Metropolitan affiliate on sale
of investment certificates -- 86,491
Commissions deducted from additional paid-in
capital, paid to a Metropolitan affiliate
on sale of preferred stock -- 13,249
Dividends received on Metropolitan's
preferred stock investments 200,256 256,991
</TABLE>
Inside Back Cover Page: This page intentionally left blank
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the Certificates, other than
selling commissions:
SEC Registration Fee ....................$ 7,106
NASD Filing Fee ......................... 6,000
Independent Underwriter Fee.............. 55,000
*Printing ............................... 10,000
*Legal Fees and Expenses ................ 10,000
*Accounting Fees and Expenses ........... 45,000
*Trustee's Fees and Expenses ............ 5,000
*Blue Sky Fees and Expenses ............. 30,000
*Advertising and Marketing Expenses .... 400,000
*Miscellaneous .......................... 3,587
TOTAL ............................. $570,000
*Estimated
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Summit'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 or
other agreement or provision of law.
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a). Exhibits:
*1.a.i. Form of Selling Agreement between Summit and
Metropolitan Investment Securities, Inc. with respect
to Certificates.
*1.a.ii. Form of Selling Agreement between Summit and
Metropolitan Investment Securities, Inc. with respect
to Preferred Stock Series S-2.
*1.b.i. Form of Agreement to Act as Qualified Independent
Underwriter between Summit, Metropolitan Investment
Securities, Inc. and Welco Securities, Inc. with
respect to Certificates to be registered.
*1.b.ii. Form of Agreement to Act as Qualified Independent
Underwriter between Summit, Metropolitan Investment
Securities, Inc. and Welco Securities, Inc. with
respect to Preferred Stock to be registered.
*1.c.i. Form of Pricing Opinion of Welco Securities, Inc. with
respect to Certificates to be registered.
*1.c.ii. Form of Pricing Opinion of Welco Securities, Inc. with
respect to Preferred Stock to be registered.
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-2.
(Exhibit 4.c to Registration No 333-115.)
*5.a. Opinion of Susan A. Thomson, Attorney at Law, as to
validity of Investment Certificates.
*5.b. Opinion of Susan A. Thomson, Attorney at Law, as to
validity of Preferred Stock.
7. Opinion Regarding Liquidation Preference. See Exhibit
5.b.
10.a. Management Receivable Acquisition and Servicing
Agreement between Summit Securities Inc. and
Metropolitan Mortgage & Securities Co., Inc. dated
September 9, 1994. (Exhibit 10.a. to Registration No.
33-57619)
10.b. Stock Purchase Agreement between Summit and
Metropolitan regarding the purchase of
Metropolitan Investment Securities, dated January
31, 1995. (Exhibit 10.b to Registration No.
33-57619)
10.c. Receivable Acquisition, Management and Services
Agreement between Old Standard Life Insurance Company
and Metropolitan Mortgage & Securities Co., Inc.,
dated December 31, 1994. (Exhibit 10.d. to
Registration No. 333-115).
*10.d. Receivable Acquisition, Management and Services
Agreement between Arizona Life Insurance Company and
Metropolitan Mortgage & Securities Co., Inc. dated
October 10, 1996.
11. Statement of Computation of Earnings Per Common Share.
(See Financial Statements.)
*12. Statement of Computation of Ratio of Earnings to Fixed
Charges.
*23.i. Consent of Coopers & Lybrand L.L.P., Independent
Accountants.
23.ii. Consent of Susan Thomson, Attorney at Law. See Exhibit
5.b.
*24. Power of Attorney
*25. Statement on Form T-1 of eligibility of Trustee, First
Trust National Association. (The Exhibits to this
Exhibit have been filed in paper pursuant to a
continuing hardship exemption granted January 24,
1994.)
*27. Financial Data Schedule.
*Filed herewith
Item 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment
to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers,
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer,
or controlling persons of the registrant in the successful defense
of any action, suit, or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-2 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Spokane, State
of Washington, on this _____ day of ___________, 199__.
SUMMIT SECURITIES, INC.
/S/ Tom Turner
By:
_________________________________________________
Tom Turner,
President/Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/S/ Tom Turner
_________________________ President/Director _______________
Tom Turner
/S/ Philip Sandifur
_________________________ Vice President/Director ________________
Philip Sandifur
/S/ Greg Gordon
_________________________ Secretary/Treasurer ________________
Greg Gordon Director
/S/ Robert Potter
________________________ Director _________________
Robert Potter
SELLING AGREEMENT
This Agreement made as of the , by and
between SUMMIT SECURITIES, INC., an Idaho corporation ("Summit") and
METROPOLITAN INVESTMENT SECURITIES, INC., a Washington corporation
(the "Selling Agent").
WITNESSETH:
WHEREAS, Summit proposes to issue and sell $40,000,000 principal
amount of its Investment Certificates, Series A (the "Certificates")
pursuant to a Registration Statement (or Registration Statements) and
a Prospectus (or Prospectuses) filed under the Securities Act of 1933;
and
WHEREAS, the Selling Agent, an affiliate of Summit, for good and
valuable consideration the receipt of which is hereby acknowledged,
desires to assist in the sale of the Certificates upon the terms and
in reliance upon the representations, warranties and agreements set
forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
1. Appointment of Selling Agent.
Summit hereby appoints the Selling Agent as its managing agent to
offer and sell the Certificates at the prices and in the manner
described in the Registration Statement and the Prospectus and in
compliance with the terms and conditions thereof. Summit agrees to
provide the Selling Agent with such number of Registration Statements
and Prospectuses as it reasonably requests to enable it to offer the
Certificates and authorizes the Selling Agent to distribute the
Registration Statements and Prospectuses.
2. Undertaking of Selling Agent.
The Selling Agent agrees to use its best efforts to sell the
Certificates on the terms stated herein and in the Registration
Statement and Prospectus and to notify Summit of the number of
Certificates with respect to which subscription agreements have been
executed by subscribers. It is understood that the Selling Agent has
no commitment to sell the Certificates other than to use its best
efforts. The Selling Agent will deliver all cash and checks received
from the subscribers to Summit by noon of the next business day. All
checks received by the Selling Agent from subscribers shall be made
payable to Summit.
The Selling Agent does not presently maintain discretionary
customer accounts and undertakes that it will not, in any event make
discretionary purchases of the Certificates for the accounts of
customers.
3. Amendment of the Registration Statement and Prospectus.
Summit agrees, at its expense, to amend or supplement the
Registration Statement or the Prospectus and to provide the Selling
Agent with sufficient copies thereof for distribution as contemplated
in the Registration Statement or the Prospectus or otherwise for
purposes contemplated by federal and state securities laws, if (i) the
Selling Agent advises Summit that in its opinion and that of its
counsel, such amendment or supplement is necessary or advisable, or
(ii) such amendment or supplement is necessary to comply with federal
or state securities laws or the rules or regulations promulgated
thereunder or is necessary to correct any untrue statement therein or
eliminate any material omissions therein or any omissions therein
which make any of the statements therein misleading. The
representations, warranties and obligations to indemnify all parties
hereto contained herein relating to the Registration Statement or the
Prospectus shall attach to any such amendment or supplement.
4. Undertakings of Summit.
Summit will promptly notify the Selling Agent in the event of the
issuance by the Securities and Exchange Commission ("SEC") of any stop
order or other order suspending the Registration of the Certificates,
or in the event of the institution or intended institution of any
action or proceeding for that purpose. In the event that the SEC
shall enter a stop order suspending or otherwise suspend the
Registration of the Certificates, Summit will make every reasonable
effort to obtain as promptly as possible the entry of an appropriate
order setting aside such stop order or otherwise reinstating the
Registration of the Certificates.
5. Representations and Warranties.
Summit represents and warrants to the Selling Agent that:
(i) The Registration Statement and the Prospectus comply as to
form in all material respects with the Securities Act of 1933 and the
rules and regulations of the SEC thereunder, accurately describe the
operations of Summit and do not contain any misleading or untrue
statements of a material fact or omit to state a material fact which
is necessary to prevent the statements therein from being misleading.
(ii) Summit is a corporation duly organized and validly existing
under the laws of the State of Idaho with full corporate power to
perform its obligations as described in the Registration Statement and
the Prospectus.
(iii) The Certificates, when issued and sold pursuant to the terms
hereof and of the Registration Statement, Prospectus and subscription
agreements, will constitute valid, binding and legal outstanding
obligations of Summit, in accordance with their terms.
(iv) This Agreement has been duly and validly authorized,
executed and delivered on behalf of Summit and is a valid and binding
agreement in accordance with its terms.
6. Indemnification.
Summit and the Selling Agent each (a) agree to indemnify and hold
harmless the other (and each person, if any, who controls the other)
against any loss, claim, damage, charge or liability to which the
other (or such controlling persons) may become subject, insofar as
such loss, claim, damage, charge or liability (or actions in respect
thereof) (i) arises out of or is based upon any misrepresentation or
breach of warranty of such party herein or any untrue statement or
alleged untrue statement of any material fact contained in the
Registration Statement or the Prospectus (or any amendment or
supplement thereto) which relates to or was supplied by such party, or
(ii) arises out of or is based upon the omission or alleged omission
to state therein a material fact relating to such party required to be
stated therein or necessary to make the statements therein not
misleading, including liabilities under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, and (b)
agree to reimburse such other party (and any controlling persons) for
any legal or other fees or expenses reasonably incurred in connection
with investigating or defending any action or claim arising out of or
based upon any of the foregoing.
7. Fees and Expenses.
Summit will pay all expenses incurred in connection with the
offering and sale of the Certificates, including without limitation,
fees and expenses of counsel, blue sky fees and expenses (including
legal fees), printing expenses, accounting fees and expenses, and fees
and expenses of First Trust, as Successor Trustee.
In the event of termination of the offering, Selling Agent will
be reimbursed only for its actual accountable out-of-pocket expenses.
The maximum commissions payable upon sale of the Certificates
shall be 6% of the investment amount.
8. This Agreement shall not in anyway affect, modify or change
the terms of that certain selling agreement, of even date hereof
between the parties hereto which provides for the sale of Preferred
Stock Series S-2.
9. Governing Law.
This Agreement shall be deemed to be made under and governed by
the laws of the State of Idaho.
IN WITNESS WHEREOF, this Agreement has been executed by the
parties hereto as of the day and year first above mentioned.
SUMMIT SECURITIES, INC.
By:___________________________________
Tom Turner, President
METROPOLITAN INVESTMENT SECURITIES, INC.
By_____________________________________
C. Paul Sandifur, President
FORM OF
VARIABLE RATE CUMULATIVE PREFERRED STOCK
SELLING AGREEMENT
This Agreement made as of , by
and between SUMMIT SECURITIES, INC., an Idaho corporation ("Summit")
and METROPOLITAN INVESTMENT SECURITIES, INC., a Washington corporation
(the "Selling Agent").
WITNESSETH:
WHEREAS, Summit proposes to issue and sell 150,000 shares of
Variable Rate Cumulative Preferred Stock, Series S-2 (par value $10.00
per share) ("Preferred Stock") pursuant to a Registration Statement
(or Registration Statements) and a Prospectus (or Prospectuses) filed
under the Securities Act of 1933; and
WHEREAS, the Selling Agent, an affiliate of Summit, for good and
valuable consideration the receipt of which is hereby acknowledged,
desires to assist in the sale of the Preferred Stock upon the terms
and in reliance upon the representations, warranties and agreements
set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
1. APPOINTMENT OF SELLING AGENT.
Summit hereby appoints the Selling Agent as its exclusive agent
to offer and sell the Preferred Stock at the prices and in the manner
described in the Registration Statement and the Prospectus and in
compliance with the terms and conditions thereof. Summit agrees to
provide the Selling Agent with such number of Registration Statements
and Prospectuses as it reasonably requests to enable it to offer the
Preferred Stock and authorizes the Selling Agent to distribute the
Registration Statements and Prospectuses.
2. UNDERTAKING OF SELLING AGENT.
The Selling Agent agrees to use its best efforts to sell the
Preferred Stock on the terms stated herein and in the Registration
Statement and Prospectus and to notify Summit of the number of shares
of Preferred Stock with respect to which subscription agreements have
been executed by subscribers. It is understood that the Selling Agent
has no commitment to sell the Preferred Stock other than to use its
best efforts. The Selling Agent will deliver all cash and checks
received from subscribers to Summit by noon of the next business day.
All checks received by the Selling Agent from subscribers shall be
made payable to Summit.
The Selling Agent does not presently maintain discretionary
customer accounts and undertakes that it will not in any event make
discretionary purchases of the Preferred Stock for the accounts of
customers.
3. AMENDMENT OF THE REGISTRATION STATEMENT AND PROSPECTUS.
Summit agrees, at its expense, to amend or supplement that
Registration Statement or the Prospectus and to provide the Selling
Agent with sufficient copies thereof for distribution as contemplated
in the Registration Statement or the Prospectus or otherwise for
purposes contemplated by federal and state securities laws, it (i) the
Selling Agent advises Summit that in its opinion and that of its
counsel, such amendment or supplement is necessary or advisable, or
(ii) such amendment or supplement is necessary to comply with federal
or state securities laws or the rules or regulations promulgated
thereunder or is necessary to correct any untrue statement therein or
eliminate any material omissions therein which make any of the
statement s therein misleading. The representation, warranties, and
obligations to indemnify all parties thereto contained herein relating
to the Registration Statement or the Prospectus shall attach to any
such amendment or supplement.
4. UNDERTAKINGS OR SUMMIT.
Summit will promptly notify the Selling Agent in the event of the
issuance by the Securities and Exchange Commission ("SEC") of any stop
order or other orders us pending the Registration of the Preferred
Stock, or in the event of the institution or intended institution of
any action or preceding for that purpose. In the event that the SEC
shall enter a stop order suspending or otherwise suspend the
Registration of the Preferred Stock, Summit will make every reasonable
effort to obtain as promptly as possible the entry of an appropriate
order setting aside such stop order or otherwise reinstate the
Registration of the Preferred Stock.
5. REPRESENTATIONS AND WARRANTIES.
Summit represents and warrants to the Selling Agent that:
(i) The Registration Statement and the Prospectus comply as to form
in all material respects with the Securities Act of 1933; and the
rules and regulations of the SEC thereunder, accurately describe
the operations of Summit and do not contain any misleading or
untrue statements of a material fact or omit to state a material
fact which is necessary to prevent the statements therein from
being misleading.
(ii) Summit is a corporation duly organized and validly existing under
the Washington Business Corporation Act with full corporate power
to perform its obligations as described int he Registration
Statement and the Prospectus.
(iii) The Preferred Stock, when issued and sold pursuant to the terms
hereof and of the Registration Statement, Prospectus and
subscription agreements, will be legally issued, fully paid and
nonassessable.
(iv) This Agreement has been duly and validly authorized, executed,
and delivered on behalf of Summit and is a valid and binding
agreement of Summit in accordance with its terms.
6. INDEMNIFICATION.
Summit and the Selling Agent each (a) agree to indemnify and hold
harmless the other (and each person, if any, who controls the other)
against any loss, claim, damage, charge or liability to which the
other or such charge or liability (or actions in respect thereof) (i)
arises out of or is based upon any misrepresentation or breach of
warranty of such party herein or any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or the Prospectus (or any amendment or supplement thereto)
which relates to or was supplied by such party, or (i) arises out of
or is based upon the omission or alleged omission to state therein a
material fact relating to such party required to be stated therein or
necessary to make the statements therein not misleading, including
liabilities under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and (b) agree to
reimburse such other party (and any controlling persons) for any legal
or other fees or expenses reasonably incurred in connection with
investigating or defending any action or claim arising out of or based
upon any of the foregoing.
7. FEES AND EXPENSES.
Summit will pay all expenses incurred in connection with the
offering and sale of the Preferred Stock, including without
limitation, fees and expenses of counsel, blue sky fees and expenses
(including legal fees), printing expenses, and accounting fees and
expenses. Provided, however, that in the event of termination of the
offering, Selling Agent will only be reimbursed for its actual,
accountable, out-of-pocket expenses.
The maximum commissions payable upon sale of the Preferred Stock
shall be 6% of the investment amount.
8. This agreement shall not in any way affect, modify or change
the terms of that certain Selling Agreement, of even date hereof
between the parties hereto which provides for the sale of Investment
Certificates.
9. GOVERNING LAW.
This Agreement shall be deemed to be made under and governed by
the laws of the State of Washington.
IN WITNESS WHEREOF, this Agreement has been executed by the
parties hereto as of the day and year first above mentioned.
SUMMIT SECURITIES, INC.
By ______________________________________________
Tom Turner, President
METROPOLITAN INVESTMENT SECURITIES, INC.
By ______________________________________________
C. Paul Sandifur, President
FORM OF
AGREEMENT TO ACT AS "QUALIFIED INDEPENDENT UNDERWRITER"
This agreement made as of the , by
and between Summit Securities, Inc., an Idaho corporation ("Summit"),
Metropolitan Investment Securities, Inc., a Washington corporation
("MIS"), and Welco Securities, Inc., a Nevada Corporation ("Welco").
WITNESSETH:
WHEREAS, Summit intends to offer $40,000,000 of Investment
Certificates Series A (hereinafter referred to as "Certificates"),
which will be offered in reliance on registration statement filed on
Form S-2, bearing SEC file number ; and,
WHEREAS, MIS, an affiliate of Summit and a member of the National
Association of Securities Dealers ("NASD"), will be engaged as the
managing sales agent for Summit; and,
WHEREAS, pursuant to subparagraph (c)of Rule 2720 of the Bylaws
of the NASD, MIS, as a NASD member, may participate in such
underwriting only if the yield at which the Certificates offered to
the public is not lower than the yield recommended by a "Qualified
Independent Underwriter" as that term is defined in subparagraph
(b)(15)of Rule 2720 to the Bylaws of the NASD, and who participates in
the preparation of the registration statement and prospectus relating
to the offering and exercises customary standards of due diligence,
with respect thereto; and,
WHEREAS, this agreement ("Agreement") describes the terms on
which Summit is retaining Welco to serve as such a "Qualified
Independent Underwriter" in connection with this offering of
Certificates; and
NOW, THEREFORE, in consideration of the recitations set forth
above, and the terms, promises, conditions, and covenants herein
contained, the parties hereby contract and agree as follows:
DEFINITIONS
As hereinafter used, except as the context may otherwise require,
the term "Registration Statement" means the registration statement on
Form S-2 (including the related preliminary prospectus, financial
statements, exhibits and all other documents to be filed as a part
thereof or incorporated therein) for the registration of the offer and
sale of the Certificates under the Securities Act of 1933, as amended,
and the rules and regulations thereunder (the "Act") filed with the
Securities and Exchange Commission (the "Commission"), and any
amendment thereto, and the term "Prospectus" means the prospectus
including any preliminary or final prospectus (including the form of
prospectus to be filed with the Commission pursuant to Rule 424(b)
under the Act) and any amendment or supplement thereto, to be used in
connection with the offering.
1. RULE 2720. Welco hereby confirms its agreement as set forth
in subparagraph 15(g) of Rule 2720 of the Bylaws of the NASD and
represents that, as appropriate, Welco satisfies or at the times
designated in such paragraph (l) will satisfy the other requirements
set forth therein or will receive an exemption from such requirements
from the NASD.
2. CONSENT. Welco hereby consents to be named in the
Registration Statement and Prospectus as having acted as a "Qualified
Independent Underwriter" solely for the purposes of Rule 2720
referenced herein. Except as permitted by the immediately preceding
sentence or to the extent required by law, all references to Welco in
the Registration Statement or Prospectus or in any other filing,
report, document, release or other communication prepared, issued or
transmitted in connection with the offering by Summit or any
corporation controlling, controlled by or under common control with
Summit, or by any director, officer, employee, representative or agent
of any thereof, shall be subject to Welco's prior written consent with
respect to form and substance.
3. PRICING FORMULA AND OPINION. Welco agrees to render a
written opinion as to the yields below which Summit's Certificates may
not be offered based on the pricing formula that is set forth in
Exhibits "A" and "B," attached hereto and incorporated herein by
reference. It is understood and agreed that the securities to which
this Agreement relates will be offered on a continuous, best efforts
basis by MIS, as the managing sales agent of Summit pursuant to the
Selling Agreement in effect between MIS and Summit which is filed as
an exhibit to the Registration Statement referred to above. Summit,
will continue to offer the Certificates according to the terms and
conditions of said Selling Agreement in accordance with this
Agreement, including, without limitation, Exhibits "A" and "B". Welco
reserves the right to review and amend its opinion upon the filing of
any post-effective amendment to the Registration Statement or upon
occurrence of any material event which may or may not require such an
amendment to be filed, or at such time as the offering shall terminate
or otherwise lapse under operation of law.
4. FEES AND EXPENSE. It is understood that Summit shall
reimburse Welco for its expenses on a nonaccountable basis in the
amount of $5,000 the receipt of which is hereby acknowledged. It is
further agreed that Welco shall be paid an additional amount of
$30,000 at the time the pricing opinion and pricing formula are
rendered, concurrent with the closing. Welco agrees to pay all fees
and expenses to any legal counsel whom it may employ to represent it
separately in connection with or on account of its actions
contemplated herein. All mailing, telephone, travel, hotel, meals,
clerical, or other office costs incurred or to be incurred by Welco in
conjunction with Summit's proposed offering which is the subject of
this Agreement shall be reimbursed to Welco by Summit at closing on an
accountable basis upon receipt of an itemization of said expenses.
5. MATERIAL FACTS. Summit represents and warrants to Welco
that at the time the Registration Statement or any amendment thereto
becomes effective, the Registration Statement and, at the time the
Prospectus is filed with the Commission (including any preliminary
prospectus and the form of prospectus filed with the Commission
pursuant to Rule 424(b)) and at all times subsequent thereto, the
Prospectus (as amended or supplemented if it shall have been so
amended or supplemented) will contain all material statements which
are required to be stated therein in accordance with the Act and will
conform to all other requirements of the federal securities laws, and
will not, on such date include any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and that all
contracts and documents required by the Act to be filed or required as
exhibits to said registration statement have been filed. Summit
further represents and warrants that any further filing, report,
document, release or communication which in any way refers to Welco or
to the services to be performed by Welco pursuant to this Agreement
will not contain any untrue or misleading statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
Summit further warrants and represents that:
(a) All leases, contracts and agreements referred to in or filed
as exhibits to the Registration Statement to which Summit is a party
or by which it is bound are in full force and effect.
(b) Summit has good and marketable title, except as otherwise
indicated in the Registration Statement and Prospectus, to all of its
assets and properties described therein as being owned by it, free and
clear of all liens, encumbrances and defects except such encumbrances
and defects which do not, in the aggregate, materially affect or
interfere with the use made and proposed to be made of such properties
as described in the Registration Statement and Prospectus; and that
Summit has no material leased properties except as disclosed in the
Prospectus.
(c) Summit is duly organized under the laws of the State of
Idaho and, as of the effective date of the Registration Statement,
Summit will be validly existing and in good standing under the laws of
the State of Idaho with full corporate power and authority to own its
properties and conduct its business to the extent described in the
Registration Statement and Prospectus; Summit is duly qualified to do
business as a foreign corporation and is in good standing in all
jurisdictions in which the nature of the business transacted by it or
its ownership of properties or assets makes qualification necessary;
the authorized and outstanding capitalization of Summit is as set
forth in the Prospectus and the description in the Prospectus of the
capital stock of Summit conforms with and accurately describes the
rights set forth in the instruments defining the same;
(d) Summit is not in violation of its certificate of
incorporation or Bylaws or in default in the performance or observance
of any material obligation, agreement, covenant or condition contained
in any bond, debenture, note, or other evidence of indebtedness,
contract or lease or in any indenture or loan agreement to which it is
a party or by which it is bound.
(e) The execution, delivery and performance of this Agreement
has been duly authorized by all necessary corporate action on the part
of Summit and MIS and performance of the foregoing agreement and the
consummation of the transactions contemplated thereby, will not
conflict with or result in a breach of any of the terms or constitute
a violation of the respective certificates of incorporation or Bylaws
of Summit or MIS, or any deed of trust, lease, sublease, indenture,
mortgage, or other agreement or instrument to which Summit or MIS is a
party or by which either of them or their property is bound, or any
applicable law, rule, regulation, judgment, order or decree of any
government, governmental instrumentality or court, domestic or
foreign, having jurisdiction over Summit or MIS or their properties or
obligations; and no consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation
of the transactions contemplated herein and in the other agreements
previously referred to in this paragraph except as may be required
under the Act or under any state securities or Blue Sky Laws.
(f) Any certificate signed by an officer of Summit and delivered
to Welco pursuant to this Agreement shall be deemed a representation
and warranty by Summit to Welco, to have the same force and effect as
stated herein, as to the matters covered thereby.
(g) If any event relating to or affecting Summit shall occur as
a result of which it is necessary, in Welco's opinion, to amend or
supplement the Prospectus in order to make the Prospectus not
misleading in the light of the circumstances existing at the time it
is delivered to a purchaser, Summit undertakes to inform MIS of such
events within a reasonable time thereafter, and will forthwith prepare
and furnish to MIS, without expense to them, a reasonable number of
copies of an amendment or amendments or a supplement or supplements to
the Prospectus (in form and substance satisfactory to Welco) which
will amend or supplement the Prospectus so that as amended or
supplemented it will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
therein in light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading.
(h) Summit hereby warrants and represents that it will offer the
Certificates described herein in accordance with the pricing formula
set forth in Exhibits "A" and "B" hereto.
(i) All representations, warranties and agreements contained in
this Agreement, or contained in certificates of officers of Summit
submitted pursuant hereto, shall remain operative and in full force
and effect, surviving the date of this Agreement.
6. AVAILABILITY OF INFORMATION. Summit hereby agrees to
provide Welco, at its expense, with all information and documentation
with respect to its business, financial condition and other matters as
Welco may deem relevant based on the standards of reasonableness and
good faith and shall request in connection with Welco's performance
under this Agreement, including, without limitation, copies of all
correspondence with the Commission, certificates of its officers,
opinions of its counsel and comfort letters from its auditors. The
above-mentioned certificates, opinions of counsel and comfort letters
shall be provided to Welco as Welco may request on the effective date
of the Registration Statement. Summit will make reasonably available
to Welco, its auditors, counsel, and officers and directors to discuss
with Welco any aspect of Summit which Welco may deem relevant. In
addition, Summit, at Welco's request, will cause to be delivered to
Welco copies of all certificates, opinions, letters and reports to be
delivered to the underwriter or underwriters, as the case may be,
pursuant to any underwriting agreement executed in connection with the
Offering or otherwise, and shall cause the person issuing such
certificate, opinion, letter or report to authorize Welco to rely
thereon to the same extent as if addressed directly to Welco. Summit
represents and warrants to Welco that all such information and
documentation provided pursuant to this paragraph 6 will not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statement therein not misleading. In
addition, Summit will promptly advise Welco of all telephone
conversations with the Commission which relate to or may affect the
Offering.
7. INDEMNIFICATION.
(a) Subject to the conditions set forth below, and in
addition to any rights of indemnification and contribution to which
Welco may be entitled pursuant to any agreement among underwriters,
underwriting agreement or otherwise, and to the extent allowed by law,
Summit hereby agrees that it will indemnify and hold Welco and each
person controlling, controlled by or under common control with Welco
within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
the rules and regulations thereunder (individually, an "Indemnified
Person") harmless from and against any and all loss, claim, damage,
liability, cost or expense whatsoever to which such Indemnified Person
may become subject under the Act, the Exchange act, or other federal
or state statutory law or regulation, at common law or otherwise,
arising out of, based upon, or in any way related or attributed to (i)
this Agreement, (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or
Prospectus or any other filing, report, document, release or
communication, whether oral or written, referred to in paragraph 5
hereof or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (iii) any application or other document
executed by Summit or based upon written information furnished by
Summit filed in any jurisdiction in order to qualify the Certificates
under the securities or Blue Sky laws thereof, or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or (iv) the breach of any representation or warranty made
by Summit in this Agreement. Summit further agrees that upon demand
by an Indemnified Person at any time or from time to time, it will
promptly reimburse such Indemnified Person for, or pay, any loss,
claim, damage, liability, cost or expense as to which Summit has
indemnified such person pursuant hereto. Notwithstanding the
foregoing provisions of this paragraph 7, any such payment or
reimbursement by Summit of fees, expenses or disbursement incurred by
an Indemnified Person in any proceeding in which a final judgment by a
court of competent jurisdiction (after all appeals or the expiration
of time to appeal) is entered against such Indemnified Person as a
direct result of such person's negligence, bad faith or willful
misfeasance will be promptly repaid to Summit. In addition, anything
in this paragraph 7 to the contrary notwithstanding, Summit shall not
be liable for any settlement of any action or proceeding effected
without its written consent.
(b) Promptly after receipt by an Indemnified Person under
sub- paragraph (a) above of notice of the commencement of any action,
such Indemnified Person will, if a claim in respect thereof is to be
made against Summit under paragraph (a), notify Summit in writing of
the commencement thereof; but the omission to so notify Summit will
not relieve Summit from any liability which it may have to any
Indemnified Person otherwise than under this paragraph 7 if such
omission shall not have materially prejudiced Summit's ability to
investigate or to defend against such claim. In case any such action
is brought against any Indemnified Person, and such Indemnified Person
notifies Summit of the commencement thereof, Summit will be entitled
to participate therein and, to the extent that it may elect by written
notice delivered to the Indemnified Person promptly after receiving
the aforesaid notice from such Indemnified Person, to assume the
defense thereof with counsel reasonably satisfactory to such
Indemnified Person; PROVIDED, HOWEVER, that if the defendants in any
such action include both the Indemnified Person and Summit or any
corporation controlling, controlled by or under common control with
Summit, or any director, officer, employee, representative or agent of
any thereof, or any other "Qualified Independent Underwriter" retained
by Summit in connection with the Offering and the Indemnified Person
shall have reasonably concluded that there may be legal defenses
available to it which are different from or additional to those
available to such other defendant, the Indemnified Person shall have
the right to select separate counsel to represent it. Upon receipt of
notice from Summit to such Indemnified Person of its election so to
assume the defense of such action and approval by the Indemnified
Person of counsel, Summit will not be liable to such Indemnified
Person under this paragraph 7 for any fees of counsel subsequently
incurred by such Indemnified Person in connection with the defense
thereof (other than the reasonable costs of investigation subsequently
incurred by such Indemnified Person) unless (i) the Indemnified Person
shall have employed separate counsel in accordance with the provision
of the next preceding sentence (it being understood, however, that
Summit shall not be liable for the expenses of more than one separate
counsel in any one jurisdiction representing the Indemnified Person,
which counsel shall be approved by Welco), (ii) Summit, within a
reasonable time after notice of commencement of the action, shall not
have employed counsel reasonably satisfactory to the Indemnified
Person to represent the Indemnified Person, or (iii) Summit shall have
authorized in writing the employment of counsel for the Indemnified
Person at the expense of Summit, and except that, if clause (i) or
(iii) is applicable, such liability shall be only in respect of the
counsel referred to in such clause (i) or (iii).
(c) In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in
paragraph 7 is due in accordance with its terms but is for any reason
held by a court to be unavailable from Summit to Welco on grounds of
policy or otherwise, Summit and Welco shall contribute to the
aggregate losses, claims, damages and liabilities (including legal or
other expenses reasonably incurred in connection with investigating or
defending same) to which Summit and Welco may be subject in such
proportion so that Welco is responsible for that portion represented
by the percentage that its fee under this Agreement bears to the
public offering price appearing on the cover page of the Prospectus
and Summit is responsible for the balance, except as Summit may
otherwise agree to reallocate a portion of such liability with respect
to such balance with any other person, including, without limitation,
any other "Qualified Independent Underwriter"; PROVIDED, HOWEVER, that
(i) in no case shall Welco be responsible for any amount in excess of
the fee set forth in paragraph 4 above and (ii) no person guilty of
fraudulent misrepresentation within the meaning of Section 11(f) of
the Act shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this
paragraph (c), any person controlling, controlled by or under common
control with Welco, or any partner, director, officer, employee,
representative or any agent of any thereof, shall have the same rights
to contribution as Welco and each person who controls Summit within
the meaning of Section 15 of the Act or Section 20 of the Exchange
Act, each officer of Summit who shall have signed the Registration
Statement and each director of Summit shall have the same rights to
contribution as Summit, subject in each case to clause (i) of this
paragraph (c). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for
contribution may be made against the other party under this paragraph
(c), notify such party from whom contribution may be sought, but the
omission to so notify such party shall not relieve the party from whom
contribution may be sought from any other obligation it or they may
have hereunder or otherwise than under this paragraph (c). The
indemnity and contribution agreements contained in this paragraph 7
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Indemnified Person or
termination of this Agreement.
8. AUTHORIZATION BY SUMMIT. Summit represents and warrants to
Welco that this Agreement has been duly authorized, executed and
delivered by Summit and constitutes a valid and binding obligation of
Summit.
9. AUTHORIZATION BY MIS. MIS represents and warrants to Welco
that this Agreement has been duly authorized, executed and delivered
by MIS and constitutes a valid and binding obligation of MIS.
10. AUTHORIZATION BY WELCO. Welco represents and warrants to
Summit that this Agreement has been duly authorized, executed and
delivered by Welco and constitutes a valid and binding obligation of
Welco.
11. NOTICE. Whenever notice is required to be given pursuant to
this Agreement, such notice shall be in writing and shall be mailed by
first class mail, postage prepaid, addressed (a) if to Welco, at P.O.
Box 688, One Belmont Avenue, Bala Cynwyd, PA 19004-3207, Attention:
Kenneth S. Shapiro, and (b) if to Summit or Metropolitan Investment
Securities, Inc., at W. 929 Sprague Ave., Spokane, WA 99204 Attention:
Susan A. Thomson, Assistant Corporate Counsel.
12. GOVERNING LAW. This Agreement shall be construed (both as
to validity and performance) and enforced in accordance with and
governed by the laws of the State of Idaho applicable to agreements
made and to be performed wholly within such jurisdiction.
IN WITNESS WHEREOF, this Agreement has been executed by the
parties hereto as of the day and year first above mentioned.
SUMMIT SECURITIES, INC.
By: ______________________________________________
Tom Turner, President
METROPOLITAN INVESTMENT SECURITIES, INC.
By: ______________________________________________
Reuel Swanson, Secretary
WELCO SECURITIES, INC.
By: _____________________________________________
Kenneth S. Shapiro, President
EXHIBIT A
The opinion of Welco is conditioned upon Summit's undertaking to
maintain the rates on its Certificates at least equal to an "assumed
floor." Based upon the pricing formula described below:
1. The interest rate to be paid on the Certificates shall be
fixed by Summit from time to time. However, the rate shall
not be lower than the computation made per the worksheet on
Exhibit B, which is attached and incorporated by reference
herein.
2. The "assumed floor" for 6 to 11 month Certificates shall be
at least 1.0% above the lesser of the interest rate on the 6
month U.S. Treasury Bills, on a discount basis, based upon
the auction average (which is published widely in newspapers
throughout the country, normally on the day following the
auction) and a composite average of the offering rates on 6
month certificates of deposit currently being offered by
banks and savings institutions in the northwestern section
of the United States. For purposes of this composite
average of certificate of deposit rates, the rates being
offered by the following institutions shall be considered
initially:
a. First Interstate Bank of Washington
b. Great American Bank
c. U.S. Bank of Washington
d. Security Pacific Bank of Washington
e. Seattle First National Bank
f. Washington Mutual Savings Bank
g. Washington Trust Bank
Welco and Summit agree to review on an ongoing basis the
group which comprises the composite average, and may
substitute another institution in the composite group from
time-to-time by mutual agreement, as the case may be.
3. The "assumed floor" for 60 to 120 month Certificates shall
be computed in like manner as that described in paragraph
"2" above, except that the latest auction average on 5 year
U.S. Treasury Notes shall be considered in place of the 6
month U.S. Treasury Bills, and 5 year certificates of
deposit currently offered in the composite group shall be
considered in lieu of the 6 month rate.
4. Rates on 12 to 23 month, 24 to 35 month, 36 to 47 month and
48 to 59 month Certificates shall be at least equal to the
interpolated differences between the computation of the
"assumed floor" of 6 to 11 month Certificates and 60 to 120
month Certificates, based upon the computation set forth in
Exhibit B.
5. Rates on Certificates payable in installments of principal
and interest shall be no lower than .25% below the "assumed
floor" for 60 to 120 month Certificates.
6. The computation of the "assumed floor" shall be made
monthly, as of the first Tuesday of each month, or at such
other times during any month that Summit causes the offering
rates to change from those in effect on the first Tuesday of
each month ("the computation date"). Summit agrees to
furnish Welco with a computation of the "assumed floor" by
completing the worksheet on Exhibit B. Should the offering
rates at that time on Summit's Certificates be less than the
"assumed floor" as computed, Summit agrees to raise the
rates on its Certificates to at least the "assumed floor"
within 10 calendar days of the computation date. Should
Summit fail to raise its offering rates within the 10 day
period referred to above, Welco reserves the right, in its
uncontrolled discretion, to withdraw its opinion regarding
the offering rates on the Certificates.
EXHIBIT B
Summit Securities
PRICING FORMULA
<TABLE>
<CAPTION>
C.D. RATE GOVERNMENT RATE
Average rate between a composite of 8 selected Most current of 8 selected auction rate
Banks and Savings and Loans as of the 1st Tuesday available on the 1st Tuesday of each month.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
CERTIFICATE OF DEPOSIT GOVERNMENT RATE ENTER LESSER SUMMIT'S
(CD) CALCULATION CALCULATION OF COLUMN A OR B ASSUMED FLOOR CURRENT RATE
<S> <C> <S> <C> <C> <C> <C> <C>
5 yr CD rate = ________ 5 yr Govt Rate = ________
6 mo CD Rate = ________ 6 mo Govt Rate = ________
DIFFERENCE = ________ DIFFERENCE = ________
x .20 x .20
________ ________
Differential = ________ Differential = ________
(enter in (a) (enter in (a)
below) below)
6 mo (actual) 6 mo (actual)
rate = ________ rate = ________ ____________________ + 1% ________________
_________
(a) + (a) + 6-11 mos.
________ ________
1 year rate = ________ 1 year rate = ________ ____________________ + 1% ________________
__________
(a) + (a) + 12-23
mos.
________ ________
2 year rate = ________ 2 year rate = ________ ____________________ + 1% ________________
_________
(a) + (a) + 24-35
mos.
________ ________
3 year rate = ________ 3 year rate = ________ ____________________ + 1% ________________
_________
(a) + (a) + 36-47
mos.
________ ________
4 year rate = ________ 4 year rate = ________ ____________________ + 1% ________________
_________
(a) + (a) + 48-59
mos.
________ ________
5 - 10 year 5 year
(actual) rate ________ (actual) rate ________ ____________________ + 1% ________________
__________
60-120
mos.
- .25
________________
<CAPTION>
<S> <C> <C>
INSTALLMENT PAYMENTS (Floor equal to Five Yr. rate MINUS .25).........................
________________ _________*
Install.
* The rate for installment payment bonds is .5% less than those specified for comparable terms.
</TABLE>
FORM OF
AGREEMENT TO ACT AS "QUALIFIED INDEPENDENT UNDERWRITER"
This agreement made as of the day of _____________, by and
between Summit Securities, Inc., an Idaho corporation ("Summit"),
Metropolitan Investment Securities, Inc., a Washington corporation ("MIS"),
and Welco Securities, Inc., a Nevada Corporation ("Welco").
WITNESSETH:
WHEREAS Summit intends to offer 150,000 shares of Preferred Stock,
designated as "Variable Rate Cumulative Preferred Stock, Series S-2,"
(hereinafter referred to as the "Preferred Stock"), which will be offered in
reliance on a registration statement filed on Form S-2, bearing SEC file
number 33- ; and,
WHEREAS, MIS, a wholly-owned broker/dealer an affiliate of Summit and a
member of the National Association of Securities Dealers ("NASD"), will be
engaged as the sole selling agent for its affiliate, Summit; and,
WHEREAS, pursuant to subparagraph (c) of Rule 2720 of the Bylaws of the
NASD, MIS, as a NASD member, may participate in such underwriting only if
the price at which the Preferred Stock is offered to the public is no higher
than the price recommended by a "Qualified Independent Underwriter" as that
term is defined in subparagraph (b)(15) of Rule 2720 to the Bylaws of the
NASD, and who participates in the preparation of the registration statement
and prospectus relating to the offering and exercises customary standards of
due diligence, with respect thereto; and,
WHEREAS, this agreement ("Agreement") describes the terms on which
Summit is retaining Welco to serve as such a "Qualified Independent
Underwriter" in connection with this offering of Preferred Stock; and,
NOW, THEREFORE, in consideration of the recitations set forth above,
and the terms, promises, conditions, and covenants herein contained, the
parties hereby contract and agree as follows:
DEFINITIONS
As hereinafter used, except as the context may otherwise require, the
term "Registration Statement" means the registration statement on Form S-2
(including the related preliminary prospectus, financial statements,
exhibits and all other documents to be filed as a part thereof or
incorporated therein) for the registration of the offer and sale of the
preferred stock under the Securities Act of 1933, as amended, and the rules
and regulations thereunder (the "Act") filed with the Securities and
Exchange Commission (the "Commission"), and any amendment thereto, and the
term "Prospectus" means the prospectus including any preliminary or final
prospectus (including the form of prospectus to be filed with the Commission
pursuant to Rule 424(b) under the Act) and any amendment or supplement
thereto, to be used in connection with the offering.
1. RULE 2720. Welco hereby confirms its agreement as set forth in
subparagraph 15(g) of Rule 2720 of the Bylaws of the NASD and represents
that, as appropriate, Welco satisfies or at the times designated in such
paragraph (l) satisfies the other requirements set forth therein or will
receive an exemption from such requirements from the NASD.
2. CONSENT. Welco hereby consents to be named in the Registration
Statement and Prospectus as having acted as a "Qualified Independent
Underwriter" solely for the purposes of Rule 2720 referenced herein. Except
as permitted by the immediately preceding sentence or to the extent required
by law, all references to Welco in the Registration Statement or Prospectus
or in any other filing, report, document, release or other communication
prepared, issued or transmitted in connection with the offering by Summit or
any corporation controlling, controlled by or under common control with
Summit, or by any director, officer, employee, representative or agent of
any thereof, shall be subject to Welco's prior written consent with respect
to form and substance.
3. PRICING FORMULA AND OPINION. Welco agrees to render a written
opinion as to the price above which Summit's Preferred Stock may not be
offered based on the computation of dividends to be declared on those shares
that is set forth in Schedule "A," a copy of which is attached hereto, and
incorporated herein by reference. It is understood and agreed by Welco that
the securities to which this Agreement relates will be offered on a best
efforts basis by MIS, as the sole selling agent of Summit pursuant to the
selling agreement to be entered into between MIS and Summit which is filed
as exhibit to the Registration Statement referred to above. Summit, through
MIS, will continue to offer the preferred stock according to the terms and
conditions of said agreement, in accordance with this Agreement. Welco
reserves the right to review and amend its opinion upon the filing of any
post-effective amendment to this Registration Statement or upon occurrence
of any material event which may or may not require such an amendment to be
filed, or at such time as the offering under this registration shall
terminate or otherwise lapse under operation of law.
4. FEES AND EXPENSE. It is understood that Summit shall reimburse
Welco for its expenses on a nonaccountable basis in the amount of $5,000 of
which $2,500 has been paid to date, and the balance to be paid at closing.
It is further agreed that Welco shall be paid an additional amount of
$15,000 at the time the pricing opinion is rendered, concurrent with the
closing. Welco agrees to pay all fees and expenses to any legal counsel
whom it may employ to represent it separately in connection with or on
account of its actions contemplated herein. All mailing, telephone, travel,
hotel, meals, clerical, or other office costs incurred or to be incurred by
Welco in conjunction with Summit's proposed offering which is the subject of
this Agreement shall be reimbursed to Welco by Summit at closing on an
accountable basis upon receipt of an itemization of said expenses.
5. MATERIAL FACTS. Summit represents and warrants to Welco that at
the time the Registration Statement and, at the time the Prospectus is filed
with the Commission (including any preliminary prospectus and the form of
prospectus filed with the Commission pursuant to Rule 424(b)) and at all
times subsequent thereto, to and including the date on which payment for,
and delivery of, the Preferred Stock to be sold in the Offering is made by
the underwriter or underwriters, as the case may be, participating in the
Offering and by Summit (such date being referred to herein as the "Closing
Date"), the Prospectus (as amended or supplemented if it shall have been so
amended or supplemented) will contain all material statements which are
required to be stated therein in accordance with the Act and will conform to
all other requirements of the federal securities laws, and will not, on such
date include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading and that all contracts and documents
required by the Act to be filed or required as exhibits to said registration
statement have been filed. Summit further represents and warrants that any
further filing, report, document, release or communication which in any way
refers to Welco or to the services to be performed by Welco pursuant to this
Agreement will not contain any untrue or misleading statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
Summit further warrants and represents that:
(a) All leases, contracts and agreements referred to in or filed as
exhibits to the Registration Statement to which Summit or its subsidiaries
is a party or by which it is bound are in full force and effect.
(b) Summit has good and marketable title, except as otherwise
indicated in the Registration Statement and Prospectus, to all of their
assets and properties described therein as being owned by them, free and
clear of all liens, encumbrances and defects except such encumbrances and
defects which do not, in the aggregate, materially affect or interfere with
the use made and proposed to be made of such properties as described in the
Registration Statement and Prospectus; and Summit has no material leased
properties except as disclosed in the Prospectus.
(c) Summit is duly organized under the laws of the State of Idaho and,
as of the effective date of the Registration Statement and at Closing Summit
will be validly existing and in good standing under the laws of the State of
Idaho with full corporate power and authority to own its properties and
conduct its business to the extent described in the Registration Statement
and Prospectus; Summit is duly qualified to do business as foreign
corporations and in good standing in all jurisdictions in which the nature
of the business transacted by them or their ownership of properties or
assets makes their qualification necessary; the authorized and outstanding
capitalization of Summit is as set forth in the Prospectus and the
description in the Prospectus of the capital stock of Summit conforms with
and accurately describes the rights set forth in the instruments defining
the same;
(d) Summit is not in violation of their respective certificates of
incorporation or Bylaws or in default in the performance or observance of
any material obligation, agreement, covenant or condition contained in any
bond, debenture, note, or other evidence of indebtedness, contract or lease
or in any indenture or loan agreement to which any of them is a party or by
which any of them is bound.
(e) The execution, delivery and performance of this Agreement has been
duly authorized by all necessary corporate action on the part of Summit and
MIS and performance of the foregoing agreement and the consummation of the
transactions contemplated thereby, will not conflict with or result in a
breach of any of the terms or constitute a violation of the respective
certificates of incorporation or Bylaws of Summit or MIS, or any deed of
trust, lease, sublease, indenture, mortgage, or other agreement or
instrument to which Summit or MIS is a party or by which any of them or
their property is bound, or any applicable law, rule, regulation, judgment,
order or decree of any government, governmental instrumentality or court,
domestic or foreign, having jurisdiction over Summit or MIS or their
properties or obligations; and no consent, approval, authorization or order
of any court or governmental agency or body is required for the consummation
of the transactions contemplated herein and in the other agreements
previously referred to in this paragraph except as may be required under the
Act or under any state securities or Blue Sky Laws.
(f) Any certificate signed by an officer of Summit and delivered to
Welco pursuant to this Agreement shall be deemed a representation and
warranty by Summit to Welco, to have the same force and effect as stated
herein, as to the matters covered thereby.
(g) If any event relating to or affecting Summit or any of its
subsidiaries shall occur as a result of which it is necessary, in Welco's
opinion, to amend or supplement the Prospectus in order to make the
Prospectus not misleading in the light of the circumstances existing at the
time it is delivered to a purchaser, Summit undertakes to inform Welco of
such events within a reasonable time thereafter, and will forthwith prepare
and furnish to Welco, without expense to them, a reasonable number of copies
of an amendment or amendments or a supplement or supplements to the
Prospectus (in form and substance satisfactory to Welco) which will amend or
supplement the Prospectus so that as amended or supplemented it will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein in light of the circumstances
existing at the time the Prospectus is delivered to a purchaser, not
misleading.
(h) Summit hereby warrants and represents that it will offer the
preferred stock in accordance with the pricing formula set forth in Schedule
"A" which is incorporated by reference herein.
(i) All representations, warranties and agreements contained in this
Agreement, or contained in certificates of officers of Summit submitted
pursuant hereto, shall remain operative and in full force and effect,
surviving the date of this Agreement.
6. AVAILABILITY OF INFORMATION. Summit hereby agrees to provide
Welco, at its expense, with all information and documentation with respect
to its business, financial condition and other matters as Welco may deem
relevant based on the standards of reasonableness and good faith and shall
request in connection with Welco's performance under this Agreement,
including, without limitation, copies of all correspondence with the
Commission, certificates of its officers, opinions of its counsel and
comfort letters from its auditors. The above-mentioned certificates,
opinions of counsel and comfort letters shall be provided to Welco as Welco
may request on the effective date of the Registration Statement and on the
Closing Date. Summit will make reasonably available to Welco, its auditors,
counsel, and officers and directors to discuss with Welco any aspect of
Summit which Welco may deem relevant. In addition, Summit, at Welco's
request, will cause to be delivered to Welco copies of all certificates,
opinions, letters and reports to be delivered to the underwriter or
underwriters, as the case may be, pursuant to any underwriting agreement
executed in connection with the Offering or otherwise, and shall cause the
person issuing such certificate, opinion, letter or report to authorize
Welco to rely thereon to the same extent as if addressed directly to Welco.
Summit represents and warrants to Welco that all such information and
documentation provided pursuant to this paragraph 6 will not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statement therein not misleading. In addition, Summit
will promptly advise Welco of all telephone conversations with the
Commission which relate to or may affect the Offering.
7. INDEMNIFICATION.
(a) Subject to the conditions set forth below, and in addition to
any rights of indemnification and contribution to which Welco may be
entitled pursuant to any agreement among underwriters, underwriting
agreement or otherwise, and to the extent allowed by law, Summit hereby
agrees that it will indemnify and hold Welco and each person controlling,
controlled by or under common control with Welco within the meaning of
Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or the rules and regulations thereunder
(individually, an "Indemnified Person") harmless from and against any and
all loss, claim, damage, liability, cost or expense whatsoever to which such
Indemnified Person may become subject under the Act, the Exchange Act, or
other federal or state statutory law or regulation, at common law or
otherwise, arising out of, based upon, or in any way related or attributed
to (i) this Agreement, (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or Prospectus or
any other filing, report, document, release or communication, whether oral
or written, referred to in paragraph 5 hereof or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, (iii) any
application or other document executed by Summit or based upon written
information furnished by Summit filed in any jurisdiction in order to
qualify the Debentures under the securities or Blue Sky laws thereof, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
or (iv) the breach of any representation or warranty made by Summit in this
Agreement. Summit further agrees that upon demand by an Indemnified Person
at any time or from time to time, it will promptly reimburse such
Indemnified Person for, or pay, any loss, claim, damage, liability, cost or
expense as to which Summit has indemnified such person pursuant hereto.
Notwithstanding the foregoing provisions of this paragraph 7, any such
payment or reimbursement by Summit of fees, expenses or disbursement
incurred by an Indemnified Person in any proceeding in which a final
judgment by a court of competent jurisdiction (after all appeals or the
expiration of time to appeal) is entered against such Indemnified Person as
a direct result of such person's negligence, bad faith or willful
misfeasance will be promptly repaid to Summit. In addition, anything in
this paragraph 7 to the contrary notwithstanding, Summit shall not be liable
for any settlement of any action or proceeding effected without its written
consent.
(b) Promptly after receipt by an Indemnified Person under
paragraph (a) above of notice of the commencement of any action, such
Indemnified Person will, if a claim in respect thereof is to be made against
Summit under paragraph (a), notify Summit in writing of the commencement
thereof; but the omission to so notify Summit will not relieve Summit from
any liability which it may have to any Indemnified Person otherwise than
under this paragraph 7 if such omission shall not have materially prejudiced
Summit's ability to investigate or to defend against such claim. In case
any such action is brought against any Indemnified Person, and such
Indemnified Person notifies Summit of the commencement thereof, Summit will
be entitled to participate therein and, to the extent that it may elect by
written notice delivered to the Indemnified Person promptly after receiving
the aforesaid notice from such Indemnified Person, to assume the defense
thereof with counsel reasonably satisfactory to such Indemnified Person;
provided, however, that if the defendants in any such action include both
the Indemnified Person and Summit or any corporation controlling, controlled
by or under common control with Summit, or any director, officer, employee,
representative or agent of any thereof, or any other "Qualified Independent
Underwriter" retained by Summit in connection with the Offering and the
Indemnified Person shall have reasonably concluded that there may be legal
defenses available to it which are different from or additional to those
available to such other defendant, the Indemnified Person shall have the
right to select separate counsel to represent it. Upon receipt of notice
from Summit to such Indemnified Person of its election so to assume the
defense of such action and approval by the Indemnified Person of counsel,
Summit will not be liable to such Indemnified Person under this paragraph 7
for any fees of counsel subsequently incurred by such Indemnified Person in
connection with the defense thereof (other than the reasonable costs of
investigation subsequently incurred by such Indemnified Person) unless (i)
the Indemnified Person shall have employed separate counsel in accordance
with the provision of the next preceding sentence (it being understood,
however, that Summit shall not be liable for the expenses of more than one
separate counsel in any one jurisdiction representing the Indemnified
Person, which counsel shall be approved by Welco), (ii) Summit, within a
reasonable time after notice of commencement of the action, shall not have
employed counsel reasonably satisfactory to the Indemnified Person to
represent the Indemnified Person, or (iii) Summit shall have authorized in
writing the employment of counsel for the Indemnified Person at the expense
of Summit, and except that, if clause (i) or (iii) is applicable, such
liability shall be only in respect of the counsel referred to in such clause
(i) or (iii).
(c) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in paragraph 7 is
due in accordance with its terms but is for any reason held by a court to be
unavailable from Summit to Welco on grounds of policy or otherwise, Summit
and Welco shall contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in
connection with investigating or defending same) to which Summit and Welco
may be subject in such proportion so that Welco is responsible for that
portion represented by the percentage that its fee under this Agreement
bears to the public offering price appearing on the cover page of the
Prospectus and Summit is responsible for the balance, except as Summit may
otherwise agree to reallocate a portion of such liability with respect to
such balance with any other person, including, without limitation, any other
"Qualified Independent Underwriter"; provided, however, that (i) in no case
shall Welco be responsible for any amount in excess of the fee set forth in
paragraph 4 above and (ii) no person guilty of fraudulent misrepresentation
within the meaning of Section 11(f) of the Act shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (c), any person
controlling, controlled by or under common control with Welco, or any
partner, director, officer, employee, representative or any agent of any
thereof, shall have the same rights to contribution as Welco and each person
who controls Summit within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, each officer of Summit who shall have signed the
Registration Statement and each director of Summit shall have the same
rights to contribution as Summit, subject in each case to clause (i) of this
paragraph (c). Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against
such party in respect of which a claim for contribution may be made against
the other party under this paragraph (c), notify such party from whom
contribution may be sought, but the omission to so notify such party shall
not relieve the party from whom contribution may be sought from any other
obligation it or they may have hereunder or otherwise than under this
paragraph (c). The indemnity and contribution agreements contained in this
paragraph 7 shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any Indemnified Person or
termination of this Agreement.
8. AUTHORIZATION BY SUMMIT. Summit represents and warrants to Welco
that this Agreement has been duly authorized, executed and delivered by
Summit and constitutes a valid and binding obligation of Summit.
9. AUTHORIZATION BY MIS. MIS represents and warrants to Welco that
this Agreement has been duly authorized, executed and delivered by MIS and
constitutes a valid and binding obligation of MIS.
10. AUTHORIZATION BY WELCO. Welco represents and warrants to Summit
that this Agreement has been duly authorized, executed and delivered by
Welco and constitutes a valid and binding obligation of Welco.
11. NOTICE. Whenever notice is required to be given pursuant to this
Agreement, such notice shall be in writing and shall be mailed by first
class mail, postage prepaid, addressed (a) if to Welco, at P.O. Box 688, One
Belmont Avenue, Bala Cynwyd, PA 19004-3207, Attention: Kenneth S. Shapiro,
and (b) if to Summit or Metropolitan Investment Securities, Inc., at West
929 Sprague Avenue, Spokane, Washington 99204, Attention: Susan A. Thomson,
Assistant Corporate Counsel.
12. GOVERNING LAW. This Agreement shall be construed (both as to
validity and performance) and enforced in accordance with and governed by
the laws of the State of Washington applicable to agreements made and to be
performed wholly within such jurisdiction.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the day and year first above mentioned.
SUMMIT SECURITIES, INC.
By:__________________________________________
Tom Turner, President
METROPOLITAN INVESTMENT SECURITIES, INC.
By:__________________________________________
Reuel Swanson, Secretary
WELCO SECURITIES, INC.
By:__________________________________________
Kenneth S. Shapiro, President
SCHEDULE A
The opinion of Welco is conditioned upon Summit's undertaking to
maintain the distribution rate of the Preferred Stock in accordance with the
formula set forth below:
Notwithstanding anything to the contrary herein the Applicable Rate for
any monthly distribution period shall not, in any event, be less than 6% or
greater than 14% per annum. The Board of Directors may, however, by
resolution, authorized distributions in excess of the Applicable Rate. The
Applicable Rate for any monthly distribution 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 hereinafter defined) plus one half of
one percentage point for such dividend period. In the event that the
Company determines in good faith that for any reason one or more of such
rates cannot be determined for any distribution period, then the Applicable
Rate for such period shall be the higher of whichever of such rates can be
so determined.
EXHIBIT B
VARIABLE RATE, CUMULATIVE
PREFERRED STOCK, SERIES S-2
PRICING
For Distributions Payable On: _____________________________________
Distributions Record Date: ________________________________________
Effective
Date Date Average Rate
3 Mo. Treasury Bill _____________________________ +1.5%
10 Yr Constant Rate _____________________________ +1.5%
20 Year _____________________________ +1.5%
HIGHEST EFFECTIVE RATE: _______________________________
MONTHLY DISTRIBUTION PER SHARE: _______________________
As resolved by the Board of Directors, distribution will be deemed declared
on the 1st day of each month, payable on the 20th of each month to the
holders of record on the 5th of each month.
_______________________________________________________
Authorized Signature
Form of
Pricing Opinion of Welco Securities, Inc.
Welco Securities, Inc.
P.O. Box 688
One Belmont Avenue, Suite 105
Bala Cynwyd, PA 19004-3207
Date:
Tom Turner, President
Metropolitan Investment Securities, Inc.
917 W. Sprague Avenue
Spokane, Washington 99210
Re: Summit Securities, Inc., Offering of $40,000,000 in
Principal Amount of Investment Certificates, Series A
Dear Mr.Turner:
This letter will serve to confirm our engagement as a "qualified
independent underwriter" as that term is defined subparagraph
(b)(15) of Rule 2720 to the NASD bylaws, as amended ("Rule 2720").
Based upon our review of the registration statement, and the
performance of "due diligence" as required in subparagraph (c)(3)
to Rule 2720, it appears that the yields on the Certificates
(which are based upon the computation set forth in Exhibits A and
B to the Agreement to Act as "Qualified Independent Underwriter"
dated ____________, which is filed as Exhibit 1(b)(i) to the
registration statement referred to hereafter), are no lower than
those which we would recommend.
We hereby consent to the use of our name as a "qualified
independent underwriter," in the Registration Statement (SEC File
No. 333- ).
Very truly yours,
WELCO SECURITIES, INC.
By:________________________________________
Kenneth S. Shapiro, President
cc: National Association of Securities Dealers, Inc.
Form of
Pricing Opinion of Welco Securities, Inc.
Date:
Tom Turner, President
Metropolitan Investment Securities, Inc.
917 W. Sprague Avenue
Spokane, Washington 99210
Re: Summit Securities, Inc. Offering of $15,000,000 of
Variable Rate Cumulative Preferred Stock, Series S-2
Dear Mr.Turner:
This letter will serve to confirm our engagement as a "qualified
independent underwriter" as that term is defined in subparagraph
(b)(15)of Rule 2720 to the NASD bylaws, as amended ("Rule 2720").
Based upon our review of the registration statement, and the
performance of "due diligence" as required in subparagraph
(c)(3)to Rule 2720, it appears that the price of $100.00 per share
on the Variable Rate Cumulative Preferred Stock, Series S-2
(provided that the manner in which the computation of dividends
are those set forth in Exhibit A to the Agreement to Act as
"Qualified Independent Underwriter" dated __________________,
which is filed as Exhibit 1(b)(ii) to the registration statement
referred to hereafter), is no higher than that which we would
recommend.
We hereby consent to the use of our name as a "qualified
independent underwriter," to the Registration Statement (SEC File
No. ).
Very truly yours,
WELCO SECURITIES, INC.
By:_______________________________________
Kenneth S. Shapiro, President
KSS/mm
cc: National Association of Securities Dealers, Inc.
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
FORM OF
OPINION OF SUSAN A. THOMSON
Dated _____________
The Directors and Stockholder
Summit Securities, Inc.
929 West Sprague Avenue
Spokane, WA 99204
Gentlemen:
I have acted as counsel to Summit Securities, Inc. (the
"Company") in connection with the proceedings for the
authorization and issuance of $40,000,000 principal amount of
Investment Certificates of the Company and the preparation of a
Registration Statement (Form S-2) under the Securities Act of
1933, as amended, which you have filed with the Securities and
Exchange Commission with respect to the Certificates. (SEC
Registration No. ).
I have examined the Registration Statement referred to above
and such documents and records of the Company and other documents
as I have deemed necessary for the purpose of this opinion.
Based upon the foregoing, I am of the opinion that upon the
happening of the following events,
(a) due action by the Board of Directors of the Company
authorizing the issuance and sale of the Certificates
pursuant to the Indenture dated as of November 15,
1990, between the Company and West One Bank, Idaho,
N.A. as Trustee, and the Tri-Party Agreement dated
April 24, 1996 between West One, Summit and First Trust
National Association, Successor Trustee;
(b) the Registration Statement referred to above becoming
effective;
(c) compliance with the terms and conditions of the
Indenture with respect to the creation, and delivery of
the Certificates the due execution by the Company of
the Certificates, and the sale thereof by the Company
as contemplated in the Registration Statement and in
accordance with the above-mentioned corporate and
governmental authorizations;
The Certificates will constitute in the hands of the holders
thereof valid, binding and legal outstanding obligations of the
Company, in accordance with their terms, subject to applicable
bankruptcy and insolvency laws.
I hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to me in the
Prospectus under the caption "Legal Opinion".
Sincerely,
Susan A. Thomson
Assistant Corporate Counsel
Form of
OPINION OF SUSAN A. THOMSON
Dated _____________
The Directors and Stockholders
Summit Securities, Inc.
West 929 Sprague Avenue
Spokane, WA 99204
Gentlemen:
I have acted as counsel to Summit Securities, Inc. (the
"Company") in connection with the proceedings for the
authorization and issuance of 150,000 shares of Variable Rate
Cumulative Preferred Stock, Series S-2 ("Preferred Stock, Series
S") including the preparation of a Registration Statement (Form
S-2) under the Securities Act of 1933, as amended, which has been
filed with the Securities and Exchange Commission. (SEC
Registration No. )
I have examined the Registration Statement referred to above
and such other documents and records as I have deemed necessary
for the purpose of this opinion.
Based upon the foregoing, and subject to the Board of
Directors' adoption of Articles of Amendment to the Company's
Article of Incorporation which incorporate the Statement of
Rights, Designation and Preferences of variable Rate Cumulative
Preferred Stock, Series S-2, and the filing of same with the
Secretary of State of the State of Idaho. I am of the opinion
that:
(1) the Preferred Stock, Series S-2 of the Company which is
being registered, when issued and sold in the manner
and for the consideration contemplated by the
Registration Statement, will be legally issued, fully
paid and non-assessable; and
(2) in the event of dissolution, liquidation or winding up
of the affairs of the Company, whether voluntary or
involuntary, the holders of Preferred Stock, Series S-2
will be entitled to receive, on parity with all other
issued and outstanding preferred stock, before any
payment or distribution is made on the Company's Class
A or Class B Common Stock, the amount of ($100.00 per
share plus an amount equal to all accrued and unpaid
dividends thereon to the date of distribution or
payment; and
(3) The liquidation preference of the preferred stock
exceeds the par value thereof. There are no
restrictions upon surplus by reason of such excess and
there are no remedies available to security holders by
reason of such excess before or after payment of any
dividend that would reduce surplus to an amount less
than the amount of such excess and which remedies arise
by reason of such excess.
This opinion is furnished pursuant to the requirements of
Item 601(b)(5) and 601(b) of Regulation S-K.
I hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to me in the
Prospectus under the caption "Legal Opinion."
Sincerely,
Susan A. Thomson
Assistant Corporate Counsel
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/ SUSAN 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> <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>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form
S-2 of our reports, which include an explanatory paragraph
describing changes in the method of accounting for impaired loans in
fiscal 1996, dated December 6, 1996 on our audits of the
consolidated financial statements and financial statement schedules
of Summit Securities, Inc. and Subsidiaries.
We also consent to the reference of our firm under the caption
"Experts".
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Spokane, Washington
January 10, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Susan Thomson and
Reuel Swanson and each of them, his true and lawful attorney-in-
fact and agent with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement on Form S-2
and file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission,
granting unto such attorney-in-fact and agents full power and
authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, to all intents
and purposes and as full as they might or could do in person,
hereby ratifying and confirming all that such attorneys-in-fact and
agents, or their substitutes may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1993,
this registration statement has been signed by the following person
in the capacities and on the dates indicated.
Signature Title Date
/S/ TOM TURNER
_________________________ President/Director January 2, 1997
Tom Turner
/S/ PHILIP SANDIFUR
_________________________ Vice President/Director January 2, 1997
Philip Sandifur
/S/ GREG GORDON
_________________________ Secretary/Treasurer January 2, 1997
Greg Gordon Director
/S/ ROBERT POTTER
________________________ Director January 2, 1997
Robert Potter
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Statement of Eligibility and Qualification
Under the Trust Indenture Act of 1939 of a
Corporation Designated to Act as Trustee
FIRST TRUST NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
91-1587893
(I.R.S. Employer Identification No.)
601 Union Street, Suite 2120 98101
Seattle, WA
(Address of Principal Executive Offices) (Zip Code)
SUMMIT SECURITIES, INC.
(Exact name of obligor 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
(208) 667-5717
(Address and telephone number of
principal executive offices)
99204
(Zip Code)
INVESTMENT CERTIFICATES
(Title of the indenture securities)
1. General Information. Furnish the following information as to
the trustee:
(a) Name and address of each examining or supervising
authority to which it is subject.
Comptroller of the Currency, Washington D.C. 20521
(b) Whether it is authorized to exercise corporate trust
power.
Yes.
2. Affiliations with Obligor and Underwriters. If the obligor or
any underwriter for the obligor is an affiliate of the trustee,
describe such affiliation.
No such affiliation exists with the Trustee, First Trust
National Association.
3. Voting Securities of the Trustee. Furnish the following
information as to each class of voting securities of the
trustee:
As of June 30, 1996
Col. A Col. B
Title of Class Amount Outstanding
Common Stock 1,000 Shares
4. Trusteeships under Other Indentures. If the trustee is a
trustee under another indenture under which any other
securities, or certificates of interest or participation in any
other securities, of the obligor are outstanding, furnish the
following information:
(a) Title of the securities outstanding under each such
other indenture.
None.
(b) A brief statement of the facts relied upon as a basis
for the claim that no conflicting interest within the
meaning of Section 310(b) (1) of the Act arises as a
result of the trusteeship under any such other
indenture, including a statement as to how the
indenture securities will rank as compared with the
securities issued under such other indenture.
Not applicable.
5. Interlocking Directorates and Similar Relationships with the
Obligor or Underwriters. If the trustee or any of the
directors or executive officers of the trustee is a director,
officer, partner, employee, appointee, or representative of the
obligor or of any underwriter for the obligor, identify each
such person having any such connection and state the nature of
each such connection.
None.
6. Voting Securities of the Trustee Owned by the Obligor or its
Officials. Furnish the following information as to the voting
securities of the trustee owned beneficially by the obligor and
each director, partner and executive officer of the obligor.
As of June 30, 1996
Col. A Col. B Col. C Col. D
Name of Title Amount Owned Percentage of
Owner of Class Beneficially Voting Securities
Represented by
Amount Given
in Col. C.
- --------------------------------------------------------------------
None
7. Voting Securities of the Trustee Owned by Underwriters or their
Officials. Furnish the following information as to the voting
securities of the trustee owned beneficially by each
underwriter for the obligor and each director, partner, and
executive officer of each such underwriter.
As of June 30, 1996
Col. A Col. B Col. C Col. D
Name of Title Amount Owned Percentage of
Owner of Class Beneficially Voting Securities
Represented by
Amount Given
in Col. C.
- --------------------------------------------------------------------
None.
8. Securities of the Obligor Owned or Held by the Trustee.
Furnish the following information as to securities of the
obligor owned beneficially or held as collateral security for
obligations in default by the trustee.
As of June 30, 1996
Col. A Col. B Col. C Col. D
Title of Whether the Amount Owned Percent of Class
Securities are Beneficially or Represented by
Voting or Held as Collateral Amount Given
Nonvoting for Obligations in Col. C.
Securities in Default Trustee
- --------------------------------------------------------------------
None.
9. Securities of Underwriters Owned or Held by the Trustee. If
the trustee owns beneficially or holds as collateral security
for obligations in default any securities of an underwriter for
the obligor, furnish the following information as to each class
of such underwriter any of which are so owned or held by the
trustee.
As of June 30, 1996
Col. A Col. B Col. C Col. D
Name of Issuer Amount Amount Owned Percent of
and Title of Outstanding Beneficially Class Represented
Class or Held as by Amount Given
Collateral for in Col. C
Obligations in
Default by Trustee
- --------------------------------------------------------------------
None.
10. Ownership or Holdings by the Trustee of Voting Securities of
Certain Affiliates or Security Holders of the Obligors. If the
trustee owns beneficially or holds as collateral security for
obligations in default voting securities of a person who, to
the knowledge of the trustee (1) owns 10 percent or more of the
voting securities of the obligor or (2) is an affiliate, other
than a subsidiary, of the obligor, furnish the following
information as to the voting securities of such person.
As of June 30, 1996
Col. A Col. B Col. C Col. D
Name of Issuer Amount Amount Owned Percent of Class
and Title of Outstanding Beneficially Represented by
Class or Held as Amount Given
Collateral In Col. C
Security for
Obligations in
Default by Trustee
None.
11. Ownership or Holdings by the Trustee of any Securities of a
Person Owning 50% or More of the voting Securities of the
Obligor. If the Trustee owns beneficially or holds as
collateral security for obligations in default any Securities
of a person who, to the knowledge of the trustee, owns 50% or
more of the voting securities of the obligor, furnish the
following information as to each class of securities of such
person any of which are so owned or held by the trustee.
As of June 30, 1996
- -------------------------------------------------------------------
Col. A Col. B Col. C Col. D
Name of Issuer Amount Amount Owned Percent of Class
and Title of Outstanding Beneficially Represented by
Class Held as Amount Given
Collateral In Col. C
Security for
Obligations in
Default by Trustee
- --------------------------------------------------------------------
None.
12. Indebtedness of the Obligor to the Trustee. Except as noted in
the instructions, if the obligor is indebted to the Trustee,
furnish the following information:
As of June 30, 1996
Col. A Col. B Col. C
Nature of Amount Outstanding Date Due
Indebtedness
None.
13. Defaults by the Obligor.
(a) State whether there is or has been a default with respect
to the securities under this indenture. Explain the
nature of any such default.
Not applicable.
(b) If the trustee is a trustee under another indenture under
which any other securities, or certificates of interest or
participation in any other securities, of the obligor are
outstanding, or is trustee for more than one outstanding
series of securities under the indenture, state whether
there has been a default under any such indenture or
series, identify the indenture or series affected, and
explain the nature of any such default.
Not applicable
14. Affiliations with the Underwriters. If any underwriter is an
affiliate of the trustee, describe each such affiliation.
None.
15. Foreign Trustee. Identify the order or rule pursuant to which
the foreign trustee is authorized to act as sole trustee under
indentures qualified or to be qualified under the Act.
Not applicable.
16. List of Exhibits. List below all exhibits filed as part of
this statement of eligibility and qualification.
1. Articles of Association of First Trust National Association.
(Attached)
2. Certificate of Authority of First Trust National Association
to Commence Business.
3. Authorization of the Trustee to exercise corporate trust
powers.
4. Bylaws of First Trust National Association. (Attached)
5. Not Applicable.
6. Consents of First Trust National Association required by
Section 321(b) of the Act. (Attached)
7. Latest Report of Condition of First Trust National
Association. (Attached)
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, First Trust National Association, a national banking
association organized under the laws of the United States, has duly
caused this statement of eligibility and qualification to be signed
on its behalf by the undersigned, thereunto duly authorized, all in
the City of Seattle, and State of Washington, on the 17th day of
December, 1996.
FIRST TRUST NATIONAL ASSOCIATION
/S/ M. Bator
By____________________________________
Exhibit 6 (to Form T-1)
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust
Indenture Act of 1939 in connection with the proposed issuance by
Summit Securities, Inc. of Investment Certificates, we hereby
consent that reports of examinations by federal, state, territorial
and district authorities may be furnished by such authorities to the
Securities and Exchange Commission upon its request therefor.
FIRST TRUST NATIONAL ASSOCIATION
/S/ M. Bator
By__________________________________
Dated: December 17, 1996
<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
