FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________
Commission file number 33-36775
SUMMIT SECURITIES, INC.
(Exact name of registrant as specified in its charter)
IDAHO 82-0438135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 W. 1st AVENUE, SPOKANE, WASHINGTON 99201-5015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (509)838-3111
Former name, former address and former fiscal year, if changed since last
report: Former address was 929 West Sprague Avenue, Spokane, Washington 99201
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: N/A.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes / / No / / N/A.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common: 10,000 shares at July 31, 1998.
SUMMIT SECURITIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
As of June 30, 1998 and September 30, 1997 (unaudited)
Condensed Consolidated Statements of Income
Three Months and Nine Months Ended June 30, 1998 and 1997 (unaudited)
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1998 and 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
______________ ______________
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 19,325,783 $ 8,461,101
Investments in affiliated company 4,522,425 4,522,425
Trading securities, at market 6,091,280 1,743,836
Available-for-sale securities, at
Market 5,434,440 5,959,470
Held-to-maturity securities, at
Amortized cost (market value:
$5,998,594 and $7,206,543) 5,997,264 7,241,209
Accrued interest on investments 139,309 162,774
Real estate contracts and mortgage
Notes and other receivables, net
Of unrealized discounts and
Allowances for losses 124,575,707 124,211,930
Real estate held for sale 2,553,411 2,819,845
Deferred acquisition costs, net 8,006,460 7,634,699
Other assets, net 2,268,863 3,596,781
______________ ______________
TOTAL ASSETS $ 178,914,942 $ 166,354,070
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Annuity reserves $ 110,568,192 $ 105,339,688
Investment certificates and accrued
interest 54,146,333 50,406,991
Debt payable 208,943 200,992
Accounts payable and accrued
expenses 1,976,791 1,302,945
Deferred income taxes 1,772,509 1,346,811
______________ ______________
TOTAL LIABILITIES 168,672,768 158,597,427
______________ ______________
STOCKHOLDERS' EQUITY
Common stock, $10 par value,
2,000,000 shares authorized:
10,000 shares issued and
outstanding 100,000 100,000
Preferred stock, $10 par value,
10,000,000 shares authorized,
60,563 and 53,817 shares issued
and outstanding (liquidation
preference $6,056,290 and
$5,381,690, respectively) 605,629 538,169
Additional paid-in capital 3,897,034 3,326,007
Retained earnings 5,592,445 3,741,613
Net unrealized gains on
Investments, net of income taxes 47,066 50,854
______________ ______________
TOTAL STOCKHOLDERS' EQUITY 10,242,174 7,756,643
______________ ______________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 178,914,942 $ 166,354,070
============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
____________ ____________ ____________ ____________
<S> <C> <C> <C> <C>
REVENUES
Interest and earned discounts $ 4,163,862 $ 3,355,906 $ 12,230,989 $ 9,021,656
Annuity fees and charges 28,631 23,995 106,764 65,691
Realized investment gains 7,751 50,000 354,079 50,000
Realized net gains on sales of 1,482,755 9,944 2,097,809 392,082
Receivables
Real estate sales 1,688,038 588,900 4,310,674 1,275,700
Dividend income 51,431 68,494 164,660 189,998
Fees, commissions, service and other
income 1,128,684 671,215 3,627,748 2,388,762
____________ ____________ ____________ ____________
TOTAL REVENUES 8,551,152 4,768,454 22,892,723 13,383,889
____________ ____________ ____________ ____________
EXPENSES
Annuity benefits 1,686,181 1,361,990 5,058,805 3,471,262
Interest 1,212,087 1,080,033 3,529,981 3,183,506
Cost of real estate sold 1,572,248 597,508 4,132,385 1,264,426
Provision for losses on real estate
Contracts and real estate held 504,842 179,435 1,452,908 650,610
Salaries and employee benefits 485,014 529,007 1,523,290 1,443,554
Commissions to agents 803,837 1,289,887 2,637,063 2,795,326
Other operating and underwriting
expenses 663,285 501,784 1,598,730 1,558,365
Less increase in deferred
acquisition costs (34,840) (1,071,887) (327,651)
(2,042,158)
____________ ____________ ____________ ____________
TOTAL EXPENSES 6,892,654 4,467,757 19,605,511 12,324,891
____________ ____________ ____________ ____________
Income before income taxes 1,658,498 300,697 3,287,212 1,058,998
Provision for income taxes (347,219) (51,080) (720,080)
(181,485)
____________ ____________ ____________ ____________
NET INCOME 1,311,279 249,617 2,567,132 877,513
Preferred stock dividends (125,611) (116,122) (367,875)
(327,469)
____________ ____________ ____________ ____________
Income applicable to common stockholders $ 1,185,668 $ 133,495 $ 2,199,257 $ 550,044
============ ============ ============ ============
Basic and diluted income per share
Applicable to common stockholder $ 118.57 $ 13.35 $ 219.93 $ 55.00
Weighted average number of Shares of common
stock outstanding 10,000 10,000 10,000 10,000
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1998 1997
______________ ______________
<S> <C> <C>
CASH PROVIDED BY
OPERATING ACTIVITIES $ 5,069,755 $ 1,341,918
______________ ______________
Cash flows from investing activities:
Purchase of available-for-sale
Investments (5,260,255)
Proceeds from investment maturities 1,787,609 1,500,000
Purchase of held-to-maturity
Investments (995,469)
Principal payments on real estate
contracts and mortgage notes and
other receivables 16,234,996 6,153,986
Purchase of real estate contracts
and mortgage notes and other
receivables (47,410,190) (40,814,515)
Proceeds from real estate sales 1,817,204 930,902
Additions to real estate held for sale (2,556,930) (1,602,236)
Proceeds from sale of receivables 33,344,785 12,711,640
______________ ______________
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 3,217,474 (27,375,947)
______________ ______________
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts from annuity products 10,642,666 35,427,722
Withdrawals of annuity products (10,650,457) (6,774,550)
Proceeds from issuance of investment
certificates 9,094,009 9,771,879
Repayment of investment certificates (5,964,732) (5,188,139)
Repayment to banks and others (8,792) (3,816,050)
Debt issuance costs (459,584) (515,096)
Contingent purchase price paid on
Subsidiary purchased from
related party (135,569) (249,719)
Issuance of preferred stock 677,227 874,228
Redemption of preferred stock (38,740)
Cash dividends on preferred and common
stock (578,575) (327,469)
______________ ______________
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,577,453 29,202,806
______________ ______________
Net change in cash and cash equivalents 10,864,682 3,168,777
Cash and cash equivalents, beginning
of period 8,461,101 4,461,315
______________ ______________
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,325,783 $ 7,630,092
============== ==============
NON CASH INVESTING AND FINANCING
ACTIVITIES OF COMPANY:
Assumption of other debt payable in
conjunction with purchase of real
estate contracts and mortgage notes $ 16,942 $ 134,355
Real estate acquired through
foreclosure 1,641,489 1,372,389
Receivables originated to facilitate
the sale of real estate 2,493,470 344,798
Transfer of available-for-sale
Securities to trading securities 652,650
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position as of June 30, 1998, the results
of operations for the three and nine months ended June 30, 1998 and 1997
and the cash flows for the nine months ended June 30, 1998 and 1997.
The results of operations for the three and nine month periods ended
June 30, 1998 and 1997 are not necessarily indicative of the results to
be expected for the full year. As provided for in regulations
promulgated by the Securities and Exchange Commission, all financial
statements included herein are unaudited; however, the condensed
consolidated balance sheet at September 30, 1997 has been derived from
the audited consolidated balance sheet. These financial statements
should be read in conjunction with the consolidated financial statements
including notes thereto included in the Company's fiscal 1997 Form 10-K.
2. The principal amount of receivables as to which payments were in arrears
more than three months was $4,800,000 at June 30, 1998 and $4,586,000 at
September 30, 1997.
3. Summit Securities, Inc. is a wholly-owned subsidiary of National Summit
Corp. The Company files consolidated federal income tax returns with
its parent. The Company is allocated a current and deferred income tax
provision from National Summit Corp. as if the Company filed a separate
tax return.
4. Summit Securities, Inc. had no material outstanding legal proceedings
other than normal proceedings associated with receivable foreclosures.
5. In September 1997 and November 1996, Summit entered into
securitization transactions with its subsidiaries, and with
Metropolitan Mortgage & Securities Co., Inc. (Metropolitan),
its former parent company, and Metropolitan subsidiaries. In
September 1997 and November 1996, proceeds from the
securitization transactions were approximately $8.3 million
and $9.6 million and resulted in gains of approximately
$465,000 and $298,000, respectively. The gains included
approximately $58,000 and $146,000, respectively, associated
with the estimated fair value of the mortgage servicing
rights retained on the pools. The servicing rights
associated with the securitization transactions were
subsequently sold to an affiliated entity at the Company's
carrying value.
In April, 1998, Summit entered into a securitization transaction with
its subsidiaries, and with Metropolitan and its subsidiaries. Proceeds
from the transaction were approximately $22.7 million and resulted in
pre-tax gains of approximately $1.4 million. Gains included
approximately $150,000 from sale of servicing rights associated with
securitized loans.
6. In December 1997, Summit sold $8.8 million of receivables to Western
United Life Assurance Company (Western United), a subsidiary of
Metropolitan, at estimated fair value of $9.3 million recognizing a gain
of $0.5 million.
7. 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.
8. In February 1997, Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings per Share" was
issued. SFAS 128 establishes standards for computing and
presenting earnings per share (EPS) and simplifies the
existing standards. This standard replaces the presentation
of primary EPS with a presentation of basic EPS. It also
requires the dual presentation of basic and diluted EPS on
the face of the income statement for all entities with
complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS
computation. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, including
interim periods and requires restatement of all prior-period
EPS data presented. Accordingly, the Company applied this
new standard during the quarter ended December 31, 1997 and
all prior-period EPS data has been restated. The
application of this standard did not have a material effect
on the presentation of the Company's EPS disclosures as the
Company did not and does not have potentially dilutive
securities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussions may contain some forward-looking statements. A forward-
looking statement may contain words such as "will continue to be," "will be,"
"continue to," "expect to," "anticipates that," "to be," or "can impact."
Management cautions that forward-looking statements are subject to risks and
uncertainties that could cause the Company's actual results to differ
materially from those projected in forward-looking statements.
Significant Transactions:
On January 31, 1995, the Company consummated an agreement with
Metropolitan Mortgage & Securities Co., Inc. (Metropolitan), the Company's
former parent company (and currently affiliated through common control),
whereby it acquired Metropolitan Investment Securities, Inc. (MIS) effective
January 31, 1995, at a purchase price of $288,950, which approximated the book
value of MIS at date of purchase. On May 31, 1995, the Company consummated an
agreement with Metropolitan, whereby it acquired Old Standard Life Insurance
(OSL) effective May 31, 1995, at a purchase price of $2,722,000, which
approximated the current book value of OSL at date of purchase, with future
contingency payments based on the earnings of OSL. The purchase price plus
estimated future contingency payments approximates the actuarial appraised
valuation of OSL. As of June 30, 1998, the Company has paid all required
future contingency payments totaling approximately $385,000.
On December 28, 1995, Summit and ILA Financial Services Inc. (ILA)
completed a purchase/sale transaction whereby 100% of the outstanding common
stock of Arizona Life Insurance Company, (AZL), an insurance company domiciled
in Arizona, was sold to a wholly owned subsidiary of Summit. The cash
purchase price was approximately $1.2 million, which approximated the book
value of AZL at the date of purchase. AZL held licenses to engage in
insurance sales in seven states and the purchase price included approximately
$268,000 in value assigned to these state licenses. AZL is in the business of
acquiring receivables using funds derived from the sale of annuities and funds
derived from receivable cash flows. At the date of purchase, AZL had no
outstanding insurance business or other liabilities.
In September 1997 and November 1996, Summit and its subsidiaries
participated as co-sellers in receivable securitizations sponsored by
affiliated companies. Proceeds from these securitization transactions were
approximately $8.3 million and $9.6 million and resulted in gains of
approximately $465,000 and $298,000, respectively. The gains included
approximately $58,000 and $146,000, respectively, associated with the
estimated fair value of the mortgage servicing rights retained on the pools.
The servicing rights associated with the securitization transactions were
subsequently sold to an affiliated entity at the Company's carrying value.
In April 1998, Summit, through its life insurance subsidiaries,
participated as co-sellers in a receivable securitization sponsored by
Metropolitan Asset Funding, Inc. II, an affiliated company. Proceeds from the
transaction were approximately $22.7 million and resulted in pre-tax gains of
approximately $1.4 million. Gains included approximately $150,000 from the
sale of servicing rights associated with the securitized loans.
Western United Life Assurance Company (Western United), a company
affiliated through common control, entered into a reinsurance agreement with
OSL whereby Western United reinsured 75% of the risk on six different annuity
products through OSL. This agreement became effective January 23, 1997 and
continued through September 30, 1997, during which time approximately $28
million in premiums was reinsured through OSL. Effective October 1, 1997, the
agreement was terminated. A similar agreement was executed August, 1998 with
retroactive application to April 1, 1998. As of June 30, 1998, the account
value of reinsured annuities with OSL was approximately $27.4 million.
Financial Condition and Liquidity:
As of June 30, 1998, the Company had cash or cash equivalents of
approximately $19.3 million and liquid investments (trading or available-for-
sale securities) of $11.5 million compared to $4.7 million and $8.9 million at
March 31, 1998, $9.7 million and $9.3 million at December 31, 1997 and $8.5
million and $7.7 million at September 30, 1997. Management believes that
current cash and cash equivalents and other liquidity provided by investments
are adequate to meet planned asset additions, required debt retirements and
other business requirements during the next twelve months. At June 30, 1998,
total cash and investments, including held-to-maturity securities, accrued
investment interest and investments in affiliates, were $41.5 million as
compared to $24.5 million at March 31, 1998, $30.9 million at December 31,
1997 and $28.1 million at September 30, 1997. During the nine months ended
June 30, 1998, funds generated by operating activities totaled $5.1 million.
Funds provided by financing activities were $2.6 million, which included a
$3.3 million net cash inflow from the sale of preferred stock and investment
certificates, less repayments and debt issue costs, offset by payments of
preferred and common stock dividends of $579,000. Funds provided by investing
activities of $3.2 million included $1.8 million net cash inflow from
investment maturities, $49.6 million net cash inflow from sales proceeds and
collections of receivables and $1.8 million net cash inflow from real estate
sales were offset by new receivable acquisitions of $47.4 million and
additions to real estate held of $2.5 million.
The receivable portfolio totaled $124.6 million at June 30, 1998
compared to $138.1 million at March 31, 1998, $126.0 million at December 31,
1997 and $124.2 million at September 30, 1997. During the nine months ended
June 30, 1998, the small increase primarily resulted from the acquisition of
receivables and origination of commercial and construction loans totaling
$47.4 million plus an additional $2.5 million in loans to facilitate the sale
of real estate being almost totally offset by the cost basis of receivables
sold and collections of principal of $47.5 million and $1.9 million in
reductions due to foreclosed receivables. Real estate held for sale totaled
$2.5 million at June 30, 1998 compared to $2.5 million at March 31, 1998, $2.3
million at December 31, 1997 and $2.8 million at September 30, 1997.
Insurance annuity reserves totaled $110.6 million at June 30, 1998
compared to $110.9 million at March 31, 1998, $107.5 million at December 31,
1997 and $105.3 million at September 30, 1997. The increase of $5.3 million
for the nine months ended June 30, 1998 resulted primarily from credited
earnings of $5.3 million as receipts from the sales of annuity products of
$10.6 million equaled withdrawals of $10.6 million. The Company had
outstanding investment certificate liabilities of $54.1 million at June 30,
1998, compared to $52.3 million at March 31, 1998, $51.1 million at December
31, 1997 and $50.4 million at September 30, 1997. For the nine months ended
June 30, 1998, net cash inflow from issuance less maturities of investment
certificates was $3.1 million plus an additional $610,000 increase in credited
interest held.
Total assets were $178.9 million at June 30, 1998 compared to $176.1
million at March 31, 1998, $170.2 million at December 31, 1997 and $166.4
million at September 30, 1997. Total stockholders' equity was $10.2 million or
5.7% of total assets at June 30, 1998 compared to $8.8 million or 5.0% of
total assets at March 31, 1998, $8.4 million or 5.0% of total assets at
December 31, 1997 and $7.8 million or 4.7% of total assets at September 30,
1997.
Results of Operations:
The Company recorded net income before preferred dividends for the nine
months ended June 30, 1998 of $2.6 million on revenues of $22.9 million. For
the similar period in the prior year, the Company reported net income before
preferred dividends of $878,000 on revenues of $13.4 million. Comparing the
current year's nine month period with the prior year's similar period,
increases in the net interest spread, increased gains on the sale of
receivables, increased gains on investments including mark-to-market valuation
adjustments, increased gains on sale of real estate and increases in other
fees and commission revenues were only partially offset by an increase in the
provision for losses on real estate assets and a decrease in deferred
acquisition costs (costs capitalized net of amortization) associated with
insurance products along with an increase in the related provision for income
taxes.
For the nine months ended June 30, 1998, the Company reported a positive
spread on its interest sensitive assets and liabilities of $3.7 million as
compared to $2.4 million in the prior year's period. The increase of $1.3
million was the result of additional investments in the receivable portfolio
coupled with a slight decrease in the weighted average interest rates on the
outstanding Investment Certificates issued by the Company and the insurance
annuity funds generated by OSL.
During the nine months ended June 30, 1998, the Company realized gains
on the sale of real estate of $178,000 and gains on the sale of receivables of
$2.1 million. In the prior year's period, the Company realized gains from the
sales of real estate of $11,000 and gains from the sale of receivables of
$392,000. The current year's gain on the sale of receivables is primarily
from Summit's sale of $8.8 million of receivables to Western United in
December 1997 resulting in a gain of $556,000 and the Company's participation
in a receivable securitization in April 1998 wherein $21.3 million of
receivables were sold resulting in a gain of approximately $1.4 million. The
Company anticipates that it will participate in a securitization of real
estate contracts and mortgage receivables in October 1998. The Company also
anticipates securitizing approximately $10 million of structured settlements
in August 1998. In December 1996, Summit purchased 733 weekly intervals in
Pono Kai Resort, an existing timeshare development located on the island of
Kauai in Hawaii. Sales operations commenced in September 1997. During the nine
months ended June 30, 1998, total sales were $2.8 million while cost of sales
(including start up costs related to the timeshare interval sales program)
totaled $2.7 million.
During the nine months ended June 30, 1998, the Company generated
approximately $3.6 million of fee revenues while incurring $5.4 million in
salaries, commissions and other operating expenses less increases in deferred
acquisition costs. In the prior year, the Company realized $2.4 million of
fee revenues while incurring by $3.8 million in other costs. This increased
net cost of approximately $400,000, is primarily the result of costs
associated with its insurance operations, which were only partially offset by
an increase in fees generated by its subsidiaries, MIS and Summit Property
Development, Inc.
In conjunction with increased investments in its receivable portfolio,
along with the valuation of foreclosed real estate, the Company provided for
loss on receivables and real estate assets of $1.5 million in the current
year's period as compared to $651,000 in the prior year's period. The current
year's increased provision resulted primarily from the Company's newer
investments in construction loans and larger commercial loans requiring the
Company to established general loss reserves for these types of investments.
In comparing the three months ended June 30, 1998 with the prior year's
similar period, the Company reported net income before preferred dividends of
$1.3 million on revenues of $8.6 million as compared to $250,000 on revenues
of $4.8 million.
Income for the comparative three month periods has increased as result
of improvements from (1) an increased spread between interest sensitive income
and interest sensitive expense, due principally to the increased investment in
the receivable portfolio, (2) an increase in overall gains from the sale of
investments, receivables and real estate, and (3) an increase in fees,
commissions and service revenues; which were only partially offset by (1) an
increase in other operating expenses and (2) an increase in the provision for
losses on receivables and other real estate assets.
For the three months ended June 30, 1998, the net interest spread was
$1.3 million while in the prior year's period the spread was $900,000. The
increase of $400,000 is the result of additional investments in both its
securities portfolios and its receivable portfolio, coupled with a slight
decrease in the weighted average interest rates on the outstanding Investment
Certificates issued by the Company and the insurance annuity funds generated
by OSL.
During the three months ended June 30, 1998, the Company realized gains
on the sale of real estate of $116,000 and gains on the sale of receivables of
$1.5 million. In the prior year's period, the Company realized losses from
the sales of real estate of $9,000 and gains from the sale of receivables of
$10,000. The current period gain on sale of real estate is primarily the
result of the Company's timeshare sales operation that commenced in September
1997 while gains on the sale of receivables was primarily the result of
participating in a receivable securitization during April 1998.
During the three months ended June 30, 1998, the Company generated
approximately $1.1 million of fee revenues while incurring $1.9 million in
salaries, commissions and other operating expenses less increases in deferred
acquisition costs. In the prior year, the Company realized approximately
$671,000 of fee revenues offset by $1.2 million of other costs. This increase
in costs of $700,000 is primarily the result of costs associated with its
insurance operations, which were offset by a $400,000 increase in fees
generated by its subsidiaries, MIS and Summit Property Development, Inc.
In conjunction with increased investments in its receivable portfolio,
along with the valuation of foreclosed real estate, the Company provided for
loss on receivables and real estate assets of $505,000 in the current year's
period as compared to $179,000 in the prior year's period. During the current
year's period, the Company has increased its investment in construction loans
and larger commercial loans necessitating the increases in the loss
provisions.
New Accounting Rules:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Comprehensive Income"
(SFAS No. 130). SFAS No. 130 becomes effective for fiscal years beginning
after December 15, 1997 and requires reclassification of earlier financial
statements for comparative purposes. SFAS No. 130 requires that amounts of
certain items, including foreign currency translation adjustments and gains
and losses on certain securities, be included in comprehensive income in the
financial statements. SFAS No. 130 does not require a specific format for the
financial statement in which comprehensive income is reported, but does
require that an amount representing total comprehensive income be reported in
that statement. Management has not yet determined the effects, if any, of
SFAS No. 130 on the consolidated financial statements.
Also, in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments for an Enterprise and Related
Information" (SFAS No. 131). This Statement will change the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information
in their quarterly reports issued to shareholders. It also requires entity-
wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its
major customers. The Statement is effective for fiscal years beginning after
December 15, 1997. Management has not yet determined the effect, if any, of
SFAS No. 131 on the consolidated financial statements.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999, however,
earlier application is encouraged as of the beginning of any fiscal quarter.
Management has not yet determined the effect of SFAS No. 133 on the
consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not currently applicable. Pursuant to General Instructions to Item 305,
disclosures are applicable to the registrant in filings with the commission
that include financial statements for fiscal years ended after June 15, 1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or threatened
against Summit Securities, Inc. or to which its property is subject.
ITEM 2. CHANGES IN SECURITIES & USE OF PROCEEDS
Recent Sales of Unregistered Securities: On October 15, 1996, Summit
issued to one accredited investor who is also an MIS Registered
Representative, in a private offering exempt from registration pursuant to the
Securities Act of 1933, as amended, $256,000 of Variable Rate Cumulative
Preferred Stock, Series S-RP. The underwriter was MIS. The consideration for
the transaction was residential real estate valued at $256,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
reporting period.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(a). Articles of Incorporation of the Company (Exhibit
3(a) to Registration No. 3-36775).
3(b). Bylaws of the Company (Exhibit 3(b) to Registration
No. 33-36775).
4(a). Indenture dated as of November 15, 1990 between
Summit and West One Bank, Idaho, N.A., Trustee
(Exhibit 4(a) to Registration No. 33-36775).
4(b). Tri-Party Agreement dated as of April 24, 1996
between West One Bank, First Trust and Summit,
appointing First Trust as successor Trustee (Exhibit
4(c) to Registration No. 333-19787).
4(c). First Supplemental Indenture between Summit and
First Trust dated as of December 31, 1997, with
respect to Investment Certificates, Series B.
(Exhibit 4(c) to Form 10-K filed January 7, 1998).
4(d). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-1
(Exhibit 4(c) to Registration No. 33-57619).
4(e). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-2
(Exhibit 4(c) to Registration No. 333-115).
4(f). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-RP
(Exhibit 4(f) to Form 10-K file January 13, 1997).
4(g). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock, Series S-3
(Exhibit 4(f) to Amendment 3 to Registration No. 333-
19787).
10(a). Receivable Management, Acquisition and Service
Agreement between Summit Securities, Inc. and
Metropolitan Mortgage & Securities Co., Inc. dated
September 9, 1994 (Exhibit 10(a) to Registration No.
33-57619).
10(b). Receivable Management, Acquisition and Service
Agreement between Old Standard Life Insurance
Company and Metropolitan Mortgage & Securities Co.,
Inc. dated December 31, 1994 (Exhibit 10(b) to
Registration No. 33-57619).
10(c). Receivable Management, Acquisition and Service
Agreement between Arizona Life Insurance Company and
Metropolitan Mortgage & Securities Co., Inc. dated
October 10, 1996 (Exhibit 4(c) to Registration No.
333-19787).
*10(d). Reinsurance Agreement between Western United Life
Assurance Company and Old Standard Life Insurance
Company.
11. Statement regarding Computation of Earnings Per
Common Share (See Financial Statements).
*27. Financial Data Schedule.
*Filed herewith
(b) Reports on Form 8-K
There have been no reports on Form 8-K filed during the quarter
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed this 12th day of August,
1998 on its behalf by the undersigned, thereunto duly authorized.
SUMMIT SECURITIES, INC.
/s/ TOM TURNER
______________________________________________
Tom Turner
President/Director
/s/ CAMERON E. WILLIAMS
______________________________________________
Cameron E. Williams
Principal Accounting Officer
Principal Financial Officer
REINSURANCE
AGREEMENT
Between
WESTERN UNITED LIFE ASSURANCE COMPANY
and
OLD STANDARD LIFE INSURANCE COMPANY
TABLE OF CONTENTS
Page
A. REINSURANCE COVERAGE 1
B. EFFECTIVE DATE OF AGREEMENT AND OF REINSURANCE 2
C. AMOUNT DUE FROM REINSURED 2
D. AMOUNT DUE FROM REINSURER 2
E. MONTHLY REPORTS AND PAYMENT SCHEDULE 2
F. ANNUAL REPORTS 3
G. TAX TREATMENT 3
H. UNUSUAL EXPENSES AND ADJUSTMENTS 3
I. POLICY ADMINISTRATION 4
J. POLICY CHANGES 4
K. ASSIGNMENT OF REINSURANCE 5
L. ERRORS 5
M. REDUCTIONS AND CANCELLATIONS 5
N. AUDIT OF RECORDS AND PROCEDURES 5
O. ARBITRATION 6
P. CHOICE OF LAW AND FORUM 6
Q. INSOLVENCY 6
R. PARTIES TO AGREEMENT 7
S. SUSPENSION AND REACTIVATION 7
T. DURATION AND TERMINATION 8
U. MISCELLANEOUS 8
V. EXECUTION 9
SCHEDULES
SCHEDULE I 10
SCHEDULE II 11
SCHEDULE III 13
SCHEDULE IV 14
SCHEDULE V 15
SCHEDULE VI 17
R E I N S U R A N C E A G R E E M E N T
between
WESTERN UNITED LIFE ASSURANCE COMPANY
of
Spokane, Washington.,
hereinafter referred to as the "REINSURED," and
OLD STANDARD LIFE INSURANCE COMPANY
of
Boise, Idaho,
hereinafter referred to as the "REINSURER."
A. REINSURANCE COVERAGE
1. The annuity policies issued by the REINSURED listed on Schedule I ( the
"Policies") shall be reinsured with the REINSURER in accordance with the
terms of this Agreement.
2. The reinsurance shall cover all benefits provided by the Policies in the
amount of the Reinsurance Share set forth in Schedule I.
3. The liability of the REINSURER shall begin:
a. for Policies written by REINSURED from and including April 1, 1998 up to
but not including the Effective Date of this Agreement (Closed Block
Policies) as of the date each such Policy was issued; and
b. for Policies issued on or after the Effective Date of this Agreement
(Open Block Policies), concurrently with that of the REINSURED.
4. Reinsurance with respect to any Policy shall not be in force and
binding unless the Policy issued directly by the REINSURED is in force and
unless the issuance and delivery of such Policy constituted the doing of
business in a state of the United States of America, the District of
Columbia, or a country in which the REINSURED was properly licensed.
5. The reinsurance under this Agreement with respect to any Policy shall be
maintained in force without reduction so long as the liability of the
REINSURED under such reinsured Policy remains in force, without reduction,
unless reinsurance is terminated or reduced as provided herein pursuant to
Sections T and M respectively.
B. EFFECTIVE DATE OF AGREEMENT AND OF REINSURANCE
1. The Effective Date of this Agreement shall be __________
2. Closed Block Policies shall be reinsured in bulk on the Effective Date of
this Agreement,
3. Open Block Policies shall be reinsured automatically upon the issuance of
any such Policy by the REINSURED.
C. AMOUNTS DUE FROM REINSURED
The REINSURED shall pay the REINSURER the Reinsurance Share, as set forth in
Schedule I, of the Premiums received by the REINSURED, plus interest,
calculated as set forth in Schedule IV.
D. AMOUNTS DUE FROM REINSURER
1. Benefits
The REINSURER shall pay the REINSURED:
a. the Reinsurance Share of the gross amount of all death or annuity
benefits paid by the REINSURED (i.e., without deduction for reserves) with
respect to the Policies reinsured hereunder; and
b. the Reinsurance Share of the cash surrender value net of surrender
charges paid by the REINSURED with respect to the Policies reinsured
hereunder, and
2. Commissions
The REINSURER shall pay the REINSURED the Reinsurance Share of Commissions
paid by the REINSURED with respect to Policies reinsured hereunder.
3. Administrative Allowances
The REINSURER shall pay the REINSURED the Administrative Allowances as
defined in Schedule I as follows:
a. The Policy Issuance Allowances shall be a one time charge payable in
full concurrent with payment of the reinsurance Premiums by the REINSURED.
b. The Policy Servicing Allowances shall be payable monthly by REINSURER.
E. MONTHLY REPORTS AND PAYMENT SCHEDULE
1. Except as otherwise specifically provided herein, all amounts due to be
paid by either the REINSURER or the REINSURED shall be determined and paid
on a net basis calculated as of the last day of the calendar month to which
such amount is attributable, plus interest calculated and accrued pursuant
to Schedule IV.
2. The REINSURED shall submit a monthly report substantially in accordance
with Schedule II (the "Monthly Report") not later than the fifteenth day of
each calendar month, regarding reinsurance occurring during the preceding
calendar month.
3. Any amounts indicated in the Monthly Report as due from the REINSURED
to the REINSURER shall accompany such report. Any amounts indicated in the
Monthly Report as due from the REINSURER to the REINSURED shall be paid by
the REINSURER within fifteen (15) days after REINSURER'S receipt of the
Monthly Report plus interest accrued up to the date of such payment.
4. Interest shall be calculated and accrue as specified in Schedule IV.
F. ANNUAL REPORTS
1. Not later than thirty (30) days after the end of each calendar year, the
REINSURED shall submit to the REINSURER an Annual Report substantially in
accordance with Schedule III.
2. Each year the REINSURED shall provide the REINSURER with a copy of its
annual financial reports prepared in accordance with GAAP, if applicable,
and its annual statutory statement, as soon as they are available.
G. TAX TREATMENT
The parties elect to have this Agreement treated in accordance with Section
1.848-2(g)(8) of the Income Tax Regulations issued under Section 848 of the
Internal Revenue Code of 1986. Specific details of this election are set forth
in Schedule VI.
H. UNUSUAL EXPENSES AND ADJUSTMENTS
1. Any unusual expenses, as hereinafter defined, incurred by the REINSURED in
defending or investigating a claim for liability on a Policy or rescinding
a Policy reinsured hereunder shall be participated in by the REINSURER in
the same proportion as its Reinsurance Share.
2. Unusual expenses shall include, but not be limited to, penalties, attorneys
fees, and interest imposed automatically by statute against the REINSURED
and arising solely out of a judgment rendered against the REINSURED in a
suit for Policy benefits reinsured hereunder.
3. The following categories of expenses or liabilities shall not be "unusual
expenses":
a. routine investigative or administrative expenses;
b. expenses incurred in connection with a dispute or contest arising out of
conflicting claims of entitlement to Policy proceeds or benefits which the
REINSURED admits are payable;
c. expenses, fees, settlements, or judgments arising out of or in
connection with claims against the REINSURED for punitive or exemplary
damages; and
d. expenses, fees, settlements, or judgments arising out of or in
connection with claims made against the REINSURED and based on alleged or
actual bad faith, failure to exercise good faith, or tortious conduct.
I. POLICY ADMINISTRATION
1. The Policies reinsured pursuant to the terms of this Agreement shall be
administered by the REINSURED in accordance with the terms of each Policy
and in compliance with applicable statutes, regulations and rules.
2. Administrative expenses incurred in connection with administration of the
Policies reinsured hereunder shall be paid by REINSURED and reimbursable by
REINSURER pursuant to Section H hereinabove and Schedule I.
J. POLICY CHANGES
1. All Policies shall be underwritten in accordance with the REINSURED'S
underwriting rules applicable to such Policies as of the Effective Date of
this Agreement.
2. If the REINSURED intends to make a change in the terms or conditions or
underwriting rules of a Policy reinsured hereunder including, but not
limited to a change in the method used to calculate the statutory reserve
on the Policy and such change is likely to affect the risk reinsured
hereunder in respect of such Policy, the REINSURED shall notify the
REINSURER of such proposed change.
3. For purposes of this Agreement, any change made to a Policy reinsured
hereunder which has not been approved by the REINSURER shall be deemed to
be the issuance of a new policy form by the REINSURED. The REINSURER shall
inform the REINSURED whether the REINSURER will include such new policy
form under this Agreement or will terminate or modify the reinsurance
hereunder in respect of such policy.
4. Unless otherwise agreed by the REINSURER and the REINSURED, the interest
rates credited on the Policies reinsured hereunder shall be determined
according to interest rates credited by the REINSURED.
K. ASSIGNMENT OF REINSURANCE
If the REINSURED proposes to sell, assumption reinsure or otherwise transfer
the Policies or risks that are reinsured under this Agreement to any third
party, it shall require that the third party agree in writing to an assignment
of all rights and obligations of the REINSURED under this Agreement. The
REINSURER may object to any assignment that would result in a material adverse
economic impact to the REINSURER. If the REINSURER objects to an assignment on
this basis, the REINSURED and the REINSURER shall mutually agree on a
termination charge which shall be paid by the REINSURED to the REINSURER.
L. ERRORS
If either party identifies an error in the Monthly Reports or any other
inadvertent clerical error, then such error shall be corrected by restoring
both the REINSURED and the REINSURER to the positions they would have occupied
had no such error occurred. If the error relates to a Monthly report or other
report, the REINSURED shall promptly provide a revised report to REINSURER.
M. REDUCTIONS AND CANCELLATIONS
1. If a portion of a Policy is terminated, the REINSURER shall return to the
REINSURED any reinsurance Premiums on that Policy in the amount that the
Reinsurance Share bears to the amount of the reduction.
2. If a Policy is cancelled in accordance with a thirty day cancellation
provision, the REINSURED shall refund the entire Policy Issuance Allowance
to the REINSURER, and the REINSURER shall refund the entire Reinsurance
Share of the Premiums to REINSURED each as they relate to the cancelled
Policy
3. Payments made pursuant to a reduction or cancellation shall include
interest and be paid pursuant to Section E.
N. AUDIT OF RECORDS AND PROCEDURES
1. The REINSURER and the REINSURED each shall have the right to audit, at the
office of the other, all records and procedures relating to reinsurance
under this Agreement.
2. Upon reasonable notice to the REINSURED, the REINSURER may require
additional monthly or annual reports from the REINSURED in order to obtain
the data REINSURER reasonably needs to properly administer this Agreement
or to prepare its financial statements.
O. ARBITRATION
If the REINSURED and the REINSURER cannot mutually resolve a dispute regarding
the interpretation or operation of this Agreement, the dispute shall be
decided through arbitration as set forth in the Schedule V. The arbitrators
shall base their decision on the terms and conditions of this Agreement.
However, if the terms and conditions of this Agreement do not explicitly
dispose of an issue in dispute between the parties, the arbitrators may base
their decision on the customs and practices of the insurance and reinsurance
industry rather than solely on an interpretation of applicable law. The
arbitrators' decision shall take into account the right to offset mutual debts
and credits as provided in this Agreement. There shall be no appeal from the
arbitrators' decision. Any court having jurisdiction over the subject matter
and over the parties may reduce the arbitrators' decision to judgment.
The parties intend this section to be enforceable in accordance with the
Federal Arbitration Act (9 U.S.C., Section 1) including any amendments to that
Act which are subsequently adopted. In the event that either party refuses to
submit to arbitration as required by paragraph 1, the other party may request
a United States Federal District Court to compel arbitration in accordance
with the Federal Arbitration Act. Both parties consent to the jurisdiction of
such court to enforce this section and to confirm and enforce the performance
of any award of the arbitrators.
P. CHOICE OF LAW AND FORUM
Idaho law shall govern the terms and conditions of the Agreement. In the case
of an arbitration, the arbitration hearing shall take place in Boise, Idaho,
Q. INSOLVENCY
1. In the event of the insolvency of the REINSURED, all reinsurance shall be
payable directly to the liquidator, receiver, or statutory successor of
said REINSURED, without diminution because of the insolvency of the
REINSURED.
2. In the event of the insolvency of the REINSURED, the liquidator, receivor,
or statutory successor shall give the REINSURER written notice of the
pendency of a claim on a Policy reinsured within a reasonable time after
such claim is filed in the insolvency proceeding. During the pendency of
any such claim, the REINSURER may investigate such claim and interpose, in
the name of the REINSURED (its liquidator, receiver, or statutory
successor), but at its own expense, in the proceeding where such claim is
to be adjudicated, any defense or defenses which the REINSURER may deem
available to the REINSURED or its liquidator, receiver, or statutory
successor.
3. The expense thus incurred by the REINSURER shall be chargeable, subject to
court approval, against the REINSURED as part of the expense of liquidation
to the extent of a proportionate share of the benefit which may accrue to
the REINSURED solely as a result of the defense undertaken by the
REINSURER. Where two or more reinsurers are participating in the same claim
and a majority in interest elect to interpose a defense or defenses to any
such claim, the expense shall be apportioned in accordance with the terms
of the reinsurance agreement as though such expense had been incurred by
the REINSURED.
4. Any debts or credits, matured or unmatured, liquidated or unliquidated,
regardless of when they arose or were incurred, in favor of or against
either the REINSURED or the REINSURER with respect to this Agreement or
with respect to any other claim of one party against the other are deemed
mutual debts or credits, as the case may be, and shall be set off, and only
the balance shall be allowed or paid.
R. PARTIES TO AGREEMENT
This is an agreement for indemnity reinsurance solely between the REINSURED
and the REINSURER. The acceptance of reinsurance hereunder shall not create
any right or legal relation whatever between the REINSURER and the insured or
the beneficiary under any Policy reinsured hereunder, and the REINSURED shall
be and remain solely liable to such insured or beneficiary under any such
Policy.
S. SUSPENSION AND REACTIVATION
1. This Agreement may be suspended at any time and from time to time
with respect to all or any of the Policy forms upon five (5) days written
notice from either party with respect to reinsurance not yet placed in
force. The REINSURER shall continue to accept reinsurance during the five
(5) day notice period, and shall remain liable on all Policies placed in
effect under this Agreement until the effective date of the suspension of
this Agreement.
2. This Agreement may be by reactivated at any time, and from time to
time, with respect to all or any of the Policy forms upon five (5) day
written notice from either party. The REINSURER shall accept reinsurance
at the end of the five (5) day notice period and be liable on all Policies
placed in effect under this Agreement until the Agreement is further
suspended or terminated.
T. DURATION AND TERMINATION
1. Except as otherwise provided herein, this Agreement shall be unlimited in
duration.
2. This Agreement may be terminated at any time by either the REINSURER or the
REINSURED upon thirty (30) days' written notice with respect to reinsurance
not yet placed in force. The REINSURER shall continue to accept reinsurance
during the thirty (30) day notice period, and shall remain liable on all
reinsurance placed in effect under this Agreement until the termination or
expiration of the Policy reinsured.
3. Upon ninety (90) days' written notice to the the other party, REINSURER and
REINSURED shall have the right to terminate reinsurance under this
Agreement with respect to those Policies which have attained the tenth or
any subsequent anniversary of having been reinsured hereunder. Any such
termination shall apply to all Policies which attain the same or any
subsequent anniversary within the twelve (12) month period following the
effective date of such notice of termination. Termination with respect to
each affected Policy shall be effective as of the anniversary of such
Policy having been reinsured hereunder. The REINSURER shall pay to the
REINSURED a surrender benefit equal to the surrender value of each Policy
for which reinsurance is terminated.
4. The termination of this Agreement or of the reinsurance in effect under
this Agreement shall not extend to or affect any of the rights or
obligations of the REINSURED and the REINSURER applicable to any period
prior to the effective date of such termination. In the event that,
subsequent to the termination of this Agreement, an adjustment is made
necessary with respect to any accounting hereunder, a supplementary
accounting shall take place. Any amount owed to either party by reason of
such supplementary accounting shall be paid promptly upon the completion
thereof.
U. MISCELLANEOUS
1. This Agreement represents the entire agreement between the REINSURED and
REINSURER and supersedes, with respect to its subject matter, any prior
oral or written agreements between the parties.
2. No modification of any provision of this Agreement shall be effective
unless set forth in a written amendment to this Agreement which is executed
by both parties.
3. A waiver shall constitute a waiver only with respect to the particular
circumstance for which it is given and not a waiver of any future
circumstance.
V. EXECUTION
IN WITNESS WHEREOF
WESTERN UNITED LIFE ASSURANCE COMPANY
of
Spokane, Washington.,
and
OLD STANDARD LIFE INSURANCE COMPANY
of
Boise, Idaho,
have by their respective officers executed this Agreement in duplicate on the
dates shown below.
WESTERN UNITED LIFE ASSURANCE COMPANY
By By
Title: Title:
Date Date
OLD STANDARD LIFE INSURANCE COMPANY
By By
Title: Title:
Date Date
SCHEDULE I
POLICIES SUBJECT TO REINSURANCE, AMOUNT OF REINSURANCE & ALLOWANCES
Reinsurance Share Administrative Allowances
Trade Name Premiums Policy Commissions Policy Policy
Reserves Issuance Servicing
Claims &
Benefits
Opti-Max I 75% 75% 75% 1.50% 0.0333%
TD-Max I 75% 75% 75% 1.50% 0.0333%
TD-Max III 75% 75% 75% 1.50% 0.0333%
TD Max V 75% 75% 75% 1.50% 0.0333%
Navigator II 75% 75% 75% 1.50% 0.0333%
Unimax III 75% 75% 75% 1.50% 0.0333%
Spectrum 75% 75% 75% 1.50% 0.0333%
Prism 75% 75% 75% 1.50% 0.0333%
Value-Max VII 75% 75% 75% 1.50% 0.0333%
Value-Max X 75% 75% 75% 1.50%. 0.0333%
Opti-Max III 75% 75% 75% 1.50% 0.0333%
Opti-Max V 75% 75% 75% 1.50% 0.0333%
Opti-Max VII 75% 75% 75% 1.50% 0.0333%
Opti-Max X 75% 75% 75% 1.50% 0.0333%
TD Max V-V 75% 75% 75% 1.50% 0.0333%
Basis for Gross Policy Commissions Reinsurance Reinsurance
charge Premiums Reserves, Incurred Quota Share Quota Share
Policy Claims of Gross of
& Benefits Premiums Acct Value
SCHEDULE II
Annuity Reinsurance Monthly Report to
OLD STANDARD LIFE INSURANCE COMPANY
Amounts Due OLD STANDARD LIFE INSURANCE COMPANY
Premiums received during the month by REINSURED multiplied by the $
Reinsurance Share applicable to each Policy
Sum of amounts due to OLD STANDARD LIFE INSURANCE COMPANY $
Amounts Due WESTERN UNITED LIFE ASSURANCE COMPANY
Commission Allowance (Attach detailed worksheet of calculations) $
Policy Issue Allowances (Attach detailed worksheet of
calculations) $
Monthly Administrative Servicing Allowances (Attach detailed
worksheet of calculations) $
Surrender values paid during the month multiplied by the
Reinsurance Share percentage $
Policy Reductions paid during the month multiplied by
the Reinsurance Share $
Death benefits paid during the month multiplied by the
Reinsurance Share percentage $
Policy Cancellations (Attach detailed worksheet of calculations)1 $
Sum of amounts due to WESTERN UNITED LIFE ASSURANCE COMPANY $
Net of amount due (sum of amounts due OLD STANDARD LIFE INSURANCE
Company minus sum of amounts due to WESTERN UNITED LIFE
ASSURANCE) $
Interest on the above amount calculated pursuant to Schedule IV $__________
Net amount due plus interest $
Note: If the net amount due is negative, then that amount is due from OLD
STANDARD LIFE INSURANCE COMPANY to WESTERN UNITED LIFE ASSURANCE COMPANY.
Additional Items:
A monthly listing of statutory and GAAP reserves, account values, and interest
credited.
SCHEDULE III
ANNUAL REPORT
The annual report shall provide the following information:
(a) Exhibit 8 from the NAIC-prescribed annual statement
(b) a breakdown of the reserves by withdrawal characteristic of the
annuity contract
(c) "Analysis of Increase in Reserves" from the NAIC-prescribed annual
statement
(d) "Exhibit of Annuities" from the NAIC-prescribed annual statement
(e) an actuarial certification of the reported statutory reserves
(f) tax reserves and required interest.
SCHEDULE IV
INTEREST RATE
The rate of interest shall be equal to the effective annual yield of the 90
day Treasury bill determined at the close of business on the last business day
of the month for the amount owed is being determined.
INTEREST ACCRUAL CALCULATION
Interest shall be calculated on the monthly ending amount due and accrued from
the preceding 15th day of such month.
SCHEDULE V
ARBITRATION SCHEDULE
To initiate arbitration, either the REINSURED or the REINSURER shall notify
the other party in writing of its desire to arbitrate, relating the nature of
its dispute and the remedy sought. The party to which the notice is sent shall
respond to the notification in writing within ten (10) days of its receipt.
The arbitration hearing shall be before a panel of three arbitrators, each of
whom must be a present or former officer of a life insurance company. An
arbitrator may not be a present or former officer, attorney, or consultant of
the REINSURED or the REINSURER or either's affiliates.
The REINSURED and the REINSURER shall each name five (5) candidates to serve
as an arbitrator. The REINSURED and the REINSURER shall each choose one
candidate from the other party's list, and these two candidates shall serve as
the first two arbitrators. If one or more candidates so chosen shall decline
to serve as an arbitrator, the party which named such candidate shall add an
additional candidate to its list, and the other party shall again choose one
candidate from the list. This process shall continue until two arbitrators
have been chosen and have accepted. The REINSURED and the REINSURER shall each
present their initial lists of five (5) candidates by written notification to
the other party within twenty-five (25) days of the date of the mailing of the
notification initiating the arbitration. Any subsequent additions to the list
which are required shall be presented within ten (10) days of the date the
naming party receives notice that a candidate that has been chosen declines to
serve.
The two arbitrators shall then select the third arbitrator from the eight (8)
candidates remaining on the lists of the REINSURED and the REINSURER within
fourteen (14) days of the acceptance of their positions as arbitrators. If the
two arbitrators cannot agree on the choice of a third, then this choice shall
be referred back to the REINSURED and the REINSURER. The REINSURED and the
REINSURER shall take turns striking the name of one of the remaining
candidates from the initial eight (8) candidates until only one candidate
remains. If the candidate so chosen shall decline to serve as the third
arbitrator, the candidate whose name was stricken last shall be nominated as
the third arbitrator. This process shall continue until a candidate has been
chosen and has accepted. This candidate shall serve as the third arbitrator.
The first turn at striking the name of a candidate shall belong to the party
that is responding to the other party's initiation of the arbitration. Once
chosen, the arbitrators are empowered to decide all substantive and procedural
issues by a majority of votes.
It is agreed that each of the three arbitrators should be impartial regarding
the dispute and should resolve the dispute on the basis described in the
Agreement and this ARBITRATION Schedule. Therefore, at no time will either the
REINSURED or the REINSURER contact or otherwise communicate with any person
who is to be or has been designated as a candidate to serve as an arbitrator
concerning the dispute, except upon the basis of jointly drafted
communications provided by both the REINSURED and the REINSURER to inform
those candidates actually chosen as arbitrators of the nature and facts of the
dispute. Likewise, any written or oral arguments provided to the arbitrators
concerning the dispute shall be coordinated with the other party and shall be
provided simultaneously to the other party or shall take place in the presence
of the other party. Further, at no time shall any arbitrator be informed that
the arbitrator has been named or chosen by one party or the other.
The arbitration hearing shall be held on the date fixed by the arbitrators. In
no event shall this date be later than six (6) months after the appointment of
the third arbitrator. As soon as possible, the arbitrators shall establish
prearbitration procedures as warranted by the facts and issues of the
particular case. At least ten (10) days prior to the arbitration hearing, each
party shall provide the other party and the arbitrators with a detailed
statement of the facts and arguments it will present at the arbitration
hearing. The arbitrators may consider any relevant evidence; they shall give
the evidence such weight as they deem it entitled to after consideration of
any objections raised concerning it. The party initiating the arbitration
shall have the burden of proving its case by a preponderance of the evidence.
Each party may examine any witnesses who testify at the arbitration hearing.
Within twenty (20) days after the end of the arbitration hearing, the
arbitrators shall issue a written decision that sets forth their findings and
any award to be paid as a result of the arbitration, except that the
arbitrators may not award punitive or exemplary damages. In their decision,
the arbitrators shall also apportion the costs of arbitration, which shall
include, but not be limited to, their own fees and expenses.
SCHEDULE VI
SECTION 1.848-2(g)(8) ELECTION
The REINSURED and the REINSURER agree to the following pursuant to Section
1.848-2(g)(8) of the Income Tax Regulations issued under Section 848 of the
Internal Revenue Code of 1986 (hereinafter "Section 1.848-2(g)(8).")
1. As used below, the term "party" will refer to the REINSURED or the
REINSURER as appropriate.
2. As used below, the phrases "net positive consideration",
"capitalize specified Policy acquisition expenses", "general
deductions limitation", and "net consideration" shall have the
meaning used in Section 1.848-2(g)(8).
3. The party with net positive consideration for this Agreement for
any taxable year beginning with the taxable year prescribed in
paragraph 5 below will capitalize specified Policy acquisition
expenses with respect to this Agreement without regard to the
general deductions limitation.
4. The parties agree to exchange information pertaining to the amount
of net consideration under this Agreement to ensure consistency.
This will be accomplished as follows:
(a) The REINSURED shall submit to the REINSURER by the
fifteenth day of March in each year its calculation of
the net consideration for the preceding calendar year.
Such calculation will be accompanied by a statement
signed by an officer of the REINSURED stating that the
REINSURED will report such net consideration in its
tax return for the preceding calendar year.
(b) The REINSURER may contest such calculation by
providing an alternative calculation to the REINSURED
in writing within thirty (30) days of the REINSURER'S
receipt of the REINSURED'S calculation. If the
REINSURER does not so notify the REINSURED, the
REINSURER will report the net consideration as
determined by the REINSURED in the REINSURER'S tax
return for the previous calendar year.
(c) If the REINSURER contests the REINSURED'S calculation
of the net consideration, the parties will act in good
faith to reach an agreement as to the current amount
within thirty (30) days of the date the REINSURER
submits its alternative calculation. If the REINSURED
and the REINSURER reach agreement on an amount of net
consideration, each party shall report such amount in
their respective tax returns for the preceding
calendar year.
5. This election shall be effective for 1998 and all subsequent taxable
years for which the Reinsurance Agreement remains in effect.
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 19,326
<SECURITIES> 22,185
<RECEIVABLES> 126,550
<ALLOWANCES> 1,974
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 178,915
<CURRENT-LIABILITIES> 0
<BONDS> 54,146
<COMMON> 100
0
606
<OTHER-SE> 9,536
<TOTAL-LIABILITY-AND-EQUITY> 178,915
<SALES> 0
<TOTAL-REVENUES> 22,893
<CGS> 0
<TOTAL-COSTS> 14,623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,453
<INTEREST-EXPENSE> 3,530
<INCOME-PRETAX> 3,287
<INCOME-TAX> 720
<INCOME-CONTINUING> 2,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,567
<EPS-PRIMARY> 219.93
<EPS-DILUTED> 219.93
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