<PAGE> 1
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ____________
Commission file number 33-36775
SUMMIT SECURITIES, INC.
AN IDAHO CORPORATION IRS EMPLOYER NO.: 82-0438135
929 WEST SPRAGUE AVENUE, SPOKANE, WASHINGTON 99201
(509)838-3111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this Chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. /X/
The voting stock of the registrant is not traded on any exchange,
therefore there is no established market value. The aggregate market value of
the stock cannot be computed by reference to the price at which the stock was
sold, or the average bid and ask price of such stock, as of any date within 60
days
<PAGE> 2
prior to the date of filing because there have been no sales of the common
stock within sixty days prior to the date of filing.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of September 30, 1997.
Single Class: 10,000 shares
Documents incorporated by reference: None.
<PAGE> 3
PART I
ITEM 1. BUSINESS
Terms
For ease of reading, the following is a compilation of several of the
defined terms which appear regularly within this document.
Arizona Life: Arizona Life Insurance Company
Certificates: This term refers to the Installment Certificates issued
by Summit.
Consolidated Group: This term refers to the combined businesses
consisting of Summit and all subsidiaries.
MIS: Metropolitan Investment Securities, Inc.
Old Standard: Old Standard Life Insurance Company.
Preferred Stock: This term refers jointly to all series of Preferred
Stock issued by Summit.
Receivables: Investments in cash flows, consisting of obligations
collateralized by real estate, structured settlements, annuities, lottery
prizes and other investments.
Summit: Summit Securities, Inc.
Affiliated Companies: The following companies are affiliated with
Summit through the common control of C. Paul Sandifur, Jr. These affiliates
provide services to the Consolidated Group for a fee and engage in various
business transactions with the Consolidated Group. See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS" under Item 13.
Metropolitan: Metropolitan Mortgage & Securities Co., Inc.,
Summit's former parent company.
Metwest: Metwest Mortgage Services Inc., a subsidiary of
Metropolitan.
Western United: Western United Life Assurance Company, a
subsidiary of Metropolitan.
<PAGE> 4
ORGANIZATIONAL CHART
(as of September 30, 1997)
National Summit Corp.
|
|
100%
Summit Securities, Inc.
|
_______________________________|__________________________________
| | |
100% 100% 100%
Metropolitan Summit Summit Group
Investment Property Holding Company
Securities, Development, |
Inc. Inc. |
100%
Old Standard Life
Insurance Company
|
|
100%
Arizona Life
Insurance Company
The above chart lists the Consolidated Group's principal operating
subsidiaries and their ownership.
National Summit Corp.: Parent Company, inactive except as owner of
Summit Securities, Inc. Wholly owned by C. Paul Sandifur, Jr., President of
Metropolitan.
Summit Securities, Inc.: Invests in Receivables and other investments
principally funded by proceeds from Receivable investments, other investments,
and securities offerings.
Metropolitan Investment Securities, Inc.: Broker/dealer marketing
securities offered by Summit and Metropolitan, mutual funds, and general
securities.
Summit Property Development, Inc.: Provides real estate development
services to others, with the principal clients being Metropolitan and its
subsidiaries.
Summit Group Holding Company: Inactive except as owner of Old Standard
Life Insurance Company.
<PAGE> 5
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.
<PAGE> 6
BUSINESS
INTRODUCTION
The Consolidated Group consists of Summit, and several subsidiaries
including insurance companies (Old Standard and Arizona Life), a securities
broker/dealer (MIS), and a property development services company (Summit
Property Development). Summit, Old Standard and Arizona Life are engaged in
the business of investing in Receivables and other assets through funds
provided by annuity sales, Receivable investment proceeds, certificate sales,
preferred stock sales, sales of Receivables and the resale of repossessed real
estate. The Consolidated Group's goal is to achieve a positive spread between
the return on its Receivable investments and other investments and its cost of
funds. Summit may also engage in other businesses or activities without
restriction in accordance with the provisions of its Articles of
Incorporation.
Summit was originally organized as a wholly owned subsidiary of
Metropolitan. On September 9, 1994, Metropolitan and C. Paul Sandifur, Jr.
completed a sale of the common stock of Summit to National Summit Corp.
National Summit Corp. is a holding company wholly owned by C. Paul Sandifur
Jr. Mr. Sandifur holds effective control of Metropolitan. Prior to the sale,
Mr. Sandifur held effective control of Summit, through Metropolitan.
Following the sale, Mr. Sandifur continues to hold effective control of Summit
through National Summit Corp. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" under Item 13.
On January 31, 1995, Summit acquired a securities broker/dealer, MIS,
from Metropolitan. Also, on January 31, 1995, Summit Property Development,
Inc. commenced operations, providing real estate development services to
Metropolitan and its subsidiaries. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" under Item 13.
On May 31, 1995, Summit, through a wholly owned holding company,
purchased Old Standard from Metropolitan. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" under Item 13.
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 held licenses to
engage in insurance sales in seven states. Obtaining access to these
additional markets was the principal purpose for the
<PAGE> 7
purchase. During 1996, Arizona Life commenced annuity sales and investing in
Receivables, similar to the activities of Old Standard. See "BUSINESS-Annuity
Operations," & "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" under Item 13.
As of September 30, 1997, Summit's personnel consisted of its officers
and directors, an accountant and an attorney. See "MANAGEMENT" under Item 10.
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.
On September 30, 1997, Summit's subsidiaries had a combined total of
forty employees.
NEW INITIATIVE-COMMERCIAL LOAN ORIGINATIONS
During 1997, the Consolidated Group (principally Old Standard) began
originating loans collateralized by multi-family properties, and commercial
properties, referred to collectively as Commercial Loans. The Consolidated
Group currently projects expansion of these activities during 1998. Current
projections include the possibility that the substantial majority of the
Consolidated Group's Receivable acquisitions during 1998 may be new Commercial
Loan originations. This projection is in part due to management's current
perception that this market may be inadequately served by lenders who are
flexible in their underwriting and pricing policies.
These Commercial Loans are generally small to mid-sized loans and
originated for less than $5 million. They are individually underwritten and
individually priced based upon the circumstances in each case. Factors which
management considers relevant to the lending decision include the property
type, the borrower's credit, the type of business, the economy of the region,
and the amount of the loan compared to the collateral value. Underwriting
policies for these loans frequently require a personal guarantee from the
individual borrower. The loans are priced based upon the perceived risk in
each circumstance. Through approximately December 15, 1997, the average
weighted annual yield (including fees and points) was approximately 14% on the
Consolidated Group's Commercial Loans which have been committed to or closed
through
<PAGE> 8
that date. Frequently, the loans closed to date have required short-term
balloon payments (approximately 2-5 years). However, because the Consolidated
Group individually underwrites and prices these loans, the current terms may
not be a reflection of the terms which may be negotiated in future
transactions.
Because originating Commercial Loans is a new initiative, management is
unable to predict with any certainty whether it will be able to, or will
desire to continue to originate Commercial Loans in these potential volumes,
or that these lending activities will achieve desirable yields. Factors
including competition from other lenders, fluctuations in market interest
rates for these types of loans and the Consolidated Group's default and loss
experience are expected to impact the Consolidated Group's expansion into this
market.
RECEIVABLE INVESTMENTS
Historically, the Consolidated Group's Receivable acquisitions have been
made pursuant to an agreement with Metropolitan. The Consolidated Group
anticipates continuing to acquire Receivables pursuant to this agreement to
the extent its new commercial lending initiative does not achieve its
projections. 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 1997, the
Consolidated Group paid Metropolitan approximately $3,385,000 in compensation
for Receivable acquisition services.
Metwest, a subsidiary of Metropolitan, provides Receivable collection
and servicing for a fee to Summit, Old Standard and Arizona Life. During
1997, the Consolidated Group paid Receivable collection and servicing fees of
approximately $341,000 to Metwest.
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.
Types of Receivables
<PAGE> 9
The Consolidated Group's Receivable acquisitions include two principal
types of Receivables: 1) Receivables collateralized by real estate and 2)
lotteries, structured settlements, annuities, and other cash flows.
Secondary Mortgage Markets
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.
Receivable Acquisition Volume
The Consolidated Group's real estate Receivable and other Receivable
investment acquisition activities grew from approximately $44.4 million in
1995, to $47.5 million in 1996, and to $72.8 million in 1997. During 1997,
the average monthly acquisition volume was in excess of $6 million.
Receivables 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.
Metropolitan has developed marketing techniques, sources and
underwriting practices for each of the different types of Receivables. In
general, the real estate Receivables acquired or originated by the
Consolidated Group consist of non-conventional, "B/C" 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. This type of lending requires that the lender focus on
the quality of the collateral as the ultimate recourse in the event of the
borrower's default and, to a lesser extent, the ability of a borrower to
repay.
Private Secondary Mortgage Market Sources
<PAGE> 10
Historically, the majority of the Consolidated Group's Receivables are
acquired through the private secondary mortgage market. See "BUSINESS-
Receivable Investments-Current Mix of Receivable Investment Holdings."
Metropolitan's principal source for private market Receivables has been
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.
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 has implemented the
following acquisition strategies: 1) centralizing acquisition activities, 2)
expanding the use of Metropolitan's Receivable submission software, BrokerNet,
3) flexible and strategic pricing and closing programs, and 4) designing and
implementing broker incentive programs. Metropolitan is exploring other
methods and sources for Receivable acquisitions in order to increase volume,
decrease cost, and enhance its competitive position. There can be no
assurance that any new strategies or programs developed will achieve these
goals.
Institutional Secondary Mortgage Market Sources
These portfolios of real estate Receivables are acquired by Metropolitan
from banks, savings and loan organizations, the Resolution Trust Corporation,
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
for 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.
Institutional 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.
<PAGE> 11
Metropolitan has recently hired additional sales and support staff and
is exploring new marketing methods in an attempt to increase its institutional
pool purchase activities.
Loan Originations Sources
During the last quarter of fiscal 1996, Metropolitan's subsidiary,
Metwest, began originating first lien residential mortgage loans. Metwest is
currently licensed as a lender or is exempt from licensing in twenty-nine
states.
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.
During the fiscal year ended September 30, 1997, Metwest originated an
average of approximately 47 loans per month. This volume was below original
projections. In an effort to increase its volume, Metwest has changed
management staff and is adding additional sales staff. Also, Metwest has
developed several new pricing programs for loan originations. Management can
give no assurance that these efforts will increase origination volume.
Correspondent Lending
During 1996, Metropolitan began acquiring loans through loan
correspondent agreements. Under these agreements, Metropolitan agrees to
acquire loans at a specified yield immediately after their origination, so
long as they comply with Metropolitan's underwriting guidelines as specified
in the agreements. In addition, loan correspondents may also submit loans
which do not meet established underwriting guidelines for individual
evaluation and pricing. Metropolitan has added staff to support growth in its
correspondent lending activities. Management can give no assurance that these
efforts will increase correspondent lending volumes.
Real Estate Receivable Underwriting and Pricing
Metropolitan's loan correspondent underwriting guidelines and Metwest's
loan origination underwriting guidelines apply criteria which include the
following: evaluating the borrower's credit, income and debt to income
ratios, obtaining and reviewing a current appraisal of the collateral,
evaluating the property type, comparing the loan amount to the collateral
value and evaluating the economics of the region where the collateral is
located. For certain, but not all, of the loans with higher loan to value
ratios, mortgage insurance is required. In addition, title
<PAGE> 12
insurance in an amount equal to the original loan amount is obtained.
Generally, a lower credit rating would result in a higher required down
payment, higher collateral value to loan amount and/or a higher interest rate.
Unlike the Receivables purchased in the private secondary mortgage market, the
loans originated by Metwest and the loans purchased through Metropolitan's
loan correspondent program have standardized documentation and terms.
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.
Lotteries, Structured Settlements and Annuities Underwriting
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. In the case of structured settlement
annuity purchases, the underwriting guidelines of Metropolitan generally also
include a review of the settlement agreement.
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.
<PAGE> 13
Other Receivables
Metropolitan continually seeks opportunities in new Receivable markets.
Metropolitan currently has Receivable programs acquiring farm subsidies and
similar cash flows. These programs account for a minimal amount of
Metropolitan's current and projected Receivable acquisition volume. However,
if new opportunities arise for the acquisition of new types of Receivables,
Metropolitan is not limited from pursuing these opportunities.
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-Receivable
Acquisitions: Sources, Strategies and 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 1997). During fiscal 1997, 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
<PAGE> 14
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. 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 include 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 predominantly 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, the geographic dispersion of the collateral and the collateral
value to investment amount requirements.
The following table presents consolidated information about the
Consolidated Group's investments in Receivables collateralized by real estate,
as of September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
____________ ____________
<S> <C> <C>
Face value of discounted
Receivables $ 99,493,067 $ 73,226,348
Face value of originated and
non discounted Receivables 9,548,371 10,439,736
Unrealized discounts, net of
unamortized acquisition costs (5,958,564) (4,733,938)
Allowance for losses (1,153,278) (974,487)
Accrued interest receivable 1,694,132 2,051,094
____________ ____________
Carrying value 103,623,728 $ 80,008,753
============ ============
</TABLE>
<PAGE> 15
As of September 30, 1997, approximately 91% of the Consolidated Group's
investments in Receivables are collateralized by first lien positions on real
estate and 9% in second lien positions. The Receivables are collateralized by
residential, business and commercial properties with residential collateral
representing approximately 58% of such investments as of September 30, 1997.
The Consolidated Group's Receivable investments in real estate loans at
September 30, 1997 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 17%
Florida 7%
New York 6%
Oregon 7%
Texas 9%
Washington 15%
<PAGE> 16
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
RECEIVABLES COLLATERALIZED BY REAL ESTATE
September 30, 1997
<TABLE>
<CAPTION>
Less than 1% of the contracts are subject to variable interest rates.
Interest rates range from 0% to 19% with rates principally (76% 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.
Non
Interest Carrying Delinquent Number of Accrual Number of
Number of Rates Amount of Principal Delinquent Principal Non Accrual
Description Receivables Principally Receivables Amount Receivables Amount Receivables
___________ ___________ ___________ ____________ ___________ ___________ _________ ___________
<S> <C> <C> <C> <C> <C> <C> <C>
RESIDENTIAL
First Mortgage
> $75,000 149 7-10% $ 18,572,318 $ 920,167 8 $106,799 1
First Mortgage
> $40,000 377 8-10% 20,507,806 1,009,439 16 -- --
First Mortgage
< $40,000 852 8-12% 17,737,192 949,229 51 -- --
Second or
Lower
> $75,000 9 8-10% 1,038,074 -- -- -- --
Second or
Lower
> $40,000 35 8-10% 1,865,575 -- -- -- --
Second or
Lower
< $40,000 193 8-12% 3,921,663 212,308 10 -- --
COMMERCIAL
First Mortgage
> $75,000 133 8-10% 25,535,365 859,986 5 -- --
First Mortgage
> $40,000 66 8-10% 3,928,370 209,845 3 -- --
First Mortgage
< $40,000 86 8-18% 1,462,141 6,706 1 -- --
<PAGE> 17
Second or
Lower
> $75,000 10 8-12% 1,047,398 -- -- -- --
Second or
Lower
> $40,000 16 8-11% 906,314 -- -- -- --
Second or
Lower
< $40,000 26 8-10% 525,973 42,952 3 -- --
FARM, LAND AND
OTHER
First Mortgage
> $75,000 40 8-12% 5,720,971 -- -- -- --
First Mortgage
> $40,000 53 8-10% 2,800,281 63,955 1 -- --
First Mortgage
< $40,000 101 8-10% 2,754,784 74,366 2 -- --
Second or
Lower
> $75,000 2 7% 328,833 208,007 1 -- --
Second or
Lower
> $40,000 2 9-12% 109,905 -- -- -- --
Second or
Lower
< $40,000 13 8-10% 278,475 29,040 1 -- --
Unrealized
discounts,
net of
unamortized
acquisition
costs, on
Receivables
purchased at
a discount (5,958,564)
Accrued
Interest
Receivable 1,694,132
Allowance for
Losses (1,153,278)
____________ __________ ________
CARRYING VALUE $103,623,728 $4,586,000 $106,799
============ ========== ========
<PAGE> 18
<FN>
The principal amount of Receivables subject to delinquent principal or
interest is defined as being in arrears for more than three months but which
are still accruing interest.
</TABLE>
<TABLE>
<CAPTION>
The contractual maturities of the aggregate amounts of Receivables
(face amount) are as follows:
Residential Commercial Farm, Land, Total
Principal Principal Other Principal Principal
________________ _______________ _______________ _______________
<S> <C> <C> <C> <C>
October 1997 - September 2000 $ 9,317,899 $ 7,694,381 $ 3,826,225 $ 20,838,505
October 2000 - September 2002 7,563,205 5,832,081 2,408,582 15,803,868
October 2002 - September 2004 6,046,022 4,629,040 1,177,112 11,852,174
October 2004 - September 2007 12,085,385 6,903,142 1,865,980 20,854,507
October 2007 - September 2012 14,799,647 5,269,468 1,429,989 21,499,104
October 2012 - September 2017 6,802,272 1,059,377 799,161 8,660,810
October 2017 - Thereafter 7,028,198 2,018,072 486,200 9,532,470
____________ ____________ ____________ ____________
$ 63,642,628 $ 33,405,561 $ 11,993,249 $109,041,438
============ ============ ============ ============
</TABLE>
<PAGE> 19
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.
Non
Interest Carrying Delinquent Number of Accrual Number of
Number of Rates Amount of Principal Delinquent Principal Non Accrual
Description Receivables Principally Receivables Amount Receivables Amount Receivables
___________ ___________ ___________ ____________ ___________ ___________ _________ ___________
<S> <C> <C> <C> <C> <C> <C> <C>
RESIDENTIAL
First Mortgage
> $75,000 145 8%-11% $15,930,198 $ 828,311 7 $ 106,799 1
First Mortgage
> $40,000 320 8%-11% 17,166,794 803,473 14 -- --
First Mortgage
< $40,000 874 8%-11% 16,824,319 1,079,313 45 -- --
Second or Lower
> $75,000 8 7%-12% 855,475 -- -- -- --
Second or Lower
> $40,000 44 8%-11% 2,256,793 159,931 3 -- --
Second or Lower
< $40,000 246 8%-11% 4,940,151 162,486 10 -- --
COMMERCIAL
First Mortgage
> $75,000 72 8%-11% 10,626,674 95,843 1 -- --
First Mortgage
> $40,000 42 8%-10% 2,371,163 139,722 2 -- --
First Mortgage
< $40,000 83 8%-18% 1,110,029 8,389 -- -- --
Second or Lower
> $75,000 9 8%-11% 819,760 -- -- -- --
<PAGE> 20
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)
___________ __________ _________
CARRYING VALUE $80,008,753 $3,375,000 $ 106,799
=========== ========== =========
<FN>
The principal amount of Receivables subject to delinquent principal or
interest is defined as being in arrears for more than three months but which
are still accruing interest. The principal amount of Receivables subject to
the nonaccrual of interest represents those on which the outstanding
principal and interest exceeds the fair value of the collateral, net of
selling costs.
<PAGE> 21
</TABLE>
<TABLE>
<CAPTION>
The contractual maturities of the aggregate amounts of Receivables
(face amount) are as follows:
Residential Commercial Farm, Land, Total
Principal Principal Other Principal Principal
________________ _______________ _______________ _______________
<S> <C> <C> <C> <C>
October 1996 - September 1999 $ 5,120,711 $ 2,156,175 $ 1,987,478 $ 9,264,364
October 1999 - September 2001 4,740,273 3,048,183 2,170,013 9,958,469
October 2001 - September 2003 5,297,759 1,497,998 939,294 7,735,051
October 2003 - September 2006 8,976,772 3,068,355 1,472,159 13,517,286
October 2006 - September 2011 12,348,635 4,287,359 1,829,649 18,465,643
October 2011 - September 2016 7,034,413 793,847 371,051 8,199,311
October 2016 - Thereafter 14,455,167 1,011,870 1,058,923 16,525,960
____________ ___________ ___________ ____________
$ 57,973,730 $15,863,787 $ 9,828,567 $ 83,666,084
============ =========== =========== ============
</TABLE>
The Consolidated Group held 2,163 Receivables collateralized by real
estate, as of September 30, 1997. The average stated interest rate (weighted
by principal balances) on these Receivables on that date was approximately
9.1%. See Note 4 to the Consolidated Financial Statements under Item 8.
<PAGE> 22
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, 1997 was 4.2% compared to 4.0% and 4.2% at September 30, 1996
and 1995, 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 higher yields and 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 10th and 15th
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,
attorney fees, costs, expenses and late charges are generally collected from
the payor, or added to the Receivable balance, as a condition of
reinstatement.
When a lottery, structured settlement, or annuity becomes delinquent,
Metwest attempts to commence collection efforts within
<PAGE> 23
4 days from a missed payment. Generally, these collection efforts consist of
sending a letter to the Receivable seller and following up with telephone
contact. If these steps have not resolved the delinquency, legal action to
enforce payment is commenced within approximately two weeks from the date of
delinquency.
Allowance for Losses on Receivables
The Consolidated Group establishes an allowance for losses on
Receivables based on an evaluation of delinquent Receivables. The
Consolidated Group reviews the results of its resales of repossessed real
estate, to identify market trends and to document the Group's historical
experience on such sales. The Consolidated Group adjusts its allowance for
losses requirement as appropriate, based upon such observed trends in
delinquencies and resales. The allowance for losses was 1.1%, 1.2%, and 1.2%
of the face value of Receivables collateralized by real estate at September
30, 1997, 1996 and 1995, respectively.
The following is an analysis of the allowance for losses on real estate
contracts and mortgage notes receivable.
<TABLE>
<CAPTION>
September 30,
_______________________
1997 1996
__________ __________
<S> <C> <C>
Balance, beginning of year $ 974,487 $ 765,130
Provision for losses on real estate
contracts and mortgage notes
receivable 386,525 212,600
Recoveries/(write-offs) (207,734) (3,243)
__________ __________
$1,153,278 $ 974,487
========== ==========
</TABLE>
At September 30, 1997 and 1996, the net investment in real estate
contracts and mortgage notes receivable for which impairment has been
recognized was approximately $118,000 and $110,000, respectively, of which
approximately $21,000 and $27,000, respectively, representing the amounts by
which the net carrying value of the receivable exceeds the fair value of the
collateral, has been specifically included in the allowance for losses on real
estate assets. Had these receivables performed in accordance with their
terms, interest income of approximately $1,900 and $2,300, respectively, would
have been recognized during the period of impairment.
<PAGE> 24
The provision for losses on real estate contracts and mortgage notes
receivable is determined as the amount required to establish the allowance at
the level determined in accordance with the policy described above. Because
primarily all of the receivables are collateralized by real estate, the
Company considers its delinquency and loss experience in determining the
likelihood that receivables that are currently performing may become
delinquent, and the loss that may be experienced should foreclosure become the
means of satisfaction. The Company manages its risk of loss upon default
through the underwriting process, which is performed by Metropolitan, and
requires a review of demographics, real estate market trends, property value
and overall economic conditions related to the real property collateralizing a
receivable. Management does not expect that the loss experience related to
the receivables will increase materially during the next full year of
operations. However, there can be no assurance in this regard.
Repossessed Properties
Summit, Old Standard and Arizona Life own various repossessed properties
held for sale. At September 30, 1997, 39 properties, acquired in satisfaction
of debt, with a combined carrying amount of approximately $1,649,000 were
held, of which the largest single property had a carrying value of
approximately $125,000.
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 in addition
to the profits which may be earned, the sale of Receivables provides a number
of benefits including allowing the Consolidated Group to diversify its funding
base and provide liquidity. The sale of Receivables allows the Consolidated
Group to continue to expand its investing activities without increasing its
total asset size.
Generally, a securitization involves the sale 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
<PAGE> 25
securitizations, the senior certificates and subordinate certificates
are sold to investors, generally institutional investors. The companies which
sell 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.
Through September 30, 1997, the Consolidated Group (principally Summit
and Old Standard) has participated as a co-sponsor in three real estate
Receivable securitizations with Metropolitan. The Consolidated Group's
percentage of each securitization has been less than approximately 10% in each
transaction. In each securitization, Metropolitan has used either futures
contracts or securities "short sales" to hedge or protect the profits for the
entire transaction. The price to the Consolidated Group at settlement for
each securitization includes their proportionate share of hedging transactions
related to each securitization. Also See Note 1 to the Consolidated Financial
Statements under Item 8.
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 value such interest in their respective financial statements based
upon certain assumptions regarding 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.
The Consolidated Group (principally Old Standard and Summit) has
participated as Sellers in securitizations with Metropolitan and Western
United. In these securitizations, 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, 1997, the
residual interests held by Summit and Old Standard from the prior
securitizations aggregated approximately $837,000.
In addition to sales through securitizations, the Consolidated Group may
sell pools of Receivables directly to
<PAGE> 26
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 1997, Summit, Old Standard, and Arizona Life received
proceeds of approximately $17.9 million from the sale of portfolios of real
estate Receivables through securitization, proceeds of $3.2 million from
direct sales of real estate Receivables, and proceeds of $3.1 million from the
direct sale of lotteries. During fiscal 1997 and 1996, gains on these
securitization and direct sales were approximately $955,000 and $977,000,
respectively.
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 $110.4 million at September 30, 1997. 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 and Oregon, and has applied for licenses in Hawaii, Washington
and Utah. During calendar 1996, the most recent year for which statistical
information is available, Old Standard's individual annuity market share in
Idaho was 8%, ranking it the second largest 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 $14.2 million at September 30,
1997. Arizona Life is licensed in Arizona, California, Delaware, Idaho, New
Mexico, Texas and Utah. 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 or Arizona
on the percent of assets which Old Standard or Arizona Life may invest in
Receivables collateralized by first position
<PAGE> 27
liens on real estate. As of September 30, 1997, 68.2% of Old Standard's
assets were invested in Receivables collateralized by real estate, and 3.1% in
lotteries. As of September 30, 1997, 79.7% of Arizona Life's assets were
invested in Receivables collateralized by real estate. As of September 30,
1997, the balance of Old Standard's and Arizona Life's investments were
invested in principally 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 collateral 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 changes in tax laws that removed the
attractiveness of competing tax-advantaged products.
Old Standard's annuities also qualify as investments under several of
the tax-advantaged programs such as Individual Retirement Accounts and related
programs.
During 1998, the Consolidated Group anticipates matching premium cash
flows substantially with the availability of Receivable investments, in order
to maximize the earnings from the interest spread. Additionally, the premium
cash flows and resulting total asset growth will be influenced by the ability
of Summit to make additional capital contributions to Old Standard and Arizona
Life, and the ability to securitize or otherwise sell Receivables.
Flexible and single premium annuities are offered with short,
intermediate and traditional surrender fee periods. At September 30, 1997,
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 subsidiaries' earnings,
requiring faster amortization of these costs. During the four months ended
September 30, 1995 and the years ended September 30, 1996 and
<PAGE> 28
September 30, 1997, the amortization of deferred policy acquisition costs
were approximately $198,000, $85,000, and $422,000, respectively. The
calculation has been reviewed by an 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, 1997, withdrawals and benefits were approximately $9.6 million.
The annualized lapse rate was approximately 11.1%. Management believes a
reasonable estimate for future lapse rates to be 12% (including 4% for death
and partial withdrawal and 8% for basic surrenders and surrenders occurring in
the year the surrender charge expires).
The life insurance subsidiaries of the Consolidated Group are required
to file statutory financial statements with state insurance regulatory
authorities in their states of domicile. Accounting principles used to
prepare these statutory financial statements differ from generally accepted
accounting principles (GAAP). A reconciliation of GAAP net income to
statutory net income for the years ended September 30, 1997 and 1996,
respectively, are as follows:
<TABLE>
<CAPTION>
1997 1996
___________ ___________
<S> <C> <C>
Net Income-GAAP $ 2,409,260 $ 1,285,135
Adjustments to reconcile:
Deferred policy acquisition cost (2,650,898) (1,097,613)
State insurance guaranty fund (298) (28,261)
Annuity reserves and benefits (167,439) 244,358
Capital gains and IMR amortization (777,877) (779,523)
Allowance for losses 712,485 486,125
Federal income taxes 404,346 258,888
Other 230,714 5,594
___________ ___________
Net Income-Statutory $ 160,293 $ 374,703
=========== ===========
</TABLE>
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 risk that a
<PAGE> 29
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
surrender fluctuations.
Western United entered into a reinsurance agreement with Old Standard
whereby Western United reinsured 75% of the risk on six different annuity
products through Old Standard. This agreement became effective January 23,
1997 and continued through September 30, 1997, during which time approximately
$28 million in premiums was reinsured through Old Standard. This agreement
allowed Old Standard to acquire annuity premiums with credited interest rates
which were more favorable than those offered directly from Old Standard. The
level of reinsurance that Old Standard could participate in was dependent upon
the sufficiency of its statutory capital to sustain such growth. Old Standard
is currently negotiating a second similar reinsurance agreement with Western
United, which is expected to become effective early calendar year 1998. It is
anticipated that approximately $3-$5 million per month will be ceded during
fiscal 1998, during the months the agreement is effective.
Reserves
State law requires that the annuity reserve be sufficient to meet Old
Standard's and Arizona Life'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 and Arizona Life utilize an
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 $105.3 million at September 30, 1997 based on GAAP financial
reporting.
Securities Investments
At September 30, 1997 and 1996, 94.0% and 99.0% of the Consolidated
Group's securities, excluding stock investment in affiliated companies, were
held by its insurance subsidiaries.
<PAGE> 30
The following table outlines the nature and carrying value of
securities investments held by Old Standard and Arizona Life at September 30,
1997:
<TABLE>
<CAPTION>
Available- Held-to-
Trading For-Sale Maturity
Portfolio Portfolio Portfolio Total
_________ ___________ _________ _________
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total Amount $ 835 $ 5,959 $ 7,241 $ 14,035 100.0%
========= =========== ========= ========= =====
% Invested in:
Fixed Income $ 835 $ 5,959 $ 7,241 $ 14,035 100.0%
Equities -- -- -- -- 0.0%
_________ ___________ _________ _________ _____
$ 835 $ 5,959 $ 7,241 $ 14,035 100.0%
========= =========== ========= ========= =====
% Fixed Income:
Taxable $ 835 $ 5,959 $ 7,241 $ 14,035 100.0%
Non-taxable -- -- -- -- 0.0%
_________ ___________ _________ _________ _____
$ 835 $ 5,959 $ 7,241 $ 14,035 100.0%
========= =========== ========= ========= =====
% Taxable:
U.S. Government $ -- $ 4,049 $ 6,240 $ 10,289 73.3%
Corporate 835 1,910 1,001 3,746 26.7%
_________ ___________ _________ _________ _____
$ 835 $ 5,959 $ 7,241 $ 14,035 100.0%
========= =========== ========= ========= =====
% Corporate:
AA $ -- $ -- $ 1,001 $ 1,001 26.7%
BBB 323 1,910 -- 2,233 59.6%
BB 336 -- -- 336 9.0%
B 176 -- -- 176 4.7%
_________ ___________ _________ _________ _____
$ 835 $ 1,910 $ 1,001 $ 3,746 100.0%
========= =========== ========= ========= =====
% Corporate:
Mortgage-backed $ 835 $ 1,910 $ -- $ 2,745 73.3%
Finance -- -- -- -- 0.0%
Industrial -- -- 1,001 1,001 26.7%
_________ ___________ _________ _________ _____
$ 835 $ 1,910 $ 1,001 $ 3,746 100.0%
========= =========== ========= ========= =====
</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
<PAGE> 31
"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.
Securities may be sold "short" (the sale of securities which are not
currently in the portfolio and therefore must be purchased to close out the
sale agreement) as another means of hedging interest rate risk, to benefit
from an anticipated movement in the financial markets. See "BUSINESS-
Receivable Investments-Receivable Sales." At September 30, 1997, the
Consolidated Group had no outstanding hedge transactions or open short sales
positions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-Asset/Liability Management" under Item 7.
In the held to maturity portfolio, gross unrealized losses were
approximately $36,000 at September 30, 1997.
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,
1997, no short-term collateralized borrowings were 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. 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. Currently, MIS's sales
efforts
<PAGE> 32
are primarily focused in the states of Washington, Oregon, Idaho and
Montana. MIS is also licensed in several other Western states: California,
Utah, Nevada and Colorado. MIS sustained a loss of approximately $84,000
during the current fiscal year. Management has made staffing, management and
budget changes which are designed to improve the profitability of MIS. There
can be no assurance that these efforts will be successful. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
under Item 7.
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, 1997 of approximately $204,000 on
revenues of approximately $1,845,000. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" under Item 7.
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. In the private secondary mortgage market, the
largest single competitors are subsidiaries of much larger companies while
the largest group of individual competitors are a multitude of individual
investors. In all areas of Receivable acquisitions, the Consolidated Group
competes with financial institutions many of which are larger, have access to
more resources and greater name recognition. 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
flexibility in structuring Receivable acquisitions. To the extent other
competing Receivable investors may develop
<PAGE> 33
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 and Arizona Life's management believe
that their respective companies are in an advantageous position in this
regard because of their earning capability through investments in Receivables
compared to that of most other life insurance companies. Old Standard has
been assigned an A.M. Best Co. (Best) rating of "B (good)," and Arizona Life
has been assigned a Best rating of "FPR4 (fair)." 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, approval from the
respective Insurance Commissioner is required prior to engaging in an
affiliated transaction.
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
<PAGE> 34
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 years ended September 30,
1997 and 1996, and the four month period ended September 30, 1995 were
approximately $120,000, $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 1995. Management does not believe that the amount of
future assessments associated with known insolvencies after 1995 will be
material to its financial condition, results of operations or cash flows.
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 unassigned statutory deficit of
the insurance subsidiaries totaled approximately $1,453,000 as of September
30, 1997.
<PAGE> 35
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 December 31,
As of __________________________
September 30, 1997 1996 1995 1994
__________________ ______ ______ ______
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Old Standard:
Capital and Surplus $8,730 $8,324 $3,007 $2,431
Ratio of Capital and
Surplus to Admitted
Assets 8.3% 11.6% 5.4% 5.4%
Arizona Life:
Capital and Surplus $3,074 $2,481 $1,214 --
Ratio of Capital and
Surplus to Admitted
Assets 22.1% 53.5% 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. At September 30, 1997, 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., 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> 36
ITEM 2. PROPERTIES
The principal offices of Summit and its subsidiaries are an office
building located at 929 West Sprague Avenue, Spokane, Washington 99201.
See "BUSINESS-Introduction" & "BUSINESS-Receivable Investments-
Repossessed Properties" under Item 1.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or threatened
against Summit Securities, Inc., or to which its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE> 37
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
1. (a) Market Information: There is no market for the Registrant's
common stock.
(b) Holders: At September 30, 1997, there was one Common stockholder,
National Summit Corporation.
(c) Dividends: The Registrant paid no dividends during the last two
years.
2. 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. See Note 13 to the Consolidated Financial Statements.
<PAGE> 38
ITEM 6. SELECTED FINANCIAL DATA
SUMMIT SECURITIES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
The consolidated financial data shown below as of September 30, 1997 and
1996 and for the years ended September 30, 1997, 1996 and 1995 (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 in Summit's Form 10-K, which is
incorporated herein by reference. The consolidated financial data shown below
as of September 30, 1995, 1994 and 1993 and for the years ended September 30,
1994 and 1993 have been derived from the consolidated financial statements not
included elsewhere herein.
Year Ended September 30,
___________________________________________________________________________
1997 1996 1995 1994 1993
____________ ____________ ___________ ___________ ___________
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $ 19,785,462 $ 14,536,449 $ 9,576,615 $ 3,395,252 $ 2,815,624
============ ============ =========== =========== ===========
Net income 1,851,240 $ 1,244,522 $ 587,559 $ 264,879 $ 283,107
Preferred stock dividends (446,560) (333,606) (309,061) (2,930) --
____________ ____________ ___________ ___________ ___________
Income applicable to common
stockholders $ 1,404,680 $ 910,916 $ 278,498 $ 261,949 $ 283,107
============ ============ =========== =========== ===========
PER COMMON SHARE DATA:
Income applicable to common
stockholders $ 140.47 $ 91.09 $ 27.85 $ 13.47 $ 14.15
============ ============ =========== =========== ===========
Weighted average number of
common shares outstanding 10,000 10,000 10,000 19,445 20,000
============ ============ =========== =========== ===========
<PAGE> 39
Ratio of earnings to fixed
charges 1.46 1.40 1.25 1.16 1.24
Ratio of earnings to fixed
charges and preferred
stock dividends 1.31 1.26 1.11 1.16 1.24
BALANCE SHEET DATA:
Due from/(to) affiliated
companies, net $ 870,255 $ 1,296,290 $(1,960,104) $ 267,735 $ 1,710,743
Total assets $166,354,070 $117,266,680 $96,346,572 $35,101,988 $25,441,605
Debt securities and other
debt payable $ 50,607,983 $ 46,674,841 $38,650,532 $31,212,718 $21,982,078
Stockholders' equity $ 7,756,643 $ 5,358,774 $ 3,907,067 $ 3,321,230 $ 3,188,024
</TABLE>
<PAGE> 40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the Three Fiscal Years Ended September 30, 1997
Introduction
Summit's operations for the current fiscal year ended September 30, 1997
continued to benefit from the acquisition and start-up of several new
operating subsidiaries acquired during 1995. MIS was acquired from Summit's
former parent company in January, 1995. At the same time, Summit established
a property development subsidiary, Summit Property Development. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" under Item 13. 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, 1997, Old Standard had total assets of approximately $110.4
million. During the fiscal year ended September 30, 1997, MIS, Summit
Property Development, Old Standard and Arizona Life contributed gross revenues
of approximately $1.5 million, $1.8 million, $9.6 million and $819,000,
respectively, to the Consolidated Group. For the same period, Summit Property
Development, Old Standard and Arizona Life contributed operating income of
approximately $135,000, $2,264,000 and $145,000, respectively, to the
Consolidated Group. MIS sustained an operating loss of approximately $84,000
during the fiscal year ended September 30, 1997.
Results of Operations
Revenues of the Consolidated Group increased to approximately $19.8
million in 1997 from $14.5 million in 1996 and $9.6 million in 1995. The
growth in revenues from 1996 to 1997 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 an
increase in real estate sales. Additionally in 1997, the Consolidated Group
realized an increase in fee, commission and service revenues primarily from
its service oriented subsidiaries, MIS and Summit Property Development. The
growth in revenues from 1995 to 1996 is attributable to the continuing
increase in investment earnings 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
<PAGE> 41
primarily from its service oriented subsidiaries, MIS and Summit Property
Development. 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
$103.6 million at September 30, 1996 from $80.0 million at September 30, 1996
and $60.1 million at September 30, 1995. Additionally, the Consolidated Group
continued to invest in annuities and structured settlements ending the year at
September 30, 1997 with a total outstanding investment of $20.6 million, which
is an increase from the $11.8 million investment at September 30, 1996.
Net income before preferred stock dividends for the fiscal year ended
September 30, 1997 was $1,851,000 compared to $1,245,000 in 1996 and $588,000
in 1995. The increase from 1996 to 1997 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 investments, 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, and an increase in salaries and benefits, commissions and other
operating expenses. 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 Consolidated Group strives to maximize its risk adjusted return by
investing in non-conventional real estate Receivables. Non-conventional
Receivables are typically Receivables not originated by a regulated financial
institution and not underwritten to FNMA or FHA underwriting guidelines.
Normally, either the borrower or the collateral will not meet FNMA or FHA
underwriting guidelines to qualify for conventional financing and the seller
will be required to provide the financing to complete the sale. These seller
financed Receivables are the types of non-conventional Receivables normally
acquired by the Consolidated Group. Because borrowers in this market
generally have blemished credit records, the Consolidated Group's underwriting
practices focus more strongly on the collateral value as the ultimate source
for repayment. While higher delinquency rates are expected in connection with
its investment in non-conventional Receivables, the Consolidated Group
believes this risk is generally offset by
<PAGE> 42
the value of the underlying collateral and the superior interest yields
realized over normal conventional financing.
Since the date of its incorporation through approximately the end of
calendar year 1993 and again in 1995, 1996 and 1997, Summit has generally
benefited from a declining interest rate environment with lower cost of funds
and relatively consistent interest yields on acquired 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 1997, 1996 and 1995 as Summit was
able to realize gains of approximately $955,000, $977,000 and $513,000,
respectively, from the sale of Receivables. Higher than anticipated levels of
prepayments in the Receivable portfolio were experienced during the years 1992
through 1997, allowing Summit to recognize unamortized discounts on
Receivables which increased resultant yields. During 1994 and continuing in
1995, 1996 and 1997, 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-Receivable
Investments" under Item 1.
As the national economy has experienced moderate growth over the past
three years, the Consolidated Group's financial results were not materially
impacted by general economic factors 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 1997, the Consolidated Group realized a loss on the sale of repossessed
real estate of approximately $80,000 as compared to a loss of $40,000 in 1996
and a gain of $6,300 in 1995. 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 $986,000, $490,000, and $455,000 for
1997, 1996, and 1995, respectively. At September 30, 1997, the Consolidated
Group had an allowance for losses on real estate assets of approximately
$1,153,000 compared to $974,000 and $765,000 at September 30, 1996
<PAGE> 43
and 1995, respectively. The increases in 1997 and 1996 were primarily due to
increases in the size of the respective year's Receivable portfolios. At
September 30, 1997, 1996 and 1995, the allowance for losses represented
approximately 1.1%, 1.2% and 1.2%, respectively, of the face value of
Receivables collateralized by real estate.
Interest Sensitive Income and Expense
Management continually monitors the interest sensitive income and
expense of the Consolidated Group. Interest sensitive expense is
predominantly related to annuity benefits and the interest costs of
Certificates, while interest sensitive income includes interest and earned
discounts on Receivables, dividends and other investment income.
The Consolidated Group is in a "liability sensitive" position in that
its interest sensitive liabilities reprice or mature more quickly than do its
interest sensitive assets. Consequently, in a rising interest rate
environment, the net return from interest sensitive assets and liabilities
will tend to decrease, thus rising interest rates will have a negative impact
on results of operations. Conversely, in a falling interest rate environment,
the net return from interest sensitive assets and liabilities will tend to
improve, thus falling interest rates will have a positive impact on results of
operations. As with the impact on operations from changes in interest rates,
the Consolidated Group's NPV (the Net Present Value) of financial liabilities
is subject to fluctuations in interest rates. The Consolidated Group
continually monitors the sensitivity of net interest income and NPV to changes
in interest rates.
<PAGE> 44
The following table presents, as of September 30, 1997, the Consolidated
Group's estimate of the change in its NPV of financial assets and liabilities if
interest rate levels generally were to increase or decrease by 1% and 2%,
respectively. These calculations, which are highly subjective and technical,
may differ from actual results. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Asset/Liability Management."
<TABLE>
<CAPTION>
Interest Rate Change
____________________________________________________
Carrying Decrease Decrease Increase Increase
Amounts Fair Value 1% 2% 1% 2%
__________ __________ __________ __________ __________ __________
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash and cash
equivalents $ 8,461 $ 8,461 $ 8,461 $ 8,461 $ 8,461 $ 8,461
Investments:
Affiliated companies 4,522 4,522 4,522 4,522 4,522 4,522
Trading 1,744 1,744 1,795 1,849 1,694 1,648
Available-for-sale 5,959 5,959 6,016 6,073 5,904 5,849
Held-to-maturity 7,241 7,207 7,241 7,274 7,175 7,142
Real estate contracts
and mortgage notes 103,083 107,809 111,822 116,104 104,045 100,510
Other receivable
investments 20,588 22,382 23,370 24,423 21,453 20,580
__________ __________ __________ __________ __________ __________
$ 151,598 $ 158,084 $ 163,227 $ 168,706 $ 153,254 $ 148,712
========== ========== ========== ========== ========== ==========
Financial Liabilities:
Annuity reserves $ 105,340 $ 105,340 $ 108,868 $ 112,563 $ 101,969 $ 98,749
Investment certificates 49,627 52,715 53,999 55,333 51,463 50,256
Debt payable 199 212 217 222 207 202
__________ __________ __________ __________ __________ __________
$ 155,166 $ 158,267 $ 163,084 $ 168,118 $ 153,639 $ 149,207
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE> 45
The excess of interest sensitive income over interest sensitive expense
was approximately $3.9 million in 1997, $2.2 million in 1996 and $1.1 million
in 1995. The increase from 1996 to 1997 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. 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.
Fees, Commissions, Service and Other Income
Fees, commissions, service and other income grew to approximately
$3,545,000 in 1997 from $2,850,000 in 1996 and $2,580,000 in 1995. Revenues
in 1997 consisted primarily of commissions earned by the Consolidated Group's
broker/dealer subsidiary, MIS, of approximately $1,497,000 (after elimination
of commissions received from Summit) and approximately $1,845,000 of service
fees earned by its property development subsidiary. The increase in 1997 of
approximately $695,000 resulted primarily from an increase in commissions
earned by MIS of $901,000 being partially offset by a decrease in property
development fees of $200,000. 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 $5,432,000 in 1997 as
compared to $3,988,000 in 1996 and $2,901,000 in 1995. The 1997 increase in
operating expenses was principally the result of the continued growth of the
Consolidated Group, in particular MIS and Old Standard. In 1997, MIS's
increase in commissions earned was offset by approximately $846,000 in
increased expenses, while Old Standards growth resulted in expense increases
of approximately $469,000. Arizona Life's growth resulted in expense
increases of approximately $105,000. 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.
Provision for Losses on Real Estate Assets
<PAGE> 46
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>
1997 1996 1995
__________ __________ __________
<S> <C> <C> <C>
Beginning Balance $ 974,487 $ 765,130 $ 250,572
Increase due to:
Acquisition of life
insurance affiliate 310,957
Provision for losses 386,525 212,600 103,950
Charge-Offs (207,734) (18,896) (34,276)
Recoveries -- 15,653 133,927
__________ __________ __________
Ending Balance $1,153,278 $ 974,487 $ 765,130
========== ========== ==========
</TABLE>
These allowances are in addition to unamortized acquisition discounts of
approximately $6.0 million at September 30, 1997, $4.7 million at September
30, 1996 and $2.6 million at September 30, 1995.
Gain/Loss on Other Real Estate Owned
During 1997, the Consolidated Group realized a loss on the sale of real
estate of approximately $80,000 as compared to a loss of $40,000 in 1996 and a
gain of $6,300 in 1995. At September 30, 1997, the Consolidated Group had
approximately $2,820,000 in real estate held for sale or 1.7 % of total assets
as compared to approximately $1,191,000 or 1.0% of total assets at September
30, 1996 and approximately $836,000 or .9% of total assets at September 30,
1995.
Effect of Inflation
During the three-year period ended September 30, 1997, 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 cost of funds on the Consolidated Group's assets and liabilities.
<PAGE> 47
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
1998, 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 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
<PAGE> 48
or through September 30, 1997. Also See "BUSINESS-Annuity Operations-
Securities Investments" under Item 1.
During fiscal 1998, approximately $26.5 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 $88.2 million reprice during fiscal 1998, and approximately
$11.8 million of Certificates and other debt will mature during fiscal 1998.
These estimates result in repricing of interest sensitive liabilities in
excess of interest sensitive assets of approximately $73.5 million, or a ratio
of interest sensitive liabilities to interest sensitive assets of
approximately 377%.
The Consolidated Group is able to manage this liability to asset
mismatch of approximately 3.8:1 by the fact that approximately 88% 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 respective insurance subsidiaries, these contracts are
subject to annual repricing. In periods of declining interest rates, this
feature is beneficial as it allows the insurance subsidiaries to reprice their
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 insurance subsidiaries have
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 insurance subsidiaries may respond more slowly to increases in market
interest rate levels thereby diminishing the impact on the Consolidated Group
of the current mismatch in the interest sensitivity ratio. Additionally,
through Receivable securitizations, the Consolidated Group 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
retire 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.
<PAGE> 49
The adoption of SFAS No. 114 did not have a material effect on the financial
statements.
In June 1996, Statement of Financial Accounting Standards No. 125 (SFAS
125), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" was issued. SFAS 125 provides accounting and
reporting standards based on a consistent application of a financial
components approach that focuses on control. Under this approach, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when
extinguished. This statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
The Consolidated Group adopted this new standard on January 1, 1997. The
adoption of SFAS 125 did not have a material effect on the Consolidated
Group's financial condition, results of operations or cash flows.
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," (SFAS No. 128) was issued. SFAS No. 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 No. 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. The Consolidated Group does not believe that the application of
this standard will have a material effect on the presentation of its earnings
per share disclosures.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," (SFAS No. 130) was issued. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. This Statement requires that all items required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This Statement does not require a
specific format for the financial statement, but requires an enterprise to
display an amount representing total
<PAGE> 50
comprehensive income for the period in the financial statement. This
Statement requires an enterprise to classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. This Statement is effective for fiscal years beginning after
December 15, 1997. The Consolidated Group has not yet determined the
financial statement effect of the application of this Statement.
In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," (SFAS No. 131) was issued. SFAS No. 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. This Statement supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," but retains the requirement
to report information about major customers. This Statement is effective for
financial statements for periods beginning after December 15, 1997. The
Consolidated Group has not yet determined the effect that the application of
this Statement will have on the disclosures of its business segments.
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 generated cash from operations of approximately
$4.3 million in 1997, utilized $.6 million in 1996, and generated $4.0 million
in 1995. Cash used by the Consolidated Group in its investing activities
totaled approximately $40.7 million in 1997, $15.2 million in 1996, $13.7
million in 1995. Cash provided by the Consolidated Group's financing
activities totaled approximately $40.4 million in 1997, $17.2 million in 1996
and $9.1 million in 1995. These cash flows have resulted in year end cash and
cash equivalent balances of approximately $8.5 million in 1997, $4.5 million
in 1996 and $3.0 million in 1995.
<PAGE> 51
During 1997, approximately $40.4 million was provided by financing
activities, approximately $4.3 million was provided by operating activities,
and $40.7 million was used in investing activities which resulted in a $4.0
million increase in available cash and cash equivalents. The cash from
financing activities of $40.4 million resulted primarily from: (1) issuance of
Certificates, net of repayments and related debt issue costs, of $5.8 million;
(2) issuance of insurance annuities, net of surrenders, of approximately $38.0
million; (3) issuance of preferred stock of approximately $1.2 million; less
(4) debt payments to banks of $3.8 million; (5) dividend payments of $.4
million and (6) contingency purchase price payments on the acquisition of
subsidiary, Old Standard, of approximately $250,000. Cash provided by
operating activities of $4.3 million resulted primarily from net income of
$1.9 million, increases in annuity reserves of $4.9 million being offset by
changes in various assets and liabilities of approximately $2.5 million. Cash
used in investing activities of $40.7 million primarily included acquisition
of real estate, real estate Receivables and other Receivable investments which
totaled $74.8 million being offset by payments and sales of real estate, real
estate Receivables and other Receivable investments of $40.7 million and
acquisition of investment securities, net of maturities and sales, of
approximately $6.6 million. Both Receivable acquisitions and Receivable
dispositions were influenced by securitizations during 1997.
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.
<PAGE> 52
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 1998, anticipated principal, interest and dividend payments on
outstanding debentures, other debt payments and preferred stock distributions
are expected to be approximately $13.1 million. During 1997, the principal
portion of the payments received on the Consolidated Group's Receivables and
proceeds from sales of real estate and Receivables was $40.7 million. A
decrease in the prepayment rate on these Receivables or a decrease in 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, 1997, cash
or cash equivalents were $8.5 million, or 5.1% of total assets. Including
securities that are either trading or available-for-sale, total liquidity was
$16.2 million, $4.7 million and $3.0 million as of September 30, 1997, 1996
and 1995, respectively, or 9.7%, 4.0% and 3.1% of total assets, respectively.
Access to new "capital markets" through Receivable securitizations has
allowed the Consolidated Group to both increase liquidity and accelerate
earnings through the gains recorded on the securitizations. This increased
ability to create liquidity will enable the Consolidated Group to accept
certain asset/liability mismatches which have historically been beneficial to
the Consolidated Group when they have been able to finance
<PAGE> 53
higher earning longer term assets with lower cost of funds associated with
shorter term liabilities.
For statutory purposes, Old Standard and Arizona Life performs cash flow
testing under several different rate scenarios as required by the states of
Idaho and Arizona, respectively. The results of these tests are filed
annually with the Insurance Commissioner of the State of Idaho. At the end of
calendar year 1996, the results of this cash flow testing process was
satisfactory.
At September 30, 1997, the Consolidated Group had no material
commitments for any capital expenditures outside of commitments related to its
normal investing activities. Additionally, the Consolidated Group had no
knowledge of any environmental liabilities associated with any of its real
estate asset investments.
Management believes that cash flow from operating activities and
financing activities, liquidity provided from current investments and the
Consolidated Group's ability to securitize its Receivables collateralized by
real estate will be sufficient for the Consolidated Group to conduct its
business and meet its anticipated obligations as they mature during fiscal
1998. Summit has not defaulted on any of its obligations since its founding
in 1990.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not currently applicable. However, see "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Interest Sensitive
Income and Expense" under Item 7 and "BUSINESS-Annuity Operations-Securities
Investments" under Item 1.
<PAGE> 54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Years Ended September 30, 1997, 1996 and 1995
Page
----------
Report of Independent Accountants F-1
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5 - F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-51
<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, 1997 and 1996,
and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
September 30, 1997. 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, 1997
and 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting
principles.
As discussed in Note 1, the Company changed its methods of accounting
for the transfer and servicing of financial assets in fiscal 1997 and
impaired loans in fiscal 1996.
/s/COOPERS & LYBRAND L.L.P.
Spokane, Washington
November 21, 1997
F-1
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 8,461,101 $ 4,461,315
Investments:
Affiliated companies 4,522,425 4,522,425
Trading securities, at market 1,743,836
Available-for-sale securities, at market 5,959,470 269,305
Held-to-maturity securities, at amortized cost 7,241,209 7,750,078
Accrued interest on investments 162,774 34,244
------------ ------------
Total cash and investments 28,090,815 17,037,367
Real estate contracts and mortgage notes receivable,
net, including real estate contracts and mortgage
notes receivable held for sale of approximately
$10,408,000 in 1996 103,623,728 80,008,753
Other receivable investments, net 20,588,202 11,788,130
Real estate held for sale, net (including foreclosed
real estate received in satisfaction of debt of
$1,648,953 and $1,191,495) 2,819,845 1,191,495
Deferred costs, net 7,634,699 4,862,046
Other assets, net, including receivables from
affiliates 3,596,781 2,378,889
------------ ------------
Total assets $166,354,070 $117,266,680
============ ============
</TABLE>
F-2
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Annuity reserves $105,339,688 $ 62,439,855
Investment certificates 50,406,991 42,823,871
Debt payable 200,992 3,850,970
Accounts payable and accrued expenses 1,302,945 1,367,131
Deferred income taxes 1,346,811 1,426,079
------------ ------------
Total liabilities 158,597,427 111,907,906
------------ ------------
Commitments and contingencies (Notes 1 and 9)
Stockholders' equity:
Preferred stock, $10 par (liquidation preference
$5,381,690 and $4,131,170) 538,169 413,117
Common stock, $10 par, 10,000 shares issued and
outstanding 100,000 100,000
Additional paid-in capital 3,326,007 2,269,137
Retained earnings 3,741,613 2,586,654
Net unrealized gain (loss) on investments 50,854 (10,134)
------------ ------------
Total stockholders' equity 7,756,643 5,358,774
------------ ------------
Total liabilities and stockholders' equity $166,354,070 $117,266,680
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Annuity fees and charges $ 111,999 $ 45,348 $ 14,179
Interest on receivables 8,402,867 6,018,615 3,901,113
Earned discount on receivables 3,359,652 2,598,306 777,659
Other investment income 1,174,828 753,163 410,568
Dividends 240,267 200,256 256,991
Real estate sales 1,910,930 1,093,000 1,123,500
Fees, commissions, service and other income 3,544,946 2,849,737 2,580,105
Gains on sales of investments, net 85,000 583
Gains on sales of receivables, net 954,973 977,441 512,500
----------- ----------- -----------
Total revenues 19,785,462 14,536,449 9,576,615
----------- ----------- -----------
Expenses:
Annuity benefits 5,071,732 3,702,324 1,034,082
Interest expense 4,325,528 3,741,095 3,251,334
Cost of real estate sold 1,991,197 1,132,552 1,117,233
Provision for losses on real estate assets 986,435 490,082 445,381
Salaries and employee benefits 1,896,748 1,636,773 907,690
Commissions to agents 4,079,786 1,673,279 1,395,994
Other operating and underwriting expenses 2,106,789 1,775,484 738,380
Less capitalized deferred costs, net of
amortization (2,650,898) (1,097,613) (140,745)
----------- ----------- -----------
Total expenses 17,807,317 13,053,976 8,749,349
----------- ----------- -----------
Income before income taxes 1,978,145 1,482,473 827,266
Income tax provision (126,905) (237,951) (239,707)
----------- ----------- -----------
Net income 1,851,240 1,244,522 587,559
Preferred stock dividends (446,560) (333,606) (309,061)
----------- ----------- -----------
Income applicable to common stockholder $ 1,404,680 $ 910,916 $ 278,498
=========== =========== ===========
Income per share applicable to common
stockholder $ 140.47 $ 91.09 $ 27.85
=========== =========== ===========
Weighted average number of shares of common
stock outstanding 10,000 10,000 10,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended September 30, 1997, 1996 and 1995
<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, 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 tax benefit of $6,122 $ (11,884) (11,884)
Excess cost over historical cost
basis of subsidiaries purchased
from related party (52,733) (52,733)
---------- ---------- ---------- ---------- ---------- ----------
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 losses
on investment securities, net
of income tax provision 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>
F-5
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
for the years ended September 30, 1997, 1996 and 1995
<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, 1996 413,117 100,000 2,269,137 (10,134) 2,586,654 5,358,774
Net income 1,851,240 1,851,240
Cash dividends on preferred
stock (variable rate) (446,560) (446,560)
Sale of variable rate pre-
ferred stock, net of offer-
ing costs (12,505 shares) 125,052 1,056,870 1,181,922
Net change in unrealized losses
on investment securities,
net of income tax provision
of $33,542 60,988 60,988
Contingent purchase price of
subsidiary previously
purchased from related party (249,721) (249,721)
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1997 $ 538,169 $ 100,000 $3,326,007 $ 50,854 $3,741,613 $7,756,643
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,851,240 $ 1,244,522 $ 587,559
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Purchase of trading securities (98,874)
Gains on sales of investments, net (85,000) (583)
Gains on sales of receivables, net (954,973) (977,441) (512,500)
(Gain) loss on sales of real estate 80,267 39,552 (6,267)
Provision for losses on real estate
assets 986,435 490,082 445,381
Depreciation and amortization 967,382 493,506 519,280
Deferred income tax provision (79,268) 134,877 164,249
Changes in assets and liabilities, net
of effects from purchases of
subsidiaries:
Annuity reserves 4,946,874 3,713,490 1,031,720
Compound and accrued interest on
investment certificates and debt
payable 1,124,113 (432,048) 1,714,943
Accrued interest on real estate
contracts and mortgage notes
receivable 157,804 (1,005,273) (306,978)
Other (4,590,006) (4,269,279) 365,111
----------- ----------- -----------
Net cash provided by (used in)
operating activities 4,305,994 (568,595) 4,002,498
----------- ----------- -----------
Cash flows from investing activities:
Net cash paid or received associated with
purchases of subsidiaries (761,739) 1,406,873
Investment in affiliated company (1,500,000)
Proceeds from sales of available-for-sale
investments 97,397 999,790 992,370
Purchase of available-for-sale investments (7,228,889) (275,641)
Proceeds from maturities of held-to-maturity
investments 1,500,000 500,000
Purchase of held-to-maturity investments (995,469) (486,753)
Principal payments on real estate contracts
and mortgage notes receivable 13,034,662 13,874,707 6,567,102
Principal payments on other receivable
investments 1,891,355 753,892 393,942
Purchases of real estate contracts and
mortgage notes receivable (59,193,794) (40,100,330) (26,130,804)
Purchases of other receivable investments (13,652,880) (7,387,117) (18,316,371)
Proceeds from real estate sales 1,566,132 79,686 163,687
Additions to real estate held for sale (1,962,997) (292,494) (141,336)
Proceeds from sale of receivables 24,213,531 19,430,000 21,350,848
----------- ----------- -----------
Net cash used in investing
activities (40,730,952) (15,165,999) (13,713,689)
----------- ----------- -----------
F-7
</TABLE>
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Receipts from annuity products 47,521,061 15,632,116 5,903,808
Withdrawals of annuity products (9,568,102) (6,465,340) (1,934,898)
Proceeds from issuance of investment
certificates 13,262,761 13,291,967 8,585,470
Repayments of investment certificates (6,812,643) (8,571,918) (2,847,347)
Borrowings from banks and others 5,752,500
Repayments to banks and others (3,812,524) (2,043,015) (193,631)
Debt issuance costs (651,450) (585,198) (441,775)
Contingent purchase price paid on sub-
sidiary purchased from related party (249,721)
Excess cost over historical cost basis
of subsidiary purchased from related
party (52,733)
Issuance of preferred stock 1,181,922 539,041 371,956
Cash dividends on preferred stock (446,560) (333,606) (309,061)
----------- ----------- -----------
Net cash provided by financing
activities 40,424,744 17,216,547 9,081,789
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 3,999,786 1,481,953 (629,402)
Cash and cash equivalents, beginning of year 4,461,315 2,979,362 3,608,764
----------- ----------- -----------
Cash and cash equivalents, end of year $ 8,461,101 $ 4,461,315 $ 2,979,362
=========== =========== ===========
See Note 16 for supplemental cash flow information.
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES:
BUSINESS AND REORGANIZATION
Summit Securities, Inc., d/b/a National Summit Securities, Inc.
in the states of New York and Ohio (the Company), was
incorporated on July 25, 1990. 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. 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.
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, the
approximate net book value of the Company at the transactiondate.
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
Metropolitan's common and preferred stock, including members of
Mr. Sandifur's immediate family, acquired 30,224 shares of the
Company's preferred stock Series S-1 for $100 per share in
exchange for preferred and common shares of Metropolitan. The
preferred shares issued for the Metropolitan shares were
recorded at their face value which approximated recent
issuances to unrelated parties. The face value of the
preferred shares approximates fair value due to the variable
dividend rate associated with such shares (see Note 13).
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, the approximate net book value of MIS at the
transaction date. 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.
Additionally, by agreement, effective 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, the Company commenced
the operation of a property development subsidiary employing
those same individuals who had previously been employed by
Metropolitan. Summit Property Development Corporation, a 100%
owned subsidiary of the Company, has negotiated an agreement
with Metropolitan to provide future property development
services.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
BUSINESS AND REORGANIZATION, CONTINUED
On May 31, 1995, the Company consummated an agreement with
Metropolitan, whereby it acquired Old Standard Life Insurance
Company (OSL), an insurance company domiciled in the state of
Idaho, for $2,722,000, 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 common
stock dividends. During the year ended September 30, 1997, the
Company paid to Metropolitan approximately $250,000 in
contingency payments. 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 the state of Arizona, was sold
to OSL. The purchase price of $1,234,000, approximated the net
book value of AZL at 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. At the date of purchase, AZL was dormant
and had no outstanding insurance business or other liabilities.
AZL's business activities have been the acquisition of real
estate contracts and mortgage notes receivable 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.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
BUSINESS AND REORGANIZATION, CONTINUED
The Company and it subsidiaries purchase contracts and mortgage
notes collateralized by real estate and other receivable
investments with funds generated from the public issuance of
debt securities in the form of investment certificates, annuity
products, cash flows from receivable payments, sales of real
estate and securitization of receivables held for sale.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Metropolitan
Investment Securities, Inc. (since January 31, 1995), Summit
Property Development, Inc. (since January 31, 1995), Old
Standard Life Insurance Company (since May 31, 1995) and its
wholly owned subsidiary, Arizona Life Insurance Company (since
December 28, 1995). 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 deposit in
banks and financial institutions. The Company periodically
evaluates the credit quality of these banks and financial
institutions. Substantially all cash and cash equivalents are
on deposit with one financial institution and balances
periodically exceed the federal 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
"trading," "available-for-sale" or "held-to-maturity". The
accounting policies related to these investments are as
follows:
TRADING SECURITIES: Trading securities, consisting of pass-
through certificates, are retained in connection with the
Company's securitization transactions and are recorded at
market value. Realized and unrealized gains and losses are
included in the consolidated statements of income.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
INVESTMENTS, CONTINUED
AVAILABLE-FOR-SALE SECURITIES: Available-for-sale
securities, consisting primarily of government-backed
securities and pass-through certificates 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. Premiums and discounts on these securities
are amortized on a specific-identification basis using the
interest method. The Company has the ability and intent to
hold these investments until maturity.
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
in the consolidated statements of income. 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 a
specific-identification basis 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. The Company
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE,
CONTINUED
accounts for its portfolio of discounted receivables acquired
before October 1, 1992 using anticipated prepayment patterns to
apply the interest method of amortization. Discounted
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 contractually scheduled payments,
which is consistent with the Company's expectations and prior
experience on similar receivables.
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD
FOR SALE
Real estate contracts and mortgage notes receivable held for
sale are carried at the lower of cost (outstanding principal
adjusted for net discounts and capitalized acquisition costs)
or market value, determined on an aggregate basis by major type
of receivable. 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 as earned. Deferred
net discounts and capitalized acquisition costs are recognized
at the time the related receivables are sold to third-party
investors or securitized.
Effective January 1, 1997, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 125 (SFAS
No. 125), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," as amended by SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions
of the SFAS No. 125". SFAS No. 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. The
application of the provisions of SFAS No. 125 did not have a
material effect on the Company's financial condition, results
of operations or cash flows.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
ALLOWANCES FOR LOSSES ON REAL ESTATE CONTRACTS AND MORTGAGE
NOTES RECEIVABLE
The established allowances for losses on real estate contracts
and mortgage notes receivable include amounts for estimated
probable losses on receivables determined in accordance with
the provisions of Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended. The adoption of this new standard on
October 1, 1995, did not have a material effect on the
Company's consolidated financial statements. Specific
allowances are established for delinquent receivables with net
carrying values in excess of $100,000, as necessary.
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
to accrue interest 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.
OTHER RECEIVABLE INVESTMENTS
Other receivables held for investment purposes are carried at
amortized cost. Discounts originating at the time of purchase,
net of capitalized acquisition costs, are amortized using the
level yield (interest) method on an individual receivable basis
over the remaining contractual term of the receivable.
REAL ESTATE HELD FOR SALE AND DEVELOPMENT
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, forfeiture or acquisition. 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.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE HELD FOR SALE AND DEVELOPMENT, CONTINUED
The Company reviews its real estate properties for impairment
in value whenever events or circumstances indicate that the
carrying value of the asset may not be recoverable. In
performing the review, if expected future undiscounted cash
flows from the use of the asset or the fair value, less selling
costs, from the disposition of the asset is less than its
carrying value, an impairment loss is recognized.
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 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 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. For investment certificate costs, amortization is
computed over the expected certificate term which ranges from 6
months to 5 years, using the interest method. Changes in the
amount or timing of estimated gross profits on the annuities or
the expected term of the investment certificates will result in
adjustments in the cumulative amortization of these costs.
ANNUITY RESERVES
Premiums for annuities are recorded as annuity reserves under
the deposit method. Reserves for annuities are equal to the
sum of the account balances including credited interest and
deferred service charges. Based on past experience,
consideration is given in actuarial calculations to the number
of policyholder and annuitant deaths that might be expected,
policy lapses, surrenders and terminations. As a result in
changes in the factors included in the actuarial calculations,
it is reasonably possible that the reserves for annuities could
change in the near term.
F-15
<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
benefited using the same assumptions as are used to amortize
deferred annuity policy 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 of insolvent
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, 1997 and 1996, the
Company has accrued a liability for guaranty fund assessments
for known insolvencies, net of estimated recoveries through
premium tax offsets. As a result of future insolvencies or
changes in the assessments of known insolvencies, the guaranty
fund liability could change in the near term.
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 is included in the consolidated income tax return
with National Summit Corp., its parent. The Company is
allocated a current and deferred tax provision from National
Summit Corp. as if the Company filed a separate tax return.
F-16
<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, 1997.
In February 1997, SFAS No. 128, "Earnings Per Share" (SFAS
No. 128) was issued. SFAS No. 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
No. 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. The Company does not believe that the application
of this standard will have a material effect on the
presentation of its earnings per share disclosures.
COMPREHENSIVE INCOME
In June 1997, SFAS No. 130, "Reporting Comprehensive Income,"
(SFAS No. 130) was issued. SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This Statement
requires that all items required to be recognized under
accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the
same prominence as other financial statements. This Statement
does not require a specific format for the financial statement,
but requires an enterprise to display an amount representing
total comprehensive income for the period in the financial
statement. This Statement requires an enterprise to classify
items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of a
statement of financial position. This Statement is effective
for fiscal years beginning after December 15, 1997. The
Company has not yet determined the financial statement effect
of the application of this Statement.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
INTEREST RATE RISK
The results of operations of the Company may be materially and
adversely affected by changes in prevailing economic
conditions, including rapid changes in interest rates. The
Company's financial assets (primarily real estate contracts and
mortgage notes receivable, other receivables and investment
securities) and liabilities (primarily annuity contracts and
investment certificates) are subject to interest rate risk. In
the year ending September 30, 1998, approximately $100,000,000
of the Company's financial liabilities will reprice or mature
as compared to approximately $26,500,000 of its financial
assets, resulting in a mismatch of approximately $73,500,000.
This structure is beneficial in periods of declining interest
rates; however, may result in declining net interest income
during periods of rising interest rates. Of the financial
liabilities scheduled to reprice or mature, approximately 88%
are annuity contracts which are subject to surrender charges.
Management is aware of the sources of interest rate risk and
endeavors to actively monitor and manage its interest rate
risk, although there can be no assurance regarding the
management of interest rate risk in future periods.
HEDGING ACTIVITIES
The Company is authorized by its Board of Directors, subject to
certain limitations, to use financial futures instruments for
the purpose of hedging interest rate risk relative to the
securities portfolio and in anticipation of sales and
securitizations of real estate contracts and other receivable
investments. The Company participates with Metropolitan and
its subsidiaries in futures contracts as a means of managing
interest rate risk or to benefit from an anticipated movement
in the financial markets. Unrealized gains or losses
associated with financial future contracts that meet the hedge
criteria prescribed in Statement of Financial Standards No. 80
(SFAS No. 80), "Accounting for Futures Contracts" are deferred
and recognized when the effects of changes in the interest rate
on the hedged asset are recognized.
The Company also purchases collateralized mortgage obligations
(CMOs), pass-through certificates and other asset-backed
securities for its investment portfolio. Such purchases have
been limited to tranches that perform in concert with the
underlying mortgages or assets; i.e., improving in value with
falling interest rates and declining in value with rising
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
HEDGING ACTIVITIES, CONTINUED
interest rates. The Company has not invested in "derivative
products" that have been structured to perform in a way that
magnifies the normal impact of changes in interest rates or in
a way dissimilar to the movement in value of the underlying
securities. At September 30, 1997, the Company was not a party
to any derivative financial instruments.
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.
2. INVESTMENTS IN AFFILIATED COMPANIES:
At September 30, 1997 and 1996, investments in affiliated
companies consisted of:
<TABLE>
<CAPTION>
Cost and Carrying Value
Number of -----------------------
Type of Shares Shares 1997 1996
-------------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
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 1,500,000
---------- ----------
$4,522,425 $4,522,425
========== ==========
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. 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, 1997 and 1996, the
Company owned 7.09% of Metropolitan's outstanding Class A common
stock. Metropolitan had total assets of approximately $1.1
billion at September 30, 1997.
The preferred stock of Metropolitan has a par value of $10 per
share and has liquidation preferences equal to its issue price.
The shares are non-voting and are senior to the common shares as
to dividends. Dividends are cumulative at variable rates;
however, dividends shall be no less than 6% or greater than 14%
per annum. At September 30, 1997, the preferred Series C, D and
E-1 had dividend rates of 7.645%. The preferred Series E-4 had
a dividend rate of 8.145%. Neither the common nor preferred
shares are traded in a public market.
At September 30, 1997 and 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 75.5% of Western United Life Insurance Company
(Western), a life insurer domiciled in the state of Washington.
Western had total assets of approximately $947 million at
September 30, 1997.
3. INVESTMENTS:
A summary of carrying and estimated market values of investments
at September 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997
-------------------------------------------------
Estimated
Market
Gross Gross Value
Amortized Unrealized Unrealized (Carrying
Trading Cost Gains Losses Value)
------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Pass-Through Certificates $1,658,836 $ 85,000 $ $1,743,836
========== ========== ========== ==========
</TABLE>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
1997
-------------------------------------------------
Estimated
Market
Gross Gross Value
Amortized Unrealized Unrealized (Carrying
Available-for-Sale Cost Gains Losses Value
------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Bonds $3,973,218 $ 75,534 $ $4,048,752
Pass-Through Certificates 1,901,856 8,862 1,910,718
---------- ---------- ---------- ----------
$5,875,074 $ 84,396 $ $5,959,470
========== ========== ========== ==========
<CAPTION>
Amortized
Cost Gross Gross Estimated
(Carrying Unrealized Unrealized Market
Held-to-Maturity Value) Gains Losses Value
------------------------- ---------- ---------- ---------- ----------
U.S. Government Bonds $6,240,640 $ 1,390 $ (34,648) $6,207,382
Corporate Bonds 1,000,569 (1,408) 999,161
---------- ---------- ---------- ----------
$7,241,209 $ 1,390 $ (36,056) $7,206,543
========== ========== ========== ==========
<CAPTION>
1996
-------------------------------------------------
Estimated
Market
Gross Gross Value
Amortized Unrealized Unrealized (Carrying
Available-for-Sale Cost Gains Losses Value)
------------------------- ---------- ---------- ---------- ----------
Pass-Through Certificates $ 269,305 $ $ $ 269,305
========== ========== ========== ==========
<CAPTION>
Amortized
Cost Gross Gross Estimated
(Carrying Unrealized Unrealized Market
Held-to-Maturity Value) Gains Losses Value
------------------------- ---------- ---------- ---------- ----------
U.S. Government Bonds $5,735,579 $ $ (111,140) $5,624,439
Corporate Bonds 2,014,499 (16,744) 1,997,755
---------- ---------- ---------- ----------
$7,750,078 $ $ (127,884) $7,622,194
========== ========== ========== ==========
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. INVESTMENTS, CONTINUED:
All bonds held at September 30, 1997 were performing in
accordance with their terms.
During the year ended September 30, 1997, the Company
reclassified available-for-sale securities with a carrying value
of approximately $1,560,000 to the trading classification. At
the date of transfer, an unrealized gain of approximately $85,000
was recognized in the consolidated statement of income.
During the year ended September 30, 1996, in accordance with a
Special Report issued by the Financial Accounting Standards
Board, the Company 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.
The following aggregate investments with individual issuers
(excluding U.S. government bonds) held by the Company at
September 30, 1997 and 1996 were in excess of ten percent of
stockholders' equity:
Aggregate
Carrying
Issuer Amount
------------------------------------ ----------
1997:
Pass-through certificates:
Triad Auto Receivables Trust $1,910,718
Metropolitan Asset Funding, Inc. 1,277,488
Corporate bonds:
Wal-Mart stores 1,000,569
1996:
Corporate bonds:
General Electric Credit
Corporation 1,012,613
Wal-Mart stores 1,001,886
At September 30, 1997, the contractual maturities of the
available-for-sale and 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 prepayment penalties.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. INVESTMENTS, CONTINUED:
Estimated
Amortized Market
Available-for-Sale Securities Cost Value
------------------------------------ ---------- ----------
Due after one year through five
years $3,973,218 $4,048,752
Due after five years through ten
years 1,901,856 1,910,718
---------- ----------
$5,875,074 $5,959,470
========== ==========
Estimated
Amortized Market
Held-to-Maturity Securities Cost Value
------------------------------------ ---------- ----------
Due in one year or less $6,251,349 $6,207,950
Due after one year through five
years 989,860 998,593
---------- ----------
$7,241,209 $7,206,543
========== ==========
4. 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, 1997, the Company held first
position liens associated with real estate contracts and mortgage
notes receivable with a face value of approximately $99,337,000
and second position liens of approximately $9,704,000.
The Company's real estate contracts and mortgage notes receivable
at September 30, 1997 are collateralized by property concentrated
in the following geographic regions:
Pacific Northwest (Washington, Alaska, Idaho, Montana
and Oregon) 27%
Pacific Southwest (California, Nevada and Arizona) 18
North Atlantic (Connecticut, New Jersey, New York and
Pennsylvania) 13
Southwest (Texas, Louisiana and New Mexico) 12
Southeast (Florida, Georgia, North Carolina and
South Carolina) 9
Other 21
---
100%
===
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. 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, 1997 and 1996 is
grouped by the following dollar ranges:
1997 1996
------------ ------------
Under $15,001 $ 4,653,217 $ 3,718,664
$15,001 to $40,000 23,044,404 22,297,937
$40,001 to $80,000 32,595,257 28,746,046
$80,001 to $150,000 22,970,999 17,852,524
Greater than $150,000 25,777,561 11,050,913
------------ ------------
$109,041,438 $ 83,666,084
============ ============
Contractual interest rates on the face value of the Company's
real estate contracts and mortgage notes receivable as of
September 30, 1997 and 1996 are as follows:
1997 1996
------------ ------------
Less than 8.00% $ 23,202,059 $ 17,315,968
8.00% to 8.99% 26,641,555 18,387,426
9.00% to 9.99% 26,409,005 19,139,440
10.00% to 10.99% 19,244,422 18,781,971
11.00% to 11.99% 2,833,468 5,660,121
12.00% to 12.99% 5,950,964 2,092,243
13% or higher 4,759,965 2,288,915
------------ ------------
$109,041,438 $ 83,666,084
============ ============
The weighted average contractual interest rate on these
receivables at September 30, 1997 is approximately 9.1%.
Maturity dates range from 1997 to 2027. The constant effective
yield on contracts purchased during the years ended September 30,
1997 and 1996 was approximately 10.4% and 10.6%, respectively.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
The following is a reconciliation of the face value of the real
estate contracts and mortgage notes receivable to the Company's
carrying value at September 30, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Face value of discounted receivables $ 99,493,067 $ 73,226,348
Face value of originated and nondiscounted
receivables 9,548,371 10,439,736
Unrealized discounts, net of unamortized
acquisition costs (5,958,564) (4,733,938)
Allowance for losses (1,153,278) (974,487)
Accrued interest receivable 1,694,132 2,051,094
------------ ------------
Carrying value $103,623,728 $ 80,008,753
============ ============
</TABLE>
The following is an analysis of the allowance for losses on real
estate contracts and mortgage notes receivable.
<TABLE>
<CAPTION>
September 30,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 974,487 $ 765,130 $ 250,572
Provision for losses on
real estate contracts
and mortgage notes
receivable 386,525 212,600 103,950
Additions from acquisition
of subsidiary 310,957
Recoveries/(write-offs) (207,734) (3,243) 99,651
------------ ------------ ------------
$ 1,153,278 $ 974,487 $ 765,130
============ ============ ============
</TABLE>
At September 30, 1997 and 1996, the net investment in real estate
contracts and mortgage notes receivable for which impairment has
been recognized was approximately $118,000 and $110,000,
respectively, of which approximately $21,000 and $27,000,
representing the respective amounts by which the net carrying
value of the receivable exceeds the fair value of the collateral,
has been specifically included in the allowance for losses on
real estate assets.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
During the years ended September 30, 1997 and 1996, the average
recorded investment in impaired receivables was approximately
$113,000 and $82,000, respectively. During the years ended
September 30, 1997 and 1996, interest income in the approximate
amount of $10,000 and $7,000, respectively, was recognized on
these receivables during the period in which they were impaired.
The principal amount of receivables with required principal or
interest payments being in arrears for more than three months was
approximately $4,586,000 and $3,375,000 at September 30, 1997 and
1996, respectively.
Aggregate amounts of the face value of the Company's real estate
contracts and mortgage notes receivable at September 30, 1997
expected to be received, based upon contractual payments, are as
follows:
Fiscal Year Ending
September 30,
------------------
1998 $ 3,793,049
1999 4,124,223
2000 4,484,312
2001 4,875,840
2002 5,301,553
Thereafter 86,462,461
------------
Total $109,041,438
============
5. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD FOR
SALE:
The Company acquires certain real estate contracts and mortgage
notes receivable for the purpose of sale or securitization.
The Company entered into securitization transactions during the
years ended September 30, 1997 and 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 trust, which sells pass-through certificates to
third parties. These securitizations are recorded as sales of
receivables and gains, net of transaction expenses, and are
recognized in the consolidated statements of income as each class
is sold.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD FOR
SALE, CONTINUED:
During the years ended September 30, 1997 and 1996, proceeds from
securitization transactions were approximately $17,891,000 and
$7,009,000 and resulted in gains of approximately $763,500 and
$297,300, respectively. The gains included approximately
$204,300 and $99,000, respectively, associated with the estimated
fair value of the mortgage servicing rights retained on the
pools. The fair value of these rights was determined based on
the estimated present value of future net servicing cash flows,
including float interest and late fees, adjusted for anticipated
prepayments. The Company evaluates possible impairment in its
mortgage servicing rights by similar type of loan and to the
extent that carrying value for a stratum exceeds its estimated
fair value, an impairment loss is recognized. The servicing
rights associated with the securitization transactions were
subsequently sold to an affiliated entity prior to September 30,
1997 and 1996 at the Company's carrying value.
Of the receivables securitized, the Company has retained
investments in certain classes of the securities having a fair
value of approximately $1,744,000 and $269,000 at September 30,
1997 and 1996, respectively. These securities were transferred
to the Company's investment portfolio and classified as trading
securities. These certificates are the lowest investment grade
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 on these
securities was 10.8% and 13.2% at September 30, 1997 and 1996,
respectively.
6. OTHER RECEIVABLE INVESTMENTS:
Other receivable investments include various cash flow
investments 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.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. OTHER RECEIVABLE INVESTMENTS, CONTINUED:
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, 1997 and
1996 was approximately 13.5% and 12.4%, respectively.
Contractual maturities range from 1998 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, 1997 and 1996.
1997 1996
------------ ------------
Face value of receivables $ 33,898,409 $ 19,103,098
Unrealized discounts, net of
unamortized acquisition costs (13,310,207) (7,314,968)
------------ ------------
Carrying value $ 20,588,202 $ 11,788,130
============ ============
All such receivables at September 30, 1997 were performing in
accordance with their contractual terms.
During the years ended September 30, 1997, 1996 and 1995, the
Company sold receivables with a carrying value of approximately
$2,961,000, $11,741,000 and $1,260,000, respectively, to a third
party without recourse and recognized gains of approximately
$124,600, $680,100 and $128,500, respectively.
The following individual other receivable investments were in
excess of ten percent of stockholders' equity at September 30,
1997 and 1996.
Aggregate
Carrying
Issuer Amount
------------------------------------------------ ------------
1997:
Safeco Life Insurance Company $ 2,311,119
Michigan State Agency 1,605,133
Transamerica Occidental Insurance Company 1,489,019
Metropolitan Life Insurance Company 1,289,871
Allstate Life Insurance Company 1,255,758
First Colony Life Insurance Company 1,088,952
New York State Agency 1,013,265
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. OTHER RECEIVABLE INVESTMENTS, CONTINUED:
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
Aggregate amounts of contractual maturities of other receivables
at their face amounts at September 30, 1997 are as follows:
Fiscal Year Ending
September 30,
------------------
1998 $ 5,418,805
1999 4,450,416
2000 4,044,290
2001 3,515,190
2002 2,930,376
Thereafter 13,539,332
------------
Total $ 33,898,409
============
7. DEFERRED COSTS:
An analysis of deferred costs related to annuity acquisition and
investment certificate issuance for the years ended September 30,
1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Annuity Investment
Acquisition Certificates Total
----------- ------------ ----------
<S> <C> <C> <C>
Balance, September 30, 1994 $ 705,994 $ 705,994
Increase due to acquisition of
life insurance subsidiary $ 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
Amortization during the period (198,190) (321,090) (519,280)
----------- ---------- ----------
Balance, September 30, 1995 2,755,523 826,679 3,582,202
</TABLE>
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. DEFERRED COSTS:
<TABLE>
<CAPTION>
Annuity Investment
Acquisition Certificates Total
----------- ------------ ----------
<S> <C> <C> <C>
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
Amortization during the period (84,773) (402,967) (487,740)
----------- ---------- ----------
Balance, September 30, 1996 3,853,136 1,008,910 4,862,046
Deferred during the period:
Commissions 2,517,323 434,795 2,952,118
Other expense 555,961 216,655 772,616
----------- ---------- ----------
Total deferred costs 6,926,420 1,660,360 8,586,780
Amortization during the period (422,386) (529,695) (952,081)
----------- ---------- ----------
Balance, September 30, 1997 $ 6,504,034 $1,130,665 $7,634,699
=========== ========== ==========
</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.
8. ANNUITY RESERVES:
Annuity reserves are based upon contractual amounts due the
annuity holder including credited interest. Annuity contract
interest rates ranged from a 5.0% to 9.9% during the year ended
September 30, 1997, 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.
On February 21, 1997, OSL entered into a reinsurance agreement
with Western whereby OSL agreed to reinsure 75% of the face value
of certain single premium deferred annuity contracts underwritten
by WULA. The amount of deferred annuity contracts reinsured by
OSL and included in annuity reserves totaled approximately
$28,358,800 at September 30, 1997.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. GUARANTY FUND ASSESSMENTS:
All states in which the Company's life 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.
The net amount expensed by the Company's life insurance
subsidiaries for guaranty fund assessments and amounts estimated
to be assessed for the years ended September 30, 1997 and 1996
and the four-month period ended September 30, 1995 were $120,000,
$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 1995. 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. At September 30, 1997
and 1996, an estimated future guaranty fund assessment of
approximately $429,000 and $531,000, respectively, has been
recorded, which is net of a 7% discount rate applied to the
estimated payment term of approximately seven years.
10. INVESTMENT CERTIFICATES:
At September 30, 1997 and 1996, investment certificates consist
of:
Annual
Interest
Rates 1997 1996
---------------------------------- ----------- -----------
6% to 7% $ 758,446 $ 1,547,283
7% to 8% 2,368,671 1,946,646
8% to 9% 30,951,990 26,380,522
9% to 10% 10,672,322 8,370,330
10% to 11% 143,396 199,926
----------- -----------
44,894,825 38,444,707
Compound and accrued interest 5,512,166 4,379,164
----------- -----------
Totals $50,406,991 $42,823,871
=========== ===========
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INVESTMENT CERTIFICATES, CONTINUED:
The weighted average interest rate on outstanding investment
certificates was approximately 8.5% at September 30, 1997 and
1996.
Investment certificates (including principal and compound and
accrued interest) at September 30, 1997 mature as follows:
Fiscal Year Ending
September 30,
------------------
1998 $ 11,831,000
1999 8,878,000
2000 7,292,000
2001 11,447,000
2002 7,437,000
Thereafter 3,521,991
------------
Total $ 50,406,991
============
11. DEBT PAYABLE:
At September 30, 1997 and 1996, debt payable consists of:
1997 1996
----------- -----------
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, interest rates
ranging from 6.5% to 8.5%, due
in installments through 2008,
collateralized by senior liens on
certain of the Company's real
estate contracts, mortgage notes
receivable and real estate held
for sale $ 199,286 37,875
Accrued interest payable 1,706 10,595
----------- -----------
$ 200,992 $ 3,850,970
=========== ===========
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. DEBT PAYABLE, CONTINUED:
Aggregate amounts of principal and accrued interest due on debt
payable at September 30, 1997 are as follows:
Fiscal Year Ending
September 30,
------------------
1998 $ 11,782
1999 10,801
2000 19,947
2001 23,408
2002 25,701
Thereafter 109,353
--------
Total $200,992
========
12. INCOME TAXES:
The tax effect of the temporary differences giving rise to the
Company's deferred tax assets and liabilities as of September 30,
1997 and 1996 is as follows:
1997 Assets Liabilities
----------------------------------- ---------- -----------
Mark to market for investment
securities $ 33,542
Guaranty fund assessments $ 145,848
Annuity reserves 784,934
Management fee payable 105,566
Allowance for losses on real estate
and receivables 675,995
Deferred policy acquisition costs 2,099,193
Deferred contract acquisition costs
and discount yield recognition 1,108,556
Net operating loss carryforwards 627,309
Other 234,040
---------- ----------
Total deferred income taxes $2,234,086 $3,580,897
========== ==========
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. INCOME TAXES, CONTINUED:
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
========== ==========
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, 1997, the
Company's remaining net operating loss carryforwards of
approximately $1,800,000 expire in years 2006 through 2012.
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.
Due to the Company's previous change in ownership, approximately
$1,000,000 of the above net operating losses, representing those
generated prior to the change in ownership, 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.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current $206,173 $103,074 $ 75,458
Deferred (79,268) 134,877 164,249
-------- -------- --------
$126,905 $237,951 $239,707
======== ======== ========
</TABLE>
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. INCOME TAXES, CONTINUED:
Following is a reconciliation 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:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax at
statutory rate $672,569 34% $504,041 34% $281,270 34%
Affiliate corporate
dividend received
deduction (57,184) (3) (47,661) (3) (49,921) (6)
Small life insurance
company deduction (497,449) (25) (225,669) (15)
Other 8,969 7,240 8,358 1
-------- --- -------- --- -------- ---
Income tax provision $126,905 6% $237,951 16% $239,707 29%
======== === ======== === ======== ===
</TABLE>
13. STOCKHOLDERS' EQUITY:
A summary of preferred and common stock at September 30, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
Issued and Outstanding Shares
-------------------------------------
Authorized Shares 1997 1996
--------------------- ----------------- -----------------
1997 1996 Shares Amount Shares Amount
--------- --------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Registered preferred
stock:
Series S-1 185,000 185,000 37,022 $370,224 36,460 $364,603
Series S-2 150,000 150,000 8,136 81,357 4,852 48,514
Series S-RP 80,000 80,000 2,560 25,600
Series S-3 150,000 6,099 60,988
--------- --------- ------ -------- ------ --------
565,000 415,000 53,817 $538,169 41,312 $413,117
========= ========= ====== ======== ====== ========
Common stock 2,000,000 2,000,000 10,000 $100,000 10,000 $100,000
========= ========= ====== ======== ====== ========
</TABLE>
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. STOCKHOLDERS' EQUITY, CONTINUED:
The Company has authorized 10,000,000 total shares of Series S
preferred stock. 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, S-3 and S-RP preferred stock.
Series S-1, S-2, S-3 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, S-3 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, S-2 and S-RP shares are callable at the sole
option of the board of directors at $100 per share. Series S-3
shares are callable at the sole option of the board of directors
at $102 per share before December 31, 1997 and at $100 per share
after December 31, 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 subsidiaries is subject to certain restrictions imposed
by statute by the respective state of domicile (see Note 14).
Dividends can only be paid out of earned surplus. Earned surplus
includes accumulated statutory basis earnings of the Company and
surplus arising from unrealized capital gains or the revaluation
of assets.
The Idaho Insurance Code presently requires the life insurance
subsidiary domiciled in the state of Idaho to maintain $1 million
in common stock and $1 million in contributed surplus. The life
insurance subsidiary domiciled in this state had an unassigned
statutory deficit and retained deficit of approximately $70,000
at September 30, 1997 and thus, is currently restricted from
paying dividends.
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. STOCKHOLDERS' EQUITY, CONTINUED:
The Arizona Insurance Code presently requires the life insurance
subsidiary domiciled in the state of Arizona to maintain $450,000
in common stock and contributed surplus. This life insurance
subsidiary domiciled in this state had an unassigned statutory
deficit and retained deficit of approximately $1,383,000 at
September 30, 1997 and thus, is currently restricted from paying
dividends.
14. STATUTORY ACCOUNTING:
The life insurance subsidiaries of the Company are required to
file statutory financial statements with state insurance
regulatory authorities in their states of domicile. Accounting
principles used to prepare these statutory financial statements
differ from generally accepted accounting principles (GAAP).
Selected differences between the statutory and the GAAP financial
statements for the insurance subsidiaries as of and for the years
ended September 30, 1997 and 1996 and for the four-month period
ended September 30, 1995, respectively, are as follows:
Statutory GAAP
----------- -----------
Stockholders' equity:
1997 $11,804,030 $16,614,551
1996 9,505,116 11,396,286
1995 2,248,969 2,743,415
Net income:
1997 $ 160,293 $ 2,409,260
1996 374,703 1,285,135
1995 (four-month period) 43,574 86,031
Unassigned statutory surplus
(deficit) and retained earnings
(deficit):
1997 (1,453,370) 3,308,279
1996 (1,002,284) 1,138,886
1995 248,969 755,299
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
1999, will likely change, to some extent, prescribed statutory
accounting practices that insurance enterprises use to prepare
their statutory financial statements.
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. STATUTORY ACCOUNTING, CONTINUED:
The Insurance Department of the State of Idaho has agreed to
allow OSL to capitalize the underwriting fees charged 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, 1997
and 1996, this permitted accounting practice increased statutory
surplus by approximately $165,000 and $435,000, respectively,
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, 1997 and 1996 was above
the minimum standards.
15. RELATED-PARTY TRANSACTIONS:
The Company receives accounting, data processing, contract
servicing and other administrative services from Metropolitan.
Charges for these services were approximately $706,000, $586,000
and $315,000 in the years ended September 30, 1997, 1996 and
1995, respectively, and were assessed based on the number of real
estate contracts and mortgage notes receivable serviced by
Metropolitan on the Company's behalf. Other indirect services
provided by Metropolitan to the Company, such as management and
regulatory compliance, were not directly charged to the Company.
Management believes that these charges are reasonable and result
in the reimbursement to Metropolitan of all significant direct
expenses incurred on behalf of the Company and its subsidiaries.
Currently, management anticipates that Metropolitan will continue
to supply these services in the future.
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. RELATED-PARTY TRANSACTIONS, CONTINUED:
The Company had the following related-party transactions with
Metropolitan and its affiliates during the years ended
September 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Real estate contracts and mort-
gage notes receivable and
other receivable investments
purchased through Metropolitan
or affiliates $63,980,678 $45,734,241 $42,479,766
Capitalized acquisition costs
charged to the Company on
purchased receivables, includ-
ing management underwriting
fees 3,384,542 1,753,206 1,967,409
----------- ----------- -----------
Total cost of receivables pur-
chased through Metropolitan $67,365,220 $47,487,447 $44,447,175
=========== =========== ===========
Real estate contracts and mort-
gage notes receivable and
other receivable investments
sold to Metropolitan or its
affiliates $ 3,815,973 $17,098,581
Gains on real estate contracts
and mortgage notes receivable
and other receivable invest-
ments sold to Metropolitan or
its affiliates 103,947 335,469
Service fees charged to Metro-
politan for property develop-
ment assistance 1,845,207 $ 2,038,202 1,250,017
Servicing and collection fees
charged by a Metropolitan
affiliate 341,000
Commissions and service fees
charged to Metropolitan on sale
of Metropolitan's debentures
and preferred stock 1,307,110 369,080 1,124,481
Commissions capitalized as
deferred costs, paid to a Metro-
politan affiliate on sale of
debentures 86,491
Commissions deducted from addi-
tional paid-in capital, paid to
a Metropolitan affiliate on sale
of preferred stock 13,249
Dividends received on Metro-
politan's preferred stock invest-
ments 240,267 200,256 256,991
Net reinsurance premiums received
from affiliate (Note 8) 26,013,283
</TABLE>
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. RELATED-PARTY TRANSACTIONS, CONTINUED:
Receivables from Metropolitan or its affiliates of $870,255 and
$1,296,290 at September 30, 1997 and 1996, respectively,
represent amounts owed to the Company related primarily to
collections on real estate contract and mortgage note receivables
and are included in other assets in the consolidated balance
sheets.
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 years ended September 30, 1997, 1996 and 1995, the
Company incurred service fees for receivable acquisition from
Metropolitan of approximately $3,385,000, $1,753,000 and
$1,967,000, 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
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,
1997, 1996 and 1995 were approximately $1,307,000, $369,000 and
$1,124,000, 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 $1,845,000, $2,038,000 and $1,250,000
during the years ended September 30, 1997, 1996 and 1995,
respectively.
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. RELATED-PARTY TRANSACTIONS, CONTINUED:
The Company's employees are included in the Metropolitan Mortgage
& Securities Co., Inc. Retirement Savings Plan (the Plan),
authorized under Section 401(k) of the Tax Reform Act of 1986, as
amended. This Plan is available to all employees over the age of
21 upon completion of six months of service in which he or she
has 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. For services performed, the contribution relating
to the Company's employees was made by Metropolitan during the
years ended September 30, 1997, 1996 and 1995.
16. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS:
Supplemental information on interest and income taxes paid during
the years ended September 30, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest paid $ 2,864,831 $ 3,914,390 $ 1,536,137
Income taxes paid (refunded) 370,569 (62,591) 128,190
</TABLE>
Non-cash investing and financing activities of the Company during
the years ended September 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Assumption of other debt payable
in conjunction with purchase
of real estate contracts and
mortgage notes receivable $ 171,435 $ 26,823 $ 162,597
Assumption of debt payable in
conjunction with foreclosure
of real estate 15,528
Real estate acquired through
foreclosure 2,256,460 1,474,233 1,232,732
Receivables originated to
facilitate the sale of real
estate 344,798 1,013,314 959,813
Transfer of securities from
held-to-maturity to available-
for-sale 999,204
</TABLE>
F-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS, CONTINUED:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Transfer of securities from
available-for-sale to trading 1,559,962
Increase in assets and liabilities
associated with purchase of
subsidiaries:
Held-to-maturity investment
securities 493,695 9,401,577
Real estate contracts and
mortgage notes receivable 32,080,899
Real estate held for sale 503,298
Deferred costs 2,614,778
Other assets 268,044 205,504
Annuity reserves 44,558,959
Accounts payable and accrued
expenses 1,653,970
</TABLE>
17. BUSINESS SEGMENT REPORTING:
The Company principally operates in one industry segment which
encompasses the investing in real estate contracts and mortgage
notes receivable, other receivables and investment securities
with funds generated from the issuance of investment
certificates, preferred stock and annuity contracts.
Additionally, the Company, through a wholly owned subsidiary,
operates a property development division, which provides services
related to the selling, marketing, designing, subdividing and
coordinating of real estate development properties.
Information about the Company's separate business segments and in
total as of and for the years ended September 30, 1997 and 1996
is as follows:
<TABLE>
<CAPTION>
1997
------------------------------------------
Property
Primary Development
Operations Operations Total
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 17,940,255 $ 1,845,207 $ 19,785,462
Income from operations 1,773,182 204,963 1,978,145
Identifiable assets, net 165,696,627 657,443 166,354,070
Depreciation and amortization 962,129 5,253 967,382
Capital expenditures 29,599 21,369 50,968
</TABLE>
F-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. BUSINESS SEGMENT REPORTING, CONTINUED:
<TABLE>
<CAPTION>
1996
------------------------------------------
Property
Primary Development
Operations Operations Total
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 12,309,367 $ 2,047,082 $ 14,356,449
Income from operations 1,269,143 213,330 1,482,473
Identifiable assets, net 116,817,327 449,353 117,266,680
Depreciation and amortization 490,890 2,616 493,506
Capital expenditures 26,063 47,528 73,591
</TABLE>
In June 1997, SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," (SFAS No. 131) was issued.
SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments
in annual financial statements and requires that those
enterprises report selected information about operating segments
in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. This Statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report
information about major customers.
This Statement is effective for financial statements for periods
beginning after December 15, 1997. The Company has not yet
determined the effect that the application of this Statement will
have on the disclosures of its business segments.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS:
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.
F-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
PUBLICLY TRADED INVESTMENT SECURITIES - Fair value is
determined by quoted market prices.
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE - For
receivables, the discount rate is estimated using rates
currently offered for receivables of similar characteristics
that reflect the credit and interest rate risk inherent in the
receivable. For residential mortgage notes receivable, 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
investment certificates 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.
The estimated fair values of the following financial
instruments as of September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997
---------------------------
Carrying
Amounts Fair Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 8,461,101 $ 8,461,101
Investments:
Affiliated companies 4,522,425 4,522,425
Trading securities 1,743,836 1,743,836
Available-for-sale securities 5,959,470 5,959,470
Held-to-maturity securities 7,241,209 7,206,543
Real estate contracts and mortgage
notes receivable 103,082,874 107,809,335
Other receivable investments 20,588,202 22,382,133
Financial liabilities:
Investment certificates - principal
and compound interest 49,627,286 52,714,599
Debt payable - principal 199,286 211,684
</TABLE>
F-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
<TABLE>
<CAPTION>
1996
---------------------------
Carrying
Amounts Fair Value
------------ ------------
<S> <C> <C>
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 199,286 3,840,375
</TABLE>
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.
F-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS:
The condensed balance sheets of Summit Securities ("Summit" or
the "parent company") at September 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 803,669 $ 1,466,892
Investments 5,433,522 4,605,199
Real estate contracts and mortgage notes
receivable and other receivable
investments 35,302,772 29,540,599
Real estate held for sale, net (including
foreclosed real estate received in
satisfaction of debt of $639,158 and
$761,980) 1,810,050 761,980
Equity in subsidiary companies 13,838,358 10,338,846
Deferred costs, net 1,335,661 1,118,781
Other assets, net 557,096 95,953
Deferred income taxes 307,276
Receivables from affiliates 513,176
------------ ------------
Total assets $ 59,388,404 $ 48,441,426
============ ============
LIABILITIES
Investment certificates and accrued
interest $ 50,406,991 $ 42,823,871
Debt payable 56,453 38,417
Accounts payable and accrued expenses 341,522 65,961
Payable to affiliates 826,795
Deferred income taxes 154,403
------------ ------------
Total liabilities 51,631,761 43,082,652
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $10 par (liquidation
preference, $5,381,690 and $4,131,170) 538,169 413,117
Common stock, $10 par 100,000 100,000
Additional paid-in capital 3,326,007 2,269,137
Retained earnings 3,741,613 2,586,654
Net unrealized gains (losses) on
investments 50,854 (10,134)
------------ ------------
Total stockholders' equity 7,756,643 5,358,774
------------ ------------
Total liabilities and stockholders'
equity $ 59,388,404 $ 48,441,426
============ ============
</TABLE>
F-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Summit's condensed statements of income for the years ended
September 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Interest and earned
discounts $ 4,048,087 $ 4,006,818 $ 3,709,749
Dividends 240,267 200,256 256,991
Fees, commissions, service
and other income 95,751 83,375 104,571
Real estate sales 1,342,030 434,500 941,500
Realized net gains on sales
of investments and
receivables 289,880 167,301 318,989
------------ ------------ ------------
Total revenues 6,016,015 4,892,250 5,331,800
------------ ------------ ------------
Expenses:
Interest expense 4,269,214 3,710,164 3,251,334
Cost of real estate sold 1,443,014 479,038 929,481
Provision for losses on
real estate assets 289,308 7,353 305,850
Salaries and employee
benefits 107,941 70,368
Other operating expenses 844,978 665,204 335,356
------------ ------------ ------------
Total expenses 6,954,455 4,932,127 4,822,021
------------ ------------ ------------
Income (loss) from operations
before income taxes and
equity in net income of
subsidiaries (938,440) (39,877) 509,779
Income tax benefit (provision) 404,837 55,956 (128,014)
------------ ------------ ------------
Income (loss) before equity in
net income of subsidiaries (533,603) 16,079 381,765
Equity in net income of
subsidiaries 2,384,843 1,228,443 205,794
------------ ------------ ------------
Net income $ 1,851,240 $ 1,244,522 $ 587,559
============ ============ ============
</TABLE>
F-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Summit's condensed statements of cash flows for the years ended
September 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,851,240 $ 1,244,522 $ 587,559
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities (1,230,286) (2,343,987) 1,198,232
------------ ------------ ------------
Net cash provided by (used in)
operating activities 620,954 (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 5,711,139 7,334,388 4,534,137
Proceeds from sales of real estate
contracts and mortgage notes
receivable and other receivable
investments 7,047,780 11,684,033 14,996,805
Acquisition of real estate contracts
and mortgage notes and other
receivable investments (18,740,065) (13,719,365) (25,763,742)
Proceeds from real estate sales 768,695 37,323 117,710
Purchase of investments (715,277) (1,582,774)
Additions to real estate held for
sale (1,910,347) (211,464) (75,353)
Net change in investment in and
advances to subsidiaries 284,308 (6,819,434) (2,661,218)
------------ ------------ ------------
Net cash used in investing
activities (7,553,767) (3,277,293) (8,851,661)
------------ ------------ ------------
Cash flows from financing activities:
Repayments to banks and others (14,719) (93,016) (193,631)
Debt issuance costs (651,450) (662,402) (476,697)
Proceeds from issuance of invest-
ment certificates 13,262,761 13,291,967 8,585,470
Repayments of investment certi-
ficates (6,812,643) (8,571,918) (2,847,347)
Contingent purchase price paid on
subsidiary purchased from related
party (249,721)
Issuance of preferred stock 1,181,922 539,041 371,956
Cash dividends on preferred stock (446,560) (333,606) (309,061)
------------ ------------ ------------
Net cash provided by financing
activities 6,269,590 4,170,066 5,130,690
------------ ------------ ------------
</TABLE>
F-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net decrease in cash and cash
equivalents (663,223) (206,692) (1,935,180)
Cash and cash equivalents at
beginning of year 1,466,892 1,673,584 3,608,764
------------ ------------ ------------
Cash and cash equivalents at end
of year $ 803,669 $ 1,466,892 $ 1,673,584
============ ============ ============
</TABLE>
Non-cash investing and financing activities not included in
Summit's condensed statements of cash flows for the years ended
September 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Receivables originated to facilitate
the sale of real estate $ 573,335 $ 297,177 $ 823,790
Real estate acquired through
foreclosure 834,620 901,175 933,534
Assumption of debt payable in conjunc-
tion with acquisition of real estate
contracts and mortgage notes
receivable or foreclosure of real
estate 32,755 26,823 178,125
Transfer of securities from available-
for-sale to trading 908,484
</TABLE>
Accounting policies followed in the preparation of the preceding
condensed financial statements of Summit (parent company only)
are the same as those policies described in the consolidated
financial statements except that the equity method was used in
accounting for the investments in and net income from
subsidiaries.
F-49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
At September 30, 1997 and 1996, Summit's debt payable consists of
the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Real estate contracts and mortgage notes payable,
interest rates ranging from 6.5% to 8.5%, due in
installments through 2008; collateralized by
senior liens on certain of the Company's real
estate contracts, mortgage notes and real estate
held for sale $ 55,587 $ 37,875
Accrued interest payable 866 542
------------ ------------
$ 56,453 $ 38,417
============ ============
</TABLE>
Aggregate amounts of principal and accrued interest due on the
parent company's debt payable at September 30, 1997 are expected
to be as follows:
Fiscal Year Ending
September 30,
------------------
1998 $ 10,943
1999 10,801
Thereafter 34,709
----------
$ 56,453
==========
At September 30, 1997 and 1996, Summit's investment certificates
consisted of the following:
Annual Interest Rates 1997 1996
----------------------------- ----------- -----------
6% to 7% $ 758,446 $ 1,547,283
7% to 8% 2,368,671 1,946,646
8% to 9% 30,951,990 26,380,522
9% to 10% 10,672,322 8,370,330
10% to 11% 143,396 199,926
----------- -----------
44,894,825 38,444,707
Compound and accrued interest 5,512,166 4,379,164
----------- -----------
$50,406,991 $42,823,871
=========== ===========
F-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Maturities of the parent company's investment certificates are as
follows:
Fiscal Year Ending
September 30,
------------------
1998 $11,831,000
1999 8,878,000
2000 7,292,000
2001 11,447,000
2002 7,437,000
Thereafter 3,521,991
-----------
$50,406,991
===========
Summit had the following related-party transactions with its
various subsidiaries and affiliated entities:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Real estate contracts, mortgage notes
and other receivable investments
purchased through Metropolitan or
affiliates $ 16,771,405 $ 12,098,944 $ 27,624,227
Contract acquisition costs charged to
the Company on purchased real
estate contracts, mortgage notes
and other receivable investments,
including management underwriting
fees 709,875 531,643 1,177,978
------------ ------------ ------------
Total costs of real estate contracts,
mortgage notes and other receivable
investments purchased through
Metropolitan $ 17,481,280 $ 12,630,587 $ 28,802,205
============ ============ ============
Proceeds on sales of real estate
contracts, mortgage notes and
other receivable investments to
Metropolitan affiliates $ 4,054,130 $ 555,633 $ 13,345,563
Realized net gains on sale of
receivables to Metropolitan
affiliates 59,251 -- 206,947
Dividends received on Metropolitan's
preferred stock investments 240,267 200,256 256,991
</TABLE>
F-51
<PAGE> 55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
MANAGEMENT
Directors and Executive Officers
(As of December 31, 1997)
<TABLE>
<CAPTION>
Name Age Position
____ ___ _____________________________________
<S> <C> <C>
Tom Turner 47 President/Director
Philip Sandifur 26 Vice President/Director
Greg Gordon 44 Secretary/Treasurer/Director
Clayton Rudd 62 President, Old Standard
Robert Potter 70 Director
</TABLE>
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 and continues to be 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 currently active
with the Consolidated Group's commercial lending activities. From 1994 to
1997, he was principally active as President of Summit Trading Services, Inc.,
a wholly owned subsidiary of Summit's parent company, National Summit.
Greg Gordon was elected Secretary/Treasurer of Summit on October 31,
1995. He joined Metropolitan in April of 1989 and started Metropolitan's
demography department, which continues to encompass his principal
responsibilities. 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.
Clayton Rudd was elected President of Old Standard in 1994. From 1990
to 1994, he was Vice President of Old Standard.
<PAGE> 57
Previously, he had been employed by Western United since 1982 in marketing.
Prior to that time, he had worked for twenty years in the insurance industry
in marketing and sales related positions.
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.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation received by
Summit's executive officers and other highly compensated executives during the
fiscal years specified. All other executive officers of Summit received less
than $100,000 in compensation. No executive officer is a party to, or a
participant in, any pension plan, contract or other arrangement providing for
cash or non cash compensation except the Consolidated Group's 401(k) plan.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
(as of September 30, 1997)
(a) (b) (c) (d)
___________________________ ____ __________ ___________
Bonus/
Name and Principal Position Year Salary ($) Commissions
___________________________ ____ __________ ___________
<S> <C> <C> <C>
Tom Turner 1997 $ 85,000 $ --
President, Summit* 1996 $ 80,833 $ --
1995 $ 59,000 $ --
<PAGE> 58
Clayton Rudd 1997 $ 108,000 $ 39,581
President, Old Standard 1996 $ 108,000 $ 19,747
1995 $ 106,000 $ --
<FN>
* The salary received by Mr. Turner is principally paid by and related to his
responsibilities as an employee of Metropolitan. Mr. Turner devotes such time
as is necessary to the business of Summit, and Summit contributes to his
salary commensurate with the time devoted.
</TABLE>
DIRECTOR COMPENSATION
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Summit does not have a formal compensation committee of the Board of
Directors. Executive officer compensation is determined by C. Paul Sandifur,
Jr., the sole common shareholder of the Consolidated Group. There are no
compensation committee interlocks between the above described individuals and
another entity's compensation committee. None of the above described
individuals serves as an executive officer of another entity outside the
Consolidated Group.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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, 1997.
<TABLE>
<CAPTION>
Shares of
Name and Address Common Stock % of Class
________________ ____________ __________
<S> <C> <C>
National Summit Corp. 10,000 100%
929 West Sprague Avenue
Spokane, WA 99201
</TABLE>
<PAGE> 59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Names and relationship of parties/persons involved in related party
transactions
Summit was originally organized as a wholly owned subsidiary of
Metropolitan. On September 9, 1994, the controlling interest in Summit was
acquired by National Summit Corp., a Delaware corporation which is wholly
owned by C. Paul Sandifur, Jr. The change in control was made pursuant to a
reorganization wherein Summit redeemed all the common shares held by its
former parent company, Metropolitan, which consisted of 100% of the
outstanding common stock of Summit. Contemporaneous with this redemption,
Summit issued 10,000 shares of common stock to National Summit Corp., a
Delaware Corporation, for $100,000. In addition, various investors in
Metropolitan's common and preferred stock, including members of Mr. Sandifur's
immediate family acquired 30,224 shares of Summit's Preferred Stock Series S-1
for $100 per share in exchange for preferred and common shares of Metropolitan
with a value of approximately $3 million. Following this sale, Metropolitan
has continued to provide, for a fee, principally all the management services
to Summit. See "BUSINESS-Receivable Investments" under Item 1.
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.
Description of Related Party Transactions
Transactions between Metropolitan, its subsidiaries and companies within
the Consolidated Group take place in the normal course of business. Such
transactions include rental of office space, provision of administrative and
data processing support, accounting and legal services. See Note 15 to the
Consolidated Financial Statements under Item 8. In addition, Metropolitan and
its subsidiaries provide services to various companies within the Consolidated
Group, as described more fully hereinbelow.
<PAGE> 60
Summit, Old Standard and Arizona Life obtain substantially all of their
Receivable management and servicing support from Metropolitan through a
Management, Receivable Acquisition and Servicing Agreement. In 1997, the
Consolidated Group paid compensation to Metropolitan for Receivable
acquisitions of approximately $3,385,000 and fees for servicing by Metwest of
approximately $341,000. See "BUSINESS-Receivable Investments" under Item 1 &
Note 15 to the Consolidated Financial Statements under Item 8. 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. The amount of deferred annuity contracts
reinsured by Old Standard totaled approximately $28,359,000 at September 30,
1997. See "BUSINESS-Annuity Operations-Reinsurance" under Item 1.
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, 1997, Summit paid or
accrued commissions to MIS in the amount of $434,795 upon the sale of
$13,262,761 of certificates and commissions of $68,598 upon the sale of
$1,181,922 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.
MIS, a broker-dealer and former subsidiary of Metropolitan, sells the
publicly registered securities of Metropolitan and Summit. Metropolitan paid
commissions to MIS for the sale of Metropolitan's securities pursuant to the
terms of written Selling Agreements. During the fiscal years ended September
30, 1997, 1996 and 1995 Metropolitan paid commissions to MIS in the amounts of
$1,151,637, $203,946 and $1,461,033, on sales of debt securities in the
amounts of $38,510,520, $9,125,303 and $53,120,179, respectively. During the
fiscal years ended September 30, 1997, 1996 and 1995, Metropolitan paid
commissions to MIS in the amounts of $0, $8,216 and $152,427 on sales of
preferred stock in the amounts of $2,135,714, $2,143,930 and $4,665,720,
respectively. Additionally, in 1997, 1996 and 1995, Metropolitan paid
commissions to MIS in the amounts of $155,473, $156,918 and $140,555 on sales
of preferred stock through an in-house trading list.
Summit Property Development has entered into an Agreement with
Metropolitan to provide property development services to
<PAGE> 61
Metropolitan for a fee. During the year ended September 30, 1997 the fee was
approximately $1.8 million. See "BUSINESS-Property Development Services"
under Item 1.
During April 1996, C. Paul Sandifur, Jr., President of Metropolitan and
controlling shareholder of Metropolitan and the Consolidated Group, sold to
Summit nineteen shares of stock in Consumers Group Holding Company (a
subsidiary of Metropolitan) for $1.5 million. The purchase price was paid in
cash.
<PAGE> 62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Included in Part II, Item 8 of this report:
Report of Independent Accountants
Consolidated Balance Sheets at September 30, 1997 and 1996
Consolidated Statements of Income for the Years Ended September
30, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(a) 2. Financial Statements Schedules
Included in Part IV of this report:
Report of Independent Accountants on Financial Statement Schedules
Schedule I - Summary of Investments other than Investments in
Related Parties
Schedule II - Valuation and Qualifying Accounts and Reserves
Schedule III - Supplementary Insurance Information
Schedule IV - Mortgage Loans on Real Estate
Other Schedules are omitted because of the absence of conditions
under which they are required or because the required information
is given in the financial statements or notes thereto.
(a) 3. Exhibits
3. Articles of Incorporation of the Company (Exhibit
3(a) to (Registration No. 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,
<PAGE> 63
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.
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(d) 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
<PAGE> 64
& 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.
*12. Statement regarding computation of ratios.
*21. Subsidiaries of Registrant.
23. Consent of Experts, See Item 14(a)2. Report of
Independent Accountants on Financial Statement
Schedules.
*27. Financial Data Schedule.
*Filed herewith
(b) Reports on Form 8-K
None.
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
The Directors and Stockholders
Summit Securities, Inc.
Our report on the consolidated financial statements of Summit
Securities, Inc. and subsidiaries is included in Item 8 herein. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedules listed in Item 14 of this Form 10-K.
In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to
be included therein.
/s/ COOPERS & LYBRAND L.L.P.
_____________________________
Coopers & Lybrand L.L.P.
Spokane, Washington
November 21, 1997
<PAGE> 66
SCHEDULE I
SUMMIT SECURITIES, INC.
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
September 30, 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D
______________________________ ____________ ___________ ______________
Amount At
Amortized Market Which Shown On
Type of Investments Cost Value Balance Sheet
______________________________ ____________ ___________ ______________
<S> <C> <C> <C>
FIXED MATURITIES
Investments:
U.S. Government and
Government Agencies and
Authorities $ 10,213,858 $10,256,134 $ 10,289,392
Corporate Bonds 1,000,569 999,161 1,000,569
Mortgage Backed Bonds 3,560,692 3,654,554 3,654,554
____________ ___________ ______________
TOTAL FIXED MATURITIES $ 14,775,119 $14,909,849 $ 14,944,515
============ =========== ==============
Real Estate Contracts and
Mortgage Notes Receivables $103,623,728 $ 103,623,728
============ ==============
Other Investment Receivables $ 20,588,202 $ 20,588,202
============ ==============
Real Estate Held for Sale $ 2,819,845 $ 2,819,845
============ ==============
Other Assets-Policy Loans $ 8,616 $ 8,616
============ ==============
TOTAL INVESTMENTS $141,815,510 $ 141,984,906
============ ==============
</TABLE>
<PAGE> 67
SCHEDULE II
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Additions Additions Deductions
from (Reductions) and
Balance at Acquisition Charged to Accounts Balance
Beginning of Costs and Written Off at End
Description of Year Subsidiaries Expenses (Recovery) of Year
_____________________________________ __________ ____________ ____________ ___________ ___________
<S> <C> <C> <C> <C> <C>
Allowance for losses deducted from
real estate contracts and mortgage
notes receivable on balance sheet
1997 $ 974,487 $ -- $ 386,525 $ 207,734 $1,153,278
1996 765,130 -- 212,600 3,243 974,487
1995 250,572 310,957 103,950 (99,651) 765,130
Allowance for losses deducted from
real estate held for sale on
balance sheet
1997 $ 206,785 $ -- $ 599,910 $ 349,268 $ 457,427
1996 91,139 -- 277,482 161,836 206,785
1995 50,300 11,591 341,431 312,183 91,139
Allowance for losses on accounts
and notes receivable deducted
from other assets on balance sheet
1997 $ 10,375 $ -- $ 9,500 $ (2,500) $ 22,375
1996 408 -- 12,000 2,033 10,375
1995 4,055 320 7,200 11,167 408
</TABLE>
<PAGE> 68
SCHEDULE III
Page 1 of 2
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Future Policy
Deferred Benefits Other
Policy Losses, Claims Policy Claims
Acquisition and Loss Unearned and Benefits
Cost Expenses Premiums Payable
___________ ______________ ________ _____________
<S> <C> <C> <C> <C>
September 30, 1997
Annuities
$ 6,504,034 $ 105,339,688 $ -- $ --
=========== ============== ======== =============
September 30, 1996
Annuities
$ 3,853,136 $ 62,439,855 $ -- $ --
=========== ============== ======== =============
</TABLE>
<PAGE> 69
SCHEDULE III
Page 2 of 2
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Benefits Amortization
Claims of Deferred
Net Losses and Policy Other
Premium Investment Settlement Acquisition Operating
Revenue Income Expenses Costs Expenses
________ __________ __________ ____________ _________
<S> <C> <C> <C> <C> <C>
September 30, 1997
Annuities $111,999 $8,555,418 $5,071,732 $ 422,386 $ 295,114
======== ========== ========== ============ =========
September 30, 1996
Annuities $ 45,348 $5,163,811 $3,702,324 $ 84,773 $ 345,892
======== ========== ========== ============ =========
</TABLE>
<PAGE> 70
SCHEDULE IV
Page 1 of 3
SUMMIT SECURITIES, INC.
MORTGAGE LOANS ON REAL ESTATE
September 30, 1997
<TABLE>
<CAPTION>
Less than 1% of the contracts are subject to variable interest rates.
Interest rates range from 0% to 19% with rates principally (76% 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.
Interest Carrying Delinquent Number of
Number of Rates Amount of Principal Delinquent
Description Receivables Principally Receivables Amount Receivables
___________ ___________ ___________ ____________ ___________ ___________
<S> <C> <C> <C> <C> <C>
RESIDENTIAL
First Mortgage > $75,000 149 7-10% $ 18,572,318 $ 920,167 8
First Mortgage > $40,000 377 8-10% 20,507,806 1,009,439 16
First Mortgage < $40,000 852 8-12% 17,737,192 949,229 51
Second or Lower > $75,000 9 8-10% 1,038,074 -- --
Second or Lower > $40,000 35 8-10% 1,865,575 -- --
Second or Lower < $40,000 193 8-12% 3,921,663 212,308 10
COMMERCIAL
First Mortgage > $75,000 133 8-10% 25,535,365 859,986 5
First Mortgage > $40,000 66 8-10% 3,928,370 209,845 3
First Mortgage < $40,000 86 8-18% 1,462,141 6,706 1
Second or Lower > $75,000 10 8-12% 1,047,398 -- --
Second or Lower > $40,000 16 8-11% 906,314 -- --
Second or Lower < $40,000 26 8-10% 525,973 42,952 3
FARM, LAND AND OTHER
First Mortgage > $75,000 40 8-12% 5,720,971 -- --
First Mortgage > $40,000 53 8-10% 2,800,281 63,955 1
First Mortgage < $40,000 101 8-10% 2,754,784 74,366 2
<PAGE> 71
Second or Lower > $75,000 2 7% 328,833 208,007 1
Second or Lower > $40,000 2 9-12% 109,905 -- --
Second or Lower < $40,000 13 8-10% 278,475 29,040 1
Unrealized discounts, net
of unamortized
acquisition costs, on
Receivables purchased at
a discount (5,958,564)
Accrued Interest
Receivable 1,694,132
Allowance for Losses (1,153,278)
____________ __________
CARRYING VALUE $103,623,728 $4,586,000
============ ==========
<FN>
The principal amount of Receivables subject to delinquent principal or
interest is defined as being in arrears for more than three months but which
are still accruing interest.
</TABLE>
<PAGE> 72
SCHEDULE IV
Page 2 of 3
SUMMIT SECURITIES, INC.
LOANS ON REAL ESTATE
September 30, 1997
<TABLE>
<CAPTION>
The contractual maturities of the aggregate amounts of Receivables
(face amount) are as follows:
Residential Commercial Farm, Land, Total
Principal Principal Other Principal Principal
________________ _______________ _______________ _______________
<S> <C> <C> <C> <C>
October 1997 - September 2000 $ 9,317,899 $ 7,694,381 $ 3,826,225 $ 20,838,505
October 2000 - September 2002 7,563,205 5,832,081 2,408,582 15,803,868
October 2002 - September 2004 6,046,022 4,629,040 1,177,112 11,852,174
October 2004 - September 2007 12,085,385 6,903,142 1,865,980 20,854,507
October 2007 - September 2012 14,799,647 5,269,468 1,429,989 21,499,104
October 2012 - September 2017 6,802,272 1,059,377 799,161 8,660,810
October 2017 - Thereafter 7,028,198 2,018,072 486,200 9,532,470
____________ ____________ ____________ ____________
$ 63,642,628 $ 33,405,561 $ 11,993,249 $109,041,438
============ ============ ============ ============
</TABLE>
<PAGE> 73
SCHEDULE IV
Page 3 of 3
SUMMIT SECURITIES, INC.
LOANS ON REAL ESTATE
September 30, 1997
<TABLE>
<CAPTION>
For the Years Ended September 30, 1997
_________________________________________
1997 1996 1995
____________ ___________ ___________
<S> <C> <C> <C>
Balance at beginning of period $ 80,008,753 $60,117,219 $27,282,991
____________ ___________ ___________
Additions during period
New subsidiary acquisition -- -- 32,080,899
New Receivables-cash 59,193,794 40,100,330 26,130,804
Loans to facilitate the
sale of real estate held-
non cash 344,798 1,013,314 959,813
Assumption of other debt
payable in conjunction
with acquisition of new
Receivables-non cash 171,435 26,823 162,597
Increase in accrued interest (157,804) 1,005,273 388,167
____________ ___________ ___________
Total additions 59,552,223 42,145,740 59,722,280
____________ ___________ ___________
Deductions during period
Collections of principal-
cash 13,034,662 13,874,707 6,567,012
Cost of Receivables sold 20,297,105 6,711,562 19,578,720
Foreclosures-non cash 2,426,690 1,458,580 1,083,277
Decrease in accrued interest -- -- --
Discount amortization -- -- (544,558)
Increase in allowances for
losses 178,791 209,357 203,601
____________ ___________ ___________
Total deductions 35,937,248 22,254,206 26,888,052
____________ ___________ ___________
Balance at end of period $103,623,728 $80,008,753 $60,117,219
============ =========== ===========
</TABLE>
<PAGE> 74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SUMMIT SECURITIES, INC.
/s/ Tom Turner
______________________________________________
Tom Turner, President
January 7, 1998
Date
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
_________ _____ ____
<S> <C> <C>
/s/ TOM TURNER
_________________________ President, Director 1/7/98
Tom Turner
/s/ PHILIP SANDIFUR
_________________________ Vice President, Director 1/7/98
Philip Sandifur
/s/ GREG GORDON
_________________________ Secretary, Treasurer, 1/7/98
Greg Gordon Director
/s/ STEVEN CROOKS
_________________________ Principal Financial 1/7/98
Steven Crooks Officer, Principal
Accounting Officer
</TABLE>
SUMMIT SECURITIES, INC.
AND
FIRST TRUST NATIONAL ASSOCIATION, TRUSTEE
FIRST SUPPLEMENTAL INDENTURE
Dated as of December 31, 1997
Relating to an issue of Investment Certificates, Series B
Supplemental to Indenture dated as of July 25, 1990
THIS FIRST SUPPLEMENTAL INDENTURE, dated as of December 31, 1997 is
between Summit Securities, Inc., an Idaho corporation (hereinafter called
"Summit" or the "Company"), having its principal office at 929 West Sprague
Avenue, Spokane, Washington 99201, and First Trust National Association, a
national banking association (hereinafter called the "Trustee"), having
offices at Two Union Square, 601 Union Street, Suite 2120, Seattle, Washington
98101, and is supplemental to an Indenture dated as of November 15, 1990 (the
"Indenture") between the Company and West One Bank, Idaho, N.A., the prior
Trustee.
RECITALS OF THE COMPANY
The Company previously executed and delivered to the Trustee the
Indenture that provides for the issuance in one or more series of the
Company's Investment Certificates (hereinafter called the "Certificates"), in
accordance with the Indenture. The initial series of Certificates issued
under the Indenture is known as the Company's Investment Certificates, Series
A, limited to the aggregate principal amount of $20,000,000.
The Board of Directors of the Company has established a new series of
Certificates to be designated "Investment Certificates, Series B," not limited
in aggregate principal amount, and has authorized an initial issue of
$40,000,000 principal amount
<PAGE> 76
thereof. The Company has complied or will comply with all provisions
required to issue additional Certificates under the Indenture.
The Company desires to execute and deliver this First Supplemental
Indenture, in accordance with the provisions of the Indenture, for the purpose
of providing for the creation of a new series of Certificates, designating the
series to be created and specifying the form and provisions of the
Certificates of such series.
All things necessary to make the Investment Certificates, Series B, when
executed by the Company, authenticated by the Trustee, delivered as authorized
by the Company and duly issued by the Company, the valid obligations of the
Company, and to make this First Supplemental Indenture a valid agreement of
the Company, in accordance with their or its terms, have been done.
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH that, for
and in consideration of the premises and the purchase of the Investment
Certificates, Series B, by the Holders thereof, it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders of the Invest
ment Certificates, Series B, as follows:
ARTICLE ONE
Investment Certificates, Series B and
Certain Provisions Relating Thereto
Section 1-1. Terms of Investment Certificates, Series B.
There shall be hereby established a series of Certificates to be
designated "Investment Certificates, Series B." The aggregate principal
amount of Investment Certificates, Series B, at any one time Outstanding shall
not be limited. The Investment Certificates, Series B, shall be issued in the
maturities and denominations with proposed interest rates upon the unpaid
principal amounts thereof as determined by the Company:
<TABLE>
<CAPTION>
Interest Minimum
Maturity Rate Denomination
_____________ ________ ____________
<S> <C> <C>
<PAGE> 77
</TABLE>
The maturities, interest rates and minimum denominations of Investment
Certificates, Series B, may be changed at any time by the Company, but no such
change will affect any Investment Certificates, Series B, issued prior to such
change. Holders of Investment Certificates, Series B, may select a monthly,
quarterly, semi-annual or annual Interest Payment Date or may elect to allow
interest to be compounded and paid as set forth in the form of the Investment
Certificates, Series B, in Section 1-2 hereof. Payment of the principal of
and interest on Investment Certificates, Series B will be made at the office
or agency of the Company maintained for that purpose in Spokane, Washington.
All such payments shall be made in such coin or currency of the United States
of America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that payment of interest may be made at the
option of the Company by check mailed to the address of the Person entitled
thereto as such address shall appear on the Certificate Register. In the
event of the death of any registered owner of an Investment Certificate,
Series B, any party entitled to receive some or all of the proceeds of such
Investment Certificate, Series B, may elect to have his or her share of such
Investment Certificate, Series B prepaid under the terms set out in the form
of the Investment Certificates, Series B in Section 1-2 hereof.
Global Certificate shall mean the Investment Certificate, Series B, in
the form shown in Section 1-2 hereof, executed by the Company and registered
in the name of the Company or its nominee and authenticated by the Trustee.
The Trustee shall, upon request by the Company, authenticate for original
issue up to $40,000,000 principal amount of Certificates, Series B. Such
authentication of the Global Certificate shall satisfy the authentication
requirement of the Indenture with respect to the Certificates, Series B. The
Company may amend and/or supplement the Global Certificate, and may increase
and/or decrease the principal amount of the Global Certificate from time to
time. The Trustee shall authenticate any endorsement to the Global
Certificate to reflect such amendment, supplement, increase or decrease in
accordance with instructions given by the Company. The Global Certificate,
and any endorsements thereto shall be deposited with the Company.
Book Entry Certificates
The Certificates may be issued to investors in book entry form, without
the issuance of individual certificates, and without the requirement for
authentication by the Trustee of such book entry investments. Investors who
hold Investment Certificates in book entry form shall be considered to be
Certificateholders and shall have all the rights and privileges of a
Certificateholder
<PAGE> 78
pursuant to the Indenture, notwithstanding that record of their Certificate
investment is represented in book entry form. The Company shall maintain
accurate records of the individual holders of such Certificates. The Company
shall promptly provide the Trustee with a listing of all book entry holders of
the Certificates, Series B at such times and from time to time, and in such
format as the Trustee may reasonably request.
With respect to Global Certificate, the ownership of which shall be
registered in the name of the Company or its nominee, except as otherwise
provided in the Indenture as herein amended, the Trustee shall have no
responsibility or obligation to any person for whom the Company or its nominee
beneficially holds an interest in book entry form in the Global Certificate.
Without limiting the generality of the foregoing, the Trustee shall have no
responsibility or obligation with respect to (i) the accuracy of the records
of the Company and its nominee with respect to the beneficial ownership
interests of Certificateholders in the Global Certificate; (ii) the delivery
to Certificateholders of any notice required to be given by the Company with
respect to their Investment Certificates; (iii) the payment by the Company or
its nominee to any Certificateholder, as shown on the books of the Company, of
principal or interest with respect to an Investment Certificate; or (iv) any
other action taken by the Company or its nominee as registered owner of the
Global Certificate.
Section 1-2. Form of Investment Certificates, Series B.
SUMMIT SECURITIES, INC.
929 West Sprague Avenue, Spokane, Washington 99201
Investment Certificate, Series B
Issued To ____________________________________
Principal Amount _____________________________
Issue Date ___________________________________
Maturity Date ________________________________
Interest Rate ________________________________
Certificate Number ___________________________
Interest Payable _____________________________
The Certificate
This is a duly authorized Certificate of Summit Securities, Inc.
("Summit"). This Certificate is issued under an Indenture dated November 15,
1990 and a First Supplemental Indenture dated as of December 31, 1997 (the
"Indenture") between Summit and First Trust National Association as Trustee
(the "Trustee"). The Indenture permits Summit to issue an unlimited amount of
Certificates, the terms of which may vary according to series. This
Certificate is of the series stated above; that series is
<PAGE> 79
limited in aggregate principal amount as stated in the Indenture (or
supplemental indentures). The Indenture (and supplemental indentures)
contains statements of the rights of the Certificateholders, Summit and the
Trustee and provisions concerning authentication and delivery of the
Certificates. Definitions of certain terms used in this Certificate are also
found in the Indenture (and supplemental indentures).
Payment of Principal
For value received, Summit promises to pay the principal amount of this
Certificate at the maturity date stated above. Payment will be made to the
Person to whom this Certificate is issued, or registered assigns.
Payment of Interest
Summit promises to pay interest on the principal amount of this
Certificate from the issue date until the principal amount is paid or made
available for payment. Interest will be computed at the annual interest rate
stated above. Interest will be payable or compounded as stated above or as
otherwise elected by the Person entitled to payment of interest. Summit will
pay interest to the Person in whose name this Certificate (or one or more
Predecessor Certificates) is registered on the books of Summit at the close of
business on the Regular Record Date for the payment of interest. The Regular
Record Date is the 15th day of the calendar month immediately preceding an
Interest Payment Date.
Compounding of Interest
If the Person entitled to payment of interest so elects, Summit will
compound interest rather than pay interest in installments. Interest will be
compounded on a semi-annual basis at the interest rate stated above from the
Interest Payment Date immediately preceding receipt by Summit of the
compounding election. Interest will be compounded from the issue date of the
Certificate if Summit receives the compounding election prior to the first
Interest Payment Date. Interest will be compounded until the maturity date
stated above and will be paid on such date. Prior to Maturity, however,
Summit will pay at the Certificateholder's request the interest accumulated in
the last two semi-annual compounding periods before Summit receives the
request, together with the interest accrued from the end of the last such semi-
annual period. Interest compounded prior to the last two semi-annual
compounding periods is payable only on the maturity date stated above.
Alternative Installment Payments of Principal and Interest
<PAGE> 80
If so elected by the Person to whom this Certificate is originally
issued, Summit promises, in lieu of the foregoing provisions for payment of
principal and interest, to pay equal monthly payments of principal and
interest, commencing thirty days from the Issue Date, until the Maturity Date,
at which time the remaining Principal Amount, if any, together with all unpaid
accrued interest, shall be paid. The amount of each monthly installment shall
be the amount necessary to amortize the Principal Amount at the specified
Interest Rate during the Amortization Term specified by the Certificateholder.
Prepayment on Death
In the event of a Certificateholder's death, any Person entitled to
receive some or all of the proceeds of this Certificate may elect to have his
or her share of the principal and any unpaid interest prepaid in full in five
consecutive equal monthly installments. Interest on the declining principal
balance of that share will continue to accrue at the interest rate stated
above. Any request for prepayment must be made in writing to Summit. The
request must be accompanied by the Certificate and evidence, satisfactory to
Summit, of the Certificateholder's death. Before Summit prepays the
Certificate, it may require additional documents or other material it
considers necessary to establish the Persons entitled to receive some or all
of the proceeds of the Certificate. Summit may also require proof of other
facts relevant to its obligation to prepay the Certificate in the event of
death.
Miscellaneous
The provisions on the reverse are part of this Certificate.
This Certificate is not entitled to any benefit under the Indenture nor
is this Certificate valid or obligatory for any purpose unless the certificate
of authentication below has been executed by the Trustee by manual signature.
This Certificate is not insured by the United States government, the
State of Idaho nor any agency thereof.
IN WITNESS WHEREOF, Summit has caused this Certificate to be duly
executed under its corporate seal.
<PAGE> 81
SUMMIT SECURITIES, INC.
(Corporate Seal)
Attest:________________________ By:___________________________
Secretary or Chairman of the Board,
Assistant Secretary President or Vice President
CERTIFICATE OF AUTHENTICATION
This is one of the Certificates referred to in the within-mentioned
Indenture.
FIRST TRUST NATIONAL ASSOCIATION,
as Trustee
By:______________________________
Authorized Officer
<PAGE> 82
[FORM OF REVERSE OF INVESTMENT CERTIFICATE, SERIES B]
Transfer and Exchange of Global Certificate
Transfer and exchange of this Global Certificate is conditioned by
certain provisions in the Indenture, as amended. To effect a transfer, the
registered owner must surrender this Certificate at the Company('s) office or
agency in Spokane, Washington. This Certificate must be duly endorsed or
accompanied by a written instrument of transfer satisfactory to the
Company('s). Upon transfer, one or more new Certificates of the same series,
of authorized denominations and for the same aggregate principal amount will
be issued to the designated transferee or transferees. Prior to due
presentment for registration of transfer, the Company('s), the Trustee or any
of their agents may treat any Person in whose name this Certificate is
registered as the owner of this Certificate, regardless of notice to the
contrary or whether this Certificate might be overdue.
This Global Certificate is issuable only as a registered Certificate; it
does not bear coupons. As provided in the Indenture, this Global Certificate
is exchangeable for other Certificates of the same series of authorized
denominations with the same aggregate principal amount. To effect an
exchange, the registered owner must surrender this Certificate at the
Company('s) office or agency in Spokane, Washington. The Certificate must be
duly endorsed or accompanied by a written instrument of exchange satisfactory
to the Company.
No service charge will be made for a transfer or exchange, but Summit
may require payment of a sum sufficient to cover any governmental charge
payable in connection with such transaction.
Amendment of the Indenture; Waiver of Rights
With certain exceptions, the Indenture may be amended, the obligations
and rights of Summit may be modified and the rights of the Certificateholders
may be modified by Summit at any time with the consent of the Holders of 66-
2/3% in aggregate principal amount of the Certificates at the time
Outstanding. The Indenture allows the Holders of specified percentages in
aggregate principal amount of the Certificates of a particular series to waive
compliance by Summit with certain Indenture provisions and to waive past
defaults and their consequences on behalf of all the Holders of Certificates
of that series. Any such consent or waiver by the Holder of this Certificate
will be binding upon that Holder. The consent or waiver will also be binding
upon all future Holders of this Certificate and of any Certificate issued upon
the transfer of, or in exchange for or in lieu of this
<PAGE> 83
Certificate, whether or not that consent or waiver is noted upon the
Certificate.
Failure to Pay Interest; Events of Default
If interest is not punctually paid or duly provided for, it shall cease
to be payable to the registered Holder of this Certificate on the applicable
Regular Record Date. Instead, the Trustee will fix a Special Record Date for
payment of the Defaulted Interest. Upon receipt by the Trustee from the
Company of a list of all Certificateholders and their Certificate principal
amounts, the Trustee will give the Certificateholders notice of the Special
Record Date at least 10 days prior to the Special Record Date. The Person in
whose name this Certificate (or one or more Predecessor Certificates) is
registered on the books of the Company at the close of business on the Special
Record Date will be entitled to payment of the Defaulted Interest and the
Trustee may rely conclusively, without liability to any Certificateholder or
the Company, upon the information provided by the Company. If the
Certificates are listed on a securities exchange, however, the Defaulted
Interest may be paid at any time and in any lawful manner consistent with the
requirements of the exchange.
If an Event of Default occurs, the principal of all the Certificates may
be declared due and payable as provided in the Indenture.
Form of Payment
Payment of principal and interest will be made at the office or agency
of Summit maintained for that purpose in Spokane, Washington. Payment will be
made in coin or currency of the United States of America that is legal tender
for payment of public and private debts at the time of payment. At Summit's
option, however, payment of interest may be made by check mailed to the Person
entitled to the interest at that Person's address as it appears in the
Certificate Register.
Business Days
Whenever any Interest Payment Date, the Stated Maturity of this
Certificate or any date on which any Defaulted Interest is proposed to be paid
is not a Business Day, the appropriate payment or compounding of interest or
principal may be made on the next succeeding Business Day without accrual of
additional interest.
Certain Definitions
<PAGE> 84
Summit is an Idaho corporation. The term "Summit" and "Company"
includes any successor corporation under the Indenture. The term "Trustee"
includes any successor trustee under the Indenture.
Section 1-3. Events of Default.
"Event of Default," with respect to the Investment Certificates, Series
B, means any one of the events specified below in this Section 1-3 (whatever
the reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law, or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) default in the payment of any interest upon any Investment
Certificate, Series B, when such interest becomes due and payable, and
continuance of such default for a period of 30 days; or
(2) default in the payment of the principal of (or premium, if any,
on) any Investment Certificate, Series B, at its Maturity; or
(3) default in the performance, or breach, of any covenant or warranty
of the Company with respect to Investment Certificates, Series B, in the
Indenture or this First Supplemental Indenture (other than a covenant or
warranty a default in whose breach is elsewhere in this Section specifically
dealt with), and continuance of such default or breach for a period of 60 days
after there has been given, by registered or certified mail, to the Company by
the Trustee or to the Company and the Trustee by the Holders of at least 10%
in principal amount of the Outstanding Investment Certificates, Series B, a
written notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default" hereunder; or
(4) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Company a bankrupt or an insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company under any Federal bankruptcy laws
or any other applicable Federal or State law, or appointing a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of the
Company or of any substantial part of its property, or ordering the winding up
or liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days; or
<PAGE> 85
(5) the institution by the Company of proceedings to be adjudicated a
bankrupt or an insolvent, or the consent by it to the institution of
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under any
Federal bankruptcy laws or any other applicable Federal or State law, or the
consent by it to the filing of any such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Company or of any substantial part of its property, or the
making by it of an assignment for the benefit of creditors, or the admission
by it in writing of its inability to pay its debts generally as they become
due, or the taking of corporate action by the Company in furtherance of any
such action.
Section 1-4. Right of Redemption.
Notwithstanding anything to the contrary contained in the Indenture or
this First Supplemental Indenture, the Investment Certificates, Series B are
not redeemable prior to Maturity; the Company may, however, pay principal and
premium, if any, and interest on such Certificates either upon mutual
agreement between the Holders of an Investment Certificate, Series B, and the
Company or as provided in the Indenture or this First Supplemental Indenture
in the event of the death of any registered owner or any registered joint
owner without such payment constituting a redemption.
ARTICLE TWO
Miscellaneous
Section 2-1. Supplemental Indenture.
This First Supplemental Indenture is executed and shall be construed as
an indenture supplemental to the Indenture, and shall form a part thereof, and
the Indenture, as hereby supplemented and modified, is hereby confirmed.
Except to the extent inconsistent with the express terms hereof, all of the
provisions, terms, covenants and conditions of the Indenture shall be
applicable to the Investment Certificates, Series B, to the same extent as if
specifically set forth herein. All terms used in this First Supplemental
Indenture shall be taken to have the same meaning as in the Indenture, except
in cases where the context herein clearly indicates otherwise.
Section 2-2. Regulation of Interest Rates.
The Company hereby agrees that it will actively resist any attempts to
claim and will not voluntarily claim, the benefit of any interest rate
regulation law against any Certificateholder.
<PAGE> 86
IN WITNESS WHEREOF, SUMMIT SECURITIES,INC. has caused this First
Supplemental Indenture to be signed in its corporate name by its Chairman of
the Board, its President or a Vice-President and its corporate seal to be
affixed hereunto, and the same to be attested by the signature of its
Secretary or Assistant Secretary; and FIRST TRUST NATIONAL ASSOCIATION, in
evidence of its acceptance of the trust hereby created, has caused this First
Supplemental Indenture to be signed in its corporate name by one of its Trust
Officers, and its corporate seal to be affixed hereunto, and the same to be
attested by one of its Trust Officers. Executed and delivered as of the date
first above written.
SUMMIT SECURITIES, INC.
/s/ Tom Turner
By: Tom Turner
Title: President
(Corporate Seal)
Attest:
/s/ Greg Gordon
Greg Gordon
Secretary
FIRST TRUST NATIONAL ASSOCIATION,
as Trustee
/s/ Michael A. Jones
By: Michael A. Jones
Title: Assistant Vice President
(Corporate Seal)
STATE OF WASHINGTON )
) ss.
COUNTY OF SPOKANE )
On this 31st day of December, 1997, before me personally appeared Tom
Turner, to me known to be the President of Summit Securities, Inc., the
corporation that executed the within and foregoing instrument, and
acknowledged said instrument to be the
<PAGE> 87
free and voluntary act and deed of said corporation, for the uses and
purposes therein mentioned, and on oath stated that he was authorized to
execute said instrument and that the seal affixed is the corporate seal of
said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ Susan Thomson
NOTARY PUBLIC in and for the
State of Washington, residing
[Seal] at Spokane
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 31st day of December, 1997, before me personally appeared
Michael A. Jones, to me known to be the Assistant Vice President of First
Trust National Association, the corporation that executed the within and
foregoing instrument, and acknowledged said instrument to be the free and
voluntary act and deed of said corporation, for the uses and purposes therein
mentioned, and on oath stated that he was authorized to execute said
instrument and that the seal affixed is the corporate seal of said
corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ Linda E. Houston
NOTARY PUBLIC in and for the
State of Washington, residing
[Seal] at Seattle
REINSURANCE AGREEMENT
Between
WESTERN UNITED LIFE ASSURANCE COMPANY
and
OLD STANDARD LIFE INSURANCE COMPANY
TABLE OF CONTENTS
Page
A. REINSURANCE COVERAGE 1
B. PLACING REINSURANCE IN EFFECT 2
C. PAYMENTS BY REINSURED 2
D. PAYMENTS BY REINSURER 2
E. TERMS OF REINSURANCE 2
F. UNUSUAL EXPENSES AND ADJUSTMENTS 3
G. POLICY ADMINISTRATION 4
H. POLICY CHANGES 4
I. ASSIGNMENT OF REINSURANCE 5
J ERRORS 5
K. REDUCTIONS 5
L. AUDIT OF RECORDS AND PROCEDURES 6
M. ARBITRATION 6
N. CHOICE OF LAW AND FORUM 6
O. INSOLVENCY 7
P. PARTIES TO AGREEMENT 7
Q. EFFECTIVE DATE 8
R. DURATION OF AGREEMENT 8
S. MISCELLANEOUS 8
T. EXECUTION 9
SCHEDULES
SCHEDULE I 10
SCHEDULE II 11
SCHEDULE III 12
SCHEDULE IV 13
SCHEDULE V 14
SCHEDULE VI 16
<PAGE> 89
C O 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 (referred to herein as "Policies") issued by the
REINSURED on the forms listed in Schedule I shall be reinsured with the
REINSURER in accordance with the REINSURED'S underwriting rules applicable
to such policies.
2. The reinsurance shall cover the portion of the Policies specified in
Schedule I. All benefits provided by the Policies shall be reinsured
hereunder in the portion specified in Schedule I.
3. The liability of the REINSURER shall begin simultaneously with that of the
REINSURED but in no event prior to the effective date of this Agreement.
Reinsurance with respect to any Policy shall not be in force and binding
unless the insurance issued directly by the REINSURED is in force and
unless the issuance and delivery of such insurance 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.
4. Reinsurance under this Agreement shall be coinsurance of the portion of the
policy which is reinsured with the REINSURER and shall follow the forms of
the REINSURED.
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 policy reinsured hereunder remains in force without
reduction, unless Coinsurance is terminated or reduced as provided herein.
B. PLACING REINSURANCE IN EFFECT
Reinsurance with respect to policies issued after the effective date of this
Agreement shall become effective automatically and simultaneously with the
liability of the REINSURED, provided however, that the REINSURED shall give
notification of such reinsurance to the REINSURER simultaneously with the
monthly reconciliation prescribed in Section E, paragraph 2.
C. PAYMENTS BY REINSURED
The REINSURED shall pay the REINSURER as Coinsurance premiums the Reinsurance
Share, as set forth in Schedule I, of the gross
<PAGE> 90
contributions or premiums the REINSURED receives on and after the effective
date of this Agreement.
D. PAYMENTS BY 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 net cash surrender values paid by the
REINSURED with respect to Policies reinsured hereunder.
2. Policy Expense Allowances
The REINSURER shall pay the REINSURED the full amount of Allowances for
Policy expenses as defined in Schedule I.
E. TERMS OF REINSURANCE
1. Except as otherwise specifically provided herein, all amounts due to be
paid to either the REINSURER or the REINSURED shall be determined and paid
on a net basis as of the last day of the calendar month to which such
amount is attributable. All amounts shall be due and accrued as of such
date. Such amounts shall be payable in accordance with the schedule set
forth in Section E, paragraph 2.
2. The REINSURED shall provide periodic reports to the REINSURER as specified
below.
(a) The REINSURED shall submit monthly, not later than fifteen (15)
days after the end of each calendar month, a Monthly Report
substantially in accordance with Schedule II. Any amounts indicated
in the Monthly Report as due the REINSURER shall accompany such
report.
(b) If a Policy is cancelled in accordance with a thirty day
cancellation provision, the REINSURED shall refund the entire
Allowance to the REINSURER, and the REINSURER shall refund the
entire Reinsurance Share to REINSURED each as they relate to the
cancelled Policy
(c) Any amounts indicated in the Monthly Report as due the REINSURED
shall be paid by the REINSURER within fifteen (15) days after
REINSURER'S receipt of the Monthly Report.
(d) Interest as specified in Schedule IV shall be paid on any amounts
not paid when due.
<PAGE> 91
(e) If the REINSURED ever becomes aware that its monthly reports for an
Accounting Period as required in section 2(a) did not accurately
reflect the actual experience of the Policies during the Accounting
Period, it shall promptly submit a revised summary to the
REINSURER. Any amount shown by the revised summary as owed by
either the REINSURED or the REINSURER to the other shall be paid
promptly.
(f) Upon notice to the REINSURED, the REINSURER may unilaterally amend
Schedule II in order to obtain the data it reasonably needs to
properly administer this Agreement or to prepare its financial
statements.
(g) 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.
(h) 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.
3. 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.
F. UNUSUAL EXPENSES AND ADJUSTMENTS
1. Any unusual expenses, as hereinafter defined, incurred by the REINSURED in
defending or investigating a claim for policy liability or rescinding a
policy reinsured hereunder, but net of unusual expenses receivable under
other reinsurance agreements with respect to the portion of the policies
reinsured hereunder, shall be participated in by the REINSURER in the same
proportion as its reinsurance bears to the total insurance under such
policy.
2. For purposes of this Agreement (but not as a limitation on the REINSURER'S
liability under paragraph 1), it is agreed that 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 shall be considered unusual
expenses.
3. In no event, however, shall the following categories of expenses or
liabilities be considered for purposes of this Agreement as "unusual
expenses":
(a) routine investigative or administrative expenses;
<PAGE> 92
(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.
G. 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. The REINSURED shall bear all expenses incurred in connection with
administration of the Policies reinsured hereunder, except as provided in
paragraph F. hereinabove.
H. POLICY CHANGES
1. If the REINSURED intends to make a change in the terms or conditions 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.
2. 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.
3. 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.
4. Unless otherwise agreed by the REINSURER and the REINSURED, the investments
underlying the Policies reinsured hereunder shall be made in accordance
with the investment policy adopted by the REINSURER. Such investment
policy may be amended from time to time by REINSURER in its sole discretion
upon reasonable notice to the REINSURED.
<PAGE> 93
I. ASSIGNMENT OF REINSURANCE
If the REINSURED proposes to sell, assumption reinsure or otherwise assist in
the transfer of 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.
J. ERRORS
If either the REINSURED or the REINSURER shall fail to perform an obligation
under this Agreement and such failure shall be the result of an error on the
part of the REINSURED or the REINSURER, 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; an "error" is a clerical mistake
made inadvertently and excludes errors of judgment and all other forms of
error.
K. REDUCTIONS
1. If a portion of the insurance issued by the REINSURED on a Policy reinsured
hereunder is terminated, reinsurance on that Policy shall be reduced.
2. The REINSURER shall return to the REINSURED any reinsurance premiums,
without interest thereon, paid to the REINSURER for any period beyond the
date of reduction of reinsurance hereunder.
L. AUDIT OF RECORDS AND PROCEDURES
The REINSURER and the REINSURED each shall have the right to audit, at the
office of the other, all records and procedures relating to riinsurance under
this Agreement.
M. 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'
<PAGE> 94
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.
N. 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,
O. 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 Coinsurance 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
<PAGE> 95
credits, as the case may be, and shall be set off, and only the balance shall
be allowed or paid.
P. 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.
Q. EFFECTIVE DATE
The effective date of this Agreement is January 1, 1997.
R. DURATION OF AGREEMENT
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 insurance 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.
S. MISCELLANEOUS
<PAGE> 96
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.
T. EXECUTION
IN WITNESS WHEREOF the said
WESTERN UNITED LIFE ASSURANCE COMPANY
of
Spokane, Washington.,
and the said
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
Signed at Spokane, WA
By: John Van Engelen
Title: President
Date: 2/26/97
OLD STANDARD LIFE INSURANCE COMPANY
Signed at Spokane, WA
By: Clayton Rudd
Title: President
Date: 2/26/97
<PAGE> 97
SCHEDULE I
POLICIES SUBJECT TO REINSURANCE, AMOUNT OF REINSURANCE & ALLOWANCES
The percentage of single premium deferred annuity contracts as defined below
issued by the REINSURED on and after the effective date of the Agreement are
subject to reinsurance as set forth in the Agreement. The amount of
reinsurance under this Agreement shall be percentage of the liability of the
REINSURED on all policies in the forms list defined below. All benefits
provided by such policies shall be reinsured.
<TABLE>
<CAPTION>
Reinsuran Allowances
ce Quota
Share
Policy
Reserves, Monthly
Claims & Admin. Admin.
Trade Name Premiums Benefits Commissions Policy Issue Servicing
<S> <C> <C> <C> <C> <C>
TDCD 75% 75% 3.00% 1.00% 0.0333%
CDMaxI 75% 75% 3.00% 1.00% 0.0333%
CDMax III 75% 75% 4.00% 1.00% 0.0333%
CDMax V 75% 75% 5.00% 1.00% 0.0333%
Navigator II 75% 75% 5.00% 1.00% 0.0333%
UNIMAXIII 75% 75% 5.00% 1.00% 0.0333%
Policy Reinsurance
Reserves, Reinsurance Reinsurance Quota
Policy Quota Share Quota Share Share
Basis for Gross Claims & of Gross of Gross of Account
Charge Premiums Benefits Premiums Premiums Value
</TABLE>
NOTES:
The Monthly Administrative Servicing Allowance percentage shall be
applied to the account at the end of each month on all reinsured
deferred annuity business in force.
<PAGE> 98
SCHEDULE II
Annuity Coinsurance
Monthly Report to
OLD STANDARD LIFE INSURANCE COMPANY
Amounts Due OLD STANDARD LIFE INSURANCE COMPANY
First year premiums (gross first year premium received during the month,
multiplied by the Reinsurance Quota Share percentage)
$_________
Sum of amounts due to OLD STANDARD LIFE INSURANCE COMPANY
$_________
Amounts Due WESTERN UNITED LIFE ASSURANCE COMPANY
Commission Allowances (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
$_________
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 amount due (sum of amounts due OLD STANDARD LIFE
INSURANCE Company minus sum of amounts due to
WESTERN UNITED LIFE ASSURANCE)
$_________
<PAGE> 99
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 Needed By
OLD STANDARD LIFE INSURANCE COMPANY For Financial Reporting
A monthly listing of statutory and GAAP reserves, account values, and interest
credited.
(1) Policies cancelled pursuant to the thirty day cancellation provision.
<PAGE> 100
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.
<PAGE> 101
SCHEDULE IV
INTEREST RATE
.75% per month times the amount overdue; if any interest is due.
<PAGE> 102
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.
<PAGE> 103
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.
<PAGE> 104
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
<PAGE> 105
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 1997 and all subsequent
taxable years for which the Reinsurance Agreement remains in
effect.
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Year ended September 30,
1997 1996 1995 1994 1993
__________ __________ _________ _________ _________
<S> <C> <C> <C> <C> <C>
Earnings:
Net income $1,851,240 $1,244,522 $ 587,559 $ 264,879 $ 283,107
Preferred dividends (446,560) (333,606) (309,061) (2,930) --
__________ __________ _________ _________ _________
Net income available to
common stockholders $1,404,680 $ 910,916 $ 278,498 $ 261,949 $ 283,107
========== ========== ========= ========= =========
Weighted average number
of common shares
outstanding 10,000 10,000 10,000 19,445 20,000
========== ========== ========= ========= =========
Net income per common
share $ 140.47 $ 91.09 $ 27.85 $ 13.47 $ 14.15
========== ========== ========= ========= =========
</TABLE>
SUMMIT SECURITIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
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.
<TABLE>
<CAPTION>
Year Ended September 30
______________________________________________________________________
(Dollars in Thousands)
1997 1996 1995 1994 1993
__________ __________ __________ __________ __________
<S> <C> <C> <C> <C> <C>
Income (loss) before
extraordinary item $1,851,240 $1,244,522 $ 587,559 $ 264,879 $ 283,107
Add:
Interest 4,325,528 3,741,095 3,251,334 2,527,945 1,792,059
Taxes (benefit) on income 126,905 237,951 239,707 140,407 145,951
__________ __________ __________ __________ __________
Adjusted earnings $6,303,673 $5,223,568 $4,078,600 $2,933,231 $2,221,117
========== ========== ========== ========== ==========
Preferred stock dividend
requirements $ 446,560 $ 333,606 $ 309,061 $ 2,930
Ratio factor of income after
provision for income taxes
to income before provision
for income taxes 94% 84% 71% 65%
Preferred stock dividend
factor on pretax basis 477,196 397,387 435,297 4,508
Fixed charges
Interest 4,325,528 3,741,095 3,251,334 2,527,945 1,792,059
__________ __________ __________ __________ __________
<PAGE> 108
Fixed charges and
preferred stock
dividends $4,802,724 $4,138,482 $3,686,631 $2,532,453 $1,792,059
========== ========== ========== ========== ==========
Ratio of adjusted earnings
to fixed charges and
preferred stock dividends 1.31 1.26 1.11 1.16 1.24
========== ========== ========== ========== ==========
</TABLE>
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
State of
Company Name Incorporation
____________ _____________
<S> <C>
Metropolitan Investment Securities, Inc.* Washington
Summit Group Holding Company, Inc. Delaware
Summit Property Development, Inc. Washington
Old Standard Life Insurance Company** Idaho
Arizona Life Insurance Company Arizona
<FN>
*Metropolitan Investment Securities, Inc. in some states uses the following
DBA:
Washington Metropolitan Investment Securities, Inc.
National Metropolitan Investment Securities, Inc.
**Old Standard Life Insurance Company in some states uses the following DBA:
Old Standard Company
Old Standard
Old Standard Life
Summit Securities, Inc. in some states uses the following DBA:
National Summit Securities, Inc.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,461
<SECURITIES> 19,630
<RECEIVABLES> 125,365
<ALLOWANCES> 1,153
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 166,354
<CURRENT-LIABILITIES> 0
<BONDS> 50,608
<COMMON> 100
0
538
<OTHER-SE> 7,119
<TOTAL-LIABILITY-AND-EQUITY> 166,354
<SALES> 0
<TOTAL-REVENUES> 19,785
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,495
<LOSS-PROVISION> 986
<INTEREST-EXPENSE> 4,326
<INCOME-PRETAX> 1,978
<INCOME-TAX> 127
<INCOME-CONTINUING> 1,851
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,851
<EPS-PRIMARY> 140.47
<EPS-DILUTED> 140.47
</TABLE>
