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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-16177
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SUMMIT SECURITIES, INC.
(Exact name of registrant as specified in its charter)
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IDAHO 82-0438135
(State of incorporation) (IRS Employer Identification No.)
601 WEST FIRST AVENUE SPOKANE, WA 99201-5015
(Address of principal executive (Zip Code)
offices)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(509) 838-3111
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
ACT: 9.50% NOTES DUE 2005
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
ACT:
VARIABLE RATE CUMULATIVE PREFERRED STOCK, SERIES S-1
VARIABLE RATE CUMULATIVE PREFERRED STOCK, SERIES S-2
VARIABLE RATE CUMULATIVE PREFERRED STOCK, SERIES S-RP
VARIABLE RATE CUMULATIVE PREFERRED STOCK, SERIES S-3
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/
Neither the voting nor non-voting common stock of the registrant is traded
on any exchange; therefore there is no established market value. The aggregate
market value of the common 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 prior to the date of filing because there have been no
sales of the common stock within 60 days prior to the date of filing.
The number of shares outstanding of the Registrant's common stock, as of
December 31, 2000, was 10,000.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
ITEM 1. BUSINESS
ORGANIZATIONAL CHART
(AS OF SEPTEMBER 30, 2000)
[ORGANIZATION CHART]
The above chart lists the principal operating subsidiaries and their
ownership for Summit Securities, Inc. and all subsidiaries (the "Consolidated
Group").
NATIONAL SUMMIT CORP.: Parent Company, inactive except as owner of Summit
(as defined herein). Wholly owned by C. Paul Sandifur, Jr., President of
Metropolitan (as defined herein).
SUMMIT SECURITIES, INC.: Invests in Receivables (as defined herein)
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.
OLD STANDARD LIFE INSURANCE COMPANY: Invests in Receivables and other
investments principally funded by proceeds from Receivable investments and from
annuity sales.
OLD WEST ANNUITY & LIFE INSURANCE COMPANY: Invests in Receivables and other
investments principally funded by proceeds from Receivable investments and from
annuity sales.
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INTRODUCTION
BACKGROUND
The Consolidated Group consists of Summit Securities, Inc. ("Summit" or the
"Registrant") and several subsidiaries, including two insurance companies, Old
Standard Life Insurance Company ("Old Standard") and Old West Annuity & Life
Insurance Company ("Old West"), a securities broker/dealer, Metropolitan
Investment Securities, Inc. ("MIS") and a property development services company,
Summit Property Development, Inc.
Summit, Old Standard and Old West are engaged in the business of investing
in cash flowing assets, consisting of obligations collateralized by real estate,
structured settlements, annuities, lottery prizes and other investments
("Receivables"), investment securities and other assets through funds provided
by annuity sales, receivable cash flow, certificate (debt obligation) sales,
preferred stock sales, earnings and sales of investments, sales of Receivables,
including sales through securitization, and the resale of repossessed real
estate. Currently, the Consolidated Group is focusing its Receivable investing
activities on loans collateralized by commercial real estate. The Consolidated
Group's goal is to achieve a positive spread between the return on its
Receivable 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 is affiliated, due to the
common control by C. Paul Sandifur, Jr., with Metropolitan Mortgage & Securities
Co., Inc. ("Metropolitan"), which has as its principal subsidiaries Metwest
Mortgage Services, Inc. ("Metwest") and Western United Life Assurance Company
("Western United"). 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 and
"NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--NOTE 16" under Item 8.
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.
As of September 30, 2000, Summit's personnel consisted of its officers and
directors, and various administrative personnel. 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 holders of
its preferred stock or debt securities, and its duties under the Indenture
pursuant to which it issues investment certificates ("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, 2000, Summit and its subsidiaries employed a total of
37 employees.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act"), became effective in December 1995. The Act provides a "safe harbor" for
companies which make forward-looking statements providing prospective
information. The "safe harbor" under the Act relates to protection for companies
with respect to litigation filed on the basis of such forward-looking
statements.
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Summit wishes to take advantage of the "safe harbor" provisions of the Act
and is therefore including this section in its Annual Report on Form 10-K. The
statements contained in this Annual Report, if not historical, are
forward-looking statements and involve risks and uncertainties which are
described below and elsewhere herein that could cause actual results to differ
materially from the results, financial or otherwise, or other expectations
described in such forward-looking statements. These statements are identified
with the words such as "may," "will," "expect," "intend," "anticipate,"
"believe," "continue," "seeks," "plans," variations of those terms or the
negative of those terms, or words of similar meaning. Therefore, forward-looking
statements should not be relied upon as a prediction of actual future results or
occurrences.
Summit's future results may be affected by certain risks and uncertainties
including the following:
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FALLING INTEREST RATES COULD
NEGATIVELY EFFECT THE PROFITABILITY
AND THE FAIR VALUE OF EQUITY OF THE
CONSOLIDATED GROUP................... If interest rates fall, the profitability and the fair value
of equity of the Consolidated Group may decline because of
refinancing of Receivables and a net decrease in interest
revenues. When interest rates fall, borrowers have an
incentive to refinance their Receivables by taking out new
loans having a lower rate of interest and repaying existing
loans at a higher rate of interest in full. Because the
Receivables with the higher rate of interest may be repaid
early, the interest earned by the Consolidated Group may
decline. In addition, lower interest rates could cause
interest revenues to decrease faster than interest expenses
decrease, because more financial assets than liabilities are
scheduled to reprice or mature for the Consolidated Group
during the fiscal year that began on October 1, 2000.
FINANCIAL PERFORMANCE AND GROWTH OF
THE CONSOLIDATED GROUP COULD BE
NEGATIVELY EFFECTED BY THE INABILITY
TO SELL RECEIVABLES.................. The Consolidated Group currently sells and intends to
continue to sell pools of receivables and previously,
together with Metropolitan, securitized pools of
Receivables. Several factors affect the Consolidated Group's
ability to sell pools of Receivables, including conditions
in the securities markets generally, conditions in the
asset-backed securities markets specifically, the credit
quality of the Receivables, compliance of the Consolidated
Group's Receivables with the eligibility requirements
established by the purchaser and the absence of any material
downgrading or withdrawal of ratings given to securities
issued in the Consolidated Group's previous securitizations.
The Consolidated Group's financial performance and growth
prospects may be adversely effected if they cannot favorably
sell Receivables, or if they are completely unable to sell
Receivables.
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RESIDUAL AND SUBORDINATE INTERESTS IN
SECURITIZATIONS MAY NOT PERFORM
CONSISTENT WITH OUR VALUATION
ASSUMPTIONS, RESULTING IN LOWER THAN
ANTICIPATED INCOME OR EARNINGS BY THE
CONSOLIDATED GROUP................... The Consolidated Group owns subordinated and residual
interests in several securitized loan pools, which generally
are in a "first loss" position relative to the more senior
securities sold to third parties and which carry a greater
risk if loans in the securitizations are not paid or losses
occur. The Consolidated Group values these residual
interests by discounting the expected cash flows using a
discount rate commensurate with the risks involved. When
determining the expected cash flow, the Consolidated Group
must estimate the future rate of prepayments, defaults and
losses of the securitized Receivables. If those assumptions
are inaccurate, the Consolidated Group will have incorrectly
valued these interests on its balance sheet and may earn
less income than was anticipated from those assets.
RISK THAT FORECLOSURE ON MORTGAGES
WILL DELAY OR REDUCE PAYMENTS ON
RECEIVABLES.......................... Foreclosure, bankruptcy and other similar proceedings used
to enforce mortgage loans are generally subject to
principles of equity which are designed to relieve the
indebted party from the legal effect of such party's
default. Statutes may limit the right of the Consolidated
Group to obtain a deficiency judgment against the defaulting
party after a foreclosure or sale. The application of any
such principal may lead to a loss or delay in the payment on
a certificate in a securitization in which the Consolidated
Group is involved or in loans held by the Consolidated
Group.
REAL ESTATE USED AS COLLATERAL TO
COVER LOSSES ON RECEIVABLES MAY BE
INADEQUATE........................... Most of the Receivables purchased by the Consolidated Group
are collateralized by real estate to provide collateral if a
borrower defaults on such borrower's mortgage. The real
estate used as collateral may be insufficient to cover any
loss in the event of foreclosure. Several factors influence
whether the value of the real estate will be sufficient to
cover the value of the Receivables, including changes in
economic conditions, property values, zoning, land use,
environmental laws and other legal restrictions, including
changes in and restrictions on the timing and methods of
foreclosure.
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RISK OF DEFAULT ON RECEIVABLES THAT
ARE SECURED ONLY BY A PROMISE TO
PAY.................................. The Consolidated Group purchases some Receivables that are
not collateralized, such as annuities, lottery prizes,
structured settlements or other investments. In these cases,
since the Consolidated Group does not have collateral in a
specific asset, it relies instead upon a promise to pay from
an insurance company, state government or other entity.
There is a risk that an insurance company, state government
or other entity will not keep its promise to pay and will
default.
UNDERWRITING MAY INSUFFICIENTLY
EVALUATE THE RISK OF LOSSES ON
RECEIVABLES.......................... Metropolitan or the Consolidated Group underwrites the
Receivables that are purchased by the Consolidated Group
using underwriting practices that may vary from conventional
lending underwriting. Metropolitan or the Consolidated Group
uses a variety of procedures to evaluate Receivables
depending on the type of investment. While Metropolitan or
the Consolidated Group tries to minimize the risk of default
and the risk of losses if there is a default, there is no
assurance that these underwriting procedures will be
effective.
RISKS RESULTING FROM THE INEXPERIENCE
OF THE CONSOLIDATED GROUP IN
ORIGINATING COMMERCIAL LOANS......... The Consolidated Group focuses its loan originations on
loans that are collateralized by commercial real estate,
including multi-family properties ("Commercial Loans").
Management cannot predict whether it will have the ability
or the desire to originate these commercial loans in the
future, whether such loans will achieve desirable yields or
whether it will be able to accurately predict commercial
loan default rates.
LACK OF CONTROL OVER SERVICING AND
SELLING RECEIVABLES.................. As a result of several contracts, Metropolitan and Metwest
provide most of the administrative services related to
servicing and selling of Receivables for the Consolidated
Group. Management cannot predict whether Metropolitan and
Metwest will effectively service and sell Receivables in the
future or whether it will be more effective and efficient to
get these services internally or from a third party. If
these services are provided by third parties, the costs to
the Consolidated Group may be more or less than the costs
charged by Metropolitan or Metwest.
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INSURANCE SUBSIDIARY EARNINGS MAY BE
UNAVAILABLE FOR DIVIDENDS AND FEES... At September 30, 2000, approximately 80% of the Consolidated
Group's assets were held by its insurance subsidiaries, Old
Standard and Old West. Insurance company regulations
restrict the way in which an insurance company can transfer
assets and the amount of money that can be paid out in
dividends by the insurance company. To use money for
dividends, the insurance company must obtain permission from
the insurance commissioner in the state of domicile of the
insurance company. These restrictions on the ability to
declare dividends and transfers of assets could have an
adverse effect on Summit's financial performance and ability
to meet its debt obligations and preferred stock dividend
payments.
THE CONSOLIDATED GROUP MAY BE UNABLE
TO MEET ITS FINANCIAL OBLIGATIONS AS
THEY BECOME DUE...................... The Consolidated Group generates cash flow primarily from
earnings on Receivables and other investments, the sale of
annuities, the sale of Receivables and the sale of debt and
equity securities. The cash flow from the existing assets
has been adequate during the past five years to satisfy the
obligation for payment of maturing certificates and to pay
preferred stock dividends. However, the Consolidated Group's
ability to repay certificates, notes and preferred stock
dividends that become due in the future and other
outstanding obligations depends in part on the success of
future public offerings of certificates and preferred stock.
AN INCREASE IN ANNUITY TERMINATION
RATES MAY DECREASE EARNINGS.......... An increase in the termination rate of annuity contracts
would tend to decrease the earnings of Old Standard and Old
West. If terminations increase, costs would increase because
the insurance subsidiaries would have to immediately expense
the unamortized deferred acquisition costs on those
surrendered policies instead of continuing to amortize those
costs over time. The rate at which annuity contracts
terminate is effected by several factors, including changes
in interest rates, competition and changes in tax and other
regulations. Management cannot predict the future rate of
termination of annuity policies.
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ENVIRONMENTAL CONDITIONS AND
REGULATIONS OF PROPERTY ACQUIRED BY
THE CONSOLIDATED GROUP MAY LEAD TO
LOSSES............................... The Consolidated Group acquires properties in the course of
its business some of which may contain hazardous waste or
other toxic materials. Various federal, state and local
environmental laws, ordinances and regulations hold the
owner or the previous owner liable for the costs of removal
or remediation of hazardous or toxic substances on, under,
in or near the effected property. Historically, the
Consolidated Group has tried to avoid acquiring properties
or Receivables collateralized by properties which may be
contaminated. As a result of its current business or if the
proposed program is implemented, the Consolidated Group may
sustain significant losses due to such liability.
THE CONSOLIDATED GROUP MAY BE LIABLE
FOR ENVIRONMENTAL CLEAN-UP ON REAL
ESTATE............................... The government can place a lien on environmentally
contaminated property to guarantee that the clean up costs
for that property are paid. In many states, these liens have
priority over the existing mortgage on the property. The
Consolidated Group may be subject to these liens directly if
they own real property subject to these liens, or indirectly
if they participate in a securitization of property and have
a role in the day-to-day management of the facility or
property. Environmental assessments to determine whether
certain properties are contaminated are rarely performed by
the Consolidated Group, and even where they are performed,
there is no guarantee that the Consolidated Group will be
insulated from liability for an environmental condition.
THE CONSOLIDATED GROUP MAY BE
ADVERSELY AFFECTED BY COMPETITION
AMONG COMPANIES IN THE CONSOLIDATED
GROUP................................ Several companies are affiliated with the Consolidated Group
through common control by C. Paul Sandifur, Jr. Certain
officers and directors of the Consolidated Group are also
employees of these affiliated companies. In addition, the
Consolidated Group provides services to affiliated
companies, buys and sells Receivables to and from such
affiliated companies and makes loans to or borrows money
from affiliated companies. These factors may lead to
conflicts of interest such as which company receives a
particular securities sale, how Receivables are distributed
among or between separate companies, how fees for services
are established and charged, how intercompany sales and
purchases of Receivables are priced and the terms of any
intercompany loans. Old Standard and Old West may compete
with the Consolidated Group in acquiring Receivables and for
the sale of annuities. Also, the Consolidated Group may
compete with Metropolitan for the acquisition of Receivables
and the sale of securities.
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THE CONSOLIDATED GROUP MAY BE
NEGATIVELY IMPACTED BY SOME OF ITS
EQUITY INVESTMENTS................... The Consolidated Group invests in venture capital, joint
ventures and other related equity investments. The market
price and valuations of these investments may fluctuate due
to market conditions and other conditions over which the
Consolidated Group has no control. Fluctuations in the
market price and valuations of these investments may reduce
the amount of carrying costs by the Consolidated Group.
These investment may also not have an active trading market
and, as a result, the Consolidated Group may not be able to
easily sell these investments and, if they are able to be
sold, they may not be sold at favorable prices.
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RECEIVABLE INVESTMENTS
BACKGROUND
Historically, the Consolidated Group's Receivable acquisitions have been
made pursuant to an agreement with Metropolitan. During the fiscal year ended
September 30, 2000, the majority of the Consolidated Group's acquisitions were
Commercial Loans underwritten and originated in coordination with Metropolitan
and the Consolidated Group. Management anticipates that this emphasis will
continue. However, the Consolidated Group may also acquire loans pursuant to the
agreement with Metropolitan. In 2000, the Consolidated Group paid to
Metropolitan approximately $111,000 as compensation to Metropolitan for
Receivable acquisition services.
Unless otherwise indicated in this section and in the section entitled
"SECURITIES INVESTMENTS," or the context otherwise requires, references to a
year (e.g., 2000) refer to the fiscal year of the Consolidated Group ended
September 30 of that year.
Metwest, a subsidiary of Metropolitan, provides Receivable collection and
servicing for a fee to Summit, Old Standard and Old West. During 2000, the
Consolidated Group paid Receivable collection and servicing fees of
approximately $404,000 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
The Consolidated Group's Receivable acquisitions include two principal types
of Receivables: (a) Receivables collateralized by real estate and
(b) alternative cash flows consisting of lotteries, structured settlements,
annuities, and other cash flowing assets. Commercial loans originated by the
Consolidated Group are originated and underwritten in coordination with
Metropolitan and the Consolidated Group. All other Receivable acquisitions of
the Consolidated Group are acquired through and underwritten by Metropolitan.
SECONDARY MORTGAGE MARKETS
The market for the acquisition or sale of existing real estate Receivables
is commonly referred to as the secondary mortgage market. The secondary mortgage
market includes individual Receivables which are held and sold by individual
investors. The secondary mortgage market includes the sale of seller financed
real estate Receivables and the sale and resale of pools of Receivables which
can be seller financed, or originated by brokers or a financial institution. The
Consolidated Group sells both individual Receivables and pools of Receivables.
COMMERCIAL LOAN ORIGINATIONS
The Consolidated Group (principally Old Standard) originates commercial
loans collateralized by various types of commercial properties. These commercial
loans are generally small to mid-sized loans that are originated for less than
$15 million.
The Consolidated Group currently projects expansion of the origination of
commercial loans during 2001. Current projections include the possibility that
principally all of the Consolidated Group's Receivable acquisitions during 2001
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
current lenders, who are not flexible in their underwriting and pricing policies
and who are not able to quickly underwrite and close such loans, particularly in
the temporary, bridge and development commercial loan markets. The
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Consolidated Group also underwrites and originates commercial loans which are
held by Metropolitan, Western United and Metwest.
The Consolidated Group obtains leads for such loans through mortgage
brokers. The borrowers submit loan applications directly to the Consolidated
Group.
Commercial loans originated by the Consolidated Group are underwritten
applying criteria which may include the following: evaluating the borrower's
credit and credit scores, obtaining a current interior appraisal of the
collateral, obtaining title insurance and calculating debt-to-income levels and
combined loan-to-value ratios. The sum of the underwriting evaluation and the
speed within which a borrower needs a decision all determine the interest rate
and loan-to-value ratio which the Consolidated Group will require. A higher risk
evaluation would result in a higher required interest rate and a lower
loan-to-value ratio. The Consolidated Group typically lends, through its
insurance companies, at 50-75% loan-to-value ratios, and may require multiple
collateral in order to adequately collateralize a particular loan.
For the fiscal year ended September 30, 2000, the average weighted annual
yield (including fees and points) was approximately 16.2% on the Consolidated
Group's commercial loans closed during the fiscal year. Frequently, the loans
closed have required short-term balloon payments (approximately two to five
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.
RECEIVABLE ACQUISITION VOLUME
The Consolidated Group's real estate Receivable and other Receivable
investment acquisition activities grew from approximately $77.0 million in 1998
to $112.1 million in 1999 and to $148.9 million in 2000. During 2000, the
average monthly acquisition volume was approximately $12.4 million. The majority
of acquisitions were commercial loan originations.
RECEIVABLE ACQUISITIONS: SOURCES, STRATEGIES AND UNDERWRITING
The following information describes Metropolitan's Receivable acquisition
and underwriting procedures as of September 30, 2000. 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 Metropolitan for the Consolidated
Group consist of non-conventional, A-, B and C credit grade 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 or the seller or borrower chose non-conventional
financing. With this type of lending, the lender generally focuses on the
quality of the collateral as the ultimate recourse in the event of the
borrower's default rather than the ability of a borrower to repay.
INDIVIDUAL RECEIVABLE ACQUISITION SOURCES
Historically, the majority of Metropolitan's real estate Receivables are
acquired through individual Receivable acquisitions. See "--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 acquisition strategy is designed to provide flexible
structuring and pricing alternatives to the real estate Receivable seller, and
quick closing times. Metropolitan believes these are key factors to
Metropolitan's ability to attract and purchase Receivables. In order to enhance
its position in this market, Metropolitan has improved its acquisition
strategies by centralizing acquisition activities and implementing
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flexible and strategic pricing and closing 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.
CAPITAL MARKETS (LOAN POOL) ACQUISITION SOURCES
Previously Metropolitan acquired pools of real estate Receivables through
the capital markets group. These loans may have been seller originated or
institutionally originated. They may have been acquired by Metropolitan from
brokers, banks, savings and loan organizations, mortgage brokerage firms and
other financial institutions. Metropolitan intends to this acquisition method
during 2000.
Capital markets department acquisitions were typically negotiated through
direct contact with the selling broker or portfolio departments at the various
selling institutions, or are acquired through bidding at an auction. The closing
costs per loan for institutional acquisitions were generally lower than private
secondary mortgage market acquisitions. However, the investment yield generally
was lower than yields available in the private market.
LOAN ORIGINATIONS SOURCES
Metwest previously originated first lien residential mortgage loans,
including both fixed and adjustable interest rate loans. Metwest is currently
licensed or exempt to originate such mortgage loans as a wholesale lender in
32 states and as a retail lender in 34 states. Metwest discontinued its
origination of wholesale and retail loans in January of 2001.
Metwest previously originated real estate loans through licensed mortgage
brokers who submitted loan applications on behalf of the borrower. Before
Metwest entered into a broker agreement, the mortgage broker had to demonstrate
that it was properly licensed, experienced and knowledgeable in lending. During
2000, Metwest originated an average of approximately 286 real estate loans per
month, including loans to facilitate the resale of repossessed real estate.
CORRESPONDENT LENDING
Beginning in 1997, Metropolitan began acquiring loans through loan
correspondent agreements. Under these agreements, Metropolitan agreed to
purchase loans at a specified yield immediately after their origination, so long
as they comply with Metropolitan's underwriting guidelines. Metropolitan
discontinued originations through this source in January of 2001. Such loans
previously originated through correspondent lending may be insured by a primary
mortgage guarantee insurance policy. Each correspondent makes standard
representations and warranties with respect to each loan and has certain limited
repurchase obligations.
REAL ESTATE RECEIVABLE UNDERWRITING
Prior to discontinuance of the origination activities, Metropolitan's loan
correspondent underwriting guidelines and Metwest's real estate loan acquisition
and origination underwriting guidelines applied criteria which included the
following: evaluating the borrower's credit (which generally may include credit
scores), 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 may be required. In addition, title
insurance in an amount equal to the Receivable balance at the time of
acquisition was generally 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 or yield (through a discounted purchase price).
Unlike the seller financed real estate Receivables, the loans originated by
Metwest, certain pool acquisitions and the loans purchased through
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Metropolitan's loan correspondent program have standardized documentation and
terms. Real estate Receivables acquired or originated for inclusion in
securitization pools generally have more stringent underwriting guidelines than
other acquired or originated real estate loans.
LOTTERIES, STRUCTURED SETTLEMENTS AND ANNUITIES SOURCES
Metropolitan also negotiates the purchase of Receivables which are not
collateralized by real estate or other assets, 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 liquidated directly
with the issuing insurance company. Metropolitan's primary source for these
investments is 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: (1) an application for sale of structured
benefits which requests certain information regarding (i) the annuitant,
including current employment, (ii) the annuity policy, and (iii) the nature of
the claim and, if applicable, injuries sustained in connection with the
structured settlement; (2) a copy of the executed settlement agreement or
judgment, if applicable; and (3) a copy of the executed annuity policy together
with any qualified assignments. In certain circumstances, Metropolitan waives
certain of these submission requirements if, in its sole best judgment, it
determines that the failure to have those documents would not impair the
acquiring company's interest in the structured settlement. Upon submission of
the file, the closing department obtains a credit report regarding the annuitant
and the most current credit rating of the annuity issuer. Furthermore,
Metropolitan conducts a Uniform Commercial Code ("UCC") search by county or
state where applicable, on the annuitant in each state or county, as applicable,
where the annuitant resided over the last five years and where the annuity
issuer is located in order to ensure that no prior liens exist on the structured
settlement payments.
When underwriting a structured settlement, Metropolitan will review the
credit report, the annuitant's completed purchase application, the results of
the UCC search, and the terms of the settlement and annuity policy, among other
things. Metropolitan will not knowingly purchase settlements paid to a trust
containing a spendthrift clause nor will it purchase settlements where the
payments are the annuitant's sole source of income, where the loss of income
would significantly damage the livelihood of the annuitant or where the payments
are used exclusively for the payment of medical necessities. Metropolitan will
not purchase payments from a minor without a court order approving the
transaction or from annuitants who are currently members of the armed forces or
from annuitants that do not otherwise have the legal capacity to contract
without a court order. Metropolitan will not purchase settlements from
annuitants that evidence a pattern of fraudulent behavior. In underwriting a
structured settlement, Metropolitan will confirm that the settlement is not a
workers' compensation settlement agreement or retirement or pension benefit.
In the case of lottery prizes, the underwriting guidelines generally require
a review of both the documents providing proof of the prize and the credit
rating of the insurance company or other entity that is making the lottery prize
payments. Where the lottery prize is from a state run lottery, the underwriting
guidelines generally require a confirmation from the respective lottery
commission of the prize winner's right to sell the prize and an acknowledgment
from the lottery commission of their receipt of notice of the sale. In many
states, the sale of a state lottery prize requires that the winner obtain a
court order permitting the sale. In those states, Metropolitan requires a
certified copy of the court order.
13
<PAGE>
OTHER RECEIVABLES
Metropolitan continually seeks opportunities in new Receivable markets.
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 Old West 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 "Receivable Acquisitions: Sources, Strategies and Underwriting."
Receivables may be purchased by the Consolidated Group from Metropolitan or
another party at a price that is less than the face amount of the Receivable.
The difference between the price paid by the Consolidated Group and the face
amount of the Receivable is the "discount." The Consolidated Group attempts to
purchase Receivables at prices which will maintain a positive interest spread
for the Consolidated Group. For Receivables of all types, the discounts
originating at the time of purchase, net of capitalized acquisition costs, are
amortized on an individual basis using the level yield (interest) method over
the remaining contractual term of the Receivable.
The Consolidated Group 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
(15% for 2000). During 2000, the Consolidated Group's average initial yield
requirement ranged from 9.5% to 14% for Receivables collateralized by real
estate. However, to the extent that Receivables are purchased at a discount and
payments are received earlier than anticipated, the discount is earned more
quickly resulting in an increase in the yield. Conversely, to the extent that
payments are received later than anticipated, the discount is earned less
quickly resulting in a lower yield.
A greater effective yield also can 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 extended, maintained or accelerated, the latter of which
increases the yield realized on a Receivable purchased at a discount from its
face value through accelerating recognition of the 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 and commercial properties. Management believes that the yield earned on
the mortgages collateralized by commercial property is higher than the yield on
Receivables collateralized by single family residential property, while the
credit risks are lower for the mortgage collateralized by single family
residential property. Management also believes that much of the risk in the
residential mortgage portion of 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.
14
<PAGE>
The following table presents consolidated information regarding the
Consolidated Group's investments in Receivables collateralized by all types of
real estate, as of September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Face value of discounted Receivables........................ $ 23,469,937 $ 63,704,841
Face value of originated and non discounted Receivables..... 162,425,971 50,411,690
Unrealized discounts, net of unamortized acquisition
costs..................................................... (8,299,143) (2,641,859)
Allowance for losses........................................ (5,363,345) (3,082,918)
Accrued interest receivable................................. 316,455 1,291,761
------------ ------------
Carrying value.............................................. $172,549,875 $109,683,515
============ ============
</TABLE>
As of September 30, 2000, approximately 98% of the Consolidated Group's
investments in Receivables were collateralized by first lien positions on real
estate and 2% in second lien positions. The Receivables which are collateralized
by residential and commercial properties represented approximately 10% and 57%,
respectively, of such investments as of September 30, 2000.
The Consolidated Group's Receivables at September 30, 2000 were
collateralized by properties located throughout the United States with not more
than 3% (by dollar amount) in any single state except as follows:
<TABLE>
<S> <C>
Hawaii...................................................... 31%
Washington.................................................. 13
California.................................................. 13
Utah........................................................ 5
Colorado.................................................... 5
Oregon...................................................... 5
Arizona..................................................... 4
New York.................................................... 4
</TABLE>
15
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
RECEIVABLES COLLATERALIZED BY REAL ESTATE
SEPTEMBER 30, 2000
Less than 1% of the Receivables are subject to variable interest rates.
Contractual interest rates principally range from 6% to 14% with approximately
92% of the face value of the Receivables within this range. The following table
segregates the Consolidated Group's real estate Receivable portfolio by type,
size, and lien position.
<TABLE>
<CAPTION>
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................. 37 7-10% $ 4,226,826 $ 980,741 5
First Mortgage > $40,000................. 91 7-11 4,766,611 270,099 5
First Mortgage < $40,000................. 1,065 7-12 8,619,103 277,038 20
Second or Lower > $75,000................ 1 9 81,857 -- --
Second or Lower > $40,000................ 8 8-10 407,794 40,000 1
Second or Lower < $40,000................ 38 7-10 619,432 58,355 2
COMMERCIAL
First Mortgage > $75,000................. 197 8-14 103,627,076 9,059,762 11
First Mortgage > $40,000................. 17 8-10 872,225 -- --
First Mortgage < $40,000................. 30 8-10 523,667 -- --
Second or Lower > $75,000................ 2 7-10 158,442 -- --
Second or Lower > $40,000................ 2 9-10 94,818 -- --
Second or Lower < $40,000................ 4 8-10 73,350 -- --
FARM, LAND AND OTHER
First Mortgage > $75,000................. 33 8-14 58,588,552 1,282,334 4
First Mortgage > $40,000................. 8 8-10 401,757 41,300 1
First Mortgage < $40,000................. 17 8-10 331,279 -- --
Second or Lower > $75,000................ 2 8 373,797 186,403 1
Second or Lower > $40,000................ 2 6-9 108,356 -- --
Second or Lower < $40,000................ 118 8-10 2,020,966 22,183 1
Unrealized discounts, net of unamortized
acquisition costs, on Receivables
purchased at a discount................ (8,299,143)
Accrued Interest Receivable.............. 316,455
Allowance for Losses..................... (5,363,345)
------------
CARRYING VALUE............................. $172,549,875 $12,218,215
============ ===========
</TABLE>
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 future maturities of the aggregate amounts of Receivables (face amount)
are as follows:
<TABLE>
<CAPTION>
RESIDENTIAL COMMERCIAL FARM, LAND, TOTAL
PRINCIPAL PRINCIPAL OTHER PRINCIPAL PRINCIPAL
----------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
October 2000--September 2003............................. $ 2,416,067 $ 78,217,053 $32,400,731 $113,033,851
October 2003--September 2005............................. 5,041,907 18,968,583 27,701,467 51,711,957
October 2005--September 2007............................. 2,799,093 3,124,822 1,088,562 7,012,477
October 2007-- September 2010............................ 3,125,299 1,792,724 258,996 5,177,019
October 2010--September 2015............................. 2,071,926 1,740,189 182,330 3,994,445
October 2015--September 2020............................. 1,167,885 534,774 146,540 1,849,199
October 2020--Thereafter................................. 2,099,403 971,437 46,120 3,116,960
----------- ------------ ----------- ------------
$18,721,580 $105,349,582 $61,824,746 $185,895,908
=========== ============ =========== ============
</TABLE>
The Consolidated Group held 1,672 Receivables collateralized by real estate,
as of September 30, 2000. The average contractual interest rate (weighted by
principal balances) on these Receivables on that date was approximately 12.4%.
See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Note 4" under Item 8.
16
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
RECEIVABLES COLLATERALIZED BY REAL ESTATE
SEPTEMBER 30, 1999
Approximately 1% of the Receivables are subject to variable interest rates.
Interest rates range from 0% to 18% with rates principally (77% of face value)
within the range of 8% to 13%. The following table segregates the Consolidated
Group's real estate Receivable portfolio by type, size, and lien position.
<TABLE>
<CAPTION>
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.................... 56 8-11% $ 6,914,078 $ 1,244,424 9
First Mortgage > $40,000.................... 139 8-10 7,204,023 294,999 6
First Mortgage < $40,000.................... 1,710 8-14 13,519,766 545,520 45
Second or Lower > $75,000................... 2 8-9 332,230 -- --
Second or Lower > $40,000................... 8 9-10 415,056 40,000 1
Second or Lower < $40,000................... 70 8-11 1,142,835 167,690 6
COMMERCIAL
First Mortgage > $75,000.................... 81 8-13 58,301,129 5,014,895 7
First Mortgage > $40,000.................... 35 8-10 1,896,952 128,613 2
First Mortgage < $40,000.................... 51 8-18 678,730 -- --
Second or Lower > $75,000................... 6 10-15 945,062 -- --
Second or Lower > $40,000................... 2 10-11 128,975 60,470 1
Second or Lower < $40,000................... 6 8-10 84,644 -- --
FARM, LAND AND OTHER
First Mortgage > $75,000.................... 15 8-12 20,554,949 -- --
First Mortgage > $40,000.................... 13 8-10 669,320 41,300 1
First Mortgage < $40,000.................... 37 8-10 751,147 -- --
Second or Lower > $75,000................... 2 9 345,601 186,403 1
Second or Lower > $40,000................... 1 6 72,201 -- --
Second or Lower < $40,000................... 8 9-11 159,833 22,183 1
Unrealized discounts, net of unamortized
acquisition costs, on Receivables
purchased at a discount................... (2,641,859)
Accrued Interest Receivable................. 1,291,761
Allowance for Losses........................ (3,082,918)
------------ -----------
CARRYING VALUE................................ $109,683,515 $ 7,746,497
============ ===========
</TABLE>
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 future maturities of the aggregate amounts of Receivables (face amount)
are as follows:
<TABLE>
<CAPTION>
RESIDENTIAL COMMERCIAL FARM, LAND, TOTAL
PRINCIPAL PRINCIPAL OTHER PRINCIPAL PRINCIPAL
----------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
October 1999--September 2002............................. $ 4,975,778 $ 39,038,805 $11,919,399 $ 55,933,982
October 2002--September 2004............................. 3,223,142 9,742,559 9,124,912 22,090,613
October 2004--September 2006............................. 8,364,853 4,040,143 355,823 12,760,819
October 2006--September 2009............................. 4,107,482 4,264,670 172,198 8,544,350
October 2009--September 2014............................. 4,750,501 2,551,856 346,153 7,648,510
October 2014--September 2019............................. 1,638,423 1,157,254 240,138 3,035,815
October 2019--Thereafter................................. 2,467,809 1,240,205 394,428 4,102,442
----------- ------------ ----------- ------------
$29,527,988 $ 62,035,492 $22,553,051 $114,116,531
=========== ============ =========== ============
</TABLE>
The Consolidated Group held 2,243 Receivables collateralized by real estate,
as of September 30, 1999. The average contractual interest rate (weighted by
principal balances) on these Receivables on that date was approximately 11.8%.
See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Note 4" under Item 8.
17
<PAGE>
DELINQUENCY EXPERIENCE AND 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, 2000 was 6.6% compared to 6.2% and 4.2% at September 30, 1999 and
1998, respectively. Management expects higher delinquency rates, because
Receivables purchased or originated 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), because of the
increasing concentration of acquisitions in commercial loans and because loans
which have no current delinquency can be sold, while delinquent loans cannot be
sold. Management also believes that these higher delinquency rates will be
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. See "--Allowance for Losses on Receivables." 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 and Old West pursuant to specific procedures. Collections efforts of
delinquent amounts of Receivables are organized in a step stage format which
staggers the intensity of the collection effort based upon the delinquency
severity and allowing the more experienced collectors to handle the more
delinquent accounts. The Consolidated Group's commercial underwriting resources
are active in the monitoring and collection process of commercial loans. Metwest
utilizes a computer generated payment behavior and scoring system to determine
at which point a borrower will be called on a late payment which sometimes may
be as soon as the first day of delinquency. If the system determines that a call
should be placed to a borrower prior to the tenth day of delinquency a front-end
collector will place a collection call to the payor. Generally, if a payment
becomes seven days past due, a late notice will automatically be sent to the
payor notifying the payor of the delinquency and the applicable late charge.
When 10 days delinquent, the Receivable will be assigned to a second stage
collector who will attempt to make verbal contact with the payor no later than
the twenty-ninth day of delinquency if the payment and behavior scoring system
indicates that a call should be placed at that time. The collector works closely
with a more senior collector in a team environment. If no satisfactory
arrangement is made by the twenty-second day of delinquency a pre-litigation
(demand) letter will be sent to the payor. Additionally at the thirtieth day of
delinquency the senior collector for that team will attempt to make contact with
the payor. If verbal contact or satisfactory arrangements are not made by the
forty-fifth day, a decision matrix is used to determine whether to forward the
file: (i) to the loan modification center for a workout solicitation or
acceleration; (ii) to the foreclosure department; or (iii) to the
pre-foreclosure committee for review to determine the best method for solving
the delinquency (either through additional workout attempts or through
foreclosure). Generally, for those loans for which verbal contact has been made,
a collector will work with the borrower to bring the loan current, or refer the
loan to the loan modification center for a work out. Collectors continue to
attempt to make contact with the payor, unless otherwise referred to the
foreclosure department or the loan modification center, through the sixtieth day
of delinquency. Collection activity may also involve the initiation of legal
proceedings against the Receivable obligor. Legal proceedings, when necessary,
are generally initiated within approximately 75 days after the initial default.
If accounts are reinstated prior to completion of the legal action, as a
condition of reinstatement, attorney fees, costs, expenses and late charges are
generally collected from the payor, or added to the Receivable balance, in some
cases.
When a lottery, structured settlement or annuity becomes delinquent, Metwest
attempts to commence collection efforts within four days of 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
18
<PAGE>
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 Consolidated Group's historical experience on such sales.
The Consolidated Group then adjusts its allowance for losses requirement as
appropriate, based upon such observed trends in delinquencies and losses on
resales. The allowance for losses was 2.9%, 2.7% and 1.4% of the face value of
Receivables collateralized by real estate at September 30, 2000, 1999 and 1998,
respectively.
The following is an analysis of the allowance for losses on real estate
contracts and mortgage notes receivable.
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year............................... $3,082,918 $1,843,055 $1,153,278
Provision for losses..................................... 2,721,039 1,507,953 1,243,044
Chargeoffs............................................... (440,612) (268,090) (553,267)
---------- ---------- ----------
$5,363,345 $3,082,918 $1,843,055
========== ========== ==========
</TABLE>
The provision for losses on real estate contracts and mortgage notes
receivable, including commercial loans, 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 Consolidated Group 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 Consolidated Group manages its
risk of loss upon default through the underwriting process, which is performed
by Metropolitan, which reviews 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.
REPOSSESSED PROPERTIES
Summit, Old Standard and Old West own various repossessed properties that
are held for sale. At September 30, 2000, 13 properties, acquired in
satisfaction of debt, with a combined carrying amount of approximately
$4.6 million were held, of which the largest single property had a carrying
value of approximately $3.2 million. This single large property of residential
lots is located the State of Hawaii and the Consolidated Group is actively
marketing the property for sale.
RECEIVABLE SALES
The Consolidated Group sells pools of Receivables when it considers it
profitable to do so. Such sales often occur in conjunction with sales of
Receivables by Metropolitan and generally occur through one of two methods:
(a) securitization or (b) 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.
Historically, the majority of the Consolidated Group's receivable sales have
been through securitizations. The Consolidated Group did not participate in any
securitizations during 2000 and does
19
<PAGE>
not anticipate doing so during the next fiscal year. Generally, a securitization
involves the sale of certain specified Receivables to a bankruptcy remote single
purpose trust. The trust issues certificates which represent an undivided
ownership interest in the Receivables transferred to the trust. Typically, the
certificates consist of several different classes, including senior
certificates, residual interest certificates and may also include intermediate
classes of subordinated certificates. The senior certificates are sold to
investors who are generally institutional investors. If a market exists, some or
all of the subordinate certificates are also sold to 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 certificates. Such interests are generally initially
apportioned based upon the respective companies' contribution of Receivables to
the pool of Receivables sold to the trust and may be resecuritized.
In the typical securitization structure, the Receivable payments are
distributed first to the senior certificates, next to the subordinated
certificates, if any, and finally to the residual interests. As a result, the
residual interest is the interest first affected by any loss of income due to
the failure of the Receivable to pay as scheduled. The rights of the senior
certificate holders can be further enhanced by subordinating the rights of the
subordinate certificate holders to receive distributions or by establishing a
reserve fund. 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
interests will experience a gain or a loss. When determining the expected cash
flow, the Consolidated Group must estimate the future rates of prepayments,
defaults, and default loss severity (the loss realized upon liquidation of
collateral from repossessed loans) as they affect the amount and timing of the
estimated cash flows. During the quarter ended June 30, 2000, the Consolidated
Group adjusted its assumptions based on the actual historical performance and
expectations of future performance of the loan pools.
The Consolidated Group may experience changes in the fair value of its
residuals, which are recorded at estimated fair value and accounted for as
"available-for-sale" securities. Temporary declines in the fair value of
residuals that are "available-for-sale" are excluded from earnings and reported
as a separate component of shareholders' equity. The Consolidated Group will
continue to periodically assess the assumptions used in valuing the cash flows
and the related carrying value of its residuals and subordinated securities.
During the third quarter of 2000, the Emerging Issues Task Force issued EITF
99-20 "Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets" ("EITF 99-20"). This EITF
will change the manner in which the Consolidated Group determines whether a
decline in fair value of its investment is other than temporary. The
Consolidated Group must adopt the provisions of EITF 99-20 on April 1, 2001, but
has not fully determined the effect of implementing EITF 99-20. As such, there
may be declines in fair value of investments, which are currently recorded in
equity as other comprehensive losses, which will be considered to be permanent
impairments resulting in a charge against earnings upon adoption.
During the fiscal year ended September 30, 2000, the Consolidated Group did
not participate in any securitizations. Through September 30, 2000, the
Consolidated Group (principally Summit and Old Standard) had participated as a
seller of Receivables in five real estate Receivable securitizations and one
structured settlement Receivable securitization with Metropolitan. The
Consolidated Group's percentage of each real estate securitization has been less
than approximately 10% in each transaction. The Consolidated Group's percentage
of the structured settlement securitization was approximately 42%. In each
securitization, Metropolitan has typically used either futures contracts or
securities "short sales" to hedge or protect the profits for all or a portion of
the transaction. The price to the Consolidated Group at settlement for each
securitization includes their proportionate share of hedging transactions
related to each securitization. See "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--Note 4" under Item 8.
20
<PAGE>
The Consolidated Group (principally Summit and Old Standard) 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 initially retained their
respective residual interests but recently, certain of such residual interests
were resecuritized. At September 30, 2000, the residual interests held by Summit
and Old Standard from the prior securitizations aggregated approximately
$3.1 million.
In addition to sales through securitizations, the Consolidated Group may
sell pools of Receivables directly to purchasers. These sales are typically
without recourse, except that for a period of time the selling company is
generally required to repurchase or replace any Receivables which do not conform
to the representations and warranties made at the time of sale. During 2000,
Summit, Old Standard, and Old West received proceeds of approximately
$9.7 million from the sale of portfolios of real estate Receivables through
direct sales and received proceeds of approximately $1.7 million from the direct
sale of other Receivable investments. During 2000 gains on these direct sales
were approximately $0.4 million.
ANNUITY OPERATIONS
INTRODUCTION
The Consolidated Group raises significant funds through its insurance
subsidiaries, Old Standard and Old West. Old Standard was incorporated in Idaho
in 1988, and was acquired by the Consolidated Group from Metropolitan on
May 31, 1995. Old Standard had total assets of approximately $203 million at
September 30, 2000. Old Standard markets its annuity products through over 300
independent sales representatives under contract. These representatives may also
sell insurance products for other companies. Old Standard is licensed as an
insurer in Idaho, Iowa, Montana, North Dakota, Oregon, South Dakota, Washington
and Utah. During calendar 2000, the most recent year for which statistical
information is available, Old Standard's individual annuity market share in
Idaho was 3%, ranking it the tenth largest producer of annuities in Idaho during
the period.
The Consolidated Group acquired Arizona Life Insurance Company ("Arizona
Life") on December 28, 1995. Arizona Life subsequently changed its name to Old
West. As of September 30, 2000, Old West had total assets of approximately
$83 million. Old West is licensed in Arizona, California, Delaware, Idaho, New
Mexico, Texas and Utah.
Management intends to expand the insurance operations into other states as
opportunities arise, which may include the acquisition of other insurance
companies.
There are no specific regulatory limitations imposed by Idaho or Arizona on
the percent of assets which Old Standard or Old West may invest in Receivables
collateralized by first position liens on real estate. As of September 30, 2000,
55% of Old Standard's assets were invested in Receivables collateralized by real
estate, and 5% in lotteries. As of September 30, 2000, 39% of Old West's assets
were invested in Receivables collateralized by real estate. As of September 30,
2000, the balance of Old Standard's and Old West's investments were principally
invested in corporate and government securities. See "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.
21
<PAGE>
ANNUITIES
During the last three years, Old Standard and Old West have derived 100% of
their premiums from annuity sales including both annuities reinsured from
Western United and their own direct 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 and Old West's annuities also qualify as investments under
several of the tax-advantaged programs.
During 2001, the Consolidated Group anticipates correlating premium cash
flows substantially with the cash flows availability from 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 Old West, 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, 2000, deferred policy
acquisition costs were approximately 4.7% of annuity reserves. Since surrender
charges typically do not exceed 5% of policy amounts, increasing termination
rates may have an adverse impact on the insurance subsidiaries' earnings,
requiring faster amortization of these costs. During the years ended
September 30, 1998, 1999 and 2000, the amortization of deferred policy
acquisition costs was approximately $1,195,000, $2,365,000 and $2,870,000,
respectively. An actuary has reviewed the calculations.
Annuity lapse rates are calculated by dividing cash outflows related to
partial and full surrenders, periodic payments and death benefits by average
annuity reserves. For the years ended September 30, 1998, 1999 and 2000,
annualized lapse rates were approximately, 11.6%, 12.0% and 23.8% respectively.
The change in lapse rates from 1999 to 2000 was primarily attributable to
maturities of one-year products issued in 1999.
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, 2000, 1999 and 1998, respectively, is as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net Income-GAAP........................ $ 3,427,741 $ 4,044,618 $ 3,211,934
Adjustments to reconcile:
Deferred policy acquisition cost..... (1,503,689) (1,824,402) (1,597,861)
State insurance guaranty fund........ (180,615) 302,320 864
Annuity reserves and benefits........ (2,418,256) 630,260 (703,876)
Capital gains and IMR amortization... 2,488,235 (1,400,626) (1,592,281)
Allowance for losses................. 2,227,969 66,481 1,112,982
Federal income taxes................. (204,595) (282,054) 416,457
Net investment income adjustment..... (1,068,111) -- --
Other................................ 59,649 -- 53,343
----------- ----------- -----------
Net Income-Statutory................... $ 2,828,328 $ 1,536,597 $ 901,562
=========== =========== ===========
</TABLE>
22
<PAGE>
REINSURANCE
Reinsurance is the practice whereby an insurance company enters into
agreements ("treaties") with other insurance companies in order to assign or
assume some of the insured risk for which a premium is paid, while the reinsured
retains 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 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.
Old Standard has entered into a reinsurance agreement with Western United
that became effective July 1, 1998 and remained in effect at September 30, 2000.
Under this agreement, Western United reinsured with Old Standard 75% of the risk
on 15 different annuity products. The premiums ceded during the fiscal year
ended September 30, 1999 and 2000 were approximately $44.7 million and
$27.4 million, respectively. Western United received ceding allowances equal to
actual commission plus 1.5% of the premium, which was approximately
$2.3 million and $1.5 million during the fiscal years ended September 30, 1999
and 2000 respectively.
This agreement has allowed Old Standard to acquire annuities at greater
speeds and at lower premium rates than management believes would have been
available through direct sales. Under its contractual terms, the agreement is an
ongoing arrangement with no stated expiration or termination date, although
either party may stop and restart at their discretion upon providing a 30-day
advance written notice. It is expected that approximately $30 million will be
ceded under this treaty during fiscal 2001. Western United receives a fee from
Old Standard for servicing the reinsured policies, which fee is 40 basis points
annually on the cash value of the reinsured policies.
In December 1998, Old Standard ceded a block of single premium deferred
annuities in the amount of approximately $37.5 million to its wholly owned
subsidiary Old West. The ceding allowance was approximately $2.1 million. The
reinsurance was a one-time transaction. Future reinsurance between Old Standard
and Old West currently is not anticipated. The objective of the transaction was
to position Old West for consistent future profitability. In addition,
management believes that the increase in Old West's asset size will better
position Old West in its market place. It is expected that Old Standard will, in
return, benefit from the profitability of its subsidiary.
RESERVES
Applicable state law requires that the annuity reserve be sufficient to meet
Old Standard's and Old West'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 Old West 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 were
approximately $237.6 million at September 30, 2000 based on GAAP financial
reporting.
23
<PAGE>
SECURITIES INVESTMENTS
At September 30, 2000 and 1999, 83% and 93%, respectively, of the
Consolidated Group's securities, excluding stock investment in affiliated
companies, were held by its insurance subsidiaries.
The following table outlines the nature and carrying value of securities
investments held by Old Standard and Old West at September 30, 2000:
<TABLE>
<CAPTION>
TRADING AVAILABLE-FOR-SALE HELD-TO-MATURITY
PORTFOLIO PORTFOLIO PORTFOLIO TOTAL PERCENTAGE
----------- ------------------ ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total Amount............. $15,825,508 $64,337,967 $ 4,616,744 $84,780,219 100.0%
=========== =========== =========== =========== ===========
% Invested in:
Fixed Income........... $15,213,255 $63,720,867 $ 4,616,744 $83,550,866 98.50
Equities............... 612,253 617,100 -- 1,229,353 1.45
----------- ----------- ----------- ----------- -----------
$15,825,508 $64,337,967 $ 4,616,744 $84,780,219 100.0
=========== =========== =========== =========== ===========
% Fixed Income:
Taxable................ $15,213,255 $63,720,867 $ 4,616,744 $83,550,866 100.00
Non-taxable............ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
$15,213,255 $63,720,867 $ 4,616,744 $83,550,866 100.0
=========== =========== =========== =========== ===========
% Taxable:
U.S. Government........ $ -- $ 1,510,547 $ 4,616,744 $ 6,127,291 7.33
Corporate.............. 15,213,255 62,210,320 -- 77,423,575 92.67
----------- ----------- ----------- ----------- -----------
$15,213,255 $63,720,867 $ 4,616,744 $83,550,866 100.0
=========== =========== =========== =========== ===========
% Corporate:
AAA.................... $ 1,458,126 $ 5,804,364 $ -- $ 7,262,490 9.38
AA..................... 3,280,421 17,026,843 -- 20,307,264 26.23
A...................... 10,474,708 3,820,472 -- 14,295,180 18.46
BBB.................... -- 30,197,669 -- 30,197,669 39.00
BB..................... -- 4,500,823 -- 4,500,823 5.81
B...................... -- 860,149 -- 860,149 1.11
Below investment
grade................ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
$15,213,255 $62,210,320 $ -- $77,423,575 100.0
=========== =========== =========== =========== ===========
% Corporate:
Mortgage- and asset-
backed............... $15,213,255 $62,210,320 $ -- $77,423,575 100.00
Finance................ -- -- -- -- --
Industrial............. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
$15,213,255 $62,210,320 $ -- $77,423,575 100.0%
=========== =========== =========== =========== ===========
</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 "REGULATION." Investments primarily include corporate,
government agency, and direct government obligations.
Old Standard and Old West 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
24
<PAGE>
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 "RECEIVABLE
INVESTMENTS--Receivable Sales." At September 30, 2000, 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.
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, certificates, preferred stock, sales of
Receivables, and collateralized borrowings. 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 and including the Federal Home Loan
Bank of Seattle. As of September 30, 2000, the Consolidated Group had $7,000,000
in short-term collateralized borrowings outstanding.
The availability of Receivables offered for investment in the national
market is believed by management to be adequate to meet the needs of the
Consolidated Group.
BROKER/DEALER ACTIVITIES
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. In addition, MIS currently markets several families of mutual
funds, and general securities. MIS is licensed as a broker/dealer in 47 states.
MIS had net income of approximately $209,000 during 2000. Management is
considering staffing, management systems and budget changes which are designed
to expand the market and improve the profitability of MIS. There can be no
assurance that these efforts will continue to be successful. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" under
Item 7 and Item 13.
PROPERTY DEVELOPMENT SERVICES
Summit Property Development, Inc. provides real estate development services
for a fee. Currently, its principal clients are Metropolitan and Western United.
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 losses for the Consolidated Group during the fiscal year
ended September 30, 2000 of approximately $485,000 on revenues of approximately
$1,975,000. Management is considering staffing changes, exploring new marketing
methods and exploring strategic alliances with other companies to expand the
activities and improve the profitability of the Summit Property Development,
Inc. 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 and Item 13.
25
<PAGE>
COMPETITION
Summit, Old Standard and Old West's ability to compete for Receivable
investments (except for commercial loans) 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 Receivable acquisitions, the
Consolidated Group competes with financial institutions many of which are
larger, have access to more resources and have greater name recognition.
Management believes 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 Old West include access to Metropolitan's Receivable
acquisition network, which allows access to markets throughout the United States
and flexibility in structuring Receivable acquisitions. To the extent other
competing Receivable investors may develop faster closing times or more flexible
investment policies, they may experience a competitive advantage.
Summit, Old Standard and Old West compete in the secondary mortgage market
as sellers of pools of Receivables through direct sales. This market is a
multi-billion dollar industry and includes many financial institutions and
government participants. Competitors generally have access to larger resources,
better name recognition and greater transaction volumes and economies of scale.
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.
Summit competes with many other lending institutions in its commercial loan
origination program. The commercial lending market is a multi-billion dollar
market including competitors with vastly greater resources, economies of scale
and name recognition. Summit believes that its flexible underwriting, pricing
guidelines and closing speed enhance its ability to compete in this market.
There can be no assurance that Summit's commercial loan origination program will
be successful in expanding these activities, or that they will be profitable, if
expanded.
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 Old West'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" (fair) and Old West has been assigned a Best rating
of "B" (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 the
policyholders and insurance agents.
REGULATION
Old Standard and Old West are subject to the Insurance Holding Company Act
as administered by the Office of the State Insurance Commissioner of the States
of Idaho and Arizona, respectively. Old West is also considered to be
commercially domiciled in the State of Texas due to the percent of its sales to
residents of Texas. As such, Old West is subject to holding company and related
regulations in the State of Texas. 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.
26
<PAGE>
Old Standard and Old West are subject to extensive regulation and
supervision by the Offices of the State Insurance Commissioner of Idaho and
Arizona, respectively. To a lesser extent they are also subject to regulation by
each of the other states in which they operate. These regulations are directed
toward supervision of such things as granting and revoking licenses to transact
business on both the insurance company and agent levels, approving policy forms,
prescribing the nature and amount of permitted investments, establishing
solvency standards and conducting extensive periodic examinations of insurance
company records. Such regulation is intended to protect annuity contract and
policy owners, rather than investors in an insurance company.
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 (recaptured) by Old Standard and Old West for
guaranty fund assessments and charged to operations for the years ended
September 30, 2000, 1999 and 1998 were approximately $(263,000), $270,000 and
$119,000, 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 1998. Management does not
believe that the amount of future assessments associated with known insolvencies
after 1998 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.
Old Standard and Old West 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 surplus deficit of Old
Standard and Old West totaled approximately $361,000 and $3,082,000,
respectively, as of September 30, 2000 and are currently restricted from paying
dividends.
For statutory purposes, Old Standard's and Old West'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, ------------------------------
2000 1999 1998 1997
-------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Old Standard:
Capital and Surplus............................ $17,439 $17,979 $12,360 $10,359
Ratio of Capital and Surplus to Admitted
Assets....................................... 8.7 % 11.6% 9.4% 9.7%
Old West:
Capital and Surplus............................ $ 8,026 $ 7,873 $ 5,961 $ 3,039
Ratio of Capital and Surplus to Admitted
Assets....................................... 9.7 % 10.3% 9.3% 18.9%
</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, 2000, the insurance subsidiaries'
capital and surplus levels exceeded the calculated minimum requirements.
27
<PAGE>
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.
ITEM 2. PROPERTIES
The principal offices of Summit and its subsidiaries are located in an
office building owned by Metropolitan located at 601 West First Avenue, Spokane,
Washington 99201-5015. See "Item 1.--INTRODUCTION."
ITEM 3. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to its business, 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
No matters were submitted to a vote of the Registrant's security holders
during the fourth quarter ended September 30, 2000.
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, 2000, there was one common stockholder,
National Summit Corp.
(c) DIVIDENDS. The Registrant paid dividends per share of $100 and $0 during
fiscal 2000 and 1999, respectively.
2. RECENT SALES OF UNREGISTERED SECURITIES. None.
28
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SUMMIT SECURITIES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data shown below summarizes certain consolidated
financial information of the Consolidated Group's for the five years in the
period ended September 30, 2000.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues......................... $ 49,577,780 $ 36,368,936 $ 29,965,547 $ 19,785,462 $ 14,536,449
============ ============ ============ ============ ============
Net income....................... $ 4,082,239 $ 2,814,828 $ 2,524,027 $ 1,851,240 $ 1,244,522
Preferred stock dividends........ (2,025,155) (838,356) (498,533) (446,560) (333,606)
------------ ------------ ------------ ------------ ------------
Income applicable to common
stockholder.................... $ 2,057,084 $ 1,976,472 $ 2,025,494 $ 1,404,680 $ 910,916
============ ============ ============ ============ ============
PER COMMON SHARE DATA:
Basic and diluted income per
share applicable to common
stockholder.................... $ 205.71 $ 197.65 $ 202.55 $ 140.47 $ 91.09
============ ============ ============ ============ ============
Weighted average number of common
shares outstanding............. 10,000 10,000 10,000 10,000 10,000
============ ============ ============ ============ ============
Cash dividends per common
share.......................... 100.00 $ 0.00 $ 21.07 $ 0.00 $ 0.00
============ ============ ============ ============ ============
Ratio of earnings to fixed
charges........................ 1.81 1.57 1.64 1.46 1.40
Ratio of earnings to fixed
charges and preferred stock
dividends...................... 1.29 1.34 1.46 1.31 1.26
BALANCE SHEET DATA:
Due from/(to) affiliated
companies, net................. $ 366,940 $ (151,077) $ 10,985,805 $ 870,255 $ 1,296,290
Total assets..................... $359,325,586 $295,115,959 $206,594,234 $166,354,070 $117,266,680
Debt securities and other debt
payable........................ $ 88,641,357 $ 72,086,696 $ 56,078,514 $ 50,607,983 $ 46,674,841
Stockholder's equity............. $ 29,829,414 $ 19,104,955 $ 10,684,064 $ 7,756,643 $ 5,358,774
</TABLE>
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the attached
audited consolidated financial statements and notes thereto for the three year
period ended September 30, 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 30, 2000
INTRODUCTION
Summit, Old Standard and Old West are engaged in the business of investing
in cash flowing assets, consisting of obligations collateralized by real estate,
structured settlements, annuities, lottery prizes and other investments,
investment securities and other assets through funds provided by annuity sales,
sale of Receivables, collateralized borrowings, certificate (debt obligation)
sales, preferred stock sales, earnings on investments and the resale of
repossessed real estate. During the fiscal year ended September 30, 2000 and
currently, the Consolidated Group is focusing its Receivable investing
activities on loans collateralized by commercial real estate. The Consolidated
Group's goal is to achieve a positive spread between the return on its
Receivables 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 is affiliated, due to the
common control by C. Paul Sandifur, Jr., with Metropolitan, which has as its
principal subsidiaries Metwest and Western United. 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.
The Consolidated Group strives to maximize its risk-adjusted return by
investing in non-conventional real estate Receivables and originating small to
mid-sized commercial loans. 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. Commercial loans are generally small to
mid-sized loans that are originated for less than $5 million and are
collateralized by various types of commercial properties including multi-family
properties. The Consolidated Group anticipates that a substantial majority of
its Receivable acquisitions during 2001 will be new commercial loan
originations. See "RECEIVABLE INVESTMENTS" under Item 1.
Seller financed Receivables are the types of non-conventional residential
Receivables normally acquired by the Consolidated Group. 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 the value of the underlying collateral and the superior
interest yields realized over normal conventional financing.
ANALYSIS OF OPERATIONS
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: (a) the wide geographic dispersion of
its Receivables; (b) the relatively small average size of its residential
mortgage Receivables; (c) strong underwriting and loan-to-value requirements for
commercial lending; and (d) a continuing strong demand for tax-advantaged
products, such as annuities.
The Consolidated Group's net income after income taxes was approximately
$4.1 million for the fiscal year ended September 30, 2000 as compared to
$2.8 million and $2.5 million for the comparable 1999 and 1998 periods,
respectively. The increase in 2000 over 1999 and the increase in 1999 over 1998
was primarily
30
<PAGE>
attributable to an increase in net interest sensitive income and commission fees
that were partially offset by an increase in other operating expenses including
salaries and commissions.
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 and collateralized
borrowings, while interest sensitive income includes interest and earned
discounts on Receivables, dividends and other income from the investment
portfolio (other investment income).
The Consolidated Group is in an "asset sensitive" position in that its
interest sensitive assets reprice or mature more quickly than do its interest
sensitive liabilities. Consequently, in a rising interest rate environment, the
net return from interest sensitive assets and liabilities will tend to increase,
thus rising interest rates will have a positive impact on results of operations.
Conversely, in a falling interest rate environment, the net return from interest
sensitive assets and liabilities will tend to decline, thus falling interest
rates will have a negative impact on results of operations. As with the impact
on operations from changes in interest rates, the Consolidated Group's Net
Present Value ("NPV") of financial assets and 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. NPV is
calculated based on the net present value of estimated cash flows utilizing
market prepayment assumptions and market rates of interest provided by
independent broker quotations and other public sources.
Computation of forecasted effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and certificate redemptions, and should not be relied
upon as indicative of actual future results.
The following table presents, as of September 30, 2000, the Consolidated
Group's estimate of the change in the NPV of the financial assets and
liabilities if interest rate levels generally were to increase or decrease by 1%
and 2%, respectively. These calculations, which are highly subjective and
technical, may differ from actual results. See "--Asset/Liability Management."
<TABLE>
<CAPTION>
FAIR VALUE WITH INTEREST RATE CHANGE
-----------------------------------------
CARRYING FAIR DECREASE DECREASE INCREASE INCREASE
AMOUNTS VALUE 1% 2% 1% 2%
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents.............. $ 24,229 $ 24,229 $ 24,229 $ 24,229 $ 24,229 $ 24,229
Investments:
Affiliated companies................. 4,522 4,522 4,522 4,522 4,522 4,522
Trading.............................. 26,264 26,264 26,845 27,461 25,715 25,197
Available-for-sale................... 71,101 71,101 73,478 75,991 68,849 66,716
Held-to-maturity..................... 4,617 4,679 4,866 5,065 4,503 4,336
Real estate contracts and mortgage
notes.............................. 177,597 198,650 204,051 209,729 193,509 188,611
Other receivable investments......... 34,736 35,673 37,013 38,433 34,406 33,209
-------- -------- -------- -------- -------- --------
$343,066 $365,118 $375,004 $385,430 $355,733 $346,820
======== ======== ======== ======== ======== ========
Financial Liabilities:
Annuity reserves....................... $237,635 $237,635 $243,393 $249,347 $232,064 $226,675
Investment certificates................ 69,395 68,819 70,105 71,431 67,570 66,357
Debt payable........................... 18,188 19,718 20,640 21,651 18,877 18,109
-------- -------- -------- -------- -------- --------
$325,218 $326,172 $334,138 $342,429 $318,511 $311,141
======== ======== ======== ======== ======== ========
</TABLE>
The calculations of present value have certain shortcomings. The discount
rates utilized for Receivables and investment securities are based on estimated
market interest rate levels of similar
31
<PAGE>
receivables and securities nationwide, with prepayment levels generally assumed
based on global statistics. The unique characteristics of the Consolidated
Group's Receivables and investment securities may not necessarily parallel those
assumed in the model, and therefore, would likely result in different discount
rates, prepayment experiences, and present values. The discount rates utilized
for investment certificates, annuity reserves and debt payable are based upon
alternative types and sources of funds which are not necessarily indicative of
the present value of such instruments. The present values are determined based
on the discounted cash flows over the remaining estimated lives of the financial
instruments and assumes that the resulting cash flows are reinvested in
financial instruments with virtually identical terms. The total measurement of
the Consolidated Group's exposure to interest rate risk as presented in the
above table may not be representative of the actual values which might result
from a higher or lower interest rate environment. A higher or lower interest
rate environment will most likely result in different investment and borrowing
strategies by the Consolidated Group designed to mitigate the effect on the
value of, and the net earnings generated from, the Consolidated Group's net
assets from any change in interest rates.
The excess of interest sensitive income over interest sensitive expense was
approximately $11.7 million in 2000, $7.9 million in 1999 and $5.3 million in
1998. The increase from 1999 to 2000, as was the case from 1998 to 1999, was
attributable to increased investments in the Receivable and investment
securities portfolios, which was largely due to the continued growth of Old
Standard and Old West. The Consolidated Group has increased its securities
investments to approximately $107.5 million in 2000 from $94.7 million in 1999
and $18.1 million in 1998. During the same time period, the Consolidated Group
has continued to invest in real estate contracts and other receivable
investments with a total outstanding investment of approximately $206.1 million
at September 30, 2000 as compared to $140.8 million and $148.7 million at
September 30, 1999 and 1998, respectively.
NET GAINS (LOSSES) ON INVESTMENTS AND RECEIVABLES
During the three-year period ended September 30, 2000, the Consolidated
Group operated in an environment of fluctuating interest rates. The five-year
U.S. Treasury rate was approximately 5.7% in October 1997, hit a low of
approximately 4.2% at September 30, 1998 and closed out September 2000 at
approximately 5.9% after high of approximately 6.7% at January 31, 2000. Periods
of declining interest rates have postively impacted earnings by increasing the
value of predominately fixed rate receivables. This situation was evident in
1999 and 1998, as the Consolidated Group was able to realize gains of
approximately $3.2 million and $2.1 million, respectively, from the sale of
receivables. These gains resulted primarily from the Consolidated Group
participating directly in receivable securitizations with Metropolitan. The
Consolidated Group did not participate in any securitizations during 2000.
During the fiscal year ended September 30, 2000, the Consolidated Group's
gain on investments, including mark-to-market adjustments on trading securities,
increased to approximately $3.5 million from a loss of $0.2 million and a gain
of $0.4 million during the same periods ended September 30, 1999 and 1998,
respectively. The gains in the current period were the result of a $4.2 million
net change in unrealized gains on mark-to-market trading investments which
exceeded $0.7 million in realized losses on the sale of investments. The
mark-to-market gains in the current period resulted primarily from investments
that the Consolidated Group has made in certain limited partnership interests.
The limited partnerships generally invest funds in both publicly and privately
traded small and microcapitalization equity securities. During the current
period, the value of the equity securities increased, thereby increasing the
value of the Consolidated Group's investment. The loss in 1999 includes a
$0.6 million net change in unrealized losses on trading investments that were
partially offset by $0.4 million in realized gains while 1998 gains were the
result of a $0.4 million net change in unrealized gains on trading investments.
FEES, COMMISSIONS, SERVICE AND OTHER INCOME
Fees, commissions, service and other income increased to approximately
$8.4 million in 2000 from $4.5 million in 1999 and $4.8 million in 1998.
Revenues in 2000 consisted primarily of commissions earned
32
<PAGE>
by the Consolidated Group's broker/dealer subsidiary, MIS, and service fees
earned by its property development subsidiary, Summit Property
Development, Inc. MIS and Summit's property development subsidiary earned
approximately $6.1 million in commissions (after eliminating commissions
received by MIS from Summit) and approximately $2.0 million in service fees in
2000, respectively. The increase in revenue in 2000 of approximately
$4.0 million resulted primarily from an increase in commissions earned by MIS.
OTHER EXPENSES
Operating expenses increased to approximately $15.2 million in 2000 from
$9.8 million in 1999 and from $7.8 million in 1998. The 2000 increase in
operating expenses was principally the result of an increase in MIS commissions
paid of approximately $3.7 million and increased costs associated with its
commercial lending and insurance operations. The 1999 increase in operating
expenses was principally the result of increased commissions to agents, in
particular commissions paid by Old Standard and Old West which increased by
approximately $1.3 million and increased operating costs associated with its
insurance operations which included an increase in amortization of deferred
policy acquisition costs of approximately $1.2 million.
PROVISION FOR LOSSES ON REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE
To provide for what management believes is an adequate allowance for
probable losses, the provision for losses on real estate contracts and mortgage
notes receivable has increased with the shift of the size and mix of the
Receivables portfolio, including an increase in the number of commercial loans.
Due to the prior and anticipated increase in commercial loan acquisitions and
the Consolidated Group's relatively short experience with these types of assets,
there can be no assurance that actual losses will not exceed management's
expectations. The following table summarizes changes in the Consolidated Group's
allowance for losses on real estate contracts and mortgage notes receivable:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Beginning Balance........................ $3,082,918 $1,843,055 $1,153,278
Increase due to:
Provision for losses................... 2,721,039 1,507,953 1,243,044
Charge-offs............................ (440,612) (268,090) (553,267)
---------- ---------- ----------
Ending Balance........................... $5,363,345 $3,082,918 $1,843,055
========== ========== ==========
</TABLE>
The allowance for losses represents approximately 2.9%, 2.7% and 1.4% of the
face value of Receivables collateralized by real estate at September 30, 2000,
1999 and 1998, respectively. These allowances are in addition to unamortized
acquisition discounts of approximately $8.3 million at September 30, 2000,
$2.6 million at September 30, 1999 and $5.0 million at September 30, 1998.
PROVISION FOR LOSSES ON OTHER RECEIVABLE INVESTMENTS
During the year ended September 30, 2000, the Consolidated Group established
a specific and general loss reserve on its investments in annuity and structured
settlement cashflows as the industry has recently focused on state and federal
collection laws and their applicability to delinquent annuity and structured
settlement payments. Additionally, during the year ended September 2000, the
Consolidated Group established a general reserve against a participation in
finance leases purchased from an affiliate. The allowance for loss represents
3.3% of the net investment in other receivable investments as of September 30,
2000.
33
<PAGE>
The following is an analysis of the allowance for losses on other receivable
investments for the year ended September 30, 2000.
<TABLE>
<CAPTION>
<S> <C>
Beginning balance........................................... $ --
Provisions for losses....................................... 1,165,047
Charge-offs................................................. (15,750)
----------
Ending balance.............................................. $1,149,297
==========
</TABLE>
GAIN/LOSS ON OTHER REAL ESTATE OWNED
During 2000, the Consolidated Group realized a loss on the sale of real
estate of approximately $44,000 compared to a gain of $143,000 in 1999 and a
loss of $118,000 in 1998. At September 30, 2000, the Consolidated Group had
approximately $4,791,000 million in real estate held for sale or 1.3% of total
assets as compared to approximately $2,654,000 or 0.9% of total assets at
September 30, 1999.
EFFECT OF INFLATION
During the three-year period ended September 30, 2000, 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. 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 continuing improvement over the three-year period in the positive spread
between the return on interest earning assets and the cost of interest bearing
liabilities. The positive spread increased to 4.61% in 2000 from 1.8% in 1998.
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 business venture
activities.
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 real estate sales 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 2001,
more of the Consolidated Group's financial assets (primarily Receivables and
fixed income investments) will reprice or mature more quickly than its financial
liabilities (primarily annuities and certificates). In an increasing interest
rate environment, this factor will tend to increase earnings as assets will
generally be repriced at higher rates of interest while financial liabilities
maintain their existing rates of interest. Conversely, in a declining interest
rate environment, this factor will tend to decrease earnings.
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
34
<PAGE>
an anticipated movement in the financial markets. At September 30, 2000, the
Consolidated Group had no outstanding hedge transactions or open short sales
positions. See "SECURITIES INVESTMENTS" under Item 1.
During fiscal 2001, approximately $168,653,000 of interest sensitive assets
(cash, Receivables and fixed income investments) are expected to reprice or
mature. Interest sensitive liabilities, including annuity reserves of
approximately $137,812,000 reprice during fiscal 2001, and approximately
$21,710,000 of Certificates and other debt will mature during fiscal 2001. These
estimates result in repricing of interest sensitive assets in excess of interest
sensitive liabilities of approximately $9,131,000, or a ratio of interest
sensitive assets to interest sensitive liabilities of approximately 106%.
The Consolidated Group is able to manage this asset to liability mismatch of
approximately 1.06:1 by the fact that approximately 84% 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 are 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 sales, the
Consolidated Group has increased its ability to raise necessary liquidity to
manage the liability to asset mismatch. If necessary, the proceeds from the
sales could be used to retire maturing liabilities.
NEW ACCOUNTING RULES
In December of 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SOP 97-3"). SOP 97-3 applies to
all entities that are subject to guaranty-fund and other insurance-related
assessments. Assessments covered by this SOP include any charge mandated by
statute or regulatory authority that is related directly or indirectly to
underwriting activities (including self-insurance), except for income taxes and
premium taxes. The Consolidated Group adopted SOP 97-3 effective October 1,
1999. This adoption had no material effect on its consolidated financial
statements.
In June of 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
was issued. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as "Derivatives") and for hedging
activities. It requires that an entity recognize all Derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999 and 2000 Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of Effective Date of SFAS 133" ("SFAS No. 137") and
Statement of Financial Accounting Standards No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities an amendment of SFAS 133"
(SFAS No. 138") were issued. SFAS No. 137 amends SFAS No. 133 to become
effective for all quarters of fiscal years beginning after June 15, 2000. The
implementation of SFAS No. 133, as amended, will not have a material effect on
the Consolidated Group's financial statements. As part of implementing SFAS 133
on October 1, 2000, the Consolidated Group's reclassified approximately
$4.6 million of investments from held-to-maturity to available-for-sale.
35
<PAGE>
In October of 1998, Statement of Financial Accounting, Standards No. 134,
"Accounting for Mortgage-Banking Enterprise" ("SFAS 134"), was issued. SFAS 134
requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a non-mortgage
banking enterprise. This statement was applied by the Consolidated Group on
January 1, 1999, and accordingly, trading securities with a carrying value of
approximately $16.7 million were reclassified to the available-for-sale
classification.
In December of 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views on applying generally
accepted accounting principles to revenue recognition in financial statements.
On June 26, 2000, the SEC issued SAB 101B to defer the effective date of
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 31, 1999. The Consolidated Group is
required to adopt SAB 101 by July 1, 2001. The Consolidated Group does not
expect the adoption of SAB 101 to have a material impact on the consolidated
financial statements.
During the third quarter of 2000, the Emerging Issues Task Force issued EITF
99-20 "Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets" ("EITF 99-20"). This EITF
will change the manner in which the Consolidated Group determines whether a
decline in fair value of its investment is other than temporary. The
Consolidated Group must adopt the provisions of EITF 99-20 on April 1, 2001, but
has not fully determined the effect of implementing EITF 99-20. As such, there
may be declines in fair value of investments, which are currently classified as
comprehensive losses, which will be considered to be permanent impairments
resulting in a charge against earnings upon adoption.
On September 29, 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--A
Replacement of FASB Statement No. 125" ("SFAS 140"). SFAS 140 is effective for
transfers occurring after March 31, 2001 and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Consolidated Group is in the process of evaluating the
impact of SFAS 140 on its results of operations and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
As a financial institution, the Consolidated Group's sources of liquidity
are largely linked to its ability to renew, maintain or obtain additional
sources of cash. The Consolidated Group has successfully met these requirements
during the past three years and has continued to invest funds generated by
financing activities, Receivables and investments.
During 2000, $189.2 million in funds provided by the Consolidated Group's
various liquidity sources were used to (1) invest $164.1 million primarily in
Receivables and investments and (2) fund $43.1 million in debt maturities,
annuity product surrenders, and the payment of dividends.
During 1999, $246.1 million in funds provided by the Consolidated Group's
various liquidity sources were used to (1) invest $186.9 million primarily in
Receivables and investments, (2) fund $27.7 million of primarily debt maturities
and annuity product surrenders and (3) fund $3.4 million in operating
activities.
During 1998, $119.9 million in funds provided by the Consolidated Group's
various liquidity sources were used to (1) invest $81.4 million primarily in
Receivables and investments, (2) fund $23.9 million of primarily debt maturities
and annuity product surrenders and (3) fund $8.9 million in operating
activities.
36
<PAGE>
During 2001, anticipated principal, interest and dividend payments on
outstanding certificates, other debt payments and preferred stock distributions
are expected to be approximately $28.9 million. During 2000, the principal
portion of the payments received on the Consolidated Group's Receivables and
proceeds from sales of real estate and Receivables were $84.7 million. A
decrease in the prepayment rate on these Receivables or a decrease in the
ability to sell 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 adequate levels of liquidity in
the foreseeable future by continuing its securities offerings and annuity sales.
At September 30, 2000, cash or cash equivalents were $24.2 million, or 6.7% of
total assets. Including securities that are either trading or
available-for-sale, total liquidity was $121.6 million, $129.8 million, and
$25.6 million as of September 30, 2000, 1999 and 1998, respectively, or 33.8%
44.0% and 12.4% of total assets, respectively. During 1999 and 1998, access to
new "capital markets" through Receivable securitizations allowed the
Consolidated Group to both increase liquidity and accelerate earnings through
the gains recorded on the securitizations.
For statutory purposes, Old Standard and Old West perform 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 respective states. At the end of calendar year
1999, the results of this cash flow testing process were satisfactory.
At September 30, 2000, 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 financing activities and liquidity
provided from current investments will be sufficient for the Consolidated Group
to conduct its business and meet its anticipated obligations as they mature
during fiscal 2001. Summit has not defaulted on any of its obligations since its
founding in 1990.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Summit is in a "asset sensitive" position in that its interest sensitive
assets reprice or mature more quickly than do its interest sensitive
liabilities. Consequently, in a rising interest rate environment, the net return
from interest sensitive assets and liabilities will tend to increase, thus
rising interest rates will have a positive impact on results of operations.
Conversely, in a falling interest rate environment, the net return from interest
sensitive assets and liabilities will tend to decline, thus falling interest
rates will have a negative impact on results of operations. As with the impact
on operations from changes in interest rates, Summit's Net Present Value ("NPV")
of financial assets and liabilities is subject to fluctuations in interest
rates. Summit continually monitors the sensitivity of net interest income and
NPV to changes in interest rates. NPV is calculated based on the net present
value of estimated cash flows utilizing market prepayment assumptions and market
rates of interest provided by independent broker quotations and other public
sources. Any computation of forecasted effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and redemptions of certificates, and should not
be relied upon as indicative of actual future results.
For additional quantitative information about market risk of the Registrant,
see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Interest Sensitive Income and Expense" under Item 7.
For qualitative information about market risk of the Registrant, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Asset/Liability Management" under Item 7.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related financial information
required to be filed are attached to and incorporated into this Report.
Reference is made to page F-1 of this Annual Report for an index to the
consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
(AS OF SEPTEMBER 30, 2000)
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Tom Turner.......................... 50 President/Director
Philip Sandifur..................... 29 Vice President/Director
Gregory Strate...................... 52 Secretary/Treasurer/Director
Robert Potter....................... 73 Director
</TABLE>
All officers are appointed by and serve at the discretion of the Board of
Directors. Directors serve for one-year terms or until their successor is duly
elected and qualified.
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 to 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 was elected Vice President on September 24, 1994, and 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.
Gregory Strate was elected Secretary, Treasurer, and Director of Summit in
2000. Since August of 1998, Mr. Strate has worked as a manager for Old
Standard's commercial lending division, first as a commercial underwriter and
then, in September of 1999, he was promoted to manager of commercial lending.
From April of 1978 to July of 1998, Mr. Strate was the vice president and
commercial loan officer of Washington Trust Bank.
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 nonprofit 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.
38
<PAGE>
The directors of Summit are elected for one-year terms at annual shareholder
meetings. The officers of Summit serve at the discretion 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 Metropolitan's 401(k) plan.
SUMMARY COMPENSATION TABLE
(AS OF SEPTEMBER 30, 2000)
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS/COMMISSIONS
--------------------------- -------- -------- -----------------
<S> <C> <C> <C>
Tom Turner......................................... 2000 $125,561 $50,000
President, Summit* 1999 $114,500 --
1998 $105,000 --
</TABLE>
* 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.
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 holding company 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, 2000.
<TABLE>
<CAPTION>
SHARES OF % OF
NAME AND ADDRESS COMMON STOCK CLASS
---------------- ------------ --------
<S> <C> <C>
National Summit Corp.
601 West First Avenue
Spokane, WA 99201...................................... 10,000 100%
</TABLE>
39
<PAGE>
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. Following this sale, Metropolitan has continued to
provide, for a fee, principally all the management services to Summit. See
"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.
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 the purchase or sale of Receivables from or to affiliated
companies, borrowing or lending money from or to affiliated companies, rental of
office space, provision of administrative and data processing support,
accounting and legal services. See "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--Note 16" under Item 8. In addition, Metropolitan and its
subsidiaries provide services to various companies within the Consolidated
Group, as described more fully herein below.
Summit, Old Standard and Old West obtain substantially all of their
Receivable management and servicing support (except for commercial loan
originations) from Metropolitan through a Management, Receivable Acquisition and
Servicing Agreement. In 2000, the Consolidated Group paid compensation to
Metropolitan for Receivable acquisitions of approximately $111,000 and fees for
servicing by Metwest of approximately $404,000. See "RECEIVABLE INVESTMENTS"
under Item 1 and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Note 16" 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 entered into a reinsurance agreement with Western United,
which became effective July 1, 1998 and remained in effect at September 30,
2000. Under this agreement, Western United reinsured with Old Standard 75% of
the risk on 15 different annuity products and premium ceded during the fiscal
years ended September 30, 1999 and 2000 was approximately $44.7 million and
$27.4 million, respectively. Western United received ceding allowances equal to
actual commission plus 1.5% of premium, which was approximately $2.3 million and
$1.5 million during the fiscal year ended September 30, 1999 and 2000,
respectively.
This agreement has allowed Old Standard to acquire annuities at greater
speeds and at lower premium rates than management believes would have been
available through direct sales. Under its contractual terms, the agreement is an
ongoing arrangement with no stated expiration or termination date, although
either party may stop and restart at their discretion upon providing a 30-day
advance written notice. It is expected that approximately $30 million will be
ceded under this treaty during fiscal 2001. Western United receives a fee from
Old Standard for servicing the reinsured policies, which fee is 40 basis points
annually on the cash value of the reinsured policies.
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, 2000, Summit paid or
40
<PAGE>
accrued commissions to MIS in the amount of $355,739 for the sale of $9,183,528
of certificates and commissions of $812,913 upon the sale of $13,328,235 of
preferred stock. During the fiscal year ended September 30, 2000, Summit also
paid commissions to MIS in the amount of $203,916 on sales of preferred stock
through an in-house trading list. 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 year ended September 30,
2000, Metropolitan paid commissions to MIS in the amount of $4,131,274, on sales
of debt securities in the amount of $96,583,832. During the fiscal year ended
September 30, 2000, Metropolitan paid commissions to MIS in the amounts of
$365,209, on sales of preferred stock in the amount of $10,904,207.
Additionally, in 2000, Metropolitan paid commissions to MIS in the amount of
$220,739 on sales of preferred stock through an in-house trading list.
Summit Property Development, Inc. has entered into an agreement with
Metropolitan to provide property development services to Metropolitan for a fee.
During the year ended September 30, 2000 the fee was approximately
$2.0 million. See "PROPERTY DEVELOPMENT SERVICES" under Item 1.
41
<PAGE>
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, 2000 and 1999
Consolidated Statements of Income for the Years Ended September 30, 2000,
1999 and 1998
Consolidated Statements of Comprehensive Income for the Years Ended
September 30, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended September 30,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
(A) (2). FINANCIAL STATEMENTS SCHEDULES
Included in Part IV of this report:
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
consolidated financial statements or notes thereto.
(A) (3). EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
3.01 Articles of Incorporation of Summit (Incorporated by
Reference to Exhibit 3(a) to Registration No. 3-36775).
3.02 Bylaws of Summit (Incorporated by Reference to Exhibit
3(b) to Registration No. 33-36775).
4.01 Indenture dated as of May 25, 2000, between Summit and U.S.
Bank Trust National Association, Trustee (Incorporated by
Reference to Exhibit 4.01 to Registration No. 333-40074
4.02 Indenture dated as of November 15, 1990 between Summit and
West One Bank, Idaho, N.A., Trustee (Incorporated by
Reference to Exhibit 4(a) to Registration No. 33-36775).
4.03 Tri-Party Agreement dated as of April 24, 1996 between West
One Bank, First Trust and Summit, appointing First Trust
as successor Trustee (Incorporated by Reference to Exhibit
4(c) to Registration No. 333-19787).
4.04 First Supplemental Indenture between Summit and First Trust
dated as of December 31, 1997, with respect to Investment
Certificates, Series B (Incorporated by Reference to
Exhibit 4(c) to Registration No. 33-36775).
4.05 Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-1
(Incorporated by Reference to Exhibit 4(c) to Registration
No. 33-57619).
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
4.06 Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-2
(Incorporated by Reference to Exhibit 4(c) to Registration
No. 333-115).
4.07 Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-RP
(Incorporated by Reference to Exhibit 4(f) to Summit's
Annual Report on Form 10-K for fiscal 1997).
4.08 Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-3
(Incorporated by Reference to Exhibit 4(d) to Amendment 3
to Registration No. 333-19787).
10.01 Receivable Management, Acquisition and Service Agreement
between Summit Securities, Inc. and Metropolitan
Mortgage & Securities Co., Inc. dated September 9, 1994
(Incorporated by Reference to Exhibit 10(a) to
Registration No. 33-57619).
10.02 Receivable Management, Acquisition and Service Agreement
between Old Standard Life Insurance Company and
Metropolitan Mortgage & Securities Co., Inc. dated
December 31, 1994 (Incorporated by Reference to Exhibit
10(b) to Registration No. 33-57619).
10.03 Receivable Management, Acquisition and Service Agreement
between Old West Life Insurance Company and Metropolitan
Mortgage & Securities Co., Inc. dated October 10, 1996
(Incorporated by Reference to Exhibit 4(c) to Registration
No. 333-19787).
10.04 Form of Reinsurance Agreement between Western United Life
Assurance Company and Old Standard Life Insurance Company
(Incorporated by Reference to Exhibit 10(d) to Summit's
Annual Report on Form 10-K for fiscal 1998).
*12.01 Statement regarding computation of ratios.
21.01 Subsidiaries of Registrant (Incorporated by Reference to
Exhibit 21 to Summit's Annual Report on Form 10-K for
fiscal 1998).
23.01 Consent of Experts.
*27.01 Financial Data Schedule.
</TABLE>
---------
* Filed herewith
(B) REPORTS ON FORM 8-K
Summit did not file any reports on Form 8-K for the fourth quarter of fiscal
year 2000.
43
<PAGE>
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.
<TABLE>
<S> <C> <C>
SUMMIT SECURITIES, INC.
By: /s/ TOM TURNER
-----------------------------------------
Tom Turner, PRESIDENT
</TABLE>
Date: January 15, 2001
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 and Director January 15, 2001
Tom Turner (Principal Executive officer)
/s/ JULIE SHIFLETT
------------------------------- Principal Financial Officer January 15, 2001
Julie Shiflett and Principal Accounting Officer
/s/ PHILIP SANDIFUR
------------------------------- Vice President and Director January 15, 2001
Philip Sandifur
/s/ GREGORY STRATE
------------------------------- Secretary, Treasurer and January 15, 2001
Gregory Strate Director
</TABLE>
44
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Comprehensive Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Directors and Stockholders
Summit Securities, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of Summit Securities, Inc. and its subsidiaries (the "Company") at
September 30, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2000, in
conformity with accounting principles generally accepted in the United States of
America. 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 of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for mortgage-backed securities retained after
the securitization of mortgage loans held for sale in fiscal 1999.
/s/ PricewaterhouseCoopers LLP
Spokane, Washington
December 28, 2000
F-1
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 24,228,881 $ 42,242,161
Investments:
Affiliated companies 4,522,425 4,522,425
Trading securities, at market 26,264,393 11,117,556
Available-for-sale securities, at market 71,101,180 76,474,251
Held-to-maturity securities, at amortized cost 4,616,744 1,499,914
Accrued interest on investments 1,027,629 1,062,327
------------ ------------
Total cash and investments 131,761,252 136,918,634
------------ ------------
Real estate contracts and mortgage notes receivable, net 172,549,875 109,683,515
Other receivable investments, net 33,586,783 31,157,832
Real estate held for sale, net (including foreclosed real
estate received in satisfaction of debt of $4,576,742
and $2,447,739) 4,790,768 2,654,284
Deferred costs, net 12,869,074 11,553,751
Receivables from affiliates, net 366,940 --
Deferred income taxes 1,138,648 1,100,986
Income taxes receivable 989,257 --
Other assets, net 1,272,989 2,046,957
------------ ------------
Total assets $359,325,586 $295,115,959
============ ============
LIABILITIES:
Annuity reserves $237,634,664 $201,331,111
Investment certificates 70,435,014 71,806,904
Debt payable 18,206,343 279,792
Accounts payable and accrued expenses 3,220,151 1,722,984
Payables to affiliates, net -- 151,077
Income taxes payable -- 719,136
------------ ------------
Total liabilities 329,496,172 276,011,004
------------ ------------
Commitments and contingencies (Notes 4 and 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $10 par (liquidation preference
$28,981,610 and $15,574,690) 2,898,161 1,557,469
Common stock, $10 par, 10,000 shares issued and
outstanding 100,000 100,000
Additional paid-in capital 23,383,884 11,988,926
Accumulated other comprehensive loss (5,007,025) (1,938,750)
Retained earnings 8,454,394 7,397,310
------------ ------------
Total stockholders' equity 29,829,414 19,104,955
------------ ------------
Total liabilities and stockholders' equity $359,325,586 $295,115,959
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Annuity fees and charges $ 235,511 $ 147,184 $ 148,958
Interest on receivables 16,920,593 12,879,126 11,364,705
Earned discount on receivables 4,302,232 3,907,961 3,437,133
Other investment income 9,015,774 7,389,363 2,025,530
Dividends 236,744 207,670 214,354
Real estate sales 6,519,781 4,391,709 5,424,221
Fees, commissions, services and other income 8,444,884 4,464,279 4,845,280
Gains (losses) on investments, net 3,507,127 (227,953) 402,814
Gains on sales of receivables, net 395,134 3,209,597 2,102,552
------------ ------------ ------------
Total revenues 49,577,780 36,368,936 29,965,547
------------ ------------ ------------
EXPENSES:
Annuity benefits 11,907,780 10,645,585 6,953,757
Interest expense 6,886,427 5,856,249 4,778,443
Cost of real estate sold 6,563,536 4,249,002 5,542,431
Provision for losses on real estate assets 2,291,109 2,325,500 1,799,173
Provision for losses on other assets 1,215,047 170,000 --
Salaries and employee benefits 2,914,733 2,418,788 2,113,632
Commissions to agents 11,203,916 6,073,818 4,776,826
Other operating and underwriting expenses 2,574,206 3,110,799 2,351,914
Less capitalized deferred costs, net of
amortization (1,523,485) (1,825,063) (1,418,690)
------------ ------------ ------------
Total expenses 44,033,269 33,024,678 26,897,486
------------ ------------ ------------
Income before income taxes 5,544,511 3,344,258 3,068,061
Income tax provision (1,462,272) (529,430) (544,034)
------------ ------------ ------------
Net income 4,082,239 2,814,828 2,524,027
Preferred stock dividends (2,025,155) (838,356) (498,533)
------------ ------------ ------------
Income applicable to common stockholder $ 2,057,084 $ 1,976,472 $ 2,025,494
============ ============ ============
Basic and diluted income per share applicable to
common stockholder $ 205.71 $ 197.65 $ 202.55
============ ============ ============
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-3
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
Net income $ 4,082,239 $ 2,814,828 $2,524,027
----------- ----------- ----------
OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized gains (losses) on investments (4,649,338) (3,076,521) 61,970
Less deferred income tax provision (benefit) (1,581,063) (1,046,017) 21,070
----------- ----------- ----------
Net other comprehensive income (loss) (3,068,275) (2,030,504) 40,900
----------- ----------- ----------
Comprehensive income $ 1,013,964 $ 784,324 $2,564,927
=========== =========== ==========
</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, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
PREFERRED COMMON PAID-IN INCOME RETAINED
STOCK STOCK CAPITAL (LOSS) EARNINGS TOTAL
---------- -------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1997 $ 538,169 $100,000 $ 3,326,007 $ 50,854 $ 3,741,613 $ 7,756,643
Net income 2,524,027 2,524,027
Cash dividends on common stock
($21.07 per share) (210,700) (210,700)
Cash dividends on preferred stock
(variable rate) (498,533) (498,533)
Sale of variable rate preferred
stock, net of offering costs
(13,161 shares) 131,612 1,114,424 1,246,036
Redemption and retirement of
preferred stock (391 shares) (3,913) (34,827) (38,740)
Net change in unrealized gains on
investment securities, net of
income tax provision of $21,070 40,900 40,900
Contingent purchase price of
subsidiary previously purchased
from related party (135,569) (135,569)
---------- -------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1998 665,868 100,000 4,405,604 91,754 5,420,838 10,684,064
Net income 2,814,828 2,814,828
Cash dividends on preferred stock
(variable rate) (838,356) (838,356)
Sale of variable rate preferred
stock, net of offering costs
(89,392 shares) 893,915 7,601,578 8,495,493
Redemption and retirement of
preferred stock (231 shares) (2,314) (18,256) (20,570)
Net change in unrealized gains on
investment securities, net of
income tax benefit of $1,046,017 (2,030,504) (2,030,504)
---------- -------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1999 1,557,469 100,000 11,988,926 (1,938,750) 7,397,310 19,104,955
Net income 4,082,239 4,082,239
Cash dividends on common stock ($100
per share) (1,000,000) (1,000,000)
Cash dividends on preferred stock
(variable rate) (2,025,155) (2,025,155)
Sale of variable rate preferred
stock, net of offering costs
(139,995 shares) 1,399,950 11,928,285 13,328,235
Redemption and retirement of
preferred stock (5,926 shares) (59,258) (533,327) (592,585)
Net change in unrealized gains on
investment securities, net of
income tax benefit of $1,580,627 (3,068,275) (3,068,275)
---------- -------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 2000 $2,898,161 $100,000 $23,383,884 $(5,007,025) $ 8,454,394 $29,829,414
========== ======== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,082,239 $ 2,814,828 $ 2,524,027
Adjustments to reconcile net income to net cash
from operating activities:
Acquisition of trading securities, net of
maturities (22,758,828) (21,976,921) (4,324,572)
Proceeds from sales of trading securities 11,696,511 -- 404,266
Earned discount on receivables (4,302,232) (3,907,961) (3,437,133)
Losses (gains) on investments, net (3,507,127) 227,953 (402,814)
Gains on sales of receivables, net (395,134) (3,209,597) (2,102,552)
Losses (gains) on sales of real estate 43,755 (142,707) 118,210
Provision for losses on real estate assets 2,291,109 2,325,500 1,799,173
Provision for losses on other assets 1,215,047 170,000 --
Depreciation and amortization 3,767,631 3,048,048 1,771,930
Deferred income tax provision (benefit) 1,543,112 (1,469,079) 67,299
Changes in assets and liabilities:
Annuity reserves 11,659,707 10,489,478 6,912,825
Compound and accrued interest on investment
certificates and debt payable 1,049,638 1,089,550 701,060
Accrued interest on real estate contracts and
mortgage notes receivable (720,893) 69,864 (731,102)
Deferred cost, net (4,393,485) (4,190,063) (2,613,690)
Receivables from/payables to affiliates, net (518,017) 11,136,882 (10,115,280)
Other, net 45,546 63,470 542,789
------------ ------------ ------------
Net cash from (used by) operating activities 798,579 (3,460,755) (8,885,564)
------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sales of available-for-sale
investments 14,612,748 12,030,278 --
Proceeds from maturities of available-for-sale
investments -- 2,167,51 8681,837
Purchase of available-for-sale investments (21,888,627) (71,809,272) --
Proceeds from maturities of held-to-maturity
investments 7,652,867 1,500,000 6,250,000
Purchase of held-to-maturity investments (3,105,250) (999,844) (1,006,719)
Principal payments on real estate contracts and
mortgage notes receivable investments 66,760,821 35,660,396 24,551,579
Proceeds from sale of real estate contracts and
mortgage notes receivable 9,703,506 70,695,666 22,706,575
Purchases and originations of real estate
contracts and mortgage notes receivable (131,033,562) (92,652,050) (55,586,826)
Proceeds from sales of other receivable
investments 1,700,843 16,701,962 10,854,452
Purchase of other receivable investments (6,971,812) (19,476,444) (21,400,127)
Proceeds from real estate sales 6,519,781 3,884,725 2,390,392
Additions to real estate held for sale (1,071,894) (1,901,175) (3,391,584)
------------ ------------ ------------
Net cash used by investing activities $(57,120,579) $(44,198,240) $(13,950,421)
============ ============ ============
</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, CONTINUED
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES:
Receipts from annuity products $ 43,308,627 $ 29,545,967 $ 14,432,732
Withdrawals from annuity products (27,259,295) (14,610,355) (12,908,370)
Reinsurance of annuity products to reinsurers, net 8,594,516 39,543,618 22,585,528
Proceeds from issuance of investment certificates 9,183,528 25,798,321 14,168,688
Increase in other debt borrowings 7,017,788 -- --
Repayments of investment certificates (11,605,055) (10,975,060) (9,382,646)
Repayments to banks and others (5,676) (33,178) (33,123)
Debt issuance costs (636,208) (1,172,915) (682,228)
Contingent purchase price paid on subsidiary
purchased from related party -- -- (135,569)
Issuance of preferred stock 13,328,235 8,495,493 1,246,036
Redemption and retirement of preferred stock (592,585) (20,570) (38,740)
Cash dividends (3,025,155) (838,356) (709,233)
------------ ------------ ------------
Net cash from financing activities 38,308,720 75,732,965 28,543,075
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (18,013,280) 28,073,970 5,707,090
Cash and cash equivalents, beginning of year 42,242,161 14,168,191 8,461,101
------------ ------------ ------------
Cash and cash equivalents, end of year $ 24,228,881 $ 42,242,161 $ 14,168,191
============ ============ ============
See note 14 for supplemental cash flow information.
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
1. SUMMARY OF ACCOUNTING POLICIES
BUSINESS
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.
The controlling interest in the Company is owned by National Summit Corp., a
Delaware corporation which is wholly owned by C. Paul Sandifur, Jr. The Company
was formerly a wholly owned subsidiary of Metropolitan Mortgage & Securities
Co., Inc. ("Metropolitan"). Metropolitan is controlled by C. Paul Sandifur, Jr.
and his immediate family through his common stock ownership and voting control.
The Company engages, nationwide, in the business of acquiring, originating,
holding and selling receivables. These receivables include residential real
estate contracts and mortgage notes and commercial loans that are collateralized
by first position liens on real estate. The Company also invests in receivables
consisting of real estate contracts and mortgage notes collateralized by second
and lower position liens, structured settlements, annuities, lottery prizes,
equipment leases and other investments. The acquired receivables collateralized
by real estate are typically non-conventional because they were either financed
by the sellers of the properties involved or they were originated by
institutional lenders who specialize in borrowers with impaired credit or
non-conventional properties. The Company also originates both construction and
commercial real estate loans. In addition to receivables, the Company invests in
U.S. Treasury obligations, corporate bonds, equity securities and other
securities.
In addition to its real estate receivable activities, the Company acts as a
securities broker/dealer and provides real estate property development services.
The Company invests in receivables and securities using funds generated from
receivable cash flows, the sale of annuities, the sale or securitization of
receivables, the sale of investment certificates and preferred stock, secured
borrowings and securities portfolio earnings.
Metropolitan and its subsidiaries provide services to the Company for a fee
and engage in various business transactions with the Company (see Note 16).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Metropolitan Investment Securities, Inc.
("MIS"), a securities broker/dealer; Summit Property Development, Inc., a real
estate property development company; Old Standard Life Insurance Company
("OSL"), a life insurance company; and its wholly owned subsidiary, Old West
Annuity & Life Insurance Company ("OWAL"), also a life insurance company. All
significant intercompany transactions and balances have been eliminated in
consolidation.
On May 31, 1995, the Company consummated an agreement with Metropolitan,
whereby it acquired OSL effective May 31, 1995, for $2,722,000, which
approximated the historical cost basis of OSL at date of purchase, with future
contingency payments equal to 20% of statutory income prior to the accrual of
income taxes for the fiscal years ending December 31, 1995, 1996 and 1997.
Future contingency payments of $135,569 were made during the year ended
September 30,1998 and were accounted for as dividends. The initial purchase
price plus estimated future contingency payments approximated the appraised
valuation of OSL. The acquisition was recorded as a purchase. However, due to
the common control of
F-8
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Metropolitan and the Company, the historical cost bases of assets and
liabilities of OSL were recorded by the Company.
CASH AND CASH EQUIVALENTS
Cash includes all balances on deposit in banks and financial institutions.
The Company considers all highly liquid debt instruments purchased with a
remaining maturity of three months or less to be cash equivalents. Substantially
all cash and cash equivalents are on deposit with one financial institution and
balances often exceed the federal insurance limit. The Company periodically
evaluates the credit quality of these banks and financial institutions.
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 consist of mortgage- and
asset-backed securities and are recorded at market value. Trading securities
are recorded at fair value based upon independent market quotes. Realized
and unrealized gains and losses on these securities are included in the
consolidated statements of income.
AVAILABLE-FOR-SALE SECURITIES: Available-for-sale securities, consisting
primarily of government-backed securities and mortgage- and asset-backed
securities are carried at quoted and estimated market values. Unrealized
gains and losses are presented as accumulated other comprehensive income
(loss), net of related deferred income taxes. Included in equity securities
is restricted equity securities representing the Company's investment in the
common stock of the Federal Home Loan Bank of Seattle ("FHLB Seattle"). This
stock may only be sold to FHLB Seattle or to another member institution;
therefore, it is restricted and is carried at cost. The carrying value of
the restricted stock was $617,100 and $404,700 at September 30, 2000 and
1999, respectively.
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.
The Company initially records residual interests from securitization
transactions at their allocated cost based upon the present value of the
interest in the cash flows retained by the Company after considering various
economic factors, including interest rates, collateral value and estimates of
the value of future cash flows using expected loss and prepayment assumptions,
discounted at a market yield. The fair value of these securities is determined
based on interest rates, actual prepayment rates, collateral value and expanded
default rates experienced by the securities.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of
F-9
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" which requires
that after the securitization of mortgage loans held for sale, an entity engaged
in mortgage banking activities classify the resulting mortgage-backed securities
or other retained interests based on its ability and intent to sell or hold
those investments. This Statement conforms the subsequent accounting for
securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the subsequent accounting for securities retained after
the securitization of other types of assets by a non-mortgage banking
enterprise. This Statement was effective for the first fiscal quarter beginning
after December 15, 1998. On January 1, 1999, the Company adopted this new
standard and reclassified approximately $16.7 million of securities that were
retained after securitizations from trading securities to available-for-sale
securities.
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.
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.
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 on an individual
contract basis using the level yield (interest) method over the remaining
contractual term of the receivable. Origination fees, net of direct origination
costs, are deferred and recognized as interest income using the level yield
(interest) method over the contractual term of the receivable.
Gains or losses on 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 during the period held for
sale. Deferred net discounts and capitalized acquisition costs are recognized at
the time the related receivables are sold to third-party investors or
securitized through transfer to a trust.
Effective January 1, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"), 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. On September 29, 2000,
the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities--A Replacement of FASB
Statement No. 125" (SFAS
F-10
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
140). SFAS 140 is effective for transfers occurring after March 31, 2001 and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The Company is in the process of
evaluating the impact of SFAS 140 on its results of operations and financial
condition.
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.
The Company establishes allowances, based on prior delinquency, foreclosure
and loss experience. Allowances for losses are based on the net carrying values
of the receivables, including accrued interest. Accordingly, the Company accrues
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 receivable investments 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
Real estate held for sale 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).
The established allowances for losses on real estate held for sale include
amounts for estimated losses as a result of an impairment in value of the real
property. 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. As a result of changes in the real
estate markets in which these assets are located, it is reasonably possible that
the carrying values could be reduced in the near term.
Profit on sales of real estate is recognized when the buyers' initial and
continuing investment is adequate to demonstrate that (1) a commitment to
fulfill the terms of the transaction exists, (2) collectibility of the remaining
sales price 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
Deferred annuity acquisition costs, consisting of commissions to agents and
other insurance underwriting and annuity policy costs, are deferred. Costs that
are estimated not to be recoverable from surrender charges are amortized as a
constant percentage of the estimated gross realized and unrealized profits
associated with the policies in force.
F-11
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Investment certificate issuance costs, including commissions to sales
representatives and other issuance costs are deferred. These costs are amortized
over the expected term of the related certificate, which ranges from 6 months to
5 years, using the interest method.
Changes in the amount or timing of estimated gross profits on policies in
force or expected term of the investment certificates will result in adjustments
to the cumulative amortization of the related costs.
ANNUITY RESERVES
Premiums for annuities are recorded as annuity reserves under the deposit
method. An obligation is recorded for the premiums assumed under reinsurance
transactions with other insurers in annuity reserves.
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.
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
policy acquisition costs.
GUARANTY FUND ASSESSMENTS
The Company's life insurance subsidiaries are subject to insurance guaranty
laws in the states in which they write premiums. 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, 2000 and 1999, 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.
Effective October 1, 1999, the Company adopted the provisions of Statement
of Position 97-3, ACCOUNTING BY INSURANCE AND OTHER ENTERPRISES FOR
INSURANCE-RELATED ASSESSMENTS ("SOP 97-3"). SOP 97-3 applies to all entities
that are subject to guaranty fund and other insurance-related assessments.
Assessments covered by this SOP include any charge mandated by statute or
regulatory authority that is related directly or indirectly to underwriting
activities (including self-insurance), except for income taxes and premium
taxes. The application of SOP 97-3 did not have a material effect on the
Company's consolidated financial statements.
INCOME TAXES
The Company accounts for income taxes using the liability method, which
requires that deferred tax assets and liabilities be determined based on the
expected future income tax consequences of events that have been recognized in
the financial statements. Deferred tax assets and liabilities are recognized
based on the temporary differences between the financial statement carrying
amounts and tax bases of assets and
F-12
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
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.
INCOME PER SHARE
Income per share--basic is computed by dividing income applicable to common
stockholder by the weighted-average number of common shares outstanding during
the period. Income per share--diluted is computed by dividing income applicable
to common stockholder by the weighted-average number of common shares
outstanding increased by the additional common shares that would have been
outstanding if potentially dilutive common shares had been issued. There were no
potentially dilutive common shares outstanding during any of the three years in
the period ended September 30, 2000.
COMPREHENSIVE INCOME
During the year ended September 30, 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). 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
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. Prior years financial
statements have been reclassified to conform to this Statement.
Reclassification adjustments, representing the net gains (losses) on
available-for-sale securities that were realized during the period, net of
related deferred income taxes, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------
<S> <C>
2000 $ (350,332)
1999 5,830
1998 --
</TABLE>
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.
The Company also purchases collateralized mortgage obligations, mortgage-
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 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.
F-13
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
At September 30, 2000, the Company was not a party to any derivative
financial instruments.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
was issued. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999 and 2000 Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of Effective Date of SFAS 133" ("SFAS No. 137") and
Statement of Financial Accounting Standards No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities an amendment of SFAS 133"
(SFAS No. 138") were issued. SFAS No. 137 amends SFAS No. 133 to become
effective for all quarters of fiscal years beginning after June 15, 2000. The
implementation of SFAS No. 133, as amended, will not have a material effect on
the Company's consolidated financial statements. As part of implementing SFAS
133 on October 1, 2000, the Company reclassified approximately $4.6 million of
investments from held-to-maturity to available-for-sale.
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, 2001, approximately $168,653,000 of the Company's financial assets
will reprice or mature as compared to approximately $159,522,000 of its
financial liabilities, resulting in a mismatch of approximately $9,131,000. This
structure is beneficial in periods of rising interest rates; however, it may
result in declining net interest income during periods of declining interest
rates. Of the financial liabilities scheduled to reprice or mature,
approximately 84% 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.
OFF-BALANCE-SHEET INSTRUMENTS
The Company has outstanding commitments to extend credit to commercial
borrowers. Such financial instruments are recorded in the financial statements
when they are funded or related fees are incurred.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain amounts in the 1999 and 1998 consolidated financial statements have
been reclassified to conform with the current year's presentation. These
reclassifications had no effect on net income or retained earnings as previously
reported.
F-14
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In December, 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views on applying generally
accepted accounting principles to revenue recognition in financial statements.
On June 26, 2000, the SEC issued SAB 101B to defer the effective date of
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 31, 1999. The Consolidated Group is
required to adopt SAB 101 by July 1, 2001. The Company does not expect the
adoption of SAB 101 to have a material impact on the consolidated financial
statements.
During the third quarter of 2000, the Emerging Issues Task Force issued EITF
99-20 "Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets" ("EITF 99-20"). This EITF
will change the manner in which the Company determines whether a decline in fair
value of its investment is other than temporary. The Company must adopt the
provisions of EITF 99-20 on April 1, 2001, but has not fully determined the
effect of implementing EITF 99-20. As such, there may be declines in fair value
of investments, which are currently recorded in equity as other comprehensive
losses, which will be considered to be permanent impairments resulting in a
charge against earnings upon adoption.
2. INVESTMENTS IN AFFILIATED COMPANIES
At September 30, 2000 and 1999, investments in affiliated companies
consisted of:
<TABLE>
<CAPTION>
COST AND
CARRYING VALUE
NUMBER -----------------------
TYPES OF SHARES OF SHARES 2000 1999
--------------- --------- ---------- ----------
<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
Consumers Group Holding Co., Inc.:
Common.................................... 19 1,500,000 1,500,000
---------- ----------
$4,522,425 $4,522,425
========== ==========
</TABLE>
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, 2000 and 1999, no Class B common stock was
outstanding. At September 30, 2000 and 1999, the 9 shares of stock the Company
owned represented 9.28% and 7.15%, respectively, of Metropolitan's outstanding
Class A common stock. Metropolitan had total consolidated assets of
approximately $1.1 billion at September 30, 2000.
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, 2000, the preferred Series C, D and E-1 had dividend
rates of 7.1%. The preferred Series E-4 had a dividend rate of 7.6%. Neither the
common or preferred shares are traded
F-15
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
in a public market. At September 30, 2000 and 1999, 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 $919 million at September 30, 2000.
3. INVESTMENTS
A summary of carrying and estimated market values of investments at
September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
2000
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET VALUES
TRADING COSTS GAINS LOSSES (CARRYING VALUES)
------- ----------- ---------- ----------- -----------------
<S> <C> <C> <C> <C>
Mortgage- and asset- backed
securities............................ $15,912,857 $ 134,611 $ (834,214) $ 15,213,254
Equity securities....................... 6,259,952 5,091,731 (300,544) 11,051,139
----------- ---------- ----------- ---------------
Totals.................................. $22,172,809 $5,226,342 $(1,134,758) $ 26,264,393
=========== ========== =========== ===============
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET VALUES
AVAILABLE-FOR-SALE COSTS GAINS LOSSES (CARRYING VALUES)
------------------ ------------ ---------- ------------ -----------------
<S> <C> <C> <C> <C>
U.S. Government bonds................. $ 1,508,109 $ 4,968 $ (2,530) $ 1,510,547
Mortgage- and asset- backed
securities.......................... 76,296,008 271,283 (7,795,558) 68,771,733
------------ ---------- ------------ ---------------
Total fixed maturities................ 77,804,117 276,251 (7,798,088) 70,282,280
Equity securities..................... 883,900 35,000 (100,000) 818,900
------------ ---------- ------------ ---------------
$ 78,688,017 $ 311,251 $ (7,898,088) $ 71,101,180
============ ========== ============ ===============
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED GROSS GROSS
COSTS (CARRYING UNREALIZED UNREALIZED ESTIMATED
HELD-TO-MATURITY VALUES) GAINS LOSSES MARKET VALUES
---------------- ---------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
U.S. Government bonds............... $ 4,616,744 $ 67,267 $ (4,964) $ 4,679,047
================ ========== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
1999
------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET VALUES
TRADING COSTS GAINS LOSSES (CARRYING VALUES)
------- ----------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
Mortgage- and asset- backed
securities........................ $11,260,360 $ -- $ (142,804) $ 11,117,556
=========== =========== =========== ==================
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET VALUES
AVAILABLE-FOR-SALE COSTS GAINS LOSSES (CARRYING VALUES)
------------------ ------------ ---------- ----------- ------------------
<S> <C> <C> <C> <C>
U.S. Government bonds............... $ 4,499,271 $ 25,569 $ (3,590) $ 4,521,250
Mortgage- and asset- backed
securities........................ 74,509,379 (2,961,078) 71,548,301
------------ ---------- ----------- ------------------
Total fixed maturities.............. 79,008,650 25,569 (2,964,668) 76,069,551
Equity securities................... 403,100 1,600 -- 404,700
------------ ---------- ----------- ------------------
$ 79,411,750 $ 27,169 $(2,964,668) $ 76,474,251
============ ========== =========== ==================
</TABLE>
F-16
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED GROSS GROSS
COSTS UNREALIZED UNREALIZED ESTIMATED
HELD-TO-MATURITY (CARRYING VALUES) GAINS LOSSES MARKET VALUES
---------------- ----------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Government bonds.................... $1,499,914 $ 4,852 $ -- $1,504,766
========== ========== =========== ==========
</TABLE>
The principal amount of mortgage- and asset-backed securities with required
principal or interest payments being in arrears for more than three months was
approximately $2,000,000 at September 30, 2000.
Proceeds from sales of available-for-sale securities during the year ended
September 30, 2000 were $14,612,748, which resulted in gross realized losses of
$530,806. Proceeds from sales of available-for-sale securities during the year
ended September 30, 1999 were $12,030,278, which resulted in gross gains and
losses of $71,624 and $62,790, respectively.
The change in net unrealized gains (losses) on trading securities, recorded
in the statements of income, were $4,234,388, $(600,029) and $372,225 during the
years ended September 30, 2000, 1999 and 1998, respectively.
The activity related to certain mortgage-backed securities, which represent
the Company's residual interests from securitization transactions, for the years
ended September 30, 2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Carrying value, beginning of year...... $ 2,855,332 $ 1,252,860 $ 836,524
Securities resecuritized............... -- (1,312,258) --
Securities retained or purchased....... 1,196,701 2,677,686 --
Remittances............................ -- (54,582) (24,548)
Investment income...................... 391,674 319,136 165,884
Fair market value adjustments.......... (1,390,692) (27,510) 275,000
----------- ----------- -----------
Carrying value, end of year............ $ 3,053,015 $ 2,855,332 $ 1,252,860
=========== =========== ===========
</TABLE>
The Company is not aware of an active market for the purchase or sale of
residuals and, accordingly, the Company determines the estimated fair value of
the residuals by discounting the expected cash flows using a discount rate
commensurate with the risks involved. When determining the expected cash flow,
the Company must estimate the future rates of prepayments, defaults, and default
loss severity (the loss realized upon liquidation of collateral from repossessed
loans) as they affect the amount and timing of the estimated cash flows. During
the year ended September 30, 2000, the Company adjusted its assumptions based on
the actual historical performance and expectations of future performance of the
loan pools. The assumptions used for valuing the residual certificates as of
September 30, 2000 were as follows:
<TABLE>
<S> <C> <C> <C>
Prepayment rates..................................... 13.5% -- 15%
Default rate......................................... 0.9% -- 3.0%
Loss severity........................................ 35% -- 42%
Discount rate........................................ 12%
</TABLE>
The Company may experience changes in the fair value of its residuals, which
are recorded at estimated fair value and accounted for as "available-for-sale"
securities. Changes in the fair value of residuals are excluded from earnings
and reported as a separate component of stockholders' equity. Other than
temporary declines in the fair value of residuals are charged to operations.
During the
F-17
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
year ended September 30, 2000, the Company recorded pre-tax valuation
adjustments of $1.4 million. The Company will continue to periodically assess
the assumptions used in valuing the cash flows and the related carrying value of
its residuals and subordinated securities.
Although the Company believes it has made reasonable estimates of the fair
value of the residuals likely to be realized, the rate of prepayments and the
amount of defaults utilized by the Company are estimates and actual experience
may vary. Higher than anticipated rates of loan prepayments or losses would
require the Company to reduce the fair value of the residual interests.
During the year ended September 30, 1999, the Company participated in a
resecuritization of certain of its residual interests with Metropolitan. The
carrying value of the residual interests that were contributed by the Company
was $1,312,258. The residual interests were restructured and a class was created
and assigned a credit rating. This class was sold to Western at estimated fair
value.
During the year ended September 30, 1999, in accordance with Statement of
Financial Accounting Standards No. 134, the Company reclassified trading
securities with a carrying value of approximately $16.7 million to the
available-for-sale classification. The reclassified securities were consistently
carried at estimated fair value. However, subsequent changes in estimated fair
value are recorded as a component of other comprehensive income (loss) rather
than being recognized in operations.
The following aggregate investments with individual issuers (excluding U.S.
government bonds) held by the Company at September 30, 2000 and 1999 were in
excess of ten percent of stockholders' equity:
<TABLE>
<CAPTION>
AGGREGATE
CARRYING
ISSUER AMOUNT
------ -----------
<S> <C>
2000:
Mortgage- and asset-backed securities:
Metropolitan Asset Funding, Inc......................... $35,046,210
GreenTree Home Improvement.............................. 15,982,906
Contimortgage Home Equity............................... 5,555,200
Merrill Lynch Mortgage.................................. 4,411,500
Metropolitan Trust...................................... 4,129,828
Country Wide............................................ 3,825,000
Oakwood Mortgage Investors Inc............................ 3,642,600
Koyah Leverage Partners, LLP............................ 4,564,797
1999:
Mortgage- and asset-backed securities:
Metropolitan Asset Funding, Inc......................... $24,888,456
GreenTree Home Improvement.............................. 18,467,823
Country Wide............................................ 7,493,750
Contimortgage Home Equity............................... 7,360,313
Merrill Lynch Mortgage.................................. 4,688,086
Metropolitan Trust...................................... 4,448,736
Oakwood Mortgage Investors Inc.......................... 3,594,375
Amresco Residential Securities.......................... 2,828,438
Select Asset Funding, Inc............................... 2,488,446
</TABLE>
F-18
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The amortized costs and estimated market values of available-for-sale and
held-to-maturity debt securities at September 30, 2000, by contractual maturity,
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.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
<S> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Due in one year or less................................... $ 499,952 $ 497,422
Due after one year through five years..................... 1,008,157 1,013,125
Mortgage- and asset-backed securities..................... 76,296,008 68,771,733
----------- -----------
$77,804,117 $70,282,280
=========== ===========
HELD-TO-MATURITY SECURITIES
Due after one year through five years..................... $ 4,616,744 $ 4,679,047
</TABLE>
The Company intends to maintain an available-for-sale portfolio which may be
shifted between investments of differing types and maturities to attempt to
maximize market returns without assuming unacceptable levels of credit risk.
Future purchases assigned to the held-to-maturity portfolio will be to replace
maturing investments, or increase the overall size of the portfolio while
maintaining its overall composition.
4. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE
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, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Face value of discounted receivables........... $ 23,469,937 $ 63,704,841
Face value of originated and nondiscounted
receivables.................................. 171,794,943 58,168,931
Undisbursed portion of originated commercial
loans........................................ (9,368,972) (7,757,241)
Unrealized discounts, net of unamortized
acquisition costs............................ (7,257,483) (2,138,142)
Deferred fees on commercial loans.............. (1,041,660) (503,717)
Allowance for losses........................... (5,363,345) (3,082,918)
Accrued interest receivable.................... 316,455 1,291,761
------------- -------------
Carrying value................................. $ 172,549,875 $ 109,683,515
============= =============
</TABLE>
At September 30, 2000, the Company held first position liens associated with
real estate contracts and mortgage notes receivable with a face value of
approximately $182,000,000 (98%) and second position or lower liens of
approximately $3,900,000 (2%).
The originated receivables are collateralized primarily by first position
liens and result from loans originated by the Company on commercial real estate
and loans to facilitate the sale of its repossessed property.
F-19
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Real estate contracts and mortgage notes receivable include receivables
collateralized by property located throughout the United States. The Company's
real estate contracts and mortgage notes receivable at September 30, 2000 and
1999 are collateralized by property concentrated in the following geographic
regions:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Pacific Northwest (Washington, Oregon, Idaho, Montana and
Alaska)................................................... 22% 30%
Pacific Southwest (California, Arizona and Nevada).......... 21 27
Pacific Islands (Hawaii).................................... 31 21
Mountain (Colorado, Utah and Wyoming)....................... 10 8
North Atlantic (New York, Connecticut, Massachusetts, New
Jersey and Pennsylvania).................................. 7 6
Southwest (Texas, New Mexico and Louisiana)................. 2 4
Southeast (Georgia, Florida, North Carolina and South
Carolina)................................................. 3 3
Other....................................................... 4 1
---- ----
100% 100%
==== ====
</TABLE>
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, 2000 and 1999 are grouped by the following dollar
ranges:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Under $15,001.................................... $ 7,056,733 $ 7,765,316
$15,001 to $40,000............................... 5,250,393 8,665,041
$40,001 to $80,000............................... 7,346,245 11,560,714
$80,001 to $150,000.............................. 4,778,221 6,951,488
Greater than $150,000............................ 161,464,316 79,173,972
------------ ------------
$185,895,908 $114,116,531
============ ============
</TABLE>
Contractual interest rates on the face value of the Company's real estate
contracts and mortgage notes receivable as of September 30, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Less than 8.00%.................................. $ 23,257,056 $ 6,780,962
8.00% to 8.99%................................... 5,822,483 8,955,657
9.00% to 9.99%................................... 7,341,315 9,993,742
10.00% to 10.99%................................. 7,763,757 12,082,025
11.00% to 11.99%................................. 356,517 930,240
12.00% to 12.99%................................. 79,274,310 53,877,729
13.00% or higher................................. 62,080,470 21,496,176
------------ ------------
$185,895,908 $114,116,531
============ ============
</TABLE>
F-20
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The weighted-average contractual interest rate on these receivables at
September 30, 2000 and 1999 is approximately 12.4% and 11.8%, respectively.
Maturity dates range from 2000 to 2030.
The following is an analysis of the allowance for losses on real estate
contracts and mortgage notes receivable.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------
2000 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Beginning balance....................... $ 3,082,918 $1,843,055 $1,153,278
Provisions for losses................... 2,721,039 1,507,953 1,243,044
Charge-offs............................. (440,612) (268,090) (553,267)
----------- ---------- ----------
Ending balance.......................... $ 5,363,345 $3,082,918 $1,843,055
=========== ========== ==========
</TABLE>
The Company establishes an allowance for expected losses on real estate
assets and periodically evaluates its reserves to determine their adequacy.
During the year ended September 30, 2000, the Company adjusted its loss reserve
assumptions based on historical experience. The increase in loss provisions
reflects the changes in reserve assumptions.
The principal amount of receivables with required principal or interest
payments being in arrears for more than three months was approximately
$12,218,000 and $7,747,000 at September 30, 2000 and 1999, respectively.
Aggregate amounts of receivable, by maturity date, at their face value are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
SEPTEMBER 30,
------------------
<S> <C>
2001............................ $ 40,706,020
2002........................... 47,279,654
2003........................... 25,048,177
2004........................... 5,510,828
2005........................... 46,201,128
Thereafter..................... 21,150,101
------------
$185,895,908
============
</TABLE>
Actual repayments of receivables will likely differ from contractual amounts
due to prepayments.
The Company entered into securitization transactions during the years ended
September 30, 1999 and 1998. 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 mortgage-backed securities to third parties.
These securitizations are recorded as sales of receivables, and gains, net of
transaction expenses, are recognized in the consolidated statements of income as
each class is sold. The Company did not participate in any securitizations
during the year ended September 30, 2000.
During the years ended September 30, 1999 and 1998, proceeds from
securitization transactions were approximately $12,331,000 and $22,707,000 and
resulted in gains of approximately $934,500 and $1,400,500, respectively. The
gains realized during the years ended September 30, 1999 and 1998 included
approximately $77,800 and $150,100, 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
F-21
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
present value of future net servicing cash flows, including float interest and
late fees, adjusted for anticipated prepayments. The servicing rights associated
with the securitization transactions were subsequently sold to an affiliated
entity at the Company's carrying value.
The Company has retained, or purchased from Metropolitan, an interest in
certain subordinate and residual classes of the securitized receivables which
had a fair value of $43,824,506 and $31,825,639 at September 30, 2000 and 1999,
respectively.
5. OTHER RECEIVABLE INVESTMENTS
Other receivable investments include various cash flow investments,
primarily annuities and lottery prizes. Annuities are general obligations of the
payor, which is generally an insurance company. Lottery prizes are general
obligations of the insurance company or other entity making the lottery prize
payments. Additionally, when the lottery prizes are from a state-run lottery,
the lottery prizes are often backed by the general credit of the state.
These investments normally are non-interest bearing and are purchased at a
discount sufficient to meet the Company's investment yield requirements. The
weighted average constant effective yield on these receivables at September 30,
2000 and 1999 was approximately 10.05% and 9.8%, respectively. Contractual
maturities range from 2001 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, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Face value of receivables...................... $ 52,360,666 $ 41,621,202
Unrealized discounts, net of unamortized
acquisition costs............................ (17,624,586) (10,463,370)
Allowance for losses........................... (1,149,297) --
------------- -------------
$ 33,586,783 $ 31,157,832
============= =============
</TABLE>
During the year ended September 30, 2000, the Company established a loss
reserve on its investments in annuity and structured settlement cashflows as the
industry has recently focused on State and Federal collection laws and their
applicability to delinquent annuity and structured settlement payments.
Additionally, during the year ended September 2000, the Company established a
reserve against a participation in finance leases purchased from an affiliate.
The following is an analysis of the allowance for losses on other receivable
investments for the year ended September 30, 2000.
<TABLE>
<S> <C>
Beginning balance........................................... $ --
Provisions for losses..................................... 1,165,047
Charge-offs............................................... (15,750)
----------
Ending balance.............................................. $1,149,297
==========
</TABLE>
The carrying value of other receivable investments that were more than 90
days delinquent as of September 30, 2000 and September 30, 1999 were $2,738,993
and $2,140,202 respectively.
During the years ended September 30, 2000, 1999 and 1998, the Company sold
or securitized otherreceivables with a carrying value of approximately
$1,644,680, $16,153,000 and $10,879,000,
F-22
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
respectively, without recourse and recognized gains of approximately $56,164,
$549,000 and $702,000, respectively.
The following other receivable investments, by issuer, were in excess of ten
percent of stockholders' equity at September 30, 2000 and 1999.
<TABLE>
<CAPTION>
AGGREGATE
CARRYING
ISSUER AMOUNT
------ -----------
<S> <C>
2000:
Texas State Agency............. $ 3,172,889
1999:
Texas State Agency............. $ 3,392,106
Massachusetts State Agency..... 2,732,654
Met Lottery Trust 97LA......... 2,280,101
</TABLE>
Aggregate amounts of contractual maturities of other receivables at their
face amounts are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
SEPTEMBER 30,
-------------
<S> <C>
2001............................ $ 6,352,332
2002........................... 5,646,004
2003........................... 7,490,808
2004........................... 7,368,874
2005........................... 4,958,574
Thereafter..................... 20,544,074
------------
$ 52,360,666
============
</TABLE>
F-23
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
6. DEFERRED COSTS
An analysis of deferred costs related to annuity acquisition and investment
certificate issuance for the years ended September 30, 2000, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
ANNUITY INVESTMENT
ACQUISITION CERTIFICATES TOTAL
----------- ------------ -----------
<S> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1997............ $ 6,504,034 $1,130,665 $ 7,634,699
Deferred during the period:
Commissions........................ 1,991,890 433,515 2,425,405
Other expense...................... 621,800 248,713 870,513
----------- ---------- -----------
Total deferred costs................. 9,117,724 1,812,893 10,930,617
Amortization during the period....... (1,195,000) (542,119) (1,737,119)
----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1998............ 7,922,724 1,270,774 9,193,498
Deferred during the period:
Commissions........................ 3,246,855 860,638 4,107,493
Other expense...................... 943,208 312,277 1,255,485
----------- ---------- -----------
Total deferred costs................. 12,112,787 2,443,689 14,556,476
Amortization during the period....... (2,365,000) (637,725) (3,002,725)
----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1999............ 9,747,787 1,805,964 11,553,751
Deferred during the period:
Commissions........................ 3,410,484 313,734 3,724,218
Other expense...................... 983,001 323,089 1,306,090
----------- ---------- -----------
Total deferred costs................. 14,141,272 2,442,787 16,584,059
Amortization during the period....... (2,870,000) (844,985) (3,714,985)
----------- ---------- -----------
BALANCE, SEPTEMBER 30, 2000............ $11,271,272 $1,597,802 $12,869,074
=========== ========== ===========
</TABLE>
The amortization of deferred annuity acquisition costs, which is based on
the estimated gross profits of the underlying annuity products, could be changed
significantly in the near term due to changes in the interest rate environment.
As a result, the recoverability of these costs may be adversely affected in the
near term.
F-24
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Annuity reserves are based upon contractual amounts due the annuity holder
including credited interest. Annuity contract interest rates ranged from 4.7% to
7.9% during the year ended September 30, 2000, 4.7% to 7.9% during the year
ended September 30, 1999 and 4.7% to 8.1% during the year ended September 30,
1998.
OSL reinsures certain single premium deferred annuity contracts underwritten
by Western. The following is a summary of reinsurance transactions assumed from
Western as of and for the years ended September 30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
ASSUMED FROM
DIRECT AMOUNT WESTERN TOTAL
------------- ------------ ------------
<S> <C> <C> <C>
BALANCE, SEPTEMBER 30, 2000:
Premium and annuity
considerations................. $ 49,424,210 $ 27,434,956 $ 76,859,166
============ ============ ============
Annuity benefits................. $ 33,484,357 $ 18,743,525 $ 52,227,882
============ ============ ============
Annuity reserves................. $126,417,219 $111,217,445 $237,634,664
============ ============ ============
BALANCE, SEPTEMBER 30, 1999:
Premium and annuity
considerations................. $ 29,545,967 $ 44,746,374 $ 74,292,341
============ ============ ============
Annuity benefits................. $ 5,596,592 $ 5,048,993 $ 10,645,585
============ ============ ============
Annuity reserves................. $104,098,458 $ 97,232,653 $201,331,111
============ ============ ============
BALANCE, SEPTEMBER 30, 1998:
Premium and annuity
considerations................. $ 14,432,732 $ 25,448,538 $ 39,881,270
============ ============ ============
Annuity benefits................. $ 5,110,866 $ 1,842,891 $ 6,953,757
============ ============ ============
Annuity reserves................. $ 83,575,177 $ 52,787,226 $136,362,403
============ ============ ============
</TABLE>
8. 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 (recaptured) by the Company's life insurance
subsidiaries for guaranty fund assessments and amounts estimated to be assessed
for the years ended September 30, 2000, 1999 and 1998 were ($263,000), $270,000
and $119,000, 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 1998. These estimates are subject to future revisions based
upon the ultimate resolution of the insolvencies and resultant losses. As a
result of these uncertainties, the Company's estimate of future assessments
could change in the near term. The Company does not believe that the amount of
future assessments associated with known insolvencies after 1998 will be
material to its financial condition or results of operations. At September 30,
2000 and 1999, an estimated future guaranty fund assessment of approximately
$387,000 and $650,000, respectively, has been recorded.
F-25
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
9. INVESTMENT CERTIFICATES
The Company has registered $50,000,000 of Investment Certificates, Series B,
of which a face amount of approximately $44,561,000 was unissued at
September 30, 2000. This current registration expires on January 31, 2001. At
September 30, 2000 and 1999, investment certificates consist of:
<TABLE>
<CAPTION>
ANNUAL INTEREST RATES 2000 1999
--------------------- ----------- -----------
<S> <C> <C>
6% to 7%........................................... $ 1,818,000 $ 4,072,401
7% to 8%........................................... 3,427,000 2,054,097
8% to 9%........................................... 42,289,000 43,862,739
9% to 10%.......................................... 14,360,000 14,321,558
10% to 11%......................................... 191,000 193,333
----------- -----------
62,085,000 64,504,128
Compound and accrued interest...................... 8,350,014 7,302,776
----------- -----------
$70,435,014 $71,806,904
=========== ===========
</TABLE>
The weighted average interest rate on outstanding investment certificates
was approximately 8.4% at September 30, 2000 and 1999.
Investment certificates (including principal and compound and accrued
interest) mature as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
SEPTEMBER 30,
-------------
<S> <C>
2001....................................................... $ 14,530,014
2002...................................................... 9,026,000
2003...................................................... 10,335,000
2004...................................................... 17,081,000
2005...................................................... 10,675,000
Thereafter................................................ 8,788,000
------------
$ 70,435,014
============
</TABLE>
F-26
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
10. DEBT PAYABLE
At September 30, 2000 and 1999, debt payable consists of:
<TABLE>
<CAPTION>
2000 1999
----------- --------
<S> <C> <C>
Real estate contracts and mortgage notes payable,
interest rates ranging from 5.25% to 8.0%, due in
installments through 2020, collateralized by senior
liens on certain of the Company's real estate
contracts, mortgage notes receivable and real
estate held for sale............................... $ 287,288 $279,195
Notes payable to Federal Home Loan Bank of Seattle
(FHLB), interest rates 6.95% and 7.06%, due
11/21/2000 and 12/15/2000, collateralized by
$26,800,000 of mortgage-backed securities.......... 7,000,000 --
Note payable to Metropolitan Mortgage & Securities
Co., Inc., interest at 10% per annum, due in annual
installments through 9/30/2011, collateralized by
other receivable investments with a face value of
$20,198,000 and a carrying value of $13,610,000.... 10,900,800 --
Accrued interest payable............................. 18,255 597
----------- --------
$18,206,343 $279,792
=========== ========
</TABLE>
Aggregate amounts of principal and accrued interest due on debt payable are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
SEPTEMBER 30,
-------------
<S> <C>
2001....................................................... $ 7,719,634
2002...................................................... 719,373
2003...................................................... 796,510
2004...................................................... 891,736
2005...................................................... 1,021,158
Thereafter................................................ 7,057,932
------------
$ 18,206,343
============
</TABLE>
The Company has secured a line of credit agreement with the FHLB through its
subsidiary, OSL. When an institution becomes a stockholder in the FHLB, it can
borrow from the FHLB at a stock to borrowing ratio of 1 to 20. At September 30,
2000, OSL had a stock investment in the FHLB of $617,000, which resulted in a
borrowing capacity of $12.3 million. The collateral eligible to be used to
secure the borrowing is predefined by the FHLB and generally consists of
eligible securities and mortgage loans. Additionally, each type of collateral
has a minimum pledge requirement that ranges from 100% to 150%. At
September 30, 2000, OSL had pledged $26.8 million in eligible collateral with a
market value of $25.9 million and a borrowing potential of $12.3 million. At
September 30, 2000, OSL had borrowed $7 million leaving an unused borrowing
potential of $5.3 million. In the event the Company wanted to increase the
borrowing capacity of the FHLB line of credit, it could purchase additional
stock and or pledge additional eligible collateral.
F-27
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
In October, 2000, the Company successfully completed a $22.5 million
publicly traded note offering listed with the Pacific Exchange. The notes bear
interest at 9.5% and mature on September 15, 2005.
11. INCOME TAXES
The tax effect of the temporary differences giving rise to the Company's
deferred tax assets and liabilities as of September 30, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
2000
------------------------
ASSETS LIABILITIES
---------- -----------
<S> <C> <C>
Allowance for losses on real estate and
receivables........................................ $2,253,425
Annuity reserves..................................... 927,062
Unrealized losses on available for sale securities... 2,579,524
Unrealized gains on trading securities............... $1,580,416
Net operating loss carryforwards..................... 1,761,206
Guaranty fund assessments............................ 131,712
Deferred policy acquisition costs.................... 3,090,289
Contract acquisition costs and discount yield
recognition........................................ 194,728
Management fee payment............................... 8,305
Premiums deferred and uncollected.................... 430,286
Policy claims........................................ 605,395
Other................................................ 604,862
---------- ----------
Total deferred income taxes.......................... $7,652,929 $6,514,281
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1999
------------------------
ASSETS LIABILITIES
---------- -----------
<S> <C> <C>
Allowance for losses on real estate and
receivables........................................ $1,330,584
Annuity reserves..................................... 1,009,149
Unrealized losses on investment securities........... 998,749
Net operating loss carryforwards..................... 926,211
Guaranty fund assessments............................ 221,129
Deferred policy acquisition costs.................... $2,928,888
Contract acquisition costs and discount yield
recognition........................................ 370,743
Management fee payment............................... 14,256
Other................................................ 70,949
---------- ----------
Total deferred income taxes.......................... $4,485,822 $3,384,836
========== ==========
</TABLE>
F-28
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
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 and the
probability of the generation of future taxable income. 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.
At September 30, 2000, the Company's remaining net operating loss
carryforwards of approximately $5,180,000 expire in years 2006 through 2019.
The components of the provision (benefit) for income taxes for the years
ended September 30, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ----------- --------
<S> <C> <C> <C>
Current................................... $ (80,840) $ 1,998,509 $476,735
Deferred.................................. 1,543,112 (1,469,079) 67,299
---------- ----------- --------
$1,462,272 $ 529,430 $544,034
========== =========== ========
</TABLE>
The 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 for the years ended September 30, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
2000 1999 1998
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax at
statutory rate......... $1,885,134 34% $1,137,048 34% $1,043,141 34%
Affiliate corporate
dividend received
deduction.............. (49,406) (1) (49,425) (1) (51,016) (1)
Small life insurance
company deduction...... (376,732) (7) (587,748) (18) (481,602) (16)
Other.................... 3,276 -- 29,555 1 33,511 1
---------- -- ---------- --- ---------- ---
Income tax provision..... $1,462,272 26% $ 529,430 16% $ 544,034 18%
========== == ========== === ========== ===
</TABLE>
F-29
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
12. STOCKHOLDERS' EQUITY
A summary of preferred and common stock at September 30, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
ISSUED AND OUTSTANDING SHARES
---------------------------------------------
AUTHORIZED SHARES 2000 1999
--------------------- --------------------- ---------------------
2000 1999 SHARES AMOUNT SHARES AMOUNT
--------- --------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Registered preferred
stock:
Series S-1.......... 185,000 185,000 36,332 $ 363,316 37,540 $ 375,395
Series S-2.......... 150,000 150,000 8,464 84,644 8,464 84,644
Series S-RP......... 80,000 80,000 2,560 25,600 2,560 25,600
Series S-3.......... 450,000 250,000 242,460 2,424,601 107,183 1,071,830
--------- --------- ------- ---------- ------- ----------
865,000 665,000 289,816 $2,898,161 155,747 $1,557,469
========= ========= ======= ========== ======= ==========
Common stock.......... 2,000,000 2,000,000 10,000 $ 100,000 10,000 $ 100,000
========= ========= ======= ========== ======= ==========
</TABLE>
The Company has authorized 10,000,000 total shares of Series S preferred
stock. 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,
S-3 and S-RP shares are callable at the sole option of the board of directors at
$100 per share.
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 13). 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.
F-30
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
13. 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 (after eliminating Old Standards investment in subsidiary earnings of
Old West) for the insurance subsidiaries as of and for the years ended
September 30, 2000, 1999 and 1998, respectively, are as follows:
<TABLE>
<CAPTION>
OLD STANDARD OLD WEST
------------------------- -------------------------
STATUTORY GAAP STATUTORY GAAP
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Stockholders' equity
2000................... $17,439,222 $28,192,310 $ 8,025,515 $11,070,837
1999................... 15,257,212 24,341,398 7,284,820 9,336,893
1998................... 12,373,875 19,060,776 3,785,690 4,558,591
Net income (loss):
2000................... $ 1,976,505 $ 1,595,680 $ 851,823 $ 1,832,061
1999................... 2,684,315 3,284,324 (1,147,718) 760,294
1998................... 937,837 2,889,916 (36,275) 322,019
</TABLE>
<TABLE>
<CAPTION>
OLD STANDARD OLD WEST
------------------------- -------------------------
STATUTORY GAAP STATUTORY GAAP
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Unassigned statutory
surplus (deficit) and
retained earnings
(accumulated deficit)
2000................... $ (360,778) $12,067,995 $(3,081,885) $ 1,924,577
1999................... 457,212 10,472,315 (2,822,580) 92,516
1998................... 573,875 7,187,990 (1,421,710) (667,777)
</TABLE>
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 of approximately $361,000 at
September 30, 2000, and thus, is currently restricted from paying dividends.
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 of approximately $3,082,000 at September 30,
2000 and thus, is currently restricted from paying dividends.
The National Association of Insurance Commissioners (the "NAIC") adopted the
Codification of Statutory Accounting Principles guidance, which will replace the
current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. The NAIC has recommended an effective date of
January 1, 2001. The Codification provides guidance for areas where statutory
accounting has been silent and changes current statutory accounting in some
areas. The Company has not estimated the potential effect of the Codification
guidance.
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
F-31
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
("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 life insurance subsidiaries at September 30, 2000
was above the minimum standards.
14. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS
Supplemental information on interest and income taxes paid during the years
ended September 30, 2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
Interest paid.......................... $ 5,819,172 $ 4,283,583 $3,695,984
Income taxes paid...................... 1,626,760 1,361,817 455,214
</TABLE>
Non-cash investing and financing activities of the Company during the years
ended September 30, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
Assumption of other debt payable in
conjunction with purchase of real
estate contracts and mortgage notes
receivable........................... $ 5,000 $ 115,296 $ 16,942
Real estate acquired through
foreclosure.......................... 7,198,196 3,173,885 2,555,076
Other receivable investment
acquisitions financed with a note
payable.............................. 10,900,800
Receivables originated to facilitate
the sale of real estate.............. 506,984 3,033,829
Transfer of securities from trading to
available-for-sale................... 16,675,773
</TABLE>
15. BUSINESS SEGMENT REPORTING
The Company principally operates in three industry segments which
encompasses: (1) the investing in real estate contracts and mortgage notes
receivable, other receivables and1 investment securities with funds generated
from the issuance of investment certificates and preferred stock; (2) annuity
operations; and (3) a property development division, which provides services
related to the selling, marketing, designing, subdividing and coordinating
activities of real estate development properties.
F-32
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Information about the Company's separate business segments and in total as
of and for the years ended September 30, 2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
2000
------------------------------------------------------------------------
PROPERTY
ANNUITY DEVELOPMENT INTERSEGMENT
INVESTING OPERATIONS OPERATIONS ELIMINATIONS TOTAL
------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues............. $ 23,022,632 $ 24,580,154 $1,974,994 $ 49,577,780
Income (loss) from
operations......... 1,410,220 4,619,705 (485,414) 5,544,511
Identifiable assets,
net................ 111,427,827 275,511,188 83,690 $(27,697,119) 359,325,586
Depreciation and
amortization....... 869,037 2,880,900 17,694 3,767,631
Capital
expenditures....... 13,926 21,082 11,746 46,754
<CAPTION>
1999
------------------------------------------------------------------------
PROPERTY
ANNUITY DEVELOPMENT INTERSEGMENT
INVESTING OPERATIONS OPERATIONS ELIMINATIONS TOTAL
------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues............. $ 10,614,610 $ 23,843,214 $1,911,112 $ 36,368,936
Income (loss) from
operations......... (1,750,051) 5,270,357 (176,048) 3,344,258
Identifiable assets,
net................ 104,499,760 238,238,836 455,651 $(48,078,288) 295,115,959
Depreciation and
amortization....... 658,837 2,373,588 15,623 3,048,048
Capital
expenditures....... 18,257 8,823 46,760 73,840
<CAPTION>
1998
------------------------------------------------------------------------
PROPERTY
ANNUITY DEVELOPMENT INTERSEGMENT
INVESTING OPERATIONS OPERATIONS ELIMINATIONS TOTAL
------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues............. $ 12,470,713 $ 15,644,245 $1,850,589 $ 29,965,547
Income (loss) from
operations......... (1,364,655) 4,168,652 264,064 3,068,061
Identifiable assets,
net................ 76,213,656 163,626,195 396,887 $(33,642,504) 206,594,234
Depreciation and
amortization....... 736,182 1,027,361 8,387 1,771,930
Capital
expenditures....... 6,682 10,379 7,094 24,155
</TABLE>
F-33
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
16. RELATED-PARTY TRANSACTIONS
The Company had the following related-party transactions with Metropolitan
and its affiliates during the years ended September 30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Real estate contracts and mortgage
notes receivable and other
receivable investments purchased
through Metropolitan or
affiliates.......................... $32,874,576 $47,063,832 $36,268,548
Capitalized acquisition costs charged
to the Company on purchased
receivables, including management
underwriting fees................... 111,090 395,856 899,999
----------- ----------- -----------
Total cost of receivables purchased
through Metropolitan................ $32,985,666 $47,459,688 $37,168,547
=========== =========== ===========
Proceeds from real estate contracts,
mortgage notes receivable and other
receivable investments sold to
Metropolitan or its affiliates...... $ 8,910,886 $56,587,031 $ 9,350,960
Gains on real estate contracts and
mortgage notes receivables and other
receivable investments sold to
Metropolitan or its affiliates...... 300,523 1,707,175 749,085
Purchase of residual interest in
securitization from Metropolitan 1,196,701 -- --
Service fees charged to Metropolitan
for property development assistance 1,974,994 1,911,112 1,844,026
Administrative service charged by
Metropolitan 480,682 662,274 390,168
Servicing and collection fees charged
by a Metropolitan affiliate 403,573 490,726 500,832
Commissions and service fees charged
to Metropolitan on sale of
Metropolitan's debentures, preferred
stock and note offering 4,717,219 1,786,408 2,448,075
Net change in note receivable from
Metropolitan (8,007,289) 9,947,289 2,560,000
Net change in notes payable to
Metropolitan 10,900,800 -- --
Net interest received on notes
receivable from and payable to
Metropolitan 1,190,359 734,126 80,028
Dividends received on affiliated
companies' stock investments 217,067 207,589 214,354
Direct reinsurance premiums received
from affiliate 27,434,956 44,746,374 25,448,538
Annuity servicing fees paid to
affiliate 374,964 331,202 126,134
Ceding commissions paid to affiliate 1,479,000 2,300,000 1,600,000
</TABLE>
F-34
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
At September 30, 2000 and 1999, the Company had net receivables due from
affiliates of $367,000 and net payables to affiliates of $151,000, respectively.
At September 30, 2000, the outstanding note payable to Metropolitan was
$10,900,800. At September 30, 2000 and 1999, the outstanding note receivable
balance from Metropolitan was $4,500,000 and $12,507,289, respectively.
During the year ended September 30, 1999, the Company sold pools of real
estate contracts and mortgage notes receivable to Metropolitan or its
affiliates, which were subsequently securitized by Metropolitan or its
affiliates. To the extent these sales were consummated just prior to the
securitization transaction, the Company was allocated a gain as if they had
participated in the securitization transaction. If the sales were made in
advance of the securitization transaction, then such sales were made at fair
value on the date of the sale, and Metropolitan or its affiliates assumed all
credit and market risk associated with the real estate contracts and mortgage
notes receivable from the date of the sale through the securitization.
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, 2000, 1999 and 1998, the Company incurred service fees for
receivable acquisition from Metropolitan of approximately $111,000, $396,000 and
$900,000, respectively. The agreements are non-exclusive and may be terminated
in whole or part by either party upon notice to the other party.
The Company receives accounting, data processing, contract servicing and
other administrative services from Metropolitan. Charges for these services were
approximately $884,000, $1,153,000 and $891,000 in the years ended
September 30, 2000, 1999 and 1998, respectively. During the year ended
September 30, 2000, the Company entered into an agreement with Metropolitan to
change from a calculated service fee to a cost sharing arrangement. 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.
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 .6% 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, 2000, 1999 and 1998 were
approximately $4,717,000, $1,786,000 and $2,448,000, 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 $1,975,000,
$1,911,000 and $1,844,000 during the years ended September 30, 2000, 1999 and
1998, respectively.
During the year ended September 30, 2000, the Company purchased a
participation in certain structured settlements from Metropolitan and a
participation in certain lease equipment receivables from
F-35
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
a subsidiary of Metropolitan at estimated fair value. The purchase price for the
structured settlements of $8,068,000 and the lease equipment receivables of
$5,542,000 were financed in part by a $10,900,800 note payable with the
participated receivables pledged as collateral.
Additionally, during the year ended September 30, 2000, the Company
purchased an $18 million non-interest bearing contract receivable,
collateralized by timber rights in Hawaii from Metropolitan at an estimated fair
value of approximately $13,100,000 using a discount rate of 12%.
The Company sponsors a 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 18 upon completion of six months of
service in which he or she has completed 500 hours of service. Employees may
defer from 1% to 15% of their compensation in multiples of whole percentages.
Prior to January 1, 1999, if the Company had a net profit for the fiscal
year ending within a calendar year, a match equal to 50% of pre-tax
contributions up to 6% of the participant's compensation, was credited to the
account of each active participant on December 31. Effective January 1, 1999,
the plan was amended to modify the employer match to a discretionary matching
contribution equal to a uniform percentage of the amount of the participant
contribution, up to 6% of the participant's annual compensation. The uniform
percentage is to be determined annually by the Company. The Company may also
make an additional discretionary contribution during any plan year. For services
performed, the contribution relating to the Company's employees was made by
Metropolitan during the years ended September 30, 2000, 1999 and 1998.
17. 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.
PUBLICLY TRADED INVESTMENT SECURITIES--Fair value is determined by
quoted market prices.
NON-PUBLICLY TRADED INVESTMENT SECURITIES--Fair value is determined
based upon quoted market prices for securities with similar characteristics
and risks or is estimated based upon expected discounted future cash flows.
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.
ANNUITY RESERVES--The fair value of annuity reserves approximates the
carrying value because the majority of the annuity policies provide for
variable rates of interest.
F-36
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
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.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS--Fair value approximates the
notional amount of commitments to extend credit because advances bear
current interest rates and are made contingent to the borrowers compliance
with the existing loan agreement.
The estimated fair values of the following financial instruments as of
September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000
---------------------------
CARRYING FAIR
AMOUNTS VALUE
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents...................... $ 24,228,881 $ 24,228,881
Investments:
Affiliated companies......................... 4,522,425 4,522,425
Trading securities........................... 26,264,393 26,264,393
Available-for-sale securities................ 71,101,180 71,101,180
Held-to-maturity securities.................. 4,616,744 4,679,047
Real estate contracts and mortgage notes
receivable................................. 177,596,765 198,649,947
Other receivable investments................. 34,736,080 35,672,998
Financial liabilities:
Annuity reserves............................... 237,634,664 237,634,664
Investment certificates-principal and compound
interest..................................... 69,394,643 68,819,012
Debt payable- principal........................ 18,188,088 19,717,737
Off-balance sheet instruments:
Commitments to extend credit..................... 9,368,972 9,368,972
</TABLE>
F-37
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
<TABLE>
<CAPTION>
1999
---------------------------
CARRYING FAIR
AMOUNTS VALUE
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents...................... $ 42,242,161 $ 42,242,161
Investments:
Affiliated companies......................... 4,522,425 4,522,425
Trading securities........................... 11,117,556 11,117,556
Available-for-sale securities................ 76,474,251 76,474,251
Held-to-maturity securities.................. 1,499,914 1,504,766
Real estate contracts and mortgage notes
receivable................................. 111,474,672 120,630,515
Other receivable investments................. 31,157,832 32,538,152
Financial liabilities:
Annuity reserves............................. 201,331,111 201,331,111
Investment certificates-principal and
compound interest.......................... 70,725,716 72,472,641
Debt payable-principal....................... 279,195 286,091
Off-balance sheet instruments:
Commitments to extend credit................. 7,757,241 7,757,241
</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-38
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS
The condensed balance sheets of Summit Securities, Inc. ("Summit" or the
"parent company") at September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................ $ 1,372,346 $ 8,413,848
Investments.............................................. 22,143,673 10,822,908
Real estate contracts and mortgage notes receivable and
other receivable investments, net...................... 54,128,931 41,113,637
Real estate held for sale, net (including foreclosed real
estate received in satisfaction of debt of $748,762 and
$694,959).............................................. 962,788 901,503
Equity in subsidiary companies........................... 29,335,985 25,034,093
Deferred cost, net....................................... 2,002,254 2,152,034
Other assets, net........................................ -- 965,955
Deferred income taxes.................................... 1,595,527 1,446,683
Receivables from affiliates.............................. -- 260,145
------------ ------------
Total assets......................................... $111,541,504 $ 91,110,806
============ ============
LIABILITIES
Investment certificates and accrued interest............. $ 70,435,014 $ 71,806,904
Debt payable............................................. 11,037,013 138,838
Payables to affiliates................................... 47,861
Accounts payable and accrued expenses.................... 192,202 60,109
------------ ------------
Total liabilities.................................... 81,712,090 72,005,851
============ ============
STOCKHOLDERS' EQUITY
Preferred stock, $10 par (liquidation preference
$28,981,610 and $15,574,690)........................... 2,898,161 1,557,469
Common stock, $10 par.................................... 100,000 100,000
Additional paid-in capital............................... 23,383,884 11,988,926
Accumulated other comprehensive loss..................... (5,007,025) (1,938,750)
Retained earnings........................................ 8,454,394 7,397,310
------------ ------------
Total stockholders' equity........................... 29,829,414 19,104,955
------------ ------------
Total liabilities and stockholders' equity........... $111,541,504 $ 91,110,806
============ ============
</TABLE>
F-39
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Summit's condensed statements of income for the years ended September 30,
2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest and earned discounts........................ $ 6,008,529 $ 4,904,417 $ 4,194,680
Dividends............................................ 236,558 207,589 214,354
Fees, commissions, services and other income......... 32,844 66,991 78,773
Real estate sales.................................... 934,990 2,253,209 4,333,321
Net gains on investments and receivables............. 5,446,717 764,222 871,980
----------- ----------- -----------
Total revenues..................................... $12,659,638 $ 8,196,428 $ 9,693,108
=========== =========== ===========
Expenses:
Interest expense..................................... $ 6,616,694 $ 5,845,279 $ 4,768,082
Cost of real estate sold............................. 944,413 2,172,782 4,487,903
Provision for losses on real estate assets........... 1,752,889 830,539 841,060
Salaries and employee benefits....................... 560,999 206,067 116,134
Other operating expenses............................. 1,536,785 886,837 877,382
----------- ----------- -----------
Total expenses..................................... $11,411,780 $ 9,941,504 $11,090,561
=========== =========== ===========
Income (loss) from operations before income taxes and
equity in net income of subsidiaries................. 1,247,858 (1,745,076) (1,397,453)
Income tax (provision) benefit......................... (379,460) 634,884 516,356
----------- ----------- -----------
Income (loss) before equity in net income of
subsidiaries......................................... 868,398 (1,110,192) (881,097)
Equity in net income of subsidiaries................... 3,213,841 3,925,020 3,405,124
----------- ----------- -----------
Net income............................................. $ 4,082,239 $ 2,814,828 $ 2,524,027
=========== =========== ===========
</TABLE>
Summit's condensed statements of cash flows for the years ended September
30, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 4,082,239 $ 2,814,828 $ 2,524,027
Adjustments to reconcile net income to net cash from
operating activities............................... (9,607,290) (341,568) (3,092,688)
----------- ----------- -----------
Net cash from (used by) operating activities....... (5,525,051) 2,473,260 (568,661)
----------- ----------- -----------
Cash flows from investing activities:
Principal payments on real estate contracts and
mortgage notes receivable and other receivable
investments........................................ 30,580,520 5,306,256 6,250,637
Proceeds from sales of real estate contracts and
mortgage notes receivable and other receivable
investments........................................ 4,280,696 16,176,114 6,597,635
</TABLE>
F-40
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities, continued:
Acquisition of real estate contracts and mort-gage
notes and other receivable investments.......... (37,549,338) (31,362,510) (6,790,468)
Proceeds from real estate sales................... 934,990 1,746,225 1,299,492
Purchase of investments........................... (2,562,705) (1,642,386)
Proceeds from sales of investments................ 600,174
Proceeds from maturities of investments........... 131,668 542,100
Additions to real estate held for sale............ (305,726) (1,267,441) (3,048,240)
Net change in investment in and advances to
subsidiaries.................................... (3,616,666) (7,082,919) (7,085,451)
------------ ------------ ------------
Net cash used by investing activities........... (8,106,561) (16,984,387) (2,776,395)
------------ ------------ ------------
Cash flows from financing activities:
Repayments to banks and others.................... (4,269) (1,033) (17,249)
Debt issuance costs............................... (694,589) (1,348,623) (775,095)
Proceeds from issuance of investment
certificates.................................... 9,183,528 25,798,321 14,168,688
Repayments of investment certificates............... (11,605,055) (10,975,060) (9,382,646)
Contingent purchase price paid on subsidiary
purchased from related party...................... (135,569)
Issuance of preferred stock, net of redemptions..... 12,735,650 8,474,923 1,207,296
Cash dividends...................................... (3,025,155) (838,356) (709,235)
------------ ------------ ------------
Net cash from financing activities.............. 6,590,110 21,110,172 4,356,190
------------ ------------ ------------
Net change in cash and cash equivalents............. (7,041,502) 6,599,045 1,011,134
Cash and cash equivalents, beginning of year........ 8,413,848 1,814,803 803,669
------------ ------------ ------------
Cash and cash equivalents, end of year.............. $ 1,372,346 $ 8,413,848 $ 1,814,803
============ ============ ============
</TABLE>
Non-cash investing and financing activities not included in Summit's
condensed statements of cash flows for the years ended September 30, 2000, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Receivables originated to facilitate the sale of
real estate....................................... $ 506,984 $ 3,033,829
Real estate acquired through foreclosure............ $ 719,997 801,241 1,157,640
Other receivable investment acquisitions financed
with a note payable............................... 10,900,800
Assumption of debt payable in conjunction with
acquisition of real estate contracts and mortgage
notes receivable or foreclosure of real estate.... 5,000 99,092
Transfer of securities from trading to
available-for-sale................................ 5,497,387
</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-41
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
At September 30, 2000 and 1999, Summit's debt payable consists of the
following:
<TABLE>
<CAPTION>
2000 1999
----------- --------
<S> <C> <C>
Real estate contracts and mortgage notes payable, interest
rates ranging from 5.25% to 7.37%, due in installments
through 2020; collateralized by senior liens on certain of
the Company's real estate contracts, mortgage notes
receivable and real estate held for sale.................. $ 136,637 $139,065
Note payable to Metropolitan Mortgage & Securities
Co., Inc., interest at 10% per annum, due in annual
installments through 9/30/2011, collateralized by other
receivable investments with a face value of $20,198,000
and a carrying value of $13,610,000....................... 10,900,800 --
Prepaid interest............................................ (424) (227)
----------- --------
$11,037,013 $138,838
=========== ========
</TABLE>
At September 30, 2000 and 1999, Summit's investment certificates consisted
of the following:
<TABLE>
<CAPTION>
ANNUAL INTEREST RATES 2000 1999
--------------------- ----------- -----------
<S> <C> <C>
6% to 7%......................................... $ 1,818,000 $ 4,072,401
7% to 8%......................................... 3,427,000 2,054,097
8% to 9%......................................... 42,289,000 43,862,739
9% to 10%........................................ 14,360,000 14,321,558
10% to 11%....................................... 191,000 193,333
----------- -----------
62,085,000 64,504,128
Compound and accrued interest.................... 8,350,014 7,302,776
----------- -----------
$70,435,014 $71,806,904
=========== ===========
</TABLE>
Maturities of the parent company's investment certificates are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
SEPTEMBER 30,
-------------
<S> <C>
2001........................................................ $14,530,014
2002........................................................ 9,026,000
2003........................................................ 10,335,000
2004........................................................ 17,081,000
2005........................................................ 10,675,000
Thereafter.................................................. 8,788,000
-----------
$70,435,014
===========
</TABLE>
F-42
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Summit had the following related-party transactions with its various
subsidiaries and affiliated entities:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Real estate contracts, mortgage notes and other
receivable investments purchased through Metropolitan
or affiliates......................................... $31,187,837 $ 400,237 $4,230,050
Contract acquisition costs charged to Summit on
purchased real estate contracts, mortgage notes and
other receivable investments, including management
underwriting fees..................................... 16,793 5,624 267,950
----------- ---------- ----------
Total costs of real estate contracts, mortgage notes and
other receivable investments purchased through
Metropolitan.......................................... $31,204,630 $ 405,861 $4,498,000
=========== ========== ==========
Purchase of residual interest in securitization from
Metropolitan.......................................... $ 1,196,701
Proceeds on sales of real estate contracts, mortgage
notes and other receivable investments to Metropolitan
or its affiliates..................................... 4,066,924 $3,844,656 $9,350,960
Realized net gains on sales of receivables to
Metropolitan or its affiliates........................ 13,571 209,630 749,085
Dividends received on affiliated companies' stock
investments........................................... 217,067 207,589 214,354
Net change in notes receivable from Metropolitan........ (10,000,000) 7,440,000 2,560,000
Net change in notes payable to Metropolitan............. 10,900,800
Net interest received on note receivable or payable to
Metropolitan.......................................... 1,002,139 642,417 80,078
Servicing and collection fees charged by a Metropolitan
affiliate............................................. 92,484 155,168 224,064
</TABLE>
During the year ended September 30, 2000, the Company purchased a
participation in certain structured settlements from Metropolitan and a
participation in certain lease equipment receivables from a subsidiary of
Metropolitan at estimated fair value. The purchase price for the structured
settlements of $8,068,000 and the lease equipment receivables of $5,542,000 were
financed in part by a $10,900,800 note payable with the participated receivables
pledged as collateral. The outstanding balance on the note receivable at
September 30, 2000 was $10,900,800.
Additionally, during the year ended September 30, 2000, the Company
purchased an $18 million non-interest bearing contract receivable,
collateralized by timber rights in Hawaii from Metropolitan at an estimated fair
value of $13,194,396 using a discount rate of 12%.
F-43
<PAGE>
SCHEDULE I
SUMMIT SECURITIES, INC.
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
COLUMN D
COLUMN B COLUMN C --------
COLUMN A -------- -------- 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............................... $ 6,124,852 $ 6,189,594 $ 6,127,291
Mortgage and Asset-Backed Bonds........... 92,208,866 83,984,987 83,984,987
------------ ----------- ------------
TOTAL FIXED MATURITIES...................... 98,333,718 90,174,581 90,112,278
============ =========== ============
Equity Securities........................... 7,143,852 11,870,039 11,870,039
============ =========== ============
Real Estate Contracts and Mortgage Notes
Receivables............................... 172,549,875 172,549,875
============ ============
Other Investment Receivables................ 33,586,783 33,586,783
============ ============
Real Estate Held for Sale................... 4,790,768 4,790,768
============ ============
Other Assets-Policy Loans................... 6,968 6,968
============ ============
TOTAL INVESTMENTS........................... $316,411,964 $312,916,711
============ ============
</TABLE>
S-1
<PAGE>
SCHEDULE II
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
ADDITIONS
(REDUCTIONS) DEDUCTIONS
BALANCE AT CHARGED TO AND ACCOUNTS
BEGINNING COSTS AND WRITTEN OFF BALANCE AT
DESCRIPTION OF YEAR EXPENSES (RECOVERY) END OF YEAR
----------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Allowance for losses deducted from real
estate contracts and mortgage notes
receivable on balance sheet................
2000..................................... $3,082,918 $ 2,721,039 $440,612 $5,363,345
1999..................................... 1,843,055 1,507,953 268,090 3,082,918
1998..................................... 1,153,278 1,243,044 553,267 1,843,055
Allowance for losses deducted from real
estate held for sale on balance sheet......
2000..................................... $ 878,102 $ (429,930) $205,570 $ 242,602
1999..................................... 617,754 817,547 557,199 878,102
1998..................................... 457,427 556,129 395,802 617,754
Allowance for losses deducted from other
receivable investments on balance sheet....
2000..................................... $ -- $ 1,165,047 $ 15,750 $1,149,297
1999..................................... -- -- -- --
1998..................................... -- -- -- --
Allowance for losses deducted from
investments on balance sheet...............
2000..................................... $ 170,000 $ 50,000 -- $ 220,000
1999..................................... -- 170,000 -- 170,000
1998..................................... -- -- -- --
</TABLE>
S-2
<PAGE>
SCHEDULE III
PAGE 1 OF 2
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
FUTURE POLICY
BENEFITS OTHER POLICY
DEFERRED POLICY LOSSES, CLAIMS CLAIMS AND
ACQUISITION AND LOSS UNEARNED BENEFITS
COST EXPENSES PREMIUMS PAYABLE
--------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
September 30, 2000
Annuities................................. $11,271,272 $237,634,664 $ -- $ --
September 30, 1999
Annuities................................. $ 9,747,787 $201,331,111 $ -- $ --
September 30, 1998
Annuities................................. $ 7,922,724 $136,362,403 $ -- $ --
</TABLE>
S-3
<PAGE>
SCHEDULE III
PAGE 2 OF 2
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
BENEFITS AMORTIZATION
CLAIMS OF DEFERRED
ANNUITY NET LOSSES AND POLICY OTHER
FEES AND INVESTMENT SETTLEMENT ACQUISITION OPERATING
CHARGES INCOME EXPENSES COSTS EXPENSES
-------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
September 30, 2000
Annuities....................... $235,511 $23,792,875 $11,907,780 $2,870,000 $2,243,586
September 30, 1999
Annuities....................... $147,184 $18,778,782 $10,645,585 $2,365,000 $1,947,061
September 30,1998
Annuities....................... $148,958 $12,575,824 $ 6,953,757 $1,195,000 $1,294,316
</TABLE>
S-4
<PAGE>
SCHEDULE IV
PAGE 1 OF 3
SUMMIT SECURITIES, INC.
MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER 30, 2000
Less than 1% of the Receivables are subject to variable interest rates.
Interest rates range principally from 6% to 14% with approximately 92% of the
face value of the Receivables within this range. The following table segregates
the Consolidated Group's Receivable portfolio by type, size, and lien position.
<TABLE>
<CAPTION>
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................ 37 7-10% $ 4,226,826 $ 980,741 5
First Mortgage > $40,000................ 91 7-11 4,766,611 270,099 5
First Mortgage < $40,000................ 1,065 7-12 8,619,103 277,038 20
Second or Lower > $75,000............... 1 9 81,857 -- --
Second or Lower > $40,000............... 8 8-10 407,794 40,000 1
Second or Lower < $40,000............... 38 7-10 619,432 58,355 2
COMMERCIAL
First Mortgage > $75,000................ 197 8-14 103,627,076 9,059,762 11
First Mortgage > $40,000................ 17 8-10 872,225 -- --
First Mortgage < $40,000................ 30 8-10 523,667 -- --
Second or Lower > $75,000............... 2 7-10 158,442 -- --
Second or Lower > $40,000............... 2 9-10 94,818 -- --
Second or Lower < $40,000............... 4 8-10 73,350 -- --
FARM, LAND AND OTHER
First Mortgage > $75,000................ 33 8-14 58,588,552 1,282,334 4
First Mortgage > $40,000................ 8 8-10 401,757 41,300 1
First Mortgage < $40,000................ 17 8-10 331,279 -- --
Second or Lower > $75,000............... 2 8 373,797 186,403 1
Second or Lower > $40,000............... 2 6-9 108,356 -- --
Second or Lower < $40,000............... 118 8-10 2,020,966 22,183 1
Unrealized discounts, net of unamortized
acquisition costs, on Receivables
purchased at a discount............... (8,299,143)
Accrued Interest Receivable............. 316,455
Allowance for Losses.................... (5,363,345)
------------
CARRYING VALUE.......................... $172,549,875 $12,218,215
============ ===========
</TABLE>
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.
S-5
<PAGE>
SCHEDULE IV
PAGE 2 OF 3
SUMMIT SECURITIES, INC.
MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER 30, 2000
The future maturities of the aggregate amounts of Receivables (face amount)
are as follows:
<TABLE>
<CAPTION>
RESIDENTIAL COMMERCIAL FARM, LAND, TOTAL
PRINCIPAL PRINCIPAL OTHER PRINCIPAL PRINCIPAL
----------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
October 2000 --September 2003.......... $ 2,416,067 $ 78,217,053 $32,400,731 $113,033,851
October 2003-- September 2005.......... 5,041,907 18,968,583 27,701,467 51,711,957
October 2005 --September 2007.......... 2,799,093 3,124,822 1,088,562 7,012,477
October 2007 --September 2010.......... 3,125,299 1,792,724 258,996 5,177,019
October 2010 --September 2015.......... 2,071,926 1,740,189 182,330 3,994,445
October 2015 --September 2020.......... 1,167,885 534,774 146,540 1,849,199
October 2020 -- Thereafter............. 2,099,403 971,437 46,120 3,116,960
----------- ------------ ----------- ------------
$18,721,580 $105,349,582 $61,824,746 $185,895,908
=========== ============ =========== ============
</TABLE>
S-6
<PAGE>
SCHEDULE IV
PAGE 3 OF 3
SUMMIT SECURITIES, INC.
MORTGAGE LOANS ON REAL ESTATE
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period..................... $109,683,515 $119,220,402 $103,623,728
------------ ------------ ------------
Additions during period
New Receivables-cash............................. 131,033,562 92,652,050 55,586,826
Loans to facilitate the sale of real estate
held-noncash................................... 506,984 3,033,829
Assumption of other debt payable in conjunction
with acquisition of new Receivables-noncash.... 5,000 115,296 16,942
Increase in accrued interest net of discount
amortization................................... 2,160,226 -- 731,102
------------ ------------ ------------
Total additions.................................... 133,198,788 93,274,330 59,368,699
------------ ------------ ------------
Deductions during period
Collections of principal-cash.................... 52,079,743 30,083,280 18,781,579
Cost of Receivables sold......................... 9,364,535 68,035,501 21,306,086
Foreclosures-non cash............................ 6,607,723 3,382,709 2,994,583
Decrease in accrued interest..................... -- 69,864 --
Increase in allowances for losses................ 2,280,427 1,239,863 689,777
------------ ------------ ------------
Total deductions................................... 70,332,428 102,811,217 43,772,025
------------ ------------ ------------
Balance at end of period........................... $172,549,875 $109,683,515 $119,220,402
============ ============ ============
</TABLE>
S-7
