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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________________ to
__________________________.
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For the Fiscal Year Ended December 31, 1998 Commission File Number 000-25253
SUMMIT LIFE CORPORATION
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(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1448244
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3021 Epperly Dr., P.O. Box 15808, Oklahoma City, Oklahoma 73155
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (405) 677-0781
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: common stock, $.01
par value per share
(Title of Class)
Check whether the registrant (1) has filed all reports required 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 No X
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Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, 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-KSB or any amendment to
this Form 10-KSB. X
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Registrant's revenues for its most recent fiscal year were $756,324.
As of March 25, 1999, the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, was $3,498,045.
As of March 25, 1999, there were 2,199,481 shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE: Registrant's Proxy Statement for the 1999
Annual Meeting of Stockholders is incorporated by reference in Part III, Items 9
through 12, of this Form 10-KSB.
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FORM 10-KSB
TABLE OF CONTENTS
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Item PART I Page
1. Description of Business............................................................... 1
2. Description of Property............................................................... 10
3. Legal Proceedings..................................................................... 10
4. Submission of Matters to a Vote of Security Holders................................... 10
PART II
5. Market for Common Equity and Related Stockholder Matters.............................. 11
6. Management's Discussion and Analysis of Financial Condition and Results of Operation.. 13
7. Financial Statements.................................................................. 19
8. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure............................................................................ 19
PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance With 19
Section 16(a) of the Exchange Act.....................................................
10. Executive Compensation................................................................ 19
11. Security Ownership of Certain Beneficial Owners and Management........................ 19
12. Certain Relationships and Related Transactions........................................ 19
13. Exhibits and Reports on Form 8-K...................................................... 19
Signatures............................................................................ 21
Financial Statements.................................................................. Appendix A
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Act"), and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Report, including, without
limitation, statements regarding the Company's future financial position,
business strategy, budgets, projected costs and plans and objectives of
Management for future operations, are forward-looking statements. In addition,
forward-looking statements generally can be identified by the use of forward-
looking terminology such as "may," "will," "expect," "intend," "estimate,"
"anticipate" or "believe" or the negative thereof or variations thereon or
similar terminology. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Such
statements are based upon numerous assumptions about future conditions which may
ultimately prove to be inaccurate and actual events and results may materially
differ from anticipated results described in such statements. Important factors
that could cause actual results to differ materially from the Company's
expectations ("cautionary statements") include the risks inherent generally in
the insurance and financial services industries, the impact of competition and
product pricing, changing market conditions, the risks disclosed under "ITEM 6--
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION" and elsewhere in this
REPORT. All subsequent written and oral forward-looking statements attributable
to the Company, or persons acting on its behalf, are expressly qualified in
their entirety by the cautionary statements. The Company assumes no duty to
update or revise its forward-looking statements based on changes in internal
estimates or expectations or otherwise. As a result, the reader is cautioned not
to place reliance on these forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Summit Life Corporation, an Oklahoma corporation formed in 1994 (the
"Company"), specializes in various segments of the insurance and financial
services industry. Through its four operating subsidiaries, the Company offers
individual life insurance and annuity products in the states of Louisiana,
Oklahoma and Texas. Additionally, although the Company's primary focus is its
life insurance operations, it also provides residential mortgage loan processing
services to individuals and financing to medical accounts receivable factoring
entities.
The Company's growth to date has been fueled primarily through
acquisitions. In September 1994, the Company made its first acquisition, of
Edmond National Life Insurance Company (renamed Summit Life and Annuity Company
after the acquisition), an Oklahoma-domiciled life insurance company. Since
then, the Company has continued to expand in both territory and product line,
now offering annuities and life insurance in Texas and Oklahoma and life
insurance only in Louisiana. The Company's premiums and deposits have increased
from $25,000 in 1994 to over $600,000 in 1998, with assets growing from
$1,032,000 in 1994 to approximately $8,400,000 at December 31, 1998. See "ITEM
6--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION." According to A.M. Best (Best's Review January 1998), in 1996
industry-wide individual annuity direct premiums and fund deposits, similar to
those offered by the Company, totaled over $85 billion, and represented
approximately 25% of overall premium dollars. The Company believes that this
niche of the insurance industry will continue to grow as a percentage of total
premium dollars and that this growth, coupled with the current consolidation of
the insurance industry, presents the Company with good opportunities to achieve
its operating strategy and make profitable acquisitions.
The Company's operating strategy is to continue to make acquisitions of
small, marginally profitable or unprofitable insurance companies, consolidate
and streamline the administrative functions of these small companies, improve
their investment yields through active asset management in a centralized
investment operation and eliminate their unprofitable products and distribution
channels. The Company believes that it is particularly well suited to make such
acquisitions and to capitalize on the cost savings that can be realized by
consolidating the administrative functions of the acquired companies.
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As of December 31, 1998, the Company had approximately 648 life insurance
policies and annuity contracts outstanding and individual life insurance in
force of approximately $23 million. As of December 31, 1998, the Company had
total assets of approximately $8.4 million and total stockholders' equity of
approximately $777,000.
History
The Company was formed in 1994 and, through funds obtained through a
private placement, acquired Edmond National Life Insurance Company (renamed
Summit Life and Annuity Company after the acquisition ("SLAC"), an Oklahoma-
domiciled life insurance company, in September 1994 for cash consideration of
$435,000. Family Benefit Life Insurance Company, a Texas corporation ("FBLIC"),
was acquired by the Company in October 1995 for cash consideration of $165,000.
In December 1994, the Company formed Equity Mortgage Services, Inc., an
Oklahoma corporation ("EMSI"), to acquire the assets of Equity National Mortgage
Company. EMSI, which acted as a mortgage loan wholesaler, was merged with and
into the Company in 1997. In December 1998, the Company adopted a plan to sell
the mortgage services segment to an officer of the Company in exchange for a
$10,000 note receivable. See "ITEM 12CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
Recent Events
In January 1998, the Company acquired Benefit Capital Life Insurance
Company, a Louisiana corporation ("BCLIC") in exchange for 100,000 shares of
common stock, in a business combination accounted for as a purchase. Because
the Company's common stock was not traded, its fair value was not reliably
measurable. Therefore, the cost of the BCLIC acquisition was estimated to be
equal to the fair values of BCLIC's assets and liabilities. On such basis, the
total cost of the acquisition was approximately $998,000.
In January 1999, the Company acquired Great Midwest Life Insurance Company,
a Texas life insurance company ("GMLIC"), for an aggregate purchase price of
$939,000. Of such purchase price, cash of $607,193 was paid to seven of the
eight shareholders of GMLIC; with the eighth shareholder receiving a promissory
note for a principal amount of $331,807, payable in three equal annual
installments at an annual interest rate of 6% on the unpaid principal balance.
The Company funded $350,000 of the cash portion of the purchase price with a
loan from BancFirst, Oklahoma City.
On January 11, 1999, a registration statement relating to a $5 million
public offering of the Company's common stock was declared effective by the
Securities and Exchange Commission. In accordance with the terms of the
offering, the Company escrowed offering proceeds with UMB Oklahoma Bank,
National Association, until the minimum offering of $700,000 had been obtained.
On March 22, 1999, a total of $724,000 was released to the Company. Pursuant to
the registration statement, the Company may continue its offering until October
31, 1999, or elect to terminate the offering at any time prior to such date and
at less than the maximum offering. In no event, however, will the Offering
extend beyond October 31, 1999. The Company plans to use a portion of the
proceeds of the offering to repay the bank borrowing of $350,000 described
above.
Operations
Insurance Products
General
Through its insurance subsidiaries, the Company offers a portfolio of
permanent and term life products as well as flexible premium and single premium
annuities designed to meet the needs of its customers for supplemental
retirement income, estate planning and protection from unexpected death. The
target market is middle income individuals, families and small businesses
throughout its marketing territory. The Company's business strategy with
respect to its insurance business is to continue to expand its marketing
territory through subsidiary growth and/or company acquisition, and to increase
shareholder value by managing certain operating fundamentals inherent to the
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insurance business. The Company intends to utilize these operating fundamentals
to differentiate its products by maintaining its position as a low-cost producer
that provides high-value products to its life insurance and annuity customers,
while also providing superior service to both agents and customers. In
addition, the Company intends to continue to seek new business opportunities
through mergers, acquisitions and strategic alliances.
The Company has realized very low entry costs in its purchases of small
insurance companies. The Company minimizes operating expenses by centralizing,
standardizing and more efficiently performing many functions common to most life
insurance companies. The operations performed by the Company include
underwriting and policy administration, accounting and financial reporting,
marketing, regulatory compliance and asset management. The Company believes that
it is currently utilizing less than 10% of its information technology systems
capability in the administration of these back office operations.
Factors Affecting Insurance Operations
The Company believes that its operating performance is significantly
impacted by four basic elements: (i) mortality, (ii) persistency, (iii)
operating expenses, and (iv) investment yield. The Company believes that its
results for each of these four basic elements for the last several years have
been good.
The Company believes its conservative risk selection practices and its
disciplined field underwriting have resulted in the Company realizing favorable
mortality experience for the last several years. See "Insurance Underwriting."
The Company fully underwrites each regular application and has no group
underwriting and maintains very little guaranteed issue business.
The Company has consistently achieved favorable persistency on its life
insurance products (i.e., lower lapse rates). This high persistency has been
achieved by providing quality service to its policyholders, incentives to agents
by, among other things, grading production bonuses by actual persistency, paying
persistency bonuses, awarding recognition for both agency and agent persistency
achievements, and monitoring agency persistency on a quarterly and annual basis.
Persistency is the extent to which policies sold remain in force. Policy lapses
over those actuarially anticipated could have an adverse effect on the financial
performance of the Company. Policy acquisition costs are deferred and expensed
over the premium paying period of a policy. Excess policy lapses, however,
cause the immediate expensing or amortizing of deferred policy acquisition
costs. Provided the Company maintains lapse and surrender rates within its
pricing assumptions for its insurance policies, the Company believes that the
present lapse and surrender rate should not have a material adverse effect on
the Company's financial results. For the years ended December 31, 1997 and
1998, the Company's lapse ratio on ordinary business was 1% and 4%,
respectively.
The Company has aggressively managed its cost structure, while realizing
certain operating efficiencies from minimal personnel and reduced data
processing costs as a result of the various acquisitions it has effected since
1994. Other factors contributing to the Company's lower cost structure include:
(i) a flat organizational structure which allows the Company to be responsive to
changing business conditions; (ii) the location of the Company in a geographic
area which provides lower cost operations than found in many other areas of the
country; (iii) a well-trained, experienced workforce; and (iv) efficient use of
technology.
The Company has maintained competitive portfolio yields, while at the same
time maintaining a conservative approach with respect to its investment
criteria. Ultimately, the Company's objective with respect to its insurance
operations is to price each of its products to earn an adequate margin between
the return to the policyholder and the return earned by the Company on its
investments. To the extent that the Company is able to realize higher portfolio
yields on its investments, it will be in a position to offer more attractive
pricing on its insurance products.
Fixed Rate Annuities
Annuities are long term savings vehicles that are particularly attractive
to customers over the age of 50 who are or may be planning for retirement and
seek a secure, tax deferred savings product. The individual annuity business is
a growing segment of the savings and retirement market and among the fastest
growing segments of the life insurance industry. Annuity products currently
enjoy an advantage over certain other retirement savings
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products, because the payment of federal income taxes on interest credited on
annuity policies is deferred during the investment accumulation period.
The Company and its subsidiaries market, issue and administer a variety of
fixed rate deferred annuity products, including single premium and flexible
premium deferred annuities. In a fixed rate deferred annuity, the insurance
company assumes the risk of interest fluctuations and pays a minimum fixed rate
of interest, usually 3% to 4% per year, with an excess amount payable based on
investment yields of its investment portfolio. Single premium deferred
annuities (`SPDAs'), in general, are savings vehicles in which the policyholder
makes a single premium payment to an insurance company. The insurance company
credits the account of the annuitant with earnings at an interest rate (the
"crediting rate"), which is declared by the insurance company from time to time
and may exceed but may not be lower than any contractually guaranteed minimum
crediting rate. All of the Company's annuities have a minimum guaranteed
crediting rate. The Company also offers flexible premium deferred annuities
("FPDAs"). FPDAs are deferred annuities in which the policyholder may elect to
make more than one premium payment. The Company currently does not offer
variable annuity products.
The Company periodically establishes an interest crediting rate for its new
annuity policies. In determining the Company's interest crediting rate on new
policies, management considers the competitive position of the Company,
prevailing market rates and the profitability of the annuity product. The
Company maintains the initial crediting rate for a minimum period of one year.
Thereafter, the Company may adjust the crediting rate at its discretion,
although historically such adjustments have generally been made on a quarterly
basis. In establishing renewal crediting rates, the Company primarily considers
the anticipated yield on its investment portfolio. Interest rates credited on
the Company's in force annuity policies ranged from 5.15% to 7.15% at December
31, 1998. All of the Company's annuity products have minimum guaranteed
crediting rates of 3.0% for the life of the policy. At December 31, 1998, more
than 60% of the Company's in force annuity policies are beyond the initial
crediting rate period.
Certain of the Company's annuity policies have a bonus crediting rate for
the first year of the policy, which typically exceeds the annual crediting rate
by 1% to 3%. The bonus and the base crediting rates are fully disclosed in the
annuity contract. The Company incorporates a number of features in its annuity
products designed to reduce the early withdrawal or surrender of the policies
and to partially compensate the Company for lost investment opportunities and
costs if policies are withdrawn early. Certain of the Company's deferred
annuity contracts provide for penalty free partial withdrawals, typically up to
10% of the accumulation value annually. Surrender charge periods on annuity
policies currently range from five years to the term of the policy, with the
majority of such policies being issued with a surrender charge period of more
than seven years. The average length of the surrender period on the Company's
deferred annuity policies issued during 1998 was eight years. The initial
surrender charge on annuity policies generally is 8% of the premium and
decreases over the surrender charge period (of up to nine years). At December
31, 1998, 80% of the Company's annuity liabilities were subject to a surrender
charge of 6% or more.
Tax Qualified Annuities
General. The Company also markets tax qualified retirement annuities that
meet the requirements of Section 403(b) of the Internal Revenue Code of 1986
("TSAs") to employees of public schools and certain other tax exempt
organizations. Teachers, school employees and employees of other tax exempt
organizations purchase TSAs through automatic payroll deductions. TSA products
tend to be purchased by customers who are younger than purchasers of the
Company's other annuity products. Therefore, the Company's specialty TSA
products tend to incorporate features that are attractive to customers in this
younger age bracket who have longer to accumulate before retirement, such as
combining a more competitive crediting interest rate offset with a longer
surrender charge period. The Company believes that the market for TSAs is
attractive because TSAs broaden its customer base and provide an ongoing source
of premium renewals. Additionally, because of their tax features and transfer
restrictions, TSAs are less likely to be surrendered, making them a more stable
and dependable source of profits for the Company. In addition to TSAs, the
Company also sells other tax qualified retirement annuities such as Individual
Retirement Annuities and other Employee Pension type programs. Tax qualified
retirement annuity values totaled almost $1,300,000 or approximately 27% of the
total annuities sold by the Company since inception.
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Favorable Tax Treatment. Under the Internal Revenue Code ("Code"), income
taxes otherwise payable on investment earnings are deferred on earnings unpaid
during the accumulation period of certain life insurance and annuity policies.
This favorable tax treatment may give the Company's annuity policies a
competitive advantage over other investment or savings vehicles that do not
offer this benefit. To the extent that the Code may be revised to eliminate or
reduce the tax deferred status of life deferred payment annuity products, or to
establish a tax deferred status to any competing policies, the Company's
competitive advantage may be adversely affected.
Traditional Life Insurance
Term Life. The Company's subsidiaries offer a low cost 10 year level term
life insurance product with level premiums for periods of ten years and an
annually renewable level term product which provides for increasing premiums in
five year durations, both utilizing a low indeterminate premium structure
afforded to it by its primary reinsurance company. The Company generally
retains a small fixed portion of the insurance risk then sells or cedes a
portion of its risks to its reinsurer, who in turn pays an additional allowance
or commission to the Company. This allows the Company to lay off its risk and
continue to grow its premium revenues and surplus. These term products are
designed for and sold to individuals ages 20 through 60 and terminates at age
70. While term life normally is bought very inexpensively by consumers, it also
is priced by companies using historical data that illustrates certain of these
coverages, when using adequate reinsurance, will not result in adverse claims.
Whole Life. The Company's subsidiaries market low cost guaranteed premium
products in which premiums are payable for the life of the insured and insurance
protection (upon certain conditions being met) is afforded for the insured's
lifetime. The premium paid for such whole life policies is generally higher
than the premium for comparable amounts of term insurance in the policy's early
years but is generally lower in the later years of the policies life. The
policyholder may borrow against the policy provided there is sufficient cash
values at a rate that is comparable or lower than other conventional lending
sources. The Company generally holds all cash values and if a death occurs it
pays death claims then collects from the reinsurer to recover the excess of its
retention limits and benefits paid.
Beginning January 13, 1999, the life insurance products of the Company
include the permanent products offered by GMLIC. In addition to traditional
permanent products, GMLIC offers a graded benefit life product which is offered
on an individual basis, primarily to persons age 40 to 85 and in amounts of
$1,000 to $5,000, without evidence of insurability. Benefits paid are less than
the face amount of the policy during the first two years, except in cases of
accidental death.
Insurance Underwriting
The Company follows detailed, uniform underwriting practices and procedures
in its insurance business which are designed to assess risks before issuing
coverage to qualified applicants. The Company has professional underwriters who
evaluate policy applications on the basis of information provided by applicants
and others. Management believes that its actual mortality results compare
favorably to those of others in the industry. The Company believes that its
favorable mortality results are attributable to, among other things, the
geographic location of its customer base in rural and suburban areas (as opposed
to urban areas), as well as its consistent application of appropriate
underwriting criteria to the processing of new customer applications.
Reinsurance
Consistent with the general practice of the life insurance industry, the
Company's subsidiaries reinsure portions of the coverage provided by their
insurance products with other insurance companies under agreements of indemnity
reinsurance.
Indemnity reinsurance agreements are intended to limit a life insurer's
maximum loss on a large or unusually hazardous risk or to obtain a greater
diversification of risk. Indemnity reinsurance does not discharge the original
insurer's primary liability to the insured. The Company's reinsured business is
ceded to numerous reinsurers, and the Company believes the assuming companies
are able to honor all contractual commitments, based on the Company's periodic
reviews of their financial statements, insurance industry reports and reports
filed with state insurance departments.
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As of December 31, 1998, the policy risk retention limit of the Company's
subsidiaries on the life of any one individual did not exceed $10,000;
reinsurance ceded by the Company's subsidiaries represented 70% of gross
combined life insurance in force. At December 31, 1998, the Company's largest
reinsurer, Optimum Re, accounted for approximately 59% of the $23 million of
total insurance in force.
Mortgage Loan Processing Services
During 1998, the Company conducted limited activities as a mortgage broker.
Pursuant to such activities, the Company performed the marketing and sourcing
functions of mortgage loan origination, while unaffiliated, third-party mortgage
lending companies actually funded the mortgage loans and performed the
underwriting function. The Company's loan origination activities were
originally conducted through EMSI, which was merged with and into the Company in
1997. In December 1998, the Company discontinued all such operations, and in
January 1999 it sold the mortgage services segment to an officer of the Company
in exchange for a $10,000 note receivable. See "ITEM 12--CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS."
Medical Receivable Financing
The Company also provides financing to medical receivable factoring
entities. Medical receivables factoring involves the purchase of accounts
receivable from doctors, hospitals, and other health care organizations. These
accounts receivable are due from major insurance companies, and are purchased by
factoring entities which specialize in the making of such investments, at prices
equal to some discounted percentage of their face amount. The Company only
makes secured loans to such factoring entities, which are collateralized by the
medical accounts receivable. Medical receivables factoring is a specialty type
of financing which provides high yields and requires specialized expertise and
systems. The Company considers the market for this type of financing to be
relatively broad, and to extend beyond the local markets served by the Company's
life insurance and mortgage services operations.
Investments
Investment activities are an integral part of the Company's business;
investment income is a significant component of the Company's total revenues.
Upon the purchase by a policyholder of an annuity or life contract and payment
of the premium, the policy is issued and delivered to the new policyholder. The
funds are then invested as the Company determines based on certain guidelines
including those set by the national association of insurance commissioners
("NAIC") as to the percentage of investment that are placed in any one category
of investments. The Company has historically invested a majority of its
available assets in securities that are issued, secured, guaranteed or backed by
federal, state or local governments, their agencies or instrumentalities.
Profitability is significantly affected by spreads between interest yields
on investments and rates credited on insurance liabilities. Although all
credited rates on single premium deferred annuities and flexible premium
deferred annuities may be changed as often as quarterly, after their first year,
changes in credited rates may not be sufficient to maintain targeted investment
spreads in all economic and market environments. In addition, competition and
other factors, including the impact of the level of surrenders and withdrawals,
may limit the Company's ability to adjust or to maintain crediting rates at
levels necessary to avoid narrowing of spreads under certain market conditions.
For the year ended December 31, 1998, the average gross yield of the Company's
invested assets was approximately 8.7% and the average credited rate was 6.2%.
The Company balances the duration of its invested assets with the expected
duration of benefit payments arising from insurance liabilities. At December
31, 1998, the adjusted modified duration of debt securities and short-term
investments was 6.0 years. At December 31, 1998, the duration of the Company's
insurance liabilities was 7.0 years.
For information regarding the composition and diversification of the
investment portfolio of the Company, subsidiaries, see Note B to the Company's
Consolidated Financial Statements.
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Acquisitions and Consolidations
General
The Company's operating strategy is to continue to make acquisitions of
small, marginally profitable or unprofitable insurance companies, consolidate
and streamline the administrative functions of these small companies, improve
their investment yields through active asset management by a centralized
investment operation and eliminate their unprofitable products and distribution
channels. Because of their small size, such companies are often overlooked as
potential acquisition candidates. The Company believes that it is particularly
well suited to make such acquisitions and to capitalize on the cost savings
which can be realized by consolidating the administrative functions of the
acquired companies. The Company plans to use a portion of the proceeds of its
initial public Offering to pursue more small company acquisitions and purchases
of profitable blocks of business.
Since 1994, the Company has acquired four life insurance companies. The
Company intends to continue its strategy of pursuing similar acquisitions of
blocks of insurance business and small insurance companies and other insurance-
related opportunities. Management believes that such acquisitions will lower
unit costs by increasing the number of policies and the amount of premiums over
which fixed expenses are spread.
Historical Acquisitions
The Company's growth to date has been fueled primarily through
acquisitions. In September 1994, the Company made its first acquisition, of
Edmond National Life Insurance Company (now SLAC), an Oklahoma-domiciled life
insurance company. Since then, the Company has continued to expand in both
territory and product line, now offering annuities and life insurance in Texas
and Oklahoma and life insurance only in Louisiana. The Company's premiums and
deposits have increased from $25,000 in 1994 to over $600,000 in 1998, with
assets growing from $1,032,000 in 1994 to approximately $8,400,000 at December
31, 1998. According to A.M. Best (Best's Review January 1998), in 1996
industry-wide individual annuity direct premiums and fund deposits, similar to
those offered by the Company, totaled over $85 billion, and represented
approximately 25% of overall premium dollars. The Company believes that this
niche of the insurance industry will continue to grow as a percentage of total
premium dollars and that this growth, coupled with the current consolidation of
the insurance industry, presents the Company with good opportunities to achieve
its operating strategy and make profitable acquisitions.
Targeted Future Acquisitions
The Company has typically sought companies that are underdeveloped, overly
burdened with expenses or owned by financially troubled companies. The Company
believes that the small insurance company marketplace is highly fragmented and
faces numerous hurdles to its survival and growth over the coming years. Some
of those hurdles include the Year 2000 problem, need for additional capital and
surplus due to the changing regulatory environment and lack of sufficient exit
strategies for owners of small, closely-held companies. The Company believes
that these factors have created acquisition opportunities often overlooked by
the large insurance companies. The Company intends to capitalize on these
opportunities as it continues to execute its growth plans. At the date of this
Report, the Company has no agreements, understandings or arrangements with
respect to any other acquisition at this time.
Employees
As of December 31, 1998, the Company had six full-time employees, most of
which perform both managerial duties and administrative functions. The
Company's employees also perform services for SLAC, FBLIC and BCLIC; neither
SLAC nor FBLIC has any full-time employees, and BCLIC has only one full-time
employee. It can be anticipated that the Company will have a need for more
employees as the size of its business grows. None of the Company's employees is
represented by a labor union. Management believes that the Company's relations
with its employees are good.
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Marketing
The Company's target markets are individuals in the middle and lower income
brackets and small businesses in the states of Oklahoma, Texas and Louisiana.
The Company believes that this market is severely underserved as more major
companies target their products and agency force toward the upper income and
large policy sales. Many large companies no longer offer insurance in face
amounts under $100,000. Although the Company does write multi-million dollar
policies, its average life policy is approximately $42,000.
The pricing of the Company's products is generally determined by reference
to actuarial calculations and statistical assumptions principally relating to
mortality, persistency, investment yield assumptions, estimates of expenses and
management's judgment as to market and competitive conditions. The premiums and
deposits received, together with assumed investment earnings, are designed to
cover policy benefits, expenses and policyowner dividends plus return a profit
to the Company. These profits arise from the margin between mortality charges
and insurance benefits paid, the margin between actual investment results and
the investment income credited to policies (either directly or through dividends
to policyowners) and the margin between expense charges and actual expenses.
The level of profits also depends on persistency because policy acquisition
costs, particularly agent commissions, are recovered over the life of the
policy. Dividends and interest credited on policies may vary from time to time
reflecting changes in investment, mortality, persistency, expenses and other
factors. Interest rate fluctuations have an effect on investment income and may
have an impact on policyowner behavior. Increased lapses in policies may be
experienced if the Company does not maintain interest rates and dividend scales
that are competitive with other products in the marketplace.
The Company markets its products primarily through "personal producing
general agents" ("PPGA's"), and small independent property and casualty
agencies. The PPGA's include the Company's founders and principal stockholders,
James L. Smith and Charles L. Smith. James L. Smith and Charles L. Smith are
the sole stockholders of the Smith Agency, which undertakes life insurance and
financial planning for estates, trusts, and corporations and is presently a
general agent for several insurance companies. The Smith Agency has sold a
majority of the Company's deferred annuities since the Company's inception.
Additionally, the companies acquired by the Company generally have in place
PPGA's who are capable and qualified to generate the sales desired by the
Company, thereby eliminating part of the expense of recruiting and training a
new agency force.
Competition
The life insurance business is highly competitive and consists of a number
of companies, many of which have greater financial resources, longer business
histories and more diversified lines of insurance products than the Company.
The Company may encounter increased competition from existing competitors or new
market entrants, some of which may be significantly larger and have greater
business resources. Companies typically compete for policyholders on the basis
of benefits, rates, financial strength and customer service and compete for
agents and brokers on the basis of commissions, financial strength and customer
service. The Company, although smaller than most of its competitors, provides
competitive benefits and rates. The Company believes that its ability to
administer its functions at a much reduced rate allows it to maintain low
internal cost products.
The Company has identified additional areas where it has very little
competition due to the size of the Company as well as the size of its targets.
That area is the consolidation field. The Company's strategy has been to
consolidate and streamline the administrative functions of small life insurance
companies. Most large life companies have high fixed costs when performing
acquisitions restricting them in the minimum size of purchase they can pursue.
The Company believes that the consolidation of the industry will continue, and
the Company intends to participate in the process.
The Company realizes the importance to policyholders of ratings and sought
in 1996 to begin the task of filings with the rating agencies and has since been
upgraded by A. M. Best Company to an "FPR 4" (fair). A.M. Best Company, Inc.
assigns two types of rating opinions, Best's Ratings (letter scale) and Best's
FPR (numerical scale). Although both ratings involve a quantitative and
qualitative evaluation of a company's financial strength, operating performance
and market profile, the analysis performed for assigning a Best's FPR is not as
costly as it is for assigning a Best's Rating. The FPR is assigned to small or
new companies which do not meet the criteria
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required for a Best's Rating. Both ratings provide an overall opinion of an
insurance company's ability to meet its obligations to policyholders. The
Company is still considered too small to obtain a letter rating.
Regulation
The Company's insurance subsidiaries are subject to regulation and
supervision by the states in which they transact business. The laws of these
jurisdictions generally establish agencies with broad regulatory authority,
including powers to: (i) grant and revoke licenses to transact business;
(ii) regulate and supervise trade practices and market conduct; (iii) establish
guaranty associations; (iv) license agents; (v) approve policy forms; (vi)
approve premium rates for some lines of business; (vii) establish reserve
requirements; (viii) prescribe the form and content of required financial
statements and reports; (ix) determine the reasonableness and adequacy of
statutory capital and surplus; and (x) regulate the type and amount of permitted
investments.
Most states also have enacted legislation that regulates insurance holding
company systems, including acquisitions, extraordinary dividends, the terms of
surplus debentures, the terms of affiliate transactions, and other related
matters. Currently, the Company and its insurance subsidiaries have registered
as holding company systems pursuant to such legislation in Texas, Oklahoma, and
Louisiana.
The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation and federal taxation, do affect the insurance business. Recently,
increased scrutiny has been placed upon the insurance regulatory framework, and
a number of state legislatures have considered or enacted legislative proposals
that alter, and in many cases increase, the authority of state agencies to
regulate insurance companies and holding company systems. In addition,
legislation has been introduced from time to time in recent years which, if
enacted, could result in the federal government assuming a more direct role in
the regulation of the insurance industry.
State insurance regulators and the NAIC are continually re-examining
existing laws and regulations and their application to insurance companies.
From time to time the NAIC has adopted, and recommended to the states for
adoption and implementation, several regulatory initiatives designed to decrease
the risk of insolvency of insurance companies in general. These initiatives
include risk-based capital ("RBC") requirements for determining the levels of
capital and surplus an insurer must maintain in relation to its insurance and
investment risks. The NAIC regulatory initiatives also impose restrictions on
an insurance company's ability to pay dividends to its stockholders. These
initiatives may be adopted by the various states in which the Company's
subsidiaries are licensed, but the ultimate content and timing of any statutes
and regulations to be adopted by the states cannot be determined at this time.
It is not possible to predict the future impact of changing state and federal
regulation on the operations of the Company, and there can be no assurance that
existing insurance related laws and regulations will not become more restrictive
in the future or that laws and regulations enacted in the future will not be
more restrictive.
Most states have enacted legislation or adopted administrative regulations
which affect the acquisition of control of insurance companies as well as
transactions between insurance companies and persons controlling them. The
nature and extent of such legislation and regulations vary from state to state.
Most states, however, require administrative approval of: (i) the acquisition
of 10 percent or more of the outstanding shares of an insurance company
incorporated in the state; or (ii) the acquisition of 10 percent or more of the
outstanding stock of an insurance holding company whose insurance subsidiary is
incorporated in the state. The acquisition of 10 percent of such shares is
generally deemed to be the acquisition of control for the purpose of the holding
company statutes. It requires not only the filing of detailed information
concerning the acquiring parties and the plan of acquisition, but also the
receipt of administrative approval prior to the acquisition. In many states, an
insurance authority may find that control does not, in fact, exist in
circumstances in which a person owns or controls 10 percent or a greater amount
of securities.
Under the solvency or guaranty laws of most states in which they do
business, the Company's insurance subsidiaries also may be required to pay
assessments (up to certain prescribed limits) to fund policyholder losses or the
liabilities of insolvent or rehabilitated insurance companies. These
assessments may be deferred or forgiven under most guaranty laws if they would
threaten an insurer's financial strength. In certain instances, the assessments
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may be offset against future premium taxes. The Company's subsidiaries
historically have not been required to pay assessments in any significant
amounts. The likelihood and amount of any future assessments cannot be
estimated, as they are beyond the control of the Company.
As part of their routine regulatory oversight process, insurance
departments approximately once every three years conduct periodic detailed
examinations ("Triennial Examinations") of the books, records and accounts of
insurance companies domiciled in their states. Such Triennial Examinations are
generally conducted in cooperation with the departments of two or three other
states, under guidelines promulgated by the NAIC.
Federal Income Taxation
The annuity and life insurance products marketed and issued by the
Company's subsidiaries generally provide the policyholder with an income tax
advantage, as compared to other saving investments such as certificates of
deposit and bonds, in that income taxation on the increase in value of the
product is deferred until receipt by the policyholder. With other savings
investments, the increase in value is taxed as earned. Annuity benefits and
life insurance benefits which accrue prior to the death of the policyholder are
generally not taxable until paid. Life insurance death benefits are generally
exempt from income tax, but not estate tax. Also, benefits received on
immediate annuities (other than structured settlements) are recognized as
taxable income ratably as opposed to the economic accrual methods, which tend to
accelerate taxable income into earlier years and which are required for other
investments. The tax advantage for annuities and life insurance is provided in
the Internal Revenue Code (the "Code"), and is generally followed in all states
and other United States taxing jurisdictions. Accordingly, it is subject to
change by Congress and the legislatures of the respective taxing jurisdictions.
The Company's insurance company subsidiaries are taxed under the life
insurance company provisions of the Code. Provisions in the Code require a
portion of the expenses incurred in selling insurance products to be deducted
over a period of years, as opposed to immediate deduction in the year incurred.
This provision increases the tax for statutory accounting purposes which
reduces statutory surplus and, accordingly, decreases the amount of cash
dividends that may be paid by the life insurance subsidiaries. The Company's
subsidiaries also fall under the small life insurance company rules on taxation
which further reduces taxes that may otherwise be due on non insurance
companies.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's administrative, marketing and production facilities consist
of approximately 3,000 square feet at a single location in Oklahoma City,
Oklahoma. The Company owns and occupies this facility and owns the approximate
30,000 square feet of raw land adjacent to the property. This facility will
provide room for possible expansion which will likely be utilized within the
next few years. Additionally, BCLIC leases approximately 800 square feet of
office space in New Orleans, Louisiana, under a lease agreement which extends
through January 31, 2000 at a monthly rental of $814. SLAC, FBLIC and GMLIC
conduct their operations from the Company's office in Oklahoma City.
During January 1998, upon acquisition of BCLIC, the Company relocated its
Louisiana operations from Thibodaux to rented facilities in New Orleans. The
Thibodaux land and building is currently held for sale and it is anticipated
that a sale will be completed during 1999. Meanwhile, the Company is leasing the
space on a short-term basis and is depreciating the building using the straight-
line method over 31.5 years. At December 31, 1998, the land and building held
for sale is reported at the lower of carrying value or fair value less cost to
sell.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings and
claims incident to the normal conduct of its business. The Company believes
that such legal proceedings and claims, individually and in the aggregate, are
not likely to have a material adverse effect on its financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading Market
There currently is no public market for the common stock, and no assurance
can be given that a market will develop. The Company intends to make application
to list the common stock on the Nasdaq SmallCap Market. However, in the event
that the Company is unable to meet the Nasdaq SmallCap listing requirements,
trading in the common stock, if any, could be limited to the OTC Bulletin Board
or the "pink sheets" used by members of the National Association of Securities
Dealers, Inc.
At March 25, 1999, 2,199,481 shares of common stock were issued and
outstanding, and no shares of Preferred Stock were issued and outstanding. At
such date, there were approximately 1,345 stockholders of record of the common
stock.
Dividends
The Company has never paid cash dividends on the common stock, and does not
anticipate that it will pay cash dividends in the foreseeable future. The
payment of dividends by the Company will depend on its earnings, financial
condition and such other factors as the Board of Directors of the Company may
consider relevant. The Company currently plans to retain any earnings to
provide for the development and growth of the Company.
Recent Sales of Unregistered Securities
The following sets forth certain information regarding securities of the
Company sold during the year ended December 31, 1998, which were not registered
pursuant to the Securities Act of 1933, as amended (the "Securities Act").
On January 13, 1998, pursuant to the terms of that certain acquisition
agreement between the Company and Benefit Capital Life Investment Corporation, a
Louisiana corporation, the Company issued 100,000 shares of common stock for all
of the issued and outstanding stock of BCLIC. It is the Company's belief that
Benefit Capital Life Investment Corporation was a "sophisticated investor"
within the meaning of Section 4(2) of the Securities Act and that pursuant to
the negotiation by which BCLIC was acquired by the Company, it had access to
information regarding the Company and the proposed transaction.
In February 1998, the following directors, as compensation for services
rendered to the Company, were issued the following shares of common stock; (i)
462 shares to Dean Brown; (ii) 962 to Gary Ellis; (iii) 962 to Thomas Sanders;
(iv) 500 to Gary Skibick; (v) 961 to Charles L. Smith; and (vi) 961 to James L.
Smith. No sales commissions were paid in connection with such issuances. In
April 1998, the following directors, as compensation for services rendered to
the Company, were issued the following shares of common stock; (i) 500 shares to
Dean Brown; (ii) 570 to Gary Ellis; (iii) 1,355 to Thomas Sanders; (iv) 570 to
Gary Skibicki; (v) 1,392 to Charles L. Smith; (vi) 1,393 to James L. Smith;
(vii) 820 to Randal Beach; and (viii) 285 to Russell Graham. The securities were
issued in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act.
In April 1998, pursuant to the provisions of the Convertible Debentures,
Quinton Hiebert, an executive officer of the Company, was issued 3,000 shares of
common stock. No sales commissions were paid in connection with such issuance.
The securities were issued in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act.
In April 1998, in lieu of commissions payable, an agent received 262 shares
of common stock. No sales commissions were paid in connection with such
issuance. The securities were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
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Sales Made Pursuant to Initial Public Offering
Pursuant to the requirements of Rule 463 and Item 701(f) of Regulation S-B
of the Securities Act, the following sets forth certain information regarding
the Company's initial public offering.
The Company's registration statement on Form SB-2, Commission File No.
333-65097, was declared effective on January 11, 1999. Pursuant to the
registration statement, the Company registered for sale to the public an
aggregate 1,000,000 shares of common stock, at an offering price per share of
$5.00. The offering, which commenced on the effective date of the registration
statement, is being sold by the Company without the use of an underwriter. The
registration statement provides that the offering will be terminated and all
subscription funds will be returned promptly to subscribers unless, on or before
April 30, 1999, the Company has accepted subscriptions and payment in full for a
minimum of 140,000 shares ($700,000). If the minimum number of shares is sold,
the Company thereafter may terminate the Offering at any time and at less than
the maximum offering. In no event will the Offering extend beyond October 31,
1999. On March 22, 1999, aggregate proceeds of $723,730 were released from the
escrow account into which subscribers' funds were placed pending sale of the
minimum offering. The proceeds of $723,730 constitute the full consideration, at
the offering price, of an aggregate 144,746 shares of common stock. At the date
of this Report, the Company is continuing sales pursuant to the offering.
[Balance of page intentionally left blank]
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion and analysis reviews the Company's operations for
the years ended December 31, 1998 and 1997. Certain statements contained in this
discussion are not based on historical facts, but are forward-looking statements
that are based upon numerous assumptions about future conditions which may
ultimately prove to be inaccurate and actual events and results may materially
differ from anticipated results described in such statements. The Company's
ability to achieve such results is subject to certain risks and uncertainties
such as those inherent generally in insurance industry, the impact of
competition, changing market conditions, and other risks. The following
discussion and analysis should be read in conjunction with the financial
statements of the Company and the notes related thereto included elsewhere in
this Report.
Although the Company's primary focus is its life insurance operations, it
also provides residential mortgage loan processing services to individuals and
financing to medical accounts receivable factoring entities. The life insurance
operations and mortgage service operations are reported as a separate business
segment in the Company's financial statements included elsewhere in this Report.
Operating Data
The following table sets forth selected information regarding operating
results for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998
<S> <C> <C>
Statement of Operations Data:
Revenues $ 517 $ 756
Benefits, losses and expenses 775 1,363
------ ------
Net loss (258) (607)
Balance Sheet Data:
Cash and cash equivalents $1,293 $1,492
Total assets 6,279 8,406
Total liabilities 5,939 7,629
Stockholders equity 339 777
</TABLE>
Results of Operations
Discontinued Operations
In December 1998, the Company adopted a plan to sell the mortgage services
segment to an officer of the Company in exchange for a $10,000 note receivable.
The actual disposal date was January 4, 1999. The assets sold and liabilities
assumed of the mortgage services segment consisted primarily of the segment's
"name", cash, and customer deposits.
Operating results of the mortgage services segment for the year ended
December 31, 1998 are shown separately in the consolidated statements of
operations included elsewhere in this Report. The consolidated statement of
operations for 1997 has been restated and operating results of the mortgage
services segment are also shown separately.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Assets/Liabilities/Stockholders' Equity. Total assets increased 34% for
the period ended December 31, 1998 over the comparable period 1997. Total
assets were $8,406,090 at December 31, 1998 compared to $6,278,701 at December
31, 1997. The increases were due to the controlled growth in the sales of the
Company's annuity and life products and the continued success in acquisition of
small target life insurance companies.
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<PAGE>
Total liabilities (primarily insurance reserves for future benefits)
increased 28% for the period ended December 31, 1998 over the comparable period
ending December 31, 1997. Total liabilities for the periods were $7,629,260 and
$5,939,266 respectively. A significant part of these increases result from
the acquisition of BCLIC and growth in annuity reserves.
Total stockholders' equity increased 129% for the period ended December 31,
1998 over the same period ended 1997, from $339,435 at December 31, 1997 to
$776,830 at December 31, 1998, respectively. The increase was primarily due to
the closing of the BCLIC acquisition.
Average rate of return on investments, including cash and cash equivalents,
was approximately 8.7% for 1998 and 10.4% for 1997, while the average rate
credited to policyholder accounts was approximately 6.2% and 6.7%,
respectively.
At December 31, 1998, the Company's net deferred tax assets totaled $31,943
and related primarily to net operating loss carryforwards. Realization of net
operating carryforwards is dependent on generating sufficient future taxable
income. The Company believes its operating strategy to continue to make
acquisitions of small insurance companies, consolidate and streamline the
administrative functions of these small companies, improve their investment
yields through active asset management in a centralized investment operation and
eliminate their unprofitable products and distribution channels will generate
future taxable income. Although realization of net deferred tax assets is not
assured, the Company believes these sources will generate sufficient future
taxable income during the available carryforward period and believes it is more
likely than not that the recorded net deferred tax assets will be realized.
Revenue. Revenues attributable to the life insurance segment increased
1,395% from $8,108 to $121,192 for the period ended December 31, 1998, compared
to the same period ended December 31, 1997. The increase was due mainly to the
BCLIC acquisition, and reflects a shift in the "mix" of insurance products sold
by the Company. Prior to the BCLIC acquisition, the Company primarily sold
annuities, the premiums for which are recorded differently than those for
regular life insurance products. Premiums received on deferred annuities and
annuities without life contingencies (i.e., investment contracts) are recorded
as deposits into the policyholder's account balance, rather than as revenues.
Revenues relating to these contracts consist primarily of withdrawal and
administrative charges. Conversely, premiums relating to life insurance
policies are recognized as revenues when received, as are premiums for certain
annuities with life contingencies, including selection of annuity settlement
options with life contingencies. During 1998, the majority of the insurance
products held in-force by the Company consisted of the block of life insurance
policies acquired with the BCLIC acquisition, compared to 1997, when the
majority of the insurance products sold by the Company consisted of deferred
annuities. The decrease in deposits to policyholder account balances from
$1,178,983 in 1997 to $514,906 in 1998 reflects the decrease in the Company's
sales of deferred annuity products. The Company expects increased sales of
existing products through newly recruited agents.
Investment income from loans to medical receivable factoring entities
increased 4.0%, from $198,918 to $206,964, for the period ended December 31,
1998 compared to the same period ended December 31, 1997, primarily as a result
of compound interest. Loan amounts at December 31, 1997 and December 31, 1998
remained unchanged at $909,743. In conjunction therewith, interest expense on
notes payable which are collateralized by these loans increased slightly from
$99,459 to $103,482, for the same period
Costs and Expenses. Total expenses increased 76% from $774,872 to
$1,362,965 for the periods ended December 31, 1997 and 1998, respectively. The
majority of these increases were a result of several distinctive items such as;
the Company's amortization of value of purchased insurance business relating to
BCLIC, and although the Company continues to lower the direct costs of
operations, such amortization is expected to continue, but at reduced levels,
over the premium paying life of the acquired policies. The Company anticipates
comparable expenses in the first half of 1999 due to its acquisition of GMLIC,
although Management believes it can subsequently realize substantial premium
increases and cost savings over prior management through aggressive agent
contact, consolidation of back-office operations and elimination of redundant
administrative personnel.
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<PAGE>
Losses. The Company reported an increase in loss from continuing operations
before income taxes of 135%, reporting a loss of $606,641 for the year ended
December 31, 1998, compared to a loss from continuing operations before income
tax of $258,213 for the year ended December 31, 1997. The net loss of $577,242
for the 1998 fiscal year reflected a 114% increase from the net loss of $269,357
reported for the 1997 fiscal year. The increase in net loss was due in part to
the Company's amortization expenses in connection with BCLIC's value of
purchased insurance business.
The Company's loss per share increased to $0.28 per share for the period
ended December 31, 1998, compared to a loss of $0.14 per share for the year
ended December 31, 1997. The weighted average shares outstanding for each
period, taking into the account the 5-for-2 stock split effected in September
1998, were 2,047,037 for 1998 and 1,893,367 for 1997.
Liquidity and Capital Resources
Liquidity
The principal requirements for liquidity in connection with the Company's
operations are its contractual obligations to policyholders and annuitants. The
Company's contractual obligations include payments of surrender benefits,
contract withdrawals, claims under outstanding insurance policies and annuities,
and policy loans. Payment of surrender benefits is a function of "persistency,"
which is the extent to which insurance policies are maintained by the
policyholder. Policyholders sometimes do not pay premiums, thus causing their
policies to lapse, or policyholders may choose to surrender their policies for
their cash surrender value. If actual experience is different from the initial
or acquisition date assumptions, a gain or loss could result. Depending on the
nature of the underlying policy, a lapse or surrender may result in surrender
charge revenue or surrender benefit expense. Such amounts may be less than, or
greater than, unamortized acquisition expenses and/or the related policy
reserves; accordingly, current period earnings may either increase or decrease.
Additionally, policy lapses and surrenders may result in lost future revenues
and possibly profitability associated with the policy.
A significant number of the life insurance policies issued by BCLIC, the
Louisiana life insurance company acquired by the Company in January 1998,
contained a feature which provided that after paying premiums on the policy for
eight years the policyholder could elect to (i) continue paying premiums and the
death benefit coverage would double or (ii) convert to a paid-up policy with the
original death benefit coverage if the cash value and accumulated policy
dividends were sufficient. In response to inquiries from policyholders that had
completed their eighth year of premiums in 1997, BCLIC notified the
policyholders that, because policy dividends had not been paid, the option to
convert to a paid-up policy with the original death benefit was not available
and the only options were to continue paying premiums and receive "double
coverage" or exercise one of the nonforfeiture provisions, i.e., surrender the
policy for its cash surrender value or convert to reduced paid-up or extended
term coverage. Management believes that the nature of BCLIC's notification in
1997 encouraged policy surrender rather than policy continuation, thus resulting
in a large number of policies surrendered. Although the continued surrender or
lapse of BCLIC's policies at a similar or increased rate could have an adverse
effect on the Company's operations, BCLIC is now actively encouraging policy
continuation, and policy surrenders have been reduced to less than 25 policies
for 1998, compared to approximately 150 policy surrenders for 1997.
Capital Resources
Although the Company currently has a $150,000 bank line of credit, it funds
most of its activity directly from cash flow from operations and cash flow from
financing activities, which includes deposits to policyholders' account
balances. The Company has not entered into any additional arrangements to
obtain alternate financing, and there can be no assurance of the availability of
any financing on acceptable terms. The existing $150,000 bank line of credit
extends to July 1999, with amounts borrowed thereunder bearing interest at
prime.
Generally, the Company has financed its loans to medical receivable
factoring entities from collateralized notes payable to individuals. The loans
and the notes payable generally have corresponding three-year terms with
interest paid semiannually or allowed to compound.
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On January 11, 1999, a registration statement relating to a $5 million
public offering of the Company's common stock was declared effective by the
Securities and Exchange Commission. In accordance with the terms of the
offering, the Company escrowed offering proceeds with UMB Oklahoma Bank,
National Association, until the minimum offering of $700,000 had been obtained.
On March 22, 1999, a total of $724,000 was released to the Company. Pursuant to
the registration statement, the Company may continue its offering until October
31, 1999, or elect to terminate the offering at any time prior to such date and
at less than the maximum offering. In no event, however, will the Offering
extend beyond October 31, 1999. The Company plans to use a portion of the
proceeds of the offering to repay existing bank borrowings of $350,000 incurred
to fund the acquisition of GMLIC. See "ITEM 1--DESCRIPTION OF BUSINESS."
The Company believes that the net proceeds of the public offering will
allow it to continue to grow its asset base while maintaining surplus/liability
ratios within acceptable industry norms. The level of additional activity to be
achieved will be dependent upon the Company's ability to continue to generate
income internally or to generate capital from outside sources.
The Company has made and intends to make substantial capital expenditures
in connection with its subsidiaries' marketing programs. Historically, the
Company has funded these expenditures from cash flow from operations.
Business Outlook and Risk Factors
The Company's future operating results may be affected by various trends,
developments and factors that the Company must successfully manage in order to
achieve favorable operating results. In addition, there are trends,
developments, and factors beyond the Company's control that may affect its
operations. In accordance with the provisions of the Private Securities
Litigation Reform Act of 1995, the cautionary statements and risk factors set
forth below and in the Company's other filings with the Securities and Exchange
Commission, identify important trends, factors, and currently known developments
that could cause actual results to differ materially from those in any forward-
looking statements contained in this Report and in any written or oral
statements of the Company. Forward-looking statements in this Report include
revenue, expense, and earnings analysis for the remainder of 1999 as well as the
Company's expectations relating to its business strategy. Risk factors include
the following:
Ability to Complete and Integrate Acquisitions; Risks Relating to Growth
Strategy. A significant portion of the Company's strategy is to pursue and
complete acquisitions of companies and in force life insurance business that
meet its acquisition criteria. The Company has acquired and seeks to acquire
companies and blocks of in force insurance policies to enhance the Company's
stockholder value utilizing the Company's operations, management and access to
capital. The Company's ability to grow by acquisition is dependent upon, and
may be limited by, the availability of suitable acquisition opportunities at
values deemed advantageous and capital and regulatory constraints. To the
extent that cash generated internally is not sufficient to provide the capital
required for acquisitions, the Company will require additional debt and/or
equity financing in order to provide for such capital. Future debt financing, if
available, will result in increased interest expenses, increased leverage and
decreased income available to fund acquisitions and expansion, and may limit the
Company's ability to withstand competitive pressures and render the Company more
vulnerable to business downturns. Future equity financings may dilute the equity
interests of existing stockholders. Growth by acquisition also involves risks
that could adversely affect the Company's operating results, including
difficulties in integrating the operations and personnel of acquired companies,
eliminating duplicative costs and reducing overhead, and the potential loss of
key employees and customers of acquired companies or lapse or surrender of
acquired insurance policies. In addition, although the Company performs a due
diligence investigation of each business that it acquires, there may
nevertheless be liabilities of an acquired business that the Company fails or is
unable to discover during its due diligence investigation and for which the
Company, as a successor owner, may be responsible.
In addition, there can be no assurance that the Company will be able to
obtain the capital necessary to fully realize its growth strategy, consummate
acquisitions on satisfactory terms or, if any such acquisitions are consummated,
successfully integrate such acquired businesses into the Company and remedy any
undiscovered liabilities of any acquired companies. See "ITEM 1--DESCRIPTION OF
BUSINESS--Acquisitions and Consolidations."
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Regulation. Insurance companies are subject to comprehensive regulation in
the jurisdictions in which they do business by state insurance commissioners.
Such regulation relates to, among other things: prior approval of the
acquisition of a controlling interest in an insurance company; standards of
solvency which must be met and maintained; licensing of insurers and their
agents; nature and limitations of investments; deposits of securities for the
benefit of policyholders; approval of policy forms; triennial examinations of
insurance companies; annual and other reports required to be filed on the
financial condition of insurers or for other purposes; and requirements
regarding reserves for unearned premiums, losses and other matters. The Company
is subject to this type of regulation in any state in which it is licensed to do
business. Such regulation could create costs and restrict operations. The
Company is currently subject to regulation in the states of Oklahoma, Texas and
Louisiana. Intercorporate transfers of assets and dividend payments from the
Company's insurance subsidiaries are subject to prior notice and approval if
they are deemed "extraordinary" under these statutes. The Company is required
to file detailed annual reports with the state insurance regulatory body of each
state in which it is licensed, and the business and accounts of insurance
subsidiaries of the Company are subject to examination by such regulatory
bodies. See "ITEM 1--DESCRIPTION OF BUSINESS--Regulation and Taxation."
Persistency. Persistency is the extent to which policies sold remain in
force. Policy lapses over those actuarially anticipated could have an adverse
effect on the financial performance of the Company. Policy acquisition costs
are deferred and expensed over the premium paying period of a policy. Excess
policy lapses, however, cause the immediate expensing or amortizing of deferred
policy acquisition costs. Provided the Company maintains lapse and surrender
rates within its pricing assumptions for its insurance policies, the Company
believes that the present lapse and surrender rate should not have a material
adverse effect on the Company's financial results. For the years ended December
31, 1997 and 1998, the Company's lapse ratio on ordinary business was 1%, and
4%, respectively.
Competition. The life insurance business is highly competitive and
consists of a number of companies, many of which have greater financial
resources, longer business histories and more diversified lines of insurance
products than the Company. The Company may encounter increased competition from
existing competitors or new market entrants, some of which may be significantly
larger and have greater business resources. In addition, to the extent that
existing or future competitors seek to gain or retain market share by reducing
prices, the Company might be compelled to lower its prices, thereby adversely
affecting operating results. See "ITEM 1--DESCRIPTION OF BUSINESS--Competition."
Economic State of the Insurance Industry. In the past decade, there have
been instances where the United States insurance industry, as a whole, has
suffered substantial losses on investments, which has reduced the financial
stability of several insurance companies. Management believes that the
principal causes of industry losses have been inappropriate investment in high
yield bonds and real estate. The Company has only minimal holdings in high
yield bonds and real estate. Management believes that these factors leave the
Company with a relatively lower investment loss risk compared to that to which
the industry as a whole is exposed.
Interest Rate Volatility; Investment Spread Risks. Much of the
profitability in the insurance industry is affected by fluctuations in interest
rates. Of prime importance in achieving profitability is an insurance company's
ability to invest premiums at a higher interest rate than the interest rate
credited to existing policies. Rapid decreases or increases in interest rates
may affect an insurance company's ability to maintain a positive spread between
the yield on invested assets and the assumed interest rate credited to policy
reserves. Rapid interest rate changes could cause increased lapses of policies
in force, although management believes the effect of such rate changes would be
minimal.
Interest rate fluctuations may also have an impact on policyholder
behavior. To the extent that the fixed rate annuity policies issued by the
Company may subsequently carry lower fixed rates than those generally available
in the market place, then there may be a tendency by certain policyholders to
surrender their policies. While this surrender would likely be mitigated by
surrender charges under annuity contracts, over the longer term such action may
reduce the Company's future income. There are significant surrender charges
which serve to discourage policyholders from surrendering policies. The
Company's ability to pay policyholder benefits with operating and investment
cash flows and cash on hand may be impaired by substantial interest rate
fluctuations.
17
<PAGE>
Adequacy of Reserves. A material inadequacy in future policy benefits
reserves could have a material adverse effect upon the business, results of
operations, and financial condition of the Company. Any inadequacy in reserves
would result in additional expenses when the Company incurs such benefits or
when the Company becomes aware of the inadequacy and increases the future
policyholder benefits reserve.
Dependence on Key Personnel. The Company's future performance and
development will depend, to a significant extent, upon the efforts and abilities
of members of senior management, particularly Charles L. Smith, President, Chief
Operating Officer and a director, and James L. Smith, Chairman of the Board and
Chief Executive Officer. The loss of services of one or more members of senior
management could have a material adverse effect on the Company's business. The
Company's future success also will depend on its ability to attract, train and
retain skilled personnel in all areas of its business. The Company currently
has employment contracts with Charles L. Smith and James L. Smith, and maintains
key man insurance of $1 million on each of such individuals.
Product Assumptions. In reliance upon its actuarial consultants, Rudd and
Wisdom, Inc., the Company's life insurance subsidiaries make certain assumptions
as to expected mortality, lapse rates, investments results and other factors in
developing the pricing and other terms of its products. The assumptions
concerning such factors are generally based upon industry experience, and
influence marketing success and profitability. Variation of actual experience
from that assumed by the Company in developing such policy terms may affect the
products' profitability and marketability.
Potential Fluctuations and Operating Results. Due to the relatively low
capitalization of the Company's life insurance subsidiaries, their operating
results are significantly impacted by the amount of fixed rate annuity policies
sold, as well as the level of death and other policyholder benefits in any one
reporting period. The annual investment returns and overhead costs will also
affect the subsidiaries' operating results.
Additionally, the Company's revenues and operating results have
historically varied significantly from quarter to quarter and are expected to
continue to fluctuate in the future. Historically, operating results have been
seasonally lower during the first fiscal quarter than during the other quarters
of the fiscal year. See "ITEM 6--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Results of Operations."
Possible Need for Future Financing. The Company anticipates, based on
currently proposed plans and assumptions relating to its operations, that the
proceeds from the Offering, together with projected cash flow from operations,
will be sufficient to meet estimated capital expenditures through 1999. If cash
flows do not develop as anticipated, or if the Company's proposed plans or the
basis for its assumptions change, the Company may be required to obtain
additional sources of capital. There can be no assurance that the Company will
be able to obtain such financing on acceptable terms, or at all. Any such
additional equity financing may entail substantial dilution of the equity of the
then-existing stockholders of the Company.
Although the Company currently has a $150,000 bank line of credit, it funds
most of its activity directly from cash flow from operations and cash flow from
financing activities, which includes deposits to policyholders' account
balances. The Company has not entered into any additional arrangements to
obtain alternate financing, and there can be no assurance of the availability of
any financing on acceptable terms. See "ITEM 6--MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Capital Resources."
Year 2000 Readiness
The "Year 2000" or "Y2K" problem is the result of computer programs being
written using two digits (rather than four) to define the applicable year. Many
existing computer programs use only two digits to identify a year in date field.
These programs were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, this could result in a system
failure or calculations of erroneous results by or at the year 2000.
The Company purchased its current information technology in 1997 after
extensive research, analysis and compliance testing, and believes that such
system is "Y2K compliant." Additionally, as part of the Company's
18
<PAGE>
assessment of its readiness to manage Year 2000 issues, it has communicated with
significant customers and suppliers to determine the extent to which the
Company's operations are vulnerable to third parties' failure to correct their
own Year 2000 issues. Based on the overall assessment performed, the Company is
not aware of any material impact on their systems relating to the transition to
the Year 2000. The Company's total cost of Year 2000 related issues is not
expected to a have a material adverse effect on the Company's consolidated
results of operations.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company and its subsidiaries
are incorporated by reference from pages F-1 through F-25 of the attached
Appendix, and include the following:
1. Historical Financial Statements:
(a) Report of Independent Certified Public Accountants
(b) Consolidated Balance Sheets at December 31, 1997 and December 31,
1998
(c) Consolidated Statements of Operations for the years ended
December 31, 1997 and 1998
(d) Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1997 and 1998
(e) Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1998
(f) Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no material disagreements between the Company and its
independent accountants on accounting and financial disclosure matters which are
required to be reported under this Item for the period for which this report is
filed.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH 16 (A) OF THE EXCHANGE ACT
The information required will be contained in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required will be contained in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required will be contained in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required will be contained in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements are attached hereto as Appendix A and included
herein on pages F-1 through F-25.
(2) The following Exhibits are filed with this report or are incorporated
by reference as set forth below:
19
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Name of Exhibit
- ------- ---------------
<S> <C>
3.1 First Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to
the Company's Registration Statement on Form SB-2, file number 333-65097 and
incorporated herein by reference)
3.2 First Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company's
Registration Statement on Form SB-2, file number 333-65097 and incorporated
herein by reference)
4.1 Specimen Certificate of the common stock (filed as Exhibit 4.1 to the Company's
Registration Statement on Form SB-2, file number 333-65097 and incorporated
herein by reference)
4.2 See Articles V and X of the Company's Certificate of Incorporation and Article
VI of the Company's Bylaws (filed as Exhibit 4.2 to the Company's Registration
Statement on Form SB-2, file number 333-65097 and incorporated herein by
reference)
4.3 Form of Promotional Shares Lock-In Agreement (filed as Exhibit 4.3 to the
Company's Registration Statement on Form SB-2, file number 333-65097 and
incorporated herein by reference)
10.1 Employment Agreement by and between the Company and James L. Smith (filed as
Exhibit 10.1 to the Company's Registration Statement on Form SB-2, file number
333-65097 and incorporated herein by reference)
10.2 Employment Agreement by and between the Company and Charles L. Smith (filed as
Exhibit 10.2 to the Company's Registration Statement on Form SB-2, file number
333-65097 and incorporated herein by reference)
10.3 Stock Purchase Agreement by and between the Company and BCLIC (filed as Exhibit
10.3 to the Company's Registration Statement on Form SB-2, file number 333-65097
and incorporated herein by reference)
10.4 Stock Purchase Agreement between the Company and Orville Homer Miller et al.
(filed as Exhibit 10.4 to the Company's Registration Statement on Form SB-2,
file number 333-65097 and incorporated herein by reference)
10.5 Escrow Agreement between the Company and UMB Bank (filed as Exhibit 10.5 to the
Company's Registration Statement on Form SB-2, file number 333-65097 and
incorporated herein by reference)
10.6 Stock Purchase Agreement between the Company and CLS Enterprises, Inc. (filed as
Exhibit 10.6 to the Company's Registration Statement on Form SB-2, file number
333-65097 and incorporated herein by reference)
10.7 Designated Agency Officer Agreement (filed as Exhibit 10.7 to the Company's
Registration Statement on Form SB-2, file number 333-65097 and incorporated
herein by reference)
*21.1 List of subsidiaries
*27.1 Financial Data Schedule
</TABLE>
* Filed herewith
(b) No report on Form 8-K was filed by the Company during the quarter ended
December 31, 1998.
20
<PAGE>
SIGNATURES
In accordance with 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.
March 30, 1999 SUMMIT LIFE CORPORATION
an Oklahoma corporation
By: /s/ Charles L. Smith
---------------------------
Charles L. Smith, President
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME AND TITLE DATE
-------------- ----
<S> <C>
/s/ James L. Smith March 30, 1999
- ------------------------------------------------------
James L. Smith,
Chairman of the Board of Directors and Chief
Executive Officer
(Principal Executive Officer)
/s/ Charles L. Smith March 30, 1999
- ------------------------------------------------------
Charles L. Smith,
President, Chief Operating Officer and Director
/s/ Quinton L. Hiebert March 29, 1999
- ------------------------------------------------------
Quinton L. Hiebert,
Vice President, Chief Financial Officer and Secretary
(Principal Financial Officer)
/s/ Randal Beach March 29, 1999
- ------------------------------------------------------
Randal Beach,
Director
/s/ Thomas D. Sanders March 29, 1999
- ------------------------------------------------------
Thomas D. Sanders,
Director
</TABLE>
21
<PAGE>
Appendix A
Index
Page
Report of Independent Certified Public Accountants............... F-2
Consolidated Balance Sheets...................................... F-3
Consolidated Statements of Operations............................ F-5
Consolidated Statement of Stockholders' Equity................... F-6
Consolidated Statements of Cash Flows............................ F-7
Notes to Consolidated Financial Statements....................... F-9
F-1
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Summit Life Corporation
We have audited the accompanying consolidated balance sheets of Summit Life
Corporation and Subsidiaries, as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Summit
Life Corporation and Subsidiaries, as of December 31, 1997 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 5, 1999
F-2
<PAGE>
Summit Life Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1997 1998
---------- -----------
<S> <C> <C>
INVESTMENTS (notes A4 and B)
Debt securities - available for sale $2,968,901 $4,105,139
Equity securities - available for sale 34,860 46,557
Notes receivable 959,743 1,241,468
Short-term investments - 156,541
Policy loans - 18,142
Investment real estate, net of accumulated depreciation of
$575 in 1997 and $3,293 in 1998 75,968 73,251
---------- ----------
4,039,472 5,641,098
CASH AND CASH EQUIVALENTS (note A3) 1,293,457 1,492,196
RECEIVABLES
Accrued investment income 156,209 240,417
Advances to affiliates 4,000 10,000
Other 86 3,156
---------- ----------
160,295 253,573
PROPERTY AND EQUIPMENT - AT COST (note A5)
Building and improvements 334,320 115,853
Furniture and equipment 119,795 132,811
Automobiles 45,275 45,275
---------- ----------
499,390 293,939
Less accumulated depreciation 40,927 63,382
---------- ----------
458,463 230,557
Land 73,800 56,000
---------- ----------
532,263 286,557
OTHER ASSETS
Cost in excess of net assets of business acquired,
less accumulated amortization of $85,805 in 1997 and
$123,321 in 1998 (note A6) 144,434 106,918
Deferred policy acquisition costs (note A8) 14,179 20,926
Value of purchased insurance business, less
accumulated amortization of $205,949 in 1998 (note A9) - 272,465
Land and building held for sale (note A5) - 176,153
Deferred income taxes (notes A7 and E) 71,943 31,943
Other 22,658 124,261
---------- ----------
253,214 732,666
---------- ----------
$6,278,701 $8,406,090
========== ==========
</TABLE>
F-3
<PAGE>
Summit Life Corporation and Subsidiaries
Consolidated Balance Sheets, Continued
December 31,
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998
----------- ------------
<S> <C> <C>
LIABILITIES
Policy reserves and policyholder funds (note A10) $4,445,490 $ 6,027,599
Accounts payable 25,600 51,061
Accrued and other liabilities 126,788 209,353
Advances from affiliates - 16,000
Notes payable (note C) 1,341,388 1,325,247
---------- -----------
5,939,266 7,629,260
COMMITMENTS AND CONTINGENCIES (notes G and I) - -
STOCKHOLDERS' EQUITY (NOTE D)
Common stock, $.01 par value - authorized, 5,000,000
shares; issued and outstanding, 1,939,780 shares
in 1997 and 2,054,735 shares in 1998 19,398 20,547
Additional paid-in capital 1,044,992 2,079,661
Common stock subscribed 42,383 39,130
Accumulated other comprehensive income 47,166 25,985
Accumulated deficit (772,121) (1,349,363)
---------- -----------
381,818 815,960
LESS STOCK SUBSCRIPTIONS RECEIVABLE 42,383 39,130
---------- -----------
339,435 776,830
---------- -----------
$6,278,701 $ 8,406,090
========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Summit Life Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Revenues
Insurance premiums and other considerations (note A10) $ 8,108 $ 121,192
Investment income 490,182 599,334
Net realized gains on sale of investments 14,275 4,337
Other 4,094 31,461
---------- ----------
516,659 756,324
Benefits, losses, and expenses
Policy benefits - 87,925
Increase in policy reserves 263,318 232,746
Interest 115,440 129,191
Taxes, licenses, and fees 14,603 23,428
Depreciation and amortization 63,524 302,557
General, administrative, and other operating 317,987 587,118
---------- ----------
774,872 1,362,965
---------- ----------
Loss from continuing operations before income taxes (258,213) (606,641)
Income tax expense (benefit) - current (notes A7 and E) (968) 3,100
---------- ----------
Loss from continuing operations (257,245) (609,741)
Earnings (loss) from operations of discontinued segment (note O) (12,112) 32,499
---------- ----------
Net loss $ (269,357) $ (577,242)
========== ==========
Basic and diluted earnings (loss) per common share (note A11)
From continuing operations $(.14) $ (.30)
From discontinued operations - .02
---------- ----------
Net loss $(.14) $ (.28)
========== ==========
Weighted average outstanding common shares, basic and diluted
(note A11) 1,893,367 2,047,037
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Summit Life Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (NOTE D)
Years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Common Stock
----------------------
Additional
Shares Par paid-in
Total Outstanding Value Capital
------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 441,993 1,825,022 $18,250 $ 854,757
Conversion of convertible
notes (note D) 112,613 86,625 866 111,747
Common stock issued 6,670 28,133 282 78,488
Comprehensive income
Net loss (269,357) - - -
Other comprehensive income
Unrealized gain on
investments, net 47,516
----------
Comprehensive
income (221,841)
---------- --------- --------- -----------
Balance at December 31,
1997 339,435 1,939,780 19,398 1,044,992
Common stock issued (notes
D and N) 1,035,818 114,955 1,149 1,034,669
Comprehensive income
Net loss (577,242) - - -
Other comprehensive income
Unrealized loss on
investments, net (21,181)
----------
Comprehensive
income (598,423)
---------- --------- --------- -----------
Balance at December 31, 1998 $ 776,830 2,054,735 $20,547 $2,079,661
========== ========= ========= ===========
<CAPTION>
Accumulated
Other
Common Comprehensive Stock
Stock income Accumulated Subscriptions
Subscribed (loss) deficit Receivable
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 72,100 $ (350) $ (502,764) $ -
Conversion of convertible
notes (note D) 42,383 - - (42,383)
Common stock issued (72,100) - - -
Comprehensive income
Net loss - - (269,357) -
Other comprehensive income
Unrealized gain on
investments, net - 47,516 - -
Comprehensive
income
------------- ----------- ------------- -----------
Balance at December 31,
1997 42,383 47,166 (772,121) (42,383)
Common stock issued (notes
D and N) (3,253) - - 3,253
Comprehensive income
Net loss - - (577,242) -
Other comprehensive income
Unrealized loss on
investments, net (21,181)
Comprehensive
income
------------- ----------- ------------- -----------
Balance at December 31,
1998 $ 39,130 $ 25,985 $(1,349,363) $(39,130)
============= =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Summit Life Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (269,357) $ (577,242)
Adjustments to reconcile net loss to cash provided by (used in) operating
activities
Depreciation and amortization 69,151 299,689
Deferral of policy acquisition costs (15,270) (9,615)
Amortization of deferred policy acquisition costs 1,091 2,868
Interest credited to policyholder account balances 259,000 280,948
Gain on sale of investment securities (14,275) (4,337)
Gain on sale of property and equipment - (8,089)
Common stock issued for directors' services - 32,753
Other (381) 7,590
(Increase) decrease in
Accrued investment income (65,041) (68,747)
Other receivables 39,015 15,163
Other assets 7,804 4,265
Increase (decrease) in
Policy reserves 94 (64,306)
Accounts payable 1,037 (14,968)
Accrued and other liabilities 11,368 81,665
----------- -----------
Net cash provided by (used in) operating activities 24,236 (22,363)
Cash flows from investing activities
Purchases of investment securities (1,726,849) (2,710,265)
Proceeds from disposition or maturities of investment securities 1,366,724 2,189,797
Issuance of notes receivable (50,000) (204,200)
Payments received on notes receivable 161,551 139,517
Increase in policy loans - (13,024)
Purchase of investment real estate (76,544) -
Advance to affiliates - (6,000)
Purchase of property and equipment (55,467) (1,613)
Proceeds from sale of property and equipment - 11,826
Cash acquired in acquisition of business - 527,578
----------- -----------
Net cash used in investing activities (380,585) (66,384)
Cash flows from financing activities
Deposits to policyholder account balances 1,178,983 514,906
Withdrawals from policyholder account balances (263,243) (159,505)
Payments on notes payable (229,010) (168,466)
Advances from affiliate - 16,000
Proceeds from issuance of notes payable 155,000 150,000
Proceeds from stock subscriptions receivable 71,550 3,253
Proceeds from sale of common stock 19,288 1,357
Initial public offering costs deferred - (70,059)
----------- -----------
Net cash provided by financing activities 932,568 287,486
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 576,219 198,739
Cash and cash equivalents at beginning of year 717,238 1,293,457
----------- -----------
Cash and cash equivalents at end of year $ 1,293,457 $ 1,492,196
=========== ===========
</TABLE>
F-7
<PAGE>
Summit Life Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
<TABLE>
<CAPTION>
1997 1998
---------- --------
<S> <C> <C>
Cash paid during the year for:
- -----------------------------
Interest $ 92,000 $ 56,000
Income taxes 2,000 300
Noncash investing and financing activities:
- ------------------------------------------
Purchase of an automobile by the incurrence of a note payable $ 32,000 $ -
Common stock subscriptions receivable 42,383 -
Conversion of convertible notes and other notes payable to common stock 99,996 -
Notes receivable acquired on sale of land and building, net of deferred
gain of $72,958 - 217,042
Acquisition of Benefit Capital Life Insurance Company in exchange for
100,000 shares of common stock (as adjusted) (note D) - 998,445
In conjunction with the acquisition, assets were acquired and
liabilities were assumed as follows:
Estimated fair value of assets acquired
Investments $ 813,561
Cash and cash equivalents 527,578
Receivables 33,694
Property and equipment 197,149
Value of purchased insurance business 478,414
Other 1,350
----------
2,051,746
Liabilities assumed
Policy reserves and policyholder funds 1,010,066
Other 43,225
----------
1,053,291
----------
Estimated fair value of common
stock issued $ 998,455
==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1998
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
1. Basis of Consolidation and Nature of Operations
-----------------------------------------------
The consolidated financial statements include the accounts of Summit Life
Corporation (SLC) and its wholly-owned subsidiaries (collectively, the
Company). Wholly-owned subsidiaries include Summit Life and Annuity Company
(SLAC), Family Benefit Life Insurance Company (FBLIC), Equity Mortgage
Services, Inc. (Equity), and Benefit Capital Life Insurance Company (BCLIC).
Effective December 31, 1997, Equity was merged into SLC. BCLIC was acquired on
January 13, 1998. Intercompany transactions and balances have been eliminated.
SLC is a holding company which specializes in the sale of life insurance
products through its life insurance subsidiaries, SLAC, FBLIC, and BCLIC.
Additionally, SLC provides financing to certain medical receivable factoring
entities and provides residential mortgage loan application processing services
to individuals. SLAC is licensed in Oklahoma, FBLIC is licensed in Texas, and
BCLIC is licensed in Louisiana. Annuity products are sold primarily by SLAC
and FBLIC and consist primarily of tax-sheltered annuities (TSAs), individual
retirement annuities (IRAs), and other individual nontax-qualified annuities.
BCLIC primarily sells life insurance products.
2. Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect certain reported amounts and disclosures; accordingly, actual
results could differ from those estimates.
3. Cash and Cash Equivalents
-------------------------
Cash equivalents include time deposits and certificates of deposit with
maturities when acquired of three months or less and money market funds.
The Company maintains its cash and cash equivalents in accounts which may not
be federally insured. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on such
accounts.
4. Investments
-----------
The Company accounts for certain investments in debt and equity securities as
follows:
. Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
. Debt and equity securities that are bought and held principally for the
purpose of selling in the near term are classified as trading securities
and reported at fair value, with unrealized gains and losses included in
operations.
. Debt and equity securities not classified as either held to maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as other comprehensive income.
F-9
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES -
CONTINUED
4. Investments - Continued
-----------------------
Declines in the fair value of individual securities below cost or amortized
cost that are other than temporary result in write-downs included in
operations. The specific identification method is followed in determining the
cost of securities sold.
Generally, notes receivable are stated at the aggregate of the unpaid
balances less estimated uncollectible amounts.
Short-term investments consist primarily of certificates of deposit and are
carried at cost, which approximates market.
Investment real estate is carried at depreciated cost.
5. Property and Equipment
----------------------
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated useful lives on the
straight-line method. Useful lives range from five to forty years.
Long-lived assets to be held and used, including investment real estate, are
reviewed for impairment whenever events or changes in circumstances indicate
that the related carrying amount may not be recoverable. When required,
impairment losses are recognized based upon the estimated fair value of the
asset.
During January 1998, upon acquisition of BCLIC, the Company relocated its
Louisiana operations from Thibodaux to rented facilities in New Orleans. The
Thibodaux land and building is currently held for sale and it is anticipated
that a sale will be completed during 1999. Meanwhile, the Company is leasing
the space on a short-term basis and is depreciating the building using the
straight-line method over 31.5 years. At December 31, 1998, the land and
building held for sale is reported at the lower of carrying value or fair value
less cost to sell.
6. Cost in Excess of Net Assets of Business Acquired
-------------------------------------------------
Cost in excess of net assets of business acquired is amortized on the
straight-line method over fifteen years for insurance company acquisitions and
five years for other acquisitions.
On an ongoing basis, management reviews the valuation and amortization of
cost in excess of net assets of business acquired. As part of this review, the
Company estimates the value and future benefits of the net income to be
generated by the related subsidiaries to determine whether impairment has
occurred. At December 31, 1998, management believes no impairment has
occurred.
F-10
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES -
CONTINUED
7. Income Taxes
------------
SLC and each of its subsidiaries file separate income tax returns.
The Company recognizes current tax expense based on estimated amounts payable
or refundable on tax returns for the year.
Deferred tax liabilities or assets are recognized for the estimated future
tax effects attributable to temporary differences and carryforwards based on
provisions of the enacted tax law. Deferred tax assets are reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
8. Deferred Policy Acquisition Costs
---------------------------------
The costs of writing new business, consisting primarily of commissions and
certain costs of policy issuance, are deferred. Deferred policy acquisition
costs for life insurance products, including immediate annuities with life
contingencies, are amortized over the estimated lives of the policies. Deferred
policy acquisition costs for investment products, principally single premium
deferred annuities, are amortized with interest in relation to the present
value of the expected gross profits, based on estimated investment yields,
mortality, persistency, and surrender charges, over the lives of the policies.
Deferred policy acquisition costs are reviewed periodically to insure that the
unamortized balance does not exceed those amounts recoverable from future
profits.
9. Value of Purchased Insurance Business
-------------------------------------
Value of purchased insurance business represents the actuarially determined
present value of estimated net cash flows embedded in existing insurance
contracts when acquired and is amortized with interest based on the incidence
of the related cash flows. At December 31, 1998, approximately 15% to 20% of
the unamortized value of purchased insurance business is expected to be
amortized in each of the next five years, based on current conditions and
assumptions as to future events on acquired policies in force.
An analysis of the value of purchased insurance business is presented below
for the year ended December 31, 1998:
Balance, beginning of year $ --
Acquisition 478,414
Imputed interest on unamortized balance at 6.5% 31,097
Amortization (237,046)
---------
Balance, end of year $ 272,465
=========
F-11
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES -
CONTINUED
10. Revenues and Policy Reserves and Policyholder Funds
---------------------------------------------------
Premiums received on deferred annuities and annuities without life
contingencies (i.e., investment contracts) are recorded as deposits into the
policyholder's account balance. Revenues relating to these contracts consist
primarily of withdrawal and administrative charges. Premiums for life
insurance products and for certain annuities with life contingencies, including
selection of annuity settlement options with life contingencies, are recognized
as revenues when due.
Policyholder account balances include amounts deposited by policyholders plus
interest credited, less withdrawals and any administrative charges deducted by
the Company. The liabilities for future policy benefits for annuities with
life contingencies are computed as the present value of future benefit
payments, including assumptions as to investment yields and mortality.
Policy reserves for life insurance products are computed using assumptions as
to investment yields, mortality, morbidity, withdrawals, and other assumptions
based on the Company's experience, modified as necessary to give effect to
anticipated trends and to include provisions for possible unfavorable
deviations. Reserve interest assumptions are graded and range from 8% to 7.5%.
Such liabilities are, for some plans, graded to equal statutory values or cash
values at or prior to maturity. Policy benefit claims are charged to expense
in the period that the claims are incurred. All insurance-related benefits,
losses, and expenses are reported net of reinsurance ceded.
Mortgage loan closing and funding income and related fees are recognized at
the time the underlying mortgage loan transaction is closed.
11. Earnings (Loss) Per common share
--------------------------------
Earnings (loss) per common share are computed based upon net earnings
(loss) divided by the weighted average number of common shares outstanding
during each period.
The weighted average outstanding common shares have been adjusted
retroactively for all periods presented to reflect the changes in capital
structure discussed in Note D. Conversion rights and convertible notes,
discussed in Note D, were antidilutive; therefore, basic and diluted earnings
(loss) per common share are the same.
12. Other Comprehensive Income
--------------------------
Accumulated other comprehensive income consists solely of net unrealized
investment gains (losses).
Unrealized loss on investments, net consists of the following for 1998:
Unrealized loss on investments arising during period $ (16,844)
Less reclassification adjustment for
gains included in net loss 4,337
---------
Unrealized loss on investments, net $ (21,181)
=========
F-12
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES -
CONTINUED
13. Reclassifications
-----------------
Certain reclassifications have been made to the 1997 consolidated
financial statements to conform to the 1998 presentation.
NOTE B - INVESTMENTS
The amortized cost of debt securities and the cost of equity securities,
together with their estimated fair values, are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------
Cost/ Gross Gross Estimated
amortized unrealized unrealized fair
Type of investment cost gains losses value
- ------------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Debt securities - available for sale
U.S. Treasury and other U.S. government
corporations and agencies $ 299,721 $ 466 $ - $ 300,187
Mortgage-backed securities 2,522,959 43,130 - 2,566,089
Industrial and miscellaneous 98,750 3,875 - 102,625
---------- ------- ---------- ----------
$2,921,430 $47,471 $ - $2,968,901
========== ======= ========== ==========
Equity securities - available for sale $ 35,289 $ 1,146 $(1,575) $ 34,860
========== ======= ========== ==========
December 31, 1998
-----------------------------------------------
Cost/ Gross Gross Estimated
amortized unrealized unrealized fair
Type of investment cost gains losses value
- ----------------------------------------------- ---------- ---------- ---------- ----------
Debt securities - available for sale
U.S. Treasury and other U.S. government
corporations and agencies $ 100,585 $ 165 $ - $ 100,750
Mortgage-backed securities 3,876,061 31,562 (7,984) 3,899,639
Industrial and miscellaneous 98,750 6,000 - 104,750
---------- ------- ---------- ----------
$4,075,396 $37,727 $(7,984) $4,105,139
========== ======= ========== ==========
Equity securities - available for sale $ 50,315 $ - $(3,758) $ 46,557
========== ======= ========== ==========
</TABLE>
F-13
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE B - INVESTMENTS - CONTINUED
The amortized cost and estimated fair values of debt securities, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1998
----------------------
Amortized Estimated
cost fair value
---------- ----------
<S> <C> <C>
Due within one year or less $ 100,585 $ 100,750
Due after ten years 98,750 104,750
---------- ----------
199,335 205,500
Mortgage-backed securities 3,876,061 3,899,639
---------- ----------
$4,075,396 $4,105,139
========== ==========
</TABLE>
During the fourth quarter of 1997, the Company sold certain held-to-maturity
securities with amortized cost of $300,000, which resulted in net realized
gains of $1,000. As a result of these sales, all securities in the held-to-
maturity category at December 31, 1997 (amortized cost of $2,921,430 and
unrealized gains of $47,471) were transferred to the available-for-sale
category. The decision to sell and transfer such securities was based
primarily on changes in the availability of and yield on alternative
investments.
Proceeds from sales of available-for-sale securities were approximately
$284,000 for 1997 and $530,000 for 1998. Gross gains of $9,200 for 1997 and
$11,752 for 1998 and gross losses of $3,500 for 1997 and $7,415 for 1998 were
realized on those sales.
Notes receivable include $909,743 for 1997 and 1998 of loans made to entities
which purchase, administer, and collect medical accounts receivable. The notes
provide for interest at 20% payable semiannually and maturity dates primarily
in 1999. These notes are collateralized by a portfolio of medical accounts
receivable. The collateral for these notes also collateralizes certain of the
Company's notes payable (see Note C).
During 1998, an 8%, $240,000 ten-year first mortgage and an 8%, $50,000 ten-
year second mortgage were received in conjunction with the sale of a building
and related land for $300,000 which had a carrying value of $220,000. The
transaction resulted in a gain of $80,000 which was deferred and is being
recognized on the installment method until adequate down payment has been
received. Notes receivable at December 31, 1998 include $199,000, net of
remaining deferred gain of $73,000, relating to these mortgages.
F-14
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
<TABLE>
<CAPTION>
NOTE C - NOTES PAYABLE
Notes payable consist of the following at December 31:
1997 1998
-------------- --------------
<S> <C> <C>
Mortgage payable to bank, payable in monthly installments of $2,292 through
November 2006, including interest at 9.4%; collateralized by real estate $ 164,645 $ -
Bank line of credit, interest payable monthly at an index determined by
the bank (8.25% at December 31, 1998), due July 1, 1999; collateralized
by personal guarantees of certain officers - 150,000
Uncollateralized note payable to individual, interest payable annually
at 8%, due April 18, 2000 75,000 75,000
Note payable to bank, payable in monthly installments of $690 through
March 1999, including interest at 10.5%; collateralized by vehicle 32,000 28,179
Uncollateralized note payable to stockholder, interest payable at
7.75%, due with the principal on September 15, 1999 30,000 32,325
Uncollateralized note payable to individual, interest payable
semiannually at 6.75%, due July 1, 2000 30,000 30,000
Uncollateralized note payable to stockholder, interest payable
semiannually at 8%, due March 17, 2001 50,000 50,000
Uncollateralized note payable to stockholder, interest payable
annually at 6.75%, due February 1, 2000 50,000 50,000
10% notes payable to individuals, the majority of which are stockholders,
interest payable either semiannually or allowed to compound, maturing
primarily in 1999; collateralized by a portfolio of medical accounts
receivable (see Note B) 909,743 909,743
---------- ----------
$1,341,388 $1,325,247
========== ==========
</TABLE>
F-15
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE C - NOTES PAYABLE - CONTINUED
The aggregate maturities of notes payable for years subsequent to
December 31, 1998 are as follows:
Year ending December 31
1999 $1,120,247
2000 155,000
2001 50,000
----------
$1,325,247
=========
NOTE D - STOCKHOLDERS' EQUITY
On September 21, 1998, in conjunction with its initial public offering of
common stock (see Note P), the following changes in capital structure were
approved and effected:
Each share of outstanding Class B common stock was exchanged for one share
of Class A common stock and Class B common stock was eliminated.
Class A common stock was redesignated as, simply, common stock.
The par value of the common stock was changed from $.50 to $.01 and the
authorized number of shares was increased from 2,000,000 to 5,000,000.
A 5-for-2 stock split on common stock was effected.
5,000,000 shares of $.001 par value preferred stock with rights and
preference to be determined by the Board of Directors was created.
These changes have been given retroactive effect in the accompanying
consolidated financial statements.
Convertible notes totaling $100,000 were converted into 76,920 common
shares at the rate of $1.30 per share on June 30, 1997. Additionally, upon
maturity, June 30, 1997, the holder of a $55,000 convertible note (convertible
into approximately 42,307 shares of common stock at $1.30 per share) did not
wish to convert. The Company, in an effort to raise additional capital,
acquired the convertible note for $55,000 then offered the related conversion
rights to existing stockholders on a basis consistent with their then-current
ownership percentage. Conversion rights not otherwise accepted by existing
stockholders were ultimately accepted by certain Company officers who are also
stockholders. These officers accepted the conversion rights by issuing
noninterest-bearing promissory notes payable, thereby committing to purchase
33,602 shares of common stock at $1.30 per share. These promissory notes and
the Company's requirement to issue the related common stock have been reflected
in the accompanying consolidated financial statements as stock subscriptions
receivable and common stock subscribed. Through December 31, 1998, 12,207
common shares have been issued under this arrangement for $15,869 and at
December 31, 1998, 30,100 common shares are subscribed under notes receivable
of $39,130.
F-16
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
<TABLE>
<CAPTION>
NOTE E - INCOME TAXES
The components of net deferred tax assets are as follows at December 31:
1997 1998
---------- -----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 81,339 $ 110,289
Policy reserves and policyholder funds 16,714 41,106
Other 3,521 21,246
Valuation allowance for deferred tax assets (28,456) (101,517)
-------- ---------
73,118 71,124
Deferred tax liabilities
Value of purchased insurance business - (37,055)
Depreciation (1,175) (2,126)
-------- ---------
(1,175) (39,181)
-------- ---------
Net deferred tax assets $ 71,943 $ 31,943
======== =========
<CAPTION>
A reconciliation of income tax (expense) benefit at the statutory
rate to the Company's effective rate is as follows:
1997 1998
-------- ---------
<S> <C> <C>
Expected statutory rate 34% 34%
Small life insurance company deduction (20) (20)
Increase in valuation allowance (6) (12)
Other (8) (1)
-------- ---------
- 1%
======== =========
</TABLE>
At December 31, 1998, the following operating loss carryforwards, which begin
expiring in 2010, were available for tax purposes:
<TABLE>
<CAPTION>
<S> <C>
SLC $612,000
SLAC 12,311
BCLIC 118,000
FBLIC 12,000
</TABLE>
F-17
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE F - RELATED PARTY TRANSACTIONS
The Company is affiliated with an insurance agency by common ownership and
management. Prior to the fourth quarter of 1997, insurance regulatory
requirements prohibited the Company from paying commissions to the agency for
policies written as such policies were considered to be written by Company
personnel. During the fourth quarter of 1997, regulatory authorities approved
an agreement whereby the Company pays the agency 75% of the commission rate to
which nonaffiliates are subject. During 1997 and 1998, commissions of
approximately $5,800 and $4,000, respectively, were paid to this agency.
From time to time, the Company makes advances to and receives advances from
affiliates, generally officers and stockholders. Such advances have no
specified repayment terms but are generally short-term in nature.
During 1997, a note receivable of $27,500 from a company controlled by a
stockholder was exchanged for services performed for the Company by the
affiliated entity.
During 1998, directors' fees of $33,000 were approved by the Board of
Directors and paid through the issuance of 11,697 shares of common stock.
Included in notes receivable at December 31, 1998 is a $25,000 note
receivable from a stockholder. The note provides for interest at 8% payable in
two installments. The note matures June 11, 1999 and is not collateralized.
NOTE G - COMMITMENTS AND CONTINGENCIES
Under its annuity contracts, the Company is committed to credit interest on
policyholder account balances at guaranteed rates. During the first policy
year the guaranteed rates range up to 8.5%. After the first year the lowest
guaranteed rate is 3%.
Most states have established guaranty fund associations to ensure that
policyholders receive the benefit of the insurance products they have
purchased. The guaranty funds receive their funding through assessments to
companies which write business in the respective states. The Company is liable
for such mandatory assessments upon notification by the states; however, such
assessments may be partially recovered through a reduction in future premium
taxes.
Certain investments with carrying values of $200,750 were pledged to
regulatory authorities in accordance with statutory requirements at December
31, 1998. Additionally, certain policies issued are considered "registered"
policies and require that assets, to the extent of the reserves, be pledged to
the Insurance Department of the State of Louisiana. At December 31, 1998, debt
securities available for sale, short-term investments, and real estate carried
at approximately $130,000, $107,000, and $176,000, respectively, were pledged.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED
The Company leases office space in Louisiana under an operating lease
agreement. In addition, the Company leases certain equipment used in
operations. Rent expense under these leases for 1998 was $10,957. Minimum
annual rentals for years subsequent to 1998 are:
1999 $12,656
2000 3,702
2001 2,888
2002 241
-------
$19,487
=======
The Company is involved in various legal actions relating to its operation.
Management believes that losses, if any, arising from such actions will not be
material to the Company's consolidated financial statements.
NOTE H - STATUTORY CAPITAL AND SURPLUS
SLC's insurance company subsidiaries prepare their statutory-basis financial
statements in accordance with accounting practices prescribed or permitted by
the domiciliary state insurance department. "Prescribed" statutory accounting
practices include state laws, regulations, and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. NAIC currently is in the process of codifying statutory
accounting practices, the result of which is expected to constitute the only
source of "prescribed" statutory accounting practices. Accordingly, that
project will likely change, to some extent, prescribed statutory accounting
practices, and may result in changes to the accounting practices that insurance
enterprises use to prepare their statutory financial statements; however, the
expected implementation date for this project is 2001 or later.
SLAC is required to maintain statutory capital and surplus of at least
$250,000 and, at December 31, 1997 and 1998, its statutory capital and surplus
amounted to $375,000 and $360,000, respectively. SLAC cannot declare dividends
which exceed the greater of 10% of statutory capital and surplus or the gain
from operations of the preceding twelve months without the prior consent of the
Oklahoma Commissioner of Insurance. The maximum dividend which may be paid in
1999 under this formula without prior consent is $36,000.
FBLIC is required to maintain statutory capital and surplus of at least
$100,000 and, at December 31, 1997 and 1998, its statutory capital and surplus
amounted to $160,000 and $150,000, respectively. FBLIC cannot declare dividends
which exceed the greater of 10% of statutory capital and surplus or the gain
from operations of the preceding twelve months without the prior consent of the
Texas Commissioner of Insurance. Certain other restrictions apply which are
used only for stipulated premium companies. The maximum dividend which may be
paid in 1999 under this formula without prior consent is $15,000.
F-19
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE H - STATUTORY CAPITAL AND SURPLUS - CONTINUED
BCLIC is required to maintain statutory capital and surplus of at least
$300,000 and, at December 31, 1998, its statutory capital and surplus amounted
to $519,000. BCLIC cannot declare dividends which exceed the lesser of 10% of
statutory capital and surplus or the net gain from operations of the preceding
twelve months without the prior consent of the Insurance Department of the
state of Louisiana. No dividends may be paid in 1999 without prior consent.
NOTE I - REGULATORY MATTERS
At periodic intervals, the domiciliary state insurance department routinely
examines the insurance company subsidiaries' statutory financial statements as
part of their legally prescribed oversight of the insurance industry. Based on
these examinations, the regulators can direct that the subsidiaries' statutory
financial statements be adjusted in accordance with their findings.
NOTE J - REINSURANCE
The Company reinsures that portion of insurance risk which is in excess of
its retention limits, generally under yearly renewable term contracts.
Retention limits range up to $20,000 on life policies. Reinsurance premiums are
recognized as a reduction of insurance premiums and other considerations over
the policy term and totaled $20,000 for 1998.
Reinsurance does not discharge or diminish the primary liability of the
Company on the risks reinsured; however, it does serve to limit the Company's
maximum loss on risks. The Company would be liable for the reinsurance risks
ceded to other companies in the event that reinsurers were unable to meet their
obligations.
At December 31, 1997 and 1998, reinsurance recoverables on policy reserves
were not significant.
NOTE K - EMPLOYMENT AGREEMENTS
Effective April 1, 1997, the Company entered into employment agreements with
the Company's Chief Executive Officer and President, both Company stockholders.
The employment agreements provide, among other things, for six-year terms, base
and maximum salaries, increases to base salaries subject to Board of Director
approval, annual bonuses, and benefits.
The agreements also provide each employee the right to purchase shares of
common stock at a specified price per share during the first three years of the
agreements. The number of shares available to the employees under these
agreements is subject to grant by the Board of Directors; however, the
difference between the option price and market price of all such shares must
not be less than $5,000 each. At December 31, 1998, the Board of Directors had
not granted any shares relating to these agreements.
The agreements may be terminated by mutual consent, by the Company at its
sole discretion without cause, or by the Company for cause, as defined. If the
agreements are terminated for cause, as defined, severance payments of $50,000
are payable to each employee. If the agreements are terminated without cause,
severance payments to each employee will be equivalent to the maximum salary
over the term of the agreements less amounts previously paid, but not less than
$360,000 for the President and $450,000 for the Chief Executive Officer.
F-20
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE L - SEGMENT INFORMATION
The Company has the following three reportable segments: mortgage services,
life insurance, and corporate. The mortgage services segment which has been
discontinued (see Note O) provides residential mortgage loan processing
services to individuals. The life insurance segment sells annuity and other
life insurance products. The corporate segment provides support to the
Company's operating subsidiaries and provides financing to certain medical
receivable factoring entities. The accounting policies used to develop segment
information correspond to those described in the summary of significant
accounting policies. The reportable segments are distinct business units.
Revenues from customers are all attributed to the United States. The following
information about the three segments is for the years ended December 31, 1997
and 1998.
<TABLE>
<CAPTION>
Mortgage Life
1997 services insurance Corporate Totals
- ---- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from customers $237,610 $ 8,108 $ - $ 245,718
Intersegment revenues - 12,627 26,424 39,051
Investment income, including net realized
gains on sale of investments 2 304,239 200,218 504,459
Interest expense 15,612 - 115,440 131,052
Depreciation and amortization 5,627 11,248 52,276 69,151
Income tax expense (benefit) 16,327 (694) (16,601) (968)
Segment loss 12,112 67,175 190,070 269,357
Segment assets 268,088 4,844,814 1,381,662 6,494,564
Expenditures for segment assets 9,467 - 46,000 55,467
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments
Revenues from customers $ 245,718
Intersegment revenues 39,051
Investment income, including net realized gains on sale of investments 504,459
----------
789,228
Other revenues 31,819
Elimination of interesegment revenues (39,051)
Discontinued operations (265,337)
----------
Total consolidated revenues $ 516,659
==========
Assets
Total assets for reportable segments $6,494,564
Elimination of intersegment assets (215,863)
----------
$6,278,701
==========
</TABLE>
F-21
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE L - SEGMENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Mortgage Life
1998 services insurance Corporate Totals
- ---- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from customers $118,739 $ 121,192 $ - $ 239,931
Intersegment revenues - 12,708 11,745 24,453
Investment income, including net realized
gains on sale of investments - 392,253 211,418 603,671
Interest expense 1,434 - 129,191 130,625
Depreciation and amortization - 239,482 63,075 302,557
Income tax expense (benefit) (646) 3,100 - 2,454
Segment (income) loss (32,499) 376,211 233,530 577,242
Segment assets 528 7,231,895 1,423,094 8,655,517
Expenditures for segment assets - 1,613 - 1,613
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments
Revenues from customers $ 239,931
Intersegment revenues 24,453
Investment income, including net realized gains on sale of investments 603,671
----------
868,055
Other revenues 31,461
Elimination of intersegment revenues (24,453)
Discontinued operations (118,739)
----------
Total consolidated revenues $ 756,324
==========
Assets
Total assets for reportable segments $8,655,517
Elimination of intersegment assets (249,427)
----------
$8,406,090
==========
</TABLE>
F-22
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments as of December 31, 1997 and 1998 as
required by Statement of Financial Accounting Standards (SFAS) No. 107,
Disclosure About Fair Value of Financial Instruments. Such information, which
pertains to the Company's consolidated financial instruments, is based upon the
requirements of SFAS No. 107 and does not purport to represent the aggregate
net fair value of the Company. The carrying amounts in the table are the
amounts at which the financial instruments are reported in the consolidated
financial statements.
All of the Company's financial instruments are held for purposes other than
trading. The fair values of debt and equity securities are estimated based on
quoted market prices for those or similar investments. The carrying value of
certain notes receivable and policy loans approximate fair value due to nominal
interest rate changes subsequent to issuance. The fair value of other notes
receivable is based on discounted future cash flows using current rates at
which similar loans with similar maturities would be made to borrowers with
similar credit risk. The carrying amounts of cash, cash equivalents, short-
term investments, and receivables approximate fair values because of the short
maturity of those assets. Cash surrender value is used in determining the fair
value of investment contracts. Estimated fair value of notes payable is the
discounted amount of future cash flows using the Company's current incremental
rate of borrowing for similar liabilities.
<TABLE>
<CAPTION>
1997 1998
---------------------- ----------------------
Carrying Fair Carrying Fair
amount value amount value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets
Debt securities - available for sale $2,968,901 $2,968,901 $4,105,139 $4,105,139
Equity securities - available for sale 34,860 34,860 46,557 46,557
Notes receivable 959,743 959,743 1,241,468 1,315,000
Short-term investments - - 156,541 156,541
Policy loans - - 18,142 18,142
Cash and cash equivalents 1,293,457 1,293,457 1,492,196 1,492,196
Receivables 160,295 160,295 253,573 253,573
Financial liabilities
Policyholder account balances -
investment contracts $4,445,490 $4,019,538 $4,975,587 $4,720,000
Notes payable 1,341,388 1,296,770 1,325,247 1,322,000
</TABLE>
F-23
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE N - BUSINESS ACQUISITIONS
In January 1998, in exchange for 100,000 shares of common stock (as
adjusted - see Note D), the Company acquired BCLIC, a Louisiana corporation, in
a business combination accounted for as a purchase. BCLIC is primarily engaged
in the sale of life insurance products in Louisiana. The results of operations
of BCLIC are included in the accompanying consolidated financial statements
since the date of acquisition. Because the Company's common stock was not
traded, its fair value was not reliably measurable. Therefore, the cost of the
acquisition was estimated through measuring directly the fair values of BCLIC's
assets and liabilities. The total cost of the acquisition, as estimated, was
approximately $998,000. The estimated fair value of assets acquired was
$2,051,746 and liabilities assumed were $1,053,291.
The following summarized pro forma (unaudited) information for 1997 assumes the
acquisition occurred as of January 1, 1997:
Revenues $1,020,580
Net loss (555,646)
Basic and diluted loss per common share $ (.28)
NOTE O - DISCONTINUED OPERATIONS
In December 1998, the Company adopted a plan to sell the mortgage services
segment to an officer of the Company in exchange for a $10,000 note receivable.
The actual disposal date was January 4, 1999. The assets sold and liabilities
assumed of the mortgage services segment consisted primarily of the segment's
"name", cash, and customer deposits.
Operating results of the mortgage services segment for the year ended
December 31, 1998 are shown separately in the accompanying consolidated
statements of operations. The consolidated statement of operations for 1997 has
been restated and operating results of the mortgage services segment are also
shown separately.
Revenues of the mortgage services segment for 1997 and 1998 were $265,337 and
$118,739, respectively. These amounts are not included in revenues in the
accompanying consolidated statements of operations.
F-24
<PAGE>
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE P - INITIAL PUBLIC OFFERING
During 1998, SLC began the process of an initial public offering, which went
effective in January 1999, of up to 1,000,000 shares of its common stock. The
initial public offering price of the shares is $5 per share, and the minimum
purchase per subscriber is 100 shares. The offering will be terminated and all
subscription funds will be returned to subscribers unless, on or before April
30, 1999, the Company has accepted subscriptions and payment in full for a
minimum of 140,000 shares. If the minimum number of shares is sold, the
Company thereafter may terminate the offering at any time and at less than the
maximum offering. In no event will the offering extend beyond October 31,
1999. Until a minimum of 140,000 shares is sold, all subscribers' funds will
be placed in a segregated escrow account. After the minimum offering is sold,
subscribers' funds will be released from the escrow account and be available
for use by the Company. Any subscription proceeds accepted after receipt and
acceptance of subscription proceeds from 140,000 shares but before termination
of the offering will not be deposited in escrow but will be available for
immediate use by the Company. Also at December 31, 1998, the Company had
offering costs of $110,000 which have been deferred and are included in other
assets. Such costs will be charged against the gross proceeds of the offering
if the minimum number of shares are sold; however, if the minimum number of
shares is not sold and the offering is aborted, such costs will be charged to
expense.
The Company intends to use the proceeds to (i) fund the acquisition of Great
Midwest Life Insurance Company (GMLIC) (see Note Q), (ii) repay debt, (iii)
recruit agents, (iv) increase capital and surplus of the insurance
subsidiaries, and (v) provide working capital and general corporate funds.
Although the Company intends to make application to Nasdaq Stock Market, Inc.
to list its common stock on the Nasdaq as soon as practicable, there can be no
assurance that such application, when and if made, will be approved.
Consequently, there can be no assurance that a regular trading market for the
Company's common stock, other than the OTC Bulletin Board or the "pink sheets",
will develop after completing this offering.
NOTE Q - SUBSEQUENT EVENTS
On January 13, 1999, the Company acquired 100% of the outstanding common
stock of GMLIC in a business combination accounted for as a purchase. GMLIC is
primarily engaged in the sale of life insurance products and is licensed in the
state of Texas. The results of operations of GMLIC will be included with the
consolidated results of the Company for periods subsequent to acquisition. The
total cost of the acquisition was approximately $939,000. Of the purchase
price, cash of $607,000 was paid to seven of eight stockholders with the eighth
stockholder receiving a promissory note for a principal amount of $332,000,
payable in three equal annual installments at an annual interest rate of 6% on
the unpaid principal balance. The Company partially funded the cash portion of
the purchase price with a $350,000 loan from a bank. The loan accrues interest
at an index rate plus .5%, payable monthly, and matures July 9, 1999. GMLIC
only prepares statutory basis financial statements; therefore, summarized pro
forma information relating to revenues, net loss, and basic and diluted loss
per common share, assuming the acquisition occurred as of January 1, 1998, was
not practicable to determine.
F-25
<PAGE>
Exhibit 21.1
LIST OF SUBSIDIARIES
OF
SUMMIT LIFE CORPORATION
The following are subsidiaries of Summit Life Corporation:
Benefit Capital Life Insurance Company, a Louisiana corporation;
Summit Life and Annuity Company, an Oklahoma corporation;
Family Benefit Life Insurance Company, a Texas corporation;
Summit Property Management, Inc., an Oklahoma corporation; and
Great Midwest Life Insurance Company, a Texas corporation.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<DEBT-HELD-FOR-SALE> 2,968,901 4,105,139
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 34,860 46,557
<MORTGAGE> 0 281,725
<REAL-ESTATE> 75,968 73,251
<TOTAL-INVEST> 4,039,472 5,641,098
<CASH> 1,293,457 1,492,196
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 14,179 20,926
<TOTAL-ASSETS> 6,278,701 8,406,090
<POLICY-LOSSES> 0 0
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 4,445,490 6,027,599
<NOTES-PAYABLE> 1,341,388 1,325,247
0 0
0 0
<COMMON> 19,398 20,547
<OTHER-SE> 320,037 756,283
<TOTAL-LIABILITY-AND-EQUITY> 6,278,701 8,400,090
8,108 121,192
<INVESTMENT-INCOME> 490,182 599,334
<INVESTMENT-GAINS> 14,275 4,337
<OTHER-INCOME> 4,094 31,461
<BENEFITS> 0 87,925
<UNDERWRITING-AMORTIZATION> 63,524 302,557
<UNDERWRITING-OTHER> 711,348 972,483
<INCOME-PRETAX> (258,213) (606,641)
<INCOME-TAX> (968) 3,100
<INCOME-CONTINUING> (257,245) (609,741)
<DISCONTINUED> (12,112) 32,499
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (269,357) (577,242)
<EPS-PRIMARY> (.14) (.28)
<EPS-DILUTED> (.14) (.28)
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 87,925
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
