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As filed with the Securities and Exchange Commission on January 11, 1999
REGISTRATION NO. 333-65097
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SUMMIT LIFE CORPORATION
(Exact name of Registrant as specified in its charter)
OKLAHOMA
(State or other jurisdiction of incorporation or organization)
6311 73-1448244
(Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
3021 Epperly Dr.
P.O. Box 15808
Oklahoma City, Oklahoma 73155
(405) 677-0781
(Address, including zip code, and telephone number, including area code, of
Registrants' principal executive offices)
Charles L. Smith
President and Chief Operating Officer
Summit Life Corporation
3021 Epperly Dr.
P.O. Box 15808
Oklahoma City, Oklahoma 73155
(405) 677-0781
(Name, address, including zip code, and telephone number,
including area code, of agents for service)
COPIES TO:
JEANETTE C. TIMMONS, ESQ.
Day Edwards Federman Propester & Christensen, P.C.
210 Park Avenue, Suite 2900
Oklahoma City, Oklahoma 73102
(405) 239-2121
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUMMIT LIFE CORPORATION
1,000,000 SHARES
COMMON STOCK
Summit Life Corporation (the "Company") is hereby offering a minimum
140,000 shares, and a maximum 1,000,000 shares, of its common stock, $.01 par
value per share (the "Common Stock"). Prior to this offering (the "Offering"),
there has been no public market for the Common Stock, and there can be no
assurance that an active market will develop. The initial public offering price
of the shares will be $5.00 per share, and the minimum purchase per subscriber
is 100 shares. The public offering price was determined by the Company, and
should not be assumed to bear any relationship to the Company's asset value, net
worth or other generally accepted criteria of value. See "DETERMINATION OF
OFFERING PRICE" for a discussion of the factors considered in determining the
offering price. Although the Company intends to make application to the Nasdaq
Stock Market, Inc. to list the Common Stock on the Nasdaq SmallCap Market (the
"Nasdaq") as soon as practicable, there can be no assurance that such
application, when and if made, will be approved.
===========================
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 6 HEREOF CONCERNING THE COMMON STOCK, BUSINESS AND
THIS OFFERING. PROSPECTIVE INVESTORS ALSO SHOULD CONSIDER THE FACT THAT THEIR
INVESTMENT WILL RESULT IN IMMEDIATE SUBSTANTIAL DILUTION. SEE "DILUTION."
__________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
__________________________
These securities are speculative and involve a high degree of risk.
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UNDERWRITING DISCOUNTS
PRICE TO INVESTORS AND COMMISSIONS PROCEEDS TO COMPANY (1)
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Per share..................... $ 5.00 -0- $ 5.00
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Total Minimum (2)(3).......... $ 700,000 -0- $ 700,000
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Total Maximum (2)............. $5,000,000 -0- $5,000,000
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(1) Before deducting legal, accounting and printing expenses payable by the
Company, estimated at $105,000 in the aggregate.
(2) 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. 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 for 140,000 shares but
before termination of the Offering will not be deposited in escrow but will
be available for immediate use by the
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Company. See "PLAN OF DISTRIBUTION."
(3) Officers, directors and other affiliates of the Company may purchase shares
in order to reach the minimum offering. However, there are no agreements
or commitments in this regard.
The shares being offered hereby are subject to prior sale, the approval of
certain legal matters by counsel and certain other conditions. The Company
reserves the right to withdraw, cancel or modify the Offering without notice and
to reject any order, in whole or in part.
__________________________
The date of this Prospectus is January 11, 1999.
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ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company has filed with the Commission a Registration Statement on Form SB-2
(including any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement and the exhibits
and schedules thereto. Statements made in this Prospectus regarding the
contents of any contract or document filed as an exhibit to the Registration
Statement are not necessarily complete and, in each instance, reference is
hereby made to the copy of such contract or document so filed. Each such
statement is qualified in its entirety by such reference. The Registration
Statement and the exhibits and the schedules thereto filed with the Commission
may be inspected, without charge, at the Commission's public reference
facilities located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the public reference facilities in the
Commission's regional offices located at: Northwestern Atrium Center, 500 West
Madison Street, Room 1400, Chicago, Illinois 60661; and Suite 1300, Seven World
Trade Center, New York, New York 10048. Copies of such materials also may be
obtained at prescribed rates by writing to the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the Commission
at http://www.sec.gov/.
As a result of this Offering, the Company will become subject to the
reporting requirements of the Exchange Act, and in accordance therewith will
file periodic reports, proxy statements and other information with the
Commission. The Company will furnish its stockholders with annual reports
containing audited consolidated financial statements certified by independent
public accountants following the end of each fiscal year, proxy statements and
quarterly reports containing unaudited consolidated financial information for
the first three quarters of each fiscal year following the end of such fiscal
quarter.
The Company intends to make application, as soon as practicable, for
listing of the Common Stock on the Nasdaq, after which time reports, proxy
statements and other information concerning the Company will be available for
inspection at the principal office of the Nasdaq at 1735 K Street, N.W.,
Washington, D.C. 20006.
This Prospectus contains certain forward-looking statements concerning the
Company. Also, documents subsequently filed by the Company with the Commission
will contain forward-looking statements. Such forward-looking statements are
based on the beliefs of the Company's management as well as on assumptions made
by and information currently available to the Company at the time such
statements are made. When used in this Prospectus, the words "anticipate,"
"believe," "estimate," "expect," "intends" and similar expressions, as they
relate to the Company are intended to identify forward-looking statements.
Actual results could differ materially from those projected in the forward-
looking statements as a result of the risk factors set forth under "RISK
FACTORS," the matters set forth or incorporated in this Prospectus generally and
certain economic and business factors, some of which may be beyond the control
of the Company. The Company cautions the reader, however, that this list of
factors may not be exhaustive, particularly with respect to future filings with
the Commission. In analyzing an investment in the Common Stock offered hereby,
prospective investors should carefully consider, along with the other matters
referred to herein, the risk factors set forth under "RISK FACTORS."
Additionally, the forward-looking statements included in this Prospectus under
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" have not been examined or compiled by the independent accountants of
the Company nor have such accountants applied any procedures thereto.
Accordingly, such accountants do not express an opinion or any other form of
assurance on them. Given these uncertainties, stockholders are cautioned not to
place undue reliance on such forward-looking statements.
3
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all financial
information and share data in this Prospectus reflect a 5-for-2 stock split
approved on April 28, 1998 and effected September 25, 1998.
THE COMPANY
Summit Life Corporation (the "Company") is a specialized financial
services holding company which operates in various segments of the insurance and
financial services industry. The Company's subsidiaries include Summit Life and
Annuity Company ("SLAC"), an Oklahoma corporation which underwrites, markets and
distributes various life insurance and annuity products to residents of
Oklahoma; Family Benefit Life Insurance Company ("FBLIC"), a Texas corporation
which underwrites, markets and distributes various life insurance and annuity
products to residents of Texas; and Benefit Capital Life Insurance Company
("BCLIC"), a Louisiana corporation which underwrites, markets and distributes
various life insurance products to residents of Louisiana. 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 $1 million in 1997, with assets growing from
approximately $1,032,000 as of December 31, 1994 to approximately $8,400,000 as
of September 30, 1998. See "BUSINESS." 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 which can be realized by
consolidating the administrative functions of the acquired companies. The
Company plans to use a portion of the proceeds of this Offering to acquire 100%
of the common stock of Great Midwest Life Insurance Company, a Texas life
insurance company ("Great Midwest"). See "USE OF PROCEEDS."
The Company markets its products primarily through small independent
property and casualty agencies and independent personal producing general agents
("PPGA's"). 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. However, the Company plans to use a portion of the net proceeds of this
Offering to add additional distribution channels for SLAC, FBLIC and BCLIC
throughout their marketing territories.
The Company's principal office is located at 3021 Epperly Dr., P.O. Box
15808, Oklahoma City, Oklahoma, 73155, and its telephone number is (405)
677-0781.
4
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1998 DEVELOPMENTS
On January 13, 1998, the Company completed the acquisition of the
outstanding capital stock of BCLIC in exchange for the issuance by the Company
of 40,000 shares of Common Stock (the "BCLIC Acquisition"). The acquisition was
accounted for under the purchase method of accounting. For the year ended
December 31, 1997, BCLIC reported total assets of approximately $1.7 million and
stockholder's equity of approximately $547,000. BCLIC reported net income for
the year ended December 31, 1997 of approximately $29,000. See "UNAUDITED PRO
FORMA CONSOLIDATED STATEMENT OF OPERATIONS."
On October 15, 1998, the Company executed a Stock Purchase Agreement to
acquire 100% of the common stock of Great Midwest. The purchase price for the
stock to be acquired will be based on conditions existing at closing, but is
estimated to be approximately $936,000, payable approximately $605,000 in cash
at the time of closing, with the remaining amount payable in three equal annual
installments. Depending on the number of shares sold in this Offering, the
Company plans to use between $495,000 and $605,000 of the net proceeds therefrom
to fund its acquisition of Great Midwest. See "USE OF PROCEEDS" and
"BUSINESS-Acquisitions and Consolidations."-Targeted Future Acquisitions."
THE OFFERING
Common Stock offered by the Company:
Maximum................................... 1,000,000 shares
Minimum................................... 140,000 shares
Shares of Common Stock to be outstanding after
the Offering .................................. 3,054,735 shares assuming the
maximum offering is sold
2,194,735 shares assuming the
minimum offering is sold
Use of Proceeds................................ To (i) fund the acquisition of
Great Midwest, (ii) repay debt,
(iii) recruit agents, (iv)
increase capital and surplus of
the Company's insurance
subsidiaries, and (v) for
working capital and general
corporate purposes. See "USE OF
PROCEEDS."
Conditions to Offering......................... 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. 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 for
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.
The minimum purchase per
subscriber is 100 shares. See
"PLAN OF DISTRIBUTION." All
subscription agreements
received by the Company are
irrevocable.
5
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THE OFFERING (CONTINUED)
Secondary Trading.............................. Although the Company intends to
make application to the Nasdaq
Stock Market, Inc. to list the
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 Common Stock, other than
the OTC Bulletin Board or the
"pink sheets," will develop
after the completion of this
Offering. See "RISK FACTORS-No
Assurance of Market for Common
Stock."
RISK FACTORS
Investment in the Common Stock offered hereby involves a high degree of risk
and immediate substantial dilution. See "RISK FACTORS" and "DILUTION."
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL INFORMATION
(dollars in thousands, except per share data)
The following selected financial information is qualified by reference
to, and should be read in conjunction with, the Company's financial statements
and related notes thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" contained elsewhere herein. The selected
financial information presented below is not necessarily indicative of the
future results of operations or financial performance of the Company. See "RISK
FACTORS." The selected financial information as of and for the years ended
December 31, 1996 and 1997 is derived from the audited financial statements of
the Company, and the selected financial information as of and for the nine
months ended September 30, 1997 and 1998 has been derived from the unaudited
financial statements of the Company. In the opinion of management of the
Company, the unaudited financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the
information set forth herein. The pro forma financial information gives effect
to the acquisition of BCLIC described under "UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATION." This historical and pro forma financial data should be
read in conjunction with the Consolidated Financial Statements of the Company
and the related notes thereto and the pro forma financial information included
elsewhere in this Prospectus.
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YEARS ENDED DECEMBER 31,
--------------------------------
PRO NINE MONTHS
HISTORICAL FORMA (1) ENDED SEPTEMBER 30,
1996 1997 1997 1997 1998
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STATEMENT OF OPERATIONS DATA:
Total revenues.................. $ 1,270 $ 782 $ 1,021 $ 610 $ 620
Loss before income taxes and
minority interest............ (374) (270) (557) (171) (446)
Net loss........................ (297) (269) (556) (180) (443)
Net loss per share.............. (.18) (.14) (.28) (.10) (.22)
Shares used in computation (2).. 1,638,235 1,893,367 1,993,367 1,878,507 2,044,955
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AS OF DECEMBER 31, 1997 AS OF SEPTEMBER 30,
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HISTORICAL PRO FORMA (1) 1997 1998
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BALANCE SHEET DATA:
Invested assets........................... $4,039 $4,853 $4,225 $5,802
Total assets.............................. 6,279 8,330 6,214 8,440
Total policy liabilities.................. 4,445 5,402 4,323 5,988
Stockholders equity....................... 339 1,338 376 939
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(1) The amounts presented "pro forma" are calculated as if the BCLIC
acquisition was completed as of January 1, 1997 for the statement of
operations data and December 31, 1997 for the balance sheet data.
(2) All share amounts used in computation of per share data reflect the
5-for-2 stock split effected in September 1998.
6
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RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider the following factors in evaluating the
Company and its business before purchasing any of the shares of Common Stock
offered hereby.
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 and amortization 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.
The BCLIC Acquisition in January 1998 represents the Company's largest
acquisition to date. In addition, in October 1998 the Company entered into a
Stock Purchase Agreement to acquire 100% of the common stock of Great Midwest.
Although the purchase price for the stock to be acquired will be based on
conditions existing at closing, it is estimated to be approximately $936,000,
payable approximately $605,000 in cash at the time of closing, with the
remaining amount payable in three equal annual installments. Depending on the
number of shares sold in this Offering, the Company plans to use between
$495,000 and $605,000, representing approximately 83.19% and 22.04%,
respectively, of the net proceeds therefrom to fund its acquisition of Great
Midwest. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS." There can be no assurance that the Company will
successfully operate BCLIC or Great Midwest.
In addition, there can be no assurance that the Company will be able to
obtain the capital necessary to pursue 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 "BUSINESSAcquisitions
and Consolidations."
RELATIONSHIP WITH SMITH AGENCY; CONFLICTS OF INTEREST. Through 1997, the
Company was dependent upon James L. "Jim" Smith & Associates, Inc. (the "Smith
Agency"), an insurance agency owned by Charles L. Smith and James L. Smith, for
originating in excess of 70% of its newly-issued life insurance policies and
annuity contracts. In mid-1997, the Company began recruiting agents to increase
the sales of its products from non-affiliated insurance agencies, in an effort
to reduce its dependence on the Smith Agency. Although the Company believes it
has been successful in such effort (through September 30, 1998, sales of life
insurance policies and annuity contracts by non-affiliated insurance agencies
accounted for approximately 90% of total sales), there can be no assurance that
the Company's current level of sales which are originated by non-affiliated
insurance agencies will continue.
In addition, because the Smith Agency is under common control with the
Company, situations could arise in which the Smith Agency's interests and the
Company's interests could conflict, as in the payment of commissions by the
Company. Existing regulatory requirements limit the amount of commissions
payable by the Company to the Smith Agency to 75% of the commission rate to
which non-affiliated parties are subject. However, there can be no assurance
that any other conflicts would be resolved to the benefit of the Company. The
Smith Agency was paid $5,800 and $4,000 in sales commissions during the year
ended December 31, 1997 and the nine months ended September 30, 1998,
respectively. See "BUSINESS" and "CERTAIN TRANSACTIONS."
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
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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 "BUSINESSRegulation 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, 1996 and 1997 and the nine months ended September 30, 1998, the Company's
lapse ratio on ordinary business was 1%, 1% and 3.3%, 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 "BUSINESSCompetition."
IMPORTANCE OF RATINGS. Ratings with respect to claims-paying ability and
financial strength have become an increasingly important factor in establishing
the competitive position of insurance companies. Claims-paying and financial
strength ratings are based upon factors relevant to policyowners and are not
directed toward protection of stockholders. The Company realizes the importance
to policyholders of ratings and sought in 1996 to begin the arduous task of
filing with the rating agencies. However, the Company is still too small to
obtain a letter rating, and currently is rated by A. M. Best Company as "FPR 4"
(fair). See "GLOSSARY OF SELECTED TERMS" under the caption "A.M. Best."
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
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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.
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. See "MANAGEMENT."
CONTROL BY EXISTING STOCKHOLDERS. Following completion of the Offering,
the Company will continue to be effectively controlled by Messrs. Charles L. and
James L. Smith, each of whom are also executive officers and directors of the
Company, and who together currently own an aggregate of 1,366,370 shares of
Common Stock, which constitute approximately 66.50% of the 2,054,735 shares of
Common Stock issued and outstanding immediately prior to this Offering. If all
of the 1,000,000 shares of Common Stock offered hereby are sold, the Smiths'
ownership interest in the Company (assuming no purchase by them of the shares
offered hereby) will constitute approximately 44.73% of the then issued and
outstanding shares of Common Stock. Such ownership interest will more than
likely enable them to continue to have the power to control the Company, to
elect the Board of Directors, and to approve any action requiring stockholder
approval, including adopting amendments to the Company's Certificate of
Incorporation and approving or disapproving mergers and sales of all or
substantially all of the assets of the Company. Because they will control the
election of the Board of Directors of the Company, they will be able to control
most, if not all, of the Company's policy decisions. See "PRINCIPAL
STOCKHOLDERS."
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 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
ANTI-TAKEOVER PROVISIONS. The Company's Amended and Restated Certificate
of Incorporation (the "Certificate of Incorporation) and Amended and Restated
Bylaws (the "Bylaws") include provisions that may delay, defer or prevent a
takeover attempt that may be in the best interest of the Company's stockholders.
These provisions include a classified Board of Directors, pursuant to which
directors are divided into three classes with three-year staggered terms. The
classified board provision could increase the likelihood that, in the event an
outside party acquired a controlling block of the Company's stock, incumbent
directors nevertheless would retain their positions for a substantial period,
which may have the effect of discouraging, delaying or preventing a change in
control of the Company. In addition, the Certificate of
9
<PAGE>
Incorporation provide for the ability of the Board of Directors to issue up to
5,000,000 shares of Preferred Stock without any further stockholder approval, a
provision under which only the Board of Directors or holders of at least two-
thirds of the outstanding shares may call meetings of stockholders, a
requirement that any stockholder action without a meeting be pursuant to
unanimous written consent and certain advance notice procedures for nominating
candidates for election to the Board of Directors and putting other proposals to
a vote of stockholders. Issuance of Preferred Stock also could discourage bids
for the Common Stock at a premium as well as create a depressive effect on the
market price of the Common Stock. In addition, under certain conditions, Section
1090.3 of the Oklahoma General Corporation Act, as amended (the "OGCA"), would
prohibit the Company from engaging in a "business combination" with an
"interested stockholder" (in general, a stockholder owning 15% or more of the
Company's outstanding voting shares) for a period of three years. The possible
impact of these provisions on takeover attempts could adversely affect the price
of the Common Stock. See "DESCRIPTION OF CAPITAL STOCK."
Additionally, the Company is an insurance holding company and, as such, is
subject to Oklahoma state law governing insurance holding companies. Under the
provisions of Oklahoma insurance law and regulations, any person or entity
desiring to acquire more than a specified percentage of the Company's
outstanding voting securities will be required to obtain approval of the
Oklahoma State Insurance Department. These, as well as certain other factors,
may be expected to have the effect of delaying or preventing a change in control
of the Company. See "BUSINESSRegulation and Taxation."
NO ASSURANCE OF MARKET FOR COMMON STOCK. There currently is no public
market for the Common Stock being offered, and no assurance can be given that a
market will develop. The Company will apply to list the Common Stock on the
Nasdaq. If a trading market does develop for the Common Stock, the prices may
be highly volatile. In addition, if a market for the Common Stock does develop,
and the Common Stock is traded below certain prices, many brokerage firms may
not effect transactions in the Common Stock, and sales of the Common Stock will
be subject to Commission Rule 15g-9. In the event that the Company is unable to
meet the Nasdaq's 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. If a market does not
develop for the Common Stock, it may be difficult or impossible for purchasers
to resell the Common Stock. There can be no assurance that any of the Common
Stock can ever be sold at the offered price or at any price.
SHARES ELIGIBLE FOR FUTURE SALE. Upon consummation of the Offering, and
assuming the maximum number of shares offered is sold, the Company will have
outstanding an aggregate of 3,054,735 shares of Common Stock. Of such shares,
the 1,000,000 shares sold pursuant to the Offering and 508,652 previously issued
shares will be tradable without restriction by persons other than "affiliates"
of the Company. An aggregate 1,316,370 "Promotional Shares" held by officers and
directors of the Company are subject to a Promotional Shares Lock-In Agreement
with the Oklahoma Department of Securities and, pursuant thereto, may not be
released for sale until one year from the completion date of the Offering, after
which time the Promotional Shares may be released in quarterly increments of
2 1/2% per quarter, with the remainder of such Promotional Shares available for
sale on the anniversary of the second year from the completion of the Offering.
The remaining 229,713 shares of Common Stock to be outstanding after the
Offering are "restricted securities" within the meaning of Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act") and may not be
publicly resold, except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption from registration, including that
provided by Rule 144 promulgated under the Securities Act. Of such 229,713
shares, 100,000 shares will be available for limited resale pursuant to the
volume limitations of Rule 144 beginning in January 1999 and unlimited resale in
January 2000.
Future sales of substantial amounts of Common Stock (including shares
issued upon the exercise of stock options) by the Company's current stockholders
after the Offering, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock. In addition, the Company
has the authority to issue additional shares of Common Stock and shares of one
or more series of Preferred Stock. The Company also intends to register on Form
S-8 under the Securities Act an aggregate of 300,000 shares of Common Stock for
future issuance under a proposed stock option plan as soon as practicable
following the consummation of the Offering. The future issuance of such shares
could result in the dilution of the voting power of the shares of Common Stock
purchased in the Offering and could have a dilutive effect on earnings per
share. No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock. The Company currently has no plans to designate or
issue any shares of Preferred Stock. See "PRINCIPAL STOCKHOLDERS," DESCRIPTION
OF CAPITAL STOCK" and "SHARES ELIGIBLE FOR FUTURE SALE."
10
<PAGE>
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 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Liquidity and Capital
Resources."
ARBITRARY DETERMINATION OF OFFERING PRICE. The public offering price for
the Common Stock offered hereby was determined by the Company, and should not be
assumed to bear any relationship to the Company's asset value, net worth or
other generally accepted criteria of value. Recent history relating to the
market prices of newly public companies indicates that the market price of the
Common Stock following this Offering may be highly volatile.
PAYMENT OF 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. See
"DIVIDEND POLICY."
IMMEDIATE SUBSTANTIAL DILUTION. The Company's current stockholders
acquired their shares of Common Stock at a cost substantially below the price at
which such shares are being offered in this Offering. In addition, the initial
public offering price of the shares of Common Stock in this Offering will be
substantially higher than the current book value per share of Common Stock.
Consequently, investors purchasing shares of Common Stock in this Offering will
incur an immediate and substantial dilution of their investment based upon the
resulting book value of Common Stock after completion of this Offering. See
"DILUTION."
USE OF PROCEEDS
Assuming all of the Common Stock offered is sold, the Company intends to
use the net proceeds of the Offering approximately as follows, in the following
order of priority: (i) approximately $605,000 (12.36%) will be used fund the
acquisition of Great Midwest; (ii) approximately $1,100,000 (22.47%) will be
used to repay substantially all outstanding debt of the Company; (iii)
approximately $150,000 (3.06%) will be used to recruit additional agents; (iv)
approximately $2,500,000 (51.07%) will be contributed to the Company's insurance
subsidiaries to increase their statutory capital and surplus; and (v)
approximately $540,000 (11.03%) will be used for working capital and general
corporate purposes, including possible acquisitions of insurance companies and
in force insurance policies consistent with the Company's business strategies,
as well as for general overhead and operating expenses. If only the minimum
$700,000 is sold, the net proceeds of the Offering will be used in the following
order of priority: (i) approximately $495,000 (83.19%) will be used to fund the
acquisition of Great Midwest; and (ii) approximately $100,000 (16.81%) will be
used to repay indebtedness.
The following table summarizes the Company's intended uses of the net
proceeds of this Offering:
11
<PAGE>
<TABLE>
<CAPTION>
MINIMUM OFFERING OFFERING MID-POINT MAXIMUM OFFERING
------------------ -------------------- --------------------
USE OF NET PROCEEDS (1) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------ -------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Fund the acquisition of Great Midwest (2) $495,000 83.19% $ 605,000 22.04% $ 605,000 12.36%
Repayment of indebtedness 100,000 16.81% 1,100,000 40.07% 1,100,000 22.47%
Recruitment of agents -- -- 150,000 5.47% 150,000 3.06%
Increase statutory capital and surplus (3) -- -- 750,000 27.32% 2,500,000 51.08%
Working capital and general corporate
purposes (4) -- -- 140,000 5.10% 540,000 11.03%
-------- ------ ---------- ------ ---------- ------
Total $595,000 100.00% $2,745,000 100.00% $4,895,000 100.00%
======== ====== ========== ====== ========== ======
</TABLE>
- ---------------------------
(1) After deducting legal, accounting and printing expenses payable by the
Company, estimated at $105,000 in the aggregate.
(2) If only the minimum offering is sold, only $495,000 of the net proceeds of
the Offering will be used to fund the $605,000 cash portion of the purchase
price. The balance will be funded from cash from operations.
(3) Most states have adopted risk-based capital ("RBC") rules to evaluate the
adequacy of statutory capital and surplus in relation to investment and
insurance risks. Statutory surplus and statutory operating results are
determined according to statutes adopted by each state in which the
subsidiaries do business. Statutory surplus bears no direct relationship
to equity as determined under generally accepted accounting principles.
The RBC formula is designed as an early warning tool to help state
regulators identify possible weakly capitalized companies for the purpose
of initiating regulatory action. Increases to statutory capital and
surplus in excess of the ratios required by state insurance regulators
would permit the Company to increase its sales, while ensuring that
fluctuations in premiums received and benefits paid do not have an adverse
effect on the Company based on such regulatory guidelines.
(4) Includes possible acquisitions of insurance companies and in force
insurance policies consistent with the Company's business strategies, as
well as payment of general overhead and operating expenses.
The Company intends to utilize a portion of the net proceeds of the
Offering to repay indebtedness. At September 30, 1998, the indebtedness owed by
the Company consisted of the following :
DESCRIPTION OF INDEBTEDNESS PRINCIPAL BALANCE
--------------------------- -----------------
Uncollateralized note payable to individual,
interest payable annually at 8%; due April 18, 2000 (1) $ 75,000
Purchase money note payable to bank, payable
in monthly installments of $600 through
March 1999, including interest at 10.5%;
collateralized by vehicle 30,759
12
<PAGE>
Uncollateralized note payable to stockholder,
interest payable annually at 7.75%; due
September 15, 1999 (2) 30,000
Note payable to individual, interest payable
semiannually at 8%; due July 1, 1999;
collateralized by U.S. TREASURY SECURITIES (2) 30,000
Uncollateralized note payable to Charles L.
Smith, interest payable semiannually at 8%;
due March 17, 1999 (1) 50,000
Uncollateralized note payable to stockholder,
interest payable annually at 6.75%;
due February 1, 1999 (1) 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 (3) 909,743
Borrowings under bank line of credit (2) 88,727
----------
Total indebtedness $1,264,229
==========
- ---------------------------
(1) The debt was incurred to fund capital and surplus requirements in
connection with the Company's acquisition of BCLIC in January 1998.
(2) The debt was incurred to fund general overhead and operating expenses
including the additional regulatory filings and actuarial fees associated
with the Company's acquisition of BCLIC.
(3) The debt was incurred to fund the Company's loans to medical accounts
receivable factoring entities.
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.
Depending on the actual number of shares sold in this Offering, the Company
plans to use a substantial amount of the proceeds therefrom to make
contributions of capital and surplus to its insurance subsidiaries, which will
enable the Company to increase its sales of insurance products. Most states
have adopted risk-based capital ("RBC") rules to evaluate the adequacy of
statutory capital and surplus in relation to investment and insurance risks.
Statutory surplus and statutory operating results are determined according to
statutes adopted by each state in which the subsidiaries do business. Statutory
surplus bears no direct relationship to equity as determined under generally
accepted accounting principles. The RBC formula is designed as an early warning
tool to help state regulators identify possible weakly capitalized companies for
the purpose of initiating regulatory action. Increases to statutory capital and
surplus in excess of the ratios required by state insurance regulators would
permit the Company to increase its sales, while ensuring that fluctuations in
premiums received and benefits paid do not have an adverse effect on the Company
based on such regulatory guidelines.
Actual allocation of net proceeds, however, will depend on the Company's
success in recruiting additional agents to sell such products. If results do
not meet the Company's requirements, it may reallocate the proceeds among the
other contemplated uses of proceeds. Moreover, although the Company plans to
use a portion of the net proceeds of this Offering to fund the acquisition of
Great Midwest, there can be no assurance that such acquisition will be effected.
If the acquisition does not close, or if the Company has funds remaining after
it has expended offering proceeds in accordance with the uses of proceeds
described herein, the Company may use a portion of the remaining net proceeds to
acquire the assets of other insurance companies. Any decision to make an
acquisition will be dependent on consideration of a variety of factors,
including business prospects, purchase price and financial terms of the
transaction. With the exception of the acquisition of Great Midwest, the
Company has no agreements, understandings or arrangements with respect to any
other acquisition at this time. See "BUSINESS."
13
<PAGE>
Pending application by the Company of the net proceeds of this Offering,
the Company may invest the net proceeds in interest-bearing accounts at insured
institutions, U.S. Government and agency obligations, certificates of deposit or
other investment grade short-term, interest-bearing securities.
14
<PAGE>
DETERMINATION OF OFFERING PRICE
The public offering price for the Common Stock offered hereby was
determined by the Company, and should not be assumed to bear any relationship to
the Company's asset value, net worth or other generally accepted criteria of
value. Recent history relating to the market prices of newly public companies
indicates that the market price of the Common Stock following this Offering may
be highly volatile.
DIVIDEND POLICY
The Company does not anticipate paying dividends on the Common Stock at any
time in the foreseeable future. The Company's Board of Directors plans to
retain earnings for the development and expansion of the Company's business.
The Board of Directors also plans to regularly review the Company's dividend
policy. The Company's ability to pay dividends will be dependent, in large
measure, on its ability to receive dividends and management fees from its life
insurance subsidiaries. The ability of these corporations to pay dividends and
management fees, in turn, is limited pursuant to the insurance laws of the
states in which the Company's insurance subsidiaries are domiciled. Generally,
such laws provide that dividends may be paid only from the earned surplus
arising from the insurance company's business and must receive the prior
approval of the Insurance Commissioner to pay a dividend if such dividend would
exceed certain statutory limitations. Current statutory limitations in each of
the states in which SLAC and FBLIC respectively operate are the greater of (i)
10% of the subsidiary's statutory capital and surplus as of the preceding year
end or (ii) the gain from operations for the previous calendar year. Current
statutory limitations in the state in which BCLIC operates are the lessor of (i)
10% of BCLIC's statutory capital and surplus as of the preceding year or (ii)
the gain from operations for the previous calendar year.
Any future determination as to the payment of dividends will be at the
discretion of the Board of Directors of the Company and will depend on a number
of factors, including future earnings, capital requirements, financial condition
and such other factors as the Board of Directors may deem relevant.
DILUTION
As of September 30, 1998, the Company reported a net tangible stockholders'
equity of $822,783, or $.40 per share of Common Stock. The net tangible
stockholders' equity of the Company is the aggregate amount of its tangible
assets less its total liabilities. The net tangible stockholders' equity per
share represents the net tangible stockholders' equity divided by the number of
shares of Common Stock outstanding. After giving effect to the sale of the
minimum and maximum number of shares of Common Stock offered hereby, at an
assumed offering price of $5.00 per share, and the application of the estimated
net proceeds therefrom, the pro forma net tangible stockholders' equity per
share would increase from $.40 to $.65 and $1.87, respectively. This represents
an immediate increase in net tangible stockholders' equity of $.25 and $1.47 per
share, respectively, to current stockholders and an immediate dilution of $4.35
and $3.13 per share, respectively, to new investors, as illustrated in the
following table:
<TABLE>
<CAPTION>
Minimum Maximum
Offering Offering
----------- -----------
<S> <C> <C>
Initial public offering per share..................................... $5.00 $5.00
Pro forma net tangible book value per share after this Offering....... .65 1.87
----- -----
Dilution per share to new investors................................... $4.35 $3.13
===== =====
</TABLE>
15
<PAGE>
The following table summarizes, as of September 30, 1998, the number of shares
of Common Stock issued by the Company, the total consideration received by the
Company and the average consideration attributable to shares held by existing
stockholders and new investors purchasing shares in this Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------------- ----------------------------- CONSIDERATION
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Current stockholders.. 2,054,735 67.3% $2,100,234 29.6% $1.02
New investors......... 1,000,000 32.7% 5,000,000 70.4% $5.00
--------- ------ ---------- ------
Total........... 3,054,735 100.0% $7,100,234 100.0%
========= ===== ========== =====
</TABLE>
16
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of September 30, 1998; and (ii) the pro forma capitalization of the
Company as adjusted to give effect to the sale of a minimum of 140,000 shares,
and a maximum of 1,000,000 shares, of Common Stock at an assumed public offering
price of $5.00 per share and the application of the estimated net proceeds as
described under "Use of Proceeds." This table should be read in conjunction
with "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------------------------------------
As Adjusted As Adjusted
Actual MINIMUM OFFERING MINIMUM OFFERING
------ ---------------- ----------------
<S> <C> <C> <C>
Liabilities:
Policy reserves and policyholder funds.......................... $ 5,988,191 $ 5,988,191 $ 5,988,191
Accounts payable and other liabilities.......................... 248,706 248,706 248,706
Notes Payable................................................... 1,264,229 1,164,229 164,229
----------- ----------- -----------
Total liabilities...................................... 7,501,126 7,401,126 6,401,126
Stockholders' Equity:
Common Stock, $.01 par value:
5,000,000 shares authorized, 2,054,735 issued and
outstanding, 2,194,735 as adjusted for the minimum aggregate
Offering, 3,054,735 as adjusted for the maximum aggregate
Offering..................................................... 20,547 21,947 30,547
Additional paid-in capital...................................... 2,079,687 2,673,287 6,964,687
Common stock subscribed......................................... 39,130 39,130 39,130
Accumulated other comprehensive income.......................... 54,345 54,345 54,345
Accumulated deficit............................................. (1,215,498) (1,215,498) (1,215,498)
Less stock subscriptions receivable................... (39,130) (39,130) (39,130)
----------- ----------- -----------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------------------------------------
As Adjusted As Adjusted
Actual MINIMUM OFFERING MINIMUM OFFERING
------ ---------------- ----------------
<S> <C> <C> <C>
Total stockholders' equity............................. 939,081 1,534,081 5,834,081
----------- ----------- -----------
Total capitalization.................................. $ 8,440,207 $ 8,935,207 $12,235,207
=========== =========== ===========
</TABLE>
18
<PAGE>
SELECTED FINANCIAL INFORMATION
(dollars in thousands, except per share data)
The following selected financial information is qualified by reference to,
and should be read in conjunction with, the Company's financial statements and
related notes thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" contained elsewhere herein. The selected
financial information presented below is not necessarily indicative of the
future results of operations or financial performance of the Company. See "RISK
FACTORS." The selected financial information as of and for the years ended
December 31, 1996 and 1997 is derived from the audited financial statements of
the Company, and the selected financial information presented as of and for the
nine months ended September 30, 1997 and 1998 is derived from the unaudited
financial statements of the Company. In the opinion of management of the
Company, the unaudited financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the
information set forth herein. The pro forma financial information gives effect
to the acquisition of BCLIC described under "UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OEPRATIONS." This historical and pro forma financial data should be
read in conjunction with the Consolidated Financial Statements of the Company
and the related notes thereto and the pro forma financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, Nine Months
---------------------------------------- -------------------------
HISTORICAL PRO Forma (1) ENDED SEPTEMBER 30,
---------- ------------- -------------------
1996 1997 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.............. $ 1,270 $ 782 $ 1,021 $ 610 $ 620
Loss before income taxes and
minority interest........ (374) (270) (557) (171) (446)
Net loss.................... (297) (269) (556) (180) (443)
Net loss per share.......... (.18) (.14) (.28) (.10) (.22)
Shares used in computation
(2)........................ 1,638,235 1,893,367 1,993,367 1,878,507 2,044,955
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF SEPTEMBER 30,
-------------------------------- ---------------------
Historical PRO FORMA (1) 1997 1998
---------- ------------- ---- ----
<S> <C> <C> <C> <C>
Balance Sheet Data:
Invested assets................................. $4,039 $4,853 $4,225 $5,802
Total assets.................................... 6,279 8,330 6,214 8,440
Total policy liabilities........................ 4,445 5,402 4,323 5,988
Stockholders' equity............................ 339 1,338 376 939
</TABLE>
- -------------------------
19
<PAGE>
(1) The amounts presented "pro forma" are calculated as if the BCLIC
acquisition was completed as of January 1, 1997 for the statement of
operations data and December 31, 1997 for the balance sheet data.
(2) All share amounts used in computation of per share data reflect the 5-for-2
stock split effected in September 1998.
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated statement of operations
gives effect to the acquisition of BCLIC as if the acquisition had occurred as
of January 1, 1997. This statement is based on available information and on
assumptions management believes are reasonable and that reflect the effects of
the transaction described above. Such statement is provided for informational
purposes only and should not be construed to be indicative of the Company's
consolidated results of operations had this transaction been consummated on the
date assumed and does not in any way represent a projection or forecast of the
Company's consolidated results of operations for any future date or period. The
unaudited pro forma consolidated statement of operations should be read in
conjunction with the notes thereto, the audited Consolidated Financial
Statements of the Company, together with the related notes and report thereon,
the unaudited consolidated statements of the Company included elsewhere in this
Prospectus and with the information set forth under "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION" and "BUSINESS."
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
--------------------------
SUMMIT LIFE
CORPORATION
AND PRO FORMA
SUBSIDIARIES BCLIC ADJUSTMENTS PRO FORMA
------------ -------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Insurance premiums and other considerations $ 8,108 $ 164,503 $ - $ 172,611
Investment income 490,184 72,713 - 562,897
Net realized gains on sale of investments 14,275 1,368 - 15,643
Mortgage loan closing and funding income and
related fees 237,610 - - 237,610
Other 31,819 - - 31,819
---------- ------------- ----------- ----------
781,996 238,584 - 1,020,580
Benefits, losses, and expenses
Policy benefits - 168,739 - 168,739
Increase (decrease) in policy reserves 263,318 (358,259)(6) 95,000(1) 59
Interest expense 131,052 - - 131,052
Mortgage loan closing, and related expenses 60,357 - - 60,357
Taxes, licenses, and fees 18,572 - - 18,572
Depreciation and amortization 69,151 - - 69,151
Amortization of deferred policy acquisition costs
and value of purchased insurance business - 93,599(6) 220,000(1) 313,599
General, administrative, and other operating 509,871 305,794 -(2) 815,665
---------- ------------- ----------- ----------
1,052,321 209,873 315,000 1,577,194
---------- ------------- ----------- ----------
Earnings (loss) before income taxes (270,325) 28,711 (315,000) (556,614)
Income tax provision 968 - -(3) 968
---------- ------------- ----------- ----------
NET EARNINGS (LOSS) $ (269,357) $ 28,711 $ (315,000) $ (555,646)
========== ============= =========== ==========
Basic and fully diluted loss per common share $ (.14) $ (.28)
========== ==========
Weighted average common shares outstanding (5) 1,893,367 100,000(4) 1,993,367
========== =========== ==========
</TABLE>
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(1) Reflects reduction in BCLIC's policy reserve decrease and amortization of
value of purchased insurance business assuming purchase accounting
assumptions were applied to policies in force at January 1, 1997. Under
purchase accounting, policy reserves and value of purchased insurance
business are computed using assumptions as to investment yields, mortality,
morbidity, and withdrawals at the acquisition date. For purposes of the pro
forma, management established the purchase accounting assumptions they
believe to be reasonable for periods subsequent to acquisition, and applied
these assumptions to the in-force policies as of January 1, 1997. For pro
forma purposes, the numerous surrenders in 1997, as discussed in footnote 6
below, resulted in a decrease in policy reserves of approximately $263,000
and amortization of value of purchased insurance business of approximately
$315,000. Management believes the assumptions established at acquisition are
reasonable for subsequent periods and that the pro forma results for 1997
should not be considered indicative of future operating results.
(2) No pro forma adjustments have been made to give effect to actions taken by
management after the acquisition of BCLIC; however, certain employee and
consulting arrangement terminations are expected to reduce general,
administrative, and other operating expenses by approximately $69,000,
annually.
(3) Due to losses and net operating loss carryforwards, no income tax benefits
have been included.
(4) To reflect the issuance of 40,000 shares of Class A Common Stock (100,000
shares, as adjusted for the 5-for-2 stock split, discussed below) in
exchange for 100% of the outstanding common stock of BCLIC.
(5) Adjusted for a 5-for-2 stock split effected in September 1998.
(6) During 1997, BCLIC had a decrease in policy reserves of $358,259 and
amortization of deferred policy acquisition costs of $93,599. The
significant factors giving rise to these items are as follows:
. In addition to normal nonforfeiture provisions which allow a
policyholder to surrender their policy for its cash surrender value or
convert to reduced paid-up or extended term coverage, a significant
number of policies existing at December 31, 1996 contained a feature
which provided that after paying premiums on the policy for eight years
the policyholder could elect to continue paying premiums and the death
benefit coverage would double or 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. Management believes that the nature of BCLIC's notification
in 1997 encouraged policy surrender rather than policy continuation,
thus resulting in the large number of policies surrendered. As a result,
total policy counts went from 709 at December 31, 1996 to 576 at
December 31, 1997.
While policy surrenders are affected by many factors, including agent
quality, marketing, characteristics of the insureds, premium levels,
cash values, inflation, interest rates, and the general state of the
economy, since SLC's acquisition of BCLIC, management has encouraged
policy continuation and believes that surrenders will be down
significantly in 1998 and future periods.
. The actuarial methodology used for determining reserves and deferred
policy acquisition costs in the historical financial statements of BCLIC
follow SFAS 60 which requires use of assumptions applicable at the time
the insurance contracts were issued. Such assumptions did not anticipate
the numerous surrenders that occurred in 1997 and, in accordance with
SFAS 60, the variations from the original assumptions were recognized
when realized, i.e., in 1997.
22
<PAGE>
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, 1996 and 1997 and for the nine months ended
September 30, 1997 and 1998. 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 discussed in
"RISK FACTORS" section herein. The following discussion and analysis should be
read in conjunction with the discussion about such risk factors and the
financial statements of the Company and the notes related thereto included
elsewhere in this Prospectus.
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. Each of these
operations is reported as a separate business segment in the Company's financial
statements included elsewhere in this Prospectus.
OPERATING DATA
The following table sets forth selected information regarding operating
results for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- -------------------------------------
1996 1997 1997 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
(in thousands)
STATEMENT OF OPERATIONS DATA:
Revenues $1,269 $ 782 $ 610 $ 620
Benefits, losses and expenses 1,643 1,052 781 1,067
Net loss (297) (269) (180) (443)
<CAPTION>
AS OF SEPTEMBER 30, 1998
-----------------------------------------------------------
AS ADJUSTED (1)
-------------------------------------------
ACTUAL MINIMUM OFFERING MAXIMUM OFFERING
------ ---------------- ----------------
<S> <C> <C> <C>
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $1,349 $1,844 $ 5,144
Total assets 8,440 8,935 12,235
Total liabilities 7,501 7,401 6,401
Stockholders' equity 939 1,534 5,834
</TABLE>
- -------------------------
(1) Gives effect to the sale of the minimum and maximum number of shares of
Common Stock offered hereby, and the application of the estimated proceeds
therefrom. See "USE OF PROCEEDS" and "CAPITALIZATION."
23
<PAGE>
RESULTS OF OPERATIONS
Recent Developments
In the fourth quarter of 1997, the Company signed a definitive agreement to
acquire BCLIC from its parent company, Benefit Capital Investment Company. As a
result of the acquisition, which was consummated in January 1998, the Company
now markets its insurance products in the State of Louisiana.
In the fourth quarter of 1997, the Company merged Equity Mortgage Services,
Inc. ("Equity Mortgage") with and into the Company. Prior to the merger, Equity
Mortgage was a wholly owned subsidiary of the Company which engaged in mortgage
brokerage activities. Subsequent to the merger, the Company sold Equity
Mortgage's building and related real estate, resulting in a deferred gain of
approximately $80,000, and downsized the personnel associated with the Company's
mortgage brokerage activities. The merger, downsizing and building sale are
expected to result in annual savings of over $60,000 in expenses.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Assets/Liabilities/Stockholders' Equity. Total assets increased 18% for
the period ended December 31, 1997 over the comparable period 1996. Total
assets were $6,278,701 at December 31, 1997 compared to $5,336,026 at December
31, 1996. The increases were due to a continuing growth in the sales of the
Company's annuity and life products.
Total liabilities (primarily insurance reserves for future benefits)
increased 21% for the period ended December 31, 1997 over the comparable period
ending December 31, 1996. Total liabilities for the periods were $5,939,266 and
$4,894,033 respectively. A significant part of these increases represented
annuity reserves.
Total stockholders' equity decreased 23% for the period ended December 31,
1997 over the same period ended 1996, from $441,993 at December 31, 1996 to
$339,435 at December 31, 1997, respectively. The decrease was partially due to
increases in reserves and the Company's losses from downsized operations.
Average rate of return on investments, including cash and cash equivalents,
was approximately 10.4% for 1997 and 11.2% for 1996, while the average rate
credited to policyholder accounts was approximately 6.7% and 4.7%,
respectively.
At December 31, 1997, the Company's net deferred tax assets totaled $71,943
and related primarily to net operating loss carryforwards. Realization of net
operating carryforwards is dependent on generating sufficient future taxable
income. Management believes that the merger and downsizing of its mortgage
brokerage operation as well as the asset growth of subsidiary insurance
companies and the 1998 sale of Equity Mortgage's real estate at a taxable gain
of approximately $80,000 will generate future taxable income. Additionally, 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 mortgage segment of operations
decreased 65% for the period ended December 31, 1997 compared to the same period
ended December 31, 1996 primarily due to the Company downsizing its unprofitable
mortgage brokerage operations. The mortgage operation generated approximately
$681,523 in revenues during 1996 but generated only $237,610 in 1997 due to the
restructuring of the Company's mortgage operations and the general fluctuations
in the mortgage industry overall.
Revenues attributable to the life insurance segment decreased 94% from
$124,901 to $8,108 for the period ended December 31, 1997, compared to the same
period ended December 31, 1996. The decrease was due mainly to the change in
the types of insurance products sold by the Company, that is, 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. Premiums for certain annuities with
life contingencies, including selection of annuity settlement options with life
contingencies, are recognized as revenues when due. During 1997, the majority
of the insurance products sold by the Company consisted of deferred annuities;
the increase in premiums and deposits to policyholder account balances from
$958,121 to $1,178,983 for the comparable period reflects the increase 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
decreased 27%, from $270,836 to $198,918, for the period ended December 31, 1997
compared to the same period ended December 31, 1996, primarily due to a
reduction of such loans from $1,071,294 at December 31, 1996 to $909,743 at
December 31,
24
<PAGE>
1997. In conjunction therewith, interest expense on notes payable which are
collateralized by these loans decreased 38%, from $154,342 to $95,067, for the
same period primarily due to a reduction of these notes payable from $1,071,294
at December 31, 1996 to $909,743 at December 31, 1997.
Costs and Expenses. Total expenses decreased 36% from $1,643,677 to
$1,052,321 for the periods ended December 31, 1996 and 1997, respectively.
These reductions were a result of the Company's continued efforts to lower costs
of operations, and was accomplished primarily as a result of the downsizing of
the Company's mortgage operations, which reduced the related expenses by 69%
($250,000 in 1997 versus $800,000 in 1996). The Company anticipates higher
expenses in the first half of 1998 due to its acquisition of BCLIC, although
Management believes it can subsequently realize substantial cost savings over
prior BCLIC management through consolidation of back-office operations and
elimination of redundant administrative personnel.
Losses. The Company reported a decrease in loss before income tax of
28%, reporting a loss before income tax of $270,325 for the year ended December
31, 1997, compared to a loss before income tax of $373,957 for the year ended
December 31, 1996. The net loss of $269,357 for the 1997 fiscal year reflected
a 9% decrease from the net loss of $297,078 reported for the 1996 fiscal year.
The decrease in net loss was due in part to the Company's continued growth in
investment income and reduction of overhead costs.
The Company's loss per share decreased to $0.14 per share for the period
ended December 31, 1997, compared to a loss of $0.18 per share for the year
ended December 31, 1996. The weighted average shares outstanding for each
period, taking into the account the 5-for-2 stock split effected in September
1998, were 1,893,367 for 1997 and 1,638,235 for 1996.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Assets/Liabilities/Stockholders' Equity. Total assets were $6,213,655 at
September 30, 1997 compared to $8,440,207 at September 30, 1998, reflecting an
increase of 35%. The increase was due primarily to continuing growth in the
sales of the Company's products and the acquisition of BCLIC.
Total liabilities (primarily insurance reserves for future benefits) were
$5,838,142 at September 30, 1997 and $7,501,126 at September 30, 1998,
reflecting an increase of 28%.
Total stockholders' equity at September 30, 1998 was $939,081, compared
to $375,513 at September 30, 1997, reflecting an increase of approximately 150%.
The increase was attributable primarily to the Company's acquisition of BCLIC in
January 1998.
Revenue. Revenues increased 2% to $620,429 for the nine months ended
September 30, 1998 compared to $609,575 for the nine months ended September 30,
1997, due primarily to the Company downsizing its unprofitable mortgage
brokerage operations to better control costs. For the nine months ended
September 30, 1998, revenues from the Company's mortgage brokerage operations
and financing operations to medical receivables factoring entities totaled
approximately 15% and 25%, respectively of total revenues. Although revenues
from the Company's mortgage brokerage operations decreased to $92,660 for the
nine months ended September 30, 1998 compared to $205,745 for the previous
comparable period (approximately 55%), such operations, due to the
restructuring, returned to profitability for the nine months ended September 30,
1998.
Investment income from loans to medical receivable factoring entities
decreased 2%, from $156,145 to $153,747, for the nine months ended September 30,
1998 compared to the same period ended September 30, 1997. In conjunction
therewith, interest expense on notes payable which are collateralized by these
loans decreased 2%, from $78,073 to $76,873, for the same period.
Costs and Expenses. Total expenses increased 37% to $1,066,565 for the
nine months ended September 30, 1998 compared to $780,686 for the previous
comparable period, due to
25
<PAGE>
costs related to the Company's acquisition of BCLIC. The Company used the
purchase method of accounting in its acquisition of BCLIC, which requires that
the Company allocate a portion of the acquisition cost to value of purchased
insurance business. These costs are amortized over the life of the policies
acquired and resulted in amortization expense of nearly $174,000 for the first
nine months of 1998. Management does not believe this amortization expense is
representative of BCLIC's ability to retain its present book of business and
expects this expense to be substantially reduced in the future. BCLIC has
improved policy retention substantially with a decrease of in force policies of
3% in the first nine months of 1998, compared to a 19% decrease for all of 1997.
Excluding the BCLIC-associated costs, the Company's expenses actually decreased
slightly.
Net Loss. The Company reported a net loss of $443,377 for the nine
months ended September 30, 1998, compared to a net loss of $180,191 for the
comparative period in 1997. The increase in net loss was due primarily to costs
associated with the acquisition of BCLIC. Management expects such costs to be
reduced or non-recurring, as noted elsewhere in this analysis.
The Company's net loss per share increased to $0.22 per share for the
nine months ended September 30, 1998, compared to a net loss of $0.10 per share
in the comparable period of 1997. The weighted average shares for each period,
taking into the account the 5-for-2 stock split effected in September 1998, were
2,044,955 at September 30, 1998 and 1,878,507 at September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
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. See Footnote (6) to NOTES TO
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS, located elsewhere in
this Prospectus. 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.
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.
The Company believes that the net proceeds of this Offering will allow it
to continue to grow its asset base while maintaining surplus/liability ratios
within acceptable industry norms. Depending on the number of shares sold in this
Offering, the Company plans to use between $495,000 and $605,000, representing
approximately 83.19% and 22.04%, respectively, of the net proceeds therefrom to
fund its acquisition of Great Midwest. 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.
In 1997, the Company successfully converted $155,000 (100%) of its 8%
Convertible Debentures at a price of $1.30 per share. The Company has not paid
dividends to date and will not do so until declared by its Board of
Directors.
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.
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
26
<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.
BUSINESS
Certain statements contained herein relating to the Company's proposed
business strategy and expansion plans 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 the insurance
industry, the impact of competition and pricing, changing market conditions, the
risks detailed in the sections entitled "RISK FACTORS" and other risks detailed
throughout this Prospectus. These forward-looking statements represent the
Company's judgment as of the date of this Prospectus. The Company disclaims,
however, any intent or obligation to update these forward-looking statements.
As a result, the reader is cautioned not to place reliance on these forward-
looking statements.
GENERAL
The Company is an Oklahoma corporation formed in 1994. The Company
specializes in various segments of the insurance and financial services
industry. Through its three operating subsidiaries, the Company offers
individual life insurance and annuity products. The Company's subsidiaries
include SLAC, an Oklahoma corporation which underwrites, markets and distributes
various life insurance and annuity products to residents of Oklahoma; FBLIC, a
Texas corporation which underwrites, markets and distributes various life
insurance and annuity products to residents of Texas; and BCLIC, a Louisiana
corporation which underwrites, markets and distributes various life insurance
products to residents of Louisiana. SLAC was acquired by the Company in
September 1994 for cash consideration of $435,000. FBLIC was acquired by the
Company in October 1995 for cash consideration of $165,000. BCLIC was acquired
by the Company in January 1998, 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.
As of September 30, 1998, the Company had approximately 670 life insurance
policies and annuity contracts outstanding and individual life insurance in
force of approximately $27 million. As of September 30, 1998, the Company had
total assets of approximately $8.4 million and total stockholders' equity of
approximately $940,000.
In addition, the Company provides residential mortgage loan processing
services to individuals and also provides financing to certain medical
receivable factoring entities.
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
27
<PAGE>
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.
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 application and has no group underwriting or
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 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 monthly basis.
The Company has aggressively managed its cost structure, while realizing
certain operating efficiencies from reduced personnel and 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 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.
28
<PAGE>
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 5.45% to 8.45% at December
31, 1997. All of the Company's annuity products have minimum guaranteed
crediting rates of 3.0% for the life of the policy. At December 31, 1997, less
than 40% of the Company's in force annuity policies had rates credited for a
multi year 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 1997 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, 1997, 100% of the Company's annuity liabilities were subject to a surrender
charge of 6% or more.
Tax Qualified Annuities
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
competitive crediting interest rate 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 Simplified
Employee Pension Plans. Tax qualified retirement annuity values totaled almost
$1,050,000 or approximately 25% of the total annuities sold by the Company since
inception.
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.
Life Insurance
Term Life. The Company's subsidiaries offer a low cost 10 year level term
life insurance product 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
29
<PAGE>
continue to grow its premium revenues and surplus. This term product is 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 a certain amount of these
coverages will not be maintained, thereby negating the risk to the Company.
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 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.
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.
As of September 30, 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 September 30, 1998, the Company's largest
reinsurer, Optimum Re, accounted for approximately 49% of the $27 million of
total insurance in force.
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.
Mortgage Loan Processing Services
The Company acts as a broker and performs the marketing and sourcing
functions of loan origination, while unaffiliated, third-party mortgage lending
companies actually fund the mortgage loans and perform the underwriting
function. The Company's loan origination activities were originally conducted
through Equity Mortgage Services, Inc., which was merged with and into the
Company in 1997. All such operations currently are conducted by the parent
company, Summit Life Corporation. Although the Company's mortgage origination
activities are significantly downsized from previous levels, the Company
believes that the current level of such activities are consistent with its
overall business strategy and does not anticipate either further developing, or
discontinuing, such business.
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.
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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, 1997, the average gross yield of the Company's
invested assets was approximately 10.4% and the average credited rate was
6.7%.
The Company balances the duration of its invested assets with the expected
duration of benefit payments arising from insurance liabilities. At September
30, 1998, the adjusted modified duration of debt securities and short-term
investments was 6.8 years. At September 30, 1998, the duration of the Company's
insurance liabilities was 7.1 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.
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 this
Offering to pursue more small company acquisitions and purchases of profitable
blocks of business.
Since 1994, the Company has acquired three 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
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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 $1 million in 1997, with
assets growing from $1,032,000 in 1994 to approximately $8,400,000 at September
30, 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.
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On October 15, 1998, the Company executed a Stock Purchase Agreement to
acquire 100% of the common stock of Great Midwest, a Texas life insurance
company. The purchase price for the stock to be acquired will be based on
conditions existing at closing, but is estimated to be approximately $936,000,
payable approximately $605,000 in cash at the time of closing, with the
remaining amount payable in three equal annual installments. Depending on the
number of shares sold in this Offering, the Company plans to use between
$495,000 and $605,000 of the net proceeds therefrom to fund its acquisition of
Great Midwest. If the acquisition does not close, or if the Company has funds
remaining after it has expended offering proceeds in accordance with the uses of
proceeds described herein, the Company may use a portion of the remaining net
proceeds to acquire the assets of other insurance companies. Any decision to
make an acquisition will be dependent on consideration of a variety of factors,
including business prospects, purchase price and financial terms of the
transaction. With the exception of the acquisition of Great Midwest, the
Company has no agreements, understandings or arrangements with respect to any
other acquisition at this time. See "USE OF PROCEEDS."
Operations and Administration
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, actuarial services 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.
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 $40,000.
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 small independent
property and casualty agencies and "personal producing general agents"
("PPGA's"), including 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 corporation 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. However, the
Company plans to use a portion of the net proceeds of this Offering to add
additional distribution channels for SLAC, FBLIC and BCLIC throughout their
marketing territories. See "USE OF PROCEEDS."
COMPETITION
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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 arduous 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 rigorous as it is for assigning a Best's Rating. The FPR
is assigned to small or new companies which do not meet the criteria required
for a Best's Rating. Both ratings provide an overall opinion of an insurance
company's ability to meet its obligations to policyholders. See "GLOSSARY OF
SELECTED TERMS" under the caption "A.M. Best." The Company is still too small
to obtain a letter rating.
REGULATION AND TAXATION
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 which 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 ever
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
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<PAGE>
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
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.
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FACILITIES
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 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. Both SLAC and FBLIC
conduct their operations from the Company's office in Oklahoma City.
EMPLOYEES
As of September 30, 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.
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and key managers of the Company and their
ages as of August 31, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James L. Smith................................ 59 Chairman of the Board of Directors and Chief
Executive Officer
Charles L. Smith.............................. 39 President, Chief Operating Officer and Director
Quinton L. Hiebert............................ 37 Vice President, Chief Financial Officer and
Secretary
Gary L. Ellis................................. 53 Vice President, Mortgage Operations
Randel Beach.................................. 43 Director and President of BCLIC
Dean Brown.................................... 72 Director
Thomas D. Sanders............................. 57 Director
</TABLE>
James L. Smith served as Chairman of the Board, President and Chief
Executive Officer from the Company's inception in 1994 until April 1998, at
which time he was elected Chairman of the Board and Chief Executive Officer.
Mr. Smith has served as Chairman of the Board and President of the Smith Agency,
an Oklahoma licensed insurance agency since 1980. Mr. Smith earned the
designation of Chartered Life Underwriter and Chartered Financial Consultant
from the American College in Bryn Mwar, Pennsylvania, and is registered with the
NASD as a registered representative. Mr. Smith is the father of Charles L.
Smith.
Charles L. Smith served as Director, Vice President, Secretary and
Treasurer from the Company's inception in 1994 until April 1998, at which time
he was elected President, Chief Operating Officer and a director. Mr. Smith
served as Chairman and President of Charles L. Smith and Associates, Inc. from
1989 until April 1994, when it merged with the Smith Agency. Mr. Smith is Vice
President and a director of the Smith Agency. Mr. Smith has been involved in
the insurance industry for over 16 years. Mr. Smith is also registered with the
NASD as a registered representative. Mr. Smith is the son of James L. Smith.
Quinton L. Hiebert has been employed by the Company as Chief Financial
Officer since March 1996, and was additionally elected Vice President in April
1998. From October 1989 to March 1996, he was employed as Chief Financial
Analyst at the Oklahoma Department of Insurance. Mr. Hiebert holds a bachelors
degree from Bethel College, Kansas and earned his MBA from Emporia State
University, Kansas. Mr. Hiebert is a CPA.
Gary L. Ellis has, since 1994, served the Company in several positions.
From 1994 until the merger of Equity Mortgage into the Company in 1997, he
served variously as Equity Mortgage's Vice President and President. Subsequent
to the Equity Mortgage merger, he was appointed the Company's Vice
PresidentMortgage Operations. Since 1988, Mr. Ellis has also owned and operated
Gary L. Ellis & Associates, which provides tax and accounting services. Mr.
Ellis graduated from Oklahoma University with a bachelors degree.
Randal M. Beach has served the Company as director since January 1998.
Since November 1995, he has served as President of BCLIC. From April 1992 to
January 1995, Mr. Beach was the Deputy Commissioner for Receivership for the
Louisiana Department of Insurance. Subsequent to his tenure with the Louisiana
Department of Insurance and prior to his employment by BCLIC, Mr. Beach was
engaged in the private practice of law. He earned his bachelors degree from
Louisiana State University and received a Juris Doctor from Southern University
School of Law.
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M. Dean Brown has served as director since April 1997. For at least five
years prior to his retirement in December 1997, he practiced law at the law firm
of Green, Brown and Stark, an Oklahoma City law firm. He holds a bachelors
degree from the University of Oklahoma and earned his Juris Doctor from Oklahoma
City University. Mr. Brown is also a CPA.
Thomas D. Sanders has served as director since April 1997. He served as the
Executive Vice President of Marketing for the Lomas Life Group from 1986 to 1990
and as Executive Vice President for Union Life Insurance Company between 1978
and 1990. Mr. Sanders currently serves as Chief Executive Officer and Director
of ReUnion Marketing, Inc. He is a graduate from Oklahoma State University.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee's functions include: (i) reviewing and recommending to the
Board of Directors (subject to stockholder approval) the independent auditors
selected to audit the Company's financial statements, including the review and
approval of the fees charged for all services by the independent auditors; (ii)
reviewing the scope of the annual audit plan; (iii) reviewing the audited
financial statements of the Company; (iv) reviewing the management letter
comments from the Company's independent auditors, including management's
responses and plans of action; (v) reviewing from time to time the Company's
general policies and procedures with respect to auditing, accounting and the
application of resources; (vi) reviewing any other matters and making special
inquiries and investigations referred to it by the Board of Directors; and (vii)
making other recommendations to the Board of Directors as the committee may deem
appropriate. The Compensation Committee's functions include determining base
salaries, annual incentive bonus awards and other compensation awards to the
executive officers of the Company. Bonus amounts earned will be based on the
attainment of budgeted performance and asset quality goals, as determined by an
objective review of the degree of attainment of such goals, as well as both an
objective and subjective review of the respective executive officer's
contribution thereto. Individual goals in each case will be established by the
Board of Directors in consultation with the particular executive concerned. The
Compensation Committee has not determined to award any bonuses or other
executive awards for the current fiscal year.
The members of both the Audit Committee and Compensation Committee are M.
Dean Brown, James L. Smith and Thomas D. Sanders. Consistent with the
requirements of the Nasdaq, on which the Company intends to seek the listing of
its Common Stock, the Company intends to maintain at least two independent,
nonaffiliated directors on its Board.
DIRECTOR COMPENSATION
Each member of the Board is paid an annual stipend of $1200 and a fee of
$100 for each Board of Directors meeting attended. All directors will receive
reimbursement of reasonable expenses incurred in attending Board and Committee
meetings and otherwise carrying out their duties.
EXECUTIVE COMPENSATION
Set forth in the following table is information as to the compensation paid
to the Company's Chief Executive Officer for each of the three years ended
December 31, 1997. No officer or director of the Company received, during any
of such periods, total compensation in excess of $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION YEAR SALARY OTHER
- --------------------------- ---- ------ -----
<S> <C> <C> <C>
James L. Smith, Chairman of the Board
and Chief Executive Officer 1997 $9,770 $3,000 (2)
1996 -- (1) --
1995 -- (1) --
</TABLE>
38
<PAGE>
(1) During 1995 and 1996, Mr. Smith was not paid a salary for his services as
the then President and Chief Executive Officer of the Company; during this
time period, Mr. Smith acted primarily in an advisory capacity and his time
commitment to the Company was minimal.
(2) Represents country club dues.
39
<PAGE>
EMPLOYMENT AGREEMENTS
In April 1997, the Company entered into employment agreements with James L.
Smith and Charles L. Smith, the Company's Chief Executive Officer and President,
respectively. 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. For 1998, the Board of
Directors has approved base salaries to James L. Smith of $12,000, and to
Charles L. Smith of $72,000. The amount of any bonus compensation payable to
James L. Smith or Charles L. Smith is determined by the Compensation Committee
of the Board of Directors, in accordance with criteria set by such committee; no
bonus compensation has been granted for 1998.
The agreements may be terminated by mutual agreement, 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 agreement less amounts previously paid, but not less than
$360,000 for Charles L. Smith and $450,000 for James L. Smith.
CERTAIN TRANSACTIONS
The Company pays sales commissions to the Smith Agency, an insurance agency
owned by Charles L. Smith and James L. Smith, in connection with sales made by
such agency of life insurance policies and annuity contracts. Existing
regulatory requirements require that commissions payable to the Smith Agency not
exceed 75% of commissions which would be payable to non-affiliated parties. The
Smith Agency was paid $5,800 and $4,000 in sales commissions during the year
ended December 31, 1997 and the nine months ended September 30, 1998,
respectively. See "BUSINESS."
The Company and FBLIC share office space with SLAC, which owns the building
at the Company's principal place of business. The building was originally
purchased from Charles L. Smith in 1995 for $75,000. The $75,000 purchase price
was paid $50,000 in cash, $15,000 through the settlement of a stock subscription
note for such amount owed by Mr. Smith to the Company, with the remaining amount
deemed satisfied by the issuance to Mr. Smith of 2,000 shares of Class A Common
Stock (10,000 shares taking into account subsequent stock splits).
In April 1995, the Company acquired 100% of the outstanding stock of CLS
Enterprises, Inc. ("CLS Enterprises"), an entity owned by James L. Smith and
Charles L. Smith, for an aggregate consideration of $142,000. Of such
consideration, $20,000 was paid in cash, and the remaining $122,000 was paid
through the issuance by the Company of $122,000 principal amount of convertible
debentures issued to the two CLS stockholders. The Company believes that the
consideration paid for the stock of CLS Enterprises was fair and that the stock
purchase agreement for the acquisition of CLS Enterprises was on terms no less
favorable to the Company than the Company could have obtained from non-
affiliated parties. In June 1996, Messrs. James L. Smith and Charles L. Smith
exercised their conversion rights associated with the debentures and were issued
an aggregate 40,664 shares of Class A Common Stock. CLS Enterprises was merged
into the Company effective December 31, 1996.
During 1998, the Company funded a residential mortgage for Charles L. Smith
in the amount of $120,000, secured by a first security interest in such
residence. The promissory note is for a three-year term at an annual interest
rate of 6%, payable in monthly installments of principal and interest of $719,
with the principal balance due at the note's maturity in 2001.
Both James L. Smith and Charles L. Smith, as the original founders of the
Company, are considered "promoters" of the Company as such term is defined under
the Securities Act. The Company believes that each of the transactions entered
into between the Company and such persons were on terms no less favorable to the
Company as those generally available from unaffiliated third parties. All such
transactions were unanimously approved by the Board of Directors which,
subsequent to April 1997, included two independent, nonaffiliated directors.
Such independent directors did not have any interest in the transactions
approved and had access, at the Company's expense, to the Company's or
independent legal counsel. All future material affiliated transactions and loans
will be made or entered into on terms that are no less favorable to the Company
than those that can be obtained from unaffiliated third parties and, in any
event, must be approved by a majority of the Company's independent directors who
do not have any interest in the transactions approved and have access, at the
Company's expense, to the Company's or independent legal counsel.
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of August 31, 1998, and as
adjusted to reflect the sale of the minimum and maximum number of shares of
Common Stock offered hereby, concerning the beneficial ownership of Common Stock
by each of the Company's directors, each executive officer named in the table
under the heading "MANAGEMENT-Directors, Executive Officers and Key Employees,"
and all directors and executive officers of the Company as a group, and by each
person who is known by the Company to own more than 5% of the outstanding shares
of Common Stock. Unless otherwise indicated, the beneficial owner has sole
voting and investment power with respect to such stock.
<TABLE>
<CAPTION>
PERCENT OF CLASS BENEFICIALLY OWNED
-------------------------------------------------
AFTER OFFERING
----------------------------
NAME AND ADDRESS SHARES
OF BENEFICIAL HOLDER/(1)/ BENEFICIALLY OWNED PRIOR TO OFFERING MINIMUM MAXIMUM
- ------------------------- ------------------ ----------------- --------- ---------
<S> <C> <C> <C> <C>
James L. Smith* /(2)/ 683,185 33.25% 31.13% 22.37%
Charles L. Smith* /(2)/ 683,185 33.25% 31.13% 22.37%
Randall M. Beach * 820 0.04% 0.04% 0.03%
Dean Brown * 100,963 4.91% 4.60% 3.31%
Gary L. Ellis 1,533 0.07% 0.07% 0.05%
Quinton L. Hiebert 4,750 0.23% 0.22% 0.16%
Thomas D. Sanders * 2,318 0.11% 0.11% 0.08%
All executive officers
and directors as a group
(7 persons) 1,476,754 71.86% 67.30% 48.37%
</TABLE>
- --------------------------
* Director
(1) Unless otherwise noted, the Company believes that each person named in the
table has sole voting and investment power with respect to all shares
beneficially owned by such person.
(2) Address is c/o Summit Life Corporation, 3021 Epperly Drive, P.O. Box 15808,
Oklahoma City, Oklahoma 73155.
DESCRIPTION OF CAPITAL STOCK
In September 1998, the Company amended its Certificate of Incorporation to
give effect to certain matters approved by the Company's Board of Directors in
April 1998. The amendment, among other things, eliminated the Class B Common
Stock, redesignated the Class A Common Stock as, simply, "Common Stock," changed
the par value of the Common Stock from $.50 to $.01 per share and increased the
authorized number of shares of Common Stock from 2,000,000 to 5,000,000.
Additionally, the Certificate of Incorporation was further amended to create a
new class of preferred stock. The authorized capital stock of the Company
subsequent to the amendments consists of (i) 5,000,000 shares of Common Stock,
having a par value of $.01 per share, and (ii) 5,000,000 shares of Preferred
Stock, having a par value of $.001 per share. Immediately prior to this
Offering, 2,054,735 shares of Common Stock were issued and outstanding, and no
shares of Preferred Stock were issued and outstanding. At September 30, 1998,
there were approximately 30 stockholders of record of the Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters submitted to a vote of stockholders. There is no cumulative voting with
respect to the election of directors. Accordingly, holders of a majority of the
shares entitled to vote in any election of directors may elect all of the
directors standing for election. Subject to preferences that may be applicable
to any then outstanding class of preferred stock, the holders of Common Stock
are entitled to receive such dividends, if any, as may be declared by the Board
of Directors from time to time out of legally available funds. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets of the Company that are legally
available for distribution, after payment of all debts and other liabilities and
subject to the prior rights of holders of any class of preferred stock then
outstanding. The holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The rights, preferences and privileges of
holders of Common Stock are subject to the rights of the holders of shares of
any series of preferred stock that the Company may issue in the future.
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<PAGE>
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time in one or more
series with such designations, voting powers, if any, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations and restrictions thereof, as are determined by resolution of the
Board of Directors of the Company. The issuance of preferred stock, while
providing flexibility in connection with possible financings, acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power of holders of Common Stock and, under certain circumstances, be used as a
means of discouraging, delaying or preventing a change in control of the
Company. Currently, the Company has no shares of Preferred Stock outstanding. No
Preferred Stock of the Company will be issued to officers, directors or other
affiliates of the Company (including, for purposes of such restriction, any 5%
holders of the Company's Common Stock), except on the same terms and conditions
as are offered to persons not so affiliated.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and By-
laws may be deemed to have anti-takeover effects and may delay, defer or prevent
a tender offer or takeover attempt that a stockholder might consider to be in
such stockholder's best interest, including those attempts that might result in
a premium over the market price for the shares held by stockholders.
Classified Board. The Company's By-laws provide that (i) the Board of
Directors is divided into three classes of as equal size as possible, (ii) the
number of directors is to be fixed from time to time by the Board of Directors,
and (iii) the term of office of each class expires in consecutive years so that
each year only one class is elected. These provisions may render more difficult
a change in control of the Company or the removal of incumbent management.
No Stockholder Action by Written Consent; Special Meetings. The Company's
Certificate of Incorporation provides that no action shall be taken by
stockholders except at an annual or special meeting of stockholders, and
prohibits action by written consent in lieu of a meeting. The Company's By-laws
provides that, unless otherwise proscribed by law, special meetings of
stockholders can only be held pursuant to a resolution of the Board of
Directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The By-laws establish an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors as well as for other
stockholder proposals to be considered at stockholders' meetings.
Notice of stockholder proposals and director nominations must be timely
given in writing to the Secretary of the Company prior to the meeting at which
the matters are to be acted upon or Directors are to be elected. In all cases,
to be timely, notice must be received at the principal executive offices of the
Company not less than 40 days before the meeting, or, if on the day notice of
the meeting is given to the stockholders less than 45 days remain until the
meeting, (i) five days after notice is given but not less than five days prior
to the meeting in the case of stockholder proposals, and (ii) 10 days after
notice is given in the case of director nominations.
Notice to the Company from a stockholder who proposes to nominate a person
at a meeting for election as a director must contain all information about that
person as would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee (including such person's
written consent to serve as a Director if so elected) and certain information
about the stockholder proposing to nominate that person. Stockholder proposals
must also include certain specified information.
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<PAGE>
These limitations on stockholder proposals do not restrict a stockholder's
right to include proposals in the Company's annual proxy materials pursuant to
rules promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
Section 1090.3 of the OGCA. Section 1090.3 of the OGCA prohibits a
publicly held Oklahoma corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation, or (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date the business combination is
approved by the board of directors and by the affirmative vote of at least 66-
2/3% of the outstanding voting stock which is not owned by the interested
stockholder. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. The effect of such statute may be to discourage
certain types of transactions involving an actual or potential change in control
of the Company.
TRANSFER AGENTS, WARRANT AGENT AND REGISTRAR
The transfer agent for the Common Stock is UMB Bank, National Association,
Kansas City, Missouri.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, and assuming the maximum number of
shares offered is sold, the Company will have outstanding an aggregate of
3,054,735 shares of Common Stock. Of such shares, the 1,000,000 shares sold
pursuant to the Offering and 508,652 previously issued shares will be tradable
without restriction by persons other than "affiliates" of the Company. An
aggregate 1,316,370 shares held by officers and directors of the Company (the
"Promotional Shares") are subject to a Promotional Shares Lock-In Agreement with
the Oklahoma Department of Securities and, pursuant thereto, may not be released
for sale until one year from the completion date of the Offering after which
time the Promotional Shares may be released in quarterly increments of 2 1/2%
per quarter, with the remainder of such Promotional Shares available for sale on
the anniversary of the second year from the completion of the Offering. The
remaining 229,713 shares of Common Stock to be outstanding after the Offering
are "restricted securities" within the meaning of Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act") and may not be publicly resold,
except in compliance with the registration requirements of the Securities Act or
pursuant to an exemption from registration, including that provided by Rule 144
promulgated under the Securities Act. Of such 229,713 shares, 100,000 shares
will be available for limited resale pursuant to the volume limitations of Rule
144 beginning in January 1999 and unlimited resale in January 2000.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who beneficially owns
Restricted Securities with respect to which at least two years have elapsed
since the later of the date the shares were acquired from the Company or from an
affiliate of the Company, is entitled to sell, within any three month period, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock of the Company, or (ii) the average weekly
trading volume in Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner-
43
<PAGE>
of-sale provisions and notice requirements, and to the availability of current
public information about the Company. A person who is not an affiliate, has not
been an affiliate within 90 days prior to sale and who beneficially owns
Restricted Securities with respect to which at least two years have elapsed
since the later of the date the shares were acquired from the Company or from an
affiliate of the Company, is entitled to sell such shares under Rule 144(k)
without regard to any of the volume limitations or other requirements described
above.
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market price of Common Stock. Nevertheless, sales of significant amounts of
Common Stock could adversely affect the prevailing market price of Common Stock,
as well as impair the ability of the Company to raise capital through the
issuance of additional equity securities. There currently is no public market
for the Common Stock being offered, and no assurance can be given that a market
will develop. The Company will apply to list the Common Stock on the Nasdaq.
If a trading market does develop for the Common Stock, the prices may be highly
volatile. In addition, if a market for the Common Stock does develop, and the
Common Stock is traded below certain prices, many brokerage firms may not effect
transactions in the Common Stock, and sales of the Common Stock will be subject
to Commission Rule 15g-9. In the event that the Company is unable to meet the
Nasdaq's 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. If a market does not develop
for the Common Stock, it may be difficult or impossible for purchasers to resell
the Common Stock. There can be no assurance that any of the Common Stock can
ever be sold at the offered price or at any price.
PLAN OF DISTRIBUTION
GENERAL
The Company is offering for sale a minimum of 140,000 shares and a maximum
of 1,000,000 shares of its Common Stock at a price of $5.00 per share. No
person or entity may purchase fewer than 100 shares of Common Stock in the
Offering, unless the Company, in its sole discretion, accepts a subscription for
a lesser number of shares. The Common Stock has not been registered for sale in
any states other than Oklahoma and Louisiana. Consequently, the Common Stock
may not be offered or sold in any states other than Oklahoma and Louisiana.
Subscriptions to purchase shares of Common Stock will be received until
midnight, Oklahoma City, Oklahoma time, on October 31, 1999, unless all of the
shares to be offered are earlier sold or a minimum of at least 140,000 shares
has not been sold by April 30, 1999. 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, however, will the Offering extend beyond
October 31, 1999. See "Conditions to the Offering and Release of Funds"
below.
Following acceptance by the Company, subscriptions are binding on
subscribers and may not be revoked by subscribers except with the consent of the
Company. In addition, the Company reserves the right to cancel accepted
subscriptions at any time and for any reason until the proceeds of the Offering
are released from escrow (as discussed in greater detail in "Conditions to the
Offering and Release of Funds" below), and the Company reserves the right to
reject, in whole or in part and in its sole discretion, any subscription. The
Company may, in its sole discretion, allocate shares of Common Stock among
subscribers in the event of an over-subscription for the shares to be offered in
the Offering.
The shares of Common Stock are being offered directly to potential
subscribers on a direct participation basis by the Company. Offers and sales
will be made only through directors and executive officers of the Company, none
of whom will receive any commissions or other form of remuneration in connection
with the sale of shares. It presently is anticipated that the Company's officers
and directors, other than James L. Smith, will be the only persons engaged in
such selling efforts, which will be directed primarily to existing stockholders
of the Company, as well as to the Company's customer base.
Certificates representing shares of Common Stock, duly authorized and fully
paid, will be issued as soon as practicable after subscription funds are
released to the Company from the subscription escrow account.
44
<PAGE>
CONDITIONS TO THE OFFERING AND RELEASE OF FUNDS
Subscription proceeds accepted by the Company for the first 140,000 shares
subscribed for in the Offering will be promptly deposited in an escrow account
with UMB Oklahoma Bank, National Association (the "Escrow Agent"), until the
conditions to the Offering have been satisfied or the Offering has been
otherwise terminated. The Offering will be terminated, no shares will be issued
and no subscription proceeds will be released from escrow to the Company unless
on or before April 30, 1999, the Company has accepted subscriptions and payment
in full for an aggregate of at least 140,000 shares. If a minimum of at least
140,000 shares has not been sold by April 30, 1999, the Company will promptly
return all investors' funds, with interest. Interest on subscriptions is not
otherwise payable. Notwithstanding anything to the contrary contained herein,
any subscription proceeds accepted after the Company has accepted subscriptions
for the initial 140,000 shares, but before this Offering is terminated, will not
be deposited in the escrow account but will be available for immediate use by
the Company. 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, however, will the Offering extend beyond October 31, 1999.
The Escrow Agent has not investigated the desirability or advisability of
an investment in shares of Common Stock by prospective investors and has not
approved, endorsed or passed upon the merits of an investment in such shares.
The Company may direct the Escrow Agent to invest subscription funds held in
escrow in short-term United States Treasury securities, banker's acceptances,
federal funds, insured or fully collateralized certificates of deposit and/or
insured money market accounts (including those of the Escrow Agent) until
released from escrow. In no event will the subscription proceeds held in escrow
be invested in instruments that would mature after the termination of the
Offering. Management presently expects that all subscription funds held in
escrow will be invested in short-term United States Treasury securities.
HOW TO SUBSCRIBE
Shares may be subscribed for by mailing or delivering a completed and
executed Subscription Agreement in the form attached hereto as Exhibit A, to the
Company. If mailed, completed and executed Subscription Agreements, along with
the proper form of payment, as discussed herein, should be sent first class mail
postage prepaid, to Summit Life Corporation , P.O. Box 15808, Oklahoma City,
Oklahoma, 73155. If delivered by hand, completed and executed Subscription
Agreements, along with the proper form of payment, should be delivered to the
Company at 3021 Epperly Drive, Oklahoma City, Oklahoma, 73155. Subscribers
should retain a copy of the completed Subscription Agreement and form of payment
for their records. The subscription price is due and payable when the
Subscription Agreement is mailed or delivered to the Company. Payment must be
made in United States dollars by cash or by check, bank draft or money order
drawn to the order of "Summit Life Corporation" in the amount of $5.00
multiplied by the number of shares subscribed for. Any subscriber who intends
to purchase shares through a self-directed retirement plan should contact the
Company at (405) 677-0781 for directions as to how to subscribe and pay for
shares.
LEGAL OPINIONS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Day, Edwards, Federman, Propester &
Christensen, P.C., Oklahoma City, Oklahoma.
45
<PAGE>
EXPERTS
The financial statements of Summit Life Corporation and Subsidiaries and
Benefit Capital Life Insurance Company, as of and for the year ended December
31, 1997, included in this prospectus have been audited by Grant Thornton LLP,
independent certified public accountants, as stated in their reports appearing
herein. The financial statements of Summit Life Corporation and Subsidiaries,
except Equity Mortgage Services, Inc., as of and for the year ended December 31,
1996, included in this prospectus have been audited by Grant Thornton LLP as
stated in their report appearing herein. Such financial statements are included
herein in reliance upon the authority of such firm as experts in accounting and
auditing in giving such reports. The financial statements of Equity Mortgage
Services, Inc. as and for the year ended December 31, 1996 have been audited by
Hamilton & Associates, Inc as stated in their report, which report is included
as an exhibit to the Registration Statement of which this Prospectus is a
part.
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<PAGE>
GLOSSARY OF SELECTED TERMS
As used in this Prospectus, the terms defined below have the meanings
assigned them in this section.
A.M. BEST. A.M. Best Company, Inc. A.M. Best financial condition ratings are
opinions of an insurance company's financial strength, operating performance and
ability to meet its obligations to policyowners. Such ratings are based upon a
comprehensive review of a company's financial performance, which is supplemented
by certain data, including responses to A.M. Best's questionnaires, quarterly
NAIC filings, state insurance department examination reports, loss reserve
reports, annual reports and reports filed with state insurance departments.
A.M. Best undertakes a quantitative evaluation based on profitability, leverage
and liquidity and a qualitative evaluation based upon the composition of a
company's book of business or spread of risk, the amount, appropriateness and
soundness of reinsurance, the quality, diversification and estimated market
value of its assets, the adequacy of its loss reserves and policyowners' surplus
and the experience and competence of its management. 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
rigorous as it is for assigning a Best's Rating. The FPR is assigned to small
or new companies which do not meet the criteria required for a Best's Rating.
Both ratings provide an overall opinion of an insurance company's ability to
meet its obligations to policyholders. A.M. Best Company, Inc. uses the
following rating scale:
<TABLE>
<CAPTION>
BEST'S RATINGS BEST'S FPR
-------------- ----------
<S> <C> <C> <C>
A++ and A+.............................. Superior FPR 9................. Very Strong
A and A-................................ Excellent FPR 8 and 7........... Strong
B++ and B+.............................. Very Good FPR 6 and 5........... Good
B and B-................................ Fair FPR 4................. Fair
C++ and C+.............................. Marginal FPR 3................. Marginal
C and C-................................ Weak FPR 2................. Weak
D....................................... Poor FPR 1 Poor
E....................................... Under Regulatory Supervision
F....................................... In Liquidation
S....................................... Rating Suspended
</TABLE>
ANNUITY. A contract that pays a periodic income benefit for the life of a
person (the annuitant), the lives of two or more persons or a specific period of
time.
CAPITAL AND SURPLUS. Generally consists of capital stock, paid - in or
contributed surplus, special surplus funds, and unassigned surplus determined in
accordance with statutory insurance accounting practices.
CREDITING RATES. Interest rates applied to life insurance policies and annuity
contracts, whether contractually guaranteed or currently declared for a
specified period.
FIXED RATE DEFERRED ANNUITY. A tax deferred accumulation contract which pays a
fixed interest rate established by the insurance company on premiums paid.
FLEXIBLE PREMIUM DEFERRED ANNUITIES. Annuities that permit the regular addition
of premium payments by the policyowner.
GAAP. United States generally accepted accounting principles.
LAPSE OR LAPSATION. The expiration or forfeiture of an insurance policy by non
payment of the premium due.
NAIC. The National Association of Insurance Commissioners, an association of
the chief insurance supervisory officials of each state, territory and insular
possession of the United States.
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<PAGE>
MORTALITY. The relative incidence of death of life insureds or annuitants.
PERSONAL PRODUCING GENERAL AGENTS OR PPGA'S. Independent agents who sell
products directly to the consumer and write business directly with insurance
companies and who are compensated primarily for personal production.
POLICY ACQUISITION COSTS. Costs incurred in the acquisition of new and renewal
insurance contracts. Acquisition costs include those costs that vary with and
are primarily related to the acquisition of insurance contracts (for example,
agent and broker commissions, certain underwriting and policy issue costs, and
medical and inspection fees). These costs are referred to as Deferred
Acquisition Costs (DAC) and although immediately expensed in statutory
accounting, they are realized as an asset account under generally accepted
accounting principles and amortized over the life of the policies.
PREMIUM. Payments and considerations received on insurance policies and annuity
contracts issued or reinsured by an insurance company. Under GAAP, premiums on
deferred annuity contracts are not accounted for as revenues.
REINSURANCE. An arrangement under which one insurance company, referred to as
the reinsurer, for consideration, agrees to indemnify another insurance company,
referred to as the ceding company, against all or part of a loss which the
ceding company may incur under certain policies of insurance for which it has
liability. Reinsurance provides a primary insurer with three major benefits: it
reduces net liability on individual risks; it helps to protect against
catastrophic losses; and it helps to maintain acceptable surplus and reserve
ratios. Reinsurance provides a primary insurer with additional underwriting
capacity in that the primary insurer can accept larger risks and can expand the
volume of business it writes without increasing its capital base. The ceding
company remains liable on its obligations under the policies reinsured if the
reinsurer fails to pay claims on a reinsured policy.
RESERVES. For life insurance policies, liabilities established to reflect the
estimated discounted present value of costs of claims, payments or contract
liabilities and the related expenses that the insurer will ultimately be
required to pay in respect of insurance it has written; for annuities without
life contingencies, liabilities established for amounts deposited by
policyholders plus interest credited, less withdrawals and administrative
charges; for annuities with life contingencies, liabilities established for
future policy benefits computed as the present value of future benefit payments,
including assumptions as to investment yields and mortality.
SINGLE PREMIUM DEFERRED ANNUITIES. Annuities that require a one - time lump sum
premium payment upon the issuance of the contract.
STATUTORY ACCOUNTING. Statutory accounting practices prescribed or permitted by
state insurance regulatory authorities. Statutory accounting emphasizes
solvency rather than matching revenues and expenses during an accounting period
and is liquidation/solvency based rather than profit based.
SURPLUS. As determined in accordance with statutory accounting practices, the
amount remaining after all liabilities, including loss reserves, are subtracted
from assets allowable for statutory accounting.
SURRENDER CHARGE. The substantial penalty imposed for the early termination of
a life insurance or annuity contract.
UNDERWRITING. The insurer's process of examining, accepting or rejecting
insurance risks, and classifying those accepted, in order to charge the
appropriate premium for each accepted risk.
WHOLE LIFE INSURANCE OR WHOLE LIFE POLICIES. Insurance that may be kept in
force for a person's entire life by paying one or more premiums. It is paid for
in one of three different ways: (i) ordinary life insurance (premiums are
payable as long as the insured lives), (ii) limited payment life insurance
(premiums are payable over a specified number of years), and (iii) single
premium life insurance (a lump sum amount paid at the inception of the policy).
The insurance policy pays a benefit (contractual amount adjusted for items such
as policy loans and dividends, if any) at the death of the insured. Whole life
insurance may also build up cash values.
48
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Summit Life Corporation
<S> <C>
Summit Life Corporation's Unaudited Consolidated Financial Statements as of and
for the Nine Months Ended September 30, 1997 and 1998
Consolidated Balance Sheets (Unaudited)......................................................... F-2
Consolidated Statements of Operations (Unaudited)............................................... F-4
Consolidated Statements of Cash Flows (Unaudited)............................................... F-5
Notes to Unaudited Consolidated Financial Statements............................................ F-6
Summit Life Corporation's Consolidated Financial Statements as of and for the
Years Ended December 31, 1996 and 1997
Report of Independent Certified Public Accountants.............................................. F-9
Consolidated Balance Sheets..................................................................... F-10
Consolidated Statements of Operations........................................................... F-12
Consolidated Statement of Stockholders' Equity.................................................. F-13
Consolidated Statements of Cash Flows........................................................... F-14
Notes to Consolidated Financial Statements...................................................... F-16
Benefit Capital Life Insurance Company
Benefit Capital Life Insurance Company's Financial Statements as of and for the
Year Ended December 31, 1997
Report of Independent Certified Public Accountants.............................................. F-29
Balance Sheet................................................................................... F-30
Statement of Operation.......................................................................... F-31
Statement of Stockholder's Equity............................................................... F-32
Statement of Cash Flows......................................................................... F-33
Notes to Financial Statements................................................................... F-34
</TABLE>
F-1
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30,
-------------------------------
1997 1998
-------------- -------------
<S> <C> <C>
INVESTMENTS
Debt securities - held to maturity $ 3,001,469 $ -
Debt securities - available for sale - 3,987,164
Equity securities - available for sale 46,421 118,437
Notes receivable, including notes receivable from
affiliates of $119,640 in 1998 977,107 1,354,476
Short-term investments 200,000 253,186
Policy loans - 13,076
Investment real estate, net of depreciation - 75,968
-------------- --------------
4,224,997 5,802,307
CASH AND CASH EQUIVALENTS 998,947 1,349,398
RECEIVABLES
Accrued investment income 215,608 265,553
Other 7,326 3,401
-------------- --------------
222,934 268,954
PROPERTY AND EQUIPMENT - AT COST
Building and improvements 327,520 111,620
Furniture and equipment 96,183 132,582
Automobiles 45,275 45,275
-------------- --------------
468,978 289,477
Less accumulated depreciation (36,380) (55,622)
-------------- --------------
432,598 233,855
Land 78,800 61,000
-------------- --------------
511,398 294,855
OTHER ASSETS
Cost in excess of net assets of businesses acquired,
less accumulated amortization 153,814 116,298
Value of purchased insurance business - 304,044
Land and building held for sale - 184,499
Other 101,565 119,852
-------------- --------------
255,379 724,693
-------------- --------------
$ 6,213,655 $ 8,440,207
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY SEPTEMBER 30,
-------------------------------
1997 1998
------------- -------------
<S> <C> <C>
LIABILITIES
Policy reserves and policyholder funds $ 4,322,898 $ 5,988,191
Accounts payable and accrued liabilities 158,155 212,385
Notes payable 1,339,277 1,264,229
Other liabilities 17,812 36,321
----------- -----------
5,838,142 7,501,126
STOCKHOLDERS' EQUITY (NOTE D)
Common stock, $.01 par value 19,355 20,547
Additional paid-in capital 1,039,463 2,079,687
Common stock subscribed 4,898 39,130
Accumulated other comprehensive income - 54,345
Accumulated deficit (683,305) (1,215,498)
Less stock subscriptions receivable (4,898) (39,130)
----------- -----------
375,513 939,081
=========== ===========
$ 6,213,655 $ 8,440,207
=========== ===========
</TABLE>
The accompanying notes are an integral part of these interim
financial statements.
F-3
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1997 1998
------------- ------------
<S> <C> <C>
REVENUES
Insurance premiums and other considerations $ 3,253 $ 88,744
Investment income 375,300 429,837
Net realized gains (losses) on sale of investments 3,185 1,712
Mortgage loan closing and funding income 205,745 92,660
Other 22,092 7,476
---------- ----------
609,575 620,429
BENEFITS, LOSSES AND EXPENSES
Policy benefits - 67,939
Increase in policy reserves 160,077 161,967
Interest expense 88,956 81,521
Mortgage loan closing expenses 43,149 547
Taxes, licenses and fees 25,726 25,222
Depreciation and amortization 56,889 238,940
General, administrative and other operating expenses 405,889 490,429
---------- ----------
780,686 1,066,565
---------- ----------
Loss before income taxes (171,111) (446,136)
INCOME TAX PROVISION
Current (expense) benefit (9,080) 2,759
---------- ----------
NET LOSS $ (180,191) $ (443,377)
========== ==========
Basic and diluted loss per common share (note D) $ (.10) $ (.22)
========== ==========
Weighted average outstanding common shares,
basic and diluted (note D) 1,878,507 2,044,955
========== ==========
</TABLE>
The accompanying notes are an integral part of these interim
financial statements.
F-4
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION> NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1997 1998
--------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (180,191) $ (443,377)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation and amortization 56,889 238,940
Interest credited to policyholder account balances 160,077 219,450
Gain on sale of investment securities (12,519) (1,712)
(Increase) decrease in
Accrued investment income (120,440) (93,883)
Other receivables 31,775 18,918
Other assets (1,062) (14,200)
Increase (decrease) in
Accounts payable (15,378) (15,600)
Accrued liabilities 39,654 79,656
Other liabilities 10,743 (62,010)
Policy reserves (3,961) (17,726)
------------- -------------
Net cash used in operating activities (34,413) (91,544)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities (1,308,182) (2,085,845)
Proceeds from disposition or maturities of investment securities 654,614 1,535,767
Issuance of notes receivable (67,363) (199,030)
Payments received on notes receivable 161,550 13,827
Proceeds from sale of property and equipment - 10,000
Cash provided by purchase of Benefit Capital Life Insurance Co. - 527,578
Purchase of property and equipment (29,767) -
------------- -------------
Net cash used in investing activities (589,148) (197,703)
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits to policyholder account balances 1,122,037 509,391
Withdrawals from policyholder account balances (225,911) (124,433)
Payments on notes payable (226,117) (167,159)
Proceeds from issuance of notes payable 150,000 90,000
Proceeds from stock subscriptions receivable 71,550 3,253
Proceeds from sale of common stock 13,711 34,136
------------- -------------
Net cash provided by financing activities 905,270 345,188
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 281,709 55,941
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 717,238 1,293,457
------------- -------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 998,947 $ 1,349,398
============= =============
</TABLE>
The accompanying notes are an integral part of these interim
financial statements.
F-5
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. For further information, refer to the consolidated
annual financial statements and footnotes thereto for the year ended December
31, 1997.
NOTE B - PURCHASE OF BENEFIT CAPITAL LIFE INSURANCE COMPANY
On January 13, 1998, in exchange for 100,000 shares of common stock (as
adjusted - see Note D), the Company acquired 100% of the outstanding common
stock of Benefit Capital Life Insurance Company ("BCLIC") in a business
combination accounted for as a purchase. BCLIC is primarily engaged in the sale
of life insurance products and is licensed in the State of Louisiana. The
results of operations of BCLIC are included in the accompanying 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.
Included in the total cost of the acquisition is an amount for the present
value of purchased insurance business. This amount represents the actuarially
determined present value of estimated net cash flows embedded in the existing
insurance contracts acquired. This asset will be amortized with interest based
on the incidence of the cash flows. Based on acquisition date assumptions,
approximately 9% to 38% of this asset is expected to be amortized in each of the
next five years.
NOTE C - SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANC-ING ACTIVITIES
In conjunction with the acquisition of BCLIC, 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 956,019
Other 97,272
-----------
1,053,291
-----------
Estimated fair value of common stock issued $ 998,455
===========
NOTE D - STOCKHOLDERS' EQUITY
Total comprehensive income for the nine months ended September 30, 1998
was a loss of approximately $435,000.
On September 21, 1998, in conjunction with an initial public offering of
common stock, 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.
F-6
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - STOCKHOLDERS' EQUITY - CONTINUED
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 financial
statements.
F-7
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-8
<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, 1996 and 1997, 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 did not audit the 1996 financial
statements of Equity Mortgage Services, Inc., a consolidated subsidiary, which
statements reflect total assets and total revenues constituting 6% and 54%,
respectively, of the related 1996 consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to the amounts included for Equity Mortgage Services,
Inc., as of and for the year ended December 31, 1996, is based solely on the
report of the other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, 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, 1996 and 1997, 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
April 3, 1998, except for Note D, as to which the
date is September 21, 1998
F-9
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1996 1997
---------- ----------
<S> <C> <C>
INVESTMENTS (notes A4 and B)
Debt securities - held to maturity $2,278,884 $ -
Debt securities - available for sale - 2,968,901
Equity securities - available for sale 3,538 34,860
Notes receivable 1,071,294 959,743
Short-term investments 299,381 -
Investment real estate, net of accumulated depreciation of $575 - 75,968
---------- ----------
3,653,097 4,039,472
CASH AND CASH EQUIVALENTS (note A3) 717,238 1,293,457
RECEIVABLES
Stock subscriptions receivable 71,550 -
Accrued investment income 95,168 156,209
Other 39,101 4,086
---------- ----------
205,819 160,295
PROPERTY AND EQUIPMENT - AT COST
(notes A5 and N)
Building and improvements 323,053 334,320
Furniture and equipment 104,639 119,795
Automobiles 13,275 45,275
---------- ----------
440,967 499,390
Less accumulated depreciation 45,221 40,927
---------- ----------
395,746 458,463
Land 73,800 73,800
---------- ----------
469,546 532,263
OTHER ASSETS
Cost in excess of net assets of businesses acquired, less
accumulated amortization of $48,287 in 1996 and 85,805 in
1997 (note A6) 181,952 144,434
Deferred policy acquisition costs (note A8) - 14,179
Deferred income taxes (notes A7 and E) 71,943 71,943
Other 36,431 22,658
---------- ----------
290,326 253,214
---------- ----------
$5,336,026 $6,278,701
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
F-10
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31,
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
---------- ----------
<S> <C> <C>
LIABILITIES
Policy reserves and policyholder funds (note A9) $3,270,656 $4,445,490
Accounts payable 24,563 25,600
Accrued liabilities 109,318 125,729
Notes payable (note C) 1,483,394 1,341,388
Other liabilities 6,102 1,059
---------- ----------
4,894,033 5,939,266
COMMITMENTS AND CONTINGENCIES (notes G and I) - -
STOCKHOLDERS' EQUITY (notes C and D)
Common stock, $.01 par value - authorized, 5,000,000 shares; issued and
outstanding, 1,825,022 shares in 1996 and 1,939,780
shares in 1997 18,250 19,398
Additional paid-in capital 854,757 1,044,992
Common stock subscribed 72,100 42,383
Accumulated other comprehensive income (loss) (350) 47,166
Accumulated deficit (502,764) (772,121)
---------- ----------
441,993 381,818
Less stock subscriptions receivable - 42,383
---------- ----------
441,993 339,435
---------- ----------
$5,336,026 $6,278,701
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
F-11
<PAGE>
Summit Life Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Revenues
Insurance premiums and other considerations (note A9) $ 124,901 $ 8,108
Investment income 446,867 490,184
Net realized gains on sale of investments 5,558 14,275
Mortgage loan closing and funding income and related fees 681,523 237,610
Other 10,871 31,819
---------- ----------
1,269,720 781,996
Benefits, losses, and expenses
Policy benefits 4,000 -
Increase in policy reserves 246,422 263,318
Interest expense 217,107 131,052
Mortgage loan closing, and related expenses 131,763 60,357
Taxes, licenses, and fees 35,506 18,572
Depreciation and amortization 66,874 69,151
General, administrative, and other operating 942,005 509,871
---------- ----------
1,643,677 1,052,321
---------- ----------
Loss before income taxes and minority interest (373,957) (270,325)
Income tax provision (notes A7 and E)
Current (expense) benefit (1,047) 968
Deferred benefit 45,191 -
---------- ----------
44,144 968
---------- ----------
Loss before minority interest (329,813) (269,357)
Minority interest in loss of consolidated subsidiary 32,735 -
---------- ----------
NET LOSS $ (297,078) $ (269,357)
========== ==========
Basic and diluted loss per common share (note A11) $ (.18) $ (.14)
========== ==========
Weighted average outstanding common shares, basic and diluted (note A11) 1,638,235 1,893,367
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
F-12
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (NOTE D)
Years ended December 31, 1996 and 1997
<TABLE>
<CAPTION>
Common stock Additional Common
---------------------
Shares Par paid-in stock
Total outstanding value capital subscribed
--------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 152,314 1,583,000 $ 15,830 $ 342,170 $ -
Conversion of convertible notes 121,992 101,660 1,017 120,975 -
Exchange of other notes payable 70,000 25,000 250 69,750 -
Sale of stock 214,830 76,725 767 214,063 -
Exchange of minority interest in preferred stock of CLS 108,185 38,637 386 107,799 -
Common stock subscriptions 72,100 - - - $ 72,100
Comprehensive income
Net loss (297,078) - - - -
Other comprehensive income
Unrealized loss on investments (350)
---------
Comprehensive income (297,428)
--------- --------- -------- ---------- ---------
Balance at December 31, 1996 441,993 1,825,022 18,250 854,757 72,100
Conversion of convertible notes (note C) 112,613 86,625 866 111,747 42,383
Common stock issued 6,670 28,133 282 78,488 (72,100)
Comprehensive income
Net loss (269,357) - - - -
Other comprehensive income
Unrealized gain on investments 47,516
---------
Comprehensive income (221,841)
--------- --------- -------- ---------- ---------
Balance at December 31, 1997 $ 339,435 1,939,780 $ 19,398 $1,044,992 $ 42,383
========= ========= ======== ========== =========
<CAPTION>
Accumulated
other Stock
comprehensive Accumulated subscribed
income deficit receivable
------------- ----------- ----------
<S> <C> <C> <C>
Balance at January 1, 1996 $ - $(205,686) $ -
Conversion of convertible notes - - -
Conversion of other notes payable - - -
Sale of stock - - -
Conversion of minority interest in preferred stock of CLS - - -
Common stock subscriptions - - -
Comprehensive income
Net loss - (297,078) -
Other comprehensive income
Unrealized loss on investments (350)
Comprehensive income
--------- --------- ---------
Balance at December 31, 1996 (350) (502,764) -
Conversion of convertible notes (note C) - - (42,383)
Common stock issued - - -
Comprehensive income
Net loss - (269,357) -
Other comprehensive income
Unrealized gain on investments 47,516
Comprehensive income
--------- --------- ---------
Balance at December 31, 1997 $ 47,166 $(772,121) $ (42,383)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-13
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1996 1997
------------ -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (297,078) $ (269,357)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities
Depreciation and amortization 66,874 69,151
Deferral of policy acquisition costs - (15,270)
Amortization of deferred policy acquisition costs - 1,091
Accrued interest income rolled into notes receivable (176,294) -
Accrued interest expense rolled into notes payable 176,294 -
Interest credited to policyholder account balances 131,000 259,000
Minority interest in loss of consolidated subsidiary (32,735) -
Gain on sale of investment securities (5,558) (14,275)
Other 2,124 (381)
(Increase) decrease in
Accrued investment income (65,620) (65,041)
Other receivables (7,056) 39,015
Other assets (396) 7,804
Deferred income taxes (45,191) -
Increase (decrease) in
Accounts payable 808 1,037
Accrued liabilities 60,818 16,411
Other liabilities 1,729 (5,043)
Policy reserves - 94
------------ -----------
Net cash provided by (used in) operating activities (190,281) 24,236
Cash flows from investing activities
Purchases of investment securities (1,824,456) (1,726,849)
Proceeds from disposition or maturities of investment securities 480,208 1,366,724
Issuance of notes receivable - (50,000)
Payments received on notes receivable 650,000 161,551
Purchase of investment real estate - (76,544)
Purchase of property and equipment (138,452) (55,467)
Acquisition of remaining 40% interest in Equity (52,500) -
------------ -----------
Net cash used in investing activities (885,200) (380,585)
Cash flows from financing activities
Deposits to policyholder account balances 958,121 1,178,983
Withdrawals from policyholder account balances (96,919) (263,243)
Payments on notes payable (237,750) (229,010)
Proceeds from issuance of notes payable 177,100 155,000
Proceeds from stock subscriptions receivable - 71,550
Proceeds from sale of common stock 215,372 19,288
------------ -----------
Net cash provided by financing activities 1,015,924 932,568
------------ -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (59,557) 576,219
Cash and cash equivalents at beginning of year 776,795 717,238
------------ -----------
Cash and cash equivalents at end of year $ 717,238 $ 1,293,457
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-14
<PAGE>
SUBMIT LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Cash paid (received) during the year for:
- ----------------------------------------
Interest $ 170,000 $ 92,000
Income taxes $ (1,000) $ 2,000
Noncash investing and financing activities:
- ------------------------------------------
Purchase of an automobile by the incurrence of a note payable $ - $ 32,000
Common stock subscriptions receivable $ 71,550 $ 42,383
Exchange of other notes payable for common stock, exchanged at $2.80 per share $ 70,000 $ -
Conversion of convertible notes to common stock $ 122,000 $ 99,996
Exchange of minority interest in preferred stock of CLS for common stock,
exchanged at $2.80 per share $ 100,000 $ -
</TABLE>
The accompanying notes are an integral part of these statements.
F-15
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1997
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), CLS Enterprises, Inc.
(CLS), and Equity Mortgage Services, Inc. (Equity). Effective December 31,
1996, CLS was merged into SLC. Prior to December 31, 1996, SLC held a 60%
interest in Equity. On December 31, 1996, SLC acquired the remaining 40% of
Equity for $52,500 in a business combination accounted for as a purchase. No
goodwill resulted from the acquisition of this 40% interest. Minority
interest in loss of consolidated subsidiary includes the 40% of Equity's
operations prior to acquisition by SLC. Effective December 31, 1997, Equity
was merged into SLC. Intercompany transactions and balances have been
eliminated.
SLC is a holding company which specializes in the sale of annuity products
through its life insurance subsidiaries, SLAC and FBLIC. Additionally, SLC
provides financing to certain medical receivable factoring entities. SLAC is
licensed in Oklahoma and FBLIC is licensed in Texas. The annuity products
consist primarily of tax-sheltered annuities (TSAs), individual retirement
accounts (IRAs), and other individual nontax-qualified annuities. Equity
primarily provides residential mortgage loan application processing services
to individuals.
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, certificates of deposit, 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-16
<PAGE>
SUMMIT LIFE COPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
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.
Notes receivable are stated at the aggregate of the unpaid balances less
estimated uncollectible amounts.
Short-term investments consist primarily of U.S. Treasury obligations 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.
6. Cost in Excess of Net Assets of Businesses Acquired
---------------------------------------------------
Cost in excess of net assets of businesses 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 businesses 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, 1997, management believes no impairment has
occurred.
7. Income Taxes
------------
SLC and each of its subsidiaries file separate income tax returns.
The Company recognizes current tax expense (benefit) 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. Primary temporary differences relate to
the deferral of policy acquisition costs and policy liabilities.
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.
F-17
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
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 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 changes, 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.
During 1996, the Company did not incur significant acquisition costs;
therefore, such costs were expensed as incurred.
9. 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 certain
annuities with life contingencies, including selection of annuity settlement
options with life contingencies, are recognized as revenues when due.
Mortgage loan closing and funding income and related fees are recognized at
the time the underlying mortgage loan transaction is closed.
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.
10. Long-Lived Assets
-----------------
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.
11. Loss Per Common Share
---------------------
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 C, were antidilutive; therefore, basic and dilutive loss per common
share are the same.
12. Other Comprehensive Income
--------------------------
Accumulated other comprehensive income consists solely of net unrealized
investment gains (losses).
13. Reclassifications
-----------------
Certain reclassifications have been made to the 1996 financial statements to
conform to the 1997 presentation.
F-18
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
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, 1996
----------------------------------------------------
Cost/ Gross Gross Estimated
amortized unrealized unrealized fair
Type of investment cost gains losses value
------------------------------------------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Debt securities - held to maturity
U.S. Treasury and other U.S. government
corporations and agencies $ 599,205 $ 3,840 $ (14,670) $ 588,375
Mortgage-backed securities 1,679,679 17,949 (2,630) 1,694,998
--------- -------- --------- ---------
Total debt securities $ 2,278,884 $ 21,789 $ (17,300) $ 2,283,373
========= ======== ======== =========
Equity securities - available for sale $ 3,888 $ - $ (350) $ 3,538
=========== ========== ========= ===========
</TABLE>
<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
=========== ========= ========= ===========
</TABLE>
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, 1997
------------------------------
Amortized Estimated
cost fair value
----------- -----------
<S> <C> <C>
Due within one year or less $ 199,811 $ 200,250
Due after ten years 198,660 202,562
---------- ----------
398,471 402,812
Mortgage-backed securities 2,522,959 2,566,089
--------- ---------
$2,921,430 $2,968,901
========= =========
</TABLE>
F-19
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE B - INVESTMENTS - CONTINUED
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
$276,000 for 1996 and $284,000 for 1997. Gross gains of $5,400 for 1996 and
$9,200 for 1997 and gross losses of $300 for 1996 and $3,500 for 1997 were
realized on those sales.
Notes receivable include $1,071,294 for 1996 and $909,743 for 1997 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 maintained by an escrow agent. The
collateral for these notes also collateralizes certain of the Company's
notes payable (see Note C).
NOTE C - NOTES PAYABLE
Notes payable consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------------- -----------
<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 $ 177,100 $ 164,645
Uncollateralized note payable to individual, interest payable
annually at 8%; due April 18, 2000 - 75,000
Note payable to bank, payable in monthly installments of $600
through March 1999, including interest at 10.5%;
collateralized by vehicle - 32,000
Uncollateralized note payable to stockholder, interest payable
annually at 7.75%; due September 15, 1998 - 30,000
Note payable to individual, interest payable semiannually at
8%; due July 1, 1998; collateralized by U.S. Treasury securities 30,000 30,000
Uncollateralized note payable to stockholder, interest payable
semiannually at 8%; due March 17, 1998 50,000 50,000
</TABLE>
F-20
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE C - NOTES PAYABLE - CONTINUED
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Uncollateralized note payable to stockholder, interest payable
annually at 6.75%; due February 1, 1998 - 50,000
8% convertible notes due June 30, 1997 (1) 155,000 -
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) 1,071,294 909,743
--------- ---------
$1,483,394 $1,341,388
========== =========
</TABLE>
(1) Convertible notes totaling $100,000 were converted into 76,920
common shares at the rate of $1.30 per share (as adjusted - see
Note D) on June 30, 1997.
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 in July 1998, thereby committing to purchase 34,512 shares
of common stock at $1.30 per share. These promissory notes and the
Company's requirement to issue the related Class A common stock
have been reflected in the accompanying consolidated financial
statements as stock subscriptions receivable and common stock
subscribed. Through December 31, 1997, 9,705 common shares have
been issued under this arrangement for $12,617 and at December 31,
1997, 32,602 common shares are subscribed under notes receivable
of $42,383.
The aggregate maturities of notes payable for years subsequent to December
31, 1997 are as follows:
Year ending December 31
1998 $ 177,000
1999 951,000
2000 90,000
2001 16,000
2002 18,000
Thereafter 89,388
----------
$1,341,388
=========
F-21
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE D - STOCKHOLDERS' EQUITY
On September 21, 1998, in conjunction with an initial public offering of
common stock, 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
financial statements.
NOTE E - INCOME TAXES
The components of net deferred tax assets are as follows at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Total deferred tax assets, primarily relating to net operating
loss carryforwards $ 87,477 $101,574
Total valuation allowance for deferred tax assets (12,874) (28,456)
Total deferred tax liabilities, relating to depreciation (2,660) (1,175)
--------- ---------
Net deferred tax assets $ 71,943 $ 71,943
======== ========
Increase in valuation allowance for the year $ 12,874 $ 15,582
======== ========
A reconciliation of income tax benefit at the statutory rate to the
Company's effective rate is as follows:
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Expected statutory rate 34% 34%
Small life insurance company deduction (20) (20)
Increase in valuation allowance (3) (6)
Other 1 (8)
---- ----
12% -%
===== =====
</TABLE>
At December 31, 1997, the following operating loss carryforwards, which
begin expiring in 2010, were available for tax purposes:
SLC $540,000
SLAC 4,000
F-22
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE F - RELATED PARTY TRANSACTIONS
Management fees of $8,000 were paid to a stockholder's company during 1996.
Included in other receivables at December 31, 1996 is a note due from a
company controlled by a stockholder of $27,500. This note was exchanged
during 1997 for services performed by the stockholder's company.
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 non-affiliates are subject. During 1997,
commissions of approximately $5,800 were paid to this agency.
NOTE G - COMMITMENTS AND CONTINGENCIES
Under its annuity contracts, the Company is committed to credit interest on
policyholder account balances at guaranteed rates. 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.
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. The 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
completion date for this project is unknown.
SLAC is required to maintain statutory capital and surplus of at least
$250,000 and, at December 31, 1996 and 1997, its statutory capital and
surplus amounted to $396,000 and $375,000, 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 1998 under this formula without prior consent is
$37,000.
F-23
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE H - STATUTORY CAPITAL AND SURPLUS - CONTINUED
FBLIC is required to maintain statutory capital and surplus of at least
$100,000 and, at December 31, 1996 and 1997, its statutory capital and
surplus amounted to $151,000 and $160,000, 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 1998 under this formula without prior
consent is $16,000.
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 for its term life insurance business. Through December
31, 1997, the Company's term life business has not been significant with
$3,695,000 in force and $3,660,000 reinsured. Retention limits range up to
$5,000.
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.
Reinsurance recoverables on policy reserves were approximately $4,000 at
December 31, 1997.
NOTE K - EMPLOYMENT AGREEMENTS
Effective April 1, 1997, the Company entered into employment agreements with
the Company's President and Executive Vice 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 agreement. The number of shares available to the employees under this
agreement 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, 1997, the Board of Directors
had not granted any shares relating to this agreement.
F-24
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE K - EMPLOYMENT AGREEMENTS - CONTINUED
The agreements may be terminated by mutual agreement, 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 agreement less amounts previously paid,
but not less than $360,000 for the Executive Vice President and $450,000 for
the President.
NOTE L - SEGMENT INFORMATION
The Company has the following three reportable segments: mortgage services,
life insurance, and corporate. The mortgage services segment provides
residential mortgage loan processing services to individuals. The life
insurance segment sells primarily annuity 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, 1996 and 1997.
<TABLE>
<CAPTION>
Mortgage Life
1996 services insurance Corporate Totals
----------------------------------------------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues from customers $681,523 $ 124,901 $ - $ 806,424
Intersegment revenues - 26,876 5,380 32,256
Investment income, including net realized
gains on sale of investments 304 179,389 272,732 452,425
Interest expense 15,555 - 201,552 217,107
Depreciation and amortization 18,914 3,188 44,772 66,874
Income tax expense (benefit) (36,547) 27,571 (35,168) (44,144)
Segment loss 81,838 43,998 203,977 329,813
Segment assets 336,025 3,686,468 1,514,139 5,536,632
Expenditures for segment assets - 138,452 - 138,452
Reconciliation to Consolidated Amounts
--------------------------------------
Revenues
--------
Total revenues for reportable segments
Revenues from customers $ 806,424
Intersegment revenues 32,256
Investment income, including net realized gains on sale of investments 452,425
----------
1,291,105
Other revenues 10,871
Elimination of interesegment revenues (32,256)
----------
Total consolidated revenues $1,269,720
==========
Assets
Total assets for reportable segments $5,536,632
Elimination of intersegment assets (200,606)
----------
$5,336,026
==========
</TABLE>
F-25
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE L - SEGMENT INFORMATION - CONTINUED
<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 28,439 67,175 173,743 269,357
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)
----------
Total consolidated revenues $ 781,996
==========
Assets
Total assets for reportable segments $6,494,564
Elimination of intersegment assets (215,863)
----------
$6,278,701
==========
</TABLE>
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, 1996 and 1997 as
required by Statement of Financial Accounting Standards No. 107, Disclosure
About Fair Value of Financial Instruments" (SFAS No. 107). Such information,
which pertains to the Company's 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 financial statement.
F-26
<PAGE>
SUMMIT LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
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 notes receivable approximates fair value due to nominal interest rate
changes subsequent to issuance. 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 annuity 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>
1996 1997
------------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets
Debt securities - held to maturity $2,278,884 $2,283,373 $ - $ -
Debt securities - available for sale - - 2,968,901 2,968,901
Equity securities - available for sale 3,538 3,538 34,860 34,860
Notes receivable 1,071,294 1,071,294 959,743 959,743
Short-term investments 299,381 299,381 - -
Cash and cash equivalents 717,238 717,238 1,293,457 1,293,457
Receivables 205,819 205,819 160,295 160,295
Financial liabilities
Policy reserves and policyholders funds 3,270,656 3,091,031 4,445,490 4,019,538
Notes payable 1,483,394 1,430,628 1,341,388 1,296,770
</TABLE>
NOTE N - SUBSEQUENT EVENTS
On January 5, 1998, the Company sold a building and related land with a
carrying amount of $209,000. The Company received cash of $10,000; an 8%,
$240,000 first mortgage payable over ten years; and an 8%, $50,000 note and
second mortgage payable over ten years. The transaction resulted in a gain
of approximately $91,000, which will be deferred and recognized on the
installment method until adequate down payment has been received.
On January 13, 1998, in exchange for 100,000 shares of common stock (as
adjusted - see Note D), the Company acquired 100% of the outstanding common
stock of Benefit Capital Life Insurance Company (BCLIC) in a business
combination accounted for as a purchase. BCLIC is primarily engaged in the
sale of life insurance products and is licensed in the state of Louisiana.
The results of operations of BCLIC will be included with the results of the
Company for periods subsequent to 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 following
summarized pro forma (unaudited) information 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)
F-27
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Benefit Capital Life Insurance Company
We have audited the accompanying balance sheet of Benefit Capital Life Insurance
Company, as of December 31, 1997, and the related statements of operations,
stockholder's equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Benefit Capital Life Insurance
Company, as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
April 3, 1998
F-29
<PAGE>
BENEFIT CAPITAL LIFE INSURANCE COMPANY
BALANCE SHEET
December 31, 1997
<TABLE>
ASSETS
<S> <C> <C>
INVESTMENTS
Debt securities - available for sale (notes A1, B, and G) $ 705,257
Short-term investments (notes A1 and G) 103,186
Policy loans 5,118 $ 813,561
----------
CASH AND CASH EQUIVALENTS (note A5) 527,578
RECEIVABLES
Accrued investment income 15,461
Reinsurance recoverable on loss payments 18,233 33,694
----------
PROPERTY AND EQUIPMENT - AT COST (notes A2 and G)
Building and improvements 232,843
Electronic data processing equipment 22,491
----------
255,334
Less accumulated depreciation 84,032
----------
171,302
Land 25,847 197,149
----------
OTHER ASSETS
Deferred policy acquisition costs (note A3) 133,506
Other 1,350 134,856
---------- ----------
$1,706,838
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Policy reserves and policyholder funds (notes A4 and E) $1,156,706
Accrued and other liabilities 3,225 $1,159,931
----------
COMMITMENTS AND CONTINGENCIES (note G) -
STOCKHOLDER'S EQUITY
Common stock - $1 par value; authorized, 100,000 shares;
issued and outstanding, 100,000 shares 100,000
Additional paid-in capital 487,669
Accumulated deficit (40,762) 546,907
---------- ----------
$1,706,838
==========
</TABLE>
The accompanying notes are an integral part of this statement
F-30
<PAGE>
BENEFIT CAPITAL LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
Year ended December 31, 1997
<TABLE>
<S> <C> <C>
Revenues
Insurance premiums and other considerations (note A3) $ 164,503
Net investment income 72,713
Net realized gains on sale of investments 1,368 $ 238,584
---------
Benefits, losses, and expenses
Policy benefits 168,739
Decrease in policy reserves (358,259)
Amortization of deferred policy acquisition costs 93,599
General, administrative, and other operating 305,794 209,873
--------- ---------
NET EARNINGS $ 28,711
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-31
<PAGE>
BENEFIT CAPITAL LIFE INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
Year ended December 31, 1997
<TABLE>
<CAPTION>
Additional
Common paid-in Accumulated
stock capital deficit Total
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $100,000 $487,669 $ (69,473) $518,196
Net earnings - - 28,711 28,711
-------- -------- --------- --------
Balance at December 31, 1997 $100,000 $487,669 $ (40,762) $546,907
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-32
<PAGE>
BENEFIT CAPITAL LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
Year ended December 31, 1997
<TABLE>
<S> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net earnings $ 28,711
Adjustments to reconcile net earnings to cash used in operating activities
Depreciation and amortization 11,280
Amortization of deferred policy acquisition costs 93,599
Gain on sale of investment securities (1,368)
Other 19,649
Increase in
Accrued investment income (2,179)
Other receivables (18,233)
Other assets (967)
Decrease in
Accrued and other liabilities (6,497)
Policy reserves and policyholder funds (390,034)
---------
Net cash used in operating activities (266,039)
Cash flows from investing activities
Purchases of investments (103,186)
Proceeds from maturities of investments 304,680
Increase in policy loans (5,118)
Purchase of property and equipment (2,092)
---------
Net cash provided by investing activities 194,284
---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (71,755)
Cash and cash equivalents at beginning of year 599,333
---------
Cash and cash equivalents at end of year $ 527,578
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-33
<PAGE>
BENEFIT CAPITAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
Benefit Capital Life Insurance Company (formerly Cajun National Life
Insurance Company) (the Company), a Louisiana corporation, is a wholly-owned
subsidiary of Benefit Capital Investment Corporation (BCIC); however, see
Note H for change of control subsequent to December 31, 1997. The Company
specializes in the sale of life insurance products in Louisiana.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. Investments
-----------
The Company accounts for 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
earnings.
. 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 in a separate component of equity.
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.
Short-term investments consist primarily of certificates of deposit and are
carried at cost, which approximates market.
2. Property and Equipment
----------------------
The Company's building is depreciated on the straight-line method over 31.5
years. Other building improvements are depreciated on the straight-line
method over 5 to 31.5 years. Subsequent to December 31, 1997, the Company
relocated operations to rented facilities in New Orleans, Louisiana, and
currently its real estate is held for sale.
Electronic data processing equipment is depreciated on the straight-line
method over five to seven years.
Long-lived assets to be held and used 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.
F-34
<PAGE>
BENEFIT CAPITAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
3. Recognition of Premium Revenues and Acquisition Costs
-----------------------------------------------------
Life insurance premiums are reported as earned when due.
The costs of writing new business, consisting primarily of commissions and
certain costs of policy issuance, are deferred. Deferred policy acquisition
costs are amortized over the estimated 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.
4. Policy Reserves and Policyholder Funds
--------------------------------------
Policy reserves 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.
Policyholder funds represent policy account balances before applicable
surrender charges, if any.
5. Cash and Cash Equivalents
-------------------------
Cash equivalents include money market funds and other highly liquid debt
instruments purchased with a maturity of three months or less.
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.
6. 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.
F-35
<PAGE>
BENEFIT CAPITAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
7. Capital Surplus Requirements
----------------------------
The Company prepares its 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. The 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 completion date for this project
is unknown.
Statutory accounting practices differ in some respects from generally
accepted accounting principles (GAAP). Some of the more significant of these
differences are as follows:
. Aggregate reserves for life policies and contracts are based on
statutorily-allowed mortality and interest assumptions, which differ
from reserves valued according to GAAP which are based on expected
assumptions, including provisions for adverse deviations.
. Policy acquisition costs, such as commissions, underwriting, and
other costs incurred in connection with acquiring new business, are
charged to operations as incurred. Under GAAP, these costs are
deferred and amortized over the policy term.
. Certain assets designated as "nonadmitted", if any, are charged to
surplus.
. Deferred income taxes are not provided on temporary differences
between the tax bases of assets and liabilities and their amounts for
reporting purposes. Under GAAP, deferred taxes, if any, are provided
on these differences.
. Bonds are generally carried at amortized cost for statutory purposes,
while GAAP generally requires classification of bonds into
held-to-maturity, available-for-sale, and trading categories. Trading
securities would be carried at fair value, with unrealized gains and
losses included in earnings; available-for-sale securities would be
carried at fair value with unrealized gains and losses excluded from
earnings and reported in a separate component of stockholders equity,
net of tax effects; and held-to-maturity securities would be carried
at amortized cost.
The amount of statutory capital and surplus necessary to satisfy regulatory
requirements was $300,000 at December 31, 1997 and, at December 31, 1997,
its statutory capital and surplus amounted to $472,000.
The Company 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.
F-36
<PAGE>
BENEFIT CAPITAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
8. Income Taxes
------------
The Company files a consolidated federal income tax return with BCIC. The
Company recognizes current tax expense (benefit) on a separate company basis
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. Primary temporary differences relate to
policy liabilities and the deferral of policy acquisition costs.
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.
NOTE B - INVESTMENTS
The amortized cost and estimated market value of debt securities are as
follows at December 31, 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
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 $605,257 $ - $ - $605,257
Mortgage-backed securities 100,000 - - 100,000
-------- --------- --------- --------
$705,257 $ - $ - $705,257
======== ========= ========= ========
</TABLE>
The amortized cost and estimated market value of debt securities, by
contractual maturity, are shown below at December 31, 1997:
<TABLE>
<CAPTION>
Estimated
Amortized market
cost value
--------- ---------
<S> <C> <C>
Due after one year through five years $100,584 $100,584
Due after five years through ten years 504,673 504,673
-------- --------
605,257 605,257
Mortgage-backed securities 100,000 100,000
-------- --------
$705,257 $705,257
======== ========
</TABLE>
F-37
<PAGE>
BENEFIT CAPITAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE B - INVESTMENTS - CONTINUED
Proceeds from sales of equity securities during 1997 were approximately
$4,700. Gross losses of $100 were realized on those sales.
Debt securities carried at approximately $100,000 were on deposit with
regulatory authorities in accordance with statutory requirements at December
31, 1997.
NOTE C - RELATED PARTY TRANSACTIONS
During 1997, the Company paid BCIC approximately $20,000 relating to
management services.
NOTE D - REGULATORY MATTERS
At periodic intervals, the Insurance Department of the State of Louisiana
routinely examines the Company's statutory financial statements as part of
their legally prescribed oversight of the insurance industry. Based on these
examinations, the regulators can direct that the Company's statutory
financial statements be adjusted in accordance with their findings.
NOTE E - REINSURANCE
The Company reinsures that portion of insurance risk which is in excess of
its retention limits. Retention limits range up to $20,000 on life policies.
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
reinsured risks ceded to other companies in the event that reinsurers were
unable to meet their obligations.
At December 31, 1997, reinsurance recoverables on policy reserves were not
significant.
NOTE F - INCOME TAXES
The amounts for deferred tax assets and liabilities are as follows at
December 31, 1997:
<TABLE>
<S> <C>
Total deferred tax assets $ 45,266
Valuation allowance for deferred tax assets (41,054)
Total deferred tax liabilities (4,212)
---------
Net $ -
=========
Decrease in valuation allowance for the year $ 809
=========
</TABLE>
The Company's effective income tax rate for 1997 is zero primarily because
of the small life insurance company deduction and the decrease in valuation
allowance.
F-38
<PAGE>
BENEFIT CAPITAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE F - INCOME TAXES - CONTINUED
At December 31, 1997, the Company had operating loss carryforwards of
approximately $492,000, which begin expiring in 2011, and will be subject to
annual utilization limitations due to the change in control discussed in
Note H.
NOTE G - COMMITMENTS AND CONTINGENCIES
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.
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 financial statements.
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, 1997, debt securities
available for sale, short-term investments, and real estate carried at
approximately $505,000, $103,000, and $184,000, respectively, were pledged.
NOTE H - SUBSEQUENT EVENTS
On January 13, 1998, 100% of the Company's common stock was acquired by
Summit Life Corporation (SLC), an Oklahoma corporation. SLC is an insurance
holding company that specializes in the sale of annuity products through two
life insurance subsidiaries.
F-39
<PAGE>
================================================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES OR AN OFFER, TO, OR A SOLICITATION OF, ANY PERSON
IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
__________________________
TABLE OF CONTENTS
PAGE
----
Additional Information................................................ 2
Prospectus Summary.................................................... 3
Risk Factors.......................................................... 6
Use of Proceeds....................................................... 10
Determination of Offering Price....................................... 12
Dividend Policy....................................................... 12
Dilution.............................................................. 13
Capitalization........................................................ 14
Selected Financial Information........................................ 15
Unaudited Pro Forma Consolidated Statement of Operations.............. 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 18
Business.............................................................. 22
Management............................................................ 31
Certain Transactions.................................................. 33
Principal Stockholders................................................ 34
Description of Capital Stock.......................................... 35
Shares Eligible for Future Sale....................................... 36
Plan of Distribution.................................................. 37
Legal Opinions........................................................ 39
Experts............................................................... 39
Glossary of Selected Terms............................................ 40
Index to Financial Statements......................................... F-1
1,000,000 SHARES
[LOGO OF SUMMIT LIFE CORPORATION]
SUMMIT LIFE CORPORATION
COMMON STOCK
__________________
PROSPECTUS
___________________
January 11, 1998
================================================================================
<PAGE>
SUMMIT LIFE CORPORATION
REGISTRATION STATEMENT ON FORM SB-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 1006(B)(7) of the General Corporation Act of the State of Oklahoma
(the "OGCA") authorizes a corporation in its certificate of incorporation to
eliminate or limit the personal liability of members of its board of directors
to the corporation or its stockholders for monetary damages for violations of a
director's fiduciary duty of care, including acts constituting gross negligence.
Such a provision would have no effect on the availability of equitable remedies,
such as an injunction or rescission, for breach of fiduciary duty. In addition,
no such provision may eliminate or limit the liability of a director for
breaching his duty of loyalty to the corporation or its shareholders, failing to
act in good faith, engaging in intentional misconduct or knowingly violating a
law, paying an unlawful dividend or approving an illegal stock repurchase, or
executing any transaction from which the director obtained an improper personal
benefit.
Section 1031 of the OGCA empowers a corporation to indemnify any person who
was or is a party to or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation), by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. With respect to actions or suits by or in the right of
the corporation, such indemnification is limited to expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit. Further, no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper. Additionally, a corporation is required to indemnify its
directors and officers against expenses to the extent that such directors or
officers have been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to above or in defense of any claim, issue
or matter therein.
An indemnification can be made by the corporation only upon a determination
made in the manner prescribed by the statute that indemnification is proper in
the circumstances because the party seeking indemnification has met the
applicable standard of conduct as set forth in the OGCA. The indemnification
provided by the OGCA shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors, or otherwise. A corporation also
has the power to purchase and maintain insurance on behalf of any person
covering any liability incurred by such person in his capacity as a director,
officer, employee or agent of the corporation, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability. The indemnification provided by the OGCA shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
II-1
<PAGE>
THE REGISTRANT'S CHARTER AND BYLAW PROVISIONS
The Registrant's First Amended and Restated Certificate of Incorporation
(i) limits its directors' liability for monetary damages to the Registrant and
its shareholders for breach of fiduciary duty except under the circumstances
outlined in Section 1006(B)(7) of the OGCA as described above, (ii) provides for
elimination or limitation of liability to the fullest extent permitted should
the OGCA be amended to authorize corporation action further eliminating or
limiting the personal liability of directors and (iii) provides for
indemnification to the fullest extent permitted by Section 1031 of the OGCA.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered. All expenses of
registration of the Shares will be borne by the Company. All of the amounts
shown are estimates, except the registration fee.
Securities and Exchange Commission registration fee........... $ 1,475.00
Legal fees and expenses....................................... $70,000.00
Accounting fees and expenses.................................. $20,000.00
Printing and engraving expenses............................... $ 8,000.00
Blue sky fees and expenses.................................... $ 3,950.00
----------
TOTAL EXPENSES $ 103,425
==========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth certain information regarding sales of securities
of the Company issued within the past three years, which were not registered
pursuant to the Securities Act of 1933, as amended (the "Securities Act").
There were no sales of securities of the Company in 1995. In September
1996, the Company offered for sale 142,857 shares of Class A common stock, par
value $0.50 per share (the "Class A Common Stock"), at a price of $7.00 per
share, pursuant to Section 4(2) of the Securities Act and Regulation D
promulgated thereunder (the "1996 Offering"). Pursuant to the 1996 Offering, the
Company sold for cash 51,943 shares of Class A Common Stock to 15 subscribers.
It is the Company's belief that each of such subscribers was a "sophisticated
investor" within the meaning of Section 4(2) of the Securities Act and that each
such subscriber had access to information regarding the Company and the proposed
transaction. No sales commissions were paid in connection with the sale of Class
A Common Stock and the securities were issued in reliance on the exemption from
registration provided by Section 4(2) and Regulation D of the Securities Act.
Each subscriber was provided an Offering Memorandum pursuant to which the offers
to sell the Class A Common Stock were made, and in which was expressly stated
the following representation of the Company:
"The Company will make available at a reasonable time prior to the
consummation of the transactions contemplated herein, to each purchaser of
unit(s) and his representative(s), the opportunity to ask questions of, and
receive answers from, the officers of the Company concerning the terms and
conditions of this Offering, and to obtain any additional information, to
the extent they possess such information or can acquire it without
unreasonable effort or expense, necessary to verify the accuracy of the
information set forth herein."
II-2
<PAGE>
Additionally, in June 1996, pursuant to the provisions of certain
convertible debentures of the Company (the "Convertible Debentures"), James L.
Smith and Charles L. Smith, both of whom were executive officers and directors
of the Company, were issued an aggregate of 40,664 shares of Class A Common
Stock (121,992 shares taking into account the 5 for 2 stock split effected in
September 1998). In December 1996, George Leger was issued 15,455 shares of
Class A Common Stock for one share of Preferred Stock of CLS Enterprises. In
January 1997, Mr. Leger was issued 10,000 shares of Class A Common Stock for the
George Leger IRA account. It is the Company's belief Mr. Leger was a
"sophisticated investor" within the meaning of Section 4(2) of the Securities
Act and that, pursuant to the negotiations by which the Class A Common Stock was
issued to Mr. Leger, he had access to information regarding the Company and the
proposed transaction. No sales commissions were paid in connection with the
above issuances and the securities were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
In June 1997, pursuant to the provisions of the Convertible Debentures,
James L. Smith and Charles L. Smith, executive officers and directors of the
Company, issued a promissory note in favor of the Company for the purchase of an
aggregate of 34,650 shares of Class A 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.
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 40,000 shares of Class A 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 negotiations by which BCLIC was acquired by the Company, it had access to
information regarding the Company and the proposed transaction. In April 1998,
pursuant to the provisions of the Convertible Debentures, Quinton Hiebert, an
executive officer of the Company, was issued 1,200 shares of Class A 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, the following directors, as compensation for services
rendered to the Company, were issued the following shares of Class A Common
Stock: (i) 200 shares to Dean Brown; (ii) 228 to Gary Ellis; (iii) 542 to Thomas
Sanders; (iv) 228 to Gary Skibicki; (v) 557 to Charles L. Smith; and (vi) 557 to
James L. Smith; (vii) 328 to Randal Beach; and (viii) 114 to Russell Graham.
In February 1998, the following directors, as compensation for services rendered
to the Company, were issued the following shares of Class A Common Stock: (i)
185 shares to Dean Brown; (ii) 385 to Gary Ellis; (iii) 385 to Thomas Sanders;
(iv) 200 to Gary Skibicki; (v) 385 to Charles L. Smith; (vi) 385 to James L.
Smith. No sales commissions were paid in connection with such issuances. The
securities were issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act.
II-3
<PAGE>
ITEM 27. EXHIBITS.
EXHIBIT NAME OF EXHIBIT
---------------
NUMBER
------
3.1* First Amended and Restated Certificate of Incorporation
3.2* First Amended and Restated Bylaws
4.1** Specimen Certificate of the Common Stock
4.2* See Articles V and X of the Company's Certificate of Incorporation and
Article VI of the Company's Bylaws (included herein as Exhibits 3.1
and 3.2, respectively)
4.3** Form of Promotional Shares Lock-In Agreement
5.1* Opinion of Day, Edwards, Federman, Propester & Christensen, P.C. as to
the legality of the securities being registered
10.1* Employment Agreement by and between the Company and James L. Smith
10.2* Employment Agreement by and between the Company and Charles L. Smith
10.3* Stock Purchase Agreement by and between the Company and BCLIC
10.4* Stock Purchase Agreement between the Company and Orville Homer Miller
etal.
10.5** Escrow Agreement between the Company and UMB Bank.
10.6* Stock Purchase Agreement between the Company and CLS Enterprises, Inc.
10.7* Designated Agency Officer Agreement
21.1* List of subsidiaries
23.1** Consent of Grant Thornton LLP, Independent Accountants
23.2** Consent of Hamilton and Associates, Inc.
23.3* Consent of Day, Edwards, Federman, Propester & Christensen, P.C.
(included in Exhibit 5.1)
27.1* Financial Data Schedule
99.1** Subscription Agreement
99.2* Report of Independent Certified Public Accountants, Hamilton and
Associates, Inc.
* Previously filed.
** Filed herewith.
II-4
<PAGE>
ITEM 28. UNDERTAKINGS.
1. The undersigned Registrant hereby undertakes:
(a) That, for the purpose of determining any liability under the
Securities Act, treat the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act as part of this Registration Statement as
of the time the Commission declared it effective.
(b) That, for the purpose of determining any liability under the
Securities Act, treat each post-effective amendment that contains a form of
prospectus as a new registration statement of the securities offered in the
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
(c) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the Prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) include any additional or changed material information on the
plan of distribution.
(d) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination or end of the offering.
2. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and has duly caused this Amendment No. 2
to the Registration Statement to be signed on its behalf by the undersigned,
thereon duly authorized in the City of Oklahoma City, State of Oklahoma, on
January 8, 1999.
SUMMIT LIFE CORPORATION
an Oklahoma corporation
By: /s/ Charles L. Smith
-------------------------------------------
Charles L. Smith, President
Pursuant to the requirement of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
NAME AND TITLE DATE
-------------- ----
/s/ *James L. Smith January 8, 1999
- ----------------------------------------------
James L. Smith,
Chairman of the Board of Directors and
Chief Executive Officer (Principal
Executive Officer)
/s/ Charles L. Smith January 8, 1999
- ----------------------------------------------
Charles L. Smith,
President, Chief Operating Officer and
Director (Principal Executive Officer)
/s/ *Randel Beach January 8, 1999
- ----------------------------------------------
Randel Beach
Director and President of BCLIC
/s/ *Dean Brown January 8, 1999
- ----------------------------------------------
Dean Brown,
Director
/s/ *Thomas D. Sanders January 8, 1999
- ----------------------------------------------
Thomas D. Sanders
Director
II-6
<PAGE>
/s/ Quinton L. Hiebert January 8, 1999
- ----------------------------------------------
Quinton L. Hiebert,
Vice President, Chief Financial Officer
and Secretary (Principal Financial Officer)
*By: Charles L. Smith
------------------------------------------
Attorney in fact
II-7
<PAGE>
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER SHARES
SUMMIT LIFE
SLC- CORPORATION
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR CERTAIN DEFINITIONS
THE STATE OF OKLAHOMA
CUSIP 866140 10 6
THIS IS TO CERTIFY THAT
IS THE OWNER OF
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF THE PAR VALUE OF ONE
CENT ($.01) PER SHARE OF
============================SUMMIT LIFE CORPORATION=============================
(the "Corporation") transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid until
countersigned by the Transfer Agent.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[CORPORATE SEAL]
/s/ QUINTON HIEBERT /s/ JAMES L. SMITH
SECRETARY CHAIRMAN OF THE BOARD
Countersigned and Registered:
UMB BANK, N.A.
By Transfer Agent
and Registrar
Authorized Signature
<PAGE>
SUMMIT LIFE
CORPORATION
The record holder of this Certificate may obtain from the Secretary of the
Corporation, upon request and without charge, a full statement of the
designation, relative rights, preferences and limitations of the shares of each
class authorized to be issued and the designation, relative rights, preferences
and limitations of each series of preferred shares authorized to be issued so
far as the same have been fixed and the authority of the Board of Directors to
designate and fix the relative rights, preferences and limitations of other
series.
- --------------------------------------------------------------------------------
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM- as tenants in common
TEN ENT- as tenants by the entireties
JT TEN- as joint tenants with right
of survivorship and not as
tenants in common
UNIF GIFT MIN ACT- ________________ Custodian ________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act __________________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value received, ________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
________________________________________________________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDE ZIP CODE OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
____________________________________________________________________ Attorney to
transfer the said stock on the books of the within-named Corporation with full
power of substitution in the promises.
Dated: _____________________ X _______________________________________________
X _______________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE, IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
SIGNATURE GUARANTEED: _______________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION, (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED, THE
CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.
<PAGE>
EXHIBIT 4.3
PROMOTIONAL SHARES LOCK-IN AGREEMENT
CLASS A ISSUER
I. This Promotional Shares Lock-In Agreement (the "Agreement") is entered into
on the __ day of January, 1999, by and between Summit Life Corporation (the
"Issuer"), whose principal place of business is located in Oklahoma City,
Oklahoma; Charles L. Smith and James L. Smith (each, a "Security Holder"
and collectively, the "Security Holders"). Capitalized terms used herein
and not otherwise defined shall have the meanings given them in the North
American Securities Administrators Association ("NASAA") Statement of
Policy on Corporate Securities Definitions.
WITNESSETH:
A. The Issuer has filed an application with the Securities Administrator
of the State of Oklahoma (the "Administrator") to register certain of
its Equity Securities for sale to public investors who are residents
of such state (the "Registration");
B. The Security Holders are the owners of an aggregate of 1,366,370
shares of the common stock of the Issuer.
C. As a condition to Registration, the Issuer and Security Holders (the
"Signatories") agree to be bound by the terms of this Agreement.
II. THEREFORE, each of the Security Holders agrees not to sell, pledge,
hypothecate, assign, grant any option for the sale of, or otherwise or dispose
of, whether or not for consideration, directly or indirectly, 658,185 shares of
the common stock of the Issuer, for an aggregate 1,316,370 shares (collectively,
the "Restricted Securities") and all certificates representing stock dividends,
stock splits, recapitalizations, and the like, that are granted to, or received
by, the Security Holders while the Restricted Securities are subject to this
Agreement.
Beginning one year from the completion date of the public offering, two and
one-half percent (2 1/2%) of the Restricted Securities may be released each
quarter pro rata among the Security Holders. All remaining Restricted
Securities shall be released from escrow on the anniversary of the second year
from the completion date of the public offering.
III. THEREFORE, the Signatories agree and will cause the following:
A. In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or
proceeding with a person who is not a Promoter, which results in the
distribution of the Issuer's assets or securities (a "Distribution"),
while this Agreement remains in effect, that:
<PAGE>
1. All holders of the Issuer's Equity Securities will initially
share on a pro rata, per share basis in the Distribution, in
proportion to the amount of cash or other consideration that they
paid per share for their Equity Securities (provided that the
Administrator has accepted the value of the other consideration),
until the shareholders who purchased the Issuer's Equity
Securities pursuant to the public offering ("Public
Shareholders") have received, or have had irrevocably set aside
for them, an amount that is equal to one hundred percent (100%)
of the public offering's price per share times the number of
shares of Equity Securities that they purchased pursuant to the
public offering and which they still hold at the time of the
Distribution, adjusted for stock splits, stock dividends
recapitalizations and the like; and
2. All holders of the Issuer's Equity Securities shall thereafter
participate on an equal, per share basis times the number of
shares of Equity Securities they hold at the time of the
Distribution, adjusted for stock splits, stock dividends,
recapitalizations and the like.
3. The Distribution may proceed on lesser terms and conditions than
the terms and conditions stated in paragraphs 1 and 2 above if a
majority of the Equity Securities that are not held by Security
Holders, officers, directors, or Promoters of the Issuer, or
their associates or affiliates vote, or consent by consent
procedure, to approve the lesser terms and conditions.
B. In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or
proceeding with a person who is a Promoter, which results in a
Distribution while this Agreement remains in effect, the Restricted
Securities shall remain subject to the terms of this Agreement.
C. Restricted Securities may be transferred by will, the laws of descent
and distribution, the operation of law, or by order of any court of
competent jurisdiction and proper venue.
D. Restricted Securities of a deceased Security Holder may be
hypothecated to pay the expenses of the deceased Security Holder's
estate. The hypothecated Restricted Securities shall remain subject
to the terms of this Agreement. Restricted Securities may not be
pledged to secure any other debt.
E. Restricted Securities may be transferred by gift to a Security
Holder's family members, provided that the Restricted Securities shall
remain subject to the terms of this Agreement.
F. With the exception of paragraph A.3 above, the Restricted Securities
shall have the same voting rights as similar Equity Securities not
subject to the Agreement.
Promotional Shares Lock-In Agreement
Page 2
<PAGE>
G. A notice shall be placed on the face of each stock certificate of the
Restricted Securities covered by the terms of the Agreement stating
that the transfer of the stock evidenced by the certificate is
restricted in accordance with the conditions set forth on the reverse
side of the certificate; and
H. A typed legend shall be placed on the reverse side of each stock
certificate of the Restricted Securities representing stock covered by
the Agreement which states that the sale or transfer of the shares
evidenced by the certificate is subject to certain restrictions until
January __, 2001 pursuant to an agreement between the named Security
Holder (whether beneficial or of record) and the Issuer, which
agreement is on file with the Issuer and the stock transfer agent from
which a copy is available upon request without charge.
I. The term of this Agreement shall begin on the date that the
Registration is declared effective by the Administrator (the
"Effective Date") and shall terminate:
1. On the anniversary of the second year from the completion date of
the public offering; or
2. On the date the Registration has been terminated if no securities
were sold pursuant thereto; or
3. If the Registration has been terminated, the date that checks
representing all of the gross proceeds that were derived
therefrom and addressed to the public investors have been placed
in the U.S. Postal Service with first class postage affixed; or
4. On the date the securities subject to this Agreement become
"Covered Securities" as defined under the National Securities
Markets Improvement Act of 1996, after written notice to, and
approval by, the Administrator.
J. This Agreement to be modified only with the written approval of the
Administrator.
IV. THEREFORE, the Issuer will cause the following:
A. A manually signed copy of the Agreement signed by the Signatories to
be filed with the Administrators prior to the Effective Date;
B. Copies of the Agreement and a statement of the per share initial
public offering price to be provided to the Issuer's stock transfer
agent;
C. Appropriate stock transfer orders to be placed with the Issuer's stock
transfer agent against the sale or transfer of the shares covered by
the Agreement prior to its expiration, except as may otherwise be
provided in this Agreement;
Promotional Shares Lock-In Agreement
Page 3
<PAGE>
D. The above stock restriction legends to be placed on the periodic
statement sent to the registered owner if the securities subject to
this Agreement are uncertificated securities.
Pursuant to the requirements of this Agreement, the Signatories have
entered into this Agreement, which may be written in multiple counterparts and
each of which shall be considered an original.
IN WITNESS WHEREOF, the Signatories have executed this Agreement in the
capacities, and on the dates, indicated.
SUMMIT LIFE CORPORATION
By Date: January __, 1999
-------------------------------------
Charles L. Smith,
President and Chief Operating Officer
CHARLES L. SMITH
Date: January __, 1999
- ---------------------------------------
JAMES L. SMITH
Date: January __, 1999
- ---------------------------------------
Promotional Shares Lock-In Agreement
Page 4
<PAGE>
EXHIBIT 10.5
SUMMIT LIFE CORPORATION
ESCROW AGREEMENT
THIS AGREEMENT, made to be effective as of the ____________ day of January,
1999, by and between Summit Life Corporation, an Oklahoma corporation (the
"Company") and UMB Bank Oklahoma City, Oklahoma, as escrow agent ("Escrow
Agent").
WITNESSETH:
WHEREAS, the Company intends to offer for sale to prospective investors (the
"Investors") up to 1,000,000 shares of common stock in the Company (the "Common
Stock"); and
WHEREAS, each Investor will be required to pay his subscription in full upon
subscribing ($5.00 per share, by check, draft or money order (the "Subscription
Proceeds"); and
WHEREAS, under the terms of the offering the Subscription Proceeds are
required to be held in escrow subject to the receipt and acceptance by the
Company of the minimum Subscription Proceeds of $700,000, including any
subscription by the Company, its officers and directors; and
WHEREAS, the officers and directors of the Company will offer and sell the
Common Stock without receiving any commissions or other fees; and
WHEREAS, no subscriptions to the Company will be accepted after receipt of
the maximum Subscription Proceeds of $5,000,000 or October 31, 1999, which ever
occurs first; and
WHEREAS, to facilitate compliance with the terms of the offering, the Company
desires to have the Subscription Proceeds deposited with the Escrow Agent and
the Escrow Agent desires to hold the Subscription Proceeds pursuant to the terms
and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
herein contained, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. APPOINTMENT OF ESCROW AGENT. The Company hereby appoints Escrow Agent as
the escrow agent to receive and to hold the Subscription Proceeds deposited with
Escrow Agent by the Company pursuant hereto, and Escrow Agent hereby agrees to
serve in such capacity during the term and based upon the provisions hereof.
2. DEPOSIT OF SUBSCRIPTION PROCEEDS. Pending receipt of the minimum
Subscription Proceeds of $700,000, the Company shall deposit the Subscription
Proceeds of each Investor with the Escrow Agent and shall deliver to the Escrow
Agent a copy of the Subscription Agreement of such Investor.
Payment for each subscription for Common Stock shall be in the form of a
check made payable to "Summit Life Corporation." The Escrow Agent shall
deliver a receipt to the Company for each deposit of Subscription Proceeds made
pursuant hereto.
3. INVESTMENT OF SUBSCRIPTION PROCEEDS. The Escrow Agent shall invest the
Subscription Proceeds in the Federated Investors Treasury Obligations Fund
(CUSIP number 60934N-872). The interest
-1-
<PAGE>
earned shall be added to the Subscription Proceeds and disbursed in accordance
with the provisions of paragraph 4 or 6, as the case may be.
4. DISTRIBUTION OF SUBSCRIPTION PROCEEDS. If the Escrow Agent:
(a) receives written notice from an authorized officer of the Company
that at least the minimum aggregate subscriptions of $700,000 have been received
and accepted by the Company, and
(b) determines that Subscription Proceeds for at least $700,000 as
determined by the Company have cleared the banking system and are good,
the Escrow Agent shall promptly release and distribute to the Company such
escrowed Subscription Proceeds which have cleared the banking system and are
good plus any interest paid and investment income earned on such Subscription
Proceeds while held by the Escrow Agent in an escrow account.
Any remaining Subscription Proceeds, plus any interest paid and investment
income earned on such Subscription Proceeds while held by the Escrow Agent in an
escrow account shall be promptly released and distributed to the Company by the
Escrow Agent as such Subscription Proceeds clear the banking system and become
good.
5. SEPARATE COMPANY ACCOUNT. During the continuation of the offering after
the receipt of at least the minimum aggregate subscriptions of $700,000 and
prior to October 31, 1999, any additional Subscription Proceeds may be deposited
by the Company directly in a separate Company account which shall not be subject
to the terms of this Agreement.
6. DISTRIBUTIONS TO SUBSCRIBERS.
(a) In the event that the Company will not be funded as contemplated
because less than the minimum aggregate subscriptions of $700,000 have been
received and accepted by the Company by twelve p.m. (noon), local time, on April
30, 1999, or for any other reason, the Company shall so notify the Escrow Agent,
whereupon the Escrow Agent promptly shall distribute to each Investor a refund
check made payable to such Investor in an amount equal to the Subscription
Proceeds of such Investor, plus any interest paid or investment income earned
thereon while held by the Escrow Agent in an escrow account as calculated by the
Company.
(b) In the event that a subscription for Stock submitted by an Investor
is rejected by the Company for any reason after the Subscription Proceeds
relating to such subscription have been deposited with the Escrow Agent, then
the Company promptly shall notify the Escrow Agent of such rejection, and the
Escrow Agent shall promptly distribute to such Investor a refund check made
payable to such Investor in an amount equal to the Subscription Proceeds of such
Investor, plus any interest paid or investment income earned thereon while held
by the Escrow Agent in an escrow account as calculated by the Company.
7. COMPENSATION AND EXPENSES OF ESCROW AGENT. The Company shall be solely
responsible for and shall pay the compensation of the Escrow Agent for its
services hereunder, as provided in Appendix 1 to this Agreement and made a part
hereof, and the charges, expenses (including any reasonable attorneys' fees),
and other out-of-pocket expenses incurred by the Escrow Agent in connection with
the administration of the provisions of this Agreement. The Escrow Agent shall
have no lien on the Subscription Proceeds deposited in an escrow account unless
and until the Company is funded with cleared Subscription Proceeds of at least
$700,000 and the Escrow Agent receives the notice described in Paragraph 4 of
this Agreement,
-2-
<PAGE>
at which time the Escrow Agent shall have, and is hereby granted, a prior lien
upon any property, cash, or assets held hereunder, with respect to its unpaid
compensation and nonreimbursed expenses, superior to the interests of any other
persons or entities.
8. DUTIES OF ESCROW AGENT. The Escrow Agent shall not be obligated to
accept any notice, make any delivery, or take any other action under this Escrow
Agreement unless the notice or request or demand for delivery or other action is
in writing and given or made by the party given the right or charged with the
obligation under this Escrow Agreement to give the notice or to make the request
or demand. In no event shall the Escrow Agent be obligated to accept any notice,
request, or demand from anyone other than the Company.
9. LIABILITY OF ESCROW AGENT. The Escrow Agent shall not be liable for any
damages, or have any obligations other than the duties prescribed herein in
carrying out or executing the purposes and intent of this Escrow Agreement;
provided, however, that nothing herein contained shall relieve the Escrow Agent
from liability arising out of its own willful misconduct or gross negligence.
The Escrow Agent's duties and obligations under this Agreement shall be entirely
administrative and not discretionary. The Escrow Agent shall not be liable to
any party hereto or to any third party as a result of any action or omission
taken or made by the Escrow Agent in good faith. The parties to this Agreement
will indemnify the Escrow Agent, hold the Escrow Agent harmless, and reimburse
the Escrow Agent from, against and for, any and all liabilities, costs, fees and
expenses (including reasonable attorney's fees) the Escrow Agent may suffer or
incur by reason of its execution and performance of this Agreement. In the
event any legal questions arise concerning the Escrow Agent's duties and
obligations hereunder, the Escrow Agent may consult with its counsel and rely
without liability upon written opinions given to it by such counsel.
The Escrow Agent shall be protected in acting upon any written notice,
request, waiver, consent, authorization, or other paper or document which the
Escrow Agent, in good faith, believes to be genuine and what it purports to be.
In the event that there shall be any disagreement between any of the parties
to this Agreement, or between them or either of any of them and any other
person, resulting in adverse claims or demands being made in connection with
this Agreement, or in the event Escrow Agent, in good faith, shall be in doubt
as to what action it should take hereunder, the Escrow Agent may, at its option,
refuse to comply with any claims or demands on it or refuse to take any other
action hereunder, so long as such disagreement continues or such doubt exists;
and in any such event, the Escrow Agent shall not be or become liable in any way
or to any person for its failure or refusal to act and the Escrow Agent shall be
entitled to continue to so refrain from acting until the dispute is resolved by
the parties involved.
BancFirst is acting solely as Escrow Agent and is not a party to, nor has it
reviewed or approved any agreement or matter of background related to this
Agreement, other than this Agreement itself, and has assumed, without
investigation, the authority of the individuals executing this Agreement to be
so authorized on behalf of the party or parties involved.
10. RESIGNATION OR REMOVAL OF ESCROW AGENT. The Escrow Agent may resign as
such following the giving of thirty days' prior written notice to the Company.
Similarly, the Escrow Agent
may be removed and replaced following the giving of thirty days' prior written
notice to the Escrow Agent by the Company.
-3-
<PAGE>
In either event, the duties of the Escrow Agent shall terminate thirty days
after the date of such notice (or as of such earlier date as may be mutually
agreeable); and the Escrow Agent shall then deliver the balance of the
Subscription Proceeds (and any interest paid or investment income earned thereon
while held by the Escrow Agent in an escrow account) in its possession to a
successor escrow agent as shall be appointed by the Company as evidenced by a
written notice filed with the Escrow Agent. If the Company shall have failed to
appoint a successor prior to the expiration of thirty days following the date of
the notice of resignation or removal, the then acting Escrow Agent may petition
any court of competent jurisdiction for the appointment of a successor escrow
agent or other appropriate relief; and any such resulting appointment shall be
binding upon all of the parties hereto.
Upon acknowledgment by any successor escrow agent of the receipt of the then
remaining balance of the Subscription Proceeds (and any interest paid or
investment income earned thereon while held by the Escrow Agent in an escrow
account), the then acting Escrow Agent shall be fully released and relieved of
all duties, responsibilities, and obligations under this Agreement.
11. TERMINATION. This Agreement shall terminate and the Escrow Agent shall
have no further obligation with respect hereto upon the occurrence of the
distribution of all Subscription Proceeds (and any interest paid or investment
income earned thereon while held by the Escrow Agent in an escrow account) as
contemplated hereby or upon the written consent of all the parties hereto.
12. NOTICE. Any notices or instructions, or both, to be given hereunder
shall be validly given if set forth in writing and mailed by certified mail,
return receipt requested, as follows:
If to the Escrow Agent:
UMB Bank
---------------------------------
204 North Robinson,
---------------------------------
Oklahoma City, Oklahoma 73102
---------------------------------
Attn. John Brown
---------------------------
Phone: (405) 239-5980
--------------------------
Facsimile: (405) 236-1971
----------------------
If to Summit Life Corporation:
Summit Life Corporation
3021 Epperly Drive
Oklahoma City, Oklahoma 73155
Attention: Charles L. Smith, President and Chief Operating Officer
Phone: (405) 677-0781
Facsimile: (405) 677-4953
Any party may designate any other address to which notices and instructions
shall be sent by notice duly given in accordance herewith.
-4-
<PAGE>
13. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in accordance with
the laws of the State of Oklahoma.
(b) This Agreement is binding upon and shall inure to the benefit of the
undersigned and their respective heirs, successors and assigns.
(c) This Agreement may be executed in multiple copies, each executed
copy to serve as an original.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the day and year first above written.
----------------------------------
As Escrow Agent
ATTEST:
By: By:
------------------------------ ------------------------------
(Authorized Officer) (Authorized Officer)
Summit Life Corporation
An Oklahoma Corporation
ATTEST:
BY: BY:
------------------------------ ------------------------------
Secretary Charles L. Smith, President & COO
-5-
<PAGE>
APPENDIX I TO ESCROW AGREEMENT
Compensation for Services of Escrow Agent
-----------------------------------------
Escrow Agent services shall be performed without charge to the Company;
provided however, that if the Escrow Agent is required to distribute refund
checks to Investors pursuant to Section 6 of the Escrow Agreement, the Company
agrees to pay Escrow Agent a fee of $1,000.00 plus $15.00 per disbursement.
-6-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 3, 1998 for Summit Life Corporation and
Subsidiaries and our report dated April 3, 1998 for Benefit Capital Life
Insurance Company accompanying the respective financial statements contained in
the Registration Statement and Prospectus. We consent to the use of the
aforementioned reports in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts".
GRANT THORNTON LLP
Oklahoma City, Oklahoma
January 8, 1999
<PAGE>
[LETTERHEAD OF HAMILTON & ASSOCIATES, INC. APPEARS HERE]
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 6,1997 for Equity Mortgage Services, Inc.
accompanying the respective financial statements contained in the Registration
Statements and Prospectus. We consent to the use of the aforementioned report
in the Registration Statements and Prospectus, and to the use of our name as it
appears under the caption "Experts"
/s/ HAMILTON & ASSOCIATES, INC.
HAMILTON & ASSOCIATES, INC.
Oklahoma City, Oklahoma
January 8, 1999
<PAGE>
EXHIBIT 99.1
EXHIBIT A
SUBSCRIPTION ORDER FORM
General
This form is to be completed and returned to SUMMIT LIFE CORPORATION (the
"Company") by all persons electing to subscribe for shares of Common Stock of
the Company. Before completing this subscription order form, you are urged to
read carefully the prospectus mailed to you with this form, and, if you have any
questions, to refer to the accompanying "Questions and Answers" supplement. IF
YOU DO NOT COMPLETE AND SIGN THIS SUBSCRIPTION ORDER FORM PROPERLY, IT MAY BE
REJECTED.
The Company will terminate the Offering unless on or before _________, the
Company has accepted subscriptions and payment in full for an aggregate of at
least 140,000 shares. If a minimum of at least 140,000 shares has not been sold
by ______, 1999, the Company will promptly return all investors' funds, with
interest. Interest on subscriptions is not otherwise payable.
--------------------------------------------------
- --------------------------------------------------------------------------------
Number of Shares
Fill in the number of shares you wish to purchase (which must be a whole number
and which must be at least 100):
NUMBER OF SHARES TO BE PURCHASED X SUBSCRIPTION PRICE = AMOUNT DUE
===============================================================================
===============================================================================
--------------------------------------------------
Payment
If you are purchasing shares, you must enclose a check or money order in U.S.
dollars representing "good funds" payable to "Summit Life Corporation" for the
total amount of your purchase, as indicated above.
When you have completed this Subscription Order Form, please mail the form with
your check or money order in the postage-paid envelope provided. Your
Subscription Order Form and payment in full must be received by the Company by
midnight, Oklahoma City time, on __________________, 1999. If the postage-paid
envelope is lost, your Subscription Order Form and payment in full should be
returned by mail to Summit Life Corporation, P.O. Box 15808, Oklahoma City,
Oklahoma 73155. If delivered by hand, express mail or overnight courier,
deliver to Summit Life Corporation, 3021 Epperly Drive, Oklahoma City, Oklahoma
73155. Stock certificates will be mailed to you within 10 days after the
closing of the Offering.
--------------------------------------------------
Page 1 of Subscription Order Form
<PAGE>
Stock Registration
(PLEASE PRINT CLEARLY)
Please indicate the name(s) in which your stock should be registered and check
the appropriate box for the form in which your stock should be registered. You
may make any corrections to your name and address (from that shown at the top of
this form) on the lines provided.
Name:
- ----
- --------------------------------------------------------------------------------
(First Name) (M.I.) (Last Name) (Social Security # or Tax ID #)
(stock certificate will show this number)
- --------------------------------------------------------------------------------
(First Name) (M.I.) (Last Name) (Social Security # or Tax ID #)
(stock certificate will show this number)
Street Address:
- ---------------
- ------------------------------------------------------------------
(City) (State) (Zip Code)
Form of Stock Ownership (check one):
- -----------------------------------
/ / Corporation
/ / Partnership
/ / Individual
/ / Joint Tenants with Right of Survivorship
/ / Tenants in Common
/ / Individual Retirement Account (IRA)
/ / Keogh Plan
/ / As Custodian for _________________ under Uniform Gift to Minors Act
of the State of ________________
/ / As Trustee for _________________
Date of Trust __________________
/ / As Executor ____________________
/ / Other: _________________________________________________________________
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Page 2 of Subscription Order Form
<PAGE>
Telephone Numbers
Please provide a phone number at which you can be reached in the event that we
have questions regarding the information that you have supplied:
Daytime ( )
-----------------------------
Evening ( )
-----------------------------
---------------------------------------------------
Acknowledgments and Signature
In order for you to purchase shares of the Company's Common Stock in the
Offering, you must sign this Subscription Order Form and date it.
Please sign exactly as you have printed your name in this Form. If you have
listed more than one name in this Form, all those listed must sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
your full title as such. If signing for a corporation, sign by an authorized
officer and indicate title. If a partnership, sign in the name of an authorized
person.
I (WE) ACKNOWLEDGE RECEIPT OF THE PROSPECTUS AND MY (OUR) OFFER TO PURCHASE
SHARES, AS SET FORTH ON THIS SUBSCRIPTION ORDER FORM. UNDER PENALTIES OF
PERJURY, I (WE) CERTIFY THAT (1) THE SOCIAL SECURITY NUMBER OR TAX ID NUMBERS
GIVEN ABOVE IS (ARE) CORRECT; AND (2) I (WE) AM (ARE) NOT SUBJECT TO BACKUP
WITHHOLDING TAX (YOU MUST CROSS OUT #2 IF YOU HAVE BEEN NOTIFIED BY THE INTERNAL
REVENUE SERVICE THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING BECAUSE OF REPORTING
INTEREST OR DIVIDENDS ON YOUR TAX RETURN).
SIGNATURE: DATE:
- ------------------------------------------ ----------------------------
SIGNATURE: (IF SECOND SIGNATURE REQUIRED) DATE:
- ------------------------------------------ ----------------------------
IF YOU HAVE ANY QUESTIONS, PLEASE CALL THE COMPANY AT (405) 677-0781.
Page 3 of Subscription Order Form
<PAGE>
EXHIBIT B
[LOGO OF SUMMIT LIFE CORPORATION APPEARS HERE]
OFFERING OF COMMON STOCK
$5.00 PER SHARE
QUESTIONS AND ANSWERS
Summit Life Corporation (the "Company"), the parent company of Summit Life
and Annuity Company, Family Benefit Life Insurance Company and Benefit Capital
Life Insurance Company, is "going public." One million (1,000,000) shares of
the Company's Common Stock will be offered to the public. If all shares offered
are sold, purchasers in this Offering will own approximately 33% of the
outstanding Common Stock of the Company. The following information is designed
to answer several basic questions about the Offering and the transactions to be
completed by the Company in going public. Please refer to the Prospectus for a
detailed explanation of the Offering. If you have any questions, please contact
the Company at 1-405-677-0781.
1. WHAT IS THE OFFERING?
The Offering is the transaction by which the Company is offering to sell
its Common Stock to the public.
2. AM I ELIGIBLE TO PARTICIPATE IN THE OFFERING IF I AM ALSO A POLICYHOLDER
WITH ONE OF THE COMPANY'S SUBSIDIARY LIFE INSURANCE COMPANIES?
Yes. Being a policyholder with one of the Company's life insurance
subsidiaries does not preclude you from purchasing shares in this Offering.
3. WILL THE COMPANY'S OFFERING AFFECT MY INSURANCE POLICY?
No. The Offering will not, in any way, change premiums or reduce policy
values, guarantees or any other obligations of any of the life insurance
subsidiaries to its policyowners.
4. HOW MANY SHARES OF COMMON STOCK CAN I BUY AND WHAT IS THE PRICE?
You may subscribe for a minimum of 100 shares, at a per share subscription
price of $5 (the "Subscription Price").
5. ARE THERE ANY RISKS ASSOCIATED WITH AN INVESTMENT IN THE COMMON STOCK?
As with any stock, there are certain risks inherent in an investment in the
Common Stock. These risks are discussed in detail in the "Risk Factors"
section of the Prospectus beginning on page 6 of the Prospectus and in
other areas of the Prospectus. As a potential investor, you should carefully
consider the "Risk Factors" section and other information in the Prospectus
prior to making an investment decision regarding the Common Stock.
Questions and Answers-Page 1
<PAGE>
6. HOW DO I SUBSCRIBE FOR SHARES?
(1) Complete and sign the enclosed Subscription Order Form related to the
Offering;
(2) Mail the Form with a check or money order (a certified check is
acceptable, but not required) for the number of shares in the enclosed
envelope. The envelope is for United States Postal Service Priority
Mail. It is pre-addressed and postage-paid. You can send it by (1)
dropping it off at your local post office or (2) placing it in a
mailbox.
If you misplace the envelope, mail your Form and payment to:
Summit Life Corporation
P.O. Box 15808
Oklahoma City, Oklahoma 73155
or, if delivery is by hand, express mail or overnight courier, use the
following address:
Summit Life Corporation
3021 Epperly Dr.
Oklahoma City, Oklahoma 73155
Note: Your check must be in "good funds" meaning that: it must be drawn
on a U.S. bank, payable in U.S. dollars; a check returned for
insufficient funds is not "good funds"--at the option of the Company it
may be returned to the sender with no attempt to redeposit. A money
order must be payable in U.S. dollars.
7. WHAT IS THE SUBSCRIPTION ORDER FORM?
The Subscription Order Form is the document that you must complete, sign and
return to the Company in order to purchase shares in the Offering. The
document requires certain important information, such as your name, address
and social security number, or Taxpayer Identification Number, as
appropriate. The Subscription Order Form also requires you to confirm that
you have received the Prospectus. A Subscription Order Form is included in
this Subscription Package. Photocopies of the Subscription Order Form may be
returned to the Company, but must include your original signature.
8. WHAT FORM OF PAYMENT SHOULD I USE WHEN I RETURN THE SUBSCRIPTION ORDER
FORM?
Payment may be made only by check or money order. Cash or credit card
payments will not be accepted. Upon receipt of your Subscription Order Form
by the Company, your check or money order will be deposited by the Company
in an account with the Escrow Agent, for safekeeping until the earlier of
(i) the release of funds from escrow, upon the obtaining of subscriptions
for at least 140,000 shares, or (ii) the termination of the Offering, if the
Company has not accepted subscriptions and payment in full for an aggregate
of at least 140,000 shares by April 30, 1999.
9. WHO SHOULD BE THE PAYEE ON MY CHECK OR MONEY ORDER?
Your check or money order should be made payable to "Summit Life
Corporation." Please ensure your name is on your check or shown as the
remitter on a money order.
10. HOW SHOULD I RETURN MY SUBSCRIPTION ORDER FORM?
Return your fully completed and signed Subscription Order Form along with
your check or money order to the Company in the enclosed envelope. If you
lose the envelope, the address is listed in Question 6.
Questions and Answers-Page 2
<PAGE>
11. WILL I EARN INTEREST ON FUNDS SUBMITTED TO PURCHASE SHARES IN THE OFFERING?
Funds you submit to purchase shares in the Offering will not earn interest
unless the Offering is terminated, under the circumstances described in
Question 8. That is, if a minimum of at least 140,000 shares has not been
sold by April 30, 1999, the Company will promptly return all investors'
funds, with interest.
Interest on subscriptions is not otherwise payable.
--------------------------------------------------
12. WHAT IS THE DEADLINE TO SUBMIT MY SUBSCRIPTION ORDER FORM AND CHECK FOR
GOOD FUNDS TO THE COMPANY?
The Company must accept subscriptions and payment in full for at least
140,000 shares by April 30, 1999. Otherwise, the Company will terminate the
Offering and return all investors' funds, with interest. If the minimum
number of shares is received by such date, the Company will continue the
Offering until October 31, 1999.
13. CAN I FIND OUT IF MY SUBSCRIPTION ORDER FORM HAS BEEN RECEIVED BY THE
COMPANY PRIOR TO THE CLOSING OF THE OFFERING?
Yes, an acknowledgment of receipt will be mailed by the Company to you.
14. MAY I REVOKE MY SUBSCRIPTION ORDER FORM ONCE IT HAS BEEN RECEIVED BY THE
COMPANY?
No. Once your Subscription Order Form has been received by the Company, it
is irrevocable. After the Company has gone public, you can buy/sell shares
as with any other publicly traded stock.
15. IF I SUBMIT MY CHECK OR MONEY ORDER FOR GOOD FUNDS TOGETHER WITH A PROPERLY
COMPLETED AND SIGNED SUBSCRIPTION ORDER FORM, WILL I DEFINITELY BECOME A
STOCKHOLDER OF THE COMPANY?
Not necessarily. As stated above in answer to Question 12, the Company will
terminate the Offering if it does not accept subscriptions and payment in
full for at least 140,000 shares by April 30, 1999. If this occurs, your
funds would be returned in full, with interest.
16. WHEN CAN I EXPECT TO RECEIVE THE STOCK CERTIFICATE FOR MY COMMON STOCK?
It is expected that the Offering will close on October 31, 1999, unless
terminated at an earlier date. A stock certificate for your shares and any
refund check, if applicable, will be mailed to you within 10 days
thereafter.
17. HOW MANY STOCK CERTIFICATES WILL I RECEIVE FOR MY SHARES OF COMMON STOCK?
You will receive one stock certificate representing all shares of Common
Stock purchased by you in the Offering.
18. WHAT IF MY ADDRESS CHANGES EITHER DURING THE SUBSCRIPTION OFFERING OR
BEFORE I RECEIVE MY STOCK CERTIFICATE?
The stock certificate will be mailed to the address provided in the
Subscription Order Form. Therefore, it is your responsibility to provide
appropriate forwarding instructions to your post office, or, when
completing your Subscription Order Form, provide an address where you will
be sure your mail will be safely received.
19. WILL I BE CHARGED A COMMISSION ON THE PURCHASE OF THE COMMON STOCK IN THE
OFFERING?
No brokerage commission will be charged on the sale of shares in the
Offering.
Questions and Answers-Page 3
<PAGE>
20. CAN I PURCHASE SHARES OF COMMON STOCK IN THE OFFERING THROUGH MY BROKER?
No. Shares offered in the Offering may be purchased only through the
subscription process described in the Prospectus and in the Subscription
Order Form. After the Company has gone public, its Common Stock can be
bought/sold like any other common stock.
22. WHAT STOCK EXCHANGE WILL THE COMMON STOCK BE TRADED ON AND WHAT WILL THE
TICKER SYMBOL BE?
The Company intends to apply to the Nasdaq Stock Market to have its shares
of Common Stock authorized for listing on the Nasdaq SmallCap Market.
Because its shares are not currently listed, the Company does not yet have a
ticker symbol for the Common Stock. The Company believes that the
consummation of this Offering (assuming the sale of the maximum 1,000,000
shares) will enable it to meet the listing requirements for its Common Stock
to be listed on the Nasdaq SmallCap Market. However, even if the Company is
not able immediately to become listed on the Nasdaq SmallCap Market, the
Company will file quarterly, annual and other reports with the Securities
and Exchange Commission. The availability to the public of such information
should enable the Company's Common Stock to be tradable even in the absence
of an exchange listing. Securities which are not listed on any stock
exchange but which are publicly traded are said to be "over the counter"
securities. The Company's preference is to have its Common Stock listed as
soon as possible on the Nasdaq SmallCap Market. However, until such time as
the Common Stock is listed on the Nasdaq or any other recognized stock
exchange, the Company will undertake to make publicly available whatever
information is necessary in order that its Common Stock may at least be
traded in the "over-the-counter" market.
23. CAN I CALL THE COMPANY WITH ANY QUESTIONS?
You may call the Company at 1-405-677-0781.
January 7, 1999
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK.
THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
Questions and Answers-Page 4
