U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________.
Commission File Number 000-25253
SUMMIT LIFE CORPORATION
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(Name of small business issuer in its charter)
OKLAHOMA 73-1448244
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3021 Epperly Dr., P.O. Box 15808, Oklahoma City, Oklahoma 73155
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (405) 677-0781
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
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Issuer's revenues for its most recent fiscal year were $812,734.
The aggregate market value of the registrant's common stock, $.01 par
value, held by non-affiliates of the registrant as of March 27, 2000 was
$3,031,256 based on the closing price of $4.00 per share on that date as
reported by the OTC Bulletin Board. As of March 27, 2000, 2,267,605 shares of
the registrant's common stock, $.01 par value, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
DOCUMENTS INCORPORATED BY REFERENCE: Registrant's Proxy Statement for the 2000
Annual Meeting of Stockholders is incorporated by reference in Part III, Items 9
through 12, of this Form 10-KSB.
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SUMMIT LIFE CORPORATION
FORM 10-KSB
For the Fiscal Year Ended December 31, 1999
TABLE OF CONTENTS
Part I.
Item 1. Description of Business........................................ 1
Item 2. Description of Property........................................ 10
Item 3. Legal Proceedings.............................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............ 10
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters....... 10
Item 6. Management's Discussion and Analysis or Plan of Operation...... 11
Item 7. Financial Statements........................................... 18
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure........................................... 18
Part III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.............. 18
Item 10. Executive Compensation......................................... 19
Item 11. Security Ownership of Certain Beneficial Owners and Management. 19
Item 12. Certain Relationships and Related Transactions................. 19
Item 13. Exhibits and Reports on Form 8-K............................... 19
Signatures ............................................................... 21
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-KSB includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements other than statements of historical facts included in
this Report, including, without limitation, statements regarding the Company's
future financial position, business strategy, budgets, projected costs and plans
and objectives of Management for future operations, are forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"intend," "estimate," "anticipate" or "believe" or the negative thereof or
variations thereon or similar terminology. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
Such statements are based upon numerous assumptions about future conditions
which may ultimately prove to be inaccurate and actual events and results may
materially differ from anticipated results described in such statements.
Important factors that could cause actual results to differ materially from the
Company's expectations ("cautionary statements") include the risks inherent
generally in the insurance and financial services industries, the impact of
competition and product pricing, changing market conditions, the risks disclosed
in the Company's Annual Report on Form 10-KSB for the Year Ended December 31,
1999 under "ITEM 6--Management's Discussion and Analysis or Plan of Operation,"
and elsewhere in this Report. All subsequent written and oral forward-looking
statements attributable to the Company, or persons acting on its behalf, are
expressly qualified in their entirety by these cautionary statements. The
Company assumes no duty to update or revise its forward-looking statements based
on changes in internal estimates or expectations or otherwise. As a result, the
reader is cautioned not to place reliance on these forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Summit Life Corporation, an Oklahoma corporation formed in 1994 (the
"Company"), is an insurance holding company. The Company's primary focus
currently is its life insurance operations, although historically it has also
provided residential mortgage loan processing services to individuals and
financing to medical accounts receivable factoring entities.
The Company's growth has been fueled primarily through acquisitions,
starting in 1994 when it acquired an Oklahoma-chartered life insurance company.
Since then, the Company has acquired three additional life insurance companies
in Texas and Louisiana. The Company consolidated its operations in 1999 by
combining three of the companies into one company operating in both Texas and
Oklahoma and selling the fourth company which operated in Louisiana. The
Company's premium revenue increased from $121,192 in 1998 to $213,598 in 1999,
and the Company believes that internal growth, coupled with strategic
acquisitions made available by the current consolidation of the insurance
industry, present the Company with good opportunities to achieve its operating
strategy. SEE "ITEM 6-MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION."
The Company's operating strategy is to continue to make acquisitions of
small, marginally profitable or unprofitable insurance companies, consolidate
and streamline the administrative functions of these small companies, improve
their investment yields through active asset management in a centralized
investment operation and eliminate their unprofitable products and distribution
channels. The Company believes that it is particularly well suited to make such
acquisitions and to capitalize on the cost savings that can be realized by
consolidating the administrative functions of the acquired companies.
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As of December 31, 1999, the Company had approximately 913 life
insurance policies and annuity contracts outstanding and individual life
insurance in force of approximately $14 million. As of December 31, 1999, the
Company had total assets of approximately $7 million and total shareholders'
equity of approximately $1,016,000.
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.
History
The Company was formed in 1994 and, since inception, has acquired four
life insurance companies with operations in, variously, Oklahoma, Texas and
Louisiana. Three of these companies were combined in 1999 to form the Company's
flagship company, Great Midwest Life Insurance Company ("GMLIC"), a
Texas-domiciled life insurance company operating in Texas and Oklahoma. The
Louisiana-domiciled subsidiary was sold in December 1999 as a result of the
Company's decision to concentrate its focus on Oklahoma and Texas.
The Company closed its initial public offering on June 30, 1999 after
raising net proceeds of approximately $712,000. The proceeds of the offering
were used to repay corporate indebtedness and to increase the capital and
surplus of the subsidiary insurance company as well as for general corporate
purposes.
Recent Events
On November 10, 1999, the Company entered into a Stock Purchase
Agreement with First Alliance Insurance Company ("First Alliance"), to sell to
First Alliance 100% of the capital stock of the Company's Louisiana-domiciled
life insurance subsidiary, Benefit Capital Life Insurance Company ("BCLIC").
Pursuant to the terms of the Stock Purchase Agreement, which closed on December
30, 1999, First Alliance paid the Company approximately $519,000 in cash and
issued to the Company 25,000 shares of First Alliance's Class A common stock.
On February 15, 2000, GMLIC executed an agreement, which is expected to
close in April 2000, regarding the acquisition of 100% of the common stock of
Texas Savings Life Insurance Company, a Texas life insurance company ("Texas
Savings"), for an amount equal to the statutory capital and surplus of Texas
Savings as of December 31, 1999, plus $400,000. The transaction is subject to
the approval of the Texas Department of Insurance, which is expected during the
second quarter of 2000. See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION."
Operations
Insurance Products
General
Through its insurance subsidiary, 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 niche is middle income individuals, families and small businesses
throughout its marketing territory. The Company's business strategy 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 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.
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The Company has realized very low entry costs in its purchases of small
insurance companies. The Company minimizes operating expenses by centralizing,
standardizing and more efficiently performing many functions common to most life
insurance companies. The operations performed by the Company include
underwriting and policy administration, accounting and financial reporting,
marketing, regulatory compliance and asset management. The Company believes that
it is currently utilizing just over 10% of its information technology systems
capability in the administration of these back office operations.
Factors Affecting Insurance Operations
The Company believes that its operating performance is significantly
impacted by four basic elements: mortality, persistency, operating expenses and
investment yield. The Company believes that its results for each of these four
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. The Company fully underwrites
each regular application and has no group underwriting and maintains very little
guaranteed issue business.
The Company has consistently achieved favorable persistency on its life
insurance products (i.e., lower lapse rates). This high persistency has been
achieved by providing quality service to its policyholders, incentives to agents
by, among other things, grading production bonuses by actual persistency, paying
persistency bonuses, awarding recognition for both agency and agent persistency
achievements, and monitoring agency persistency on a quarterly and annual basis.
Persistency is the extent to which policies sold remain in force. Policy lapses
over those actuarially anticipated could have an adverse effect on the financial
performance of the Company. Policy acquisition costs are deferred and expensed
over the premium paying period of a policy. Excess policy lapses, however, cause
the immediate expensing or amortizing of deferred policy acquisition costs.
Provided the Company maintains lapse and surrender rates within its pricing
assumptions for its insurance policies, the Company believes that the present
lapse and surrender rate should not have a material adverse effect on the
Company's financial results. For the years ended December 31, 1998 and 1999, the
Company's lapse ratio on ordinary business was 4% and 11%, respectively. The
increase in lapse ratio was attributable primarily to the acquisition of GMLIC,
and the Company anticipates that such ratio will return to historical levels
(below 10%) during 2000.
The Company has aggressively managed its cost structure, while
realizing certain operating efficiencies from minimal personnel and reduced
overall costs as a result of the various acquisitions it has effected since
1994. Other factors contributing to the Company's lower cost structure include:
a flat organizational structure which allows the Company to be responsive to
changing business conditions; the location of the Company in a geographic area
which provides lower cost operations than found in many other areas of the
country; a well-trained experienced workforce; and 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.
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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.
Through GMLIC, the Company markets, issues and administers a variety of
fixed rate deferred annuity products, including single premium and flexible
premium deferred annuities. In a fixed rate deferred annuity, the insurance
company assumes the risk of interest fluctuations and pays a minimum fixed rate
of interest, usually 3% to 4% per year, with an excess amount payable based on
investment yields of its investment portfolio. Single premium deferred annuities
("SPDAs"), in general, are savings vehicles in which the policyholder makes a
single premium payment to an insurance company. The insurance company credits
the account of the annuitant with earnings at an interest rate (the "crediting
rate"), which is declared by the insurance company from time to time and may
exceed but may not be lower than any contractually guaranteed minimum crediting
rate. All of the Company's annuities have a minimum guaranteed crediting rate.
The Company also offers flexible premium deferred annuities ("FPDAs"). FPDAs are
deferred annuities in which the policyholder may elect to make more than one
premium payment. The Company currently does not offer variable annuity products.
The Company periodically establishes an interest crediting rate for its
new annuity policies. In determining the Company's interest crediting rate on
new policies, management considers the competitive position of the Company,
prevailing market rates and the profitability of the annuity product. The
Company maintains the initial crediting rate for a minimum period of one year.
Thereafter, the Company may adjust the crediting rate at its discretion,
although historically such adjustments have generally been made on a quarterly
basis. In establishing renewal crediting rates, the Company primarily considers
the anticipated yield on its investment portfolio. Interest rates credited on
the Company's in force annuity policies ranged from 5.15% to 8.15% at December
31, 1999. All of the Company's annuity products have minimum guaranteed
crediting rates of 3.0% for the life of the policy. At December 31, 1999, more
than 98% of the Company's in force annuity policies were beyond the initial
crediting rate period.
Certain of the Company's annuity policies have a bonus crediting rate
for the first year of the policy, which typically exceeds the annual crediting
rate by 1% to 3%. The bonus and the base crediting rates are fully disclosed in
the annuity contract. The Company incorporates a number of features in its
annuity products designed to reduce the early withdrawal or surrender of the
policies and to partially compensate the Company for lost investment
opportunities and costs if policies are withdrawn early. Certain of the
Company's deferred annuity contracts provide for penalty free partial
withdrawals, typically up to 10% of the accumulation value annually. Surrender
charge periods on annuity policies currently range from five years to the term
of the policy, with the majority of such policies being issued with a surrender
charge period of more than seven years. The average length of the surrender
period on the Company's deferred annuity policies issued during 1998 and 1999
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, 1999, 56% of the Company's annuity liabilities were
subject to a surrender charge of 5% or more.
Tax Qualified Annuities
General. The Company also markets tax qualified retirement annuities
that meet the requirements of Section 403(b) of the Internal Revenue Code of
1986 ("TSAs") to employees of public schools and certain other tax exempt
organizations. Teachers, school employees and employees of other tax exempt
organizations purchase TSAs through automatic payroll deductions. TSA products
tend to be purchased by customers who are younger than purchasers of the
Company's other annuity products. Therefore, the Company's specialty TSA
products tend to incorporate features that are attractive to customers in this
younger age bracket who have longer to accumulate before retirement, such as
combining a more competitive crediting interest rate offset with a longer
surrender charge period. The Company believes that the market for TSAs is
attractive because TSAs broaden its customer base and provide an ongoing source
of premium renewals. Additionally, because of their tax features and transfer
restrictions, TSAs are less likely to be surrendered, making them a more stable
and dependable source of profits for the Company. In addition to TSAs, the
Company also sells other tax qualified retirement annuities such as Individual
Retirement Annuities and other Employee Pension type programs. Tax qualified
retirement annuity values totaled almost $1,300,000 or approximately 27% of the
total annuities sold by the Company since inception.
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Favorable Tax Treatment. Under the Internal Revenue Code ("Code"),
income taxes otherwise payable on investment earnings are deferred on earnings
unpaid during the accumulation period of certain life insurance and annuity
policies. This favorable tax treatment may give the Company's annuity policies a
competitive advantage over other investment or savings vehicles that do not
offer this benefit. To the extent that the Code may be revised to eliminate or
reduce the tax deferred status of life deferred payment annuity products, or to
establish a tax deferred status to any competing policies, the Company's
competitive advantage may be adversely affected.
Traditional Life Insurance
Term Life. The Company's subsidiary offers a low cost 10 year level
term life insurance product with level premiums for periods of ten years and an
annually renewable level term product which provides for increasing premiums in
five year durations, both utilizing a low indeterminate premium structure
afforded to it by its primary reinsurance company. The Company generally retains
a small fixed portion of the insurance risk, then sells or cedes a portion of
its risks to its reinsurer, who in turn pays an additional allowance or
commission to the Company. This allows the Company to transfer a portion of its
risk and continue to grow its premium revenues and surplus. These term products
are designed for and sold to individuals ages 20 through 60 and terminate at age
70. While term life normally is bought very inexpensively by consumers, it is
also priced by companies using historical data that illustrates certain of these
coverages, when using adequate reinsurance, will not result in adverse claims.
Whole Life. The Company's subsidiary markets low cost guaranteed
premium products in which premiums are payable for the life of the insured and
insurance protection (upon certain conditions being met) is afforded for the
insured's lifetime. The premium paid for such whole life policies is generally
higher than the premium for comparable amounts of term insurance in the policy's
early years but is generally lower in the later years of the policies life. The
policyholder may borrow against the policy, provided there is sufficient cash
values, at a rate that is comparable or lower than other conventional lending
sources. The Company generally holds all cash values and if a death occurs it
pays death claims then collects from the reinsurer to recover the excess of its
retention limits and benefits paid.
Beginning January 1999, the life insurance products of the Company's
subsidiary included annuities in addition to traditional life insurance
products. GMLIC also offers a graded benefit life product which is offered on an
individual basis, primarily to persons age 40 to 85 and in amounts of $1,000 to
$5,000, without evidence of insurability. Benefits paid are less than the face
amount of the policy during the first two years, except in cases of accidental
death.
Insurance Underwriting
The Company follows detailed, uniform underwriting practices and
procedures in its insurance business which are designed to assess risks before
issuing coverage to qualified applicants. The Company has professional
underwriters who evaluate policy applications on the basis of information
provided by applicants and others. Management believes that its actual mortality
results 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.
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Reinsurance
Consistent with the general practice of the life insurance industry,
the Company's subsidiary reinsures portions of 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 December 31, 1999, the policy risk retention limit of the
Company's subsidiary on the life of any one individual did not exceed $10,000;
reinsurance ceded by the Company's subsidiary represented 84% of gross combined
life insurance in force. At December 31, 1999, the Company's largest reinsurer,
Optimum Re Insurance Company, accounted for approximately 83% of the $14 million
of the total insurance in force.
Investments
Investment activities are an integral part of the Company's business;
investment income is a significant component of the Company's 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 maintain crediting rates at levels
necessary to avoid narrowing of spreads under certain market conditions. For the
year ended December 31, 1999, the average gross yield of the Company's invested
assets was approximately 7.3% and the average credited rate was 5.5%.
The Company balances the duration of its invested assets with the
expected duration of benefit payments arising from insurance liabilities. At
December 31, 1999, the adjusted modified duration of debt securities and short
term investments was 6.0 years. At December 31, 1999, the duration of the
Company's insurance liabilities was 7.0 years.
For information regarding the composition and diversification of the
investment portfolio of the Company and its subsidiary, see Note B to the
Company's Consolidated Financial Statements.
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Acquisitions and Consolidations
General
The Company's operating strategy is to continue to make acquisitions of
small, marginally profitable or unprofitable insurance companies, consolidate
and streamline the administrative functions of these small companies, improve
their investment yields through active asset management by a centralized
investment operation and eliminate their unprofitable products and distribution
channels. Because of their small size, such companies are often overlooked as
potential acquisition candidates by other companies in the industry. 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.
Historical Acquisitions
The Company's growth to date has been fueled primarily through
acquisitions. Since 1994, the Company has acquired four life insurance
companies. During 1999, three of these companies were combined, either by merger
or through transfer of operations, to create one company, operating in Texas and
Oklahoma, while a fourth company was sold. 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 continue to lower unit costs by increasing
the number of policies and the amount of premiums over which fixed expenses are
spread.
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 technological obsolescence, the 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 these factors have created acquisition opportunities often
overlooked by the large insurance companies. The Company intends to capitalize
on these opportunities as it continues to execute its growth plans. At the date
of this Report, the Company awaits approval from the Texas Department of
Insurance to purchase Texas Savings Life Insurance Company, a Texas-domiciled
life insurance company. The Company has no other agreements, understandings or
arrangements with respect to any other acquisitions at this time.
Employees
As of December 31, 1999, the Company had six full-time employees, most
of which perform both managerial and administrative functions. The Company's
employees also perform services for GMLIC which has no employees. 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.
Marketing
The Company's target markets are individuals in middle income brackets
in addition to small businesses in the states of Texas and Oklahoma. 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 $17,000.
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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 depend on persistency
because policy acquisition costs, particularly agent commissions, are recovered
over the life of the policy. Dividends and interest credited on policies may
vary from time to time reflecting changes in investment, mortality, persistency,
expenses and other factors. Interest rate fluctuations have an effect on
investment income and may have an impact on policyowner behavior. Increased
lapses in policies may be experienced if the Company does not maintain interest
rates and dividend scales that are competitive with other products in the
marketplace.
The Company markets its products primarily through personal producing
general agents ("PPGAs") and small independent property and casualty agencies.
The PPGAs include the Company's founders and principal stockholders, James L.
Smith and Charles L. Smith. James L. Smith and Charles L. Smith are the sole
stockholders of the Smith Agency, which undertakes life insurance and financial
planning for estates, trusts and corporations, was 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 PPGAs who are
capable and qualified to generate the sales desired by the Company, thereby
eliminating part of the expense of recruiting and training a new agency force.
Competition
The life insurance business is highly competitive and consists of a
number of companies, many of which have greater financial resources, longer
business histories and more diversified lines of insurance products than the
Company. The Company may encounter increased competition from existing
competitors or new market entrants, some of which may be significantly larger
and have greater business resources. Companies typically compete for
policyholders on the basis of benefits, rates, financial strength and customer
service and compete for agents and brokers on the basis of commissions,
financial strength and customer service. The Company, although smaller than most
of its competitors, provides competitive benefits and rates. The Company
believes that its ability to administer its functions at a much reduced rate
allows it to maintain low internal cost products.
The Company has identified additional areas where it has very little
competition due to the size of the Company as well as the size of its target.
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.
Regulation
The Company's insurance subsidiary is subject to regulation and
supervision by the states in which it transacts business. The laws of these
jurisdictions generally establish agencies with broad regulatory authority,
including powers to: (1) grant and revoke licenses to transact business; (2)
regulate and supervise trade practices and market conduct; (3) establish
guaranty associations; (4) license agents; (5) approve policy forms; (6) approve
premium rates for some lines of business; (7) establish reserving requirements;
(8) prescribe the form and content of required financial statements and reports;
(9) determine the reasonableness and adequacy of statutory capital and surplus;
and (10) regulate the type and amount of permitted investments.
Most states also have enacted legislation that regulates insurance
holding company groups, including acquisitions, extraordinary dividends, the
terms of surplus debentures, the terms of affiliate transactions and other
related matters. Currently, the Company and its insurance subsidiary are
registered as a holding company group pursuant to such legislation in Texas and
Oklahoma.
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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 groups. In
addition, legislation has been introduced from time to time in recent years
which, if enacted, could result in the federal government assuming a more direct
role in the regulation of the insurance industry.
State insurance regulators and the NAIC are continually re-examining
existing laws and regulations and their application to insurance companies. From
time to time the NAIC has adopted, and recommended to the states for adoption
and implementation, several regulatory initiatives designed to decrease the risk
of insolvency of insurance companies in general. These initiatives include
risk-based capital ("RBC") requirements for determining the levels of capital
and surplus an insurer must maintain in relation to its insurance and investment
risks. The NAIC regulatory initiatives also impose restrictions on an insurance
company's ability to pay dividends to its stockholders. These initiatives may be
adopted by the various states in which the Company's subsidiary is 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 regulations 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: (1) the
acquisition of 10 percent or more of the outstanding shares of an insurance
company incorporated in the state; or (2) 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 purposes 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 subsidiary may be required to pay assessments
(up to certain prescribed limits) to fund policyowner 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 conduct periodic detailed examinations of the books, records and
accounts of insurance companies domiciled in their states. Texas conducts such
examinations on a three to five year cycle under guidelines promulgated by the
NAIC. The Company expects to incur examination expenses in 2000 for a scheduled
examination of GMLIC.
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Federal Income Taxation
The annuity and life insurance products marketed and issued by the
Company's subsidiary generally provide the policyowner with an income tax
advantage, as compared to other savings 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 policyowner. 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 policyowner are
generally not taxed 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 subsidiary is 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 subsidiary. GMLIC also qualifies under the
small life insurance company rules for taxation which may further reduce taxes.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's administrative, marketing and production facilities
consist of approximately 3,000 square feet at a single location in Del City,
Oklahoma. The Company owns and occupies this facility and owns the approximate
30,000 square feet of raw land adjacent to the property. This facility will
provide room for possible expansion which will likely be utilized within the
next few years.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings
and claims incident to the normal conduct of its business. The Company believes
that such legal proceedings and claims, individually and in the aggregate, are
not likely to have a material adverse effect on its financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading Market
There is currently a limited market for the common stock of the
Company, which has been quoted on the OTC Bulletin Board since October 1999
under the symbol SUMC. The following table sets forth, for the periods
indicated, the high and low quoted prices of the Company's common stock as
published by the OTC Bulletin Board:
Price Range
------------------------
Date High Low
------------------- ---------- ---------
October 1999 $5.00 $5.00
November 1999 $5.00 $2.00
December 1999 $6.00 $3.938
January 2000 $5.00 $4.50
February 2000 $4.875 $2.00
OTC Bulletin Board quotations reflect interdealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions. The Company intends to make application to list the common stock
on the Nasdaq SmallCap Market when it qualifies for listing.
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Number of stockholders
As of the close of business on March 27, 2000, 2,267,605 shares of
common stock were issued and outstanding and 5,000 shares of preferred stock
were issued and outstanding. At such date, there were approximately 1,429
stockholders of record of the common stock.
Dividend Policy
To date, the Company has declared no cash dividends on its common
stock, and does not expect to pay cash dividends in the near term. The Company
intends to retain future earnings, if any, to provide funds for operations and
the continued expansion of its business.
Recent Sales of Unregistered Securities
During the second quarter of 1999, the Company issued 4,892 shares of a
newly created class of preferred stock, resulting in gross proceeds of
approximately $489,200. In October 1999, the Company issued an additional 108
shares of preferred stock, resulting in gross proceeds to the Company of
$10,800. It is the Company's belief that each of the individuals to whom the
preferred stock was issued was a "sophisticated investor" within the meaning of
Section 4(2) of the Securities Act and that each such investor had access to
information regarding the Company and the proposed transaction. No sales
commissions were paid in connection with the sale of the preferred stock and the
securities were issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis reviews the Company's operations
for the years ended December 31, 1999 and 1998. Certain statements contained in
this discussion are not based on historical facts, but are based upon numerous
assumptions about future conditions which may ultimately prove to be inaccurate
and actual events and results may differ materially 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, changing market conditions
and other risks. The following discussion and analysis should be read in
conjunction with the financial statements of the Company and the notes related
thereto included elsewhere in this Report.
Operating Data
The following table sets forth selected information regarding operating
results for the periods indicated:
Year Ended December 31,
-----------------------
1998 1999
--------- ---------
(dollars in thousands)
Statement of Operations Data:
Revenues $ 756 $ 813
Benefits and expenses 1,363 1,704
--------- ---------
Net loss $ (607) $ (891)
========= =========
Balance Sheet Data:
Cash and cash equivalents $ 1,492 $ 936
Total assets $ 8,406 $ 7,016
Total liabilities $ 7,629 $ 6,000
Stockholders equity $ 777 $ 1,016
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Results of Operations
Discontinued Operations
In December 1998, the Company adopted a plan to sell the mortgage
services segment to a then officer of the Company in exchange for a $10,000 note
receivable. The actual disposal date was January 4, 1999. The assets sold and
liabilities assumed of the mortgage services segment consisted primarily of the
segment's "name", cash, and customer deposits. Operating results of the mortgage
services segment are shown separately in the consolidated statements of
operations included elsewhere in this Report.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Assets/Liabilities/Stockholders' Equity. Total assets were $7,015,821
at December 31, 1999, compared to $8,406,090 at December 31, 1998, a decrease of
17%. The decrease was due to the sale of BCLIC in December 1999 and the
reduction of certain Company debt. See "ITEM 1. DESCRIPTION OF BUSINESS-Recent
Events." These offset the gain in assets realized from the purchase of GMLIC in
January 1999.
Total liabilities (primarily insurance reserves for future policyholder
benefits) were $5,999,783 at December 31, 1999, compared to $7,629,260 at
December 31, 1998, a decrease of 21%. The decrease was due primarily to the sale
of BCLIC and the resulting decrease in reserves and from repayment of a portion
of the Company's outstanding debt.
Total stockholders' equity was $1,016,038 at December 31, 1999,
compared to $776,830 at December 31, 1998, an increase of 31%. The increase was
primarily due to sales of the Company's common stock pursuant to the Company's
initial public offering (the "IPO") effected in the first half of 1999, as well
as private placements of the Company's preferred stock in April 1999 and October
1999.
Average rate of return on investments, including cash and cash
equivalents, was approximately 7.3% for 1999 and 8.7% for 1998, while the
average rate credited to policyowner accounts was approximately 5.5% and 6.2%,
respectively.
At December 31, 1999, the Company's net deferred tax assets totaled
$37,241 and related primarily to net operating loss carryforwards. Realization
of net operating carryforwards is dependent on generating sufficient future
taxable income. The Company believes its operating strategy to continue to make
acquisitions of small insurance companies, consolidate and streamline the
administrative functions of these small companies, improve 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 life insurance increased 176% from
$121,192 to $213,598 for the year ended December 31, 1999, compared to the year
ended December 31, 1998. The increase was due primarily to the acquisition of
GMLIC in January 1999, and also reflects the continuing shift, from annuities to
life insurance, in the "mix" of insurance products sold by the Company. Prior to
1998, the Company primarily sold annuities, which are recorded as deposit
liabilities, rather than as revenues. Revenues relating to annuity contracts
consist primarily of withdrawal and administrative charges. Conversely, premiums
relating to life insurance policies are recognized as revenues when received.
Investment income decreased 13%, from $599,334 for the year ended
December 31, 1998 to $519,434 for the year ended December 31, 1999, primarily as
a result of a decrease in assets invested. Certain investments, primarily
medical accounts receivable, were restructured so that the Company receives less
investment income, but is no longer required to pay the offsetting interest
expense related to its previous financing activities.
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Other income increased 137%, from $31,461 for the year ended December
31, 1998 to $74,500 for the year ended December 31, 1999, primarily as a result
of certain administrative functions performed for other companies, the sale of
certain intangible property and an increase in rents received on properties
owned by the Company's insurance subsidiaries.
Costs and Expenses. Total expenses increased 25% from $1,362,965 to
$1,703,951 for the years ended December 31, 1998 and 1999, respectively. Such
increase was primarily attributable to certain nonrecurring expenses associated
with the combination of the insurance subsidiaries ($121,000), a large death
claim received at year-end ($100,000) and certain promotional expenses used to
raise visibility of the Company in the investment community ($72,000), as well
as amortization of value of purchased insurance business relating to Great
Midwest and Benefit Capital. Such amortization is expected to continue, but at
reduced levels, over the premium-paying life of the acquired policies.
Conservation of existing business in BCLIC and the resulting decrease in
amortization expense was offset by the purchase of GMLIC, with its resulting
amortization of the purchased value of insurance business, as well as the one
time write-off of goodwill associated with the combination of the Company's
insurance subsidiaries. Expenses were also impacted by a loss on the sale of
BCLIC ($57,824) closed at year-end. The Company anticipates the sale of BCLIC
and the combination of the remaining subsidiaries will result in cost savings
which will reduce expenses below 1998 levels.
Policy benefits increased 178% from $87,925 to $244,156 for the
comparable periods, due almost completely to the inclusion of Great Midwest in
the Company's 1999 operations. In addition, the year ended December 31, 1999
reflects a $20,600 expense not incurred during the comparable period in 1998,
related to examination costs associated with regulatory examinations of the
Company's life insurance subsidiaries. Because such examinations are made on a
periodic basis ranging from three to five years, the prior period does not
reflect any of such costs. The Company expects to incur additional expenses for
2000 due to a scheduled examination of GMLIC.
Losses. The Company reported a loss from continuing operations for the
year ended December 31, 1999 of $883,679, compared to a loss from continuing
operations for the year ended December 31, 1998 of $609,741, a 45% increase.
This was due, in part, to management's decision to write-off certain expenses
associated with the goodwill of its insurance subsidiaries ($106,000) and to
certain promotional expenses necessary to raise the value of the Company's stock
and attract large institutional investors ($72,000), as well as the loss on the
sale of one of its insurance subsidiaries. Net loss increased 53%, with a net
loss of $883,679 for the year ended December 31, 1999, compared to a net loss of
$577,242 for the year ended December 31, 1998, primarily due to the factors
stated above.
The Company's loss per share from continuing operations increased to
$0.42 per share for the year ended December 31, 1999, compared to a loss of
$0.30 per share for the year ended December 31, 1998. Net loss per share for the
comparable periods was $0.42 and $0.28 per share, respectively.
Liquidity and Capital Resources
Liquidity
The principal requirements for liquidity in connection with the
Company's operations are in contractual obligations to policyowners 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 policyowner. Policyowners sometimes do not pay premiums, thus causing their
policies to lapse, or policyowners 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 possible profitability associated with the policy.
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On January 11, 1999, a registration statement relating to the Company's
IPO was declared effective by the Securities and Exchange Commission. In
accordance with the terms of the offering, the Company escrowed the offering
proceeds until the minimum offering of $700,000 had been obtained, which
occurred in March 1999. The Company elected to close the offering on June 30,
1999 after receiving an aggregate of $822,000, which represented the sale of
163,770 shares of common stock pursuant to the offering. Net proceeds of
approximately $712,000 were utilized for the stated uses described in the
registration statement in the following manner: repayment of indebtedness
related to the acquisition of Great Midwest, $392,000, repayment of other
indebtedness, $100,000, increase the statutory capital and surplus of subsidiary
insurance companies $193,000, recruitment of agents, $15,000, general corporate
purposes, $12,000.
During 1999, the Company issued 5,000 shares of its Series A Preferred
Stock, resulting in gross proceeds of approximately $500,000. The Series A
Preferred Stock provides for annual dividends of 10% which are cumulative and
for a liquidation preference of $100 per share. The effect of preferred stock
dividends on the loss to common shareholders was $28,830 for the year ended
December 31, 1999. The net proceeds from the sale of the Series A Preferred
Stock were utilized to repay outstanding debt of the Company, to increase the
statutory capital and surplus of its subsidiary insurance company, and to
increase working capital. At December 31, 1999, the proceeds of both the IPO and
the private placement of the Series A Preferred Stock had been expended for the
purposes for which such funds were raised.
Capital Resources
Although the Company currently has a $150,000 bank line of credit, it
funds most of its activity directly from cash flow from operations and cash flow
from financing activities, which includes deposits to policyholders' account
balances. The line of credit extends to July 2000, with amounts borrowed
thereunder bearing interest at prime plus .5%. At December 31, 1999, $110,000
was outstanding under the line of credit and, as of the date of this Report, the
Company has $40,000 available under the credit facility.
On January 13, 1999, the Company acquired 100% of the outstanding
common stock of GMLIC, a Texas-chartered life insurance company. The total cost
of the acquisition was approximately $939,000. Of the purchase price, cash of
$607,000 was paid to seven of eight stockholders with the eighth stockholder
receiving a promissory note for a principal amount of $332,000, payable in three
equal annual installments at an annual interest rate of 6% on the unpaid
principal balance. The Company partially funded the cash portion of the purchase
price with a $350,000 loan from a bank. The loan accrues interest at an index
rate plus .5%, payable monthly, and originally matured on July 9, 1999, at which
time the Company paid $100,000 of the principal amount owed and renewed the
balance for a six-month term maturing January 9, 2000. The balance of the loan
was paid December 31, 1999 using operating cash flow and the proceeds from the
sale of BCLIC. In addition, in June 1999 the Company paid the first of the three
installments due on the promissory note held by the former stockholder.
Formerly, the Company has financed its loans to medical accounts
receivable factoring entities from collateralized notes payable to individuals.
The loans and the notes payable generally had corresponding three-year terms
with interest paid semiannually or allowed to compound. The loans to the medical
accounts receivable factoring entities and the corresponding collateralized
notes payable to individuals matured during April and May 1999 and were
collected and repaid at that time. The Company presently does not borrow direct
funds to finance its loan activities to medical accounts receivable factoring
entities, but instead conducts any such activities as direct investment
activities of its subsidiary out of available cash flow.
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On December 30, 1999, the Company received $519,329 from the sale of
100% of the outstanding common stock of BCLIC. See "ITEM 1-DESCRIPTION OF
BUSINESS-Recent Events."
On February 15, 2000, GMLIC executed an agreement, which is expected to
close in the second quarter of 2000, regarding the acquisition of 100% of the
common stock of Texas Savings, a Texas life insurance company, for an amount
equal to the statutory capital and surplus of Texas Savings as of December 31,
1999, plus $400,000. The transaction is subject to the approval of the Texas
Department of Insurance, which is expected in the second quarter of 2000. The
Company will fund the acquisition with available funds.
In accordance with the Company's plan to consolidate certain of its
operations and thereby eliminate duplicative capital and surplus requirements,
the Company determined to consolidate the operations of GMLIC and Summit Life
and Annuity Company, its Oklahoma-domiciled life insurance subsidiary. In
October 1999, after GMLIC was approved to do business in Oklahoma, Summit Life
and Annuity Company's block of business was transferred to Great Midwest. Summit
Life and Annuity Company was merged with and into the Company after completion
of the transaction. As a result of these series of transactions, over $300,000
of the statutory capital and surplus formerly required to be maintained by
Summit Life and Annuity Company as a separate life insurance company was able to
be released to the Company as additional working capital.
The Company has made and intends to make ongoing expenditures in
connection with its subsidiary's marketing programs. Historically, the Company
has funded these expenditures from cash flow from operations.
The Company believes that the liquidity resulting from the sale of
BCLIC and the consolidation of its subsidiaries described above, together with
anticipated cash from continuing operations, should be sufficient to fund its
operations, including the acquisition of Texas Savings, and to make required
payments under its credit facility, the required payments of principal and
interest under the 6% promissory notes payable to a former stockholder of Great
Midwest and the annual 10% dividend on the Series A Preferred Stock. The
Company's ability to fund its operations and to make scheduled principal and
interest payments will depend on its future performance, which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. The Company believes
it will be able to meet its obligations for repayment or it will be able to
obtain financing at reasonable rates, however, there can be no assurance that
the Company will be able to effect any such refinancing on favorable terms.
Business Outlook and Risk Factors
The Company's future operating results may be affected by various
trends, developments and factors that the Company must successfully manage in
order to achieve favorable operating results. In addition, there are trends,
developments and factors beyond the Company's control that may affect its
operations. In accordance with the provisions of the Private Securities
Litigation Reform Act of 1995, the cautionary statements and risk factors set
forth below and in the Company's other filings with the Securities and Exchange
Commission, identify important trends, factors and currently known developments
that could cause actual results to differ materially from those in any
forward-looking statements contained in this Report and in any written or oral
statements of the Company. Forward-looking statements in this Report include
revenue, expense and earnings analysis for the remainder of 2000 as well as the
Company's expectations relating to its business strategy. Risk factors include
the following:
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Ability to Complete and Integrate Acquisitions; Risks Relating to
Growth Strategy. A significant portion of the Company's strategy is to pursue
and complete acquisitions of companies and in force life insurance business that
meet its acquisition criteria. The Company has acquired and seeks to acquire
companies and blocks of in force insurance policies to enhance the Company's
stockholder value utilizing the Company's operations, management and access to
capital. The Company's ability to grow by acquisition is dependent upon, and may
be limited by, the availability of suitable acquisition opportunities at values
deemed advantageous and capital and regulatory constraints. To the extent that
cash generated internally is not sufficient to provide the capital required for
acquisitions, the Company will require additional debt and/or equity financing
in order to provide for such capital. Future debt financing, if available, will
result in increased interest expenses, increased leverage and decreased income
available to fund acquisitions and expansion, and may limit the Company's
ability to withstand competitive pressures and render the Company more
vulnerable to business downturns. Future equity financings may dilute the equity
interests of existing stockholders. Growth by acquisition also involves risks
that could adversely affect the Company's operating results, including
difficulties in integrating the operations and personnel of acquired companies,
eliminating duplicative costs and reducing overhead, and the potential loss of
key employees and customers of acquired companies or lapse or surrender of
acquired insurance policies. In addition, although the Company performs a due
diligence investigation of each business that it acquires, there may
nevertheless be liabilities of an acquired business that the Company fails or is
unable to discover during its due diligence investigation and for which the
Company, as a successor owner, may be responsible.
In addition, there can be no assurance that the Company will be able to
obtain the capital necessary to fully realize its growth strategy, consummate
acquisitions on satisfactory terms or, if any such acquisitions are consummated,
successfully integrate such acquired businesses into the Company and remedy any
undiscovered liabilities of any acquired companies. See "ITEM 1-DESCRIPTION OF
BUSINESS-Acquisitions and Consolidations."
Regulation. Insurance companies are subject to comprehensive regulation
in the jurisdictions in which they do business by state insurance commissioners.
Such regulation relates to, among other things: prior approval of the
acquisition of a controlling interest in an insurance company; standards of
solvency which must be met and maintained; licensing of insurers and their
agents; nature and limitations of investments; deposit of securities for the
benefit of policyowners; approval of policy forms; periodic 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 premium, 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 and Texas.
Intercorporate transfers of assets and dividend payments from the
Company's insurance subsidiary are subject to prior notice and approval if they
are deemed "extraordinary" under these statutes. The Company is required to file
detailed annual reports with the state insurance regulatory body of each state
in which it is licensed, and the business and accounts of insurance subsidiaries
of the Company are subject to examination by such regulatory bodies. See "ITEM
1-DESCRIPTION OF BUSINESS-Regulation and Taxation."
Persistency. Persistency is the extent to which policies sold remain in
force. Policy lapses over those actuarially anticipated could have an adverse
effect on the financial performance of the Company. Policy acquisition costs are
deferred and expensed over the premium paying period of a policy. Excess policy
lapses, however, cause the immediate expensing or amortizing of deferred policy
acquisition costs. Provided the Company maintains lapse and surrender rates
within its pricing assumptions for its insurance policies, the Company believes
that the present lapse and surrender rate should not have a material adverse
effect on the Company's financial results. For the years ended December 31, 1998
and 1999, the Company's lapse ratio on ordinary business was 4% and 11%,
respectively.
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Competition. The life insurance business is highly competitive and
consists of a number of companies, many of which have greater financial
resources, longer business histories and more diversified lines of insurance
products than the Company. The Company may encounter increased competition from
existing competitors or new market entrants, some of which may be significantly
larger and have greater business resources. In addition, to the extent that
existing or future competitors seek to gain or retain market share by reducing
prices, the Company might be compelled to lower its prices, thereby adversely
affecting operating results. See "ITEM 1-DESCRIPTION OF BUSINESS-Competition."
Economic State of the Insurance Industry. In the past decade, there
have been instances where the United States insurance industry, as a whole, has
suffered substantial losses on investments, which has reduced the financial
stability of several insurance companies. Management believes that the principal
causes of industry losses have been inappropriate investment in high yield bonds
and real estate. The Company has only minimal holdings in high yield bonds and
real estate. Management believes that these factors leave the Company with a
relatively lower investment loss risk compared to that to which the industry as
a whole is exposed.
Interest Rate Volatility; Investment Spread Risks. Much of the
profitability in the insurance industry is affected by fluctuations in interest
rates. Of prime importance in achieving profitability is an insurance company's
ability to invest premiums at a higher rate of interest 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 policyowner
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 policyowners 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 policy owners from surrendering policies. The
Company's ability to pay policyowner 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.
Product Assumptions. In reliance upon its actuarial consultants, Rudd
and Wisdom, Inc., the Company's life insurance subsidiary makes certain
assumptions as to expected mortality, lapse rates, investment 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.
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Potential Fluctuations and Operating Results. Due to the relatively low
capitalization of the Company's life insurance subsidiary, their operating
results are significantly impacted by the amount of fixed rate annuity policies
sold, as well as the level of death and other policyowner benefits in any one
reporting period. The annual investment returns and overhead costs will also
affect the subsidiary operating results.
Additionally, the Company's revenues and operating results have
historically varied significantly from quarter to quarter and are expected to
continue to fluctuate in the future. Historically, operating results have been
seasonally lower during the first fiscal quarter than during the other quarters
of the fiscal year. See "ITEM 6-MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION-Results of Operations."
Possible Need for Future Financing. The Company anticipates, based on
currently proposed plans and assumptions relating to its operations, that the
additional working capital made available from the consolidation of its
operating subsidiaries, together with the projected cash flow from operations,
will be sufficient to meet estimated capital expenditures through 2000. 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.
Year 2000 Readiness
The Company experienced no significant problems in its operations
relating to Year 2000 readiness in its information technology or in that of its
vendors. Although the Company continues to monitor its systems and those of its
vendors, the Company does not believe there will be any material impact on its
operations for Year 2000 issues.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company are incorporated
by reference from pages F-1 through F- 23 of the attached Appendix, and include
the following:
Consolidated Financial Statements of Summit Life Corporation and Subsidiaries
(1) Report of Independent Certified Public Accountants;
(2) Consolidated Balance Sheets as of December 31, 1999 and 1998;
(3) Consolidated Statements of Operations for Years Ended December 31, 1999
and 1998;
(4) Consolidated Statement of Shareholders' Equity for Years Ended
December 31, 1999 and 1998;
(5) Consolidated Statements of Cash Flows for Years Ended December 31, 1999
and 1998; and
(6) Notes to Consolidated Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no material disagreements between the Company and its
independent accountants on accounting and financial disclosure matters which are
required to be reported under this Item for the period for which this Report is
filed.
-19-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required will be contained in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required will be contained in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required will be contained in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required will be contained in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements are attached hereto as Appendix A and
included herein on pages F-1 through F-23.
(2) The exhibits set forth on the following Exhibit Index are
filed with this Report or are incorporated by reference as set forth therein.
Exhibit
Number Name of Exhibit
- ------- ---------------
3.1 First Amended and Restated Certificate of Incorporation (filed as
Exhibit 3.1 to the Company's Registration Statement on Form SB-2, file
number 333-65097 and incorporated herein by reference)
3.2 First Amended and Restated Bylaws (filed as Exhibit 3.2 to the
Company's Registration Statement on Form SB-2, file number 333-65097
and incorporated herein by reference)
4.1 Specimen Certificate of the common stock (filed as Exhibit 4.1 to the
Company's Registration Statement on Form SB-2, file number 333-65097
and incorporated herein by reference)
4.2 See Articles V and X of the Company's Certificate of Incorporation and
Article VI of the Company's Bylaws (filed as Exhibit 4.2 to the
Company's Registration Statement on Form SB-2, file number 333-65097
and incorporated herein by reference)
4.3 Form of Promotional Shares Lock-In Agreement (filed as Exhibit 4.3 to
the Company's Registration Statement on Form SB-2, file number
333-65097 and incorporated herein by reference)
10.1 Employment Agreement by and between the Company and James L. Smith
(filed as Exhibit 10.1 to the Company's Registration Statement on Form
SB-2, file number 333-65097 and incorporated herein by reference)
10.2 Employment Agreement by and between the Company and Charles L. Smith
(filed as Exhibit 10.2 to the Company's Registration Statement on Form
SB-2, file number 333-65097 and incorporated herein by reference)
-20-
<PAGE>
10.3 Stock Purchase Agreement between the Company and Orville Homer Miller
et al. (filed as Exhibit 10.4 to the Company's Registration Statement
on Form SB-2, file number 333-65097 and incorporated herein by
reference)
10.4 Stock Purchase Agreement between the Company and CLS Enterprises, Inc.
(filed as Exhibit 10.6 to the Company's Registration Statement on Form
SB-2, file number 333-65097 and incorporated herein by reference)
10.5 Designated Agency Officer Agreement (filed as Exhibit 10.7 to the
Company's Registration Statement on Form SB-2, file number 333-65097
and incorporated herein by reference)
10.6 Stock Purchase Agreement between Summit Life Corporation, Seller, and
First Alliance Insurance Company, Buyer, dated November 10, 1999
(filed as Exhibit 2.1 to the Company's Current Report on Form 8-K
filed November 24, 1999 and incorporated herein by reference).
*10.7 Stock Purchase Agreement between Texas Savings Holding Company and
Great Midwest Life Insurance Company, dated February 15, 2000.
*21.1 List of subsidiaries
*27.1 Financial Data Schedule
* Filed electronically herewith.
(b) A report on Form 8-K was filed by the Company on November 24, 1999,
reporting under "Item 2 - Acquisition or Disposition of Assets" the sale of
Benefit Capital Life Insurance Company, the Company's wholly owned
Louisiana-domiciled subsidiary.
-21-
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
March 30, 2000 SUMMIT LIFE CORPORATION
an Oklahoma corporation
By: /s/ Charles L. Smith
--------------------------------
Charles L. Smith, President
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
NAME AND TITLE DATE
-------------- ----
/s/ James L. Smith March 30, 2000
- -----------------------
James L. Smith,
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
/s/ Charles L. Smith March 30, 2000
- -----------------------
Charles L. Smith,
President, Chief Operating Officer and Director
/s/ Quinton L. Hiebert March 30, 2000
- -----------------------
Quinton L. Hiebert,
Vice President, Chief Financial Officer and Secretary
(Principal Financial Officer)
/s/ Randal Beach March 30, 2000
- -----------------------
Randal Beach,
Director
/s/ Dean Brown March 30, 2000
- -----------------------
Dean Brown.
Director
/s/ Thomas D. Sanders March 30, 2000
- -----------------------
Thomas D. Sanders,
Director
-22-
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
-23-
<PAGE>
APPENDIX A
Consolidated Financial Statements
Summit Life Corporation and Subsidiaries
Years ended December 31, 1998 and 1999
with Report of Independent Auditors
-24-
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
-25
<PAGE>
Summit Life Corporation and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1998 and 1999
Contents
Report of Independent Certified Public Accountants...........................F-1
Consolidated Financial Statements:
Consolidated Balance Sheets...............................................F-2
Consolidated Statements of Operations.....................................F-4
Consolidated Statement of Stockholders' Equity............................F-5
Consolidated Statements of Cash Flows.....................................F-6
Notes to Consolidated Financial Statements................................F-8
-26-
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
-27-
<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, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Summit
Life Corporation and Subsidiaries, as of December 31, 1998 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 29, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
Summit Life Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1998 1999
------------- -------------
<S> <C> <C>
INVESTMENTS (notes A4 and B)
Debt securities - available for sale $ 4,105,139 $ 3,202,369
Equity securities - available for sale 46,557 22,000
Equity securities - other - 62,500
Notes receivable 1,241,468 312,864
Short-term investments 156,541 1,470,000
Policy loans 18,142 37,947
Investment real estate, net of accumulated depreciation of
$3,293 in 1998 and $6,080 in 1999 73,251 72,580
------------ ------------
5,641,098 5,180,260
CASH AND CASH EQUIVALENTS (note A3) 1,492,196 935,746
RECEIVABLES
Accrued investment income 240,417 85,753
Advances to affiliates 10,000 10,000
Other 3,156 4,808
------------ ------------
253,573 100,561
PROPERTY AND EQUIPMENT - AT COST (note A5)
Building and improvements 115,853 129,419
Furniture and equipment 132,811 114,470
Automobiles 45,275 54,015
------------ ------------
293,939 297,904
Less accumulated depreciation 63,382 88,573
------------ ------------
230,557 209,331
Land 56,000 56,000
------------ ------------
286,557 265,331
OTHER ASSETS
Cost in excess of net assets of business acquired, less
accumulated amortization of $123,321 in 1998 and
$133,761 in 1999 (note A6) 106,918 45,000
Deferred policy acquisition costs (note A8) 20,926 42,226
Value of purchased insurance business, less accumulated
amortization of $205,949 in 1998 and $52,965 in 1999
(note A9) 272,465 370,758
Land and building held for sale (note A5) 176,153 -
Deferred income taxes (notes A7 and E) 31,943 37,241
Other 124,261 38,698
----------- ------------
732,666 533,923
----------- -----------
$ 8,406,090 $ 7,015,821
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
Summit Life Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999
---------- -----------
<S> <C> <C>
LIABILITIES
Policy reserves and policyholder funds (note A10) $ 6,027,599 $ 5,335,971
Unpaid claims 4,354 107,000
Accounts payable 46,707 74,742
Accrued and other liabilities 209,353 28,713
Advances from affiliates 16,000 11,138
Notes payable (note C) 1,325,247 442,219
---------- -----------
7,629,260 5,999,783
COMMITMENTS AND CONTINGENCIES (notes G and I) - -
STOCKHOLDERS' EQUITY (note D)
Common stock, $.01 par value - authorized, 5,000,000
shares; issued and outstanding, 2,054,735 shares in
1998 and 2,267,605 shares in 1999 20,547 22,676
Series A cumulative preferred stock, $.001 par value -
authorized, 5,000 shares; issued and outstanding, 5,000
shares in 1999; stated at liquidation value - 500,000
Additional paid-in capital 2,079,661 2,923,596
Common stock of parent held by subsidiary - (95,000)
Common stock subscribed 39,130 -
Accumulated other comprehensive income (loss) 25,985 (83,565)
Accumulated deficit (1,349,363) (2,251,669)
---------- ----------
815,960 1,016,038
Less stock subscriptions receivable 39,130 -
------------ -------------
776,830 1,016,038
$ 8,406,090 $ 7,015,821
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Summit Life Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1998 1999
----------- -----------
<S> <C> <C>
Revenues (note O)
Insurance premiums and other considerations (note A10) $ 121,192 $ 213,598
Investment income 599,334 519,434
Net realized gains on sale of investments 4,337 5,202
Other 31,461 74,500
----------- -----------
756,324 812,734
Benefits, losses, and expenses (note O)
Policy benefits 87,925 244,156
Increase in policy reserves 232,746 208,160
Interest 129,191 97,402
Taxes, licenses, and fees 23,428 43,819
Depreciation and amortization 302,557 308,803
General, administrative, and other operating 587,118 743,787
Loss on disposal of subsidiary -- 57,824
----------- -----------
1,362,965 1,703,951
----------- -----------
Loss from continuing operations before income taxes (606,641) (891,217)
Income tax expense (benefit) - current (notes A7 and E) 3,100 (7,538)
----------- -----------
Loss from continuing operations (609,741) (883,679)
Earnings from operations of discontinued segment (note O) 32,499 --
----------- -----------
Net loss (577,242) (883,679)
Preferred stock dividends -- 28,830
----------- -----------
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS $ (577,242) $ (912,509)
=========== ===========
Basic and diluted earnings (loss) per common share (note A11)
From continuing operations $ (.30) $ (.42)
From discontinued operations .02 --
----------- -----------
NET LOSS $ (.28) $ (.42)
=========== ===========
Weighted average outstanding common shares, basic and diluted
(note A11) 2,047,037 2,177,196
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (NOTE D)
Years ended December 31, 1998 and 1999
Series A cumulative
Common Stock preferred stock
---------------------- --------------------------
Additional
Shares Par Shares Liquidation paid-in
Total Issued Value issued value capital
------------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ 339,435 1,939,780 $ 19,398 -- $ -- $ 1,044,992
Common stock issued 1,035,818 114,955 1,149 -- -- 1,034,669
Comprehensive loss
Net loss (577,242) -- -- -- -- --
Other comprehensive loss
Unrealized loss on investments, net (21,181)
-----------
Comprehensive loss (598,423)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 776,830 2,054,735 20,547 -- -- 2,079,661
Sale of common stock, net of offering
expenses of $110,488 (note P) 711,934 163,770 1,638 -- -- 710,296
Sale of preferred stock 500,000 -- -- 5,000 500,000 --
Collection of stock subscriptions
receivable 39,130 30,100 301 -- -- 38,829
Issuance of common stock of parent
to subsidiary -- 19,000 190 -- -- 94,810
Dividends on preferred stock (18,627) -- -- -- -- --
Comprehensive loss
Net loss (883,679) -- -- -- -- --
Other comprehensive loss
Unrealized loss on investments, net (109,550)
-----------
Comprehensive loss (993,229)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 $ 1,016,038 2,267,605 $ 22,676 5,000 $ 500,000 $ 2,923,596
=========== =========== =========== =========== =========== ===========
Common Accumulated
stock of Other
parent Common Comprehensive Stock
held by Stock income Accumulated subscriptions
subsidiary Subscribed (loss) deficit receivable
-------------- -------------- ------------- -------------- --------------
Balance at January 1, 1998 $ -- $ 42,383 $ 47,166 $ (772,121) $ (42,383)
Common stock issued -- (3,253) -- -- 3,253
Comprehensive loss
Net loss -- -- -- (577,242) --
Other comprehensive loss
Unrealized loss on investments, net (21,181)
Comprehensive loss
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 -- 39,130 25,985 (1,349,363) (39,130)
Sale of common stock, net of offering
expenses of $110,488 (note P) -- -- -- -- --
Sale of preferred stock -- -- -- -- --
Collection of stock subscriptions
receivable -- (39,130) -- -- 39,130
Issuance of common stock of parent
to subsidiary (95,000) -- -- -- --
Dividends on preferred stock -- -- -- (18,627) --
Comprehensive loss
Net loss -- -- -- (883,679) --
Other comprehensive loss
Unrealized loss on investments, net (109,550)
Comprehensive loss
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 $ (95,000) $ -- $ (83,565) $(2,251,669)$ --
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1999
------------- ------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (577,242) $ (883,679)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 299,689 303,472
Deferral of policy acquisition costs (9,615) (26,631)
Amortization of deferred policy acquisition costs 2,868 5,331
Interest credited to policyholder account balances 280,948 233,523
Gain on sale of investment securities (4,337) (5,202)
(Gain) loss on sale of assets (8,089) (1,664)
Loss on disposal of subsidiary - 57,824
Common stock issued for directors' services 32,753 -
Other 7,590 (29,107)
(Increase) decrease in
Accrued investment income (68,747) 144,242
Other receivables 15,163 (9,430)
Other assets 4,265 (29,668)
Increase (decrease) in
Policy reserves (64,306) (28,388)
Accounts payable (14,968) 154,710
Accrued and other liabilities 81,665 (120,193)
------------- -----------
Net cash used in operating activities (22,363) (234,860)
Cash flows from investing activities
Purchases of investment securities (2,710,265) (2,627,174)
Proceeds from disposition or maturities of investment securities 2,189,797 1,830,142
Issuance of notes receivable (204,200) (71,000)
Payments received on notes receivable 139,517 1,015,251
Increase in policy loans (13,024) (12,226)
Advance to affiliates (6,000) -
Purchase of property and equipment (1,613) (6,636)
Proceeds from sale of assets 11,826 165,500
Net cash acquired (paid) in acquisition of business 527,578 (406,766)
Net cash acquired on disposal of subsidiary - 86,869
------------- ------------
Net cash used in investing activities (66,384) (26,040)
Cash flows from financing activities
Deposits to policyholder account balances 514,906 67,009
Withdrawals from policyholder account balances (159,505) (394,212)
Payments on notes payable (168,466) (1,492,731)
Advances from (payments to) affiliate 16,000 (4,862)
Proceeds from issuance of notes payable 150,000 510,000
Proceeds from stock subscriptions receivable 3,253 39,130
Proceeds from sale of common and preferred stock 1,357 1,039,172
Dividends paid on preferred stock - (18,627)
Initial public offering costs (70,059) (40,429)
------------ ------------
Net cash provided by (used in) financing activities 287,486 (295,550)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 198,739 (556,450)
Cash and cash equivalents at beginning of year 1,293,457 1,492,196
---------- ----------
Cash and cash equivalents at end of year $ 1,492,196 $ 935,746
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
1998 1999
--------------------------
<S> <C> <C>
Cash paid (received) during the year for:
Interest $ 56,000 $ 246,000
Income taxes 300 (7,000)
Noncash investing and financing activities:
Purchase of an automobile by the incurrence of a note payable $ - $ 14,059
Conversion of convertible notes, other notes payable, and accrued interest
to common stock - 281,700
Notes receivable acquired on sale of land and building, net of deferred
gain of $72,958 217,042 -
Acquisition of Benefit Capital Life Insurance Company in exchange for
100,000 shares of common stock (note N) 998,445 -
In conjunction with the acquisition, assets were acquired and
liabilities were assumed as follows:
Estimated fair value of assets acquired, including
cash and cash equivalents of $527,578 $ 2,051,746
Liabilities assumed (1,053,291)
---------
Estimated fair value of common
stock issued $ 998,455
===========
Acquisition of Great Midwest Life Insurance Company in exchange for
issuance of note payable and cash (note N) - 331,807
In conjunction with the acquisition, assets were acquired and
liabilities were assumed as follows:
Estimated fair value of assets acquired, including
cash and cash equivalents of $250,546 $ 1,349,905
Liabilities assumed (360,786)
Issuance of note payable (331,807)
-----------
Cash paid $ 657,312
===========
Disposal of Benefit Capital Life Insurance Company in exchange for
stock and cash (note O) - 62,500
In conjunction with the disposal, assets were sold and
liabilities were transferred as follows:
Book value of assets sold, including cash and
cash equivalents of $ 432,460 $ 1,597,816
Liabilities transferred (958,163)
-----------
Net assets sold 639,653
Proceeds for sale
Cash received 519,329
First Alliance Corporation common
stock received 62,500
------------
581,829
------------
Loss on disposal of subsidiary $ 57,824
============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999
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), Benefit Capital Life
Insurance Company (BCLIC), and Great Midwest Life Insurance Company (GMLIC).
BCLIC was acquired on January 13, 1998 and was sold on December 30, 1999.
GMLIC was acquired on January 13, 1999. FBLIC was merged into GMLIC with an
effective date of February 1, 1999. In October 1999, GMLIC and SLAC received
the necessary regulatory approvals to complete a reinsurance agreement which
transferred all of SLAC's insurance business to GMLIC. Effective November
24, 1999, SLAC was merged into SLC. Intercompany transactions and balances
have been eliminated.
SLC is a holding company which specializes in the sale of life insurance
products through its life insurance subsidiary, GMLIC. GMLIC is licensed in
Oklahoma and Texas and primarily sells fixed rate annuities and life
insurance products.
2. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures;
accordingly, actual results could differ from those estimates.
3. Cash and Cash Equivalents
cash equivalents include time deposits and certificates of deposit with
maturities when acquired of three months or less and money market funds.
The Company maintains its cash and cash equivalents in accounts which may
not be federally insured. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on
such accounts.
4. Investments
The Company accounts for certain investments in debt and equity securities
as follows:
o 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.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
4. Investments - Continued
o 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.
o 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 (loss).
Declines in the fair value of individual securities below cost or amortized
cost that are other than temporary result in write-downs included in
operations. The specific identification method is followed in determining
the cost of securities sold.
Generally, notes receivable are stated at the aggregate of the unpaid
balances less estimated uncollectible amounts.
Short-term investments consist primarily of certificates of deposit and in
1999 interests in medical receivables. Short term investments are carried at
cost, which approximates market. The interests in medical receivables
provides for 10% return on the investment, and at December 31, 1999, the
$1,320,000 medical receivables investment is collateralized by receivables
with face values of $1,584,000.
Investment real estate is carried at depreciated cost.
5. Property and Equipment
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated useful lives on the
straight-line method. Useful lives range from five to forty years.
Long-lived assets to be held and used, including investment real estate, are
reviewed for impairment whenever events or changes in circumstances indicate
that the related carrying amount may not be recoverable. When required,
impairment losses are recognized based upon the estimated fair value of the
asset.
During January 1998, upon acquisition of BCLIC, the Company relocated its
Louisiana operations from Thibodaux to rented facilities in New Orleans. The
Thibodaux land and building was held for sale at December 31, 1998 and was
reported at the lower of carrying value or fair value less cost to sell.
During 1999, the building was sold at a loss of approximately $7,000.
6. Cost in Excess of Net Assets of Business Acquired
Cost in excess of net assets of business acquired is amortized on the
straight-line method over ten to fifteen years for insurance company
acquisitions and five years for other acquisitions.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
6. Cost in Excess of Net Assets of Business Acquired - Continued
On an ongoing basis, management reviews the valuation and amortization of
cost in excess of net assets of business acquired. As part of this review,
the Company estimates the value and future benefits of the net income to be
generated by the related subsidiaries to determine whether impairment has
occurred.
7. Income Taxes
SLC and each of its subsidiaries file separate income tax returns.
The Company recognizes current tax expense based on estimated amounts
payable or refundable on tax returns for the year.
Deferred tax liabilities or assets are recognized for the estimated future
tax effects attributable to temporary differences and carryforwards based on
provisions of the enacted tax law. Deferred tax assets are reduced by a
valuation allowance if it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
8. Deferred Policy Acquisition Costs
The costs of writing new business, consisting primarily of commissions and
certain costs of policy issuance, are deferred. Deferred policy acquisition
costs for life insurance products, including immediate annuities with life
contingencies, are amortized over the estimated lives of the policies.
Deferred policy acquisition costs for investment products, principally
single premium deferred annuities, are amortized with interest in relation
to the present value of the expected gross profits, based on estimated
investment yields, mortality, persistency, and surrender charges, over the
lives of the policies. Deferred policy acquisition costs are reviewed
periodically to insure that the unamortized balance does not exceed those
amounts recoverable from future profits.
9. Value of Purchased Insurance Business
Value of purchased insurance business represents the actuarially determined
present value of estimated net cash flows embedded in existing insurance
contracts when acquired and is amortized with interest based on the
incidence of the related cash flows. At December 31, 1999, approximately 13%
of the unamortized value of purchased insurance business is expected to be
amortized in each of the next five years, based on current conditions and
assumptions as to future events on acquired policies in force.
F-11
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
9. Value of Purchased Insurance Business - Continued
An analysis of the value of purchased insurance business is presented below
for the year ended December 31:
1998 1999
-------- --------
<S> <C> <C>
Balance, beginning of year $ - $ 272,465
Acquisition 478,414 423,723
Imputed interest on unamortized balance at 6.5% 31,097 45,252
Amortization (237,046) (182,842)
Disposal of subsidiary - (187,840)
-------- --------
Balance, end of year $ 272,465 $ 370,758
======== ========
</TABLE>
10. Revenues and Policy Reserves and Policyholder Funds
Premiums received on deferred annuities and annuities without life
contingencies (i.e., investment contracts) are recorded as deposits into the
policyholder's account balance. Revenues relating to these contracts consist
primarily of withdrawal and administrative charges. Premiums for life
insurance products and for certain annuities with life contingencies,
including selection of annuity settlement options with life contingencies,
are recognized as revenues when due.
policyholder account balances include amounts deposited by policyholders
plus interest credited, less withdrawals and any administrative charges
deducted by the Company. The liabilities for future policy benefits for
annuities with life contingencies are computed as the present value of
future benefit payments, including assumptions as to investment yields and
mortality.
Policy reserves for life insurance products are computed using assumptions
as to investment yields, mortality, morbidity, withdrawals, and other
assumptions based on the Company's experience, modified as necessary to give
effect to anticipated trends and to include provisions for possible
unfavorable deviations. Reserve interest assumptions are graded and range
from 8% to 3.5%. Such liabilities are, for some plans, graded to equal
statutory values or cash values at or prior to maturity. Policy benefit
claims are charged to expense in the period that the claims are incurred.
All insurance-related benefits, losses, and expenses are reported net of
reinsurance ceded.
Mortgage loan closing and funding income and related fees are recognized at
the time the underlying mortgage loan transaction is closed.
11. Earnings (Loss) Per Common Share
Earnings (loss) per common share are computed based upon net earnings
(loss), after deduction of preferred stock dividends, divided by the
weighted average number of common shares outstanding during each period.
F-12
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
11. Earnings (Loss) Per Common Share - Continued
The weighted average outstanding common shares for December 31, 1998 have
been adjusted retroactively to reflect the changes in capital structure
discussed in Note D. Conversion rights and convertible notes, discussed in
Note D, were antidilutive; therefore, basic and diluted earnings (loss) per
common share are the same.
12. Other Comprehensive Loss
Accumulated other comprehensive income (loss) consists solely of net
unrealized investment gains (losses).
Unrealized loss on investments, net consists of the following:
1998 1999
--------- ---------
<S> <C> <C>
Unrealized loss on investments arising during period $ (16,844) $(104,348)
Less reclassification adjustment for gains included in net loss 4,337 5,202
--------- ---------
Unrealized loss on investments, net $ (21,181) $(109,550)
======== ========
</TABLE>
13. Reclassifications
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform to the 1999 presentation.
NOTE B - INVESTMENTS
The amortized cost of debt securities and the cost of equity securities,
together with their estimated fair values, are summarized as follows:
<TABLE>
December 31, 1998
---------------------------------------------------
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 $ 100,585 $ 165 $ - $ 100,750
Mortgage-backed securities 3,876,061 31,562 (7,984) 3,899,639
Industrial and miscellaneous 98,750 6,000 - 104,750
----------- --------- ---------- ----------
$4,075,396 $ 37,727 $ (7,984) $ 4,105,139
=========== ========= ========== ==========
Equity securities - available for sale $ 50,315 $ - $ (3,758) $ 46,557
=========== ========= ========== ===========
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE B - INVESTMENTS - CONTINUED
December 31, 1998
---------------------------------------------------
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 $ 327,065 $ 134 $ (11,561) $ 315,638
Mortgage-backed securities 2,623,905 526 (56,238) 2,568,193
Industrial and miscellaneous 331,002 - (12,464) 318,538
--------- ----------- -------- ----------
$3,281,972 $ 660 $ (80,263) $ 3,202,369
========= =========== ======== ==========
Equity securities - available for sale $ 25,962 $ - $ (3,962) $ 22,000
========= ============ ========= ==========
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.
December 31, 1999
--------------------------
Amortized Estimated
cost fair value
----------- -----------
value
Due within one year or less $ 150,054 $ 150,189
Due six to ten years 232,043 223,162
Due after ten years 275,970 260,825
--------- ----------
658,067 634,176
Mortgage-backed securities 2,623,905 2,568,193
--------- ---------
$3,281,972 $3,202,369
========= =========
</TABLE>
Proceeds from sales of available-for-sale securities were approximately
$530,000 for 1998 and $446,000 for 1999. Gross gains of $11,752 for 1998 and
$7,387 for 1999 and gross losses of $7,415 for 1998 and $2,185 for 1999 were
realized on those sales.
Equity securities - other consist of First Alliance Corporation (FAC) common
stock carried at cost. The securities are restricted as to sale or transfer
through December 30, 2000 and FAC retains the right of first refusal to
purchase the shares through December 30, 2001.
Notes receivable include $909,743 for 1998 of loans made to entities which
purchase, administer, and collect medical accounts receivable. The notes
provided for interest at 20% payable semiannually and matured in 1999.
F-14
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE B - INVESTMENTS - CONTINUED
During 1998, an 8%, $240,000 ten-year first mortgage and an 8%, $50,000
ten-year second mortgage were received in conjunction with the sale of a
building and related land for $300,000 which had a carrying value of
$220,000. The transaction resulted in a gain of $80,000 which was deferred
and is being recognized on the installment method until adequate down
payment has been received. Notes receivable at December 31, 1998 and 1999
include $199,000 and $183,000, net of remaining deferred gain of $73,000 and
$67,000, respectively, relating to these mortgages.
NOTE C - NOTES PAYABLE
Notes payable consist of the following at December 31:
1998 1999
----------- -----------
<S> <C> <C>
Bank line of credit, interest payable monthly at an index determined by
the bank (8.25% at December 31, 1998), paid off
during 1999 $ 150,000 $ -
Uncollateralized note payable to individual, interest payable
annually at 8%, paid off during 1999 75,000 -
Note payable to bank, payable in monthly installments of $690 through
March 1999, including interest at 10.5%, paid off
during 1999 28,179 -
Note payable to stockholder, interest payable at 7.75%, paid
off during 1999 32,325 -
Note payable to individual, interest payable semiannually at
6.75%, paid off during 1999 30,000 -
Note payable to stockholder, interest payable semiannually at
8%, paid off during 1999 50,000 -
Uncollateralized note payable to stockholder, interest payable
annually at 6.75%, due February 1, 2000 50,000 50,000
10% notes payable to individuals, the majority of which are
stockholders, interest payable either semiannually or allowed
to compound, paid off during 1999 909,743 -
Bank line of credit, interest payable quarterly at the Wall Street
Journal prime (8.5% at December 31, 1999) plus .5%, due
July 1, 2000; guaranteed by certain officers and directors - 110,000
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE C - NOTES PAYABLE - CONTINUED
1998 1999
-------- --------
<S> <C> <C>
Uncollateralized note payable to stockholder, interest payable
at 6.75%, due with principal on April 30, 2000 - 50,000
Note payable to a corporation, interest payable at 6%, due with annual
principal installments of approximately $111,000
through June 1, 2001 - 221,205
Note payable to bank, payable in monthly installments of $337 through
January 2003, including interest at 6.95%;
collateralized by vehicle - 11,014
--------- -------
$1,325,247 $442,219
========= =======
The aggregate maturities of notes payable for years subsequent to December
31, 1999 are as follows:
Year ending December 31
2000 $323,965
2001 114,211
2002 3,873
2003 170
-------
$442,219
=======
</TABLE>
NOTE D - STOCKHOLDERS' EQUITY
On September 21, 1998, in conjunction with its initial public offering of
common stock (see Note P), the following changes in capital structure were
approved and effected:
Each share of outstanding Class B common stock was exchanged for one
share of Class A common stock and Class B common stock was eliminated.
Class A common stock was redesignated as, simply, common stock.
The par value of the common stock was changed from $.50 to $.01 and the
authorized number of shares was increased from 2,000,000 to 5,000,000.
A 5-for-2 stock split on common stock was effected.
5,000,000 shares of $.001 par value preferred stock with rights and
preference to be determined by the Board of Directors was created.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE D - STOCKHOLDERS' EQUITY - CONTINUED
These changes have been given retroactive effect in the accompanying
consolidated financial statements.
On April 23, 1999, nonvoting Series A Cumulative Preferred Stock was
created. Semiannual dividends of $5 per share are cumulative. The preferred
stock has priority as to liquidation value ($100 per share) and dividends in
arrears over common stock upon dissolution.
Prior to 1998, the Company, in an effort to raise additional capital,
acquired a convertible note for $55,000 then offered the related conversion
rights to existing stockholders on a basis consistent with their
then-current ownership percentage. Conversion rights not otherwise accepted
by existing stockholders were ultimately accepted by certain Company
officers who are also stockholders. These officers accepted the conversion
rights by issuing noninterest-bearing promissory notes payable, thereby
committing to purchase 33,602 shares of common stock at $1.30 per share.
These promissory notes and the Company's requirement to issue the related
common stock have been reflected in the accompanying consolidated financial
statements as stock subscriptions receivable and common stock subscribed.
Through December 31, 1998, 12,207 common shares had been issued under this
arrangement for $15,869 and at December 31, 1998, 30,100 common shares are
subscribed under notes receivable of $39,130. During 1999, the notes
receivable were collected, and the common stock was issued.
NOTE E - INCOME TAXES
The components of net deferred tax assets and changes in the related
valuation allowance are as follows:
December 31,
----------------------
1998 1999
--------- ---------
Deferred tax assets
Net operating loss carryforwards $ 110,289 $ 203,852
Policy reserves and policyholder funds 41,106 38,782
Other 21,246 14,767
Valuation allowance for deferred tax assets (101,517) (167,025)
--------- ---------
71,124 90,376
Deferred tax liabilities
Value of purchased insurance business (37,055) (51,906)
Depreciation (2,126) --
Other -- (1,229)
--------- ---------
(39,181) (53,135)
--------- ---------
Net deferred tax assets $ 31,943 $ 37,241
========= =========
Increase in valuation allowance $ 72,971 $ 65,508
========= =========
F-17
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE E - INCOME TAXES - CONTINUED
A reconciliation of income tax (expense) benefit at the statutory rate to
the Company's effective rate is as follows:
1998 1999
----------- -----------
<S> <C> <C>
Expected statutory rate 34% 34%
Small life insurance company deduction (20) (20)
Increase in valuation allowance (12) (7)
Other (3) (6)
----------- -----------
(1%) 1%
=========== ===========
At December 31, 1999, the following operating loss carryforwards, which
begin expiring in 2010, were available for tax purposes:
SLC $ 1,276,000
GMLIC 89,000
</TABLE>
NOTE F - RELATED PARTY TRANSACTIONS
The Company is affiliated with an insurance agency by common ownership and
management. Insurance regulatory authorities have approved an agreement
whereby the Company pays the agency 75% of the commission rate to which
nonaffiliates are subject. During 1998 and 1999, commissions of
approximately $4,000 and $1,000, respectively, were paid to this agency.
From time to time, the Company makes advances to and receives advances from
affiliates, generally officers and stockholders. Such advances have no
specified repayment terms but are generally short-term in nature.
During 1998, directors' fees of $33,000 were approved by the Board of
Directors and paid through the issuance of 11,697 shares (as adjusted - see
Note D) of common stock.
Included in notes receivable at December 31, 1998 is a $25,000 note
receivable from a corporation owned by a minority stockholder. The note
provided for interest at 8% payable in two installments and matured June 11,
1999.
NOTE G - COMMITMENTS AND CONTINGENCIES
Under its annuity contracts, the Company is committed to credit interest on
policyholder account balances at guaranteed rates. During the first policy
year the guaranteed rates range up to 8.5%. After the first year the lowest
guaranteed rate is 3%.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED
Most states have established guaranty fund associations to ensure that
policyholders receive the benefit of the insurance products they have
purchased. The guaranty funds receive their funding through assessments to
companies which write business in the respective states. The Company is
liable for such mandatory assessments upon notification by the states;
however, such assessments may be partially recovered through a reduction in
future premium taxes.
Certain investments with carrying values of $263,200 were pledged to
regulatory authorities in accordance with statutory requirements at December
31, 1999.
The Company leases certain equipment used in operations and storage space.
Rent expense under these leases for 1998 and 1999 was $10,957 and $16,322,
respectively. At December 31, 1999, there are no future commitments due to
terms being on a month-to-month basis.
The Company is involved in various legal actions relating to its operation.
Management believes that losses, if any, arising from such actions will not
be material to the Company's consolidated financial statements.
NOTE H - STATUTORY CAPITAL AND SURPLUS
SLC's insurance company subsidiaries prepare their statutory-basis financial
statements in accordance with accounting practices prescribed or permitted
by the domiciliary state insurance department. "Prescribed" statutory
accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners (NAIC). "Permitted" statutory
accounting practices encompass all accounting practices that are not
prescribed; such practices may differ from state to state, may differ from
company to company within a state, and may change in the future. The NAIC
has approved the Codification of Statutory Accounting Practices (the
Codification). The Codification will be effective on January 1, 2001. It is
currently uncertain when individual states will require adoption of the
Codification for statutory financial statements. The Company has not yet
determined what effect, if any, the Codification will have on its
subsidiary's statutory financial statements.
SLAC was required to maintain statutory capital and surplus of at least
$250,000 and, at December 31, 1998, its statutory capital and surplus
amounted to $360,000.
FBLIC was required to maintain statutory capital and surplus of at least
$100,000 and, at December 31, 1998, its statutory capital and surplus
amounted to $150,000.
BCLIC was required to maintain statutory capital and surplus of at least
$300,000 and, at December 31, 1998, its statutory capital and surplus
amounted to $519,000.
GMLIC is required to maintain statutory capital and surplus of at least
$700,000 and, at December 31, 1999, its statutory capital and surplus
amounted to $907,000. GMLIC 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. The maximum dividend which may be paid in 2000
under this formula without prior consent is $90,000.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE I - REGULATORY MATTERS
At periodic intervals, the domiciliary state insurance department routinely
examines the insurance company subsidiaries' statutory financial statements
as part of their legally prescribed oversight of the insurance industry.
Based on these examinations, the regulators can direct that the
subsidiaries' statutory financial statements be adjusted in accordance with
their findings.
NOTE J - REINSURANCE
The Company reinsures that portion of insurance risk which is in excess of
its retention limits, generally under yearly renewable term contracts.
Retention limits range up to $20,000 on life policies. Reinsurance premiums
are recognized as a reduction of insurance premiums and other considerations
over the policy term and totaled $20,000 and $52,000 for 1998 and 1999,
respectively.
Reinsurance does not discharge or diminish the primary liability of the
Company on the risks reinsured; however, it does serve to limit the
Company's maximum loss on risks. The Company would be liable for the
reinsurance risks ceded to other companies in the event that reinsurers were
unable to meet their obligations.
At December 31, 1998 and 1999, reinsurance recoverables on policy reserves
were not significant.
NOTE K - EMPLOYMENT AGREEMENTS
Effective April 1, 1997, the Company entered into employment agreements with
the Company's Chief Executive Officer and President, both Company
stockholders. The employment agreements provide, among other things, for
six-year terms, base and maximum salaries, increases to base salaries
subject to Board of Director approval, annual bonuses, and benefits.
The agreements also provide each employee the right to purchase shares of
common stock at a specified price per share during the first three years of
the agreements. The number of shares available to the employees under these
agreements is subject to grant by the Board of Directors; however, the
difference between the option price and market price of all such shares must
not be less than $5,000 each. At December 31, 1999, the Board of Directors
had not granted any shares relating to these agreements.
The agreements may be terminated by mutual consent, by the Company at its
sole discretion without cause, or by the Company for cause, as defined. If
the agreements are terminated for cause, as defined, severance payments of
$50,000 are payable to each employee. If the agreements are terminated
without cause, severance payments to each employee will be equivalent to the
maximum salary over the term of the agreements less amounts previously paid,
but not less than $360,000 for the President and $450,000 for the Chief
Executive Officer.
F-20
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE L - SEGMENT INFORMATION
Prior to 1999, the Company had the following reportable segments: mortgage
services, life insurance, and corporate. The mortgage services segment which
has been discontinued (see Note O) provided residential mortgage loan
processing services to individuals. The life insurance segment sells annuity
and other life insurance products. The corporate segment provided support to
the Company's operating subsidiaries and provided 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 were distinct
business units. Subsequent to the discontinuance of the mortgage services
segment, the Company operated only in the life insurance segment. Revenues
from customers are all attributed to the United States. The following
information about the segments is for the year ended December 31, 1998.
Mortgage Life
1998 services insurance Corporate Totals
----------------------------------------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Revenues from customers $118,739 $ 121,192 $ - $ 239,931
Intersegment revenues - 12,708 11,745 24,453
Investment income, including net realized
gains on sale of investments - 392,253 211,418 603,671
Interest expense 1,434 - 129,191 130,625
Depreciation and amortization - 239,482 63,075 302,557
Income tax expense (benefit) (646) 3,100 - 2,454
Segment loss (32,499) 376,211 233,530 577,242
Segment assets 528 7,231,895 1,423,094 8,655,517
Expenditures for segment assets - 1,613 - 1,613
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments
Revenues from customers $ 239,931
Intersegment revenues 24,453
Investment income, including net realized gains on sale of investments 603,671
----------
868,055
Other revenues 31,461
Elimination of intersegment revenues (24,453)
Discontinued operations (118,739)
----------
Total consolidated revenues $ 756,324
==========
Assets
Total assets for reportable segments $8,655,517
Elimination of intersegment assets (249,427)
----------
$8,406,090
==========
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
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, 1998 and 1999.
Such information, which pertains to the Company's financial instruments,
does not purport to represent the aggregate net fair value of the Company.
The carrying amounts in the table are the amounts at which the financial
instruments are reported in the consolidated financial statements.
All of the Company's financial instruments are held for purposes other than
trading. The fair values of debt and equity securities are estimated based
on quoted market prices for those or similar investments. The carrying value
of certain notes receivable and policy loans approximate fair value due to
nominal interest rate changes subsequent to issuance. The fair value of
other notes receivable is based on discounted future cash flows using
current rates at which similar loans with similar maturities would be made
to borrowers with similar credit risk. The carrying amounts of cash, cash
equivalents, short-term investments, and receivables approximate fair values
because of the short maturity of those assets. Cash surrender value is used
in determining the fair value of investment contracts. Estimated fair value
of notes payable is the discounted amount of future cash flows using the
Company's current incremental rate of borrowing for similar liabilities.
1998 1999
-----------------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets
Debt securities - available for sale $4,105,139 $4,105,139 $3,202,369 $3,202,369
Equity securities - available for sale 46,557 46,557 22,000 22,000
Equity securities - other - - 62,500 62,500
Notes receivable 1,241,468 1,315,000 312,864 370,957
Short-term investments 156,541 156,541 1,470,000 1,470,000
Policy loans 18,142 18,142 37,947 37,947
Cash and cash equivalents 1,492,196 1,492,196 935,746 935,746
Receivables 253,573 253,573 100,561 100,561
Financial liabilities
Policyholder account balances -
investment contracts $4,975,587 $4,720,000 $4,886,903 $4,673,874
Notes payable 1,325,247 1,322,000 442,219 440,987
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE N - BUSINESS ACQUISITIONS
In January 1998, in exchange for 100,000 shares of common stock (as adjusted
- see Note D), the Company acquired BCLIC, a Louisiana corporation, in a
business combination accounted for as a purchase. BCLIC was primarily
engaged in the sale of life insurance products in Louisiana. The results of
operations of BCLIC are included in the accompanying consolidated financial
statements since the date of acquisition. Because the Company's common stock
was not traded, its fair value was not reliably measurable. Therefore, the
cost of the acquisition was estimated through measuring directly the fair
values of BCLIC's assets and liabilities. The total cost of the acquisition,
as estimated, was approximately $998,000. The estimated fair value of assets
acquired was $2,051,746 and liabilities assumed were $1,053,291.
In January 1999, the Company acquired 100% of the outstanding common stock
of GMLIC in a business combination accounted for as a purchase. GMLIC was
primarily engaged in the sale of life insurance products in the state of
Texas. The results of operations of GMLIC have been included in the
accompanying consolidated financial statements since the date of
acquisition. The total cost of the acquisition was approximately $939,000.
Of the purchase price, cash of $607,000 was paid to seven of eight
stockholders with the eighth stockholder receiving a promissory note for a
principal amount of $332,000, payable in three equal annual installments at
an annual interest rate of 6% on the unpaid principal balance. Prior to the
acquisition, GMLIC only prepared statutory basis financial statements;
therefore, summarized pro forma information relating to revenues, net loss,
and basic and diluted loss per common share, assuming the acquisition
occurred as of January 1, 1998, was not practicable to determine.
NOTE O - DISCONTINUED OPERATIONS AND DISPOSITIONS
In December 1998, the Company adopted a plan to sell its mortgage services
segment to an officer of the Company in exchange for a $10,000 note
receivable. The actual disposal date was January 4, 1999. The assets sold
and liabilities assumed of the mortgage services segment consisted primarily
of the segment's "name", cash, and customer deposits.
Operating results of the mortgage services segment for the year ended
December 31, 1998 are shown separately in the accompanying consolidated
statements of operations.
Revenues of the mortgage services segment for 1998 were $118,739. This
amount is not included in revenues in the accompanying consolidated
statements of operations. There are no revenues or expenses attributable to
the mortgage services segment for 1999.
On December 30, 1999, the Company sold 100% of the outstanding common stock
of BCLIC for $62,500 of First Alliance Corporation common stock (25,000
shares) and $519,329 in cash, resulting in a loss of $57,824. BCLIC's
operating results included in the consolidated statements of operations were
revenues of $208,647 and $142,705 in 1998 and 1999, respectively, and
benefits, losses, and expenses of $307,133 and $159,330 in 1998 and 1999,
respectively.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1999
NOTE P - INITIAL PUBLIC OFFERING
During 1998, SLC began the process of an initial public offering, which went
effective in January 1999, of up to 1,000,000 shares of its common stock.
The initial public offering price of the shares was $5 per share, and the
minimum purchase per subscriber was 100 shares. The offering was closed
effective June 30, 1999, resulting in the issuance of 163,770 shares of
common stock and gross proceeds of approximately $822,000.
At December 31, 1998, the Company had offering costs of $110,000 which had
been deferred and were included in other assets. These costs were charged
against the gross proceeds of the offering in 1999.
The Company used the proceeds primarily to (i) fund the acquisition of GMLIC
(see Note N), (ii) repay debt, and (iii) provide working capital and general
corporate funds.
NOTE Q - SUBSEQUENT EVENTS
On February 15, 2000, GMLIC executed an agreement to purchase 100% of the
outstanding common stock of Texas Savings Life Insurance Company (TSLIC) for
an amount equal to TSLIC's capital and surplus at December 31, 1999 plus
$400,000. TSLIC is primarily engaged in the sale of life insurance products
and is licensed in the state of Texas. The acquisition will be accounted for
under the purchase method and is expected to be completed in the second
quarter.
F-24
STOCK PURCHASE AGREEMENT
BETWEEN
TEXAS SAVINGS HOLDING COMPANY
SELLER
GREAT MIDWEST LIFE INSURANCE COMPANY
BUYER
FEBRUARY 15, 2000
<PAGE>
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made and entered into effective the 15th day of
February, 2000 by and among GREAT MIDWEST LIFE INSURANCE COMPANY, a Texas
Corporation (The "Buyer"), and TEXAS SAVINGS HOLDING COMPANY, a Texas
Corporation (the "Seller").
WITNESSETH:
The Seller owns all of the issued and outstanding capital stock of
Texas Savings Life Insurance Company ("TSLIC"), a Texas Corporation. The Buyer
wishes to purchase and the Seller wishes to sell all of the issued and
outstanding stock of TSLIC (the "Shares").
In consideration of the mutual promises set forth in this Agreement,
the parties agree as follows:
I. SALE OF THE SHARES
1.01 Description of the Shares. There is presently authorized 500,000
Shares of the $1.00 par value common stock of TSLIC, of which 400,000 common
Shares are issued and outstanding, which Shares are owned as follows: (copies of
the certificates which are attached hereto, together with copies of the Articles
of Incorporation and By-laws, as Exhibit "1"). The rights, duties, obligations
and preferences of all classes of stock are set forth in the Articles as shown
on Exhibit "1".
Shareholder: TEXAS SAVINGS HOLDING COMPANY
400,000 Common Shares
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1.02 Sale and Purchase of the Shares of TSLIC. Subject to all the terms
and conditions hereof, and in reliance upon the representations and warranties
of the Buyer contained herein, the Seller hereby agrees to sell 100% of all of
the authorized and issued Shares of capital stock of TSLIC, which, heretofore,
have been authorized and/or issued, to the Buyer at the closing herein, and the
Buyer, subject to all the terms and conditions hereof, and in specific reliance
upon the representations and warranties of the Seller contained herein, fully
agrees to purchase the Shares of TSLIC from the Seller for the Purchase Price
and in the manner set forth below.
II. TERMS OF THE TRANSACTION
2.01 Purchase Price. The Purchase Price per share for the Shares to be
purchased pursuant to this Agreement shall be based upon an amount equal to the
statutory capital and surplus of TSLIC, as of December 31, 1999, as set forth on
line 38, page 3 of the Annual Financial Statement to be filed with the Texas
Department of Insurance as of March 1, 2000, paid in cash or certified funds at
Closing; plus, Four Hundred Thousand ($400,000) Dollars (the "Appraised Value"),
as described in Section 2.02, below.
2.02 Payment of the Purchase Price. The Purchase Price as set forth in
Paragraph 2.01 shall be paid by the Buyer, at closing, as follows:
A. The Purchase Price for the capital and surplus shall be paid
in cash in the form of a bank cashier's or certified check representing
immediately available funds.
B. The Purchase Price for the Appraised Value shall be paid as
follows:
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1. The sum of Four Hundred Thousand and no/100 Dollars
($400,000.00) shall be paid in cash in the form of a bank cashier's or certified
check representing immediately available funds.
2.03 Financial Statement(s). Seller has provided to Buyer a true and
accurate copy of TSLIC's September 30, 1999 Quarterly Financial Statement as
filed with the Department (herein call "the Financial Statements") and TSLIC's
most recent Examination Report, which are attached hereto as Exhibit "2." As
soon as it is prepared in final form and filed with the Department, a true and
correct copy of TSLIC's December 31, 1999 statutory Annual Financial Statement
shall be delivered to Buyer and shall replace TSLIC's September 30, 1999
statutory Quarterly Financial Statement as the "Financial Statements" referenced
in this Agreement and shall be attached hereto and become a part of Exhibit "2."
2.04 Conditions Precedent to Closing. As a condition precedent to
Closing:
A. Buyer shall have from date of execution of this Agreement
until March 15, 2000 (the "Inspection Period") in which to examine all of the
books, records, and documents of TSLIC together with all Exhibits as set forth
in this Agreement, which are to be provided by Seller to Buyer for Buyer's
review, in which to satisfy itself as to the condition of TSLIC.
(i) Buyer shall have the right to notify Seller of any
reasons, in Buyer's sole discretion, at any time prior to Closing for
terminating this contract by giving written notice to Seller specifying such
reasons in detail.
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(ii) In the event Seller is unwilling or unable to correct
Buyer's objections to the sale within five (5) days of notice (said notice
specifying such reasons), notice to be delivered by facsimile or hand delivery,
the Buyer, in its sole discretion, may terminate this Agreement prior to
Closing, and thereafter all respective rights and obligations of the parties
under this Agreement shall cease.
B. If, in Seller's reasonable opinion, at any time Buyer is not
diligently pursuing approval of its Form A by the Department, Seller may
terminate this Agreement by giving Buyer at least five (5) days advance written
notice of its intent to cancel, if Buyer does not, within that five (5) day
period, satisfy Seller that it is diligently pursuing the Form A approval.
2.05 Closing Contingencies.
A. The closing of this transaction shall be specifically
contingent upon the Buyer receiving approval by the Texas Department of
Insurance ("Department") of Buyer's Form A Acquisition Statement application
("Form A") to acquire TSLIC. The Buyer shall file a complete Form A with the
Department no later than February 25, 2000, and shall make a diligent effort to
obtain its approval and to comply with, in Buyer's reasonable opinion, the
requirements of the Department for such approval. Seller agrees to assist and
cooperate with Buyer in the Form A application process.
B. If Buyer's Form A to acquire TSLIC is not approved by the
Department, on or before March 31, 2000, then, at Buyer's option, this Agreement
may be canceled by Buyer and all obligations of either party hereunder shall
terminate.
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III. CLOSING
3.01 Time and Place and Obligations to Close. The Closing of the sale
and purchase of the Shares will take place on or before the Tenth (10th)
business day after the receipt of the final order granting approval of Buyer's
Form A by the Department, but no later than April 15, 2000, unless otherwise
agreed to by Seller. Closing shall be held at the offices of TSLIC, 3636
Executive Center Drive, Ste. G-22, Austin, TX 78731 at 10:00 a.m., or at such
other time and place as the parties may mutually agree.
3.02 Deliveries by the Seller. At the Closing, the Seller will
deliver to the Buyer the following:
A. Certificates representing the Shares accompanied by stock
powers duly executed in blank and otherwise in form acceptable for transfer on
the books of TSLIC.
B. The stock books, stock ledgers, minute books and corporate
seal of TSLIC, together with all other records, books and documents of TSLIC
which are located in or without the corporate premises of TSLIC.
C. Resignation of all officers and directors of TSLIC.
D. A certificate of compliance with this Agreement under Section
5.01, hereof.
E. Seller's Special Representation pursuant to Section 5.06,
hereof.
3.03 Deliveries by the Buyer. At the Closing, the Buyer will deliver
to the Seller the following:
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A. The Buyer's bank cashier's or certified check representing
immediately available funds, for the cash portions of the Purchase Price due at
Closing.
B. A certificate of compliance with Buyer's covenants,
representations and warranties under this Agreement, pursuant to Section 7,
hereof.
IV. RESTRICTION ON THE SELLER'S CONDUCT PENDING CLOSING
During the period pending Closing, the Seller agrees that, except as
otherwise consented to by the Buyer in writing, the Seller will comply with the
following as regards TSLIC:
4.01 Mortgage, Pledge, Etc. The Seller will not permit or allow any
of the properties or assets, real, personal, or mixed, tangible, or intangible,
of TSLIC to be mortgaged, pledged, or subjected to any lien or encumbrance.
4.02 Waived Rights, Etc. The Seller will not cancel or allow any other
debts or claims, or waive any rights of substantial value, or sell or transfer
any of TSLIC's properties or assets, real, personal, or mixed, tangible, or
intangible, except in the ordinary course of business and consistent with past
practice.
4.03 Compensation. The Seller will not grant or allow any general
uniform increase in the compensation of TSLIC's employees (including, without
limitation, any increase pursuant to any bonus, pension, profit-sharing, or
other plan or commitment), or any increase in any compensation payable or to
become payable to any officer or employee, and no such increase (whether general
or otherwise) is required by any agreement, plan, statute, or regulation.
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4.04 Capital Expenditures. The Seller will not make or allow any
capital expenditures or commitments by TSLIC without first obtaining Buyer's
consent.
4.05 Accounting. The Seller will not make any material change in any
method of accounting or accounting practice for TSLIC, except as otherwise
required by law.
4.06 Payments to Officers. The Seller will not pay, loan, or advance
any amount to, or sell, transfer, or lease any properties or assets (real,
personal, or mixed, tangible or intangible) to, or enter into any agreement or
arrangement with TSLIC's officers or directors or any "affiliate" or "associate"
of any such officers or directors (as such terms are defined in the rules and
regulations of the Securities and Exchange Commission under the Securities Act
of 1933, as amended), except for compensation to officers, and reimbursement of
expenses incurred by employees in connections with their current employment, nor
will it allow any such occurrences, except in the ordinary course of business
and disclosed to Buyer.
4.07 Dividends. Except as required in connection with the
Administrative Oversight by the Department, and with prior notice to Buyer, the
Seller will not declare or pay any dividend, or declare or make any distribution
on, or directly or indirectly redeem, purchase, or otherwise acquire any Shares
of TSLIC's outstanding capital stock, nor will it allow any such occurrence.
4.08 Reinsurance. The Seller will provide Buyer with copies of all
reinsurance, agreements or treaties currently in force, together with all
changes, addendums, and endorsements.
8
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4.09 Agents. The Seller will attempt, in good faith, to maintain and
renew all agent's contractual relationships with TSLIC prior to Closing.
4.10 Corporate Existence. The Seller will maintain, renew, and keep in
full force and effect TSLIC's corporate existence, rights, and franchises.
Except as required by the Administrative Oversight, and with prior notice to
Buyer, the Seller will not amend TSLIC's charter or by-laws; and TSLIC will duly
comply with all laws, rules, and regulations applicable to TSLIC and to the
conduct of its business.
4.11 Merger, Etc. The Seller will not merge or consolidate TSLIC with
any other person, firm or corporation or acquire any new business through TSLIC
in any manner which involves the assets of TSLIC other than insurance sales in
the ordinary course of business.
4.12 Changes. The Seller will not suffer any material damage,
destruction or loss (whether or not covered by insurance) affecting TSLIC's
properties, business or prospects, or waive any rights of substantial value.
V. CONDITIONS OF THE BUYER'S OBLIGATIONS
All obligations of the Buyer are subject to the fulfillment, as an
absolute condition precedent to performance hereunder, prior to or at the
Closing, of each of the following conditions by the Seller:
5.01 Performance. The Seller shall have performed and complied with
all agreements, obligations, and conditions required by this Agreement to be so
performed or complied with and a certificate signed by the Seller to such effect
shall be delivered to the Buyer at the Closing.
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5.02 Consents. All consents from third parties required to consummate
the transactions contemplated by this Agreement shall have been obtained.
5.03 Resignations. The Buyer shall have received the undated
resignations of all of TSLIC's directors and officers.
5.04 Financial Condition. That Buyer shall have satisfied itself of
financial condition of TSLIC which is accurately reflected in the Financial
Statement attached as Exhibit "2", and shall be satisfied that there has been no
material change in the financial condition of TSLIC as reflected in the Exhibit
"2" through the Closing.
5.05 Approval. On or before the date of Closing, the Commissioner of
Insurance of Texas shall have given his consent and issued its final order
approving Buyer's Form A for the consummation of this Agreement.
5.06 Special Representation. The Buyer shall have received from
Seller, a special representation, acceptable to the Buyer, to the effect that:
A. Seller, is a corporation duly organized and existing in good
standing under the laws of the State of Texas, and is entitled to own or lease
its properties and to carry on its business as and in the places where such
properties are now owned, leased or operated and such business is now conducted;
and that Seller has taken proper corporate action to approve such sale.
B. The Seller, whether corporate or otherwise, has full power and
authority to convey, assign, transfer and deliver the shares of stock to be
transferred hereunder.
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C. The Certificates of TSLIC to be transferred hereunder are the
sole and only validly issued and outstanding shares of capital stock of TSLIC
and represent One Hundred percent of interests of Seller to be conveyed pursuant
to this Agreement.
D. All corporate acts of Seller and other proceedings required to
be taken by or on the part of Seller to authorize it to carry out this Agreement
have been approved.
E. The persons, executing this Agreement on behalf of Seller have
been duly authorized and have full power to execute this Agreement on behalf of
Seller.
F. The Officers and Directors of TSLIC as set forth in the
Certificate of Incumbency, attached hereto as Exhibit "10", are the sole, only
and duly elected officers and directors of TSLIC.
G. To the best of Seller's knowledge, after due inquiry, the
execution, delivery and performance of this Agreement by Seller, will not
violate any provisions of Seller's Articles of Incorporation or By-Laws.
H. There are no lawsuits pending and to the knowledge of Seller,
none threatened against Seller which would, if successful, result in any claim
or lien against the shares.
I. The Minute Book and related files containing the minutes of
TSLIC accurately and truly reflect the records and actions of TSLIC.
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VI. REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller hereby represents and warrants as follows:
6.01 Title to the Shares. It owns, and will transfer to the Buyer at
the Closing, good, valid, and marketable title to all of the Shares of stock of
TSLIC, free, and clear of all liens, claims, options, changes, encumbrances
whatsoever except as described on Exhibit "3", and that the Seller owns all
issued and outstanding Shares of TSLIC. At the time of Closing, there will be no
outstanding options, warrants, or rights to purchase or acquire any of the stock
of TSLIC, other than to Buyer.
6.02 Valid and Binding Agreement. This Agreement constitutes a valid
and binding Agreement of the Seller, enforceable in accordance with its terms,
and neither the execution and delivery of this Agreement, nor , subject to the
receipt of approval of the Insurance Commissioner of Texas, the consummation by
the Seller of the transactions contemplated hereby (a) violates or will violate
the Articles of Incorporation or By-Laws of TSLIC, or any statute or law or any
rule, regulation or order of any court or governmental authority, or (b)
violates or will violate or conflicts with or will conflict with, or constitutes
a default under or will constitute a default under, any contract, commitment,
agreement, understanding, arrangement, or restriction of any kind to which the
Seller or TSLIC is a party, or by which any of such parties is bound.
6.03 Organization of TSLIC.
A. Except as alleged and ultimately proved by the Department in
connection with the Administrative Oversight, which is more fully described in
Exhibit "11," hereto, TSLIC is a corporation duly organized, validly existing,
and in good standing under the laws of Texas and has the corporate power and
authority to carry on its business as presently conducted in all states where it
is licensed or admitted to do business or is doing business.
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<PAGE>
B. Copies of the charter (Articles of Incorporation) and all
amendments thereto, of TSLIC not previously provided to Buyer, as certified by
the proper governmental official of the domiciliary state, and of its by-laws,
as amended to date, as certified by its Secretary (all of which will be
delivered to the Buyer one week in advance of Closing), are complete and correct
copies of the charter and by-laws of TSLIC, as amended and in effect on the date
thereof.
6.04 Capitalization of the Company.
A. The authorized capital stock of TSLIC consists of 500,000
shares of Common Stock, $1.00 par value, of which 400,000 shares are duly
authorized, validly issued and outstanding, fully paid and non-assessable.
B. Except for pre-emptive rights, if any, and as between Buyer
and Seller there are no outstanding options, warrants, or rights to purchase or
acquire any issued, unissued, or treasury shares of capital stock or other
securities of TSLIC, and no unissued or treasury shares of capital stock or
other securities of TSLIC are reserved for issuance for any purpose and there
are no contracts, commitments, agreements, understandings, arrangements, or
restrictions to which any of TSLIC or the Seller is a party or by which either
of them are bound relating to any shares of common stock or other securities of
TSLIC, whether or not outstanding.
C. The current financial condition of TSLIC is accurately
reflected in its Financial Statements attached hereto as Exhibit "2"; there has
been no material change in the financial condition of TSLIC as reflected in
those Financial Statements, and there are no other debts, known or unknown
liabilities, or obligations of TSLIC, whether accrued, absolute, contingent, or
otherwise due or to become due (including without limitations, liabilities for
taxes of any kind whatsoever), or arising out of transactions occurring, or any
state of facts existing, on or prior to the date of such Financial Statements,
to the date of Closing, except as may be required by the Administrative
Oversight.
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6.05 Tax Returns. TSLIC has duly filed all tax reports and returns
required to be filed by it and has duly paid all taxes and other charges due or
claimed to be due from it by Federal, State or Local taxing authorities
(including, without limitation, those due in respect of its properties, income,
franchise, licenses, sales, and payrolls).
6.06 Leases. If required, Exhibit "4" hereto contains an accurate and
complete description of the terms of all leases pursuant to which TSLIC leases
real or personal property. All such leases are, as of the date hereof, valid and
enforceable in accordance with their terms, and in full force and effect without
any default thereunder.
6.07 Litigation. Except as set forth in Exhibit "5" hereto concerning
the Administrative oversight, or otherwise, there are no actions, proceedings,
or investigations pending, or (to the best knowledge and belief of the Seller)
threatened against TSLIC, including without limitations, all matters involving
claims or disputes with TSLIC's agents, all matters arising out of reinsurance
contracts and treaties, or any matters relating to or arising out of the
insurance regulatory authority of any state; and neither TSLIC nor the Seller
know or has any reason to know of any basis for any such action, proceeding, or
investigation. There is no event or condition of any kind or character
pertaining to the business or assets of TSLIC that may materially and adversely
affect any such business or assets.
14
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6.08 Bank Accounts. At least one week prior to Closing, the Seller
will deliver to the Buyer copies of all records, including all signature or
authorization cards pertaining to such bank accounts.
6.09 No Outstanding Contract. TSLIC has (i) no outstanding contracts
that are not cancelable by it on notice not more than (30) days and without
liability, penalty, or premium, except those identified in Exhibit "6" or other
Exhibits attached hereto, (ii) no collective bargaining agreements, nor (iii)
any agreements that contain any severance or termination pay liability or
obligations.
6.10 No Powers of Attorney. TSLIC has not given any power of attorney
to any person, firm, or corporation for any purpose whatsoever other than in
connection with the issuance of Notary undertakings. The amount and numbers
given to each agent are contained in Exhibit "7" attached hereto.
6.11 Compliance with Applicable Law. To the best of Seller's knowledge
and unless the Department's Administrative Oversight allegations prevail, TSLIC
has duly complied, in respect of its operations, real property, equipment, all
other property, practices, and all other aspects of its business, with all
applicable laws (whether statutory or otherwise), rules, regulations, orders,
ordinances, judgments, and decrees of all governmental authorities (Federal,
State, Local or otherwise).
6.12 Assets Necessary to Business. TSLIC has good, valid, absolute and
marketable title to all of its properties and assets, real, personal, and mixed,
tangible and intangible, held in each case subject to no lease, mortgage,
pledge, lien, charge, security interest, encumbrance, or restriction whatsoever,
except as set forth in the Financial Statements attached hereto as Exhibit "2".
The furniture, fixtures, and equipment of TSLIC, if any, are in good condition
and repair, reasonable wear and tear excepted, as described in the inventory
dated _______________, a copy of which is attached hereto as Exhibit "8".
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6.13 Unpaid Claims. Except as reflected in the Financial Statements in
Exhibit "2" there were, as of the date of such Statements, no unpaid claims or
other obligations due or owed with respect to any insurance policy or
underwriting contract issued or reinsured by such company other than unreported
claims and claims in process incurred in the ordinary course of business
consistent with the past practice of such company.
6.14 Reinsurance Agreement. TSLIC's sole reinsurance agreements or
treaties to which it is a party are as set forth and described on Exhibit "9"
hereto, each of which is, on the date hereof, a valid and binding agreement of
such company, enforceable in accordance with their terms, and in full force and
effect, without any defaults thereunder. TSLIC has no knowledge nor any reason
to believe that a party to such reinsurance agreements or treaties, is or will
be unable to fully satisfy any claims, liabilities, obligations, or expense
which might arise thereunder.
6.15 No Compensation. Neither the Seller or TSLIC has paid or agreed
to pay any fee, commission, compensation or other valuable consideration
whatsoever to any director, officer, agent of the Company, or employees, in any
manner, aiding, promoting, or assisting in the consummation of the transactions
contemplated by this Agreement.
6.16 Disclosure. No representation or warranty by the Seller in this
Agreement, or in any writing attached hereto, contains or will contain any
untrue statement of material fact or omits or will omit to state any material
fact (of which any of the Seller or any of their directors or stockholders has
knowledge or notice) required to make the statements herein or therein contained
not misleading.
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6.17 Employment Contracts. There will be at Closing no employment
contracts or agreements, written or verbal or any commitment, with any employee,
officer or director of the Seller extending Sellers obligations beyond Closing.
6.18 Executive Compensation. Except as disclosed in Exhibit "6", there
are no executive or employee compensation plans, bonus or deferred compensation
plans, stock appreciation rights, phantom stock plans or any employee pension
benefit plans, as such terms are defined under "ERISA", including but not
limited to life insurance, health insurance, disability benefits, vacation pay,
day care and legal services plans, qualified and non-qualified, and all other
forms or types of benefit plans.
VII. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents, warrants and agrees as follows:
7.01 Corporate Organization. Buyer is a life insurance company duly
organized, validly existing and in good standing under the laws of the State of
Texas, and has all requisite power and authority (corporate and other) to own
its properties and assets and to conduct its business as now conducted.
7.02 Corporate Authority. Buyer has the corporate power to enter into
this Agreement and to carry out its obligations hereunder. The execution and
delivery of this Agreement, and the performance of Buyer's obligations hereunder
shall be duly authorized prior to Closing by the Board of Directors of Buyer and
no other corporate proceedings on the part of Buyer are necessary to authorize
such execution, delivery and performance. Except for requisite corporate
approvals set forth in the preceding sentence, this Agreement has been duly
executed by Buyer as the valid and binding obligation of Buyer, enforceable
against Buyer in accordance with the terms hereof, except as such enforcement
may be limited by applicable bankruptcy, insolvency, reorganization or similar
laws relating to or affecting creditors' rights generally or general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
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7.03 No Violation. The execution, delivery and performance by Buyer of
this Agreement and the consummation of the transactions contemplated hereby to
the best of Buyer's knowledge will not:
A. violate, conflict with or result in the breach of any
provision of the charter documents or by-laws of Buyer;
B. violate any order, writ, judgment, ruling, injunction, award
or decree applicable to or binding upon Buyer or upon the assets or properties
of Buyer;
C. violate any statute, law, rule or regulation of any
governmental entity applicable to Buyer or any of its assets or properties;
D. violate or result in the modification, revocation, termination
or suspension of any material license, permit, franchise, authorization or
approval of any governmental entity required to permit the continued lawful
conduct of Buyer's business in the manner now conducted.
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7.04 Investment Intent. The Buyer is acquiring the Shares of TSLIC for
its own account and for investment and not with a view to any resale,
distribution, subdivisions, or fractionalization thereof, within the meaning of
the Securities Act of 1933, as amended.
VIII. OBLIGATIONS OF THE PARTIES
Pending the Closing, and except as otherwise consented to by the Buyer
in writing, the Seller and TSLIC will comply with the following :
8.01 Full Access. The Seller and TSLIC will permit during normal
business hours the Buyer and its counsel, accountants, actuaries, and other
representatives, full access to its plants, properties, books and records in
order that the Buyer may have full opportunity to make such investigations as it
shall desire to make of the affairs of TSLIC, and the officers of TSLIC will
furnish the Buyer with such additional financial and operating data and other
information as to its business and property as the Buyer shall, from time to
time, reasonably request, including, without limitation, information required
for inclusion on any application or statement to be made to any governmental or
regulatory body in connection with the transactions contemplated by this
Agreement.
8.02 Approvals. As promptly as is practicable, but no later than
February 25, 2000, the Buyer shall make a Form A application to acquire TSLIC
with the Department, diligently prosecute such Form A application when made, and
use its best efforts to obtain, all authorizations and approvals of regulatory
bodies or officials, and all consents of third parties necessary to permit the
consummation of the transactions contemplated hereby; and the Seller shall
cooperate with and assist the Buyer, as requested, in the prosecution by it of
all obligations, approvals and consents.
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8.03 Supplemental Information. From time to time prior to the Closing,
the Buyer and the Seller will deliver to the other supplemental information
concerning events subsequent to the date hereof for inclusion in any Exhibit
required to be delivered by the Buyer, by the Seller, or TSLIC hereunder, in
order that any statement, representation, or warranty made in this Agreement, or
in any such Exhibit, shall continue to be true, complete, and correct in all
respects.
8.04 Financial Statements. The Seller will deliver to the Buyer on or
before March 1, 2000, the Statutory Annual Financial Statement of TSLIC as of
December 31, 1999, as filed with the Department, and when delivered by Seller to
Buyer, such Annual Statement shall replace the Financial Statements contained in
Exhibit 2 for all purposes in this Agreement.
IX. CONDITIONS OF THE SELLER'S OBLIGATIONS
All obligations of the Seller under this Agreement are subject to the
fulfillment as an absolute condition precedent to Seller's performance
hereunder, prior to or at the Closing, of each of the following conditions:
9.01 Performance. The Buyer shall have performed and complied with all
agreements, obligations, and conditions required by this Agreement.
X. MISCELLANEOUS
10.01 Materiality. The word "material", as used in this Agreement to
limit or qualify any provision hereof, shall mean:
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A. Either liability to or liability of TSLIC, in an amount of
more than Five Thousand Dollars ($5,000.00) as to each such item so limited or
qualified, and in an amount of more than Ten Thousand Dollars ($10,000.00) as to
all such items so limited or qualified in the aggregate; or
B. Liability of or action against TSLIC which:
1. Would cause the revocation, suspension, limitation, or
attempted revocation, suspension, or limitation of any of TSLIC's licenses or
other necessary regulatory approvals to do business in any state where the
Company is now licensed; or
2. The costs to the Buyer concerning which, including fines,
penalties, and attorney's fees, to correct or eliminate such effect would not be
assumed by Buyer.
C. Notwithstanding any other provision in this Section 10.01 or
in this Agreement, for the purposes of defining the term "material change" as
used in Section 5.04 of this Agreement concerning the financial condition of
TSLIC, "material change" shall not include, in any amount, market price
fluctuations in publicly traded securities owned by TSLIC occurring on or after
December 31, 1999, up to and including the date of Closing.
10.02 Nature and Survival of Representations and Warranties. The
representations and warranties contained in and made pursuant to this Agreement
shall survive the execution and delivery of this Agreement and all inspections,
examinations, and audits made at any time by or on behalf of any of the parties,
for a period of one (1) year, other than matters involving misrepresentation of
a material fact which shall extend for two (2) years, and other than tax
matters, which shall extend for four (4) years.
21
<PAGE>
10.03 Indemnifications.
A. Indemnification of Buyer. Seller hereby assumes and agrees to
defend, indemnify, protect, save and keep harmless Buyer from and against any
and all losses, damages, injuries, claims, demands and expenses, including legal
expenses, of whatsoever kind and nature arising on account of or in any way
relating to:
1. Any breach or default by Seller in the performance of its
obligations hereunder, or under any other agreement, instrument or document
executed in connection herewith or therewith;
2. Any material inaccurate representation of Seller in
respect of this Agreement; or
3. Any breach of Seller of a warranty or representation made
by Seller in this Agreement. It is understood and agreed, however, that Buyer
shall give Seller reasonably prompt written notice of any claim or liability
hereby indemnified against, and that Seller shall be entitled to control the
defense thereof (unless Buyer elects to undertake its own defense at its own
cost, in which case the parties shall cooperate in defending the claim in
question to the greatest extent consistent with their respective legal rights,
duties and obligations).
B. Indemnification of Seller. Buyer hereby assumes and agrees to
defend, indemnify, protect, save and keep harmless Seller from and against any
and all losses, damages, injuries, claims, demands and expenses, including legal
expenses, of whatsoever kind and nature arising on account of or in any way
relating to:
22
<PAGE>
1. Any breach or default by Buyer, in the performance of one
or more of their obligations hereunder, or under any other agreement, instrument
or document executed in connection herewith or therewith;
2. Any material inaccurate representation of Buyer in
respect of this Agreement; or
3. Any breach by Buyer of a warranty or representation made
by Buyer in this Agreement. It is understood and agreed, however, that Seller
shall give Buyer reasonably prompt written notice of any claim or liability
hereby indemnified against, and that Buyer shall be entitled to control the
defense thereof (unless Seller elects to undertake its own defense at its own
cost, in which case the parties will cooperate in defending the claim in
question to the greatest extent consistent with their respective legal rights,
duties and obligations).
10.04 Termination.
A. Buyer or Seller shall have the right to terminate during the
period from the date hereof to the Closing Date, if either party learns of any
fact or condition which is at variance with one or more of the warranties or
representations of Buyer or Seller, respectively, as set forth in this
Agreement.
B. Either the Buyer or Seller may, at its election, waive any of
its rights to terminate this Agreement under the foregoing provisions, and shall
be deemed to have waived such rights upon completion of the Closing under this
Agreement.
C. If the transaction under this Agreement shall not have closed
by the date set forth in Section 3.01 because of the inability of the Seller or
the Buyer by reason of causes beyond their respective control to carry out
performance as contemplated by this Agreement, neither the Buyer, on the one
hand, nor the Seller, on the other, shall be liable to the other for any loss,
damage, or expenses, and the only remedy of either shall be to terminate this
Agreement by notice to the other.
23
<PAGE>
10.05 Commissions. The Seller and the Buyer acknowledge that there are
no agreements with or claims by any party for brokerage commissions or finder's
fees in connection with the transactions contemplated by this Agreement. Seller
and Buyer will indemnify and hold harmless the other from and against any and
all claims or liabilities for brokerage commissions or finder's fees incurred by
reason of any action taken by such other party.
10.06 Expenses. All fees and expenses incurred by the Seller in
connection with the transactions contemplated by this Agreement shall be borne
by the Seller, and all fees and expenses incurred by the Buyer in connection
with the transactions contemplated by this Agreement shall be borne by the
Buyer.
10.07 Further Assurances. Seller and Buyer mutually agree that they
will, without further consideration, and at their own expense, execute and
deliver such other documents, and take such other action, as may reasonably be
requested in order to more effectively consummate the transactions contemplated
hereby.
10.08 Parties in Interest. All of the terms and provisions of this
Agreement shall be binding upon, shall inure to the benefit of, and shall be
enforceable by the lawfully authorized representatives, successors, and assigns
of the parties hereto.
24
<PAGE>
10.09 Entire Agreement; Amendments. This Agreement, including the
Exhibits, schedules, lists and other documents referred to herein which form a
part hereof, contains the entire understanding of the parties hereto in respect
of the subject matter contained herein. There are no restrictions, promises,
warranties, covenants, or undertakings other than those expressly set forth
herein. This Agreement may be amended only by a written instrument duly executed
by the parties hereto or their respective successors or assigns. Any condition
to a party's obligation hereunder may be waived by such party in writing.
10.10 Headings. The Section and Paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretations of this Agreement.
10.11 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered or mailed, registered or certified mail, return receipt requested,
postage prepaid:
If to the Seller: R. Kenneth Evans, President
Texas Savings Holding Company
3636 Executive Center Drive, Ste G-22
Austin, TX 78731
With a Copy to: Jeff W. Autrey, Esq.
Cantey & Hanger, Roan & Autrey, L.L.P.
400 West 15th Street, Suite 200
Austin, TX 78701
If to the Buyer: Great Midwest Life Insurance Company
P. O. Box 15808
Del City, OK 73155
Attn: Charles Smith
With a Copy to: Donald B. Nevard
4800 N. Lincoln Blvd.
Oklahoma City, OK 73105
25
<PAGE>
10.12 Assignment. So long as such assignment has no material affect on
the performance of the Buyer or its assignee to carry out the terms and
conditions place upon Buyer by this Agreement, including the successful
completion of the Form A process at the Department, the Buyer shall have the
right to sell, assign, or transfer this Agreement without prior consent of
Seller to an affiliated entity under common control with Buyer at any time
during the term of this Agreement, and any such assignee shall acquire all of
the rights and assume all of the obligations of the Buyer under this Agreement.
Any other assignment shall require approval of Seller.
10.13 Attorney's Fees. If any action at law or in equity, including an
action for declaratory relief, is brought to enforce or interpret the provisions
of this Agreement, the prevailing party shall be entitled to recover reasonable
attorney's fees from the other party, which fees may be set by the court in the
trial of such action or may be enforced in a separate action brought for that
purpose, and which fees shall be in addition to any other relief which may be
awarded.
10.14 Governing Law. This Agreement, the terms and conditions and
obligations hereunder shall be governed and construed according to the laws of
the State of Texas.
10.15 Counterpart Execution. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
26
<PAGE>
10.16 Gender. All personal pronouns used in this Agreement shall
include the other genders whether used in the masculine or feminine or neuter
gender, and the singular shall include the plural whenever and as often as may
be appropriate.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed on the date adjacent to their signatures.
SELLER: TEXAS SAVINGS HOLDING COMPANY
By:
----------------------------------
----------------------------------
Title:
----------------------------------
----------------------------------
Dated:
----------------------------------
----------------------------------
BUYER: GREAT MIDWEST LIFE INSURANCE COMPANY
By:
----------------------------------
----------------------------------
Title:
----------------------------------
----------------------------------
Dated:
----------------------------------
----------------------------------
27
<PAGE>
EXHIBITS
--------
EXHIBIT "1" Stock Certificates, Articles of Incorporation, Minutes and By-laws
EXHIBIT "2" Financial Statements
EXHIBIT "3" Liens, Claims, Options, Charges, and Encumbrances
EXHIBIT "4" Leases
EXHIBIT "5" Litigation
EXHIBIT "6" Outstanding Contracts
EXHIBIT "7" Powers of Attorney
EXHIBIT "8" Inventory
EXHIBIT "9" Reinsurance Agreements
EXHIBIT "10" Incumbency Certificate
EXHIBIT "11" Administrative Oversight Agreement
28
Exhibit 21.1
LIST OF SUBSIDIARIES
OF
SUMMIT LIFE CORPORATION
The following are subsidiaries of Summit Life Corporation:
Great Midwest Life Insurance Company, a Texas corporation; and
Summit Property Management, Inc., an Oklahoma corporation.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000924963
<NAME> Summit Life Corporation
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C> <C>
<PERIOD-TYPE> Year Year
<FISCAL-YEAR-END> Dec-31-1999 Dec-31-1998
<PERIOD-START> Jan-01-1999 Jan-01-1998
<PERIOD-END> Dec-31-1999 Dec-31-1998
<EXCHANGE-RATE> 1 1
<DEBT-HELD-FOR-SALE> 3,202,369 4,105,139
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 84,500 46,557
<MORTGAGE> 245,553 281,725
<REAL-ESTATE> 72,580 73,251
<TOTAL-INVEST> 5,180,260 5,641,098
<CASH> 935,746 1,492,196
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 412,984 293,391
<TOTAL-ASSETS> 7,015,821 8,406,090
<POLICY-LOSSES> 0 0
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 5,442,971 6,031,953
<NOTES-PAYABLE> 442,219 1,325,247
0 0
500,000 0
<COMMON> 22,676 20,547
<OTHER-SE> 493,362 756,283
<TOTAL-LIABILITY-AND-EQUITY> 7,015,821 8,406,090
213,598 121,192
<INVESTMENT-INCOME> 519,434 599,334
<INVESTMENT-GAINS> 5,202 4,337
<OTHER-INCOME> 74,500 31,461
<BENEFITS> 244,156 87,925
<UNDERWRITING-AMORTIZATION> 142,920 208,817
<UNDERWRITING-OTHER> 1,316,875 1,066,223
<INCOME-PRETAX> (891,217) (606,641)
<INCOME-TAX> (7,538) 3,100
<INCOME-CONTINUING> (883,679) (609,741)
<DISCONTINUED> 0 32,499
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (883,679) (577,242)
<EPS-BASIC> (.42) (.28)
<EPS-DILUTED> (.42) (.28)
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
