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, 2002
[ ] 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 Identification No.)
incorporation or organization)
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 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. ___
Issuer's revenues for its most recent fiscal year were $763,045.
The aggregate market value of the registrant's common stock, $.01 par
value, held by non-affiliates of the registrant as of March 18, 2003 was
$956,417.60 based on the closing price of $.80 per share on that date as
reported by the OTC Bulletin Board. As of March 18, 2003, 2,691,255 shares of
the registrant's common stock, $.01 par value, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE: Registrant's Proxy Statement for the 2003
Annual Meeting of Stockholders is incorporated by reference in Part III, Items 9
through 12, of this Form 10-KSB.
SUMMIT LIFE CORPORATION
FORM 10-KSB
For the Fiscal Year Ended December 31, 2002
TABLE OF CONTENTS
Part I.
Item 1. Description of Business.......................................... 1
Item 2. Description of Property.......................................... 10
Item 3. Legal Proceedings................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.............. 11
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters......... 11
Item 6. Management's Discussion and Analysis or Plan of Operation........ 12
Item 7. Financial Statements............................................. 19
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure......................................... 20
Part III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act................ 21
Item 10. Executive Compensation........................................... 21
Item 11. Security Ownership of Certain Beneficial Owners and Management... 21
Item 12. Certain Relationships and Related Transactions................... 21
Item 13. Exhibits and Reports on Form 8-K................................. 21
Item 14. Controls and Procedures.......................................... 23
Signatures ................................................................. 24
-i-
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
herein 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, is an
insurance holding company. The Company's primary focus is its life insurance
operations. As used in this report, the "Company" refers to Summit Life
Corporation and its subsidiary, Great Midwest Life Insurance Company ("Great
Midwest"), unless the context requires otherwise.
The Company's growth has been fueled primarily through acquisitions,
starting in 1994 when it acquired an Oklahoma-chartered life insurance company.
The Company acquired three additional life insurance companies in Texas and
Louisiana in 1997, 1998 and 1999. The Company consolidated its operations in
1999 by combining three of the companies into one company. The resulting
combined company was Great Midwest, an Oklahoma-domiciled life insurance company
operating in both Texas and Oklahoma. The fourth company, which operated in
Louisiana, was sold in 1999.
On August 1, 2001, the Company's wholly owned subsidiary, Great
Midwest, acquired from Presidential Life Insurance Company of Dallas, Texas
("Presidential"), a block of approximately 1,400 life insurance policies with
estimated annual premium of $120,000. Liabilities of $712,000 and assets of
$634,392 were transferred to Great Midwest for a purchase price of $77,608.
On February 14, 2003, the Company acquired Security General Life
Insurance Company, an Oklahoma-domiciled life insurance company ("Security
General"), for a net purchase price of $495,000. Security General is licensed to
operate as a life insurance company in multiple states. The purpose of the
acquisition was to acquire these licenses, which constituted substantially all
of the assets of Security General on the closing date. As a result of the
acquisition, the Company intends that Security General will become its primary
operating subsidiary. In connection therewith, the Company has obtained the
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necessary regulatory approval to transfer the entire block of insurance policies
of Great Midwest to Security General and to thereafter liquidate the remaining
assets of Great Midwest through a distribution to the Company as its sole
shareholder. Subsequent to such transfer, Security General will become the sole
insurance subsidiary of the Company and will operate in approximately 15 states
throughout the southeastern and western United States. The Company expects that
the transfer of business from Great Midwest to Security General, and the
liquidation of Great Midwest, should be completed by the end of the first
quarter of 2003. 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.
The Company's total revenue increased 25% from $609,614 in 2001 to
$763,045 in 2002. The Company believes that internal growth, coupled with
strategic acquisitions made available by the current consolidation of the
insurance industry, presents the Company with good opportunities to achieve its
operating strategy. In particular, the Company anticipates that the acquisition
of Security General will provide it with additional opportunities for the growth
of the Company. SEE "ITEM 6-MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION."
As of December 31, 2002, the Company had approximately 2,051 life
insurance policies and annuity contracts outstanding and individual life
insurance in force of approximately $22 million. As of December 31, 2002, the
Company had total assets of approximately $7.06 million and total shareholders'
equity of approximately $980,000.
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.
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.
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 5% of its information technology systems
capability in the administration of these back office operations.
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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, 2002 and 2001, the
Company's lapse ratio on ordinary business was 2% and 3%, respectively.
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 attempts to maintain competitive portfolio yields, while at
the same time maintaining a conservative approach with respect to its investment
criteria. Ultimately, the Company's objective with respect to its insurance
operations is to price each of its products to earn an adequate margin between
the return to the policyholder and the return earned by the Company on its
investments. To the extent that the Company is able to realize higher portfolio
yields on its investments, it will be in a position to offer more attractive
pricing on its insurance products.
Fixed Rate Annuities
Annuities are long term savings vehicles that are particularly
attractive to customers over the age of 50 who are or may be planning for
retirement and seek a secure, tax deferred savings product. The individual
annuity business is a growing segment of the savings and retirement market and
among the fastest growing segments of the life insurance industry. Annuity
products currently enjoy an advantage over certain other retirement savings
products because the payment of federal income taxes on interest credited on
annuity policies is deferred during the investment accumulation period.
Through Great Midwest, 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
3
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 3.00% to 6.50% at December
31, 2002. All of the Company's annuity products have minimum guaranteed
crediting rates of 3.0% for the life of the policy. At December 31, 2002, 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 2002 and 2001
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, 2002, 15% of the Company's annuity liabilities were
subject to a surrender charge of 5% or more.
Tax Qualified Annuities
General. The Company also markets to employees of public schools and
certain other tax exempt organizations certain tax qualified retirement
annuities that meet the requirements of Section 403(b) of the Internal Revenue
Code of 1986 and are known as "tax sheltered annuities" or "403(b) annuities"
("TSAs"). 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 $1,100,000 or approximately 27% of the
total annuities currently held by the Company.
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
4
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, Great Midwest, 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, Great Midwest, 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 premiums paid for such whole life policies are
generally higher than the premiums for comparable amounts of term insurance in
the policies early years but is generally lower in the later years of the life
of the policies. 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.
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.
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, 2002, the policy risk retention limit of the
Company's subsidiary on the life of any one individual did not exceed $5,000;
reinsurance ceded by the Company's subsidiary represented 56% of the gross
combined life insurance in force. At December 31, 2002, the Company's largest
reinsurer, Optimum Re Insurance Company, accounted for approximately 98% of the
$12 million of reinsurance ceded by the Company.
5
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, 2002, the average gross yield of the Company's invested
assets was approximately 8.7% and the average credited rate was 4.5%. Excluding
the sale of the communication tower lease, the average gross yield of the
Company's invested assets was approximately 4.8% for the year 2002. SEE "ITEM
2-DESCRIPTION OF PROPERTY."
The Company balances the duration of its invested assets with the
expected duration of benefit payments arising from insurance liabilities. At
December 31, 2002, the adjusted modified duration of debt securities and short
term investments was 6.0 years. At December 31, 2002, the average 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, see Note B to the Company's Consolidated
Financial Statements.
Acquisitions and Consolidations
General
The Company's operating strategy is to continue to make acquisitions of
small, marginally profitable or unprofitable insurance companies, consolidate
and streamline the administrative functions of these small companies, improve
their investment yields through active asset management by a centralized
investment operation and eliminate their unprofitable products and distribution
channels. Because of their small size, such companies are often overlooked as
potential acquisition candidates 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 five life insurance
companies. During 1999, three of these companies were combined, either by merger
or through transfer of operations, to create Great Midwest, which operates in
Texas and Oklahoma, while a fourth company was sold. In addition to stock
acquisitions, the Company has also made asset acquisitions. In 2001, the Company
's wholly owned subsidiary, Great Midwest, acquired a block of approximately
1,400 life insurance policies with estimated annual premium of $120,000. SEE
"ITEM 1-BUSINESS--General." The Company intends to continue its strategy of
6
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. The Company
has no agreements, understandings or arrangements with respect to any other
acquisitions at this time, with the exception of the acquisition of Security
General previously noted.
Employees
As of December 31, 2002, the Company had two full-time employees who
perform both managerial and administrative functions. Great Midwest has three
employees who perform administrative services. The Company's controller function
is outsourced. 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 $13,000.
The pricing of the Company's products is generally determined by
reference to actuarial calculations and statistical assumptions principally
relating to mortality, persistency, investment yield assumptions, estimates of
expenses and management's judgment as to market and competitive conditions. The
premiums and deposits received, together with assumed investment earnings, are
designed to cover policy benefits, expenses and policyowner dividends plus
return a profit to the Company. These profits arise from the margin between
mortality charges and insurance benefits paid, the margin between actual
investment results and the investment income credited to policies (either
directly or through dividends to policyowners) and the margin between expense
charges and actual expenses. The level of profits also 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
7
planning for estates, trusts and corporations. The Smith Agency 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. Because Great
Midwest is licensed to sell insurance in Oklahoma and Texas, it is subject to
regulation by the insurance regulatory agencies of both states. With the recent
acquisition of Security General, which is licensed as a life insurance company
in multiple states, the Company will also be subject to regulation by the
insurance regulatory agencies of the states in which Security General is
licensed and in which the Company intends to conduct business.
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.
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.
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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.
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.
9
The Company's insurance company subsidiary, Great Midwest, 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.
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.
In March 2001, the Company leased 2,400 square feet of space within the
internal boundaries of its property to Nextel Westcorp, Inc., on which space the
lessee erected a communications tower. Terms of the lease agreement (the "Nextel
Lease Agreement"), which was entered into in March 2001, provided for monthly
payments to the Company during the initial five-year term of the lease. The
lease was renewable at the option of the lessee for five additional five-year
terms.
On March 6, 2001, the Company sold the Nextel Lease Agreement. In
connection with the sale, the Company had a disagreement with Grant Thornton,
LLP, its then auditors, regarding the Company's proposed accounting treatment of
the sale. SEE "ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE." The Company interpreted certain provisions
relating to Statement of Financial Accounting Standards ("FAS") 13 to allow the
recording of a gain on the sale of the Nextel Lease Agreement as of the
effective date of the sale in the amount of $186,000, because the Company did
not retain any ownership in the lease revenue stream and the buyer had no
recourse against the Company if the lease revenue stream did not continue. Grant
Thornton LLP's review of the transaction indicated that the Nextel Lease
Agreement was an operating lease and that pursuant to FAS 13 paragraph 22, the
sale or assignment by the lessor of lease payments due under an operating lease
should be accounted for as a borrowing. As such, Grant Thornton LLP recommended
that the Company record the sale of the Nextel Lease Agreement as a borrowing as
of the effective date of the sale. The effect on the Company's first quarter
2001 financial statements was to eliminate $186,000 from income and record a
like amount as a liability.
During the Company's discussions with Grant Thornton LLP, the Company
was informed of certain requirements that had to be satisfied in order for the
gain on the sale of the Nextel Lease Agreement to be recognized as income.
Pursuant to the information provided by Grant Thornton LLP, in June 2001 the
Company sold, to the purchaser of the Nextel Lease Agreement, the real property
underlying the communication tower lease, which structured the transaction to
meet the requirements necessary for the gain on the sale to be recognized as
income. Accordingly, the Company recorded a gain of $186,000 in June 2001. The
effect on the Company's financial statements was to delay recording $186,000 of
income from the first quarter of 2001 to the second quarter of 2001.
As a result of events subsequent to the sale, the Company came to the
conclusion the tower property and lease were more attractive investments than
when they initially were sold by the Company. Accordingly, on December 17, 2001,
the Company repurchased the property, together with the underlying communication
tower lease, for $213,500.
As a part of the regulatory process in connection with the filing of
the Company's 10-KSB for the year ended December 31, 2001, the Company requested
a review by the Securities and Exchange Commission (the "SEC") of its accounting
treatment of the sale and repurchase of the property underlying the
communication tower lease. After review, the SEC advised the Company that,
although the Company's proposed accounting treatment was consistent with the
10
literal application of the applicable accounting principles, the SEC nonetheless
believed it to be appropriate for the Company to restate certain items relating
to the transactions. The effect of such restatement was to reverse the reporting
of the $186,000 of income on the original sale of the real estate subject to the
Nextel Lease Agreement, which previously had been reported in the second quarter
of 2001.
On June 29, 2002, the Company sold the subject property and
accompanying communication tower for $211,000. The Company reported investment
income of $211,000 as a result of the sale.
On July 31, 2002, the Company purchased an office and warehouse,
consisting of approximately 15,000 square feet at a single location in Del City,
Oklahoma. The Company intends in the next few years to relocate its
administrative, marketing and production facilities to this location. In such
event, the Company may sell or lease the property where its offices are
currently located. The purchase price was $529,871 and the Company renovated the
warehouse and adjacent land into climate controlled and regular storage
facilities at an additional cost of $622,850. When the property becomes fully
leased, the Company expects to recognize investment income from the property.
The purchase of the property and the renovations have been paid from existing
cash flow from operations.
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.
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 27, 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:
2001 2002
--------------------- --------------------
High Low High Low
--------- --------- --------- --------
First Quarter.................... $ .53 $ .25 $ .95 $ .23
Second Quarter................... $1.05 $ .10 $1.01 $ .30
Third Quarter.................... $ .80 $ .75 $1.00 $ .51
Fourth Quarter................... $ .90 $ .10 $ .90 $ .51
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 Bulletin Board Exchange when it qualifies for listing.
11
Number of stockholders
As of the close of business on March 18, 2003, 2,691,255 shares of
common stock were issued and outstanding, 5,000 shares of Series A preferred
stock were issued and outstanding and 350,000 shares of Series B preferred stock
were issued and outstanding. At such date, there were approximately 1,400
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.
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, 2002 and 2001. Certain statements contained in
this discussion are not based on historical facts, and are "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 discussion, 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 herein under "--Business Outlook and Risk Factors," 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. 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.
The Company's only business segment is its life insurance operations.
Operating Data
The following table sets forth selected information regarding operating
results for the periods indicated:
Year Ended December 31,
-----------------------
2002 2001
--------- ---------
(dollars in thousands)
Statement of Operations Data:
Revenues $ 763 $ 610
Benefits and expenses 858 933
--------- ---------
Net loss $ (95) $ (324)
========= =========
Balance Sheet Data:
Cash and cash equivalents $ 2,109 $ 1,661
Total assets $ 7,063 $ 6,629
Total liabilities $ 6,083 $ 5,572
Stockholders equity $ 980 $ 1,057
12
Results of Operations
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Assets/Liabilities/Stockholders' Equity. Total assets were $7,062,950
at December 31, 2002, compared to $6,629,095 at December 31, 2001, an increase
of 7%. The increase was due to an increase in the sales of the Company's annuity
products which are booked as deposits.
Total liabilities (primarily insurance reserves for future policyholder
benefits) were $6,083,251 at December 31, 2002, compared to $5,572,208 at
December 31, 2001, an increase of 9%. The increase was due primarily to the
increase in sales of the Company's annuity products as noted above.
Total stockholders' equity was $979,699 at December 31, 2002, compared
to $1,056,887 at December 31, 2001, a decrease of 7%. The decrease was primarily
due to the Company's net loss from operations. Equity was also impacted by
public offering costs (a decrease of $56,522) incurred in connection with a
public offering of the Company's common stock that was completed in March 2002,
sale of the Company's stock held by its subsidiary (an increase of $95,000),
preferred dividends (a decrease of $50,000) and unrealized gains (an increase of
$28,018) on its available for sale security portfolio.
Average rate of return on investments, including cash and cash
equivalents, was approximately 8.7% for 2002 (4.8% excluding the sale of the
communication tower lease) and 6.1% for 2001, while the average rate credited to
policyowner accounts was approximately 4.5% and 5.0%, respectively.
At December 31, 2002, the Company's net deferred tax assets totaled
$31,800 and related primarily to net operating loss and capital loss
carryforwards. Realization of net operating and capital loss 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. Total revenues increased 25% from $609,614 for the twelve
months ending December 31, 2001 to $763,045 for the same period ending December
31, 2002. Revenue increases were reported for investment income and net gains on
trading securities while other categories decreased.
Revenues attributable to premium income decreased 25% from $359,533 to
$268,721 for the year ended December 31, 2002, compared to the year ended
December 31, 2001. Revenues attributable to life insurance increased 21% from
year to year, however, revenues attributable to certain annuitized contracts
dropped by 69% from year to year and offset the increase in life insurance
premiums.
Investment income increased 39%, from $338,670 for the year ended
December 31, 2001 to $469,680 for the year ended December 31, 2002, $211,000 of
which was attributable to the sale of certain real property and an accompanying
lease agreement. Excluding the income from the sale of such property, investment
income decreased 24%, due in part to historically low interest rates that
impacted the Company's entire investment portfolio by lowering the rates of
return received on its investments and accelerating principal prepayments on its
higher-return investments.
Realized losses on the sale of investments increased from $7,792 for
the year ended December 31, 2001 to $26,661 for the year ended December 31,
2002, due to a loss suffered on one security connected with the bankruptcy of
the issuer during 2002.
13
The Company reported a net gain on trading securities of $5,091 for the
year ended December 31, 2002, compared to a net loss on trading securities of
$139,527 for the year ended December 31, 2001. The Company substantially reduced
its exposure during 2002.
Other income decreased 21%, from $58,730 for the year ended December
31, 2001 to $46,214 for the year ended December 31, 2002, primarily as a result
of the discontination of a contract for administrative services performed for
another company.
Costs and Expenses. Total expenses decreased 9% from $933,818 to
$852,758 for the years ended December 31, 2001 and 2002, respectively. Such
decrease was primarily attributable to a decrease of $93,926 in general,
administrative and operating expenses, including the outsourcing of the
Company's controller position. This was partially offset by increases in most
categories related to policy service and benefits as well as the amortization of
the value of purchased insurance business relating to the Great Midwest and
Presidential blocks of business. Such amortization is expected to continue over
the premium-paying life of the acquired policies.
Policy benefits increased 28% from $142,413 to $182,430 for the
comparable periods, due to the inclusion of the Presidential block in the
Company's operations for a full year. Interest expense decreased by $13,393 from
2002 compared to 2001 due to the payment of debt by the Company during 2001.
Taxes, licenses and fees also decreased on a year to year basis by $11,490 as a
result of the Company paying for the costs associated with the regulatory
examination of Great Midwest during 2001. These costs are incurred on a periodic
basis ranging from three to five years and the Company expects to incur
additional expenses in either 2004 or 2005.
Losses. The Company reported a net loss for the year ended December 31,
2002 of $95,154, compared to a net loss for the year ended December 31, 2001 of
$324,204, a 71% decrease. The decrease in net loss was due primarily to the sale
of the communication tower lease and underlying real property, which provided
income of $211,000, as well as cost-cutting initiatives taken by management
during 2002 to reduce operating expenses. Net loss decreased 61%, with a net
loss of $145,154 for the year ended December 31, 2002, compared to a net loss of
$374,204 for the year ended December 31, 2001, primarily due to the factors
stated above. Net loss per share for the comparable periods was $0.05 and $0.15
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 of a policy or block of
policies 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.
Capital Resources
On March 31, 2001, a principal shareholder and director of the Company
entered into an agreement with the Company to provide the Company with an
unsecured revolving line of credit in the aggregate amount of $500,000 (the
"Revolving Line of Credit"). The Revolving Line of Credit, which bears no
14
interest, is due and payable upon demand by the creditor. See Note C to the
Company's Consolidated Financial Statements. The Revolving Line of Credit
replaced the Company's bank line of credit, which was repaid in its entirety
with borrowings under the Revolving Line of Credit, and has been and will be
utilized as necessary to fund the Company's operations if other sources of
funding are not available. See "--Business Outlook and Risk Factors," below,
under the heading "The Company may not have alternate sources of financing
available if the Revolving Line of Credit is terminated." As of December 31,
2002, the Company has been advanced $245,629.
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.
On February 14, 2003, the Company acquired Security General Life
Insurance Company, an Oklahoma-domiciled life insurance company ("Security
General"), for a net purchase price of $495,000. The purchase price was funded
with cash from operations. Because the transaction was structured so that the
only assets to be retained by Security General were the regulatory licenses held
by it, under the terms of the acquisition agreement the Company agreed to
reimburse the seller for the statutory capital and surplus required to be
retained by Security General. In connection with this provision, the Company
obtained a three-month bridge loan in the amount of $1,500,000 to reimburse the
seller for the approximately $1.5 million of statutory capital and surplus in
Security General. The Company intends to repay the bridge loan, which was
obtained from a bank at an interest rate of 3.25% per annum, as soon as the
liquidation of Great Midwest is completed, and its remaining capital and surplus
is permitted by regulators to be released for distribution to the Company as its
sole shareholder. In the event that proceeds from the liquidation of Great
Midwest are insufficient for such purposes, the Company may sell shares of its
preferred stock. If the Company decides to not sell its preferred stock or the
sale of preferred stock is not fully completed, the Company could be required to
obtain funds by extending and increasing the bridge loan or by obtaining
financing from other sources.
The Company believes that anticipated cash from continuing operations
and its Revolving Line of Credit should be sufficient to fund its operations and
the annual 10% dividend on the Series A Preferred Stock for at least the next
twelve months. The Company may not, however, generate sufficient cash flow for
these purposes. The Company's ability to fund its operations and to make
scheduled dividend 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 and the
ability of the principal shareholder to advance additional funds to the Company
under the Revolving Line of Credit if other sources of funds are not available.
The risk factors to which the Company's operations are subject include the
following:
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 2003 as well as the
Company's expectations relating to its business strategy. Risk factors include
the following:
The Company operates in a highly competitive industry, which could
limit its ability to gain or maintain its position.
15
The Company is in direct competition with a large number of insurance
companies, many of which offer a greater number of products through a greater
number of agents and have greater resources than the Company. In addition, the
Company may be subject, from time to time, to new competition resulting from
additional private insurance carriers introducing products similar to those
offered by it. Moreover, as a result of recent federal legislation, commercial
banks, insurance companies, and investment banks may now combine, provided
certain requirements are satisfied, and the Company expects to encounter
increased competition from these providers of financial services. This
competitive environment could results in lower premiums, less favorable
underwriting terms and conditions, loss of sales and reduced profitability.
Over the past four fiscal years, substantially all of the Company's
premiums were from sales of policies in Oklahoma and Texas. The Company's
ability to compete successfully may suffer from competitive changes in these
particular markets.
The Company's lack of a rating could adversely affect its ability to
compete.
Ratings of insurance companies are typical with the industry. Increased
public and regulatory concerns regarding the financial stability of insurance
companies have resulted in policyholders placing greater emphasis upon company
ratings and have created some measure of competitive advantage for insurance
carriers with higher ratings. Rating organizations assign ratings based on
several factors. While most of the considered factors relate to the rated
company, some of the factors relate to general economic conditions and
circumstances outside the rated company's control. As of March 27, 2003, the
Company has not been rated by any rating organization. The absence of a rating
could adversely affect the Company's ability to sell its products or retain
existing business, and could adversely affect its ability to compete for
attractive acquisition opportunities.
The Company may not be able to compete successfully if it cannot
recruit and retain insurance agents.
The Company continuously recruits and trains independent agents to
market and sell its products. The Company may not be able to continue to attract
and retain independent agents to sell its products. The Company also engages
marketing general agents from time to time to recruit independent agents and
develop networks of agents in various states. The Company's business and ability
to compete may suffer from the inability to recruit and retain insurance agents
and from the loss of services provided by its marketing agents.
The Company's policy claims fluctuate from year to year, and future
benefit payments may exceed reserves.
The Company's results may fluctuate from year to year due to
fluctuations in policy claims received by its life insurance subsidiary. Great
Midwest has established reserves for claims and future policy benefits based on
accepted actuarial practices. By care in underwriting new policies and sharing
risk with reinsurance companies, Great Midwest has attempted to limit the risk
that its actual payments of death and other benefits will exceed its reserves.
The reserves are, however, only actuarial estimates and it is possible that
Great Midwest's claim experience could be worse than anticipated, so that its
reserves may prove to be insufficient. If this were to happen, it could result
in increased operating losses.
The Company could be forced to sell illiquid investments at a loss to
cover policyholder withdrawals.
Many of the products offered by Great Midwest allow policyholders and
contractholders to withdraw their funds under defined circumstances. Great
Midwest manages its liabilities and configures its investment portfolio so as to
provide and maintain sufficient liquidity to support anticipated withdrawal
16
demands, contract benefits and maturities. While Great Midwest owns a
significant amount of liquid assets, a certain portion of its assets are
relatively illiquid. Unanticipated withdrawal or surrender activity could, under
some circumstances, compel Great Midwest to dispose of illiquid assets on
unfavorable terms, which could have an adverse effect on the Company.
Interest rate fluctuations could negatively affect the spread income.
Significant changes in interest rates expose insurance companies to the
risk of not earning anticipated spreads between the interest rate earned on
investments and the credited rates paid on outstanding policies. Both rising and
declining interest rates can negatively affect the Company's spread income.
While the Company develops and maintains asset/liability management programs and
procedures designed to preserve spread income in rising or falling interest rate
environments, changes in interest rates could adversely affect such spreads.
Lower interest rates may result in lower sales of certain of the
Company's insurance and investment products. In addition, certain of the
Company's insurance products guarantee a minimum credited interest rate.
The Company's insurance subsidiary is highly regulated and government
regulation may affect profitability or market value.
The Company's insurance subsidiary is subject to government regulation
in each of the states in which it conducts business. Such regulation is vested
in state agencies having broad administrative power dealing with many aspects of
the insurance business which may include premium rates, marketing practices,
advertising, policy forms and capital adequacy, and is concerned primarily with
the protection of policyholders rather than share owners. Changes in these
regulations could affect the Company's profitability or the market value of its
shares.
The Company's insurance subsidiary acts as a fiduciary and is subject
to regulation by the United States Department of Labor when providing a variety
of products and services to employee benefit plans governed by the Employment
Retirement Income Security Act ("ERISA"). Severe penalties are imposed on
insurers that breach their fiduciary duties to the plans under ERISA. If the
Company were fined or a penalty was imposed on the Company by a government
agency having jurisdiction over it, the Company might not have the financial
resources to pay the fine or penalty.
The Company cannot predict the effect of recent insurance regulatory
changes.
The National Association of Insurance Commissioners, or the NAIC,
adopted the Codification of Statutory Accounting Principles ("Codification")
effective on January 1, 2001. The Company determined that the primary effect of
Codification is that goodwill and deferred tax assets can now be recorded as
admitted assets, subject to limitations, on it's subsidiary's statutory
financial statements.
A tax law change could adversely affect the Company's ability to
compete with non-insurance products.
Under the Internal Revenue Code of 1986, as amended (the "Code"),
income tax payable by policyholders on investment earnings is deferred during
the accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of the Company's products a competitive
advantage over other non-insurance products. To the extent that the Code is
revised to reduce or eliminate the tax-deferred status of life insurance and
annuity products, or to increase the tax-deferred status of competing products,
all life insurance companies, including Great Midwest, would be adversely
affected with respect to their ability to sell such products, and, depending on
grandfathering provisions, the surrenders of existing annuity contracts and life
insurance policies. In addition, life insurance products are often used to fund
estate tax obligations. If the estate tax were eliminated, the demand for
certain life insurance products could be adversely affected. The Company cannot
predict what tax initiatives may be enacted which could adversely affect us.
17
The Company's investments are subject to risks.
The Company's invested assets are subject to customary risks of credit
defaults and changes in market values. The value of the Company's investment
portfolio depends in part on the financial condition of the companies in which
it has made investments. Factors that may affect the overall market value of the
Company's invested assets include interest rate levels, financial market
performance, and general economic conditions, as well as particular
circumstances affecting the businesses of individual companies.
The Company's growth from acquisitions involves risks.
The Company's acquisitions have benefited it in part by allowing it to
enter new markets and to position the Company to realize certain operating
efficiencies associated with economies of scale. There can be no assurance,
however, that the Company will realize the anticipated financial results from
its acquisitions or that suitable acquisitions, presenting opportunities for
continued growth and operating efficiencies, or capital to fund acquisitions
will continue to be available to it.
The Company is dependent on the performance of others.
The Company's results may be affected by the performance of others
because the Company has entered into various agreements involving other parties.
For instance, many of the Company's products are sold through independent
distribution channels. Additionally, a portion of the Company's life insurance
sales comes from arrangements with unrelated marketing organizations. As with
all financial services companies, the Company's ability to conduct business is
dependent upon consumer confidence in the industry and its products. Actions of
competitors, and financial difficulties of other companies in the industry,
could undermine consumer confidence and adversely affect the Company's business.
A decline in the Company's stock price may limit our ability to raise
capital.
During the past few years, many financial services companies, including
the Company, experienced a decrease in the market price of their common stock.
Although the Company believes it has sufficient, internally generated cash flow
to fund its day-to-day operations, a lower stock price may limit its ability to
raise capital to fund other growth opportunities and acquisitions. In fact, the
lower stock prices suffered by the Company's stock in 2001 had an adverse effect
on its ability to fully sell all 1,000,000 shares offered in its public offering
that commenced in May 2001.
The Company's reinsurance program involves risks.
Great Midwest is able to assume insurance risks beyond the level which
its capital and surplus would support by transferring substantial portions of
such risks to other larger insurers through reinsurance contracts. These
reinsurance arrangements, which are the usual practice in the insurance
industry, leave Great Midwest exposed to two risks:
-- The credit risk, which exists because reinsurance does not
fully relieve Great Midwest of its liability to its insureds for the
portion of the risks ceded to reinsurers. Although Great Midwest places
its reinsurance with reinsurers it believes to be financially stable, a
reinsurer's subsequent insolvency or inability to make payments under
the terms of a reinsurance treaty could have a materially adverse
effect on the Company's financial condition.
-- The amount and cost of reinsurance available to Great Midwest
is subject, in large part, to prevailing market conditions beyond its
control. Non-renewal or cancellation of a reinsurance arrangement
affects only new business and the reinsurer remains liable on business
reinsured prior to
18
non-renewal or cancellation. If Great Midwest were to be
unable to maintain or replace its reinsurance facilities on
acceptable terms upon their expiration and were unwilling or
unable to bear the associated increase in exposure on new
business, it would have to reduce the amount of its new
business.
The Company is dependent on dividends and management fees from its
insurance subsidiary, Great Midwest, to fund its operations.
The Company's ability to fund its operations is affected by the ability
of its insurance company subsidiary, Great Midwest to declare and distribute
dividends to the Company as its sole shareholder, as well as on its ability to
pay the Company management fees for the administrative services the Company
provides to it. Insurance company subsidiaries, like Great Midwest, are subject
to various state statutory and regulatory restrictions, applicable to insurance
companies generally, that limit the amount of cash dividends, loans and advances
that those subsidiaries may pay to their parent companies. Under Texas insurance
laws, Great Midwest, generally may pay dividends only out of its unassigned
surplus as reflected in its statutory financial statements filed in that state.
In addition, the Texas Commissioner of Insurance, must approve, or not
disapprove within 30 days of notice, payment of an "extraordinary" dividend from
Great Midwest. Under Texas insurance laws, that term generally refers to a
dividend that exceeds, together with all dividends paid by Great Midwest within
the previous 12 months, the greater of 1) 10% of Great Midwest's statutory
capital and surplus at the preceding December 31, or 2) the net gain from
operations of Great Midwest for the 12 months ended on such December 31. With
the recent acquisition of Security General, which is licensed as a life
insurance company in multiple states, the Company will also be subject to
regulation by the insurance regulatory agencies of the states in which Security
General is licensed and in which the Company intends to conduct business.
It is possible that more stringent restrictions will be adopted from
time to time, which could have the effect, under certain circumstances, of
significantly reducing dividends or other amounts payable to the Company by its
insurance subsidiary without affirmative prior approval by state insurance
regulatory authorities.
In the event of the insolvency, liquidation, reorganization,
dissolution or other winding-up of an insurance subsidiary of the Company, all
creditors of the subsidiary, including holders of life insurance policies, would
be entitled to payment in full out of the assets of such subsidiary before the
Company, as shareholder, would be entitled to any payment.
The Company may not have alternate sources of financing available if
the Revolving Line of Credit is terminated.
The Company is also dependent, in the absence of sufficient cash from
operations or other sources, upon the Revolving Line of Credit to fund its
operations. The amounts advanced to the Company under the Revolving Line of
Credit totaled $245,629 and $79,000 at December 31, 2002 and December 31, 2001,
respectively. The Revolving Line of Credit is terminable on demand of the
creditor, and it is possible that the credit line could be terminated at a time
when other sources of funds may not be available to the Company. In such an
event, or if the creditor becomes unable to advance additional funds under the
line, the Company may not be able to adequately fund its operations.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company are incorporated by
reference from pages F-1 through F-18 of the attached Appendix, and include the
following:
Consolidated Financial Statements of Summit Life Corporation and
Subsidiaries
(1) Report of Independent Certified Public Accountants;
19
(2) Consolidated Balance Sheets as of December 31, 2002 and 2001;
(3) Consolidated Statements of Operations for Years Ended December
31, 2002 and 2001;
(4) Consolidated Statements of Stockholders' Equity for Years
Ended December 31, 2002 and 2001;
(5) Consolidated Statements of Cash Flows for Years Ended December
31, 2002 and 2001; and
(6) Notes to Consolidated Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As of June 29, 2001, the Company's Board of Directors dismissed Grant
Thornton LLP as the Company's independent accountants and appointed Gary
Skibicki CPA, PC as the Company's independent accountants.
The reports of Grant Thornton LLP on the Company's consolidated
financial statements as of and for the years ended December 31, 2000 and 1999
did not contain any adverse opinion or disclaimer of opinion, and neither report
was qualified or modified as to uncertainty, audit scope or accounting
principles.
The decision to change independent accountants was recommended by the
Company's Audit Committee, and approved by the Company's Board of Directors on
June 29, 2001.
During the two most recent fiscal years and through the date of this
report, the Company has not had any disagreements with Grant Thornton LLP,
except as set forth below in this paragraph, on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreement(s), if not resolved to the satisfaction of Grant
Thornton LLP would have caused Grant Thornton LLP to make reference thereto in
their report on the consolidated financial statements of the Company for such
periods. During the two most recent fiscal years and through the date of this
report, the Company has had one disagreement with Grant Thornton LLP regarding
the Company recording a gain on the March 6, 2001 sale of a communications site
lease agreement (the "Lease Agreement"). SEE "ITEM 2 - DESCRIPTION OF PROPERTY."
The Company interpreted certain provisions relating to Statement of Financial
Accounting Standards ("FAS") 13 to allow the recording of a gain on the sale of
the Nextel Lease Agreement as of the effective date of the sale in the amount of
$186,000 because the Company did not retain any ownership in the lease revenue
stream and the buyer had no recourse against the Company if the lease revenue
stream did not continue. Grant Thornton LLP's review of the transaction
indicated that the lease agreement was an operating lease and that pursuant to
FAS 13 paragraph 22, the sale or assignment by the lessor of lease payments due
under an operating lease should be accounted for as a borrowing. As such, Grant
Thornton LLP recommended that the Company record the sale of the lease agreement
as a borrowing as of the effective date of the sale.
The Company's Audit Committee was informed of the disagreement by
letter from Grant Thornton LLP. After considerable discussion, the Company
accepted the recommendations of Grant Thornton LLP and did not record the gain
as of the effective date of the sale of the Nextel Lease Agreement. The matter
was resolved to the satisfaction of Grant Thornton LLP. The discussions between
the Company and Grant Thornton LLP covered the accounting principles and
literature related to the different types of leases and revenue recognition. The
effect on the Company's first quarter financial statements was to eliminate
$186,000 from income and record a like amount as a liability.
The Company, during the course of evaluating Grant Thornton LLP's
recommendation, discussed the recording of the gain on the sale of the Nextel
Lease Agreement with Gary Skibicki CPA, PC. The discussions between the Company
and Gary Skibicki CPA, PC covered the accounting principles and literature
related to the different types of leases and revenue recognition. Gary Skibicki
CPA, PC concurred with the recommendations of Grant Thornton LLP regarding the
20
manner in which the sale should be recorded and, as stated above, the Company
did record the sale of the Nextel Lease Agreement as a borrowing in accordance
with the recommendations of Grant Thornton LLP. The Company authorized Grant
Thornton LLP to respond fully to inquiries of Gary Skibicki CPA, PC, regarding
the subject matter of the disagreement.
The Company has requested Gary Skibicki CPA, PC to review the
disclosure required by this Item 8 and Gary Skibicki CPA, PC has informed the
Company that it concurs with the disclosure as set forth in this Item 8
concerning Gary Skibicki CPA, PC.
Other than the disagreement set forth above, during the Company's two
most recent fiscal years and through the date of this report, the Company has
not had any reportable events as defined in Item 304 (a)(l)(iv) of Regulation
S-B and there has not been a transaction similar to the sale of the Nextel Lease
Agreement during the two most recent fiscal years or the subsequent interim
period.
The Company requested that Grant Thornton LLP furnish it with a letter
addressed to the Securities and Exchange Commission stating whether it agrees
with the above statements. A copy of the letter dated July 13, 2001 is filed as
Exhibit 16 to Form 8-K/A filed on July 13, 2001.
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 2003 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 2003 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 2003 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 2003 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-18.
(2) The exhibits set forth on the following Exhibit Index
are filed with this Report or are incorporated by reference as set forth
therein.
21
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* Specimen Certificate of the Series A Preferred Stock (filed as Exhibit
4.1 to the Company's Quarterly Report on Form 10-QSB for the Quarter
ended June 30, 1999 and incorporated herein by reference).
4.4* Certificate of Designation of Series A Preferred Stock (filed as
Exhibit 4.2 to the Company's Quarterly Report on Form 10-QSB for the
Quarter ended June 30, 1999 and incorporated herein by reference).
4.5* Certificate of Designation of Series B Convertible Preferred Stock
(filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-QSB
for the Quarter ended September 30, 2000 and incorporated herein by
reference).
10.1* Employment Agreement by and between the Company and James L. Smith
(filed as Exhibit 10.1 to the Company's Registration Statement on Form
SB-2, file number 333-65097 and incorporated herein by reference).
10.2* Employment Agreement by and between the Company and Charles L. Smith
(filed as Exhibit 10.2 to the Company's Registration Statement on Form
SB-2, file number 333-65097 and incorporated herein by reference).
10.3* Escrow Agreement between the Company and UMB Bank (filed as Exhibit
10.5 to the Company's Registration Statement on Form SB-2, file number
333-55722 and incorporated herein by reference).
10.4* 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).
10.5* Communications Site Lease Agreement dated March 6, 2001 between the
Company and Nextel West Corp. and Amendment No. 1 thereto. (filed as
Exhibit 10.8 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2001 and incorporated herein by reference).
10.6 Agreement dated June 29, 2002 between the Company and
______________________.
16* Letter to SEC from Grant Thornton LLP dated July 13, 2001 (filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 13,
2001 and incorporated herein by reference).
22
Exhibit
Number Name of Exhibit
------ ---------------
21.1 List of subsidiaries.
99.1 Certification of Periodic Financial Report by Chief Financial Officer
Pursuant to 18 U.S.C.ss. 1350.
99.2 Certification of Periodic Financial Report by Chief Executive Officer
Pursuant to 18 U.S.C.ss. 1350.
99.3 Certification of Periodic Financial Report by Chief Accounting Officer
Pursuant to 18 U.S.C.ss. 1350.
* Previously filed.
(b) There was no Form 8-K filed by the Company during the fourth quarter
of 2002.
ITEM 14. CONTROLS AND PROCEDURES
The Company's principal executive officers and principal financial
officers have concluded, based on their evaluation as of a date within 90 days
of the filing of this Form 10-KSB that its disclosure controls and procedures
(as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of
1934) are effective. There have been no significant changes in internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
23
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 27, 2003 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 27, 2003
---------------------------
James L. Smith,
Chairman of the Board of Directors
Chief Executive Officer and Secretary
(Principal Executive Officer)
/s/ Charles L. Smith March 27, 2003
---------------------------
Charles L. Smith,
President, Chief Operating Officer
Chief Financial Officer and Director
(Principal Financial Officer)
/s/ Quinton L. Hiebert March 27, 2003
---------------------------
Quinton L. Hiebert,
Chief Accounting Officer
/s/ Gary Ellis March 27, 2003
---------------------------
Gary Ellis,
Director
/s/ Dean Brown March 27, 2003
---------------------------
Dean Brown,
Director
/s/ Thomas D. Sanders March 27, 2003
---------------------------
Thomas D. Sanders,
Director
24
CERTIFICATIONS
I, Charles L. Smith, President, Chief Operating Officer, Chief Financial Officer
and a Director of Summit Life Corporation certify that:
1. I have reviewed this annual report on Form 10-KSB of Summit Life Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Charles L. Smith
-------------------------------------
Charles L. Smith
President, Chief Operating Officer,
Chief Financial Officer, and Director
25
I, Quinton L. Hiebert, Chief Accounting Officer of Summit Life Corporation
certify that:
1. I have reviewed this annual report on Form 10-KSB of Summit Life Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Quinton L. Hiebert
------------------------
Quinton L. Hiebert
Chief Accounting Officer
26
I, James L. Smith, Chief Executive Officer and a Director of Summit Life
Corporation certify that:
1. I have reviewed this annual report on Form 10-KSB of Summit Life Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ James L. Smith
----------------------------------
James L. Smith
Chief Executive Officer and
Chairman of the Board of Directors
27
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* Specimen Certificate of the Series A Preferred Stock (filed as Exhibit
4.1 to the Company's Quarterly Report on Form 10-QSB for the Quarter
ended June 30, 1999 and incorporated herein by reference).
4.4* Certificate of Designation of Series A Preferred Stock (filed as
Exhibit 4.2 to the Company's Quarterly Report on Form 10-QSB for the
Quarter ended June 30, 1999 and incorporated herein by reference).
4.5* Certificate of Designation of Series B Convertible Preferred Stock
(filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-QSB
for the Quarter ended September 30, 2000 and incorporated herein by
reference).
10.1* Employment Agreement by and between the Company and James L. Smith
(filed as Exhibit 10.1 to the Company's Registration Statement on Form
SB-2, file number 333-65097 and incorporated herein by reference).
10.2* Employment Agreement by and between the Company and Charles L. Smith
(filed as Exhibit 10.2 to the Company's Registration Statement on Form
SB-2, file number 333-65097 and incorporated herein by reference).
10.3* Escrow Agreement between the Company and UMB Bank (filed as Exhibit
10.5 to the Company's Registration Statement on Form SB-2, file number
333-55722 and incorporated herein by reference).
10.4* 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).
10.5* Communications Site Lease Agreement dated March 6, 2001 between the
Company and Nextel West Corp. and Amendment No. 1 thereto. (filed as
Exhibit 10.8 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2001 and incorporated herein by reference).
10.6 Agreement dated June 29, 2002 between the Company and
______________________.
16* Letter to SEC from Grant Thornton LLP dated July 13, 2001 (filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K filed July 13,
2001 and incorporated herein by reference).
28
Exhibit
Number Name of Exhibit
------ ---------------
21.1 List of subsidiaries.
99.1 Certification of Periodic Financial Report by Chief Financial Officer
Pursuant to 18 U.S.C.ss. 1350.
99.2 Certification of Periodic Financial Report by Chief Executive Officer
Pursuant to 18 U.S.C.ss. 1350.
99.3 Certification of Periodic Financial Report by Chief Accounting Officer
Pursuant to 18 U.S.C.ss. 1350.
* Previously filed.
[THIS PAGE LEFT BLANK INTENTIONALLY]
29
APPENDIX A
Consolidated Financial Statements
Summit Life Corporation and Subsidiaries
Years ended December 31, 2001 and 2002
with Report of Independent Auditors
30
[THIS PAGE LEFT BLANK INTENTIONALLY]
31
Summit Life Corporation and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2001 and 2002
Contents
Report of Independent Certified Public Accountants...........................F-1
Consolidated Financial Statements:
Consolidated Balance Sheets...............................................F-2
Consolidated Statements of Operations.....................................F-4
Consolidated Statements of Stockholders' Equity...........................F-5
Consolidated Statements of Cash Flows.....................................F-6
Notes to Consolidated Financial Statements................................F-7
32
[THIS PAGE LEFT BLANK INTENTIONALLY]
33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Board of Directors
And Shareholders of Summit Life Corporation
I have audited the accompanying consolidated balance sheet of Summit Life
Corporation and its Subsidiary, as of December 31, 2002 and December 31, 2001,
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. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that I 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. I believe that my audit provides a reasonable basis for
my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Summit
Life Corporation and its Subsidiary, as of December 31, 2002 and December 31,
2001, and the consolidated results of their operations and their consolidated
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
Gary Skibicki, CPA, PC
Oklahoma City, Oklahoma
March 25, 2003
F-1
Summit Life Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
2002 2001
----------- -----------
INVESTMENTS
Debt and equity securities $ 1,843,649 $ 2,903,470
Notes receivable 1,048,714 992,033
Policy loans 113,020 113,865
Investments in limited partnerships 32,404 30,800
----------- -----------
3,037,787 4,040,168
CASH AND CASH EQUIVALENTS 2,109,388 1,661,410
RECEIVABLES
Accrued investment income 41,689 54,993
Other 13,305 37,583
----------- -----------
54,994 92,576
PROPERTY AND EQUIPMENT - AT COST
Building and improvements 1,017,140 129,419
Furniture and equipment 120,848 119,198
Automobiles 22,015 22,015
----------- -----------
1,160,003 270,632
Less accumulated depreciation (153,738) (130,870)
----------- -----------
1,006,265 139,762
Land 321,000 56,000
----------- -----------
1,327,265 195,762
OTHER ASSETS
Cost in excess of net assets of business acquired,
less accumulated amortization of $20,000 in 2002
and $15,000 in 2001 30,000 35,000
Deferred policy acquisition costs 145,960 107,765
Value of purchased insurance business, less
accumulated amortization of $231,023 in 2002
and $145,364 in 2001 282,006 355,966
Deferred income taxes 31,800 37,240
Public offering costs 0 56,653
Other 43,750 46,555
----------- -----------
533,516 639,179
----------- -----------
$ 7,062,950 $ 6,629,095
=========== ===========
The accompanying notes are an integral part of these statements.
F-2
Summit Life Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2001
----------- -----------
LIABILITIES
Policy reserves and policyholder funds $ 5,777,027 $ 5,364,682
Unpaid claims 10,000 24,971
Accounts payable 8,910 63,116
Accrued and other liabilities 9,950 8,233
Notes payable 277,364 111,206
----------- -----------
6,083,251 5,572,208
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value - authorized, 5,000,000;
issued 2,691,255 in 2002, and 2,267,605 shares in 2001 26,913 22,676
Equity of holder's common stock equivalents 0 422,200
Series A cumulative nonvoting preferred stock, $.001 par
value - authorized, issued, and outstanding, 5,000 shares;
stated at liquidation value 500,000 500,000
Series B noncumulative, nonvoting, convertible preferred
stock, $.001 par value - authorized, 1,000,000 shares;
issued and outstanding, 350,000 shares; stated at
liquidation value 350,000 350,000
Additional paid-in capital 3,286,507 2,923,596
Common stock of parent held by subsidiary - 19,000 shares 0 (95,000)
Accumulated other comprehensive income (loss) 41,727 13,709
Accumulated deficit (3,225,448) (3,080,294)
----------- -----------
979,699 1,056,887
----------- -----------
$ 7,062,950 $ 6,629,095
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
Summit Life Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2002 2001
----------- -----------
Revenues
Insurance premiums and other considerations, net of reinsurance $ 268,721 $ 359,533
Investment income 469,680 338,670
Net realized (losses) on sale of available for sale securities (26,661) (7,792)
Net realized gains (losses) on trading securities 5,091 (139,527)
Other 46,214 58,730
----------- -----------
763,045 609,614
Benefits, losses, and expenses
Policy benefits 182,430 142,413
Increase in policy reserves 209,254 220,251
Interest 265 13,658
Taxes, licenses, and fees 23,800 35,290
Depreciation and amortization 110,041 101,312
General, administrative, and other operating 326,968 420,894
----------- -----------
852,758 933,818
Loss before income tax (89,713) (324,204)
Provisions for income taxes 5,441 --
----------- -----------
Net loss (95,154) (324,204)
Preferred stock dividends 50,000 50,000
----------- -----------
NET LOSS TO COMMON STOCKHOLDERS $ (145,154) $ (374,204)
=========== ===========
Basic and diluted net loss per common share (0.05) (0.15)
=========== ===========
Weighted average outstanding common shares, basic and diluted 2,681,523 2,419,037
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
Summit Life Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2002 and 2001
Series A cumulative Series B convertible
Common stock preferred stock preferred stock
------------------------- ------------------------- -------------------------
Shares Shares Liquidation Shares Liquidation
Total issued Par value issued value issued value
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at January 1, 2001 $ 975,300 2,267,605 $ 22,676 5,000 $ 500,000 350,000 $ 350,000
Common stock subscribed, not issued 422,200 -- -- -- -- -- --
Cancellation of preferred stock -- -- -- -- -- -- --
subscription
Dividends on Series A preferred (50,000) -- -- -- -- -- --
stock
Comprehensive loss
Net loss (324,204) -- -- -- -- -- --
Other comprehensive income
Unrealized gain on investment,
net 33,591 -- -- -- -- -- --
-----------
Comprehensive loss (290,613)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 1,056,887 2,267,605 22,676 5,000 500,000 350,000 350,000
Common stock subscribed 1,500 -- -- -- -- -- --
Close of public offering less
Expense of $56,652 (56,552) 423,700 4,237 -- -- -- --
Sale of stock held by subsidiary 95,000 -- -- -- -- -- --
Dividends on preferred stock (50,000) -- -- -- -- -- --
Adjustment -- (50) -- -- -- -- --
Comprehensive income
Net loss (95,154) -- -- -- -- -- --
Other comprehensive income
(loss)
Unrealized gain on investments 28,018 -- -- -- -- -- --
-----------
Comprehensive loss (67,136)
Balance at December 31, 2002 $ 979,699 2,691,255 $ 26,913 5,000 $ 500,000 350,000 $ 350,000
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-5
Summit Life Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CONTINUED
Years ended December 31, 2002 and 2001
Common Accumulated
stock of other
Additional parent comprehensive Stock
paid-in held by Stock income Accumulated subscriptions
capital subsidiary subscribed (loss) deficit receivable
----------- ----------- ----------- ----------- ----------- -----------
Balance at January 1, 2001 $ 2,923,596 $ (95,000) $ 650,000 $ (19,882) $(2,706,090) $ (650,000)
Common stock subscribed, not issued -- -- 422,200 -- -- --
Cancellation of preferred stock -- -- (650,000) -- -- 650,000
subscription
Dividends on Series A preferred -- -- -- -- (50,000) --
stock
Comprehensive loss
Net loss -- -- -- -- (324,204) --
Other comprehensive income
Unrealized gain on investment,
net -- -- -- 33,591 -- --
Comprehensive loss
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 2,923,596 (95,000) 422,200 13,709 (3,080,294) 0
Common stock subscribed -- -- 1,500 -- -- --
Close of public offering less
Expense of $56,652 362,911 -- (423,700) -- -- --
Sale of stock held by subsidiary -- 95,000 -- -- -- --
Dividends on preferred stock -- -- -- -- (50,000) --
Adjustment -- -- -- -- -- --
Comprehensive income
Net loss -- -- -- -- (95,154) --
Other comprehensive income
(loss)
Unrealized gain on investments -- -- -- 28,018 -- --
Comprehensive loss
Balance at December 31, 2002 $ 3,286,507 $ 0 $ 0 $ 41,727 $(3,225,448) 0
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-5
Summit Life Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002 and 2001
2002 2001
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (95,154) $ (324,204)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 110,041 75,133
Deferral of policy acquisition costs (52,522) (60,323)
Amortization of deferred policy acquisition costs 14,327 26,179
Interest credited to policyholder account balances 159,433 183,144
Gain on sale of investment securities, other than trading (26,661) --
Other 25,299 (23,608)
(Increase) decrease in
Trading securities 5,091 (139,527)
Accrued investment income 13,304 (13,009)
Other receivables 21,218 (27,655)
Other assets (2,905) (22,408)
Increase (decrease) in
Policy reserves 66,277 (81,491)
Unpaid claims (14,971) (150,980)
Accounts payable (54,206) 23,658
Accrued and other liabilities 1,717 (7,191)
----------- -----------
Net cash used in operating activities 176,098 (542,282)
Cash flows from investing activities
Purchases of investment securities, other than trading (192,505) (897,584)
Proceeds from disposition or maturities of investment securities,
other than trading 1,275,253 1,231,025
Net investment in limited partnerships (1,604) 26,500
Issuance of notes receivable (160,000) (250,000)
Payments received on notes receivable 103,319 199,845
Increase (decrease) in policy loans 845 80,483
Purchase of property and equipment (1,152,721) (2,628)
Proceeds from sale of assets -- 16,713
----------- -----------
Net cash provided by investing activities (127,413) 404,354
Cash flows from financing activities
Deposits to policyholder account balances 401,797 166,783
Withdrawals from policyholder account balances (215,162) (415,675)
Payments on notes payable -- (475,395)
Proceeds from issuance of notes payable 166,158 338,347
Proceeds from acquisition of business -- 433,392
Proceeds from sale of common and preferred stock 96,500 422,200
Dividends paid on preferred stock (50,000) (50,000)
Public offering costs -- (56,652)
----------- -----------
Net cash provided by (used in) financing activities 399,293 363,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 447,978 225,072
Cash and cash equivalents at beginning of year 1,661,410 1,436,338
----------- -----------
Cash and cash equivalents at end of year $ 2,109,388 $ 1,661,410
=========== ===========
The accompanying notes are an integral part of these statements.
F-6
SUMMIT LIFE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
1. Basis of Consolidation and Nature of Operations
-----------------------------------------------
Summit Life Corporation ("SLC") is an Oklahoma corporation chartered on April
12, 1994 that primarily markets life insurance and annuity policies through its
wholly owned insurance subsidiary, Great Midwest Life Insurance Company ("Great
Midwest"), a Texas corporation acquired on January 13, 1999. The consolidated
financial statements include the accounts of each of these corporations with
inter-company transactions and balances eliminated. Subsequent references to
"the Company" pertain to the consolidated financial statements.
SLC is a holding company and manages its operations as well as Great Midwest's
which primarily include marketing/servicing life insurance and annuity products
in Texas and Oklahoma. Great Midwest is required to maintain an investment
portfolio to cover potential claims plus preserve a minimum $800,000 statutory
capital and surplus. In 2002, Great Midwest paid SLC $114,588 for management
services.
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 financial statements and disclosures; accordingly, actual results could
differ from those estimates.
3. Accounting Pronouncements Adopted in 2002
-----------------------------------------
During 2002, the Financial Accounting Standards Board issued the following
statements of financial accounting standards ("SFAS"). Adoption of these
standards did not have a material effect on the financial position, results of
operations, or on discloses within the financial statements.
(1) SFAS No 142 - Goodwill and Intangible Assets
(2) SFAS No 143 - Retirement of Tangible Long Lived Assets
(3) SFAS No 144 - Impairment on Disposal of Long Lived Assets
4. Accounting Pronouncements Adopted in 2001
-----------------------------------------
During 2001, the Financial Accounting Standards Board issued the following
statements of financial accounting standards ("SFAS"). Adoption of this standard
did not have a material effect on the financial position, results of operations,
or on disclosures within the financial statements.
(1) SFAS No. 141 - Business Combinations
5. 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 that 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 risks on these
accounts.
6. Investments
-----------
The Company accounts for certain investments in debt and equity securities as
follows:
F-7
SUMMIT LIFE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - (CONTINUED)
a) 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.
b) Debt and equity securities that are bought and held
principally for the purpose of selling in the near term are
classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings.
c) Debt and equity securities not classified as either held to
maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and
reported in a separate component of shareholder equity as
other comprehensive income (loss).
For individual securities classified as available-for-sale or held-to-maturity,
non-temporary declines in specifically identified securities below cost or
amortized cost result in write-downs included in operations. The specific
identification method is followed for determining the cost of securities sold.
Notes receivable and policy loans are stated at the total of unpaid balances
less estimated uncollectible amounts.
Investments in limited partnerships are accounted for on the equity method.
Accordingly, the Company's share of the partnerships' earnings or losses are
included in the consolidated operating statement with corresponding adjustments
made to the carrying amounts on the balance sheet.
Investments in real estate are carried at depreciated cost.
7. Property and Equipment
----------------------
Depreciation is allocated to assets over estimated economic lives using the
straight-line method. Estimates of economic lives range from five to forty
years.
Investment and operating assets are reviewed for impairment whenever events,
circumstances, or changes in market value indicate that the related carrying
amount(s) may not be recoverable. Any required write-downs are based upon the
current fair value of the asset.
An office and warehouse property was acquired on July 31, 2002 for $529,871
approximately two blocks from the existing corporate office. During the fourth
quarter of 2002 additional storage units housed within three new buildings were
constructed for another $622,850. Approximately $13,000 in office rental income
was received from existing tenants in 2002, which is included in the $469,680 in
investment income, while storage unit rentals are not expected to occur until
2003.
8. Cost in Excess of Net Assets of Business Acquired
-------------------------------------------------
Cost in excess of net assets of business acquired is amortized for 10 years on a
straight-line basis. In 1999 Great Midwest was purchased with a $50,000
commission being amortized at $5,000 per year. Management reviews acquisition,
amortization, and valuation amounts for impairment by evaluating future benefits
of the net income earned to determine whether impairment has occurred.
F-8
SUMMIT LIFE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - (CONTINUED)
9. Income Taxes
------------
For the year ended December 31, 2002, SLC and Great Midwest will elect to file
consolidated income tax returns. In 2003 Great Midwest will dissolve as part of
the acquisition of Security General Life Insurance Company ("Security General").
By filing a consolidated tax return the combined entities will maximize the
preservations of existing net operating losses. SLC has a net operating loss
carryforward of $1,777,561, and by filing a 2002 consolidated return a portion
will be available in future years.
Current tax expense is based on estimated taxes payable or refundable on current
year tax returns. Deferred tax liabilities or assets are recognized for the
estimated future tax effects attributable to temporary differences and loss
carryforward. The measurement of deferred tax assets is based on provisions of
enacted laws and are reduced by the amount of tax benefits that based on
available evidence may not be realized. For the year ended December 31, 2002 a
deferred tax asset of $31,800 is recognized which is the amount of tax benefit
management calculates beyond any reasonable doubt will be utilized in 2003.
10. Deferred Policy Acquisition Costs
---------------------------------
Deferred acquisition costs are those costs that vary with, and are primarily
related to, the acquisition of new and renewal insurance contracts. Commissions
and other costs such as underwriting and medical exam fees that are principally
related to insurance contracts issued or renewed during the year are considered
acquisition costs. Acquisition costs are capitalized and amortized to operating
expenses in proportion to premium revenue recognized over the estimated lives of
the policies. Deferred policy acquisition costs for investment products, mainly
single premium deferred annuities, are amortized with interest in proportion to
the value of expected gross profits as determined by estimated investment
yields, mortality, surrender expenses, and persistency experience over the lives
of the policies. Deferred policy acquisition costs are examined periodically to
insure that the unamortized balance does not exceed amounts expected to be
recovered from future profits. Acquisition costs that vary in a constant
relationship to premiums or insurance in force, are recurring in nature, or
incurred in level amounts from period to period are charged to expense in that
period.
11. 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. The Company estimates that insurance contracts have an
average economic life of twenty years, and purchased insurance contracts are
amortized over that time period in proportion to the expected decline in net
cash flows of that year. Interest is calculated on unamortized values at the
annual rate of 6.5%. At December 31, 2002 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.
A summary of the value of purchased insurance business for the years ended
December 31:
2002 2001
--------- ---------
Balance, beginning of year $ 355,966 $ 321,851
6.5% on Unamortized Balance 15,678 20,920
Amortization on Beginning Balance (85,659) (62,649)
Cost of Acquired Policies From
Presidential Life Insurance Co - 2001 -- 77,608
Presidential Amortization (3,979) (1,764)
--------- ---------
Balance, end of year $ 282,006 $ 355,966
F-9
SUMMIT LIFE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - (CONTINUED)
12. Revenues, Policy Reserves and Policyholder Funds
------------------------------------------------
Premiums received on deferred annuities and annuities without life contingencies
are recorded as liabilities (deposits) into policyholder account balances. Great
Midwest earns revenues from these contracts primarily from surrender charges and
administrative fees. Premiums for life insurance products and annuities with
life contingencies, including annuities with life contingency settlement
options, are recognized when due.
Policyholder account balances include amounts received from policyholders, plus
interest credited, less withdrawals and administrative fees deducted by Great
Midwest. The liabilities for future policy benefits for annuities with life
contingencies are actuarially computed at the present value of future benefits
which includes investment yields and mortality assumptions.
Policy reserves for life insurance contracts are computed based on mortality,
morbidity, withdrawals, investment yields and prior experience or other
contingencies that could unfavorably increase reserves. Reserve interest
assumptions range from 3.0% to 5.5%. Policy reserves for life insurance products
are the same for financial and statutory reporting purposes. Life insurance
benefit claims are charges to operating expenses in the period that the claims
are incurred. All life insurance related benefits, claims, losses, and expenses
are reported net of reinsurance ceded.
13. Earnings (Loss) Per Share Common
Earnings (loss) per common share is computed based upon net earnings (loss)
after deduction of preferred stock dividends, divided by the weighted average
number of common shares during each period. For both 2002 and 2001, Series B
convertible preferred stock (see Note D) is antidilutive and therefore basic and
diluted loss per common share are the same.
14. Other Comprehensive Income (Loss)
---------------------------------
Accumulated other comprehensive income (loss) consists solely of net unrealized
investment gains (losses) on debt and equity securities not classified as either
held to maturity or trading securities.
Unrealized gain (loss) on investments consists of the following for the years
ended December 31:
2002 2001
-------- --------
Beginning Other Comprehensive Income (Loss) $ 13,709 $(19,882)
Unrealized Appreciation Of Securities 31,000 33,591
-------- --------
Accumulated Other Comprehensive Income (Loss) $ 44,709 $ 13,709
F-10
SUMMIT LIFE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
NOTE B - INVESTMENTS
Investments in securities are summarized as follows for December 31, 2002.
COST/ GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
TYPE OF INVESTMENT COST GAINS LOSSES FAIR VALUE
--------------------------------------------------------------------------------
Debt Securities -
Held to Maturity
US Treasury and Federal
Mortgage Assoc. Bonds $ 379,841 $ 42,832 $ -- $ 422,673
Corporate Bonds 43,219 -- (2,474) 40,745
Debt Securities -
Available For Sale
US Treasury & Other
US Govt. Agencies 986,983 48,241 -- 1,035,224
Industrial and
Miscellaneous 75,000 3,695 -- 78,695
--------------------------------------------------
Total Debt Securities
Available For Sale $1,485,043 $ 94,768 $ (2,474) $1,577,337
==================================================
Equity Securities -
Trading -- -- -- $ 66,353
Equity Securities -
Available For Sale -- -- -- $ 159,740
Equity Securities -
Other $ 66,788 $ 12,487 -- $ 79,275
Investments in securities are summarized as follows for December 31, 2001.
COST/ GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
TYPE OF INVESTMENT COST GAINS LOSSES FAIR VALUE
--------------------------------------------------------------------------------
Debt Securities -
Held to Maturity $ 279,871 $ 13,115 $ -- $ 292,986
Debt Securities -
Available For Sale
US Treasury & Other
US Govt. Agencies 2,018,884 17,682 -- 2,036,566
Industrial and
Miscellaneous 148,036 -- (3,973) 144,063
--------------------------------------------------
Total Debt Securities
Available For Sale $2,166,920 $ 17,682 $ (3,973) $2,180,629
==================================================
Equity Securities -
Available For Sale $ 292,451 -- $ (1,105) $ 291,346
Equity Securities -
Other $ 66,788 -- -- $ 66,788
F-11
SUMMIT LIFE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
NOTE B - INVESTMENTS (CONTINUED)
Equity Securities - Other - consists of 26,250 shares of First Alliance
Corporation (FAC) common stock which thru December 31, 2001 was carried at cost
plus stock dividends received through December 30, 2001. The stock was
restricted as to sale or transfer and FAC retained the right of first refusal to
purchase the shares through December 30, 2001. On November 8, 2002 FAC entered
into an agreement to exchange all outstanding shares for Citizens, Inc., a
Colorado corporation at an exchange value of $3.02 per share which increases the
stock value to $79,275. The agreement was approved by the shareholders of FAC
and during the first quarter of 2003 the actual exchange, 1 share of FAC for
..449806 shares of Citizens, Inc., will take place.
The amortized cost and estimated fair values of debt securities, by contractual
maturity, at December 31, 2002 are summarized below. Actual maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay indebtedness without prepayment penalties.
Held to Maturity Available for Sale
----------------------- -----------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
-------------------------------------------------
Due Six to Ten Years $ -- $ -- $ -- $ --
Due after Ten Years 222,562 250,685 75,000 78,695
Mortgage Backed Securities 200,498 212,733 986,983 1,035,224
-------------------------------------------------
Total $ 423,060 $ 463,418 $1,061,983 $1,113,919
=================================================
The amortized cost and estimated fair value of debt securities, by contractual
maturity, at December 31, 2001 are summarized below.
Held to Maturity Available for Sale
----------------------- -----------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
-------------------------------------------------
Due Six to Ten Years $ -- $ -- $ -- $ --
Due after Ten Years 178,566 187,906 -- --
Mortgage Backed Securities 101,305 105,080 2,018,884 2,036,566
-------------------------------------------------
Total $ 279,871 $ 292,986 $2,018,884 $2,036,566
=================================================
Proceeds from sales of available-for-sale-securities approximated $1,129,081 in
2002 and $1,231,000 in 2001. Gross gains on available-for-sale-securities were
$1,983 in 2002 and $4,310 in 2001 while gross losses were $32,518 in 2002 and $0
for 2001.
Trading securities gains were $5,091 for 2002 while trading securities losses
were $139,527 in 2001.
Included in 2002 investment income is $211,000 deposited from the sale of a
communication tower lease on June 28, 2002. On March 6, 2001 Great Midwest
entered into a five-year lease with Nextel Corporation to lease approximately
1,500 square feet of land to construct a communication tower. The lease, which
was renewable for five successive five-year terms, was purchased for $211,000 by
an unaffiliated party.
F-12
Notes receivable consist of the following at December 31:
Original Pct 2002 2001
Type of Loan Date Amount Int Term Status Balance Balance
------------ ---- ------ --- ---- ------ ------- -------
Secured
Real Estate 1/5/98 $240,000 8.00% 10 yrs Current $145,550 $167,870
Secured
Real Estate 7/30/98 59,200 9.75% 10 yrs Current -0- 38,495
Secured
Real Estate 4/29/00 47,000 6.50% 30 yrs Current 43,011 46,152
Secured
Real Estate 4/29/00 47,000 6.50% 30 yrs Current 43,011 46,152
Secured
Real Estate 11/10/00 42,000 7.00% 10 yrs Current 35,489 38,733
Secured
Real Estate 7/11/00 225,000 6.25% 3 yrs Current 225,000 225,000
Secured
Real Estate 2/1/00 100,000 6.25% 10 yrs Current 100,000 100,000
Secured
Real Estate 1/5/98 50,000 8.00% 10 yrs Current 30,322 34,973
Unsecured
Individual 11/1/00 41,345 7.00% 4 yrs 3 mo past due 26,681 32,065
Unsecured
Corporate 3/3/02 12,500 8.00% 1 yr Current 12,500 12,593
Unsecured
Corporate 12/5/02 100,000 5.75% 1 yr Current 77,150 100,000
Unsecured
Corporate 8/23/02 150,000 7.00% 1 yr Current 150,000 150,000
Unsecured
Limited
Liability Co 5/31/02 160,000 5.75% 66 mo Current 160,000 --
---------- ---------- ----------
$1,274,045 $1,048,714 $992,033
F-13
SUMMIT LIFE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
NOTE C - NOTES PAYABLE
Note payable consisted of the following at December 31:
2002 2001
-------- --------
Uncollateralized Loan From Shareholder $245,629 $ 79,000
Uncollateralized Loan From Corporation 31,400 27,998
Bank Loan, Six and 95/100% note payable 335 4,208
collateralized by vehicle. Final payment
January 2003 -------- --------
Total Notes Payable $277,364 $111,206
On March 31, 2001 the Company entered into a $500,000 line of credit agreement
with the principal shareholder and director of the corporation. The terms of the
agreement provide for the corporation to draw a maximum of $500,000 as needed at
0% interest without collateral.
NOTE D - STOCKHOLDERS' EQUITY
On April 23, 1999 non-voting Series A Cumulative Preferred Stock was created
with 5,000 shares issued and outstanding on December 31, 2001. The Series A
Preferred Stock has liquidation priority ($100 per share plus dividend
arrearages, if any) over common stock upon dissolution.
On September 29, 2000 Series B Convertible Preferred Stock was created. The
Series B Preferred Stock is noncumulative, non-voting and is convertible on a
one-to-one basis into shares of common stock at the option of the holders after
March 31, 2003. The Series B Preferred Stock is senior to common stock and
junior to Series A Preferred Stock in dividend priority. At December 31, 2001
there were 350,000 shares of Series B Preferred Stock outstanding and upon
liquidation is ranked equivalent to Series A Preferred Stock as to per share
liquidation value ($1.00 per share) and unpaid dividends.
On June 30, 2002 the Company sold 19,000 shares of its common stock, which were
owned by Great Midwest, to an unaffiliated third party for $95,000.
Additionally, in 2002 the Company finalized the sale of 423,700 shares of common
stock with the net effect being an increase in common stock at par of $4,237 and
an increase of $362,911 in additional paid in capital. Most of the proceeds were
received in 2001 and reported in the equity section of the balance sheet as
common stock equivalents of $422,200 which were set off by $56,653 in public
offerings cost shown under "Other Assets" on the December 31, 2001 balance
sheet.
NOTE E - INCOME TAX
The Company's net operating loss carryforward for tax purposes, which begins
expiring in 2010, are as follows:
2002 2001
---------- ----------
Summit Life Corporation $1,666,794 $1,834,653
Great Midwest 102,422 75,605
---------- ----------
Total $1,769,216 $1,910,258
========== ==========
In 2001 SLC and Great Midwest filed separate income tax returns while in 2002 an
election will be made to file consolidated returns. In 2003 Great Midwest will
dissolve and by filing a 2002 consolidated tax return existing net operating
losses will be available.
F-14
SUMMIT LIFE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
NOTE E - INCOME TAX (CONTINUED)
SLC and Great Midwest have both capital loss and net operating losses
available with the deferred tax benefit of each summarized below. The
calculations and assumptions regarding the December 31, 2002 deferred tax asset
of $31,800 are based upon anticipated known tax benefit resulting from the 2003
dissolution of Great Midwest and accordingly only part of the capital loss
carryforward is recognized. Additionally, none of the net operating loss benefit
is recognized inasmuch as is reasonable that those tax benefits will not be
realized.
The components of net deferred tax assets and the related valuation allowance
are as follows:
2002 2001
--------- ---------
Deferred Tax Assets
Net Operating Loss Carryforwards $ 283,457 $ 288,600
Capital Loss Carryforwards 89,992 63,650
Policy Reserves and Policyholder Funds -- 7,397
Other -- 1,167
Valuation Allowance for Deferred Taxes (299,348) (263,258)
--------- ---------
74,101 97,556
--------- ---------
Tax Deferred Liabilities
Value of Purchased Insurance Business (42,301) (54,445)
Depreciation -- (832)
Other -- (5,039)
--------- ---------
(42,301) (60,316)
Net Deferred Tax Asset $ 31,800 $ 37,240
========= =========
Increase (Decrease) in Valuation Allowance $ 36,070 $ (30,408)
========= =========
In 2003 the Company has incurred on the sale and liquidation of Great Midwest a
net capital gain of $212,000. Using a statutory tax rate of 15% actual taxes
will be $31,800 which reconciles to the December 31, 2002 tax benefit.
A reconciliation of income tax benefits at the statutory rate to the Company's
effective tax rate at December 31 is as follows:
2002 2001
--------- ---------
Expected Statutory Rate 15% 34%
Small Life Insurance Company Deduction (60%) (9) (20)
Net Effect Tax Loss Carryforwards (6) (14)
--------- ---------
Effective Tax Rate 0% 0%
========= =========
NOTE F - RELATED PARTY TRANSACTIONS
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. At the end of December
31, 2002 and December 31, 2001 there was $10,000 owed to the Company.
F-15
SUMMIT LIFE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
NOTE G - COMMITMENTS AND CONTINGENCIES
Under its annuity contracts Great Midwest is committed to credit interest on
policyholder account balances at guaranteed rates. During the first year, the
guaranteed rates range up to 7.8%. After the first year, the lowest guaranteed
rate is 3%.
Most states have established guaranty fund associations to ensure that
policyholders receive the benefit of the insurance products they have purchased.
The guaranty funds receive their funding through assessments to companies that
write business in the respective states. Great Midwest is liable for such
mandatory assessments upon notification by the states; however, such assessments
may be partially recovered through a reduction in future premium tax.
Certain investments with carrying values of $320,610 and $279,871 were pledged
to regulatory authorities in accordance with regulatory requirements at December
31, 2002 and 2001 respectively.
The Company leases certain equipment used in operations. Rent expense under
these leases approximated $800 in 2002 and $1,600 in 2001.
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
Great Midwest prepares its statutory-basis financial statements in accordance
with accounting practices prescribed or permitted by the domiciliary state
insurance department. "Prescribed" statutory accounting practices include state
laws, regulations, and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners (NAIC).
"Permitted" statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ from state to state, may
differ from company to company within a state, and may change in the future. The
NAIC has approved the Codification of Statutory Accounting Practices effective
on January 1, 2001. Great Midwest has determined that the primary effect of
Codification is that goodwill can now be recorded as an admitted asset on its
statutory financial statements.
Great Midwest is required by the Texas Insurance Commissioners office to
maintain statutory capital and surplus of at least $800,000 and at December 31,
2002 the amount was $810,142. On December 20, 2002 the Company signed an
agreement to acquire Security General and in the first quarter of 2003 Great
Midwest will dissolved with all insurance and annuity contracts, assets and
liabilities sold to Security General. Security General is licensed in multiple
states and with operations expected to expand to approximately 15 of these
states, no dividends are planned in 2003.
In 2001 the Company requested a review by the Securities and Exchange Commission
("SEC") of its accounting treatment of the sale and repurchase of a real estate
lease. The sale and repurchase of the lease resulted in reporting $186,000 of
income during 2001 but upon the request of the SEC the gain was reversed and
accordingly the audited 2001 financial statements did not include it.
The transaction also impacted statutory financial reports prepared by Great
Midwest but because in 2002 the same lease was resold at a $211,000 gain the
issued ended.
F-16
SUMMIT LIFE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
NOTE I - REGULATORY MATTERS
At periodic intervals, the domiciliary state insurance department routinely
examines the insurance company subsidiary's statutory financial statements as
part of their legally prescribed oversight of the insurance industry. Based on
these examinations, the regulators can direct that the subsidiary's statutory
financial statements be adjusted in accordance with their findings.
NOTE J - REINSURANCE
Great Midwest reinsures that portion of insurance risk that is in excess of its
retention limits, generally under yearly renewable term contracts. Retention
limits range up to $5,000 on life policies. Reinsurance premiums are recognized
as a reduction of insurance premiums and other considerations over the policy
term and totaled $37,000 for 2002 and $47,000 for 2001.
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 of 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, 2001 reinsurance recoverables on policy claims were $25,000 and
was received January 2002. No recoverables were due the Company at December 31,
2002.
NOTE K - EMPLOYMENT AGREEMENTS
The Company has employment agreements with its Chief Executive Officer and
President, both Company stockholders. The employment agreements provide, among
other things, for terms through March 2003, base and maximum salaries, increases
to base salaries subject to Board of Director approval, annual bonuses, and
benefits.
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.
NOTE L - 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, 2002 and 2001
respectively. 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.
Except as identified, 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 secured notes receivable and policy loans approximate fair
value The carrying amounts of cash, cash equivalents, short-term investments,
and receivables approximate fair values because of the short maturity of those
assets. Net 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.
F-17
SUMMIT LIFE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
2002 2001
Carrying Fair Carrying Fair
FINANCIAL ASSETS Amount Value Amount Value
---------------- ---------- ---------- ---------- ----------
Debt Securities - Held to Maturity $ 423,060 $ 423,060 $ 279,871 $ 279,871
Debt Securities - Available For Sale 1,113,919 1,113,919 2,180,629 2,180,629
Equity Securities - Available For Sale 159,740 159,740 291,248 291,248
Equity Securities - Trading 67,655 67,655 84,934 84,934
Equity Securities - Other 79,275 79,275 66,788 --
Notes Receivables 1,048,714 977,257 992,033 937,389
Policy Loans 113,020 113,020 113,865 113,865
Cash and Cash Equivalents 2,109,388 2,109,388 1,661,410 1,661,410
Other Receivables 54,994 54,994 92,576 92,576
FINANCIAL LIABILITIES
---------------------
Policy Holder Account
Balances - Investment Contracts $4,439,445 $4,319,537 $4,063,756 $3,933,403
Notes Payable 277,364 277,364 111,206 111,206
NOTE M - BUSINESS ACQUISITIONS
On December 20, 2002 the Company signed an agreement to acquire Security General
for $1,990,000. The Company intends to fund the purchase with liquidation
proceeds from Great Midwest and the sale of preferred stock. Great Midwest's
insurance and annuity business has been transferred to Security General which,
beginning in 2003, will be the sole subsidiary of SLC. The Company paid $490,000
for Security General's state charters and licenses and $1,500,000 for capital
and surplus. No insurance or annuity contracts were included in the acquisition
but the additional charters will now permit operations in additional states. The
purchase was closed on February 14, 2003 and the transaction did not have an
impact on the Company's 2002 financial statements.
F-18