FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________
Commission file number 33-36775
SUMMIT SECURITIES, INC.
(Exact name of registrant as specified in its charter)
IDAHO 82-0438135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 W. 1st AVENUE AVENUE, SPOKANE, WASHINGTON 99201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (509)838-3111
Former name, former address and former fiscal year, if changed since last
report: N/A.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: N/A.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes / / No / / N/A.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common: 10,000 shares at January 31, 1999.
SUMMIT SECURITIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
As of December 31, 1998 and September 30, 1998 (unaudited)
Condensed Consolidated Statements of Income
Three Months Ended December 31, 1998 and 1997 (unaudited)
Consolidated Statements of Comprehensive Income
Three Months Ended December 31, 1998 and 1997 (unaudited)
Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31, 1998 and 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
______________ ______________
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 59,728,457 $ 14,168,191
Investments in affiliated company 4,522,425 4,522,425
Trading securities, at market 20,775,923 6,049,823
Available-for-sale securities, at 10,931,622 5,356,652
Market
Held-to-maturity securities, at
Amortized cost (market value:
$2,012,110 and $2,018,282) 2,003,896 2,005,209
Real estate contracts and mortgage
notes and other receivables, net
of unrealized discounts and
allowances for losses 134,741,967 148,723,475
Real estate held for sale 2,791,199 2,645,773
Deferred acquisition costs, net 10,600,452 9,193,498
Other assets, net 1,942,296 13,929,188
______________ ______________
TOTAL ASSETS $248,038,237 $206,594,234
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Annuity reserves $171,870,039 $136,362,403
Investment certificates and accrued
interest 60,263,016 55,894,093
Debt payable 187,508 184,421
Accounts payable and accrued
expenses 1,853,231 2,055,143
Deferred income taxes 1,585,503 1,414,110
______________ ______________
TOTAL LIABILITIES 235,759,297 195,910,170
______________ ______________
STOCKHOLDERS' EQUITY
Common stock, $10 par value,
2,000,000 shares authorized:
10,000 shares issued and
outstanding 100,000 100,000
Preferred stock, $10 par value,
10,000,000 shares authorized,
75,487 and 66,587 shares issued
and outstanding (liquidation
preference $7,548,730 and
$6,658,680, respectively) 754,873 665,868
Additional paid-in capital 5,156,172 4,405,604
Retained earnings 6,147,228 5,420,838
Accumulated other comprehensive
income 120,667 91,754
______________ ______________
TOTAL STOCKHOLDERS' EQUITY 12,278,940 10,684,064
______________ ______________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $248,038,237 $206,594,234
============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
____________ ____________
<S> <C> <C>
REVENUES
Interest and earned discounts $ 5,194,109 $ 3,983,119
Annuity fees and charges 21,752 39,787
Realized investment gains (losses) (53,222) 188,442
Realized net gains on sales of
Receivables 1,491,686 626,164
Real estate sales 849,066 1,465,728
Dividend income 47,359 67,738
Fees, commissions, service and other
Income 887,307 1,068,775
____________ ____________
TOTAL REVENUES 8,438,057 7,439,753
____________ ____________
EXPENSES
Annuity benefits 2,527,670 1,689,865
Interest 1,317,861 1,166,370
Cost of real estate sold 832,356 1,638,565
Provision for losses on real estate
contracts and real estate held 517,789 399,786
Salaries and employee benefits 602,859 509,397
Commissions to agents 2,059,323 729,430
Other operating and underwriting
Expenses 796,541 561,740
Less increase in deferred
Acquisition costs (1,307,736) (115,484)
____________ ____________
TOTAL EXPENSES 7,346,663 6,579,669
____________ ____________
Income before income taxes 1,091,394 860,084
Provision for income taxes (226,953) (200,039)
____________ ____________
NET INCOME 864,441 660,045
Preferred stock dividends (138,051) (122,477)
____________ ____________
Income applicable to common stockholders $ 726,390 $ 537,568
============ ============
Basic and diluted income per share
applicable to common shareholder $ 72.64 $ 53.76
Weighted average number of shares of common 10,000 10,000
stock outstanding
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
____________ ____________
<S> <C> <C>
NET INCOME $ 864,441 $ 660,045
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE
INCOME TAXES:
Change in unrealized gains (losses) on
investments 33,582 (7,378)
Less deferred income tax provision 4,669 (1,697)
(benefit)
____________ ____________
Net other comprehensive income (loss) 28,913 (5,681)
____________ ____________
Comprehensive income $ 893,354 $ 654,364
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1998 1997
______________ ______________
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (1,122,833) $ 1,239,713
______________ ______________
Cash flows from investing activities:
Proceeds from sales of available-for-
sale investments 2,991,773 141,412
Purchase of available-for-sale
investments (8,673,819)
Proceeds from maturities of available
for sale investments 152,558
Principal payments on real estate
contracts and mortgage notes and
other receivables 5,084,293 6,893,644
Purchase of real estate contracts
and mortgage notes and other
receivables (42,556,419) (17,300,867)
Proceeds from real estate sales 412,057 766,299
Additions to real estate held for sale (479,371) (886,723)
Proceeds from sale of receivables 52,291,885 9,463,153
______________ ______________
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 9,222,957 (923,082)
______________ ______________
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts from annuity products 6,327,029 4,091,269
Withdrawals of annuity products (3,390,210) (3,561,201)
Redemption and retirement of
preferred stock (332)
Proceeds from issuance of investment
certificates 6,011,303 1,925,930
Repayment of investment certificates (1,985,937) (1,526,023)
Repayment to banks and others (259) (571)
Debt issuance costs (248,141) (74,358)
Issuance of preferred stock 839,905 143,801
Reinsurance of annuity products
to reinsurers 30,044,835
Cash dividends on preferred stock (138,051) (122,477)
______________ ______________
NET CASH PROVIDED BY
FINANCING ACTIVITIES 37,460,142 876,370
______________ ______________
Net increase in cash and cash equivalents 45,560,266 1,193,001
Cash and cash equivalents, beginning
of period 14,168,191 8,461,101
______________ ______________
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 59,728,457 $ 9,654,102
______________ ______________
============== ==============
NON CASH INVESTING AND FINANCING
ACTIVITIES OF COMPANY:
Assumption of other debt payable in
conjunction with purchase of real
estate contracts and mortgage notes $ 16,942
Real estate acquired through
foreclosure $ 790,327 385,920
Receivables originated to facilitate
the sale of real estate 437,009 699,429
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position as of December 31, 1998, the
results of operations for the three months ended December 31, 1998 and
1997 and changes in cash flows for the three months ended December 31,
1998 and 1997. The results of operations for the three month periods
ended December 31, 1998 and 1997 are not necessarily indicative of the
results to be expected for the full year. As provided for in
regulations promulgated by the Securities and Exchange Commission, all
financial statements included herein are unaudited; however, the
condensed consolidated balance sheet at September 30, 1998 has been
derived from the audited consolidated balance sheet. These financial
statements should be read in conjunction with the consolidated financial
statements including notes thereto included in the Company's fiscal 1998
Form 10-K.
2. The principal amount of receivables as to which payments were in arrears
more than three months was $5,500,000 at December 31, 1998 and
$4,641,000 at September 30, 1998.
3. Summit Securities, Inc. had no outstanding material legal proceedings
other than normal proceedings associated with receivable foreclosures.
4. In November, 1998, the Company and its subsidiaries, and with
Metropolitan Mortgage & Securities Co., Inc (Metropolitan), its former
parent company, and Metropolitan subsidiaries participated in a
receivable securitization sponsored by Metropolitan Asset Funding Inc.,
II, an affiliated company. Approximately $194.4 million of receivables,
with $12.0 million provided by the Company and its subsidiaries, were
sold in the securitization. The Company and its subsidiaries recorded
approximately $934,000 in pre-tax gains from their portion of the sale.
In December, 1998, the Company participated as one of the two co-sellers
in a structured settlement securitization sponsored by Select Asset
Funding Corporation, an affiliated company. Approximately $37.7 million
in structured settlements at amortized costs, with $16.0 million
provided by the Company, were sold in the securitization. The Company
recorded approximately $546,000 in pre-tax gains from their portion of
the sale.
5. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
These discussions may contain some forward-looking statements. A
forward-looking statement may contain words such as "will continue to be,"
"will be," "continue to," "expect to," "anticipates that," "to be," or "can
impact." Management cautions that forward-looking statements are subject to
risks and uncertainties that could cause the Company's actual results to
differ materially from those projected in forward-looking statements.
Significant First Quarter Transactions:
In November 1998 and December 1998, the Company entered into
securitization transactions with its subsidiaries, Metropolitan and
Metropolitan's subsidiaries. In November 1998 and December 1998, proceeds
from the securitization transactions were approximately $12.3 million and
$16.5 million and resulted in gains of approximately $934,000 and $546,000,
respectively. The November 1998 gain included approximately $78,000 associated
with the estimated fair value of the mortgage servicing rights retained on the
pool. The servicing rights associated with the securitization transaction were
subsequently sold to an affiliated entity at the Company's carrying value.
OSL has entered into two separate reinsurance agreements with Western
United Life Assurance Company (Western United), a company affiliated through
common control. The first of those two agreements became effective January
23, 1997 and was terminated with respect to additional premiums on September
30, 1997. Under this first agreement, Western United reinsured 75% of the
risk on six different annuity products through OSL. The second of the two
agreements became effective July 1, 1998 and continues to remain in effect.
Under this second agreement, Western United reinsured 75% of the risk on 15
different annuity products through OSL. Western United received ceding
allowances equal to actual commission plus 1.5% of the premium. The reserves
on deferred annuity contracts reinsured through OSL totaled approximately
$84.1 million at December 31, 1998.
Financial Condition and Liquidity:
As of December 31, 1998, the Company had cash or cash equivalents of
approximately $59.7 million and liquid investments (trading or available-for-
sale securities) of $31.7 million compared to $14.2 million in cash and cash
equivalents and $11.4 million in liquid investments at September 30, 1998.
Management anticipates that cash generated from operations, and cash and cash
equivalents and liquidity provided by other investments are adequate to meet
planned asset additions, required debt retirements or other business
requirements during the next twelve months. During the three months ended
December 31, 1998, funds used in operating activities totaled $1.1 million.
Funds provided by financing activities were $37.5 million, which included a
$33.0 million net cash inflow from annuity products, including reinsurance
transactions, a $4.9 million net cash inflow from the sale of preferred stock
and investment certificates, less repayments, which were offset by payments of
preferred stock dividends of $138,000 and debt issuance costs incurred of
$248,000. Funds provided by investing activities were $9.2 million, which
included $3.1 million net cash inflow from investment maturities and sales,
$57.4 million net cash inflow from sales proceeds and collections of
receivables and $412,000 net cash inflow from real estate sales, which were
used to fund new receivable acquisitions of $42.6 million, purchase of
available-for-sale investments of $8.7 million and additions to real estate
held of $479,000.
The receivable portfolio totaled $134.7 million at December 31, 1998
compared to $148.7 million at September 30, 1998. During the three months
ended December 31, 1998, the change resulted from the acquisition of
receivables totaling $42.6 million plus an additional $437,000 in loans to
facilitate the sale of real estate being fully offset by the sale and removal
of the cost basis of receivables and collections of principal aggregating
$56.4 million and $790,000 in reductions due to foreclosed receivables. Real
estate held for sale totaled approximately $2.0 million at both December 31,
1998 and September 30, 1998.
Insurance annuity reserves totaled $171.9 million at December 31, 1998
as compared to $136.4 million at September 30, 1998. The increase of $35.5
million for the three months ended December 31, 1998 resulted from credited
earnings of $2.5 million plus a $33.0 million net cash inflow from sales of
annuity products, as receipts, including reinsurance transactions, of $37.1
million exceeded the $4.1 million in withdrawals. The Company had outstanding
investment certificate liabilities of $60.3 million at December 31, 1998,
compared to $55.9 million at September 30, 1998. For the three months ended
December 31, 1998, net cash inflow from issuance less maturities of debentures
was $4.0 million plus an additional $344,000 increase in credited interest
held.
Total assets were $248.0 million at December 31, 1998 as compared to
$206.6 million at September 30, 1998. Total liabilities were $235.8 million at
December 31, 1998 compared to $195.9 million at September 30, 1998. Total
stockholders' equity was $12.3 million or 5.0% of total assets at December 31,
1998, as compared to $10.7 million or 5.2% of total assets at September 30,
1998.
Results of Operations:
Income available to common stockholder was $726,000 on revenues of
approximately $8.4 million for the three months ended December 31, 1998. For
the similar period in the prior year, the Company reported income available to
common stockholder of $538,000 on revenues of approximately $7.4 million.
Income for the comparative three month periods has increased as result
of improvements from (1) an increased spread between interest sensitive income
and interest sensitive expense, due principally to increases in the investment
and receivable portfolios, and (2) an increase in gains from the sale of
receivables and real estate. These increases were partially offset by (1) a
decrease in fees, commissions and service revenues, (2) a loss from the mark-
to-market adjustments on trading securities, (3) an increase in other
operating expenses, including deferred acquisition costs and related
amortization, and (4) an increase in the provision for losses on receivables
and other real estate assets.
For the three months ended December 31, 1998, the net interest spread
was $1.4 million while in the prior year's period the net spread was $1.2
million. The increase of $200,000 is the result of additional investments in
both the investment and receivable portfolios coupled with a slight decrease
in both the weighted average interest rates on the outstanding Investment
Certificates issued by the Company and insurance annuity funds generated by
OSL and OWAL.
During the three months ended December 31, 1998, the Company realized
gains on the sale of real estate of $17,000 and gains on the sale of
receivables of $1.5 million. In the prior year's period, the Company realized
losses from the sales of real estate of $173,000 and gains from the sale of
receivables of $626,000. The current year's gain on the sale of receivables
is related to the Company's participation in receivable securitizations in
November and December 1998. The prior year's gain resulted primarily from the
sale of receivables to Western United in a whole loan sale transaction.
Current year's real estate sales, including its Hawaii timeshare sales, were
at an approximate breakeven basis, while prior year's sales, primarily
timeshare sales in Hawaii, were generally recorded at a loss. In December
1996, Summit purchased 733 weekly intervals in Pono Kai Resort, an existing
timeshare development located on the island of Kauai in Hawaii. Sales
operations commenced in September 1997. During the three months ended December
31, 1997, total sales were $750,000 while cost of sales totaled $963,000. The
loss of $213,000 was primarily the result of start up costs related to the
timeshare interval sales program.
During the three months ended December 31, 1998, the Company generated
approximately $887,000 of fee revenues while incurring $2.2 million in
salaries, commissions and other operating expenses less increases in deferred
acquisition costs. In the prior year, the Company realized $1.1 million of
fee revenues offset by $1.7 million of other costs. This increased net cost,
of approximately $700,000, is primarily the result of increased costs
associated with its insurance operations and reduced fees generated by its
property development and broker dealer subsidiaries.
In conjunction with increased investments in its receivable portfolio,
along with the valuation of foreclosed real estate, the Company provided for
loss on receivables and real estate assets of $518,000 in the current year's
period as compared to $400,000 in the prior year's period.
New Accounting Rules:
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards
for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. This Statement requires that all items required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. This Statement does not require a specific
format for the financial statement, but requires an enterprise to display an
amount representing total comprehensive income for the period in the financial
statements. This Statement requires an enterprise to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement
of financial position. The Company adopted SFAS 130 as of October 1, 1998.
The application of SFAS 130 did not have a material effect on the Company's
net income or stockholders' equity. The Statement of Comprehensive Income for
the three months ended December 31, 1998 has been presented to conform to SFAS
130.
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments for an Enterprise and Related Information" (SFAS
131) was issued. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This Statement
supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about major
customers. The Company adopted this standard as of October 1, 1998; however,
this standard does not require interim period disclosures in the initial year
of adoption.
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SOP 97-3"). SOP 97-3 applies
to all entities that are subject to guaranty-fund and other insurance-related
assessments. Assessments covered by this SOP include any charge mandated by
statute or regulatory authority that is related directly or indirectly to
underwriting activities (including self-insurance), except for income taxes
and premium taxes. SOP 97-3 is effective for financial statements for fiscal
years after December 15, 1998. The Consolidated Group does not believe that
the application of SOP 97-3 will have a material effect on its consolidated
financial statements.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
was issued. SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as "Derivatives") and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS 133 is effective for all quarters of fiscal
years beginning after June 15, 1999, however, earlier application is
encouraged as of the beginning of any fiscal quarter. The Consolidated Group
has not yet determined the effect of the application of this statement on its
consolidated financial statements.
In October 1998, Statement of Financial Accounting Standards No. 134,
"Accounting for Mortgage-Banking Enterprise" ("SFAS 134"), was issued. SFAS
134 requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting mortgage-
backed securities or other retained interests based on its ability and intent
to sell or hold those investments. This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans
by a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a non-mortgage
banking enterprise. This statement is effective for the first fiscal quarter
beginning after December 15, 1998. The Consolidated Group has not yet
determined the effect of the application of this statement on its consolidated
financial statements.
Year 2000 Disclosure
The Consolidated Group is aware of the potential effect that the year
2000 and the new century may have on computer hardware, computer software and
applications and embedded micro-controllers in non-computer equipment
(collectively "Information Technology"). The problem is insuring that the
Consolidated Group is "Year 2000 Compliant" meaning that the Information
Technology is able to (i) process date and time data accurately and (ii)
calculate, compare and sequence from, into and between the twentieth and
twenty-first centuries, the years 1999, 2000 and leap years.
The Consolidated Group and its affiliates share many software, hardware,
facilities and other systems. Therefore, the Consolidated Group's Year 2000
efforts are a combined and coordinated effort among all companies within the
Consolidated Group and its affiliates. The following are statements regarding
the Year 2000 compliance of the Consolidated Group. The information below has
not been independently verified by the Consolidated Group, other than
statements relating to the Consolidated Group.
State of Readiness
The Consolidated Group has established a Year 2000 task force which has
developed an action plan for addressing issues related to the Year 2000.
Management currently contemplates that the plan, with the exception of the
contingency plan, will be substantially completed by August 1, 1999. The
contingency plan is expected to be substantially completed by December 1,
1999, but will continue to be revised thereafter as needed in order to
maintain an effective contingency plan. The action plan includes the
following phases:
Inventory - Identify all internal and external systems and services that
may utilize date sensitive information.
Assessment - Determine whether each system or service meets the
Consolidated Group's definition of Year 2000 Compliance and assess the
potential business impact of non-compliance.
Renovation - Modify and/or replace any systems or services that do not
satisfy the Consolidated Group's definition of Year 2000 Compliance.
Certification - Obtain certification that each system or service meets
the definition of compliance.
Training - Develop and implement any training and procedural changes to
ensure correct data-entry.
Contingency Planning - Develop and implement contingency plans against
possible failures.
The plan includes a timeline for the completion of each of the phases
and components of the work within each phase. Many of the different phases
have overlapping timelines and are therefore progressing simultaneously,
therefore the status of progress on any particular phase is difficult to
assess at any point in time. The Year 2000 task force generally meets weekly
to coordinate its efforts as well as to monitor progress.
The status of the Consolidated Group's Year 2000 efforts are regularly
monitored by the internal auditor. In addition, during the first quarter of
calendar 1999, the Consolidated Group intends to engage a third party to
provide an external evaluation of its Year 2000 plan and the status of the
preparations of the Consolidated Group at that time.
The Consolidated Group has begun the testing of its internally supported
software applications and its hardware. Testing to date has not produced any
results which were not able to be resolved. The testing continues to be
substantially on track with the Year 2000 action plan timeline.
The Consolidated Group is requesting vendor documentation certifying
Year 2000 compliance with respect to third party software applications, third
party services, equipment and facilities related systems. Certain equipment
and facilities systems which have been identified as higher priority are also
being tested for compliance, where testing is possible. To date, the
Consolidated Group has not received any indication from any third party that a
mission critical system or service will not be able to be certified by them as
Year 2000 compliant. The Year 2000 task force is monitoring and tracking
projected certification dates from third party providers.
The Consolidated Group has begun the development of a Year 2000
contingency plan to address potential Year 2000 related failures. There can
be no assurance that this contingency plan or that the Year 2000 action plan
will be able to prevent a material disruption of the Consolidated Group's
business.
Expected Costs of Remediation
Prior to fiscal 1998, the Consolidated Group did not track Year 2000
related costs. The Consolidated Group and its affiliates had developed a Year
2000 budget of approximately $1.3 million for the fiscal year commencing
October 1, 1998. The Consolidated Group will pay certain of these costs while
the remainder of the costs will be paid by or charged to the affiliated
companies. The predominant components of both past and future costs consist
of soft costs related to employee time and resource allocations rather than
direct costs such as the acquisition of new software.
Risks
The Consolidated Group, as a financial institution, relies heavily upon
computers and information technology systems to acquire, service and sell
Receivables as well as for its securities and insurance sales activities. The
Consolidated Group faces extensive Year 2000 related risks. The order within
which these risks are presented is not intended as a prioritization of the
potential risks nor an exhaustive identification of the risks. These risks
include, but are not limited to the following:
unavailability of electrical power or telecommunication systems supplied
by third parties;
inability of obligors on the Receivables to access their funds to make
required payments;
inability of the mail systems or wire transfer systems performed by
third parties to deliver such payments;
inability of banks to process those payments;
failure of any of the software/hardware systems which the Consolidated
Group uses to track insurance products, securities products or acquire,
service and sell Receivables;
inability of the Consolidated Group to access its own funds or to make
wire transfers or otherwise make payments on its obligations due to
internal or third party (generally banking) system failures; and
inability of the Consolidated Group to process data accurately or timely
for general business management purposes, regulatory reporting purposes
or other purposes.
Contingency Plans
The Consolidated Group has commenced the development of a contingency plan but
has not finalized such a plan to date. Development of contingency plans for
mission critical items is the first and top priority of the contingency
planning phase. Where appropriate and feasible, the plan will also address
alternatives for internally developed systems as well as externally developed
ones, and will include steps to implement transition to an alternative system.
The plan will include trigger dates for implementing alternative solutions
prior to the Year 2000, where system testing or third party documentation
indicates that a system is not and will not be compliant. There can be no
assurance that this contingency plan, or that the Year 2000 action plan will
be able to prevent a material disruption of the Consolidated Group's business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Consolidated Group is in a "liability sensitive" position in that it
interest sensitive liabilities reprice or mature more quickly than do its
interest sensitive assets. Consequently, in a rising interest rate
environment, the net return from interest sensitive assets and liabilities
will tend to decrease, thus rising interest rates will have a negative impact
on results of operations. Conversely, in a falling interest rate environment,
the net return from interest sensitive assets and liabilities will tend to
improve, thus falling interest rates will have a positive impact on results of
operations. As with the impact on operations from changes in interest rates,
the Consolidated Group's Net Present Value ("NPV") of financial assets and
liabilities is subject to fluctuations in interest rates. The Consolidated
Group continually monitors the sensitivity of net interest income and NPV to
changes in interest rates. NPV is calculated based on the net present value
of estimated cash flows utilizing market prepayment assumptions and market
rates of interest provided by independent broker quotations and other public
sources. Any computation of forecasted effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and redemptions of certificates, and should
not be relied upon as indicative of actual future results.
The Company believes that there has not been a material change in its
market risk since the end of its last fiscal year.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or threatened
against Summit Securities, Inc. or to which its property is subject.
ITEM 2. CHANGES IN SECURITIES & USE OF PROCEEDS
Recent Sales of Unregistered Securities: On October 15, 1996, Summit
issued to one accredited investor who is also an MIS Registered
Representative, in a private offering exempt from registration pursuant to the
Securities Act of 1933, as amended, $256,000 of Variable Rate Cumulative
Preferred Stock, Series S-RP. The underwriter was MIS. The consideration for
the transaction was residential real estate valued at $256,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of Security Holders during the
reporting period.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(a). Articles of Incorporation of the Company (Exhibit
3(a) to Registration No. 3-36775).
3(b). Bylaws of the Company (Exhibit 3(b) to Registration
No. 33-36775).
4(a). Indenture dated as of November 15, 1990 between
Summit and West One Bank, Idaho, N.A., Trustee
(Exhibit 4(a) to Registration No. 33-36775).
4(b). Tri-Party Agreement dated as of April 24, 1996
between West One Bank, First Trust and Summit,
appointing First Trust as successor Trustee (Exhibit
4(c) to Registration No. 333-19787).
4(c). First Supplemental Indenture between Summit and
First Trust dated as of December 31, 1997, with
respect to Investment Certificates, Series B.
(Exhibit 4(c) to Form 10-K filed January 7, 1998).
4(d). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-1
(Exhibit 4(c) to Registration No. 33-57619).
4(e). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-2
(Exhibit 4(c) to Registration No. 333-115).
4(f). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-RP
(Exhibit 4(f) to Form 10-K file January 13, 1997).
4(g). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock, Series S-3
(Exhibit 4(f) to Amendment 3 to Registration No. 333-
19787).
10(a). Receivable Management, Acquisition and Service
Agreement between Summit Securities, Inc. and
Metropolitan Mortgage & Securities Co., Inc. dated
September 9, 1994 (Exhibit 10(a) to Registration No.
33-57619).
10(b). Receivable Management, Acquisition and Service
Agreement between Old Standard Life Insurance
Company and Metropolitan Mortgage & Securities Co.,
Inc. dated December 31, 1994 (Exhibit 10(b) to
Registration No. 33-57619).
10(c). Receivable Management, Acquisition and Service
Agreement between Arizona Life Insurance Company and
Metropolitan Mortgage & Securities Co., Inc. dated
October 10, 1996 (Exhibit 4(c) to Registration No.
333-19787).
10(d). Reinsurance Agreement between Western United Life
Assurance Company and Old Standard Life Insurance
Company (Exhibit 10(d) to Form 10-K filed January 7,
1998.
11. Statement regarding Computation of Earnings Per
Common Share (See Financial Statements).
*27. Financial Data Schedule.
*Filed herewith
(b) Reports on Form 8-K
There have been no reports on Form 8-K filed during the quarter
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed this 22nd day of February
1999 on its behalf by the undersigned, thereunto duly authorized.
SUMMIT SECURITIES, INC.
/s/ TOM TURNER
______________________________________________
Tom Turner
President/Director
/s/ STEVE CROOKS
______________________________________________
Steve Crooks
Principal Accounting Officer
Principal Financial Officer
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