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 March 31, 1999
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, 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 April 30, 1999.
SUMMIT SECURITIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
As of March 31, 1999 and September 30, 1998 (unaudited)
Condensed Consolidated Statements of Income
Three Months and Six Months Ended March 31, 1999 and 1998
(unaudited)
Consolidated Statement of Comprehensive Income (Loss)
Three and Six Months Ended March 31, 1999 and 1998
(Unaudited)
Condensed Consolidated Statements of Cash Flows
Six Months Ended March 31, 1999 and 1998 (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>
March 31, September 30,
1999 1998
_____________ _____________
_ _
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 17,771,169 $ 14,168,191
Investments in affiliated 4,522,425 4,522,425
company
Trading securities, at market 11,853,156 6,049,823
Available-for-sale securities,
at 75,682,947 5,356,652
market
Held-to-maturity securities, at
amortized cost (market value:
$1,507,188 and $2,018,282) 1,502,396 2,005,209
Real estate contracts and
mortgage
notes and other receivables,
net 131,799,258 148,723,475
of unrealized discounts and
allowances for losses
Real estate held for sale 2,813,026 2,645,773
Deferred acquisition costs, net 10,702,269 9,193,498
Other assets, net 3,846,488 13,929,188
_____________ _____________
_ _
TOTAL ASSETS $260,493,134 $206,594,234
============= =============
= =
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES
Annuity reserves $180,365,418 $136,362,403
Investment certificates and
accrued 64,562,382 55,894,093
interest
Debt payable 206,852 184,421
Accounts payable and accrued
expenses 1,066,263 2,055,143
Deferred income taxes 873,130 1,414,110
_____________ _____________
_ _
TOTAL LIABILITIES 247,074,045 195,910,170
_____________ _____________
_ _
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,
91,084 and 66,587 shares
issued 898,650 665,868
and outstanding (liquidation
preference $9,108,380 and
$6,658,680, respectively)
Additional paid-in capital 6,366,553 4,405,604
Retained earnings 6,548,150 5,420,838
Accumulated other
comprehensive 91,754
income (loss) (494,264)
_____________ _____________
_ _
TOTAL STOCKHOLDERS' EQUITY 13,419,089 10,684,064
_____________ _____________
_ _
TOTAL LIABILITIES AND
STOCKHOLDERS' $260,493,134 $206,594,234
EQUITY
============= =============
= =
</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 Six Months Ended
March 31, March 31,
1999 1998 1999 1998
___________ ____________ ____________ __________
_ __
<S> <C> <C> <C> <C>
REVENUES
Interest and earned discounts $ $ 4,084,008 $ 10,915,512 $
5,721,403 8,067,127
Annuity fees and charges 38,346 52,680
30,928 78,133
Realized investment gains 157,886 49,454
102,676 346,328
Realized net gains (losses) on
sales of 1,978,730
receivables 487,044 (11,110) 615,054
Real estate sales 1,156,908 1,827,676
978,610 2,622,636
Dividend income 45,491 102,389
55,030 113,229
Fees, commissions, service and
other 1,430,289 1,813,796
Income 926,489 2,499,064
___________ ____________ ____________ __________
_ __
TOTAL REVENUES 6,901,818 16,740,237
8,302,180 14,341,571
___________ ____________ ____________ __________
_ __
EXPENSES
Annuity benefits 1,682,759 4,908,194
2,380,524 3,372,624
Interest 1,151,524 2,729,963
1,412,102 2,317,894
Cost of real estate sold 921,572 1,846,417
1,014,061 2,560,137
Provision for losses on real
estate 548,280 1,167,951
contracts and real estate held 650,162 948,066
Salaries and employee benefits 528,879 1,191,662
588,803 1,038,276
Commissions to agents 1,103,796 2,855,896
796,573 1,833,226
Other operating and underwriting
expenses 373,705 1,588,802
792,261 935,445
(Increase) decrease in deferred
acquisition costs (1,235,855)
71,881 (177,327) (292,811)
___________ ____________ ____________ __________
_ __
TOTAL EXPENSES 6,133,188 15,053,030
7,706,367 12,712,857
___________ ____________ ____________ __________
_ __
Income before income taxes 768,630 1,687,207
595,813 1,628,714
Provision for income taxes (256,824)
(29,871) (172,822) (372,861)
___________ ____________ ____________ __________
_ __
NET INCOME 595,808 1,430,383
565,942 1,255,853
Preferred stock dividends (303,071)
(165,020) (119,786) (242,264)
___________ ____________ ____________ __________
_ __
Income applicable to common $ $ 476,022 $ 1,127,312 $
stockholders 400,922 1,013,589
=========== ============ ============ ==========
= ==
Basic and diluted income per share
Applicable to common stockholder $ $ 47.60 $ 112.73 $
40.09 101.36
Weighted average number of shares of 10,000 10,000
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 (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
___________ ____________ ____________ __________
_ __
<S> <C> <C> <C> <C>
NET INCOME
$ $ 595,808 $ 1,430,383 $
565,942 1,255,853
___________ ____________ ____________ __________
_ __
OTHER COMPREHENSIVE INCOME (LOSS),
BEFORE INCOME TAXES:
Change in unrealized gains (losses) on
investments (887,908)
(921,490) (62) (7,440)
Less deferred income tax provision
(benefit) (301,890)
(306,559) (833) (2,530)
___________ ____________ ____________ __________
_ __
Net other comprehensive income 771 (586,018)
(loss) (614,931) (4,910)
___________ ____________ ____________ __________
_ __
Comprehensive income (loss) $ $ 596,579 $ 844,365
(48,989) $1,250,943
=========== ============ ============ ==========
= ==
</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>
Six Months Ended March 31,
1999 1998
_____________ _____________
_ _
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (8,353,424) $ 4,936,332
_____________ _____________
_ _
Cash flows from investing
activities:
Proceeds from sales of available-
for- 9,021,773 348,346
sale investments
Purchase of available-for-sale
investments (63,823,069)
Proceeds from investment 796,259 1,000,000
maturities
Principal payments on real
estate
contracts and mortgage notes 12,410,875 14,310,098
and
other receivables
Purchase of real estate
contracts
and mortgage notes and other (54,689,405) (36,704,645)
receivables
Proceeds from real estate sales 1,320,692 1,228,601
Additions to real estate held (645,575) (1,603,992)
for sale
Proceeds from sale of 59,209,366 9,486,911
receivables
_____________ _____________
_ _
NET CASH USED IN INVESTING
ACTIVITIES (36,399,084) (11,934,681)
_____________ _____________
_ _
CASH FLOWS FROM FINANCING
ACTIVITIES
Receipts from annuity products 15,467,290 9,702,109
Withdrawals of annuity products (6,475,930) (7,465,382)
Redemption and retirement of
preferred stock (17,572)
Proceeds from issuance of
investment 11,985,933 5,716,188
certificates
Repayment of investment (4,028,415) (4,120,332)
certificates
Repayment to banks and others (523) (12,153)
Debt issuance costs (590,724) (303,823)
Contingent purchase price paid
on
subsidiary purchased from (135,569)
related party
Issuance of preferred stock 2,211,303 340,723
Reinsurance of annuity products to
reinsurers, net 30,107,195
Cash dividends on preferred and
common (303,071) (452,964)
stock
_____________ _____________
_ _
NET CASH PROVIDED BY FINANCING
ACTIVITIES 48,355,486 3,268,797
_____________ _____________
_ _
Net change in cash and cash 3,602,978 (3,729,552)
equivalents
Cash and cash equivalents,
beginning 14,168,191 8,461,101
of period
_____________ _____________
_ _
CASH AND CASH EQUIVALENTS, END OF $ 17,771,169 $ 4,731,549
PERIOD
============= =============
= =
NON CASH INVESTING AND FINANCING
ACTIVITIES OF COMPANY:
Assumption of other debt payable
in
Conjunction with purchase of $ 16,203 $ 16,942
real
Estate contracts and mortgage
notes
Real estate acquired through
foreclosure 1,856,644 839,812
Receivables originated to
facilitate 506,984 1,394,035
the sale of real estate
Transfer of securities from trading
to available-for-sale 16,716,534
</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 March 31, 1999, the results of operations for
the three and six months ended March 31, 1999 and 1998 and
changes in cash flows for the six months ended March 31,
1999 and 1998. The results of operations for the three and
six month periods ended March 31, 1999 and 1998 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 $4,850,000 at
March 31, 1999 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, 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. 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. The Company adopted
this statement effective January 1, 1999. Concurrent with
the adoption, the Company transferred $16.7 million in
mortgage-backed securities from its trading category to its
available-for-sale category.
6. 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 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 Second Quarter Transactions:
On January 1, 1999, the Company applied Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS
134"). The Company availed itself of the one-time opportunity to
reclassify $16.7 million of mortgage-backed securities and other
beneficial interests from the trading category to the available-
for-sale category.
Financial Condition and Liquidity:
As of March 31, 1999, the Company had cash or cash
equivalents of $17.8 million and liquid investments (trading or
available-for-sale securities) of $87.5 million compared to $59.7
million and $31.7 million at December 31, 1998 and $14.2 million
and $11.4 million at September 30, 1998. Management anticipates
that cash generated from operations, current 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. Total cash and investments at March 31, 1999, including
held-to-maturity securities and investments in affiliates, were
$111.3 million as compared to $98.0 million at December 31, 1998
and $32.1 million at September 30, 1998. During the six month
period ended March 31, 1999, approximately $8.4 million were used
in operating activities. Funds used in investing activities of
$36.4 million were primarily the result of sale proceeds and
collections of receivables of $71.6 million, proceeds from the
sale of real estate of $1.3 million and sales and maturities of
investments of $9.8 million, being exceeded by the $54.7 million
of new receivable acquisitions, additions to real estate held of
$0.6 million and purchase of available-for-sale securities of
$63.8 million. Funds provided by financing activities of $48.4
million were primarily the result of the net cash inflow of $9.0
million in life and annuity products, a net inflow from
investment certificate sales less maturities of $8.0 million, the
net ceding of annuity products to reinsurers of $30.1 million and
issuance of preferred stock of $2.2 million, which exceeded cash
dividends of $0.3 million and other debt issue costs of $0.6
million.
The receivable portfolio totaled $131.8 million at March 31,
1999 compared to $134.7 million at December 31, 1998 and $148.7
million at September 30, 1998. During the six months ended March
31, 1999, the decrease was primarily the result of principal
collections on receivables of $12.4 million, a reduction for the
cost basis of receivables sold of $57.2 million and a reduction
due to foreclosed receivables of approximately $1.9 million,
exceeding the acquisition of receivables totaling $54.7 million
plus an additional $0.5 million in loans to facilitate the sale
of real estate.
Real estate held for sale and development increased slightly
to $2.8 million at March 31, 1999 and $2.8 million at December
31, 1998 from $2.6 million at September 30, 1998. For the six
months ended March 31, 1999, real estate additions of $2.5
million, including $1.9 million of foreclosed receivables, were
offset by costs of real estate sold of $1.8 million and charge-
offs to the allowance for losses of $0.5 million.
Life insurance and annuity policy reserves increased $44.0
million during the six months ended March 31, 1999 to
approximately $180.4 million from $136.4 million at September 30,
1998. This increase resulted from credited earnings of $4.9
million plus a $39.1 million net cash inflow from insurance
products, including reinsurance transactions. For the six months
ended March 31, 1999, investment certificates outstanding
increased by $8.7 million to $64.6 million from $55.9 million at
September 30, 1998. Net cash inflow from issuance of investment
certificates less maturities was approximately $8.0 million plus
an additional $0.7 million increase in credited interest held.
Additionally, the Company had cash inflow, net of redemptions, of
approximately $2.2 million from the sale of preferred stock and
reinvestment of preferred stock dividends during the six months
ended March 31, 1999.
Total assets were $260.5 million at March 31, 1999, compared
to $248.0 million at December 31, 1998 and $206.6 million at
September 30, 1998. Total stockholders' equity was $13.4 million
or 5.2% of total assets at March 31, 1999, compared to $12.3
million or 5.0% of total assets at December 31, 1998 and $10.7
million or 5.2% of total assets at September 30, 1998. At March
31, 1999, the Company had net unrealized losses on securities
available-for-sale in the amount of $0.5 million as compared to
unrealized gains of $0.1 million at September 30, 1998. Net
unrealized losses on securities available-for-sale is presented
as a separate component of stockholders' equity.
Results of Operations:
The Company recorded net income before preferred dividends
for the six months ended March 31, 1999 of $1.4 million compared
to $1.3 million in the prior year's period. Comparing the
current year's six month period with the prior year's similar
period, an increase in gains on the sale of receivables and an
increased net interest spread have been materially offset by
increases in the provision for losses on real estate assets, a
decrease in fee, commission and service income, an increase in
other operating expenses including salaries, commissions and
benefits adjusted for an increase in the amortization of deferred
acquisition costs and a reduction in investment gains.
For the six-month period ended March 31, 1999, the Company
reported a positive spread on its interest sensitive assets and
liabilities of $3.3 million as compared to $2.5 million in the
prior year's period. The increase was primarily the result of
additional earning assets funded, at a positive spread, by
increased sales of annuity products and sales of investment
certificates.
During the six months ended March 31, 1999, the Company
realized net gains on sales of receivables of $2.0 million as
compared to $615,000 in the prior year's period. The increase
resulted primarily from a real estate receivable securitization
in November 1998 and the whole loan sale of structured
settlements in December 1998. The Company did not participate in
any securitizations during the prior year's similar period.
During the six months ended March 31, 1999, the Company
realized net gains on investments of $49,000, including mark-to-
market adjustments on trading securities, compared to net gains
of $346,000 in the prior year's period. The reduction in the
current period includes some mark-to-market losses, as higher
interest rates and increased spreads to treasuries have decreased
the valuation of certain trading securities. The prior year's
gain was primarily the result of reduced interest rates and
tightening of spreads to treasuries, thus increasing the value of
trading securities. Also in the prior year the Company revalued
some of its retained securities from prior securitizations. The
Company realized losses of $19,000 on sales of $1.8 million of
real estate in the current year's period compared to gains of
$62,000 on sales of $2.6 million in the prior year. It is the
policy of management to actively market real estate in order to
return the investment to an earning asset.
In the six months ended March 31, 1999, the Company
made provisions for losses on receivables and real estate assets
of approximately $1.2 million as compared to $948,000 in the
prior year's period. The increase in reserves and valuation
accounts was based upon updated appraisals on delinquent
receivables and appraisals or fair market valuations of newly
acquired repossessed properties.
In the six months ended March 31, 1999, the Company has
incurred increases of approximately $0.9 million in other
operating expenses including salaries, commissions and benefits
less related adjustments for deferred acquisition costs as
current year net expenses of $4.4 million exceeded the prior
year's $3.5 million. In addition to the expense increase, the
Company has recorded a reduction in fee, service and commission
income of approximately $0.7 million with the current year
revenues at $1.8 million compared to $2.5 million in the prior
year.
In comparing the three months ended March 31, 1999 with the
prior year's similar period, the Company recorded net income
before preferred dividends of $566,000 as compared to $596,000.
The slight decrease in net income for the comparative three month
period was primarily the result of (1) an increase in gains on
the sale of receivables and (2) an increase in the net interest
spread, being completely offset by (1) losses on sale of real
estate, (2) reduced investment gains, (3) an increase in the
provision for losses on real estate assets, (4) a reduction in
fee, service and commission income and (4) increases in other
operating expenses including salaries, commissions, and benefits
less related adjustments for deferred acquisition costs.
For the three months ended March 31, 1999, the net interest
spread was $2.0 million compared to $1.3 million in the prior
year. The increase was primarily the result of the Company
increased investment portfolio funded through increased annuity
and investment certificate sales.
During the three months ended March 31, 1999, the Company
realized net gains on investments of $103,000 and realized gains
on the sale of receivables of $487,000. In the prior year, the
Company recorded investment gains of $158,000 and losses on the
sale of receivables of $11,000.
In conjunction with the Company's evaluation of its real
estate assets, the Company provided for loss on real estate
assets of $650,000 in the current year's three-month period as
compared to $548,000 million in the prior year. The increase in
reserves and valuation accounts was based upon updated appraisals
on delinquent receivables and appraisals or fair market
valuations of newly acquired repossessed properties.
During the three months ended March 31, 1999, the Company
recorded fee, service and commission income of $0.9 million
compared to $1.4 million in the prior year. Additionally, the
Company incurred other operating expenses (including salaries,
commissions and benefits and related deferred acquisition costs)
of $2.2 million in the current year compared to $1.8 million in
the prior year.
New Accounting Rules:
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 application of SFAS 131 is not expected to have a
material effect on the Company's consolidated financial
statements.
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 Company 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 Company 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. The Company adopted this
statement effective January 1, 1999. Concurrent with the
adoption, the Company transferred $16.7 million in mortgage-
backed securities for its trading category to its available-for-
sale category.
Year 2000 Disclosure
The Consolidated Group (Summit and its subsidiaries) 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
engaged 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
On March 31, 1999, the Annual Meeting of Shareholders was
held wherein the stockholder unanimously elected the following
Directors to serve until the next annual meeting:
Greg Gordon, Robert K. Potter, Philip Sandifur, Tom Turner.
No other matters were 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 19th day of May, 1999 on its behalf by the undersigned,
thereunto duly authorized.
SUMMIT SECURITIES, INC.
/s/ GREG GORDON
______________________________________________
Greg Gordon
Secretary/Treasurer
/s/ STEVE CROOKS
______________________________________________
Steve Crooks
Principal Accounting Officer
Principal Financial Officer
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