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 June 30, 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 July 31, 1999.
SUMMIT SECURITIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
As of June 30, 1999 and September 30, 1998 (unaudited)
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended June 30, 1999 and 1998 (unaudited)
Consolidated Statement of Comprehensive Income (Loss)
Three and Nine Months Ended June 30, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1999 and 1998 (unaudited)
Notes to Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
______________ ______________
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 20,170,521 $ 14,168,191
Investments in affiliated company 4,522,425 4,522,425
Trading securities, at market 11,439,450 6,049,823
Available-for-sale securities, at
Market 75,126,473 5,356,652
Held-to-maturity securities, at
Amortized cost (market value:
$1,502,187 and $2,018,282) 1,500,559 2,005,209
Real estate contracts and mortgage
notes and other receivables, net
of unrealized discounts and
allowances for losses 143,784,583 148,723,475
Real estate held for sale 3,124,821 2,645,773
Deferred acquisition costs, net 10,995,577 9,193,498
Other assets, net 5,748,566 13,929,188
______________ ______________
TOTAL ASSETS $276,412,975 $206,594,234
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Annuity reserves $188,814,259 $136,362,403
Investment certificates and accrued
interest 69,131,755 55,894,093
Debt payable 210,165 184,421
Accounts payable and accrued
expenses 2,088,485 2,055,143
Deferred income taxes 219,385 1,414,110
______________ ______________
TOTAL LIABILITIES 260,464,049 195,910,170
______________ ______________
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,
123,514 and 66,587 shares issued
and outstanding (liquidation
preference $12,351,390 and
$6,658,680, respectively) 1,235,139 665,868
Additional paid-in capital 9,248,930 4,405,604
Retained earnings 6,428,744 5,420,838
Accumulated other comprehensive
income (loss) (1,063,887) 91,754
______________ ______________
TOTAL STOCKHOLDERS' EQUITY 15,948,926 10,684,064
______________ ______________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $276,412,975 $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 OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
____________ ____________ ____________ ____________
<S> <C> <C> <C> <C>
REVENUES
Interest and earned discounts $ 5,951,994 $ 4,163,862 $ 16,867,506 $ 12,230,989
Annuity fees and charges 46,052 28,631 98,732 106,764
Realized investment gains (losses) (179,436) 7,751 (129,982) 354,079
Realized net gains on sales of
receivables 9,202 1,482,755 1,987,932 2,097,809
Real estate sales 1,063,133 1,688,038 2,890,809 4,310,674
Dividend income 51,477 51,431 153,866 164,660
Fees, commissions, service and other
Income 999,153 1,128,684 2,812,949 3,627,748
____________ ____________ ____________ ____________
TOTAL REVENUES 7,941,575 8,551,152 24,681,812 22,892,723
____________ ____________ ____________ ____________
EXPENSES
Annuity benefits 2,721,213 1,686,181 7,629,407 5,058,805
Interest 1,525,892 1,212,087 4,255,855 3,529,981
Cost of real estate sold 1,023,788 1,572,248 2,870,205 4,132,385
Provision for losses on real estate
contracts and real estate held 69,882 504,842 1,237,833 1,452,908
Salaries and employee benefits 608,822 485,014 1,800,484 1,523,290
Commissions to agents 1,139,306 803,837 3,995,202 2,637,063
Other operating and underwriting
expenses 949,011 663,285 2,537,813 1,598,730
Increase in deferred acquisition costs (141,465) (34,840) (1,377,320)
(327,651)
____________ ____________ ____________ ____________
TOTAL EXPENSES 7,896,449 6,892,654 22,949,479 19,605,511
____________ ____________ ____________ ____________
Income before income taxes 45,126 1,658,498 1,732,333 3,287,212
Income tax benefit (provision) 60,513 (347,219) (196,311)
(720,080)
____________ ____________ ____________ ____________
NET INCOME 105,639 1,311,279 1,536,022 2,567,132
Preferred stock dividends (225,045) (125,611) (528,116)
(367,875)
____________ ____________ ____________ ____________
Income (loss) applicable to common
stockholders $ (119,406) $ 1,185,668 $ 1,007,906 $ 2,199,257
============ ============ ============ ============
Basic and diluted income (loss) per share
applicable to common stockholder $ (11.94) $ 118.57 $ 100.79 $ 219.93
Weighted average number of shares of common 10,000 10,000 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 Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
____________ ____________ ____________ ____________
<S> <C> <C> <C> <C>
NET INCOME
$ 105,639 $ 1,311,279 $ 1,536,022 $ 2,567,132
____________ ____________ ____________ ____________
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE
INCOME TAXES:
Change in unrealized gains (losses) on
investments (863,064) 1,699 (1,750,972)
(5,741)
Less deferred income tax provision (benefit)
(293,441) (577) (595,331)
(1,953)
____________ ____________ ____________ ____________
Net other comprehensive income (loss) (569,623) 1,122 (1,155,641)
(3,788)
____________ ____________ ____________ ____________
Comprehensive income (loss) $ (463,984) $ 1,312,401 $ 380,381 $2,563,344
============ ============ ============ ============
</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>
Nine Months Ended June 30,
1999 1998
______________ ______________
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (5,932,382) $ 5,069,755
______________ ______________
Cash flows from investing activities:
Proceeds from sales of available-for-
sale investments 10,901,460
Purchase of available-for-sale
investments (66,701,993)
Proceeds from investment maturities 1,394,729 1,787,609
Principal payments on real estate
contracts and mortgage notes and
other receivables 14,092,317 16,234,996
Purchase of real estate contracts
and mortgage notes and other
receivables (73,109,222) (47,410,190)
Proceeds from real estate sales 2,208,205 1,817,204
Additions to real estate held for sale (1,193,931) (2,556,930)
Proceeds from sales of receivables 63,232,544 33,344,785
______________ ______________
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (49,175,891) 3,217,474
______________ ______________
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts from annuity products 22,584,357 10,642,666
Withdrawals of annuity products (10,269,290) (10,650,457)
Redemption and retirement of preferred
stock (18,903) (38,740)
Proceeds from issuance of investment
certificates 19,500,533 9,094,009
Repayment of investment certificates (7,174,861) (5,964,732)
Repayment to banks and others (792) (8,792)
Debt issuance costs (927,349) (459,584)
Contingent purchase price paid on
subsidiary purchased from
related party (135,569)
Issuance of preferred stock 5,431,500 677,227
Reinsurance of annuity products to
reinsurers, net 32,513,524
Cash dividends on preferred and common
Stock (528,116) (578,575)
______________ ______________
NET CASH PROVIDED BY FINANCING
ACTIVITIES 61,110,603 2,577,453
______________ ______________
Net change in cash and cash equivalents 6,002,330 10,864,682
Cash and cash equivalents, beginning
of period 14,168,191 8,461,101
______________ ______________
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,170,521 $ 19,325,783
============== ==============
NON CASH INVESTING AND FINANCING
ACTIVITIES OF COMPANY:
Assumption of other debt payable in
conjunction with purchase of real
estate contracts and mortgage notes $ 16,203 $ 16,942
Real estate acquired through
Foreclosure 2,766,237 1,641,489
Receivables originated to facilitate
The sale of real estate 682,604 2,493,470
Transfer of securities from trading to
available-for-sale 16,717,534
</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 June 30, 1999, the results
of operations for the three and nine months ended June 30, 1999 and 1998
and changes in cash flows for the nine months ended June 30, 1999 and
1998. The results of operations for the three and nine month periods
ended June 30, 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 $4,700,000 at June 30, 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's 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 Third Quarter Transactions:
The Company had no significant or unusual transactions during the
quarter ending June 30, 1999. The Company did not participate in any real
estate receivable securitizations during the quarter, which was the primary
reason for the reduced earnings reported for the quarter.
Financial Condition and Liquidity:
As of June 30, 1999, the Company had cash or cash equivalents of $20.2
million and liquid investments (trading or available-for-sale securities) of
$86.6 million compared to $17.8 million and $87.5 million at March 31, 1999,
$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 June 30, 1999, including held-to-
maturity securities and investments in affiliates, were $112.8 million as
compared to $111.3 million at March 31, 1999, $98.0 million at December 31,
1998 and $32.1 million at September 30, 1998. During the nine month period
ended June 30, 1999, approximately $5.9 million were used in operating
activities. Funds used in investing activities of $49.2 million were
primarily the result of sale proceeds and collections of receivables of $77.3
million, proceeds from the sale of real estate of $2.2 million and sales and
maturities of investments of $12.3 million, being exceeded by the $73.1
million of new receivable acquisitions, additions to real estate held of $1.2
million and purchase of available-for-sale securities of $66.7 million. Funds
provided by financing activities of $61.1 million were primarily the result of
the net cash inflow of $12.3 million in life and annuity products, a net
inflow from investment certificate sales less maturities of $12.3 million, the
net ceding of annuity products to reinsurers of $32.5 million and issuance of
preferred stock of $5.4 million, which exceeded cash dividends of $0.5 million
and other debt issue costs of $0.9 million.
The receivable portfolio totaled $143.8 million at June 30, 1999
compared to $131.8 million at March 31, 1999, $134.7 million at December 31,
1998 and $148.7 million at September 30, 1998. During the nine months ended
June 30, 1999, the decrease was primarily the result of principal collections
on receivables of $14.1 million, a reduction for the cost basis of receivables
sold of $61.2 million, an increase in allowance for losses of $0.6 million and
a reduction due to foreclosed receivables of approximately $2.8 million,
exceeding the acquisition of receivables totaling $73.1 million plus an
additional $0.7 million in loans to facilitate the sale of real estate.
Real estate held for sale and development increased slightly to $3.1
million at June 30, 1999 from $2.8 million at March 31, 1999, $2.8 million at
December 31, 1998 and $2.6 million at September 30, 1998. For the nine months
ended June 30, 1999, real estate additions of $4.0 million, including $2.8
million of foreclosed receivables, were offset by costs of real estate sold of
$2.9 million and charge-offs to the allowance for losses of $0.4 million.
Life insurance and annuity policy reserves increased $52.4 million
during the nine months ended June 30, 1999 to approximately $188.8 million
from $136.4 million at September 30, 1998. This increase resulted from
credited earnings of $7.6 million plus a $44.8 million net cash inflow from
insurance products, including reinsurance transactions. For the nine months
ended June 30, 1999, investment certificates outstanding increased by $13.2
million to $69.1 million from $55.9 million at September 30, 1998. Net cash
inflow from issuance of investment certificates less maturities was
approximately $12.3 million plus an additional $0.9 million increase in
credited interest held. Additionally, the Company had cash inflow, net of
redemptions, of approximately $5.4 million from the sale of preferred stock
and reinvestment of preferred stock dividends during the nine months ended
June 30, 1999.
Total assets were $276.4 million at June 30, 1999 compared to $260.5
million at March 31, 1999, $248.0 million at December 31, 1998 and $206.6
million at September 30, 1998. Total stockholders' equity was $15.9 million
or 5.8% of total assets at June 30, 1999 compared to $13.4 million or 5.2% of
total assets at March 31, 1999, $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 June 30, 1999, the Company had net unrealized losses on securities
available-for-sale in the amount of $1.1 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 component of accumulated other
comprehensive income (loss) in stockholders' equity.
Results of Operations:
The Company recorded net income before preferred stock dividends for the
nine months ended June 30, 1999 of $1.5 million compared to $2.6 million in
the prior year's period. Comparing the current year's nine month period with
the prior year's similar period, an increase in net interest spread and a
reduction in the provision for losses on real estate assets have been
completely offset by a reduction in gains on the sale of real estate, losses
on securities investments, a reduction in gains on sale of receivables, a
decrease in fee, commission and service income and an increase in other
operating expenses including salaries, commissions and benefits adjusted for
an increase in the amortization of deferred acquisition costs.
For the nine-month period ended June 30, 1999, the Company reported a
positive spread on its interest sensitive assets and liabilities of $5.1
million as compared to $3.7 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 nine months ended June 30, 1999, the Company realized net
gains on sales of receivables of $2.0 million as compared to $2.1 million in
the prior year's period. The current year gains resulted primarily from a
real estate receivable securitization in November 1998 and the securitization
of structured settlements in December 1998, while in the prior period the
Company participated in a real estate receivable securitization in April 1998.
During the nine months ended June 30, 1999, the Company realized net
losses on investments of $130,000, including mark-to-market adjustments on
trading securities, compared to net gains of $354,000 in the prior year's
period. The losses 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. The Company
realized gains of $21,000 on sales of $2.9 million of real estate in the
current year's period compared to gains of $178,000 on sales of $4.3 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 nine months ended June 30, 1999, the Company made provisions for
losses on receivables and real estate assets of approximately $1.2 million as
compared to $1.5 million in the prior year's period. The changes in reserves
and valuation accounts were based upon updated appraisals on delinquent
receivables and appraisals or fair market valuations of newly acquired
repossessed properties.
In the nine months ended June 30, 1999, the Company has incurred
increases of approximately $1.5 million in other operating expenses including
salaries, commissions and benefits less related adjustments for deferred
acquisition costs as current year net expenses of $7.0 million exceeded the
prior year's $5.4 million. In addition to the expense increase, the Company
has recorded a reduction in fee, service and commission income of
approximately $0.8 million with the current year revenues at $2.8 million
compared to $3.6 million in the prior year.
In comparing the three months ended June 30, 1999 with the prior year's
similar period, the Company recorded net income before preferred dividends of
$106,000 as compared to $1.3 million. The decrease in net income for the
comparative three month period was primarily the result of (1) a decrease in
gains on the sale of receivables, (2) losses on securities investments, (3)
increases in other operating expenses including salaries, commissions, and
benefits less adjustments for deferred acquisition costs, (4) a reduction in
fee, service and commission income and (5) a reduction in gains from the sale
of real estate, which were only partially offset by (1) an increase in the net
interest spread and (2) a reduction in the provision for losses on real estate
assets.
For the three months ended June 30, 1999, the net interest spread was
$1.8 million compared to $1.3 million in the prior year. The increase was
primarily the result of the Company's increased investment portfolio funded
through increased annuity and investment certificate sales.
During the three months ended June 30, 1999, the Company realized net
losses on investments of $179,000 and realized gains on the sale of
receivables of $9,000. In the prior year, the Company recorded investment
gains of $8,000 and gains on the sale of receivables of $1.5 million. Current
year investment losses are primarily related to rising interest rates
affecting the Company's mark-to-market adjustments. Gains from receivable
sales in the prior year resulted from a securitization sale in April 1998,
while the Company did not participate in any securitizations during the
current year's three-month period.
In conjunction with the Company's evaluation of its real estate assets,
the Company provided for loss on real estate assets of $70,000 in the current
year's three-month period as compared to $505,000 in the prior year. The
change 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 June 30, 1999, the Company recorded fee,
service and commission income of $1.0 million compared to $1.1 million in the
prior year. Additionally, the Company incurred other operating expenses
(including salaries, commissions and benefits and related deferred acquisition
costs) of $2.6 million in the current year compared to $1.9 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. In June 1999, Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of SFAS 133" ("SFAS 137") was
issued. SFAS 137 amends SFAS 133 to become effective for all quarters of
fiscal years beginning after June 15, 2000, 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 (Metropolitan 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 meets as needed 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 completed the testing of its internally
developed and supported software applications, hardware and facilities
systems. Updates and modifications were made to systems if and as needed.
Testing to date has not produced any results which were not able to be
resolved. Testing for newly acquired or upgraded software, hardware and
facilities systems will continue as deemed appropriate through the remainder
of the year.
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 have been
tested for compliance, where testing is possible. Where such testing has
occurred, the tests have not produced any results which were not able to be
resolved. 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. A
contingency planning task force has developed preliminary contingency plans
which will be further refined and tested during the remainder of the year.
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. Certain of these costs will be charged to or reimbursed by
the affiliated companies, and certain of these costs will be paid by the
Consolidated Group with respect to their respective costs associated with the
Year 2000 action plan. 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 Company 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 Company's Net Present Value ("NPV") of financial assets and liabilities is
subject to fluctuations in interest rates. The Company 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
No 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 12th day of August,
1999 on its behalf by the undersigned, thereunto duly authorized.
SUMMIT SECURITIES, INC.
/s/ GREG GORDON
______________________________________________
Greg Gordon
Secretary/Treasurer
/s/ WILLIAM D. SNIDER
______________________________________________
William D. Snider
Principal Accounting Officer
Principal Financial Officer
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