<PAGE>
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, 2000
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 0-29075
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, 2000.
<PAGE>
SUMMIT SECURITIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
Consolidated Balance Sheets
As of March 31, 2000 and September 30, 1999 (unaudited)................ 3
Consolidated Statements of Income
Three Months and Six Months Ended March 31, 2000 and 1999 (unaudited).. 4
Consolidated Statements of Comprehensive Income
Three Months and Six Months Ended March 31, 2000 and 1999 (unaudited).. 5
Consolidated Statement of Stockholders' Equity
Six Months Ended March 31, 2000 (unaudited)............................ 6
Consolidated Statements of Cash Flows
Six Months Ended March 31, 2000 and 1999 (unaudited)................... 7
Notes to Consolidated Financial Statements............................. 8
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------ -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 8,056,522 $ 42,242,161
Investments:
Affiliated companies 4,522,425 4,522,425
Trading securities, at market 30,401,078 11,117,556
Available-for-sale securities, at market 80,101,321 76,474,251
Held-to-maturity securities, at amortized cost 1,500,729 1,499,914
Accrued interest on investments 1,139,959 1,062,327
------------- -------------
Total cash and investments 125,722,034 136,918,634
Real estate contracts and mortgage notes receivable, net 124,609,664 119,683,515
Other receivable investments, net 31,910,710 21,157,832
Real estate held for sale, net 4,666,374 2,654,284
Deferred costs, net 11,287,809 11,553,751
Deferred Income taxes - 1,100,986
Other assets, net 1,477,946 2,046,957
------------- -------------
TOTAL ASSETS $299,674,537 $295,115,959
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Annuity reserves $194,486,341 $201,331,111
Investment certificates 74,480,039 71,806,904
Debt payable 282,066 279,792
Accounts payable and accrued expenses 1,392,735 1,722,984
Payables to affiliates, net 1,576,458 151,077
Income taxes payable 665,013 719,136
------------- -------------
TOTAL LIABILITIES 272,882,652 276,011,004
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $10 par value, 220,005 and 155,747 shares 2,200,053 1,557,469
issued and outstanding (liquidation preference $22,000,530
and $15,574,690)
Common stock, $10 par value, 10,000 shares issued and 100,000 100,000
outstanding
Additional paid-in capital 17,448,912 11,988,926
Accumulated other comprehensive loss (1,817,779) (1,938,750)
Retained earnings 8,860,699 7,397,310
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 26,791,885 19,104,955
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $299,674,537 $295,115,959
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Annuity fees and charges $ 32,101 $ 30,928 $ 98,541 $ 52,680
Interest on receivables 3,709,929 3,072,395 7,558,582 6,413,366
Earned discounts on receivables 1,077,229 1,015,610 1,832,493 1,952,872
Other investment income 2,291,996 1,683,398 4,602,953 2,599,274
Dividends 61,958 55,030 120,024 102,389
Real estate sales 796,941 978,610 2,219,874 1,827,676
Fees, commissions, service and other income 2,687,079 926,489 3,950,623 1,813,796
Gains on investments, net 3,303,971 102,676 3,590,559 49,454
Gains (losses) on sales of receivables, net (6,867) 487,044 293,656 1,978,730
----------- --------- ---------- ----------
TOTAL REVENUES 13,954,337 8,352,180 24,267,305 16,790,237
----------- --------- ---------- ----------
EXPENSES
Annuity benefits 2,808,598 2,380,524 5,761,831 4,908,194
Interest expense 1,644,703 1,412,102 3,289,924 2,729,963
Cost of real estate sold 718,195 1,014,061 2,124,317 1,846,417
Provision for losses on real estate assets 369,620 650,162 587,511 1,167,951
Provision for losses on other assets 75,000 50,000 450,000 50,000
Salaries and employee benefits 651,692 588,803 1,282,789 1,191,662
Commissions to agents 2,751,709 796,573 4,032,053 2,855,896
Other operating and underwriting expenses 615,945 792,261 1,535,992 1,588,802
(Increase) decrease in capitalized deferred costs, 146,462 71,881 288,666 (1,235,855)
net of amortization
---------- ---------- ---------- ----------
TOTAL EXPENSES 9,781,924 7,756,367 19,353,083 15,103,030
---------- ---------- ---------- ----------
Income before income taxes 4,172,413 595,813 4,914,222 1,687,207
Income tax provision (1,242,676) (29,871) (1,552,732) (256,824)
---------- ---------- ---------- ----------
NET INCOME 2,929,737 565,942 3,361,490 1,430,383
Preferred stock dividends (480,439) (165,020) (898,101) (303,071)
---------- ---------- ---------- ----------
Income applicable to common stockholder $ 2,449,298 $ 400,922 $ 2,463,389 $ 1,127,312
========== ========== ========== ==========
Basic and diluted income per share applicable to
common stockholder $ 244.93 $ 40.09 $ 246.34 $ 112.73
Weighted average number of shares of common stock
outstanding 10,000 10,000 10,000 10,000
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
----------- --------- ---------- -----------
<S> <C> <C> <C> <C>
NET INCOME $2,929,737 $ 565,942 $3,361,490 $1,430,383
OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized gains (losses) on investments 997,793 (921,490) 183,290 (887,908)
Less deferred income tax provision (benefit) 339,250 (306,559) 62,319 (301,890)
---------- --------- ---------- ----------
Net other comprehensive income (loss) 658,543 (614,931) 120,971 (586,018)
---------- --------- ---------- ----------
Comprehensive income (loss) $3,588,280 $ (48,989) $3,482,461 $ 844,365
========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Preferred Common Paid-In Comprehensive Retained
Stock Stock Capital Loss Earnings Total
----------- ----------- -------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1999 $1,557,469 $100,000 $11,988,926 $ (1,938,750) $ 7,397,310 $ 19,104,955
NET INCOME 3,361,490 3,361,490
Net Change in unrealized
gains on investments, net
of taxes 120,971 120,971
Cash dividends, common (1,000,000) (1,000,000)
Cash dividends, preferred
(variable rate) (898,101) (898,101)
Redemption and retirement
of preferred stock (6,907) (62,167) (69,074)
Sale of variable rate
preferred stock, net 649,491 5,522,153 6,171,644
---------- --------- ------------ ------------- ------------ ------------
BALANCE, MARCH 31, 2000 $2,200,053 $100,000 $17,448,912 $ (1,817,779) $ 8,860,699 $26,791,885
========== ========= ============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-6-
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended March 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,361,490 $ 1,430,383
Adjustments to reconcile net income to net cash from operating
activities:
Acquisition of trading securities, net of maturities (21,917,484) (22,497,906)
Proceeds from sales of trading securities 6,753,769 -
Earned discounts on receivables (1,832,493) (1,952,872)
Gains on investments, net (3,590,559) (49,454)
Gains on sales of receivables, net (293,656) (1,978,730)
Losses (gains) on sales of real estate (95,557) 18,741
Provision for losses on real estate assets 587,511 1,167,951
Provision for losses on other assets 450,000 50,000
Depreciation and amortization 1,833,435 1,429,512
Deferred income tax provision (benefit) 1,280,459 (356,572)
Changes in assets and liabilities:
Annuity reserves 5,657,323 4,904,460
Compound and accrued interest on investment certificates 873,394 710,771
and debt payable
Accrued interest on real estate contracts and mortgage (418,529) (3,606)
notes receivable
Deferred cost, net (1,111,334) (2,325,855)
Accounts payable and accrued expense including receivable 1,425,381 9,703,623
from/payable to affiliates, net
Other, net (312,485) (556,742)
----------- -----------
NET CASH FROM OPERATING ACTIVITIES (7,349,335) (10,306,296)
----------- -----------
Cash flows from investing activities:
Proceeds from sales of available-for-sale investments 14,246,640 9,021,773
Purchase of available-for-sale investments (19,880,467) (63,823,069)
Proceeds from investment maturities 1,753,871 796,259
Principal payments on real estate contracts and mortgage notes 30,572,342 14,363,747
and other receivables
Purchase of real estate contracts and mortgage notes and other (53,698,920) (54,689,405)
receivables
Proceeds from real estate sales 2,219,874 1,320,692
Additions to real estate held for sale (266,124) (645,575)
Proceeds from sale of receivables 5,148,435 59,209,366
----------- -----------
NET CASH FROM INVESTING ACTIVITIES (19,904,349) (34,446,212)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts from annuity products 14,273,603 15,467,290
Withdrawals of annuity products (15,822,136) (6,475,930)
Redemption and retirement of preferred stock (17,572)
(69,074)
Proceeds from issuance of investment certificates 6,418,347 11,985,933
Repayment of investment certificates (4,618,607) (4,028,415)
Repayment to banks and others (3,416) (523)
Debt issuance costs (430,655) (590,724)
Issuance of preferred stock 6,171,644 2,211,303
Reinsurance of annuity products to (from) reinsurers, net (10,953,560) 30,107,195
Cash dividends (1,898,101) (303,071)
----------- -----------
NET CASH FROM FINANCING ACTIVITIES (6,931,955) 48,355,486
----------- -----------
Net change in cash and cash equivalents (34,185,639) 3,602,978
Cash and cash equivalents, beginning of period 42,242,161 14,168,191
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,056,522 $ 17,771,169
=========== ===========
NON CASH INVESTING AND FINANCING
ACTIVITIES OF COMPANY:
Real estate acquired through foreclosure $ 3,949,886 $ 1,856,644
Transfer of securities from trading to available-for-sale - 16,716,534
Assumption of other debt payable in conjunction with purchase - 16,203
of real estate contracts and mortgage notes receivable
Receivables originated to facilitate the sale of real estate - 506,984
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-7-
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO 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, 2000, the results of
operations for the three month and six month periods ended March 31, 2000
and 1999 and changes in cash flows for the six month periods ended March
31, 2000 and 1999. The results of operations for the three month and six
month periods ended March 31, 2000 and 1999 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, 1999 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 1999 Form 10-K.
2. The principal amount of receivables as to which payments were in arrears
more than three months was $8,069,000 at March 31, 2000 and $7,747,000 at
September 30, 1999.
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.
-8-
<PAGE>
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.
6. The Company principally operates in three industry segments which
encompasses: (1) the investing in real estate contracts and mortgage notes
receivable, other receivables and investment securities with funds
generated from issuance of investment certificates and preferred stock; (2)
annuity operations; and (3) a property development division, which provides
services related to the selling, marketing, designing, subdividing and
coordinating activities of real estate development properties.
Information about the Company's separate business segments and in total as
of and for the quarter ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
As of and for the quarter ended March 31, 2000
------------------------------------------------------------------------------
Property
Annuity Development
Investing Operations Operations Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 7,650,855 $ 5,741,573 $561,909 $ 13,954,337
Income (loss) from operations 2,326,981 1,916,257 (70,825) 4,172,413
Identifiable assets, net 63,492,527 236,079,255 102,755 299,674,537
Depreciation and amortization 198,762 712,974 4,426 916,162
Capital expenditures - 4,739 8,108 12,847
</TABLE>
<TABLE>
<CAPTION>
As of and for the quarter ended March 31, 1999
---------------------------------------------------------------------------------
Property
Annuity Development
Investing Operations Operations Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 3,202,390 $ 4,709,824 $439,966 $ 8,352,180
Income (loss) from operations (1,010,886) 1,454,406 152,293 595,813
Identifiable assets, net 45,670,072 214,537,115 285,947 260,493,134
Depreciation and amortization 173,981 987,097 3,833 1,164,911
Capital expenditures 13,652 3,200 2,067 18,919
</TABLE>
-9-
<PAGE>
Information about the Company's separate business segments and in total as of
and for the six months ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
As of and for the six months ended March 31, 2000
------------------------------------------------------------------------------
Property
Annuity Development
Investing Operations Operations Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $12,045,148 $ 11,135,432 $1,086,725 $ 24,267,305
Income (loss) from operations 3,613,028 1,407,131 (105,937) 4,914,222
Identifiable assets, net 63,492,527 236,079,255 102,755 299,674,537
Depreciation and amortization 419,578 1,405,233 8,624 1,833,435
Capital expenditures - 18,641 8,806 27,447
</TABLE>
<TABLE>
<CAPTION>
As of and for the six months ended March 31, 1999
-----------------------------------------------------------------------------------
Property
Annuity Development
Investing Operations Operations Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 6,974,684 $ 8,889,954 $925,599 $ 16,790,237
Income (loss) from operations (1,161,605) 2,741,680 107,132 1,687,207
Identifiable assets, net 45,670,072 214,537,115 285,947 260,493,134
Depreciation and amortization 327,793 1,094,144 7,575 1,429,512
Capital expenditures 13,652 5,932 38,074 57,658
</TABLE>
-10-
<PAGE>
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 Second Quarter Transactions:
The Company had no significant or unusual transactions during the quarter
ended March 31, 2000.
Financial Condition and Liquidity:
As of March 31, 2000, the Company had cash or cash equivalents of
approximately $8.1 million and liquid investments (trading or available-for-sale
securities) of $110.5 million compared to $42.2 million and $87.6 million at
September 30, 1999. 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, 2000, including held-to-maturity securities and investments in
affiliates, were $125.7 million as compared to $136.9 million at September 30,
1999. During the six month period ended March 31, 2000, approximately $7.3
million was used in operating activities. Funds used in investing activities of
$19.9 million were primarily the result of sale proceeds and collections of
receivables of $35.7 million, proceeds from the sale of real estate of $2.2
million and sales and maturities of investments of $16.0 million, being exceeded
by the $53.7 million of new receivable acquisitions, additions to real estate
held of $0.3 million and purchase of available-for-sale securities of $19.9
million. Funds used in financing activities of $6.9 million were primarily the
result of the net outflow of ceded annuity products with reinsurers of $11.0
million, $1.5 million net cash outflow from annuity products, cash dividends of
$1.9 million and other debt issue costs of $0.4 million which exceeded the cash
inflow, net of redemptions, of $6.1 million from the sale of preferred stock and
reinvested dividends and a net inflow from investment certificate sales less
maturities of $1.8 million.
The receivable portfolio increased $15.7 million to $156.5 million at March
31, 2000 from $140.8 million at September 30,
-11-
<PAGE>
1999. For the six months ended March 31, 2000, the increase was primarily the
result of the acquisition of receivables of $53.7 million which exceeded the
principal collections on receivables of $30.6 million, a reduction due to
foreclosed receivables of $3.9 million and a reduction for the cost basis of
receivables sold of $4.9 million.
Real estate held for sale increased $2.0 million to $4.7 million at March
31, 2000 from $2.7 million at September 30, 1999. For the six months ended March
31, 2000, the real estate additions of $4.2 million, including $3.9 million of
foreclosed receivables, were offset by the cost of real estate sold of $2.1
million.
Annuity policy reserves decreased $6.8 million to $194.5 million at March
31, 2000 from $201.3 million at September 30, 1999. For the six months ended
March 31, 2000, the decrease resulted primarily from $12.5 million net cash
outflows from annuity products, including reinsurance transactions, which
exceeded credited earnings of $5.7 million.
Investment certificates outstanding increased $2.7 million to $74.5 million
at March 31, 2000 from $71.8 million at September 30, 1999. For the six months
ended March 31, 2000, net cash inflow resulted from compound and accrued
interest of $0.9 million and from issuances less maturities of investment
certificates of $1.8 million. Additionally, the Company had cash inflow, net of
redemptions, of approximately $6.1 million from the sale of preferred stock and
reinvestment of preferred stock dividends during the six months ended March 31,
2000.
Total assets were $299.7 million at March 31, 2000 compared to $295.1
million at September 30, 1999. Total stockholders' equity was $26.8 million or
8.9% of total assets at March 31, 2000 compared to $19.1 million or 6.5% of
total assets at September 30, 1999. At March 31, 2000, the Company had net
unrealized losses on available-for-sale securities in the amount of $1.8 million
as compared to net unrealized losses of $1.9 million at September 30, 1999. Net
unrealized losses on available-for-sale securities are presented as a component
of accumulated other comprehensive loss in stockholders' equity.
Results of Operations:
Six Months Ended March 31, 2000 Compared to Six Months Ended March 31, 1999
The Company recorded net income before preferred stock dividends for the
six months ended March 31, 2000 of approximately $3.4 million compared to $1.4
million in the prior
-12-
<PAGE>
year's similar period. Comparing the current year's six month period with the
prior year's similar period, the increase in net income is primarily due to an
increase of $3.5 million in net gains on investments, an increase of $1.7
million in net interest spread, and an increase of $2.1 million in fees,
commissions and service income. These increases were partially offset by a
decrease of $1.7 million in net gains on sales of receivables and a net increase
of $2.7 million in other operating expenses, salaries, commissions and benefits
after related adjustments for deferred acquisition costs.
For the six month period ended March 31, 2000, the Company reported a
positive spread on its interest sensitive assets and liabilities of $5.0 million
as compared to $3.4 million in the prior year's similar period. The increase was
primarily the result of higher returns on earning assets.
During the six months ended March 31, 2000, the Company realized net gains
on sales of receivables of $0.3 million as compared to $2.0 million in the prior
year's similar period. The current year gains resulted primarily from sales of
real estate receivables to affiliates, while in the prior period, the Company
participated in a real estate receivable securitization in November 1998 and the
securitization of structured settlements in December 1998.
During the six months ended March 31, 2000, the Company realized net gains
on investments of approximately $3.6 million, including mark-to-market
adjustments on trading securities, compared to net gains of approximately
$49,000 in the prior year's similar period. The gains in the current period were
primarily the result of $4.7 million in mark-to-market gains, which exceeded
$1.1 million of realized losses on the sale of investments. The mark-to-market
gains in the current period resulted from investments that the Company has made
in certain limited partnership interests. The limited partnerships generally
invest funds in both publicly and privately traded small and microcapitalization
equity securities. During the current period, the value of the equity securities
increased, thereby increasing the value of the Company's investment. The prior
year's gain includes some mark-to-market losses, as higher interest rates and
increased spreads to treasuries decreased the valuation of certain trading
securities.
During the six months ended March 31, 2000, the Company realized gains of
$96,000 on sales of $2.2 million of real estate as compared to losses of $19,000
on sales of $1.8 million in the prior year's similar period. It is the policy
of management to actively market real estate in order to return the investment
to an earning asset.
-13-
<PAGE>
In the six months ended March 31, 2000, the Company made provisions for
losses on real estate assets and other assets of approximately $0.6 million and
$0.5 million, respectively, as compared to $1.2 million and $50,000,
respectively, in the prior year's similar 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 six months ended March 31, 2000, the Company has incurred increases
of approximately $2.7 million in other operating expenses, salaries, commissions
and benefits after related adjustments for deferred acquisition costs. In
addition to the expense increase, the Company has recorded an increase in fee,
service and commission income of approximately $2.1 million with the current
year revenues at $4.0 million compared to $1.8 million in the prior year
primarily due to an increase in the average receivables balances.
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
The Company recorded net income before preferred stock dividends for the
three months ended March 31, 2000 of approximately $2.9 million compared to $0.6
million in the prior year's similar period. Comparing the current year's three
month period with the prior year's similar period, the increase in net income is
primarily due to an increase of $3.2 million in net gains on investments, an
increase of $0.6 million in net interest spread, and an increase of $1.8 million
in fees, commissions and service income. These increases were partially offset
by a decrease of $0.5 million in net gains on sales of receivables and a net
increase of $1.9 million in other operating expenses, salaries, commissions and
benefits after related adjustments for deferred acquisition costs.
For the three month period ended March 31, 2000, the Company reported a
positive spread on its interest sensitive assets and liabilities of $2.7 million
as compared to $2.0 million in the prior year's similar period. The increase was
primarily the result of higher returns on earning assets.
During the three months ended March 31, 2000, the Company realized a slight
loss on the sale of receivables as compared to a gain of $0.5 million in the
prior year's similar period. The prior period gain resulted primarily from
sales of real estate receivables to affiliates.
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<PAGE>
During the three months ended March 31, 2000, the Company realized net
gains on investments of approximately $3.3 million, including mark-to-market
adjustments on trading securities, compared to net gains of approximately
$103,000 in the prior year's similar period. The gains in the current period
were primarily the result of $3.2 million in mark-to-market gains and $0.1
million of realized losses on the sale of investments. The mark-to-market gains
in the current period resulted from investments that the Company has made in
certain limited partnership interests. The limited partnerships generally invest
funds in both publicly and privately traded small and microcapitalization equity
securities. During the current period, the value of the equity securities
increased, thereby increasing the value of the Company's investment.
During the three months ended March 31, 2000, the Company realized gains of
$79,000 on sales of $0.8 million of real estate as compared to losses of $35,000
on sales of $1.0 million in the prior year's similar period. It is the policy
of management to actively market real estate in order to return the investment
to an earning asset.
In the three months ended March 31, 2000, the Company made provisions for
losses on real estate assets and other assets of approximately $0.4 million and
$75,000, respectively, as compared to $0.7 million and $50,000, respectively, in
the prior year's similar 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 three months ended March 31, 2000, the Company has incurred
increases of approximately $1.9 million in other operating expenses, salaries,
commissions and benefits after related adjustments for deferred acquisition
costs. In addition to the expense increase, the Company has recorded an
increase in fee, service and commission income of approximately $1.8 million
with the current year revenues at $2.7 million compared to $0.9 million in the
prior year primarily due to an increase in the average receivables balances.
New Accounting Rules:
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
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<PAGE>
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 adopted this standard
effective October 1, 1999 with no material effect on its consolidated financial
statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 provides guidance
on accounting for the costs of computer software by identifying the
characteristics of internal-use software. The Company adopted this standard
effective October 1, 1999 with no 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 Effective Date of SFAS 133" ("SFAS No. 137") was issued.
SFAS No. 137 amends SFAS No. 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.
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.
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<PAGE>
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 established a Year 2000 task force which has
developed an action plan for addressing issues related to the Year 2000. The
plan, with the exception of the contingency plan, was completed by September 30,
1999. The contingency plan, including rollover planning was completed by
December 1, 1999, but has continued to be revised thereafter as needed in order
to maintain an effective contingency plan. The action plan included 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 included a timeline for the completion of each of the phases and
components of the work within each phase. Many of the different phases had
overlapping timelines and, therefore, progressed simultaneously. The Year 2000
task force generally met weekly to coordinate its efforts as well as to monitor
progress.
The Consolidated Group completed the testing of its internally supported
software applications and its hardware.
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<PAGE>
Testing did not produce any results which were not able to be resolved. Newly
acquired or upgraded software, hardware and facilities systems will continue to
be tested as deemed necessary.
The Consolidated Group requested 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 were identified as higher priority were tested for
compliance, where testing is possible. The Consolidated Group has not received
any indication from any third party that a mission critical system or service
was not Year 2000 compliant.
Expected Costs of Remediation
Prior to fiscal 1998, the Consolidated Group did not track Year 2000
related costs. The Consolidated Group and its affiliates incurred $1.4 million
in Year 2000 related costs through December 31, 1999. The Consolidated Group
does not believe that any remaining remediation costs will be significant. 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;
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<PAGE>
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 developed a contingency plan which included plans for
mission critical items as the first and top priority. Where appropriate and
feasible, the plan also addressed alternatives for internally developed systems
as well as externally developed ones, and included steps to implement transition
to an alternative system. The plan included trigger dates for implementing
alternative solutions prior to the Year 2000, where system testing or third
party documentation indicates that a system was not and would 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 "asset sensitive" position in that its
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
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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 Consolidated Group believes that there has not been a material change
in its market risk since the end of its last fiscal year.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or threatened
against Summit Securities, Inc. and its subsidiaries or to which its property is
subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
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
3.01. Articles of Incorporation of the Company (Exhibit 3(a) to
Registration No. 3-36775).
3.02. Bylaws of the Company (Exhibit 3(b) to Registration No.
33-36775).
4.01. 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).
4.02. 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).
4.03. 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).
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<PAGE>
4.04. Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-1
(Exhibit 4(c) to Registration No. 33-57619).
4.05. Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock Series S-2
(Exhibit 4(c) to Registration No. 333-115).
4.06. 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).
4.07. 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).
10.01. 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).
10.02. 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).
10.03. 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).
10.04. 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.
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<PAGE>
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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed this 15th day of May 2000 on
its behalf by the undersigned, thereunto duly authorized.
SUMMIT SECURITIES, INC.
/s/ TOM TURNER
--------------------------------------
Tom Turner
President/Director
/s/ JULIE HANLEY
--------------------------------------
Julie Hanley
Principal Accounting Officer
Principal Financial Officer
-24-
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,057
<SECURITIES> 117,666
<RECEIVABLES> 160,123
<ALLOWANCES> 3,603
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 299,675
<CURRENT-LIABILITIES> 0
<BONDS> 74,480
100
0
<COMMON> 2,200
<OTHER-SE> 24,492
<TOTAL-LIABILITY-AND-EQUITY> 299,675
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