<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 June 30, 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 /X/ 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, 2000.
<PAGE>
SUMMIT SECURITIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
------- --------------------
Consolidated Balance Sheets
As of June 30, 2000 and September 30, 1999 (unaudited)
Consolidated Statements of Operations
Three Months and Nine Months Ended June 30, 2000 and 1999 (unaudited)
Consolidated Statements of Comprehensive Income (Loss)
Three Months and Nine Months Ended June 30, 2000 and 1999 (unaudited)
Consolidated Statement of Stockholders' Equity
Nine Months Ended June 30, 2000 (unaudited)
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2000 and 1999 (unaudited)
Notes to Consolidated Financial Statements
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
------- --------------------
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 9,616,869 $ 42,242,161
Investments:
Affiliated companies 4,522,425 4,522,425
Trading securities, at market 24,404,767 11,117,556
Available-for-sale securities, at market 72,087,478 76,474,251
Held-to-maturity securities, at amortized cost 4,609,425 1,499,914
Accrued interest on investments 1,079,609 1,062,327
------------- -------------
Total cash and investments 116,320,573 136,918,634
Real estate contracts and mortgage notes receivable, net 145,887,902 109,683,515
Other receivable investments, net 30,202,501 31,157,832
Real estate held for sale, net 5,540,170 2,654,284
Deferred costs, net 11,252,843 11,553,751
Deferred Income taxes 2,032,126 1,100,986
Other assets, net 1,347,555 2,046,957
------------- -------------
TOTAL ASSETS $312,583,670 $295,115,959
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Annuity reserves $198,263,041 $201,331,111
Investment certificates 72,949,260 71,806,904
Debt payable 284,919 279,792
Other debt payable 12,020,183 -
Accounts payable and accrued expenses 2,068,236 1,722,984
Payables to affiliates, net 1,328,429 151,077
Income taxes payable - 719,136
------------- -------------
TOTAL LIABILITIES 286,914,068 276,011,004
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $10 par value, 256,497 and 155,747 shares
issued and outstanding (liquidation preference
$25,649,720 and $15,574,690) 2,564,972 1,557,469
Common stock, $10 par value, 10,000 shares issued and 100,000 100,000
outstanding
Additional paid-in capital 20,538,257 11,988,926
Accumulated other comprehensive loss (4,847,772) (1,938,750)
Retained earnings 7,314,145 7,397,310
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 25,669,602 19,104,955
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $312,583,670 $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 OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Annuity fees and charges $ 70,060 $ 46,052 $ 168,601 $ 98,732
Interest on receivables 3,851,430 3,075,919 11,410,012 9,489,285
Earned discounts on receivables 1,295,665 829,273 3,128,158 2,782,145
Other investment income 2,244,925 2,096,802 6,847,878 4,696,076
Dividends 58,650 51,477 178,674 153,866
Real estate sales 504,988 1,063,133 2,724,862 2,890,809
Fees, commissions, service and other income 2,044,920 999,153 5,995,543 2,812,949
Gains (losses) on investments, net (2,449,605) (179,436) 1,140,954 (129,982)
Gains on sales of receivables, net 51,525 9,202 345,181 1,987,932
----------- ---------- ----------- -----------
TOTAL REVENUES 7,672,558 7,991,575 31,939,863 24,781,812
----------- ---------- ----------- -----------
EXPENSES
Annuity benefits 2,850,445 2,721,213 8,612,276 7,629,407
Interest expense 1,721,884 1,525,892 5,011,808 4,255,855
Cost of real estate sold 544,803 1,023,788 2,669,120 2,870,205
Provision (recoveries) for losses on real estate
assets (247,894) 69,882 339,617 1,237,833
Provision for losses on other assets 388,674 50,000 838,674 100,000
Salaries and employee benefits 812,655 608,822 2,095,444 1,800,484
Commissions to agents 2,351,224 1,139,306 6,383,277 3,995,202
Other operating and underwriting expenses 948,379 949,011 2,484,371 2,537,813
(Increase) decrease in capitalized deferred costs,
net of amortization (45,290) (141,465) 243,376 (1,377,320)
----------- ---------- ----------- -----------
TOTAL EXPENSES 9,324,880 7,946,449 28,677,963 23,049,479
----------- ---------- ----------- -----------
Income (loss) before income taxes (1,652,322) 45,126 3,261,900 1,732,333
Income tax benefit (provision) 626,621 60,513 (926,111) (196,311)
----------- ---------- ----------- -----------
NET INCOME (LOSS) (1,025,701) 105,639 2,335,789 1,536,022
Preferred stock dividends (520,853) (225,045) (1,418,954) (528,116)
----------- ---------- ----------- -----------
Income (loss) applicable to common stockholder $(1,546,554) $ (119,406) $ 916,835 $ 1,007,906
=========== ========== =========== ===========
Basic and diluted income (loss) per share applicable
to common stockholder $ (154.66) $ (11.94) $ 91.68 $ 100.79
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 (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $(1,025,701) $ 105,639 $ 2,335,789 $ 1,536,022
OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized gains (losses) on
investments (4,590,899) (863,064) (4,407,609) (1,750,972)
Less deferred income tax provision (benefit) (1,560,906) (293,441) (1,498,587) (595,331)
----------- --------- ----------- -----------
Net other comprehensive income (loss) (3,029,993) (569,623) (2,909,022) (1,155,641)
----------- --------- ----------- -----------
Comprehensive income (loss) $(4,055,694) $(463,984) $ (573,233) $ 380,381
=========== ========= =========== ===========
</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 2,335,789 2,335,789
Net change in unrealized gains (losses)
on investments, net of taxes (2,909,022) (2,909,022)
Cash dividends, common (1,000,000) (1,000,000)
Cash dividends, preferred (variable
rate) (1,418,954) (1,418,954)
Redemption and retirement of preferred
stock (10,329) (92,966) (103,295)
Sale of variable rate preferred stock,
net 1,017,832 8,642,297 9,660,129
---------- -------- ----------- ------------- ----------- -----------
BALANCE, JUNE 30, 2000 $2,564,972 $100,000 $20,538,257 $(4,847,772) $ 7,314,145 $25,669,602
========== ======== =========== ============= =========== ===========
</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>
Nine Months Ended June 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,335,789 $ 1,536,022
Adjustments to reconcile net income to net cash from operating
activities:
Acquisition of trading securities, net of maturities (22,671,777) (22,200,845)
Proceeds from sales of trading securities 11,501,211 -
Earned discounts on receivables (3,128,158) (2,782,145)
Losses (gains) on investments, net (1,576,031) 129,982
Gains on sales of receivables, net (345,181) (1,987,932)
Gains on sales of real estate (55,742) (20,604)
Provision for losses on real estate assets 339,617 1,237,833
Provision for losses on other assets 838,674 100,000
Depreciation and amortization 2,798,234 2,255,939
Deferred income tax provision (benefit) 283,387 (599,395)
Changes in assets and liabilities:
Annuity reserves 8,434,473 7,623,265
Compound and accrued interest on investment certificates
and debt payable 802,785 922,323
Accrued interest on real estate contracts and mortgage
notes receivable (453,953) 66,969
Deferred cost, net (1,891,624) (3,097,320)
Accounts payable and accrued expense including receivable
from/payable to affiliates, net 1,177,352 9,041,561
Other, net 617,560 (940,180)
------------ ------------
NET CASH FROM OPERATING ACTIVITIES (993,384) (8,714,527)
------------ ------------
Cash flows from investing activities:
Proceeds from sales of available-for-sale investments 14,246,641 10,901,460
Purchase of available-for-sale investments (21,820,788) (66,701,993)
Purchase of held to maturity investments (3,105,250) -
Proceeds from investment maturities 6,739,985 1,394,729
Principal payments on real estate contracts and mortgage notes
and other receivables 35,762,860 16,874,462
Purchase of real estate contracts and mortgage notes and other
receivables (84,055,833) (73,109,222)
Proceeds from real estate sales 2,724,862 2,208,205
Additions to real estate held for sale (706,201) (1,193,931)
Proceeds from sale of receivables 11,155,848 63,232,544
------------ ------------
NET CASH FROM INVESTING ACTIVITIES (39,057,876) (46,393,746)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C>
Receipts from annuity products 21,394,153 22,584,357
Withdrawals of annuity products (21,893,546) (10,269,290)
Redemption and retirement of preferred stock (103,295) (18,903)
Proceeds from issuance of investment certificates 8,826,711 19,500,533
Repayment of investment certificates (8,487,140) (7,174,861)
Repayment to banks and others (3,014) (792)
Debt issuance costs (566,110) (927,349)
Issuance of preferred stock 9,660,129 5,431,500
Reinsurance of annuity products to (from) reinsurers, net (11,003,149) 32,513,524
Cash dividends (2,418,954) (528,116)
Increase in other debt borrowings 12,020,183 -
------------ ------------
NET CASH FROM FINANCING ACTIVITIES 7,425,968 61,110,603
------------ ------------
Net change in cash and cash equivalents (32,625,292) 6,002,330
Cash and cash equivalents, beginning of period 42,242,161 14,168,191
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,616,869 $ 20,170,521
============ ============
NON CASH INVESTING AND FINANCING
ACTIVITIES OF COMPANY:
Real estate acquired through foreclosure $ 4,345,870 $ 2,766,237
Transfer of securities from trading to available-for-sale - 16,716,534
Assumption of other debt payable in conjunction with purchase
of real estate contracts and mortgage notes receivable - 16,203
Receivables originated to facilitate the sale of real estate - 682,604
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
8
<PAGE>
SUMMIT SECURITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all
adjustments necessary to present fairly the financial position of Summit
Securities, Inc. and subsidiaries (the "Company") as of June 30, 2000, the
results of operations for the three and nine months ended June 30, 2000
and 1999 and the cash flows for the nine months ended June 30, 2000 and
1999. The results of operations for the nine months ended June 30, 2000 and
1999 are not necessarily indicative of the results to be expected for the
full year. 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 $11,072,000 at June 30, 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.
9
<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 June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
As of and for the quarter ended June 30, 2000
----------------------------------------------------------------------------------
Property
Annuity Development
Investing Operations Operations Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,151,889 $ 5,980,757 $ 539,912 $ 7,672,558
Income (loss) from operations (2,112,166) 671,823 (211,979) (1,652,322)
Identifiable assets, net 61,223,413 251,217,481 142,776 312,583,670
Depreciation and amortization 222,646 737,671 4,482 964,799
Capital expenditures - - - -
</TABLE>
<TABLE>
<CAPTION>
As of and for the quarter ended June 30, 1999
----------------------------------------------------------------------------------
Property
Annuity Development
Investing Operations Operations Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 2,866,850 $ 4,759,091 $ 365,634 $ 7,991,575
Income (loss) from operations (303,257) 630,593 (282,210) 45,126
Identifiable assets, net 49,335,910 226,853,907 223,158 276,412,975
Depreciation and amortization 190,326 632,206 3,895 826,427
Capital expenditures 2,253 2,150 1,065 5,468
</TABLE>
10
<PAGE>
Information about the Company's separate business segments and in total as of
and for the nine months ended June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
As of and for the nine months ended June 30, 2000
----------------------------------------------------------------------------------
Property
Annuity Development
Investing Operations Operations Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $13,197,037 $ 17,116,189 $1,626,637 $ 31,939,863
Income (loss) from operations 1,500,862 2,078,954 (317,916) 3,261,900
Identifiable assets, net 61,223,413 251,217,481 142,776 312,583,670
Depreciation and amortization 642,224 2,142,904 13,106 2,798,234
Capital expenditures - 18,641 8,806 27,447
</TABLE>
<TABLE>
<CAPTION>
As of and for the nine months ended June 30, 1999
----------------------------------------------------------------------------------
Property
Annuity Development
Investing Operations Operations Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 9,841,534 $ 13,649,045 $1,291,233 $ 24,781,812
Income (loss) from operations (1,464,862) 3,372,273 (175,078) 1,732,333
Identifiable assets, net 49,335,910 226,853,907 223,158 276,412,975
Depreciation and amortization 518,119 1,726,350 11,470 2,255,939
Capital expenditures 15,905 8,082 39,139 63,126
</TABLE>
11
<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.
Financial Condition and Liquidity:
As of June 30, 2000, the Company had cash or cash equivalents of
approximately $9.6 million and liquid investments (trading or available-for-sale
securities) of $96.5 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 June 30, 2000, including held-to-maturity securities and investments in
affiliates, were $116.3 million as compared to $136.9 million at September 30,
1999. During the nine month period ended June 30, 2000, approximately $1.0
million was used in operating activities. Funds used in investing activities of
$39.1 million were primarily the result of sale proceeds and collections of
receivables of $46.9 million, proceeds from the sale of real estate of $2.7
million and sales and maturities of investments of $21.0 million, being exceeded
by the $84.1 million of new receivable acquisitions, additions to real estate
held of $0.7 million and purchase of available-for-sale and held to maturity
securities of $24.9 million. Funds provided from financing activities of $7.4
million were primarily the result of the cash inflow of $12.0 million increase
in other debt borrowings and inflow, net of redemptions, of $9.6 million from
the sale of preferred stock and reinvested dividends and a net inflow from
investment certificate sales less maturities of $0.3 million which exceeded the
net outflow of ceded annuity products with reinsurers of $11.0 million, $0.5
million net cash outflow from annuity products, cash dividends of $2.4 million
and other debt issue costs of $0.6 million.
12
<PAGE>
The receivable portfolio increased $35.3 million to $176.1 million at June
30, 2000 from $140.8 million at September 30, 1999. For the nine months ended
June 30, 2000, the increase was primarily the result of the acquisition of
receivables of $84.1 million which exceeded the principal collections on
receivables of $35.8 million, a reduction due to foreclosed receivables of $4.3
million and a reduction for the cost basis of receivables sold of $10.8 million.
Real estate held for sale increased $2.8 million to $5.5 million at June
30, 2000 from $2.7 million at September 30, 1999. For the nine months ended June
30, 2000, the real estate additions of $5.0 million, including $4.3 million of
foreclosed receivables, were offset by the cost of real estate sold of $2.7
million.
Annuity policy reserves decreased $3.0 million to $198.3 million at June
30, 2000 from $201.3 million at September 30, 1999. For the nine months ended
June 30, 2000, the decrease resulted primarily from $11.5 million net cash
outflows from annuity products, including reinsurance transactions, which
exceeded credited earnings of $8.4 million.
The Company has secured a line of credit agreement with the Federal Home
Loan Bank of Seattle (FHLB) through its subsidiary, Old Standard Life Insurance
Company (OSL). The collateral eligible to be used to secure the borrowing is
predefined by the FHLB and generally consists of eligible securities and
mortgage loans. Additionally, each type of collateral has a minimum pledge
requirement that ranges from 100% to 150%. At June 30, 2000 OSL had borrowed
$12.0 million to fund activities related to real estate contracts and mortgage
notes receivable.
Investment certificates outstanding increased $1.1 million to $72.9 million
at June 30, 2000 from $71.8 million at September 30, 1999. For the nine months
ended June 30, 2000, net cash inflow resulted from compound and accrued interest
of $0.8 million and from issuances less maturities of investment certificates of
$0.3 million. Additionally, the Company had cash inflow, net of redemptions, of
approximately $9.6 million from the sale of preferred stock and reinvestment of
preferred stock dividends during the nine months ended June 30, 2000.
Total assets were $312.6 million at June 30, 2000 compared to $295.1
million at September 30, 1999. Total stockholders' equity was $25.7 million or
8.2% of total assets at June 30, 2000 compared to $19.1 million or 6.5% of total
assets at September 30, 1999. At June 30, 2000, the Company had net unrealized
losses on available-for-sale securities in the amount of $4.8 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:
Nine Months Ended June 30, 2000 Compared to Nine Months Ended June 30, 1999
13
<PAGE>
The Company recorded net income before preferred stock dividends for the
nine months ended June 30, 2000 of approximately $2.3 million compared to $1.5
million in the prior year's similar period. Comparing the current year's nine
month period with the prior year's similar period, the increase in net income is
primarily due to an increase of $1.3 million in net gains on investments, an
increase of $2.7 million in net interest spread, and an increase of $3.2 million
in fees, commissions and service income. These increases were partially offset
by a decrease of $1.6 million in net gains on sales of receivables and a net
increase of $4.3 million in other operating expenses, salaries, commissions and
benefits after related adjustments for deferred acquisition costs.
For the nine month period ended June 30, 2000, the Company reported a
positive spread on its interest sensitive assets and liabilities of $7.9 million
as compared to $5.2 million in the prior year's similar period. The increase was
primarily the result of higher returns on earning assets.
During the nine months ended June 30, 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. In the prior period, the gains resulted primarily from
the Company participating directly in a real estate receivable securitization in
November 1998 and the securization of structured settlements in December 1998.
In the current period, the gains resulted primarily from sales of real estate
receivables to affiliates. The Company did not participate in any
securitizations in the current period.
During the nine months ended June 30, 2000, the Company realized net gains
on investments of approximately $1.1 million, including mark-to-market
adjustments on trading securities, compared to net losses of approximately $0.1
million in the prior year's similar period. The gains in the current period were
primarily the result of $1.9 million in mark-to-market gains, which exceeded
$0.8 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 losses includes some mark-to-market losses, as higher interest rates and
increased spreads to treasuries decreased the valuation of certain trading
securities.
During the nine months ended June 30, 2000, the Company realized gains of
$56,000 on sales of $2.7 million of real estate as compared to losses of $21,000
on sales of $2.9 million in the
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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 nine months ended June 30, 2000, the Company made provisions for
losses on real estate assets and other assets of approximately $1.1 million as
compared to $1.3 million in the prior year's similar period. The decrease in
provisions reflects the decrease in the Company's purchases of real estate
contracts and mortgage notes receivables from affiliates.
In the nine months ended June 30, 2000, the Company has incurred increases
of approximately $4.3 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 $3.2 million with the current
year revenues at $6.0 million compared to $2.8 million in the prior year
primarily due to an increase in its securities broker/dealer and real estate
property development activities.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
The Company recorded net loss before preferred stock dividends for the three
months ended June 30, 2000 of approximately $1.0 million compared to a net
income of $0.1 million in the prior year's similar period. Comparing the current
year's three month period with the prior year's similar period, the decrease in
net income is primarily due to a decrease of $2.3 million in net gains on
investments and a net increase of $1.5 million in other operating expenses,
salaries, commissions and benefits after related adjustments for deferred
acquisition costs offset by an increase of $1.1 million in net interest spread,
and an increase of $1.0 million in fees, commissions and service income.
For the three month period ended June 30, 2000, the Company reported a
positive spread on its interest sensitive assets and liabilities of $2.9 million
as compared to $1.8 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 June 30, 2000, the Company realized a gain of
$52,000 on the sale of receivables as compared to a gain of $9,000 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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During the three months ended June 30, 2000, the Company realized net
losses on investments of approximately $2.4 million, including mark-to-market
adjustments on trading securities, compared to net losses of approximately
$179,000 in the prior year's similar period. The losses in the current period
were primarily the result of $2.8 million in mark-to-market losses and $0.4
million of realized gains on the sale of investments. The mark-to-market losses
in the current period resulted primarily 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 decreased, thereby decreasing the value of the Company's
investment.
During the three months ended June 30, 2000, the Company realized losses of
$40,000 on sales of $0.5 million of real estate as compared to gains of $39,000
on sales of $1.1 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 June 30, 2000, the Company recorded provisions
for losses on real estate assets and other assets of approximately $100,000, as
compared to $100,000 in the prior year's similar period.
In the three months ended June 30, 2000, the Company has incurred increases
of approximately $1.5 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 $1.0 million with the current
year revenues at $2.0 million compared to $1.0 million in the prior year
primarily due to an increase in its securities broker/dealer and real estate
property development activities.
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 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
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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.
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
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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. 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.
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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;
inability of banks to process those payments;
failure of any of the software/hardware systems which the Consolidated
Group uses to track insurance products,
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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 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
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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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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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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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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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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed this 14th day of August 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
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