===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended: September 30, 1995
Commission file number: 811-6328
-----------
SBM CERTIFICATE COMPANY
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1671595
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
C/O ARM FINANCIAL GROUP, INC.
239 S. FIFTH STREET, 12TH FLOOR
LOUISVILLE, KENTUCKY 40202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 582-7900
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.[X] Yes [_] No
As of September 30, 1995, 250,000 shares of the registrant's common stock
were outstanding, all of which are privately owned and not traded on a public
market.
The registrant meets the conditions set forth in General Instruction H(1)
(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
Page 1 of 13 pages
<PAGE>
TABLE OF CONTENTS
Item Page
PART I. FINANCIAL INFORMATION
1. Financial Statements (Unaudited)
Condensed Balance Sheets--September 30, 1995 and
December 31, 1994.....................................................3
Condensed Statements of Income--Nine and Three
Months Ended September 30, 1995 and 1994..............................5
Condensed Statements of Cash Flows--Nine
Months Ended September 30, 1995 and 1994..............................6
Notes to Condensed Financial Statements.................................7
2. Management's Analysis of Results of Operations..........................10
PART II. OTHER INFORMATION
1. Legal Proceedings........................................................12
6. Exhibits and Reports on Form 8-K.........................................12
Signatures...............................................................13
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
SBM CERTIFICATE COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, | DECEMBER 31,
1995 | 1994
- - - - - - ------------------------------------------------------------------------------------------------- | ------------------
(Unaudited) |
<S> <C> <C>
ASSETS |
Qualified assets: |
Cash and investments: |
Investments in securities of unaffiliated issuers: |
Fixed maturities available-for-sale $ 48,209,384 | $ 37,141,729
Fixed maturities held-to-maturity -- | 13,944,234
Equity securities 778,598 | 683,089
Mortgage loans on real estate 3,856,959 | 4,271,255
Certificate loans 280,244 | 338,879
Other invested assets 648,353 | 1,110,921
Cash and cash equivalents 260,207 | 1,530,899
------------------- | -----------------
Total cash and investments 54,033,745 | 59,021,006
|
Receivables: |
Dividends and interest 509,902 | 432,469
Investment securities sold 182,716 | --
------------------- | -----------------
Total receivables 692,618 | 432,469
------------------- | -----------------
Total qualified assets 54,726,363 | 59,453,475
|
Investments in securities of unaffiliated issuers -- fixed |
maturities available-for-sale 3,102,300 | --
Deferred acquisition costs 84,645 | 309,587
Goodwill 145,175 | --
Deferred federal income taxes -- | 845,629
Other assets 112,979 | 239
------------------- | -----------------
|
Total assets $ 58,171,462 | $ 60,608,930
=================== | =================
</TABLE>
3
<PAGE>
SBM CERTIFICATE COMPANY
CONDENSED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, | DECEMBER 31,
1995 | 1994
- - - - - - -------------------------------------------------------------------------------------------------- | ----------------
(Unaudited) |
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY |
Liabilities: |
Certificate reserves: |
Fully-paid certificates $ 52,306,115 | $ 59,375,137
Installment certificates 1,127,870 | 979,878
------------------- | -----------------
Total certificate reserves 53,433,985 | 60,355,015
Deferred federal income taxes 55,818 | --
Accounts payable and other liabilities 87,635 | 66,992
------------------- | -----------------
Total liabilities 53,577,438 | 60,422,007
|
Shareholder's equity: |
Common stock 250,000 | 250,000
Additional paid-in capital 3,050,000 | 3,740,006
Net unrealized investment gains (losses) 532,650 | (4,242,659)
Retained earnings 761,374 | 439,576
------------------- | -----------------
Total shareholder's equity 4,594,024 | 186,923
------------------- | -----------------
|
Total liabilities and shareholder's equity $ 58,171,462 | $ 60,608,930
=================== | ==================
</TABLE>
See accompanying notes.
4
<PAGE>
SBM CERTIFICATE COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
- - - - - - ------------------------------------------------------------------------------------------ --------------------------------
<S> <C> <C> <C> <C>
Investment income:
Interest income from securities $ 3,197,028 $ 3,438,697 $ 1,103,909 $ 1,160,759
Interest income from mortgage loans 292,504 328,465 99,757 108,503
Other investment income 199,352 224,291 63,060 66,901
---------------------------------- --------------------------------
Total investment income 3,688,884 3,991,453 1,266,726 1,336,163
Investment expenses:
Management and investment advisory fees 333,495 387,515 65,715 127,130
Amortization of deferred acquisition costs and
renewal commissions 245,399 386,665 42,845 129,114
Amortization of goodwill 21,448 -- 16,086 --
Other expenses 116,877 131,146 47,111 37,644
---------------------------------- --------------------------------
Total investment expenses 717,219 905,326 171,757 293,888
Provision for certificate reserves 2,215,583 2,757,951 734,220 885,193
---------------------------------- --------------------------------
Net investment income before federal income taxes 756,082 328,176 360,749 157,082
Federal income tax expense (141,324) (93,000) (47,324) (47,000)
---------------------------------- --------------------------------
Net investment income 614,758 235,176 313,425 110,082
Realized investment gains 194,177 29,788 463,722 2,106
Federal income tax expense on realized
investment gains (71,102) (10,000) (177,862) (1,000)
---------------------------------- --------------------------------
Net realized investment gains 123,075 19,788 285,860 1,106
---------------------------------- --------------------------------
Net income $ 737,833 $ 254,964 $ 599,285 $ 111,188
================================== ================================
</TABLE>
See accompanying notes.
5
<PAGE>
SBM CERTIFICATE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
- - - - - - --------------------------------------------------------------------------------------------------- ------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 2,932,974 $ 3,095,262
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (29,436,747) (5,103,290)
Maturities and redemptions 1,799,645 9,623,701
Sales 30,677,072 --
Maturities and redemptions -- mortgage loans 414,296 113,892
Additions to other invested assets, net (81,200) --
Proceeds from sale of other invested assets -- 208,483
Repayments of certificate loans, net 58,635 20,924
------------------- ------------------
Cash flows provided by investing activities 3,431,701 4,863,710
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts paid to face-amount certificate holders (11,326,133) (8,796,471)
Amounts received from face-amount certificate holders 2,190,766 2,990,227
Capital contribution from SBM Life 1,500,000 --
------------------- ------------------
Cash flows used in financing activities (7,635,367) (5,806,244)
------------------- ------------------
Net change in cash and cash equivalents (1,270,692) 2,152,728
Cash and cash equivalents at beginning of period 1,530,899 2,128,330
------------------- ------------------
Cash and cash equivalents at end of period $ 260,207 $ 4,281,058
=================== ==================
</TABLE>
See accompanying notes.
6
<PAGE>
SBM CERTIFICATE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
SBM Certificate Company (the "Company"), was incorporated in 1990 for the
purpose of acquiring the face-amount certificate business of SBM Company
("SBM"). Pursuant to the terms of an agreement of assignment and assumption,
effective January 1, 1991, SBM transferred the assets constituting its
face-amount certificate business segment to the Company and the Company assumed
all of SBM's liabilities related to the face-amount certificate business.
Effective December 31, 1993, SBM transferred all of the Company's shares of
common stock to its wholly owned subsidiary, State Bond and Mortgage Life
Insurance Company ("SBM Life"), and the Company became a wholly owned subsidiary
of SBM Life.
On June 14, 1995, ARM Financial Group, Inc. ("ARM"), completed the
acquisition of substantially all of the assets and business operations of SBM,
including all of the issued and outstanding common stock of SBM's subsidiaries,
SBM Life and SBM Financial Services, Inc. ("SBM Financial Services"), and SBM's
management contracts with the State Bond group of mutual funds (the
"Acquisition"). By virtue of the Acquisition, ARM acquired control of the
Company, a wholly owned subsidiary of SBM Life. Concurrent with the Acquisition,
ARM acquired all outstanding shares of the authorized common stock of the
Company from SBM Life for a purchase price of $3.3 million.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. 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, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The accompanying unaudited condensed statements of income and the
condensed statement of cash flows for the nine months ended September 30, 1995
represent the historical results of the Company for the period prior to May 31,
1995 (the effective date of the Acquisition), combined with the results of the
Company subsequent to the Acquisition. The operating results subsequent to the
Acquisition include the effect of new accounting values assigned to invested
assets and intangibles. Combined operating results for the nine month and three
month periods ended September 30, 1995 are not necessarily indicative of those
to be expected for the full year.
For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1994.
7
<PAGE>
Certain amounts from prior periods have been reclassified to conform to the
current period presentation. These reclassifications had no effect on previously
reported net income or shareholder's equity.
2. ACQUISITION OF THE COMPANY
The Acquisition has been accounted for using the purchase method of
accounting. Under purchase accounting, the purchase price is allocated to assets
and liabilities acquired based on their respective fair values. These
allocations may be adjusted upon final determination of such values.
The following combining condensed statements of income and cash flows
present results for the five months ended May 31, 1995, prior to the
Acquisition, and the four months ended September 30, 1995, following the
Acquisition. The combined amounts agree to the accompanying statements of income
and cash flows for the nine months ended September 30, 1995.
<TABLE>
<CAPTION>
FOUR MONTHS
FIVE MONTHS | ENDED
ENDED MAY 31, | SEPTEMBER 30,
1995 | 1995 COMBINED
---------------------|-----------------------------------------------
|
|
<S> <C> <C> <C>
|
Total investment income $ 2,013,780 | $ 1,675,104 $ 3,688,884
|
Total investment expenses 511,343 | 205,876 717,219
|
Provision for certificate reserves 1,224,738 | 990,845 2,215,583
---------------------|----------------------------------------------
Net investment income before federal income taxes 277,699 | 478,383 756,082
|
Federal income tax expense (94,000) | (47,324) (141,324)
---------------------|-----------------------------------------------
Net investment income 183,699 | 431,059 614,758
|
Realized investment gains (losses) (314,000) | 508,177 194,177
|
Federal income tax benefit (expense) on realized |
investment gains and losses 106,760 | (177,862) (71,102)
---------------------|---------------------------------------------
Net income $ (23,541) | $ 761,374 $ 737,833
=====================|===============================================
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
FOUR MONTHS
FIVE MONTHS | ENDED
ENDED MAY 31, | SEPTEMBER 30,
1995 | 1995 COMBINED
--------------------|------------------------------------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 1,462,487 | $ 1,470,487 $ 2,932,974
|
CASH FLOWS PROVIDED BY (USED IN)INVESTING ACTIVITIES: |
Fixed maturity investments: |
Purchases (21,615) | (29,415,132) (29,436,747)
Maturities and redemptions 903,084 | 896,561 1,799,645
Sales 5,090,653 | 25,586,419 30,677,072
Maturities and redemptions-- mortgage loans 392,947 | 21,349 414,296
Additions to other invested assets, net (81,200) | -- (81,200)
Repayments of certificate loans, net 66,731 | (8,096) 58,635
---------------------|------------------------------------------
Cash flows provided by (used in) investing activities 6,350,600 | (2,918,899) 3,431,701
|
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: |
Amounts paid to face-amount certificate holders (7,066,042) | (4,260,091) (11,326,133)
Amounts received from face-amount certificate holders 1,926,095 | 264,671 2,190,766
Capital contribution from SBM Life 1,500,000 | -- 1,500,000
--------------------|------------------------------------------
Cash flows used in financing activities (3,639,947) | (3,995,420) (7,635,367)
--------------------|------------------------------------------
Net change in cash and cash equivalents 4,173,140 | (5,443,832) (1,270,692)
|
Cash and cash equivalents at beginning of period 1,530,899 | 5,704,039 1,530,899
--------------------|---------------------------------------------
|
Cash and cash equivalents at end of period $ 5,704,039 | $ 260,207 $ 260,207
====================|=============================================
</TABLE>
Since the Acquisition, ARM has provided certain administrative and other
services to the Company. These services include customer services; accounting,
tax and auditing; marketing and product development; functional support
services; personnel functions; administrative support services; and investment
functions. Prior to the Acquisition, these services were provided by SBM.
3. SHAREHOLDER'S EQUITY AND REGULATORY CAPITAL
The Company is subject to two principal restrictions relating to its
regulatory capital requirements. First, under the Investment Company Act of 1940
(the "1940 Act"), the Company is required to establish and maintain qualified
assets (as defined in Section 28(b) of the 1940 Act) having a value not less
than the aggregate of certificate reserves plus $250,000 ($53.7 million as of
September 30, 1995). The Company had qualified assets of $54.1 million at
September 30, 1995 (before $587,868 of unrealized pretax gains on fixed maturity
and equity securities classified as qualified investments). Second, the
Minnesota Department of Commerce ("MDC") has historically recommended to the
Company that face-amount certificate companies should maintain a ratio of
9
<PAGE>
shareholder's equity to total assets at a minimum of 5% based upon a valuation
of available-for-sale securities reflected at amortized cost for purposes of
this calculation. Under this formula, the Company's capital ratio was 7.1% at
September 30, 1995. In November 1994, based on the decline in the value of the
Company's investment portfolio, resulting from increasing interest rates in 1994
and the Company's decreasing liquidity resulting from reduced principal payments
on the Company's collateralized mortgage obligations ("CMOs") portfolio, the MDC
recommended that the Company increase its capital level. The MDC's concern was
influenced by the Company's capital ratio, calculated including the effects of
unrealized investment losses. Therefore, on March 29, 1995, SBM Life, the former
parent company of the Company, made a $1.5 million capital contribution to the
Company. As of September 30, 1995, the Company was in compliance with the MDC's
recommended capital ratio level.
ITEM 2. MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS
Nine Months Ended September 30, 1995 Compared with Nine Months Ended
September 30, 1994
The Company's results of operations are derived from the margin between
earnings on investments and amounts paid or credited on its fixed-rate
certificate deposits ("investment spread").
Net investment income for the nine months ended September 30, 1995 was
$614,758 compared to $235,176 for the same period in 1994. The increase in net
investment income is primarily due to a higher investment spread and lower
investment expenses (principally as a result of lower amortization of deferred
charges and lower management fees since the Acquisition). The annualized yield
on average cash and investments for the nine months ended September 30, 1995 and
1994 was 8.08% and 7.65%, respectively. The average annualized rate of interest
credited to certificate holders for the nine months ended September 30, 1995 and
1994 was 5.22% and 5.59%, respectively.
As a result of the increasing interest rate environment during 1994, the
Company increased the interest rates offered on new certificates issued
throughout 1994 and January of 1995. As market interest rates have decreased in
1995, the Company reduced interest rates offered on new certificates in May and
August of 1995. The Company monitors new rates against competitive products,
mainly bank certificates of deposit. Further interest credited rate adjustments
(up or down) on new certificates will be made as the Company deems necessary.
10
<PAGE>
Certificate reserves decreased 11.5% during the first nine months of 1995,
as maturities have exceeded sales and renewals. The Company believes the
decrease is mainly the result of the certificate of deposit marketplace
currently being very competitive, as many financial institutions are offering
special high rates to induce customers to open new accounts.
To improve its investment spreads, the Company added U.S. Government Agency
CMOs to its investment portfolio in 1993 and early 1994. The Company has been
able to achieve higher yields with these securities without assuming additional
credit risk as the CMOs are collateralized primarily by U.S. Government and U.S.
Government agencies. However, these securities do have additional interest rate
risk in that volatility in the interest rate market will cause the fair value of
these securities to fluctuate significantly. In addition, all mortgage-backed
securities (including CMOs) are subject to the risk that a changing interest
rate environment might cause prepayment of the underlying obligations at speeds
slower or faster than anticipated at the time of their purchase. Since the
Acquisition in June 1995, and continuing through September 1995, an initial
restructuring of the investment portfolio was performed to better match the
duration of the investment portfolio and related certificate deposits, reduce
total CMO holdings, and improve investment yields. CMOs represented 55% and 48%
of the Company's qualified assets as of June 30, 1995 and September 30, 1995,
respectively.
Realized investment gains were $194,177 and $29,788 during the nine months
ended September 30, 1995 and 1994, respectively, and $463,722 and $2,106 for the
three months ended September 30, 1995 and 1994, respectively. These realized
investment gains were interest-rate related and attributable to the on-going
management of the Company's fixed maturity securities classified as
available-for-sale which can result in period-to-period swings in realized
investment gains and losses since securities are sold during rising and falling
interest rate environments.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in no material legal or administrative
proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended September 30, 1995.
Exhibits
No exhibits are filed herewith.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 10, 1995.
SBM CERTIFICATE COMPANY
By: /s/ JOHN R. MCGEENEY
John R. McGeeney
President
By: /s/ DON W. CUMMINGS
Don W. Cummings
Controller
13
