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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended: June 30, 1996
Commission file number: 811-6268
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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 (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
As of June 30, 1996, 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.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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Item Page
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1. Financial Statements (Unaudited)
Condensed Balance Sheets--June 30, 1996 and
December 31, 1995................................................ 3
Condensed Statements of Operations--Six and Three
Months Ended June 30, 1996 and 1995.............................. 5
Condensed Statements of Cash Flows--Six Months
Ended June 30, 1996 and 1995..................................... 6
Notes to Condensed Financial Statements........................... 7
2. Management's Analysis of Results of Operations..................... 8
PART II. OTHER INFORMATION
1. Legal Proceedings................................................. 10
6. Exhibits and Reports on Form 8-K.................................. 10
Signatures........................................................ 11
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SBM CERTIFICATE COMPANY
CONDENSED BALANCE SHEETS
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JUNE 30, DECEMBER 31,
1996 1995
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(Unaudited)
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ASSETS
Qualified assets:
Cash and investments:
Investments in securities of unaffiliated issuers:
Fixed maturities available-for-sale, at fair value
(amortized cost: June 30, 1996--$51,612,356;
December 31, 1995--$53,166,600) $51,478,577 $54,486,378
Equity securities, at fair value (cost:
June 30, 1996--$435,317;
December 31, 1995--$479,817) 411,782 522,928
Certificate loans 273,351 279,463
Other invested assets 550,083 632,154
Cash and cash equivalents 3,176,260 3,900,494
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Total cash and investments 55,890,053 59,821,417
Receivables:
Dividends and interest 507,474 397,898
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Total qualified assets 56,397,527 60,219,315
Deferred acquisition costs 117,918 113,500
Goodwill 153,007 192,919
Other assets 42,948 54,203
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Total assets $56,711,400 $60,579,937
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SBM CERTIFICATE COMPANY
CONDENSED BALANCE SHEETS (CONTINUED)
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JUNE 30, DECEMBER 31,
1996 1995
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(Unaudited)
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LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Certificate reserves $51,356,898 $52,459,724
Payable for investment securities purchased 885,233 2,454,325
Deferred federal income taxes 105,135 619,148
Accounts payable and other liabilities 303,612 60,582
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Total liabilities 52,650,878 55,593,779
Shareholder's equity:
Common stock, 250,000 shares issued 250,000 250,000
Additional paid-in capital 3,050,000 3,050,000
Net unrealized gains (losses) on available-for-sale securities (157,314) 885,878
Retained earnings 917,836 800,280
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Total shareholder's equity 4,060,522 4,986,158
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Total liabilities and shareholder's equity $56,711,400 $60,579,937
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See accompanying notes.
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SBM CERTIFICATE COMPANY
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
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SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Investment income:
Interest income from securities $2,023,722 $2,093,119 $1,023,658 $1,047,529
Other investment income 99,147 329,039 49,628 161,635
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Total investment income 2,122,869 2,422,158 1,073,286 1,209,164
Investment and other expenses:
Management and investment advisory fees 128,492 229,098 62,906 100,098
Deferred acquisition cost amortization and
renewal commissions 110,949 202,554 59,971 74,319
Real estate expenses 105,168 53,470 57,547 22,359
Amortization of goodwill 39,912 5,362 19,956 5,362
Other expenses 43,105 54,978 837 38,472
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Total investment and other expenses 427,626 545,462 201,217 240,610
Interest credited on certificate reserves 1,424,164 1,481,363 707,104 745,425
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Net investment income before federal income taxes 271,079 395,333 164,965 223,129
Federal income tax expense (107,314) (94,000) (66,455) (41,000)
------------------------ ------------------------
Net investment income 163,765 301,333 98,510 182,129
Realized investment gains (losses) (57,169) (269,545) (29,836) 44,455
Federal income tax benefit (expense) on realized
investment gains and losses 10,960 106,760 5,560 (240)
------------------------ ------------------------
Net realized investment gains (losses) (46,209) (162,785) (24,276) 44,215
------------------------ ------------------------
Net income $ 117,556 $ 138,548 $ 74,234 $ 226,344
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</TABLE>
See accompanying notes.
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SBM CERTIFICATE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
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1996 1995
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CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 1,990,278 $ 1,846,381
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (19,507,276) (14,712,281)
Maturities and redemptions 3,259,392 1,063,802
Sales 15,952,438 17,224,174
Additions to other invested assets -- (81,200)
Proceeds from sale of other invested assets 102,643 399,299
Repayments of certificate loans, net 6,112 61,779
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Cash flows provided by (used in) investing activities (186,691) 3,955,573
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts paid to face-amount certificate holders (3,092,579) (7,912,944)
Amounts received from face-amount certificate holders 564,758 1,991,306
Capital contribution -- 1,500,000
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Cash flows used in financing activities (2,527,821) (4,421,638)
----------------------------
Net change in cash and cash equivalents (724,234) 1,380,316
Cash and cash equivalents at beginning of period 3,900,494 1,530,899
----------------------------
Cash and cash equivalents at end of period $ 3,176,260 $ 2,911,215
============================
</TABLE>
See accompanying notes.
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SBM CERTIFICATE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
1. BASIS OF PRESENTATION
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. Operating results for SBM Certificate Company (the "Company") for
the six months ended June 30, 1996 are not necessarily indicative of those to be
expected for the year ended December 31, 1996. 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, 1995.
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. 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, as amended (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 ($51.6
million as of June 30, 1996). The Company had qualified assets of $56.6 million
at June 30, 1996 (which excludes $0.2 million of unrealized pretax losses on
fixed maturities and equity securities classified as available-for-sale).
For purposes of determining compliance with the foregoing provisions,
qualified assets are valued in accordance with the District of Columbia
Insurance Laws (the "D.C. Laws") as required by the 1940 Act. Qualified assets
for which no provision for valuation is made in the D.C. Laws are valued in
accordance with rules, regulations, or orders prescribed by the Securities and
Exchange Commission. These values are the same as the financial statement
carrying values, except that for financial statement purposes, fixed maturities
and equity securities classified as available-for-sale are carried at fair
value. For qualified asset purposes, fixed maturities classified as available-
for-sale are valued at amortized cost and equity securities are valued at cost.
Second, the Minnesota Department of Commerce has historically recommended
to the Company that face-amount certificate companies should maintain a ratio of
shareholder's equity to total assets
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of 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 7.4% at June 30, 1996.
3. FEDERAL INCOME TAXES
Federal income taxes are different from the amount determined by
multiplying pretax earnings by the expected federal income tax rate of 35%. The
differences are primarily attributable to goodwill amortization and changes in
valuation allowances related to deferred tax assets.
ITEM 2. MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS
The Company was acquired by ARM Financial Group, Inc. ("ARM") from SBM
Company effective May 31, 1995 (the "Acquisition"). The results of operations
for the six months ended June 30, 1995 represent the historical results of the
Company for the period from January 1, 1995 to May 31, 1995 combined with the
results of operations of the Company subsequent to the Acquisition from June 1,
1995 to June 30, 1995. Historical results do not include the effect of purchase
accounting and other adjustments resulting from the Acquisition. Therefore,
results of the current period are not completely comparable with the prior
period.
Net income for the six months ended June 30, 1996 was $117,556 compared to
net income of $138,548 for the same period in 1995. Net income was essentially
flat with a decrease in net investment spread being offset by lower investment
and other expenses and lower net realized investment losses.
Net investment spread, which is the difference between investment income
and interest credited on certificate reserves, decreased to $698,705 during the
six months ended June 30, 1996 from $940,795 during the same period in 1995.
These amounts reflect the difference of 2.12% and 2.72% during the six months
ended June 30, 1996 and 1995, respectively, between the Company's annualized
investment yield on average cash and investments and the annualized average rate
credited on certificate reserves. The Company's investment income decreased to
$2.1 million from $2.4 million for the six months ended June 30, 1996 and 1995,
respectively. These amounts represent annualized investment yields of 7.61% and
7.84% on average cash and investments of $55.6 million and $60.5 million for the
six months ended June 30, 1996 and 1995, respectively. This decrease in
annualized investment yield is primarily attributable to a repositioning of the
Company's investment portfolio in December 1995. The repositioning was performed
to reduce the average duration of the investment portfolio and to minimize the
Company's exposure to changing interest rates. The Company aims to control this
exposure through the management of duration, convexity and cash flow
characteristics of its interest bearing assets and liabilities. Interest
credited on certificate reserves was $1.4 million and $1.5 million for the six
months ended June 30, 1996 and 1995, respectively. These amounts represent
annualized average rates of interest credited of 5.49% and 5.12% on average
certificate reserves of $51.6 million and $56.5 million for the six months ended
June 30, 1996 and 1995, respectively. The majority of the Company's outstanding
face-amount certificates are fixed-rate three year contracts. The Company
monitors credited interest rates for new
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and renewal issues against competitive products, mainly bank certificates of
deposit. Credited interest rate adjustments (up or down) on new certificates are
made as the Company deems necessary. New and renewal contracts issued during the
past year have crediting rates that are generally higher than contracts that
matured during that period, resulting in the overall increase in the average
credited rate.
The decrease in investment and other expenses is primarily attributable to
the decrease in management and investment advisory fees and a net decrease in
amortization, partially offset by an increase in real estate expenses.
Currently, management and investment advisory fees are computed as a percentage
of average certificate reserves and qualified assets. Such fees have been lower
since the Acquisition primarily due to ARM's lower marginal operating cost
attributable to greater economies of scale.
Realized investment losses were $57,169 and $269,545 during the six
months ended June 30, 1996 and 1995, respectively. Realized investment losses
for the first six months of 1996 were interest-rate related and attributable to
the ongoing management of the Company's fixed maturities 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. Realized investment losses for the first six months
of 1995 were interest-rate related and resulted from the sale of fixed maturity
securities in order to improve liquidity through May 31, 1995. The proceeds were
primarily used to increase the Company's short-term investment position in
anticipation of certificate maturities.
The Company primarily invests in securities with fixed maturities with
the objective of providing reasonable returns while limiting credit and
liquidity risks. The Company's investments in fixed maturities were 98%
investment grade as of June 30, 1996 and December 31, 1995 (at amortized cost).
Investment grade securities are those classified as 1 or 2 by the National
Association of Insurance Commissioners, or where such classifications are not
available, having a rating on a scale used by Standard & Poor's Corporation of
BBB- or above. Additionally, the Company's investment portfolio has minimal
exposure to real estate, mortgage loans and common equity securities, which
represent 1% of qualified assets at June 30, 1996.
Fixed maturities include mortgage-backed and asset-backed securities,
corporate securities, and U.S. Treasury securities. Mortgage-backed securities
("MBSs"), which include pass-through securities and collateralized mortgage
obligations ("CMOs") totaled $35.2 million at June 30, 1996 (at amortized cost),
representing 62.2% of total qualified assets (61.3% at December 31, 1995). The
Company's investments in CMOs, which are primarily backed by the U.S. government
or U.S. government agencies, represented 51.7% and 46.6% of the Company's
qualified assets (at amortized cost) as of June 30, 1996 and December 31, 1995,
respectively. All MBSs (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;
however, the prepayment risk associated with individual CMO structures may vary
significantly. The Company regularly evaluates its mix of CMO holdings with the
aim of reducing positions in more volatile or highly leveraged securities in
favor of the more stable or less leveraged
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CMO tranches. The ongoing management of the Company's investment portfolio is a
significant component of the Company's asset/liability management strategy. The
Company monitors three year cash flow projections with the goal of maintaining
an adequate level of liquidity for maturing certificates. The Company's
asset/liability management strategy not only allows the Company to monitor its
short-term liquidity needs but also aims to provide protection to the investment
portfolio from adverse changes in interest rates.
Certificate reserves decreased $1.1 million or 2.1% during the first six
months of 1996, as maturities and surrenders exceeded sales and renewals. The
Company believes a significant factor leading to the decrease is 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. For certificates reaching their maturity date during the six months
ended June 30, 1996 and 1995, 69% and 71%, respectively, were renewed.
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 June 30, 1996.
Exhibits
No exhibits are filed herewith.
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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 on its behalf by the
undersigned, thereunto duly authorized, on August 12, 1996.
SBM CERTIFICATE COMPANY
By: /s/ EDWARD L. ZEMAN
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Edward L. Zeman
Executive Vice President-Chief
Financial Officer (Principal Financial
Officer)
By: /s/ BARRY G. WARD
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Barry G. Ward
Controller (Principal Accounting
Officer)
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