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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: March 31, 1997
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.
515 WEST MARKET STREET
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 March 31, 1997, 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
Item Page
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PART I. FINANCIAL INFORMATION
1. Financial Statements (Unaudited)
Condensed Balance Sheets--March 31, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Operations--Three
Months Ended March 31, 1997 and 1996. . . . . . . . . 5
Condensed Statements of Cash Flows--Three
Months Ended March 31, 1997 and 1996. . . . . . . . . 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
<TABLE>
MARCH 31, DECEMBER 31,
1997 1996
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(Unaudited)
<S> <C> <C>
ASSETS
Qualified assets:
Cash and investments:
Investments in securities of unaffiliated issuers:
Fixed maturities available-for-sale, at fair value
(amortized cost: March 31, 1997-$49,458,446;
December 31, 1996-$49,863,826) $49,290,373 $50,169,361
Equity securities, at fair value (cost:
March 31, 1997-$493,912; December 31, 1996-$493,912) 530,916 544,594
Certificate loans 246,815 273,368
Other invested assets 510,244 523,083
Cash and cash equivalents 4,507,180 3,247,192
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Total cash and investments 55,085,528 54,757,598
Receivables:
Dividends and interest 421,453 533,958
Receivable for investment securities sold -- 122,570
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Total receivables 421,453 656,528
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Total qualified assets 55,506,981 55,414,126
Deferred acquisition costs 131,504 132,163
Goodwill 27,139 113,095
Other assets 73,070 66,163
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Total assets $55,738,694 $55,725,547
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</TABLE>
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SBM CERTIFICATE COMPANY
CONDENSED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
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(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Certificate reserves $49,549,779 $50,186,386
Payable for investment securities purchased 989,979 --
Deferred federal income taxes 332,840 445,419
Accounts payable and other liabilities 1,054 29,940
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Total liabilities 50,873,652 50,661,745
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 (85,195) 231,541
Retained earnings 1,650,237 1,532,261
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Total shareholder's equity 4,865,042 5,063,802
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Total liabilities and shareholder's equity $55,738,694 $55,725,547
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SEE ACCOMPANYING NOTES.
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SBM CERTIFICATE COMPANY
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Investment income:
Interest income from securities $1,033,248 $1,000,064
Other investment income 43,513 49,519
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Total investment income 1,076,761 1,049,583
Investment and other expenses:
Management and investment advisory fees 61,617 65,586
Deferred acquisition cost amortization and renewal commissions 70,297 50,978
Real estate expenses 32,117 47,621
Amortization of goodwill 19,956 19,956
Other expenses 5,995 42,268
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Total investment and other expenses 189,982 226,409
Interest credited on certificate reserves 699,987 717,060
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Net investment income before federal income taxes 186,792 106,114
Federal income tax expense (64,006) (40,859)
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Net investment income 122,786 65,255
Realized investment losses (5,372) (27,333)
Federal income tax benefit on realized investment losses 562 5,400
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Net realized investment losses (4,810) (21,933)
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Net income $ 117,976 $ 43,322
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</TABLE>
SEE ACCOMPANYING NOTES.
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SBM CERTIFICATE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 1,146,506 $ 873,050
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments available-for-sale:
Purchases (4,327,458) (13,555,339)
Maturities and redemptions 1,051,350 1,420,987
Sales 4,698,847 10,021,776
Proceeds from sales or maturities of other invested assets 839 49,379
Repayments of certificate loans, net 26,553 3,448
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Cash flows provided by (used in) investing activities 1,450,131 (2,059,749)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts paid to face-amount certificate holders (1,430,187) (1,689,159)
Amounts received from face-amount certificate holders 93,538 353,269
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Cash flows used in financing activities (1,336,649) (1,335,890)
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Net change in cash and cash equivalents 1,259,988 (2,522,589)
Cash and cash equivalents at beginning of period 3,247,192 3,900,494
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Cash and cash equivalents at end of period $ 4,507,180 $ 1,377,905
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</TABLE>
SEE ACCOMPANYING NOTES.
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SBM CERTIFICATE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
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 three months ended March 31,
1997, are not necessarily indicative of those to be expected for the year
ending December 31, 1997. 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, 1996.
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 ($49.8 million as of March 31, 1997). The Company had qualified
assets of $55.5 million at March 31, 1997 (which excludes $131,069 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 of a minimum of 5% based upon a valuation
of available-for-sale securities at amortized cost for purposes of this
calculation. Under this formula, the Company's capital ratio was 8.9% at
March 31, 1997.
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3. FEDERAL INCOME TAXES
Federal income taxes are different from the amount determined by
multiplying pretax earnings by the federal income tax rate of 35%. The
differences are primarily attributable to non-deductible goodwill
amortization and the dividends received deduction.
In the event that deferred tax assets are recognized on deductible
temporary differences for which a valuation allowance was provided at the
date of the acquisition of the Company, such benefits will be applied to
first reduce the balance of goodwill. During the first quarter of 1997,
goodwill was reduced by $66,000 as a result of realizing such benefits.
ITEM 2. MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996
Net income for the first quarter of 1997 was $117,976 compared to $43,322
for the first quarter of 1996. Net investment income (net income excluding
realized investment gains and losses, net of tax) was $122,786 and $65,255
for the three months ended March 31, 1997 and 1996, respectively. The
increase in net investment income is primarily attributable to a higher net
investment spread and lower investment and other expenses.
Net investment spread, which is the difference between investment income
and interest credited on certificate reserves, increased to $376,774 during
the first three months of 1997 from $332,523 during the same period in 1996.
These amounts reflect net investment spread of 2.25% and 2.03% for the three
months ended March 31, 1997 and 1996, 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 increased to $1.1 million from $1.0 million for the three
months ended March 31, 1997 and 1996, respectively. These amounts represent
annualized investment yields of 7.86% and 7.53% on average cash and
investments of $54.8 million and $55.7 million for the three months ended
March 31, 1997 and 1996, respectively. This increase in annualized investment
yield on cash and investments was primarily attributable to benefits from the
ongoing management of the Company's investment portfolio.
Interest credited on certificate reserves was $699,987 and $717,060 for
the three months ended March 31, 1997 and 1996, respectively. These amounts
represent annualized average rates of interest credited of 5.61% and 5.50% on
average certificate reserves of $49.9 million and $52.2 million for the three
months ended March 31, 1997 and 1996, 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 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
crediting rate.
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Investment and other expenses were $189,982 and $226,409 for the three
months ended March 31, 1997 and 1996, respectively. The decrease in
investment and other expenses is primarily attributable to (i) a decrease in
real estate expenses at the Company's Minnesota facility, (ii) a decrease in
other expenses resulting from a decrease in annual regulatory examination
expenses and franchise taxes and (iii) partially offset by an increase in
renewal commissions.
Realized investment losses were $5,372 and $27,333 for the three months
ended March 31, 1997 and 1996, respectively. Such realized investment losses
were interest-rate related and attributable to the asset/liability management
strategies of the Company. Fixed maturities and equity securities classified
as available-for-sale are sold during rising and falling interest rate
environments which can result in period-to-period swings in realized
investment gains and losses.
The Company primarily invests in securities with fixed maturities with
the objective of providing reasonable returns while limiting liquidity and
credit risks. The Company's investments in fixed maturities were 98%
investment grade as of March 31, 1997 and December 31, 1996. 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 the 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
represented 1.0% of qualified assets at March 31, 1997 and December 31, 1996.
Fixed maturities include mortgage-backed and asset-backed securities,
corporate securities, U.S. Treasury securities and other government
obligations. Mortgage-backed securities ("MBSs"), which include pass-through
securities and collateralized mortgage obligations ("CMOs"), totaled $33.6
million at March 31, 1997, representing 60.6% of total qualified assets
(58.9% at December 31, 1996). The Company's investments in CMOs, which are
primarily backed by the U.S. Government or U.S. Government agencies,
represented 54.8% and 52.8% of the Company's qualified assets as of March 31,
1997 and December 31, 1996, respectively. MBSs, including CMOs, are subject
to risks associated with prepayments of the underlying mortgage loans.
Prepayments cause these securities to have actual maturities different from
those expected at the time of purchase. The degree to which a security is
susceptible to either an increase or decrease in yield due to prepayment
speed adjustments is influenced by the difference between its amortized cost
and par, the relative sensitivity of the underlying mortgages backing the
assets to prepayments in a changing interest rate environment and the
repayment priority of the securities in the overall securitization structure.
Prepayment sensitivity is evaluated and monitored, giving full consideration
to the collateral characteristics such as weighted average coupon rate,
weighted average maturity and the prepayment history of the specific loan
pool. Additionally, the Company routinely reprojects three year liability and
asset cash flows with the goal of maintaining an adequate level of liquidity
for maturing face-amount certificates. The Company's asset/liability
management strategies not only allow the Company to monitor its short-term
liquidity needs, but also aim to provide protection to the investment
portfolio from adverse changes in interest rates.
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Certificate reserves decreased $636,607 or 1.3% during the first three
months of 1997, as maturities and surrenders exceeded sales and renewals. The
Company believes a significant factor leading to the decrease is that the
certificate of deposit marketplace is currently very competitive. For
certificates reaching their maturity date during the three months ended March
31, 1997 and 1996, 64% and 62%, 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 March 31, 1997.
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 May 14, 1997.
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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