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: June 30, 2000
Commission file number: 811-6268
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 STATE BOND & MORTGAGE COMPANY, L.L.C.
2 WISCONSIN CIRCLE, SUITE 700
CHEVY CHASE, MARYLAND 20815
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 656-4200
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 August 18, 2000, 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>
The information contained in this Form 10-Q for the period ended June
30, 2000 is as of that date unless otherwise indicated. SBM Certificate
Company of Minnesota has since been merged into SBM Certificate Company, a
Maryland corporation wholly owned by State Bond & Mortgage Company, L.L.C., a
Maryland limited liability company 100% owned by 1st Atlantic Guaranty
Corporation. See Note 3 of Notes to Condensed Financial Statements (Unaudited).
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SBM CERTIFICATE COMPANY
CONDENSED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2000 1999
---------------- -----------------
(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:
June 30, 2000-$13,877,894; December 31, 1999-$19,886,594) $ 13,332,788 $ 18,998,215
Equity securities, at fair value (cost: June 30, 2000-$165,372;
December 31, 1999-$290,688) 175,071 353,545
Certificate loans 110,545 124,933
Cash and cash equivalents 15,228,645 14,407,479
---------------- -----------------
Total cash and investments 28,847,049 33,884,172
Receivables:
Dividends and interest 140,673 180,962
Receivable for investment securities sold 110,383 53,997
---------------- -----------------
Total receivables 251,056 234,959
---------------- -----------------
Total qualified assets 29,098,105 34,119,131
Other assets -- 15,368
Deferred acquisition costs 136,979 150,400
---------------- -----------------
Total assets $ 29,235,084 $ 34,284,899
================ =================
</TABLE>
2
<PAGE>
<TABLE>
SBM CERTIFICATE COMPANY
CONDENSED BALANCE SHEETS (CONTINUED)
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------------- ---------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Certificate reserves $ 27,248,206 $ 30,116,686
Accounts payable and other liabilities 57,997 --
---------------- -----------------
Total liabilities 27,306,203 30,116,686
Shareholder's equity:
Common stock, 250,000 shares issued 250,000 250,000
Additional paid-in capital 3,050,000 3,050,000
Retained earnings (deficit) (835,712) 1,693,735
Accumulated other comprehensive loss from
net unrealized losses on available-for-sale securities (535,407) (825,522)
---------------- -----------------
Total shareholder's equity 1,928,881 4,168,213
---------------- -----------------
Total liabilities and shareholder's equity $ 29,235,084 $ 34,284,899
================ =================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
SBM CERTIFICATE COMPANY
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
---------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Investment income:
Interest income from securities $ 460,862 $ 561,739 $ 990,008 $ 1,139,363
Other investment income (losses) (3,707) 12,185 13,212 14,782
---------------- ------------------
----------------- ----------------
Total investment income 457,155 573,924 1,003,220 1,154,145
Investment and other expenses:
Management and investment advisory fees 32,980 15,687 68,700 68,700
Deferred acquisition cost amortization and
renewal commissions 42,002 52,426 85,496 108,367
Other expenses 54,489 9,720 63,781 14,626
---------------- ------------------
----------------- ----------------
Total investment and other expenses 129,471 77,833 217,977 191,693
Interest credited on certificate reserves 348,801 417,101 725,216 850,012
---------------- ------------------ ----------------- ----------------
Net investment income before federal income taxes
(21,117) 78,990 60,027 112,440
Income tax expense 2,508 (25,004) (15,668) (36,729)
---------------- ------------------ ----------------- ----------------
Net investment income (loss) (18,609) 53,986 44,359 75,711
Realized investment gains (losses) (465,599) -- (453,068) (33,689)
Income tax (expense) benefit on realized --
investment gains (losses) (16,352) -- (20,738) 11,791
---------------- ------------------ ----------------- ----------------
Net realized investment gains (losses) (481,951) (473,806) (21,898)
---------------- ------------------ ----------------- ----------------
Net income (loss) $ (500,560) $ 53,986 $ (429,447) $ 53,813
================ ================== ================= ================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
<TABLE>
SBM CERTIFICATE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<CAPTION>
2000 1999
---------------- ---------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 950,912 $ 1,062,413
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Fixed maturity investments available-for-sale:
Purchases (263,808) (5,777,188)
Maturities and redemptions 5,813,370 3,899,986
Sales 0 2,683,159
Repayments of certificate loans, net 14,388 42,010
---------------- ---------------
Cash flows provided by investing activities 5,563,950 847,967
CASH FLOWS USED IN FINANCING ACTIVITIES:
Amounts paid to face-amount certificate holders (3,609,377) (2,294,503)
Amounts received from face-amount certificate holders 15,681 162,424
Dividends paid (2,100,000) --
---------------- ---------------
Cash flows used in financing activities (5,693,696) (2,132,079)
---------------- ---------------
Net change in cash and cash equivalents 821,166 (221,699)
Cash and cash equivalents at beginning of period 14,407,479 3,279,970
---------------- ---------------
Cash and cash equivalents at end of period $ 15,228,645 $ 3,058,271
================ ===============
SEE ACCOMPANYING NOTES.
</TABLE>
5
<PAGE>
SBM CERTIFICATE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
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, 2000, are not necessarily indicative of those to
be expected for the year ending December 31, 2000. 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, 1999.
2. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," requires unrealized gains or losses on the Company's
available-for-sale securities to be included in other comprehensive income.
The components of comprehensive income (loss), net of related tax, for the
three and six months ended June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Net income (loss) $ (500,560) $ 53,986
Net unrealized gains (losses) on available-for-sale securities 233,381 (731,865)
------------------- -------------------
Comprehensive income (loss) $ (267,179) (677,879)
=================== ===================
Six Months Ended June 30,
----------------------------------------
2000 1999
------------------- -------------------
Net income (loss) $ (429,447) $ 53,813
Net unrealized gains (losses) on available-for-sale securities 290,115 (932,211)
------------------- -------------------
Comprehensive income (loss) $ (139,332) $ (878,398)
=================== ===================
</TABLE>
6
<PAGE>
3. RELATIONSHIP WITH ARM FINANCIAL GROUP, INC. ("ARM") AND SALE OF COMPANY
On June 30, 2000, the Company was a wholly owned subsidiary of ARM, and
pursuant to an Investment Services Agreement and an Administrative Services
Agreement, the Company's operations were administered and managed by ARM.
On December 17, 1999 ARM announced that it had signed a definitive
agreement whereby Western and Southern Life Insurance Company ("Western and
Southern") would acquire ARM's insurance subsidiaries, Integrity Life Insurance
Company ("Integrity") and National Integrity Life Insurance Company. The
acquisition of the insurance companies by Western and Southern was implemented
in a voluntary petition for relief under chapter 11 of the Bankruptcy Code filed
on December 20, 1999 in the United States Bankruptcy Court for the District of
Delaware ("the Bankruptcy Court") in re: ARM Financial Group, Inc., Case No.:
99-4430 (Judge Walsh). On March 3, 2000 ARM completed the sale of its insurance
subsidiaries to Western and Southern ("the Insurance Transaction").
Western and Southern did not acquire the Company. As a result of the
consummation of the Insurance Transaction, the vast majority of ARM's employees,
including the employees who support the Company, became employees of Integrity.
Employees of Integrity are assisting ARM in winding up ARM's affairs, including
the administration of the Company, pursuant to a Transition Services Agreement
dated March 3, 2000 ("the Transition Services Agreement"). The Transition
Services Agreement has a term of eighteen months, but may be terminated by
Western and Southern after six months, upon 90 days notice.
Pursuant to a Letter Agreement dated February 17, 2000 (as amended on March
1, 2000, the "WTR&A Agreement"), ARM retained Walker, Truesdell, Radick &
Associates ("WTR&A") as its Restructuring Agent, to provide consulting and
management services to ARM, including services related to the sale of the
Company to 1st Atlantic. On March 2, 2000, WTR&A's retention was approved by the
Bankruptcy Court. WTR&A is a consulting firm that specializes in crisis
management, bankruptcy administration and asset liquidation services.
On March 28, 2000 ARM and the Company entered into a stock purchase
agreement to sell the Company to 1st Atlantic Guaranty Corporation ("1st
Atlantic") (the "Purchase Agreement"). The Purchase Agreement was submitted to
the Bankruptcy Court for approval. An auction between interested bidders was
conducted, and 1st Atlantic ultimately prevailed. The Purchase Agreement as
approved by the Bankruptcy Court provided for a purchase price of $1,400,000. Of
the purchase price, $1,000,000 would be paid directly to ARM and $400,000 would
be placed in escrow for 18 months. The escrowed proceeds shall be used to secure
certain indemnifications of ARM. Immediately prior to the closing of the sale,
the Company shall (subject to obtaining appropriate regulatory approvals)
dividend to ARM an amount equal to the Company's shareholders' equity less (i)
$450,000 and (ii) estimated deferred acquisition costs net of income taxes. The
dividend will be in the form of a transfer of certain securities, in kind, and
the balance, if any, in cash or cash equivalents. The transaction was approved
by the Bankruptcy Court on April 27, 2000, and was closed on July 19, 2000.
7
<PAGE>
4. REGISTRATION STATEMENT
As a result of the Company's lack of employees, it has not filed a
Registration Statement on Form S-1 ("S-1") with the Securities and Exchange
Commission. The S-1 was scheduled to be filed, and become effective, on or
before May 1, 2000. Therefore, until the S-1 is filed and becomes effective, the
Company is unable to [i] sell new certificates, and/or [ii] renew certificates
which have matured. Therefore, the Company is currently required to pay in full
certificates which are requested to be renewed by the certificate holder. The
Company anticipates that an S-1 will be prepared and filed by 1st Atlantic
in the near future.
ITEM 2. MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999
Net investment income (net income excluding net realized investment gains
and losses) was $44,359 and $75,711 for the six months ended June 30, 2000 and
1999, respectively. The decrease in net investment income is primarily
attributable to a decrease in net investment spread, partially offset by lower
investment and other expenses.
Net investment spread, which is the difference between investment income
and interest credited on certificate reserves, was $278,004 during the first six
months of 2000 compared to $304,133 during the same period in 1999. On an
annualized yield basis, these amounts reflect net investment spread of 1.11% and
0.98% for the six months ended June 30, 2000 and 1999, respectively. The
Company's investment income decreased to $1.0 from $1.2 million for the six
months ended June 30, 2000 and 1999, respectively. These amounts represent
annualized investment yields of 6.10% and 6.07% on average cash and investments
of $31.9 million and $37.6 million for the six months ended June 30, 2000 and
1999, respectively. The decrease in average cash and investments was the reason
for the decrease in investment income.
Interest credited on certificate reserves was $0.7 million and $0.9 million
for the six months ended June 30, 2000 and 1999, respectively. These amounts
represent annualized average rates of interest credited of 4.99% and 5.09% on
average certificate reserves of $28.5 million and $33.1 million for the six
months ended June 30, 2000 and 1999, 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, such as 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 lower than contracts that matured during that period,
resulting in the overall decrease in the average crediting rate.
Investment and other expenses were $217,977 and $191,693 for the six months
ended June 30, 2000 and 1999, respectively. The increase in investment and other
expenses was the result of and increase in operating expenses partially offset
by lower deferred acquisition cost amortization as a result of less certificates
being outstanding during the period.
8
<PAGE>
Realized investment losses were $453,068 and $33,689 for the six months
ended June 30, 2000 and 1999, respectively. Realized investment gains and losses
are primarily interest-rate related and attributable to the asset/liability
management strategies of the Company. Net loss was $429,447 for the six months
ended June 30, 2000 while net income was $53,813 for the six months ended June
30, 1999. The change is explained by the items discussed in the previous
paragraphs including a lower level of net investment income in the six months
ended June 30, 2000 compared to the previous year period and greater realized
investment losses in 2000 versus 1999.
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 100% investment grade
at both June 30, 2000 and December 31, 1999. Investment grade securities are
those classified as 1 or 2 by the National Association of Insurance
Commissioners, or where such classifications are not available, securities are
classified by a nationally recognized statistical rating organization (i.e.,
Standard & Poor's Corporation's rating of BBB- or above). Additionally, the
Company's investment portfolio has no investments in real estate, mortgage loans
and common equity securities. It is expected, however, that the Company will in
the future make significant investments in real estate mortgage loans and common
equities, as permitted by law. As of June 30, 2000, the Company held no
securities, which had defaulted, on principal or interest payments.
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 but
are primarily collateralized mortgage obligations ("CMOs"), totaled $9.1 million
at June 30, 2000, representing 31.9% of total qualified assets (30.1% at
December 31, 1999). 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.
Certificate reserves decreased $2.9 million or 9.4% during the first six
months of 2000, as maturities and surrenders exceeded sales and renewals. The
Company believes a factor leading to the decrease was the modest increase in
intermediate-term market interest rates in 2000 which enhanced the
attractiveness of competing products, such as money market funds and bank
certificates of deposit. For face-amount certificates reaching their maturity
date during the six months ended June 30, 2000 and 1999, 41% and 68%,
respectively, were renewed.
On June 20, 2000, the Board of Directors declared a $2.1 million dividend.
The dividend was paid to the sole shareholder of the Company, ARM Financial
Group on June 21, 2000.
9
<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 June 30, 2000.
EXHIBITS
No exhibits are filed herewith.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 18, 2000.
SBM CERTIFICATE COMPANY
(A Maryland corporation, as
successor to SBM Certificate
Company, a Minnesota corporation.)
By: /s/ JOHN J. LAWBAUGH
---------------------------------
John J. Lawbaugh
President
11
