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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: March 31, 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 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 May 12, 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.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SBM CERTIFICATE COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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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, 2000 - $19,562,091; December 31, 1999 - $19,886,594) $ 18,730,959 $ 18,998,215
Equity securities, at fair value (cost: March 31, 2000 - $264,813;
December 31, 1999 - $290,688) 328,660 353,545
Certificate loans 124,970 124,933
Cash and cash equivalents 14,602,461 14,407,479
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Total cash and investments 33,787,050 33,884,172
Receivables:
Dividends and interest 219,560 180,962
Receivable for investment securities sold 26,016 53,997
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Total receivables 245,576 234,959
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Total qualified assets 34,032,626 34,119,131
Other assets -- 15,368
Deferred acquisition costs 137,677 150,400
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Total assets $ 34,170,303 $ 34,284,899
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</TABLE>
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SBM CERTIFICATE COMPANY
CONDENSED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Certificate reserves $ 29,790,685 $ 30,116,686
Accounts payable and other liabilities 83,557 --
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Total liabilities 29,874,242 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 1,764,849 1,693,735
Accumulated other comprehensive loss from
net unrealized losses on available-for-sale securities (768,788) (825,522)
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Total shareholder's equity 4,296,061 4,168,213
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Total liabilities and shareholder's equity $ 34,170,303 $ 34,284,899
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</TABLE>
SEE ACCOMPANYING NOTES.
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SBM CERTIFICATE COMPANY
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Investment income:
Interest income from securities $ 546,065 $ 577,624
Other investment income -- 2,597
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Total investment income 546,065 580,221
Investment and other expenses:
Management and investment advisory fees 44,411 53,013
Deferred acquisition cost amortization and renewal commissions 43,494 55,941
Other expenses 601 4,906
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Total investment and other expenses 88,506 113,860
Interest credited on certificate reserves 376,414 432,911
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Net investment income before federal income taxes 81,145 33,450
Income tax expense (18,176) (11,725)
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Net investment income 62,969 21,725
Realized investment gains (losses) 12,531 (33,689)
Income tax (expense) benefit on realized investment gains (losses) (4,386) 11,791
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Net realized investment gains (losses) 8,145 (21,898)
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Net income (loss) $ 71,114 $ (173)
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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, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 515,065 $ 489,600
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Fixed maturity investments available-for-sale:
Purchases (7,254) (1,768,704)
Maturities and redemptions 354,387 3,138,684
Sales 35,235 2,106,754
Repayments (issuance) of certificate loans, net (37) 3,462
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Cash flows provided by investing activities 382,331 3,480,196
CASH FLOWS USED IN FINANCING ACTIVITIES:
Amounts paid to face-amount certificate holders (739,714) (1,318,817)
Amounts received from face-amount certificate holders 37,300 157,698
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Cash flows used in financing activities (702,414) (1,161,119)
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Net change in cash and cash equivalents 194,982 2,808,677
Cash and cash equivalents at beginning of period 14,407,479 3,279,969
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Cash and cash equivalents at end of period $ 14,602,461 $ 6,088,646
===================================
</TABLE>
SEE ACCOMPANYING NOTES.
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SBM CERTIFICATE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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 three months ended March 31, 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 months ended March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------- ------------------
2000 1999
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<S> <C> <C>
Net income (loss) $ 71,114 $ (173)
Net unrealized gains (losses) on available-for-sale securities 56,734 (200,346)
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Comprehensive income (loss) $ 127,848 $ (200,519)
=================== ==================
</TABLE>
3. RELATIONSHIP WITH ARM FINANCIAL GROUP, INC. ("ARM") AND SALE OF COMPANY
The Company is a wholly owned subsidiary of ARM, and pursuant to an
Investment Services Agreement and an Administrative Services Agreement, the
Company's operations are 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
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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.
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, 1st Atlantic ultimately prevailed. The Purchase Agreement as approved
by the Bankruptcy Court provides for a purchase price of $1,400,000. Of the
purchase price, $1,000,000 will be paid directly to ARM and $400,000 will 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, approved by
the Bankruptcy Court on April 27, 2000, may be subject to various approvals and
is scheduled to close in the second quarter of 2000. There can be no assurance
that a sale transaction will be consummated, or that any proceeds from such
prospective sale will be received by ARM.
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.
4. REGISTRATION STATEMENT
As a result of the Company's lack of employees, and its pending sale to 1st
Atlantic, the Company 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. As a result, 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 sometime shortly after consummation of the sale.
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ITEM 2. MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1999
Net investment income (net income excluding net realized investment gains
and losses) was $62,969 and $21,725 for the three months ended March 31, 2000
and 1999, respectively. The increase in net investment income is primarily
attributable to an increase in net investment spread, combined with lower
investment and other expenses.
Net investment spread, which is the difference between investment income
and interest credited on certificate reserves, was $169,651 during the first
three months of 2000 compared to $147,310 during the same period in 1999. On an
annualized yield basis, these amounts reflect net investment spread of 1.27% and
0.92% for the three months ended March 31, 2000 and 1999, respectively. The
Company's investment income decreased to $546,065 from $580,221 for the three
months ended March 31, 2000 and 1999, respectively. These amounts represent
annualized investment yields of 6.30% and 6.06% on average cash and investments
of $34.6 million and $38.3 million for the three months ended March 31, 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 $376,414 and $432,911 for the
three months ended March 31, 2000 and 1999, respectively. These amounts
represent annualized average rates of interest credited of 5.03% and 5.14% on
average certificate reserves of $30.0 million and $33.7 million for the three
months ended March 31, 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 $88,506 and $113,860 for the three
months ended March 31, 2000 and 1999, respectively. The decrease in investment
and other expenses was the result of lower deferred acquisition cost
amortization as a result of less certificates being outstanding during the
period and reduced management fee allocations from ARM.
Realized investment gains were $12,531 for the three months ended March 31,
2000, while realized investment losses were $33,689 for the three months ended
March 31, 1999. Realized investment gains and losses are primarily interest-rate
related and attributable to the asset/liability management strategies of the
Company. Net income during the first quarter of 2000 was $71,114 compared to a
net loss of $173 for the same period in 1999. The change is explained by the
items discussed in the previous paragraphs including a higher level of net
investment income in the three months ended March 31, 2000 compared to the
previous year period and realized investment gains in 2000 versus losses in
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
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maturities were 100% investment grade at both March 31, 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 exposure to real
estate, mortgage loans and common equity securities. As of March 31, 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 $10.1
million at March 31, 2000, representing 29.6% 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. 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 projects 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.
Certificate reserves decreased $0.3 million or 1.1% during the first three
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 three months ended March 31, 2000 and 1999, 83% and 63%,
respectively, were renewed.
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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, 2000.
EXHIBITS
No exhibits are filed herewith.
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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 May 19, 2000.
SBM CERTIFICATE COMPANY
By: /s/ BARRY G. RADICK
--------------------------------
Barry G. Radick
Restructuring Agent
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