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, 2000
Commission filed number: 811-6268
SBM CERTIFICATE COMPANY
(Formerly SBM Certificate Company, a Minnesota Corporation)
(Exact name of registrant as specified in its charter)
MARYLAND 52-2250397
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
C/o STATE BOND AND MORTGAGE COMPANY, L.L.C.
5101 RIVER ROAD, SUITE 101
BETHESDA, MD 20816
(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. /_/Yes /X/No
As of November 30, 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.
<PAGE>
SBM Certificate Company
Explanatory Note
On July 19, 2000, SBM Certificate Company, a Maryland Corporation
("SBM-MD" or the "Company") and SBM Certificate Company, a Minnesota
Corporation ("SBM-MN") consummated a reverse merger transaction ("the Merger")
pursuant to which SBM-MD became the surviving corporation. As a result of the
Merger and in accordance with the provision of Accounting Principles Board
Opinion No. 16, "Business Combinations", the Company will be considered the
acquiring enterprise for financial reporting purposes. Accordingly, this Form
10-Q for the quarter ended September 30, 2000 presents SBM-MD's current
financial information along with SBM-MN's historical financial information.
-2-
<PAGE>
Table of Contents
PAGE
NUMBER
Part I. FINANCIAL INFORMATION
Item 1. SBM CERTIFICATE COMPANY FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REPORT...............................................4
Condensed Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999................................5
Condensed Statements of Operations for the three and
nine months ended September 30, 2000 (unaudited) and
September 30, 1999 (unaudited)...................................7
Statement of Change in Shareholder's Equity for the three
months ended September 30, 2000 (unaudited)......................8
Condensed Statements of Cash Flows for the nine
months ended September 30, 2000 (unaudited) and
September 30, 1999 (unaudited)...................................9
Notes to Condensed Financial Statements..........................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................13
Item 3(a) Quantitative and Qualitative Disclosures about Market Risk.......18
Part II. Other Information
Item 1. LEGAL PROCEEDINGS................................................19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K REPORTS
SIGNATURES...................................................................20
-3-
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Shareholder and Board of Directors
SBM Certificate Company
We have reviewed the accompanying condensed balance sheet of SBM
Certificate Company as of September 30, 2000 and the related condensed
statements of income for the three months ended September 30, 2000. These
condensed financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
The balance sheet of SBM Certificate Company, as of December 31, 1999,
and the related statements of income, changes in shareholder's equity and cash
flows for the year then ended (not presented herein), was previously audited
by other auditors in accordance with generally accepted auditing standards.
Their report dated March 20, 2000, expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
1999 is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
Reznick, Fedder & Silverman
Baltimore, Maryland
December 7, 2000
-4-
<PAGE>
SBM CERTIFICATE COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Qualified assets:
Cash and investments:
Investments in securities of unaffiliated issuers:
Fixed maturities, available-for-sale, at fair value (amortized
cost: September 30, 2000 = $13,444,268; December 31, 1999 =
$19,886,594) 13,114,300 18,998,215
Equity securities, at fair value (amortized cost: September 30,
2000 = $161,772; December 31, 1999 = $290,688) 201,312 353,545
Certificate loans 110,945 124,933
Mortgage notes receivable 1,029,621 0
Cash and Cash equivalents 9,082,675 14,407,479
Escrows 364,167 0
----------- -----------
Total cash and investments 23,903,020 33,884,172
----------- -----------
Receivables
Dividends and interests 141,216 180,962
Receivable for investment securities sold 21,254 53,997
----------- -----------
Total receivables 162,470 234,959
----------- -----------
Total qualified assets 24,065,490 34,119,131
Other assets 0 15,368
Deferred acquisition costs 145,385 150,400
Goodwill , net of accumulated amortization 265,567 0
----------- -----------
Total assets $24,476,442 $34,284,899
=========== ===========
</TABLE>
(Continued)
-5-
<PAGE>
SBM CERTIFICATE COMPANY
CONDENSED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Liabilities:
Certificate reserves $22,811,416 $ 30,116,686
Federal taxes payable 101,283 0
Deferred tax liability 62,350 0
Accounts payable and other liabilities 89,443 0
------------ -----------
Total liabilties 23,064,492 30,116,686
Shareholder's equity:
Common Stock, $1 par value, 10,000,000 authorized, 250,000 shares issued
and outstanding 250,000 250,000
Additional paid-in capital 1,102,500 3,050,000
Retained earnings (deficit) (39,644) 1,693,735
Accumulated other comprehensive income (loss) 99,094 (825,522)
------------ ----------
Total shareholder's equity 1,411,950 4,168,213
------------ ----------
Total liabilities and shareholder's equity
$24,476,442 $34,284,899
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
-6-
<PAGE>
SBM CERTIFICATE COMPANY
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- -----------------------
2000 1999 2000 1999
--------------------- -----------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Investment income:
Interest and dividend income from securities $ 464,798 $ 566,034 $ 1,454,806 $ 1,705,397
Realized investment gains (losses) (791) (436,818) (453,859) (470,507)
Other investment income (losses) 0 4,971 13,212 19,753
---------- ------------ ------------ ------------
Total investment income 464,007 134,187 1,014,159 1,254,643
Investment and other expenses:
Management and investment advisory fees 0 30,774 68,700 99,474
Amortization of goodwill 2,984 0 2,984 0
Deferred acquisition cost amortization and renewal commissions 0 55,425 85,496 163,792
Other expenses 14,739 458 78,520 15,084
---------- ------------ ------------ ------------
Total investment and other expenses 17,723 86,657 235,700 278,350
Interest credited on certificate reserves 160,680 397,407 885,896 1,247,419
---------- ------------ ------------ ------------
Net investment income before income tax benefit (expense) 285,604 (349,877) (107,437) (271,126)
Income tax benefit (expense) $(101,283) $ 160,734 $ (137,689) $ (112,214)
---------- ------------ ------------ ------------
Net income (loss) $ 184,321 $ (189,143) $ (245,126) $ (383,340)
========== ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
-7-
<PAGE>
SBM CERTIFICATE COMPANY
STATEMENT OF CHANGES IN SHARHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Common Stock Additional Accumulated Total
Paid-in Accumulated Other Shareholder's
Capital Deficit Comprehensive Equity
Shares Amount Income (Loss)
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------
Balance at July 9, 2000 - $ - $ $ $ - $ -
------------------------------------------------------------------------------------
Issuance of Common Stock 250,000 250,000 1,102,500 1,352,500
Unrealized Gain (Loss) on available-
for-sale securities, net of tax - - - 99,094 99,094
Dividends Paid - - - (1,749,980) (1,749,980)
Certificate Reserve Release - - - 1,526,015 1,526,015
Net Income - - - 184,321 184,321
------------------------------------------------------------------------------------
Balance at September 30, 2000 250,000 $250,000 $1,102,500 $ (39,644) $ 99,094 $1,411,950
(Unaudited)
------------------------------------------------------------------------------------
</TABLE>
-8-
<PAGE>
CONDENSED STATEMENTS OF CASHFLOW
For the nine month period ending September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
..............................
(Unaudited)
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net Income: (245,126) (383,340)
Adjustments to reconcile net income to cash have provided by
operating activities:
Realized loss on sale of investments 453,859 470,507
Changes in other assets and liabilities 458,049 1,420,310
------------ -----------
:Cash flows provided by operating activities 666,782 1,507,477
------------ -----------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Cash paid for SBM-MN (1,350,000) 0
Purchases of fixed maturity investments (263,808) (21,473,925)
Sales and redemption of fixed maturity investments 6,128,488 30,141,233
Investment in Mortgage notes receivable (1,029,621) 0
Repayments of certificate loans, net 14,388 41,483
------------ -----------
Cash Flows provided by investing activities 3,499,444 8,708,791
------------ -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from the sale of common stock 2,500 0
Capital contributed to company 1,350,000 0
Amounts paid to face-amount certificate holders (5,400,850) (4,397,769)
Amounts received from face-amount certificate holders 15,681 164,612
Dividends paid (5,458,364) 0
------------ ------------
CASH FLOWS USED IN FINANCING ACTIVITIES: (9,491,033) (4,233,157)
------------ ------------
Net (decrease) increase in cash and cash equivalents (5,324,804) 5,983,111
Cash and cash equivalents at beginning of period 14,407,479 3,279,970
------------ ------------
Cash and cash equivalents at end of period $ 9,082,675 $ 9,263,081
============== ============
Supplemental disclosure of significant non-cash investing and
financing activities::
Unrealized gain on investments $ 451,559
==============
Release of certificate reserve liability $ 1,526,015
==============
Acquisition of SBM-MN:
Cash purchase price 1,350,000
Net assets acquired (1,081,449)
--------------
GOODWILL $ 268,551
==============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
-9-
<PAGE>
SBM CERTIFICATE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
1. ORGANIZATION AND BASIS OF PRESENTATION
SBM Certificate Company (the "Company" or "SBM-MD") was formed on May
24, 2000 under the laws of the State of Maryland. The Company is a wholly
owned subsidiary of State Bond and Mortgage Company, LLC ("State Bond"). The
Company is an issuer of face-amount certificates and is registered under the
Investment Company Act of 1940 (the "1940 Act"). Face-amount certificates
issued by the Company entitle the certificate holder to receive, at maturity,
the principal investment and accrued interest. 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.
On July 19, 2000, SBM-MD completed a merger transaction with SBM
Certificate Company, a Minnesota corporation ("SBM-MN"), whereby the Company
became the surviving corporation (See note 3). In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included.
Operating results for the Company for the nine months ended September
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 nine months ended September 30, 2000 and 1999 are as follows:
-10-
<PAGE>
<TABLE>
<CAPTION>
Three months ended
September 30,
----- ----
2000 1999
----- ----
<S> <C> <C>
Net income (loss) $ 184,321 $(189,143)
Net unrealized gains (losses) on available-for-sale
securities, net of tax 99,094 566,034
---------- ----------
Comprehensive income (loss) $ 283,415 $ 376,891
========== ==========
Nine months ended
September 30,
----- ----
2000 1999
----- ----
<S> <C> <C>
Net income (loss) $(245,126) $ (383,340)
Net unrealized gains (losses) on available-for-sale
securities, net of tax 389,209 (628,772)
---------- ------------
Comprehensive income (loss) $ 144,083 $(1,012,112)
========== ============
</TABLE>
3. ACQUISITION OF COMPANY BY STATE BOND AND MORTGAGE COMPANY, L.L.C.
On July 19, 2000, State Bond completed the purchase of 100% of the
issued and outstanding shares of common stock of SBM-MN, from ARM Financial
Group ("ARM"), a Delaware corporation (the "Acquisition"). SBM-MN was a wholly
owned subsidiary of ARM and an issuer of face-amount certificates under the
Investment Company Act of 1940. The Company filed a report on Form 8-K dated
July 24, 2000 to report the Acquisition.
State Bond effected the Acquisition as assignee under a Stock Purchase
Agreement, dated March 28, 2000, by and among 1st Atlantic Guaranty
Corporation ("1st Atlantic"), a Maryland corporation, SBM-MN and ARM. State
Bond is a 100% owned subsidiary of 1st Atlantic. A copy of the Stock Purchase
Agreement (exhibits omitted) was included as an exhibit to 1st Atlantic's Form
8-K dated April 12, 2000, filed to report the then proposed acquisition.
The Stock Purchase Agreement provided for a purchase price of
$1,400,000, which allowed for an adjustment to the purchase price based on
actual asset value at the date of the Acquisition. As a result, the purchase
price was reduced to $1,350,000, of which $950,000 was paid directly to ARM
and $400,000 is being held by an escrow agent for 18 months as security for
certain post-closing obligations and liabilities of ARM under the Stock
Purchase Agreement. The transaction was accounted for as a reverse merger
using the purchase method of accounting, whereby SBM-MD became the surviving
corporation.
-11-
<PAGE>
Additionally the Acquisition resulted in goodwill calculated as follows:
Purchase Price $1,350,000
Less:
Total Assets at Acquisition $27,482,692
Total Liabilities at Acquisition 26,401,243
-----------
Net Assets 1,081,449
----------
Goodwill from Merger $ 268,551
===========
Goodwill is being amortized over 15 years which amounted to $2,984 at
September 30, 2000.
The Acquisition was financed by a short-term bank loan made to State
Bond, in the amount of $1,500,000. The loan provided for a floating and
fluctuating rate of interest equal to the prime rate. State Bond's President,
his wife and other officers also personally guaranteed this loan.
On July 19, 2000, upon completion of the acquisition, the Company
declared and paid a cash dividend in the amount of $1,500,000 to its parent,
State Bond, which used these proceeds to repay the bank borrowing described
above. Immediately prior to the closing of the sale, the Company paid a
dividend to ARM in an amount equal to the Company's shareholders' equity less
(i) $450,000 and (ii) estimated deferred acquisition cost net of income taxes.
The dividend, totaling $3,708,384 was in the form of a transfer of certain
securities, in-kind, and the balance, in cash and cash equivalents. The
transaction was approved by the Bankruptcy Court on April 27, 2000.
Following the Acquisition, a new methodology for calculating the
certificate reserve liability was adopted and implemented. This methodology is
in accordance with Section 28 of the Investment Company Act of 1940, which
states that the certificate reserve balance shall at no time be less than the
aggregate surrender values and other amounts to which all certificate holders
are entitled. Application of this method of calculating reserves resulted in a
reduction of the certificate reserve liability of $1,526,015. This amount is
reflected as an adjustment to the retained earnings in the financial
statements.
As a result of the Acquisition transactions, SBM-MD has succeeded SBM-MN
as the "registrant" in all filings made by SBM-MN under the Securities Act of
1933, Securities Exchange Act of 1934 and Investment Act of 1940 ("1940 Act).
Pursuant to the Stock Purchase Agreement, the former board of directors
of SBM-MN has resigned and the incumbent board of directors of SBM-MD,
appointed on July 13, 2000, succeeded as the board of directors for the
Company.
The Stock Purchase Agreement and related transactions described above
were part of the proceedings involved in a voluntary petition for relief under
-12-
<PAGE>
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")
by ARM, as previously reported in the Company's Form 10-Q report for the
quarter ended June 30, 2000. The Stock Purchase Agreement, ultimate purchase
of SBM-MN by 1st Atlantic (through State Bond) and dividend paid to ARM, among
other transactions, were approved by the Bankruptcy Court.
4. REGISTRATION STATEMENT
As a result of SBM-MN's lack of employees, staff assistance and the
pending sale of SBM-MN, SBM-MN did not file an updated Registration Statement
on Form S-1 ("S-1") with the Securities and Exchange Commission for offerings
of certificates after April 30, 2000. However, the Company has filed an
amendment, and will file a further amendment, to its S-1 so that the Company
may resume its offerings of certificates at the earliest possible date.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
SBM MN was incorporated in (Minnesota) in June 1990 to assume the
face-amount certificate business of SBM Company ("SBM") which began in 1914.
ARM purchased most of the assets of SBM in June 1995 and continued the
issuance of face-amount certificates. The Company was formed on May 24, 2000
under the laws of the State of Maryland. The Company is a wholly owned
subsidiary of State Bond. The Company is an issuer of face-amount certificates
and is registered under the 1940 Act. Face-amount certificates issued by the
Company entitle the certificate holder to receive, at maturity, the principal
investment and accrued interest. As a result of the Acquisition, the Company
has assumed the obligations of SBM MN's outstanding face-amount certificates
and now is the issuer of face-amount certificates that trace their origin to
the early 1900s.
Business
The Company's sole business is issuing fixed rate face-amount
certificates. A face-amount certificate is an obligation of the issuer to pay
a face, or principal, amount, plus specified interest, to the holder of the
certificate. Under the certificates, the face amount may be paid at the end of
a certificate's Guarantee Period or at its Maturity Date. Lesser amounts are
paid at such times if all or part of an investment in the Certificate is
withdrawn prior to maturity or the end of any Guarantee Period. Interest, as
described above, may be paid quarterly or annually, or may be compounded.
The Company currently offers four series of single-payment investment
certificates. The Company's face-amount certificate operations include
issuance of single-payment certificates and the servicing of outstanding
single-payment and installment certificates, the investment of related funds,
and other related service activities.
-13-
<PAGE>
The Company's gross margin is derived primarily from the margin between
earnings on its investments and amounts paid or credited on its fixed rate
Certificate deposits ("investment spread"). The Company's net income is
determined by deducting investment and other expenses and federal income
taxes. The investment spread is affected principally by general economic
conditions, government monetary policy, the policies of regulatory authorities
that influence market interest rates, and the Company's ability to respond to
changes in such rates. Changes in market interest rates may have a negative
impact on its earnings. State Bond provides the Company with administrative
services pursuant to an Administrative Services Agreement.
Competition
The Company 's face-amount certificate business competes in general with
various types of individual savings products which offer a fixed rate of
return on investors' money, especially insurance and bank and thrift products.
Some of these other products are insured by governmental agencies or funds or
private third parties. For example, banks and thrifts typically have federal
deposit insurance covering monies deposited with them. The Company's
Certificates are not guaranteed or insured by any governmental agency or fund
or independent third party. The Company's ability to offer competitive
interest rates, attractive terms, and efficient service are its primary basis
for meeting competition. American Express Certificate Company (formerly IDS
Certificate Company) is the Company's main competitor in the issuance of
face-amount certificates.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net income (loss) was $184,321 and $(189,143) for the three months ended
September 30, 2000 and 1999, respectively. This increase is due primarily to a
decrease in the realized investment losses from the sale of securities in the
investment portfolio. In addition, operating expenses for the same period were
lower by 79.5% compared to the period ending September 30, 1999.
Net investment spread, which is the difference between investment income
and interest credited on certificate reserves, was $303,327 during the three
months ended September of 2000 compared to $(263,220) during the same period
in 1999. On an annualized yield basis, the net investment spread was .93% and
1.19% for the three months ended September 30, 2000 and 1999, respectively.
The Company's investment income increased to $464,007 from $134,187 for
the three months ended September 30, 2000 and 1999, respectively. Realized
investment losses were $791 and $436,818 for the three months ended September
30, 2000 and 1999, and was the primary reason for the lower investment income.
Realized investment gains and losses are principally interest-rate related and
attributable to the asset/liability management strategies of the Company.
These amounts represent annualized investment yields of 6.28% and 6.26%
on average cash and investments of $23.7 million and $36.6 million for the
-14-
<PAGE>
three months ended September 30, 2000 and 1999, respectively. The decrease in
average cash and investments is a result of the dividends paid in the amount
of approximately $5.3 million. In addition there were redemptions of
face-amount certificates without any new sales of face-amount certificates
from May 2000 to the present, which also contributed to the lower investment
income.
Interest credited on certificate reserves was $160,680 and $397,407 for
the three months ended September 30, 2000 and 1999, respectively. The decrease
was a result of a decrease in the face-amount certificates outstanding in
fiscal year 2000 and the withdrawal penalty charged against the reserve
liability. These amounts represent annualized average rates of interest
credited of 5.32% and 5.07% on average certificate reserves of $25 million and
$32.8 million for the three months ended September 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.
Investment and other expenses were $17,723 and $86,657 for the three
months ended September 30, 2000 and 1999, respectively. The decrease in
investment and other expenses was the result of a decrease in the operating
expenses related to the waiver of management and investment advisory fees for
the three months ended September 30, 2000. The Company entered into an
administrative services agreement with its parent company, State Bond in which
State Bond earns a fee from the Company of 2% of Total Certificate Reserves.
State Bond waived the fee for the third quarter.
Certificate reserves decreased $7.4 million or 24.3% during the three
months ending September 30, 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. In addition, there were no sales of
face-amount certificates from May 1, 2000 through the present period, due to
the previous owner of the Company not updating its Form S-1 Registration
Statement beyond April 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net loss was $245,126 and $383,340 for the nine months ended September
30, 2000 and 1999, respectively. This decrease is due primarily to a decrease
in the realized investment losses from the sale of securities in the
investment portfolio. In addition, operating expenses for the same period were
lower by 16.3% compared to the period ending September 30, 1999.
Net investment spread, which is the difference between investment income
and interest credited on certificate reserves, was $128,263 during the first
nine months of 2000 compared to $7,224 during the same period in 1999. On an
annualized yield basis, the net investment spread was .93% and 1.19% for the
nine months ended September 30, 2000 and 1999, respectively.
-15-
<PAGE>
The Company's investment income decreased to $1,014,159 from $1,254,643
for the nine months ended September 30, 2000 and 1999, respectively. Realized
investment losses were $453,859 and $470,570 for the nine months ended
September 30, 2000 and 1999, and was the primary reason for the lower
investment income. Realized investment gains and losses are principally
interest-rate related and attributable to the asset/liability management
strategies of the Company.
These amounts represent annualized investment yields of 6.28% and 6.26%
on average cash and investments of $23.7 million and $36.6 million for the
nine months ended September 30, 2000 and 1999, respectively and realized
losses on available for sale securities. The decrease in average cash and
investments is a result of the dividends paid in the amount of approximately
$5.3 million. In addition there were redemptions of face-amount certificates
without any new sales of face-amount certificates from May 2000 to the
present, which also contributed to the lower investment income.
Interest credited on certificate reserves was $ 885,895 and $ 1,247,419
for the nine months ended September 30, 2000 and 1999, respectively. The
decrease was a result of a decrease in the face-amount certificates
outstanding in fiscal year 2000 and the withdrawal penalty charged against the
reserve liability. These amounts represent annualized average rates of
interest credited of 5.35% and 5.07% on average certificate reserves of $25
million and $32.8 million for the nine months ended September 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.
Investment and other expenses were $232,716 and $278,350 for the nine
months ended September 30, 2000 and 1999, respectively. The decrease in
investment and other expenses was the result of a decrease in the operating
expenses related primarily to management and investment advisory fees for the
third quarter of 2000. The Company entered into an Administrative Services
agreement with its parent company, State Bond in which State Bond earns a fee
from the Company of 2% of Total Certificate Reserves. State Bond waived the
fee for the third quarter.
Net loss was $245,126 for the nine months ended September 30, 2000 and
$383,340 for the nine months ended September 30, 1999. The increase is
explained by the items discussed in the previous paragraphs regarding net
investment income.
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 September 30, 2000 and September 30, 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).
-16-
<PAGE>
Additionally, the Company's investment portfolio has a small portion of
its assets invested in real estate consisting of mortgage loans totaling
$1,029,621 for the nine months ending September 30, 2000. It is expected,
however, that the Company, will in the future make significant investments in
real estate mortgage loans as permitted by law but not at the expense of
assuming more than acceptable risk in the portfolio. As of September 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 $5.026 million at September 30, 2000, representing 20.79% of total
qualified assets (30.4% at September 30, 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 is due to prepayment
speed adjustments which are influenced by the differences 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 $7.4 million or 24.3% during the first
nine 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. In addition, there were no sales of face-amount
certificates from May 1, 2000 through the present period, due to the previous
owner of the Company not updating its Form S-1 Registration Statement beyond
April 30, 2000.
For face-amount certificates reaching their maturity date during the
nine months ended September 30, 2000 and 1999, 26.8% and 65%, respectively,
were renewed. The percentage of renewals for the period ended September 30,
2000 was adversely impacted by the need to suspend the offering of
certificates as discussed previously.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT THE MARKET RISKS
Under the 1940 Act, the Company must maintain reserves to support its
obligations under its face-amount certificates. These reserves may only be
invested in assets that are "qualified investments" under the laws of the
District of Columbia and such other assets as the SEC may permit. Please see
the discussion under "Item 2", Management's Discussion and Analysis of
Operations" above, regarding the Company's investments.
-17-
<PAGE>
As most of the Company's assets are represented by fixed maturities
comprised of government and corporate bonds and mortgage-backed securities,
managing interest rates between those earned on the Company's investments and
those paid under the face-amount certificates is fundamental to the Company's
investment decisions. Both rates are sensitive to changes in the general level
of interest rates in the economy, as well as to competitive factors in the
case of the certificates.
The Investment Committee of the Board of Directors reviews and
approves the overall investment strategy developed by management. They also
monitor the results of management's strategy and may make adjustments within
established policy guidelines.
Presently, the Company has a small portion of its portfolio invested
in real estate loans. Over time, it anticipates increasing this segment of its
investment portfolio with the view to enhancing the Company's return on
investment. Fluctuations in the value of the underlying real estate represent
the greatest risk factor for this investment strategy. However, the Company
will invest only in those loans that have a history of producing income, are
of high quality by industry standards or have underlying properties that
represent excellent values and safety relative to the market.
In addition to standard methods used to analyze interest rate
sensitivity, the Company regularly analyzes the potential impact of a range of
different interest rate models. These provide "benchmarks" for assessing the
impact on Company earnings if rates moved higher or lower than the expected
targets set in our investment guidelines. The Company will continue to
formulate strategies directed at protecting earnings for the potential
negative effects of changes in interest rates.
------------------------------------------------------------------------------
Various forward-looking statements have been made in this Form 10-Q
Quarterly Report. In addition, from time to time, the Registrant through its
management may make oral forward-looking statements. Forward-looking
statements are subject to uncertainties that could cause actual results to
differ materially form such statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date on which they are made. Registrant undertakes no obligations to update
publicly or revise any forward-looking statements.
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
-18-
<PAGE>
During the quarter ended September 30, 2000, the Company filed a report
dated July 24, 2000 on Form 8-K to report the completion of the Acquisition.
The report included information under Items 1, 5 and 7(c).
EXHIBITS
No exhibits are filed herewith.
-19-
<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 December 11, 2000. SBM CERTIFICATE
COMPANY
By: /s/ JOHN J. LAWBAUGH
------------------------
John J. Lawbaugh
Chairman of the Board, President and Treasurer
(Principal Financial and Accounting Officer)
