FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACTION OF 1934
For the transition period from _______________________ to _____________________
Commission file number 811-407
SBM Company
(Exact name of registrant as specified in its charter)
Minnesota 41-0557530
_____________________________________ ______________________________________
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation of organization)
8400 Normandale Lake Boulevard, Suite 1150, Minneapolis, Minnesota 55437
_______________________________________________________________________________
(Address of principal executive offices)
(Zip Code)
(612) 835-0097
_______________________________________________________________________________
(Registrant's telephone number, including area code)
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 ___
Number of shares of Common Stock outstanding at March 31, 1995: 2,179,714
Page 1 of 14
SBM COMPANY AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE(S)
Item I - Financial Statements (Unaudited)
Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Consolidated Financial Statements 4-7
Item II - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-11
PART II - OTHER INFORMATION 12
- ---------------------------
PART I - FINANCIAL INFORMATION
------------------------------
ITEM I - FINANCIAL STATEMENTS
-----------------------------
SBM COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
--------------- ---------------
(unaudited)
ASSETS
<S> <C> <C>
Investments
Debt securities available-for-sale at market - Note C............................... $ 648,317,303 $ 653,207,076
Debt securities held-to-maturity at amortized cost.................................. 13,923,608 13,944,234
Marketable equity securities at market.............................................. 714,866 683,089
Mortgage loans...................................................................... 33,636,210 36,257,214
Policy loans........................................................................ 22,427,287 22,153,936
Other invested assets............................................................... 1,693,006 1,694,506
Short-term investments.............................................................. 59,786,533 37,602,490
--------------- ---------------
Total investments................................................................ 780,498,813 765,542,545
Cash................................................................................... 1,675,579 3,565,693
Accrued investment income.............................................................. 6,113,194 8,470,103
Receivable from reinsurer.............................................................. 93,466,912 105,806,093
Deferred policy acquisition costs, less accumulated amortization....................... 70,835,753 76,950,470
Land, building and equipment, at cost less accumulated depreciation of $2,530,418 and
$2,470,302, respectively............................................................ 1,394,625 1,417,796
Deferred income taxes.................................................................. 3,165,534 3,091,000
Refundable income taxes................................................................ 2,510,594 3,003,386
Other assets........................................................................... 2,043,731 1,517,067
--------------- ---------------
$ 961,704,735 $ 969,364,153
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Future policy benefits................................................................. $ 877,947,462 $ 910,104,179
Face amount certificate reserves....................................................... 57,176,977 60,355,015
Accounts payable and other liabilities................................................. 13,306,016 9,252,047
Deferred compensation and retirement benefits for officers............................. 1,200,516 1,227,284
--------------- ---------------
Total liabilities................................................................ 949,630,971 980,938,525
--------------- ---------------
Mandatory redeemable voting convertible preferred stock, par value $1,000 (includes
dividends in arrears: March 31, 1995 - $1,162,952, December 31, 1994 - $760,000).
Authorized 19,000 shares;
issued 19,000 shares, liquidation value $19,000,000, plus dividends in arrears...... 18,923,031 18,485,868
Common stock held by employee benefit plans; 304,693 shares - Note E................... 1,916,519 1,916,519
Commitments and contingencies - Note D
Common stock, no par value. Authorized 20,000,000 shares; issued and outstanding
2,179,714 shares; less 304,693 shares held by employee benefit plans................ 2,945,606 2,945,606
Unrealized losses on marketable equity securities, net of income tax benefit of
$120,244 and $131,048, respectively................................................. (233,415) (254,388)
Unrealized losses on debt securities, net - Note C..................................... (36,063,460) (59,691,765)
Retained earnings...................................................................... 24,585,483 25,023,788
--------------- ---------------
Total stockholders' equity (deficit)............................................. (8,765,786) (31,976,759)
--------------- ---------------
$ 961,704,735 $ 969,364,153
=============== ===============
See notes to consolidated financial statements.
</TABLE>
1
SBM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------
1995 1994
---------- ----------
<S> <C> <C>
Revenues:
Net investment income...........................................................................$ 15,104,765 $ 15,767,869
Underwriting, sales service and distribution fees............................................... 732,943 975,238
Life insurance premiums......................................................................... 100,840 104,323
Advisory and other fees from affiliated mutual funds............................................ 370,501 371,650
Realized investment (losses) gains, net......................................................... (451,613) 10,552
Other income.................................................................................... 617,492 449,748
------------- -------------
Total revenues............................................................................... 16,474,928 17,679,380
------------- -------------
Benefits and expenses:
Provisions for benefits:
Annuities and life insurance................................................................ 10,880,260 10,808,005
Face amount certificate reserves (interest).................................................. 735,938 958,456
Loan and real estate losses..................................................................... - 150,000
Death and other benefits........................................................................ 120,934 80,566
Commissions, wages and benefits................................................................. 1,851,756 1,939,361
Interest expense................................................................................ - 42,401
Amortization of deferred policy acquisition costs............................................... 1,778,235 1,152,534
Occupancy and equipment......................................................................... 315,345 347,680
State guaranty association assessments.......................................................... 75,550 226,210
Other expenses.................................................................................. 727,051 527,734
------------- -------------
Total benefits and expenses.................................................................. 16,485,069 16,232,947
------------- -------------
Income (loss) from operations before income taxes.................................................. (10,141) 1,446,433
Income taxes (benefit)............................................................................. (9,000) 493,000
------------- -------------
Net income (loss)..........................................................................$ (1,141) $ 953,433
============= =============
Mandatory redeemable voting convertible preferred stock dividends..................................$ 402,952 $ 380,000
Discount accretion on preferred stock.............................................................. 34,212 33,948
------------- -------------
Net income (loss) applicable to common stock.......................................................$ (438,305) $ 539,485
============= =============
Earnings per common share:
Primary.........................................................................................$ (.20) $ .24
============= =============
Fully diluted...................................................................................$ (.20) $ .24
============= =============
Weighted average common shares
outstanding (primary)........................................................................... 2,179,714 2,211,212
Weighted average common shares
outstanding (fully diluted)..................................................................... 2,179,714 3,398,712
See notes to consolidated financial statements.
</TABLE>
2
SBM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
Net cash provided by operating activities.............................. $ 16,582,530 $ 9,803,057
Cash flows from investing activities:
Proceeds from maturities and repayment of debt securities:
Available-for-sale............................................... 3,999,043 32,198,402
Held-to-maturity................................................. 51,500 20,610,604
Proceeds from sales of debt securities available-for-sale........... 29,887,528 685,515
Cost of debt securities acquired:
Available-for-sale............................................... - (48,252,588)
Held-to-maturity................................................. - (13,486,952)
Sales (purchases) of short term investments, net.................... (21,537,220) 3,130,438
Loan principal repayments........................................... 5,625,316 4,040,234
Loans funded........................................................ (3,277,477) (2,353,952)
Proceeds from (additions to) land, building and equipment, net...... (36,944) (64,681)
--------------- ---------------
Net cash provided by (used in) investing activities.............. 14,711,746 (3,492,980)
Cash flows from financing activities:
Payments to face amount certificate holders......................... (7,823,103) (6,348,692)
Reserve payments from face amount certificate holders............... 3,957,062 4,596,360
Deposits received from annuitants, net.............................. 15,468,103 18,727,251
Payments to annuitants.............................................. (44,786,452) (20,619,547)
Purchase of common stock............................................ - (1,511,346)
Dividends on common stock........................................... - (228,000)
Dividends on preferred stock........................................ - (380,000)
Principal payments on notes payable................................. - (46,171)
--------------- ---------------
Net cash used in financing activities.......................... (33,184,390) (5,810,145)
Net increase (decrease) in cash........................................ (1,890,114) 499,932
Cash at beginning of period............................................ 3,565,693 898,726
--------------- ---------------
Cash at end of period.................................................. $ 1,675,579 $ 1,398,658
=============== ===============
See notes to consolidated financial statements.
</TABLE>
3
SBM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. BASIS OF PRESENTATION
The consolidated balance sheet as of March 31, 1995 and the condensed
consolidated statements of income and condensed consolidated statements of cash
flows for the three month periods ended March 31, 1995 and 1994, have been
prepared by the Company without audit. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial positions, results of operations and cash flows at March
31, 1995, and for all periods presented have been made.
The consolidated financial statements include the accounts of SBM Company (the
"Company") and its wholly owned subsidiaries: State Bond and Mortgage Life
Insurance Company ("SBM Life"), SBM Certificate Company ("SBMC") and SBM
Financial Services, Inc.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1994.
B. SALE AND LIQUIDATION OF THE COMPANY
Pursuant to an Amended and Restated Stock and Asset Purchase Agreement dated
February 16, 1995, between the Company and ARM Financial Group, Inc., (ARM), the
Company has agreed to sell substantially all of the business operations and
assets of the Company to ARM (the Proposed Transaction) for a purchase price of
$38.6 million, subject to certain adjustments. As part of the Proposed
Transaction, ARM will acquire all of the outstanding stock of the subsidiaries
and certain assets of the Company and assume certain liabilities of the Company.
Additionally, the agreement requires ARM to contribute between $15-20 million in
additional capital to the subsidiaries. The completion of the Proposed
Transaction is subject to a number of contingencies, including the obtaining of
regulatory and shareholder approvals.
As soon as practicable after consummation of the Proposed Transaction, the
Company intends to wind up and liquidate the Company. The Company has adopted a
Plan of Dissolution, such Plan to be effective upon consummation of the Proposed
Transaction. In the liquidation, distributions to the holders of common stock
will be subject to the senior rights of the holders of the Series A Preferred
Stock and the Series B Preferred Stock (no Series B shares are outstanding as of
March 31, 1995).
At the Company's regular meeting of shareholders, to be held May 18, 1995, the
Company's shareholders will vote on the above matters. A proxy statement was
sent to all shareholders with detailed information concerning the Proposed
Transaction and the Plan of Dissolution.
The Proposed Transaction and the Plan of Dissolution each require the
affirmative vote of the holders of a majority of the voting power of all shares
entitled to vote, voting together as a single class. Approval of the Proposed
Transaction also requires the affirmative vote of the holders of 66 2/3% of the
outstanding shares of Series A Preferred Stock, voting separately as a class.
The accompanying consolidated financial statements have been prepared on an
historical basis of accounting and do not include any purchase accounting,
liquidation accounting or other adjustments which would result upon completion
of the Proposed Transaction and the Plan of Dissolution.
4
SBM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
C. DEBT SECURITIES AVAILABLE FOR SALE
Effective January 1, 1994, the Company adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). The primary
impact of SFAS 115 is to require the Company to classify its securities into
categories based upon the Company's intent relative to the eventual disposition
of the securities. SFAS 115 established three categories of securities: (1)
Held-to-maturity securities are comprised of securities which the Company has
the positive intent and ability to hold to maturity. These securities are
carried at amortized cost. SFAS 115 prevents the Company from classifying a
security as held-to maturity if the security might be sold for liquidity needs
or based on changes in interest rates. (2) Available-for-sale securities may be
sold to address liquidity and other needs of the Company. These securities are
held at "fair value" on the balance sheet with an increase or decrease to
stockholders' equity for unrealized gains or losses after adjustment of
amortization of deferred policy acquisition costs (per Securities and Exchange
Commission guidance as to the effect of SFAS 115 on SFAS 97 calculations of
deferred acquisition costs) and the recording of deferred income taxes. (3)
Trading securities are securities acquired for the purpose of selling them in
the near term. The Company does not currently intend to classify any of its
securities as trading securities.
Upon adoption of SFAS 115, the Company analyzed its debt securities and
determined that to maintain flexibility in its investment portfolio it would
classify a significant portion of its investment portfolio as available-for-sale
even though management did not have the intention of selling these securities.
As such, as of January 1, 1994, approximately $505.6 million of its debt
securities were classified as available-for-sale with approximately $254.2
million classified as held-to-maturity. The fair value of the available-for-sale
securities created a net unrealized after tax gain of $3.8 million, after
adjustment for deferred acquisition costs, at January 1, 1994. Due to an
investment portfolio repositioning program in mid 1994, the Company's life
insurance subsidiary transferred approximately $234 million of securities
classified as held-to-maturity in to the available-for-sale category with an
unrealized loss of $15.9 million. With the significant increase in interest
rates in 1994, the fair value of the available-for-sale securities at December
31, 1994 resulted in a net pretax unrealized loss of $79.1 million and a
deferred tax benefit of approximately $6.6 million. A tax valuation allowance of
approximately $20.3 million had been established for the additional tax benefit
that cannot be recognized at that time. In addition, deferred policy acquisition
costs have been increased by $12.8 million, net of a deferred tax liability of
$6.5 million, in conjunction with SFAS 115. The aggregate of these amounts is
included in the stockholders' equity section for unrealized losses on debt
securities at December 31, 1994.
During the first quarter of 1995 interest rates have decreased and the market
value of the debt securities classified as available-for-sale has risen
resulting in the net pretax unrealized loss dropping by $28.7 million from
December 31, 1994 to $50.4 million at March 31, 1995. The corresponding effects
of this is a deferred tax benefit of $4.2 million, a tax valuation allowance of
$12.1 million and deferred policy acquisition costs increase of $14 million, net
of a deferred tax adjustment of $4.8 million, at March 31, 1995. In the past,
changes in market interest rates have caused fluctuations in the value of
securities classified as available-for-sale which has created volatility in the
Company's stockholders' equity.
D. COMMITMENTS AND CONTINGENCIES
The Company's life insurance subsidiary is subject to state guaranty association
assessments. The assessments are made by associations to obtain funds to pay off
policyholders of insolvent insurance companies. During the three month periods
ended March 31, 1995 and 1994, the Company recorded approximately $75,550 and
$226,210 of assessments, respectively. The Company has no control over these
assessments and additional assessments in future years are probable but
indeterminable at this time.
5
SBM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Internal Revenue Service (the "IRS") has conducted examinations of the
Company's income tax returns for the years 1986 through 1990 and has proposed
several adjustments to increase taxable income relating to the timing of certain
deductions. Based on these adjustments, additional tax due would be
approximately $1.3 million plus interest. However, additional taxes currently
payable would be principally offset by deductions to taxable income in future
periods. The Company has filed a protest with the Appellate Division of the IRS
and is vigorously contesting all of the proposed adjustments. The Company
believes the ultimate resolution of this matter will not have a material adverse
effect on the Company's consolidated results of operations or financial
position.
The Company and its subsidiaries are involved in various litigation in the
ordinary course of business. In the opinion of management, the ultimate
resolution of such litigation will not have a material adverse effect upon the
financial condition or results of operations of the Company.
E. COMMON STOCK HELD BY EMPLOYEE BENEFIT PLANS
The Company's two employee benefit plans own 304,693 shares of Company common
stock. The value of the shares owned by the plans has been classified outside of
stockholders' equity as a separate line item on the Company's consolidated
balance sheet. The Company has entered into a written trustee agreement with the
trustee for the two plans pursuant to which the Company has agreed to purchase
common shares tendered to it from either benefit plan by the trustee at a price
equal to the higher of adjusted book value or fair market value. Adjusted book
value is defined in the agreement as the consolidated net assets of the Company
as reflected in its financial statements plus unrealized losses on marketable
equity securities plus the deferred income tax liability (if any) of the
Company's life insurance subsidiary. Historically, adjusted book value of
Company common stock in the two plans has been computed based upon amortized
cost value of debt securities. However, as is discussed in Note C, effective
January 1, 1994, SFAS 115 requires that debt securities classified as
available-for-sale be valued on a mark-to-market basis rather than at amortized
cost. Accordingly, with the required adoption of SFAS 115, common stockholders'
equity is in a deficit position. The Company has determined that, in connection
with the adoption of SFAS 115, the adjusted book value of Company common stock
held by employee benefit plans for purposes of the trustee agreement must be
computed based upon market value of available-for-sale debt securities. As such,
the adjusted book value for the common stock held by the plans is currently
negative.
However, as is discussed above, under the terms of the trustee agreement the
Company is required to repurchase Company common stock from the plans at a price
equal to the higher of adjusted book value or fair market value. In the past,
for purposes of the trustee agreement the Company has regarded adjusted book
value of Company stock as being equivalent to the fair market value of such
stock. However, with the adoption of SFAS 115, adjusted book value of Company
stock frequently will be greater or less than the fair market value of such
stock. Accordingly, the Company has obtained an independent determination of the
fair market value of its common stock as of June 30, 1994, for purposes of
valuing the Company's stock pursuant to the trustee agreement. The fair market
value of the Company stock held by the plans was determined by the valuation to
be $6.29 per common share. As this amount exceeds the adjusted book value of
Company stock, it has been used by management to determine the value of the
stock in the plans as of March 31, 1995. Because the valuation was performed as
of June 30, 1994, it may not precisely reflect the value of SBM common stock
held by the plans as of March 31, 1995. The Company is in the process of
obtaining an independent valuation as of December 31, 1994 for purposes of
valuing the Company's stock pursuant to the trustee agreement. Further, the
value determined by the independent valuation does not reflect the value of the
Company's common stock held by the Company's other shareholders.
During the first quarter of 1995, the trustee of the plans notified the Company
that it was tendering all shares held by the plans to the Company under the
trustee agreement. The tender indicated that the value of the stock should be
based on amortized cost adjusted book value in that it was the trustee's
interpretation that this was the appropriate method of valuing the stock under
the trustee agreement. The Company believes the trustee's tender of all shares
is not consistent with the trustee agreement and the valuation of
6
SBM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
the common stock held by the Plans should not be based upon amortized cost but
rather based on the methodology described above. The Company has subsequently
commenced a lawsuit against the trustee to obtain a declaratory judgment as to
the appropriate interpretation of the trustee agreement.
While the Company believes its interpretation of the trustee agreement is
appropriate, if it were determined that, for the limited purpose of establishing
the adjusted book value of the Company common stock in the two plans under the
trustee agreement, the plans should use amortized cost value of portfolio
securities rather than market value, this would have the effect at March 31,
1995 of increasing the value of the stock held by the plans by approximately
$2.5 million or $1.33 per share and reducing stockholders' equity by an equal
amount.
F. REGULATORY MATTERS
On November 16, 1994, the Commissioner of the MDC issued an administrative order
to the Company's life insurance subsidiary (SBM Life). The order restricts the
following types of material transactions without approval of the Commissioner:
merging or consolidating with another company; paying dividends; entering into
new reinsurance agreements; making material changes in management; increasing
salaries and benefits of officers or directors or making payment of bonuses;
entering into any transactions with officers and directors, including employment
agreements, or making other payments determined preferential by the
commissioner; disposing of, conveying, or encumbering its assets or its business
in force; or amending or entering into new contracts with the holding company or
other affiliated companies.
The issuance of the order was influenced by the SBM Life's A.M. Best rating
reduction and the significant unrealized depreciation in its investment
portfolio. An additional capital infusion to SBM Life will be necessary to
address the issues of the MDC and for possible re-evaluation of its rating.
The Company's face amount certificate subsidiary, SBMC, is subject to two
principal restrictions relating to its regulatory capital requirements. First,
under the Investment Company Act of 1940, SBMC is required to establish and
maintain minimum qualified assets in an amount of certificate reserves plus
$250,000 ($57,133,384 as of March 31, 1995). SBMC had qualified assets of
$62,614,363 at March 31, 1995 (before reduction of $3,387,258 for net unrealized
pretax losses on marketable equity and debt securities). Second, the Minnesota
Department of Commerce (MDC) has historically recommended to SBMC that face
amount certificate companies should maintain a ratio of stockholder's equity to
total assets at a minimum of 5% based upon a valuation of available-for-sale
securities reflected at amortized cost for purposes of this calculation. Under
this formula, SBMC's capital level was 9.7% at March 31, 1995. In November 1994,
based on the decline in value of SBMC's investment portfolio, resulting from
increasing interest rates in 1994 and SBMC's decreasing liquidity resulting from
reduced principal payments on SBMC's CMO portfolio, the MDC recommended that
SBMC increase its capital level. The MDC's concern was influenced by SBMC's
capital ratio, calculated including the effects of SFAS 115, which would have
been approximately 3.0% at March 31, 1995 without the capital contribution on
March 29, 1995. Therefore, on March 29, 1995, SBM Life, the parent company of
SBMC, contributed $1.5 million to the capital of SBMC. SBMC is now in compliance
with the MDC's recommendation.
The subsidiary has not paid dividends in the past and has no present intentions
to pay dividends in the near future, in order to increase capital resources.
7
SBM COMPANY AND SUBSIDIARIES
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
--------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
SALE AND LIQUIDIATION OF THE COMPANY
Pursuant to an Amended and Restated Stock and Asset Purchase Agreement dated
February 16, 1995, between the Company and ARM Financial Group, Inc., ("ARM"),
the Company has agreed to sell substantially all of the business operations and
assets of the Company to ARM (the "Proposed Transaction") for a purchase price
of $38.6 million, subject to certain adjustments. As part of the Proposed
Transaction, ARM will acquire all of the outstanding stock of the subsidiaries
and certain other assets of the Company and assume certain liabilities of the
Company. Additionally, the agreement requires ARM to contribute between $15-20
million in additional capital to the subsidiaries. The completion of the
Proposed Transaction is subject to a number of contingencies, including the
obtaining of regulatory and shareholder approvals and is expected to close late
in the second quarter of 1995.
In connection with the Proposed Transaction, ARM had entered into agreements
with the holders of the Series A Mandatory Redeemable Voting Convertible
Preferred Stock of the Company to purchase such Preferred Stock and 72,950
shares of Common Stock immediately prior to the closing of the Proposed
Transaction (the "Preferred Agreements"). The Preferred Agreements contain
provisions which, among other things, require (i) the holders of the Preferred
Stock to vote in favor of the Proposed Transaction and a liquidation of the
Company subsequent to the consummation of the Proposed Transaction, (ii) the
holders of the Preferred Stock to refrain from taking various actions which
might interfere with the Proposed Transaction, and (iii) those holders, ARM, and
the Company to enter into mutual releases to be effective upon the Proposed
Transaction.
As soon as practicable after consummation of the Proposed Transaction, the
Company intends to wind up and liquidate the Company. The Board of Directors of
the Company has adopted a Plan of Dissolution, such Plan to be effective upon
consummation of the Proposed Transaction. The Plan of Dissolution is also
subject to shareholder approval. In the liquidation, distributions to the
holders of the common stock will be subject to the senior rights of the holders
of the Company's Preferred Stock.
The consolidated financial statements have been prepared on an historical basis
of accounting and do not include any purchase accounting, liquidation accounting
or other adjustments which would result upon completion of the Proposed
Transaction and the Plan of Dissolution. (See Note B to the consolidated
financial statements.)
RESULTS OF OPERATIONS
Net income (loss) for the three months ended March 31, 1995, was $(1,141)
compared to $953,433 for the same period in 1994. The significant decrease in
consolidated net income relates to the decrease in earnings of the Company's
annuity and life insurance subsidiary, SBM Life, as discussed below.
ANNUITIES AND LIFE INSURANCE SEGMENT - SBM LIFE
In November 1994, A.M. Best informed SBM Life that its rating was being reduced
from A- (excellent) to B+ (very good). A.M. Best indicated that the reasons for
the rating change were SBM Life's concentration in CMOs even after the
disposition of $186 million of CMOs and its desire that SBM Life increase its
capital level. Also, during the third quarter of 1994, several adverse newspaper
articles were written concerning SBM Life's investment portfolio and the
unrealized depreciation associated with it. The combination of these
announcements and the reduction by A.M. Best of SBM Life's rating has and will
continue to negatively impact new sales, especially in the Tax Sheltered Annuity
("TSA") marketplace. Policy withdrawals and surrenders have also increased as a
result of the above. These factors should be considered in the review of the
following discussion.
8
SBM COMPANY AND SUBSIDIARIES
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
--------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
RESULTS OF OPERATIONS (CONTINUED)
The Company's life insurance subsidiary (SBM Life) has seen a decrease in
annuity premiums during the first quarter of 1995 compared to 1994 with premium
being $14.7 million in 1995 compared to $18.2 million in 1994. The decrease has
been in both single premium deferred annuities and first year premium on sales
of 403(b) tax sheltered flexible premium deferred annuities. This decrease is
mainly due to the A.M. Best rating change discussed above and, to a lesser
degree, product changes to its TSA product line which have not been fully
accepted by some agents and competition from competitive products such as
variable annuities.
Annuity surrenders and withdrawals for SBM Life for the three months ended March
31, 1995 compared to the same period last year were $44.2 million and $20.1
million, respectively. This increase in withdrawals is mainly attributable to
the A.M. Best rating change discussed above. During the past six years SBM Life
has had significant growth with its annuity reserves increasing from $143
million at December 31, 1987, to $766 million at March 31, 1995. With this
increasing level of annuity reserves a corresponding increase in surrenders and
withdrawals is expected. Many of the annuities sold by SBM Life allow the
annuitant a 10% per year free withdrawal privilege. As the number of outstanding
policies increases, a certain percentage of annuitants will elect to use this
feature. Also, each year a larger number of policies have the surrender charge
period expire which allows the annuitant to surrender their policy without any
penalty. On one particular product a significant number of policies are reaching
this point and surrenders on this product have increased. The higher interest
rates during 1994 and 1995, as compared to the renewal crediting rates being
paid on older annuities, have also caused some increase in withdrawals as
annuity holders look for other investments or annuities which have higher rates
of return. At March 31, 1995, approximately 45% of the outstanding annuities
have a 5% or less surrender charge.
Operating income before taxes, excluding the effect of realized gains/losses,
for SBM Life for the three months ended March 31, 1995, was $244,000 compared to
$1,421,000 for the same period in 1994. This decrease was the result of two main
items. First, the spread between investment income earned on its investment
portfolio and the interest credited on the outstanding annuities significantly
decreased. Return on invested assets excluding realized gains and losses for the
three months ended March 31, 1995 and 1994 was 7.38% and 7.64%, respectively.
The average rate of interest credited on annuities was 5.57% and 5.50% for the
periods ended March 31, 1995 and 1994, respectively, resulting in a year-to-date
net spread of 1.81% in 1995 and 2.14% in 1994. Second the increase in
withdrawals and surrenders during the first quarter of 1995 resulted in
increased amortization of deferred acquisitions costs. Amortization to date in
1995 was $1,650,000 compared to $1,025,000 for the same period last year.
FACE AMOUNT CERTIFICATE SEGMENT - SBM CERTIFICATE COMPANY ("SBMC")
Net investment income after income taxes for the three months ended March 31,
1995 was $119,204 compared to $37,314 for the same period in 1994. The increase
in net investment income is mainly due to a higher spread earned on SBMC's
investment portfolio in relation to interest paid on outstanding certificates.
Administrative and building expense decreases also contributed to the increase
in net investment income.
As a result of the increasing interest rate environment, SBMC increased the
interest rates offered on new Series 503 certificates throughout 1994 and on
January 25, 1995. SBMC is closely monitoring these new rates against competitive
products, mainly bank certificates of deposit. Further interest rate adjustments
(up or down) on new certificates will be made as deemed necessary.
Sales of new certificates for the first three months of 1995 are approximately
70% of the level of sales for the comparable period in 1994. In addition, during
the first three months of 1995, certificate renewal rates have decreased by
approximately 7% from historical renewal levels. SBMC believes these decreases
are mainly the result of the certificate of deposit marketplace currently being
very competitive as many financial institutions are offering special high rates
to induce customers to open new accounts. As noted above, SBMC has increased its
rates to remain as competitive as possible in order to attempt to maintain its
historical certificate renewal rates and generate new certificate sales while
still maintaining adequate operating spreads.
9
SBM COMPANY AND SUBSIDIARIES
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
--------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
RESULTS OF OPERATIONS (CONTINUED)
Also, in the first quarter of 1995, SBMC recognized $(314,000) in investment
capital losses as a result of selling $5 million of various securities and
reinvesting the proceeds in commercial paper. This was done in anticipation of
greater amounts of scheduled maturities in the first half of 1995 as discussed
below in "Liquidity".
As of March 31, 1995, CMOs represented 41% of SBMC's qualified assets. SBMC has
been able to achieve higher yields with these securities without assuming
additional credit risk as all of the CMOs are collateralized by U.S. Government
Agency/Instrumentality Securities. However, these securities do have additional
interest rate risk in that volatility in the interest rate market (as in 1994)
will cause the fair value of these securities to significantly fluctuate.
The Company believes that, given current market conditions, and assuming
relatively level rates of interest, its net interest margin will decline
slightly as outstanding certificates paying interest at lower rates mature and
are renewed at the slightly higher rates of interest, and as new Certificates
are sold at the current rates of interest.
MUTUAL FUND INVESTMENT ADVISORY SEGMENT
Mutual fund sales continue to decrease during 1995 with total fund sales
(excluding the State Bond Cash Management Fund) of approximately $2.9 million
for the three months ended March 31, 1995 compared to approximately $4.7 million
for the same period in 1994. Redemptions increased from $4.7 million in 1994 to
$6.0 million in 1995. Assets under management grew from $204 million at December
31, 1994 to $213 million at March 31, 1995 as a result of increases in value in
both the stock and bond markets.
CAPITAL RESOURCES
Beginning toward the end of the first quarter of 1994, the CMO marketplace
became very depressed. This was the result of two main items. First, interest
rates increased dramatically throughout 1994. As such, the economic value of any
debt security decreased significantly. In addition, prepayments on mortgages
underlying the CMOs decreased, resulting in reduced principal cash flows and
extensions of the average maturities of these bonds. Such factors had a negative
effect on the market value of the bonds. Second, combined with the rise in
interest rates, the CMO marketplace was negatively impacted due to the
technical/emotional change in the marketplace as a result of several well
publicized problems in several brokers/dealers, mutual funds and other
companies. The effect of the above has been a significant decrease in price in
CMOs which has resulted in significant unrealized losses in SBM Life's CMO
portfolio which represents 48% of SBM Life's investments at March 31, 1995.
As discussed in Note C, the adoption of SFAS 115 combined with the significant
unrealized losses in the Company's investment portfolio which under current
accounting rules must be charged against stockholders' equity has resulted in a
stockholders' equity deficiency of $8.7 million. However, while not included in
stockholders' equity because of its redemption feature (effective in the year
2004), the Company's outstanding mandatory redeemable voting convertible
preferred stock, which has a value of $18.9 million, and the common stock held
by employee benefit plans valued at $1.9 million should be considered an
integral part of the Company's capital base. As such, the Company's total
capital base including the preferred stock and common stock held by employee
benefit plans is $12.1 million.
10
SBM COMPANY AND SUBSIDIARIES
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
--------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
CAPITAL RESOURCES (CONTINUED)
In addition, while SBM Life's entire investment portfolio is being classified as
available-for-sale and valued at fair value under current accounting rules (as
described in Note C to the consolidated financial statements), it is the current
intention of management to hold a substantial portion of the investment
portfolio to maturity and not realize the current unrealized losses which have
been charged against stockholders' equity.
In 1994, as a result of the adoption of SFAS 115 and its impact on stockholders'
equity as a result of rising interest rates and the resulting unrealized losses
in the Company's investment portfolios, regulatory concerns regarding capital,
and the reduction in SBM Life's A.M. Best rating, the Company has had to look to
outside sources of capital and as a result has entered into the pending sale of
the Company. (See Note B to the consolidated financial statements.)
The ability of the Company to pay cash dividends to common and preferred
shareholders is dependent in large part upon the amount of dividends received
from subsidiaries, as well as regulatory and rating agency requirements. (See
Note F of the consolidated financial statements.)
As of March 31, 1995, dividends in arrears on the Company's mandatory redeemable
preferred stock were approximately $1,160,000.
LIQUIDITY
Liquidity for the Company is measured by the ability of each subsidiary or other
business segment to provide adequate cash flows to meet the needs of the
financial instruments it has issued and its operating expenses. Each of the
Company's business subsidiaries maintains liquidity based on past history and
expected future cash flow needs.
The A.M. Best rating reduction of SBM Life and the adverse newspaper articles in
late 1994 regarding SBM Life have increased surrender and withdrawal requests in
1995. As a result, SBM Life has increased its short-term investments to $54
million at March 31, 1995 through the sale of $25 million of U.S. Treasury
Notes, which resulted in a pretax loss of approximately $(138,000).
During the first quarter of 1995, SBMC sold approximately $5 million of
available-for-sale securities with a realized loss of $(314,000). These
securities were sold to generate funds to redeem matured certificates in the
first quarter of 1995 and to increase SBMC's short term investments in
anticipation of maturing certificates during the remainder of 1995.
While the CMO marketplace discussed above under "Capital Resources" and Note C
have significantly reduced the amount of principal received by the Company from
its CMO investments, the Company believes the above actions provide it with
ample liquidity for payment of surrenders, withdrawals and face amount
certificate maturities. However, if liquidity needs exceeded current cash flow
and short-term investments, the investment portfolios of SBM Life and SBM
Certificate are readily marketable and could be sold as necessary. If selling
securities were required, depending on the interest rate environment at the time
of sale, losses may be realized which would reduce the Company's capital level.
11
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Form 8-K, Items 5 and 7, February 16, 1995
SIGNATURE
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.
SBM COMPANY
Date _________________________ By: ___________________________________
/s/ 5-12-95 /s/Edward L. Zeman
Its: Vice President, Chief Operating Officer,
and Chief Financial Officer
S7:10QSEC
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000093706
<NAME> SBM COMPANY
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 648,317,303
<DEBT-CARRYING-VALUE> 13,923,608
<DEBT-MARKET-VALUE> 12,430,314
<EQUITIES> 714,866
<MORTGAGE> 33,636,210
<REAL-ESTATE> 1,462,149
<TOTAL-INVEST> 780,498,813
<CASH> 61,462,112
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 70,835,753
<TOTAL-ASSETS> 961,704,735
<POLICY-LOSSES> 877,947,462
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 57,176,977
<NOTES-PAYABLE> 0
<COMMON> 2,945,606
18,923,031
0
<OTHER-SE> (11,711,392)
<TOTAL-LIABILITY-AND-EQUITY> 961,704,735
100,840
<INVESTMENT-INCOME> 15,104,765
<INVESTMENT-GAINS> (451,613)
<OTHER-INCOME> 1,720,936
<BENEFITS> 11,737,132
<UNDERWRITING-AMORTIZATION> 1,778,235
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (10,141)
<INCOME-TAX> (9,000)
<INCOME-CONTINUING> (1,141)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,141)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
