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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1999 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
As of February 28, 2000, 250,000 shares of the registrant's common stock
were outstanding. The registrant is a wholly owned subsidiary and its common
stock is not traded on a public market.
DOCUMENTS INCORPORATED BY REFERENCE
None
The registrant meets the conditions set forth in General Instruction I (1)
(a) and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business.............................................................................................3
2. Properties...........................................................................................5
3. Legal Proceedings....................................................................................5
4. Submission of Matters to a Vote of Security Holders..................................................5
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters....................................................................6
6. Selected Financial Data..............................................................................6
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................................6
8. Financial Statements and Supplementary Data.........................................................12
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................................12
PART III
10. Directors and Executive Officers of the Registrant..................................................13
11. Executive Compensation..............................................................................13
12. Security Ownership of Certain Beneficial Owners and Management......................................13
13. Certain Relationships and Related Transactions......................................................13
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................14
Signatures..........................................................................................16
Index to Financial Statements......................................................................F-1
2
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
SBM Certificate Company (the "Company") was incorporated in Minnesota
in June of 1990, to assume the face-amount certificate business of SBM
Company ("SBM"). Effective December 31, 1993, SBM transferred all of the
Company's shares of common stock to its wholly owned subsidiary, State Bond
and Mortgage Life Insurance Company ("SBM Life"). On June 14, 1995, the
Company became a wholly owned subsidiary of ARM Financial Group, Inc.
("ARM") pursuant to ARM's purchase of substantially all of the assets and
business operations of SBM (the "Acquisition").
On December 20,1999 ARM filed a voluntary petition for relief under the
provisions of chapter 11 of the U.S. Bankruptcy Code (the "Code") in the
United States Bankruptcy Court for the District of Delaware. ARM is as a
debtor in possession under the Code. ARM provided retirement savings and
investment products through its insurance company subsidiaries. On March 3,
2000 ARM completed the sale of its insurance subsidiaries to Western and
Southern Life Insurance Company ("Western and Southern") ("the Insurance
Transaction") (see Item 7 below). On March 28, 2000 ARM entered into a
definitive agreement to sell the Company to 1st Atlantic Guaranty
Corporation ("1st Atlantic") for a purchase price of $650,000. Of the
purchase price, $250,000 will be paid directly to ARM and $400,000 will be
placed in escrow for 18 months. The escrowed proceeds shall be used to fund
certain indemnifications of ARM. Immediately prior to the closing of the
sale of the Company, the Company shall (subject to obtaining appropriate
regulatory approvals) dividend to ARM an amount equal to the Company's
shareholder's equity less (i) $250,000 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 closing of this transaction is subject to various
approvals, including that of the Bankruptcy Court, and is expected to close
in the second quarter of 2000.
Pursuant to a continuing hardship exemption from the electronic filing
requirements of the Securities Exchange Act of 1934 (the "1934 Act"), ARM
now makes all of its public filings in paper format. Accordingly, copies
of ARM's public filings filed after March 1, 2000, may be obtained from the
Public Reference Department of the Securities Exchange Commission, 450
Fifth Street, NW, Washington, DC 20549. The 1999 Form 10-K for ARM will not
be filed within the period prescribed by the requirements for such
filings in the 1934 Act.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company has one business segment.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The Company is an issuer of fixed-rate face-amount certificates
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). A face-amount certificate is an obligation of the Company requiring
the Company to pay certificate holders the original invested amount of the
certificate, plus a three-year fixed-rate return, at a given maturity date.
The Company selects the interest rate offered on the face-amount
certificates based on the short to intermediate term sections of the yield
curve. Face-amount certificates, which are similar to bank certificates of
deposit, generally compete with various types of individual savings
products offered by banks and insurance companies that provide a fixed rate
of return on investors' money. The Company's face-amount certificates are
sold primarily in the Midwest.
3
The Company's face-amount certificates are distributed by ARM
Securities Corporation ("ARM Securities"), a wholly owned subsidiary of
ARM, pursuant to an Underwriting Agreement. ARM Securities currently uses a
network of independent agents to sell and service the face-amount
certificates. ARM Securities is registered with the Securities and Exchange
Commission (the "SEC") as a broker-dealer under the provisions of the
Securities Exchange Act of 1934, as amended. On April 4, 2000, ARM entered
into a Stock Purchase Agreement to sell ARM Securities to ND Holdings, Inc.
The sale of ARM Securities is subject to Bankruptcy Court and other
regulatory approvals, and is expected to close during the second quarter.
Upon the consummation of the sale of the Company it will likely need to
enter into an underwriting agreement with a different broker-dealer.
The Company's gross margin is derived primarily from the margin between
earnings on investments and amounts paid or credited on its fixed-rate
certificate deposits ("net investment spread"). The Company's net income is
determined by deducting investment and other expenses and federal income
taxes from gross margin. The net investment spread is affected 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 the Company's earnings.
The Company's face-amount certificate business generally competes with
various types of individual savings products that offer a fixed rate of
return on investors' money, especially insurance and bank products. Some of
these other products are insured by governmental agencies or funds or
independent third parties. The certificates offered by the Company are not
guaranteed or insured by any governmental agency or fund or independent
third party. The Company's business is highly competitive and the Company
competes with many other companies having greater financial resources,
larger sales forces, and greater access to customers. The Company's ability
to offer competitive interest rates, attractive terms, and efficient
service are the Company's primary basis for meeting competition.
The Company has no employees. Pursuant to an Investment Services
Agreement and an Administrative Services Agreement, the Company's
operations have been administered and managed by ARM. 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 Life Insurance Company ("Integrity") (see Item 7
below). Employees of Integrity are assisting ARM in winding up ARM's
affairs, including the administration of the Company, pursuant to a
Transition Services Agreement dated March 3, 2000 (the "Transition Services
Agreement"). The Transition Services Agreement has a term of eighteen
months, but may be terminated by Western and Southern after six months,
upon 90 days notice.
Pursuant to a Letter Agreement dated February 17, 2000 (as amended on
March 1, 2000, the "WTR&A Agreement"), ARM retained Walker, Truesdell,
Radick & Associates ("WTR&A") as its Restructuring Agent, to provide
consulting and management services to ARM, including services related to
the sale of the Company to 1st Atlantic. On March 2, 2000, WTR&A's
retention was approved by the Bankruptcy Court. WTR&A is a consulting firm
that specializes in crisis management, bankruptcy administration and asset
liquidation services.
4
Like many financial services companies, which offer investment
opportunities to the public, the Company is subject to regulation and
supervision by federal and state regulators. The 1940 Act and rules issued
by the SEC thereunder specify certain terms for face-amount certificates,
the method for calculating reserve liabilities on outstanding certificates,
the minimum amounts and types of investments to be deposited with a
qualified custodian to support such reserve liabilities, and a variety of
other restrictions on the operation and governance of a face-amount
certificate company. Pursuant to statutory authority, the Minnesota
Department of Commerce ("MDC") and the Illinois Secretary of State exercise
supervisory powers over the Company's face-amount certificate business
similar to those under the 1940 Act. In addition, the MDC conducts
examinations of the Company on a periodic basis. The offer and sale of the
Company's face-amount certificates also are subject to federal and state
securities laws.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
The Company has no foreign operations.
ITEM 2. PROPERTIES
The Company's and ARM's corporate executive offices (the "Corporate
Offices") are located at 515 West Market Street, Louisville, Kentucky. The
Corporate Offices are the location of the Company's executive officers and the
primary location for ARM's accounting, legal and marketing activities and
various other support personnel.
The Company's administrative offices are located in New Ulm, Minnesota, at
100 North Minnesota Street.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of the Company's property the
subject of, any material pending legal proceedings, other than ordinary
litigation routine to the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
This information is omitted in accordance with Instruction (I)(2)(c) to
Form 10-K.
5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is currently no public market or trading in the common stock of the
Company. All of the Company's 250,000 outstanding shares of common stock are
held by ARM as of December 31, 1999. The Company has never paid cash dividends
on its common stock.
The Company is subject to two principal restrictions on its ability to pay
dividends in addition to the generally applicable restrictions and requirements
of Minnesota corporate law. First, pursuant to Section 28(b) of the 1940 Act,
the Company is required to establish and maintain qualified assets having a
value not less than the aggregate of certificate reserves plus $250,000. Second,
the MDC has determined that face-amount certificate companies such as the
Company should maintain a ratio of shareholder's equity to total assets of a
minimum of 5%. For purposes of determining compliance with both requirements,
assets are based upon a valuation of available-for-sale securities reflected at
amortized cost. The Company could not pay dividends if it did not meet both of
these two requirements or if payment of a dividend would cause it not to meet
such requirements. As of December 31, 1999, the Company had qualified assets in
excess of certificate reserves plus $250,000 of $4.6 million and total assets in
excess of the 5% ratio of $3.2 million.
ITEM 6. SELECTED FINANCIAL DATA
This information is omitted in accordance with Instruction (I)(2)(a) to
Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RELATIONSHIP WITH ARM FINANCIAL GROUP, INC.
The Company is a wholly owned subsidiary of ARM. Pursuant to an Investment
Services Agreement and an Administrative Services Agreement, the Company's
operations are administered and managed by ARM.
On July 29, 1999, ARM announced that it was restructuring its institutional
business and positioning its retail business and technology operations for the
sale of ARM or its businesses or its assets. Following the July 29, 1999
announcement, the ratings of ARM and Integrity were significantly lowered
several times by four major rating agencies, materially and adversely affecting
Integrity's ability to market and maintain persistency of retail products. As a
result, ARM sought protection with respect to its insurance subsidiary,
Integrity, from the Ohio Department of Insurance. Integrity is domiciled in
Ohio. On August 20, 1999, Integrity consented to a Supervision Order issued by
the Ohio Department of Insurance. The supervision order was terminated on March
3, 2000 as a result of the consummation of the Insurance Transaction.
On December 17, 1999 ARM announced that it had signed a definitive
agreement whereby Western and Southern would acquire ARM's insurance
subsidiaries, Integrity and National Integrity
6
Life Insurance Company. The acquisition of the insurance companies by Western
and Southern was implemented in a voluntary petition for relief under chapter 11
of the Bankruptcy Code filed on December 20, 1999 in the United States
Bankruptcy Court for the District of Delaware. In re: ARM Financial Group, Inc.,
Case No.: 99-4430(Judge Walsh). The transaction was approved by the Bankruptcy
Court on March 2, 2000 and closed on March 3, 2000.
Western and Southern did not acquire the Company or ARM Securities. 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 Life Insurance Company ("Integrity"). (see Item 7 below).
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.
During the fourth quarter of 1999, the Company entered into discussions
with several companies to evaluate the possibility of a sale of the Company to
one of these companies. As described in Part I, Item 1(a) above, on March 28,
2000 ARM and the Company entered into a definitive agreement to sell the Company
to 1st Atlantic. 1st Atlantic is a Maryland corporation currently engaged in the
sale of face-amount certificates. There can be no assurance that a transaction
will be consummated, or that the required approvals of the Bankruptcy Court and
various other regulatory bodies will be received. If a closing cannot be
consummated with 1st Atlantic, ARM may seek to sell the Company to another
party, or to avail itself of other options that may be available to it,
including the possible refund of currently held certificates and the dissolution
of the Company (subject to regulatory approval).
Pursuant to the WTR&A Agreement, ARM retained 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.
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998
Net investment income (net income excluding net realized investment gains
and losses) was $408,673 and $133,733 for 1999 and 1998, respectively. The
increase in net investment income was primarily attributable to a decrease in
real estate expenses (due to the sale of real estate in 1998), and lower
investment and other expenses.
Net investment spread, which is the difference between investment income
and interest credited on certificate reserves, decreased to $0.7 million during
1999 from $0.8 million in 1998. These amounts reflect net investment spread of
1.20% and 1.12% during 1999 and 1998, respectively, between the Company's
investment yield on average cash and investments and the average rate
7
credited on certificate reserves. The Company's investment income decreased to
$2.3 million from $2.8 million for 1999 and 1998, respectively. These amounts
represent investment yields of 6.20% and 6.46% on average cash and investments
of $36.9 million and $43.8 million for 1999 and 1998, respectively. This
decrease in annualized investment yield on cash and investments was primarily
attributable to the Company investing in lower yielding securities during 1999
compared to 1998.
Interest credited on certificate reserves was $1.6 million and $2.1 million
for 1999 and 1998, respectively. These amounts represent average rates of
interest credited of 5.00% and 5.34% on average certificate reserves of $32.3
million and $38.7 million for 1999 and 1998, respectively. The majority of the
Company's outstanding face-amount certificates are fixed-rate three year
contracts. The Company monitors credited interest rates for new and renewal
issues against competitive products, mainly bank certificates of deposit.
Credited interest rate adjustments (up or down) on new certificates are made as
the Company deems necessary. New and renewal contracts issued during 1999 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 $369,825 and $575,823 for 1999 and 1998,
respectively. The decrease in investment and other expenses is primarily
attributable to a decrease in management and investment advisory fees, deferred
acquisition cost amortization and renewal commissions, and real estate expenses
in 1999 of $53,093, $85,316 and $87,813, respectively, compared to 1998.
Realized investment losses (net of gains) were $470,507 and $152,977 for
1999 and 1998, respectively. Realized investment losses for 1998 include a loss
of $178,795 related to the write-down to fair value and subsequent sale of the
Company's real estate investment. Other realized investment gains and losses
were primarily interest-rate related and attributable to the asset/liability
management strategies of the Company. Fixed maturities and equity securities
(i.e., non-redeemable preferred stock) classified as available-for-sale are sold
during rising and falling interest rate environments which can result in
period-to-period swings in interest-rate related realized investment gains and
losses.
In the event that the Company experiences higher than historical levels of
certificate surrenders, the Company might need to liquidate investments other
than in accordance with its normal asset/liability management strategy and, as a
result, the Company could experience substantial realized investment losses. If
the Company requires additional capital, it is unlikely that such capital would
be available from ARM. (SEE "-RELATIONSHIP WITH ARM FINANCIAL GROUP, INC.")
During 1999, net income was $36,143 compared to $30,643 in 1998. The
increase was primarily attributable to an increase in net investment income
partially offset by an increase in net realized investment losses.
Certificate reserves decreased $4.0 million or 11.6% during 1999, 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 1999, which enhanced the attractiveness of competing
products, such as money market funds and bank certificates of deposit. For
certificates reaching their maturity date during 1999 and 1998, 66% and 61%,
respectively, were renewed.
8
1998 COMPARED WITH 1997
Net investment income was $133,733 and $258,205 for 1998 and 1997,
respectively. The decrease in net investment income was primarily attributable
to a decrease in net investment spread, partially offset by lower investment and
other expenses.
Net investment spread decreased to $0.8 million during 1998 from $1.1
million in 1997. These amounts reflect net investment spread of 1.12% and 1.63%
during 1998 and 1997, respectively, between the Company's investment yield on
average cash and investments and the average rate credited on certificate
reserves. The Company's investment income decreased to $2.7 million from $3.9
million for 1998 and 1997, respectively. These amounts represent investment
yields of 6.46% and 7.43% on average cash and investments of $43.8 million and
$52.9 million for 1998 and 1997, respectively. This decrease in investment yield
on cash and investments was primarily attributable to the Company investing in
more corporate and plain vanilla mortgage-backed securities during 1998 compared
to 1997. As a result of this trading activity, above normal average cash
balances were held, further depressing the investment yield.
Interest credited on certificate reserves was $2.1 million and $2.8 million
for 1998 and 1997, respectively. These amounts represent average rates of
interest credited of 5.34% and 5.80% on average certificate reserves of $38.7
million and $48.2 million for 1998 and 1997, respectively. New and renewal
contracts issued during 1998 had crediting rates that were generally lower than
contracts that matured during 1998, resulting in the overall decrease in the
average crediting rate.
Investment and other expenses were $575,823 and $755,256 for 1998 and 1997,
respectively. The decrease in investment and other expenses was primarily
attributable to a decrease in management and investment advisory fees and real
estate expenses in 1998 of $39,333 and $76,247, respectively, compared to 1997.
In addition, there was no goodwill amortization during the year ended December
31, 1998 compared to the $23,833 for the year ended December 31, 1997. The
goodwill asset became fully amortized during the second quarter of 1997.
Realized investment losses were $152,977 and $268,002 for 1998 and 1997,
respectively. Realized investment losses for 1998 included loss of $178,795
related to the write-down to fair value and subsequent sale of the Company's
real estate investment. Other realized investment gains and losses were
primarily interest-rate related and attributable to the asset/liability
management strategies of the Company. Fixed maturities and equity securities
(i.e., non-redeemable preferred stock) classified as available-for-sale are sold
during rising and falling interest rate environments which can result in
period-to-period swings in interest-rate related realized investment gains and
losses.
During 1998, net income was $30,643 compared to $94,688 in 1997. The
decrease was primarily attributable to a decrease in net investment income.
Certificate reserves decreased $11.1 million or 24.5% during 1998, as
maturities and surrenders exceeded sales and renewals. The Company believes a
significant factor leading to the decrease was that the certificate of deposit
marketplace was very competitive, as many financial institutions
9
offered special high rates to induce customers to open new accounts. For
face-amount certificates reaching their maturity date during 1998 and 1997, 61%
and 64%, respectively, were renewed.
ASSET PORTFOLIO REVIEW
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% and 97%
investment grade as of December 31, 1999 and 1998, respectively. 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 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 December 31, 1999, the
Company held no securities that 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 and
collateralized mortgage obligations ("CMOs"), totaled $10.3 million at December
31, 1999, representing 30.1% of total qualified assets (48.0% at December 31,
1998). The Company's investments in CMOs represented 29.2% and 46.7% of the
Company's qualified assets as of December 31, 1999 and 1998, respectively. MBSs,
including CMOs, are subject to risks associated with prepayments of the
underlying mortgage loans. Prepayments cause these securities to have actual
maturities different from those expected at the time of purchase. The degree to
which a security is susceptible to either an increase or decrease in yield due
to prepayment speed adjustments is influenced by the difference between its
amortized cost and par, the relative sensitivity of the underlying mortgages
backing the assets to prepayments in a changing interest rate environment and
the repayment priority of the securities in the overall securitization
structure. Prepayment sensitivity is evaluated and monitored, giving full
consideration to the collateral characteristics, such as weighted average coupon
rate, weighted average maturity and the prepayment history of the specific loan
pool. Additionally, the Company routinely projects three-year liability and
asset cash flows to monitor the level of liquidity for maturing face-amount
certificates.
Based on the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company currently classifies its fixed maturity and equity
securities as available-for-sale. Such securities are carried at fair value and
changes in fair value, net of related deferred income taxes, are charged or
credited directly to shareholder's equity. Fluctuations in interest rates during
1999 resulted in unrealized losses of $825,522 at December 31, 1999 compared to
unrealized gains of $70,448 (net of $37,942 in deferred income taxes) at
December 31, 1998. Volatility in reported shareholder's equity occurs as a
result of the application of SFAS No. 115, which requires some assets to be
carried at fair value while other assets and all liabilities are carried at
historical values. As a result, adjusting the shareholder's equity for changes
in the fair value of the Company's fixed maturities and equity securities
without reflecting offsetting changes in the value of the Company's liabilities
or other
10
assets creates volatility in reported shareholder's equity but does not
reflect the underlying economics of the Company's business.
LIQUIDITY AND FINANCIAL RESOURCES
As of December 31, 1999, the Company had $4.6 million of qualified assets
in excess of the minimum amount required by the 1940 Act and the rules and
regulations promulgated thereunder by the SEC, as computed in accordance with
Section 28(b) of the 1940 Act. In addition, the MDC has historically recommended
to the Company that face-amount certificate companies should maintain a ratio of
shareholder's equity to total assets of a minimum of 5% based upon a valuation
of available-for-sale securities reflected at amortized cost for purposes of
this calculation. Under this formula, the Company's capital ratio was 14.0% at
December 31, 1999. The Company has never paid cash dividends on its common stock
in order to maintain and increase capital resources.
The primary liquidity requirement of the Company relates to its payment of
certificate maturities and surrenders. The principal sources of cash to meet
such liquidity requirements are investment income and proceeds from maturities
and redemptions of investments.
At December 31, 1999, cash and cash equivalents totaled $14.4 million, an
increase of $11.1 million from December 31, 1998. Due to the uncertainty
surrounding ARM and the ownership of the Company significantly higher levels of
cash and cash equivalents were maintained in 1999. The Company's aim is to
manage its cash and cash equivalents position so as to satisfy short-term
liquidity needs. In connection with this management of cash and cash
equivalents, the Company may invest idle cash in short duration fixed maturities
to capture additional yield when short-term liquidity requirements permit.
Cash flows of $2.1 million, $2.2 million and $4.0 million were generated
from operating activities in 1999, 1998 and 1997, respectively. These cash flows
resulted principally from investment income, less management and investment
advisory fees and commissions paid. Proceeds from sales, redemptions and
maturities of investments generated $37.0 million, $50.1 million and $93.1
million in cash flows during 1999, 1998 and 1997, respectively, which were
offset by purchases of investments of $22.5 million, $49.3 million and $79.5
million, respectively.
YEAR 2000
ARM completed its Year 2000 compliance project as it relates to the Company
prior to December 31, 1999. The costs of ARM's Year 2000 initiatives were not
material to ARM's results of operations or financial condition. Likewise, costs
to the Company that related to Year 2000 compliance were not material to the
Company's results of operations or financial condition.
To date, the Company has experienced no major interruption of business
activities. Even though ARM has assessed and continues to assess third party
issues, it has no direct ability to influence the compliance actions of such
parties. Accordingly, while ARM believes its actions in this regard should have
the effect of reducing Year 2000 risks, it is unable to eliminate them or to
estimate the ultimate effect Year 2000 risks will have on ARM's operations.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements begin on page F-3. Reference is made to
the Index to Financial Statements on page F-1 herein. There is no additional
supplementary data filed herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with independent accountants
on accounting, auditing, or financial reporting matters.
12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is omitted in accordance with Instruction (I)(2)(c) to
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
This information is omitted in accordance with Instruction (I)(2)(c) to
Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is omitted in accordance with Instruction (I)(2)(c) to
Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is omitted in accordance with Instruction (I)(2)(c) to
Form 10-K.
13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS.
See financial statements index on page F-1 of this document for a
listing of financial statements and related report of independent
auditors included in this report.
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules of the Company and the
related Report of Independent Auditors are incorporated herein as
follows:
Report of Independent Auditors
Schedule I Investments in Securities of Unaffiliated
Issuers-December 31, 1999
Schedule V Qualified Assets on Deposit-December 31, 1999
Schedule VI Certificate Reserves-Year Ended December 31, 1999
Schedule XII Valuation and Qualifying Accounts-December 31, 1999
Schedules required by Article 6 of Regulation S-X for face-amount
certificate investment companies other than those listed are omitted
because they are not required, are not applicable, or equivalent
information has been included in the financial statements and notes
thereto, or elsewhere herein.
3. EXHIBITS
See Exhibit Index on page 15 of this report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter of 1999.
14
SBM CERTIFICATE COMPANY
EXHIBIT INDEX
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
3.1 Articles of Incorporation-filed as Exhibit 3(a) to Registration
Statement No. 33-38066 dated December 4, 1990.*
3.2 By-laws-filed as Exhibit 3(b) to Registration Statement No. 33-38066
dated December 4, 1990.*
4 Instruments defining the rights of security holders-Form of Series 503
Certificate filed as Exhibit 4 to Registration Statement on Form
N-8B-4, File No. 811-6268, filed April 1, 1991.*
10.1 Underwriting Agreement by and between the Company and SBM Financial
Services, Inc. dated June 14, 1995, filed as Exhibit 10(b) to
Amendment No. 7 to Registration Statement No. 33-38066 of the Company
dated March 5, 1996.*
10.2 Administrative Services Agreement by and between the Company and ARM
Financial Group, Inc. dated as of June 14, 1995, filed as Exhibit
10(c) to Amendment No. 7 to Registration Statement No. 33-38066 of the
Company dated March 5, 1996.*
10.3 Investment Services Agreement by and between the Company and ARM
Financial Group, Inc. dated as of June 14, 1995, filed as Exhibit
10(d) to Amendment No. 7 to Registration Statement No. 33-38066 of the
Company dated March 5, 1996.*
10.4 Custody Agreement, as amended and supplemented, between the Company
and First Trust National Association dated December 20, 1990, filed as
Exhibit 10(b) to Amendment No. 1 to Registration Statement No.
33-38066 of the Company dated January 2, 1991.*
10.5 Form of Tax Allocation Agreement by and among the Company, ARM
Financial Group, Inc. and certain ARM subsidiaries dated March 21,
1996, filed as Exhibit 10.1 to Form 10-Q of the Company, File No.
811-6268, filed May 14, 1996.*
10.6 Policies on Asset/Liability Risk Management and Investment Management
of the Company, adopted as of March 19, 1997, filed as Exhibit 10(g)
to Form S-1 Registration Statement of the Company File No. 33-38066,
filed March 2, 1998.*
10.7 Indemnification Agreement by and between the Company and ARM Financial
Group, Inc. dated June 26, 1997, filed as Exhibit 10(h) to Form S-1
Registration Statement of the Company File No. 33-38066, filed March
2, 1998.*
10.8 Definitive Agreement
27 Not applicable.
* Previously filed as indicated and incorporated herein by reference.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned; thereunto duly authorized, on April 11, 2000.
SBM Certificate Company
Walker, Truesdell, Radick and Associates, Inc.
Restructuring Agent
By: /s/ Hobart G. Truesdell
-------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 11th day of April 2000.
NAME TITLE
---- -----
/s/ PAUL J. HOUK Director
- ------------------------------------------------------
Paul J. Houk
/s/ ROBERT J. MARSHALL, JR. Director
- ------------------------------------------------------
Robert J. Marshall, Jr.
/s/ WALTER L. SALES Director
- ------------------------------------------------------
Walter L. Sales
16
SBM CERTIFICATE COMPANY
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors..................................................................................F-2
Balance Sheets as of December 31, 1999 and 1998.................................................................F-3
Statements of Operations for the Years Ended December 31, 1999, 1998, and 1997..................................F-5
Statements of Shareholder's Equity for the Years Ended December 31, 1999, 1998 and 1997.........................F-6
Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997...................................F-7
Notes to Financial Statements...................................................................................F-8
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SBM Certificate Company
We have audited the accompanying balance sheets of SBM Certificate Company as of
December 31, 1999 and 1998, and the related statements of operations,
shareholder's equity, and cash flows for each of the three years in the period
ended December 31, 1999. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SBM Certificate Company at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that SBM
Certificate Company will continue as a going concern. As more fully described in
Note 2, SBM Certificate Company is a wholly owned subsidiary of ARM Financial
Group, Inc. On a consolidated basis, ARM Financial Group, Inc. reported a net
loss of $271 million for 1999 and has a capital deficiency. These conditions
raise substantial doubt about ARM Financial Group Inc.'s ability to continue as
a going concern. Because of the aforementioned conditions relating to ARM
Financial Group Inc., and the uncertainties surrounding its plans to address its
liquidity problems, the parent company's actions could have a substantial effect
on the Company's operations, therefore, there is also substantial doubt about
whether SBM Certificate Company will continue as a going concern. (Management's
plans in regard to these matters are also described in Note 2.) The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Louisville, Kentucky
March 31, 2000
F-2
SBM CERTIFICATE COMPANY
BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1999 1998
---------------------------------------
ASSETS
Qualified assets:
Cash and investments:
Investments in securities of unaffiliated issuers:
Fixed maturities, available-for-sale, at fair value (amortized cost:
1999-$19,886,594; 1998-$34,136,751) $ 18,998,215 $ 34,149,196
Equity securities, at fair value (cost: 1999-1998 - $290,688) 353,545 390,776
Certificate loans 124,933 164,209
Cash and cash equivalents 14,407,479 3,279,970
---------------------------------------
Cash and investments 33,884,172 37,984,151
Receivables:
Dividends and interest 180,962 296,013
Receivable for investment securities sold 53,997 22,249
---------------------------------------
Total receivables 234,959 318,262
---------------------------------------
Total qualified assets 34,119,131 38,302,413
Other fixed maturities, available-for-sale, at fair value (amortized
cost: 1998-$851,978) (unaffiliated issuer) - 847,835
Deferred acquisition costs 150,400 204,228
Other assets 15,368 -
---------------------------------------
Total assets $ 34,284,899 $ 39,354,476
=======================================
F-3
SBM CERTIFICATE COMPANY
BALANCE SHEETS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1999 1998
------------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Certificate reserves $ 30,116,686 $ 34,067,826
Deferred federal income taxes - 27,265
Accounts payable and other liabilities - 231,345
------------------------------------
Total liabilities 30,116,686 34,326,436
Shareholder's equity:
Common stock, $1 par value; 1,000,000 shares authorized;
250,000 shares issued and outstanding 250,000 250,000
Additional paid-in capital 3,050,000 3,050,000
Accumulated other comprehensive income (loss) from net unrealized
gains and losses on available-for-sale securities (825,522) 70,448
Retained earnings 1,693,735 1,657,592
------------------------------------
Total shareholder's equity 4,168,213 5,028,040
------------------------------------
Total liabilities and shareholder's equity $ 34,284,899 $ 39,354,476
====================================
SEE ACCOMPANYING NOTES.
F-4
SBM CERTIFICATE COMPANY
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
Investment income:
Interest income from securities $ 2,261,957 $ 2,699,491 $ 3,729,295
Other investment income 29,602 127,006 203,810
----------------------------------------------------
Total investment income 2,291,559 2,826,497 3,933,105
Investment and other expenses:
Management and investment advisory fees 154,042 207,135 246,468
Deferred acquisition cost amortization and renewal
commissions 193,973 279,289 288,974
Real estate expenses 2,610 90,423 166,670
Amortization of goodwill - - 23,833
Other expenses (income) 19,200 (1,024) 29,311
----------------------------------------------------
Total investment and other expenses 369,825 575,823 755,256
Interest credited on certificate reserves 1,615,074 2,063,311 2,795,360
----------------------------------------------------
Net investment income before
income taxes 306,660 187,363 382,489
Income tax benefit (expense) 102,013 (53,630) (124,284)
----------------------------------------------------
Net investment income 408,673 133,733 258,205
Realized investment losses (470,507) (152,977) (268,002)
Income tax benefit on realized
investment losses 97,977 49,887 104,485
----------------------------------------------------
Net realized investment losses (372,530) (103,090) (163,517)
----------------------------------------------------
Net income $ 36,143 $ 30,643 $ 94,688
====================================================
SEE ACCOMPANYING NOTES.
F-5
SBM CERTIFICATE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED SHAREHOLDER'S
STOCK CAPITAL INCOME (LOSS) EARNINGS EQUITY
---------------------------------------------------------------------------------------
Balance, January 1, 1997 $ 250,000 $3,050,000 $ 231,541 $1,532,261 $5,063,802
Net income 94,688 94,688
Change in net unrealized
gains on available-for-sale
securities, net of tax (176,818) (176,818)
------------------
Comprehensive loss (82,130)
---------------------------------------------------------------------------------------
Balance, December 31, 1997 250,000 3,050,000 54,723 1,626,949 4,981,672
Net income
30,643 30,643
Change in net unrealized
gains on available-for-sale
securities, net of tax 15,725 15,725
------------------
Comprehensive income 46,368
---------------------------------------------------------------------------------------
Balance, December 31, 1998 250,000 3,050,000 70,448 1,657,592 5,028,040
Net income 36,143 36,143
Change in net unrealized
gains (losses) on available-
for-sale securities, net of tax (895,970) (895,970)
------------------
Comprehensive loss (859,827)
---------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 250,000 $3,050,000 $(825,522) $1,693,735 $4,168,213
=======================================================================================
SEE ACCOMPANYING NOTES.
F-6
SBM CERTIFICATE COMPANY
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
----------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 36,143 $ 30,643 $ 94,688
Adjustments to reconcile net income to cash flows
provided by operating activities:
Provision for certificate reserves 1,615,074 2,063,311 2,795,360
Realized investment losses 470,507 152,977 268,002
Deferral of acquisition costs (140,145) (325,523) (314,805)
Amortization of deferred acquisition costs and
renewal commissions 193,973 279,289 288,974
Other amortization and depreciation 23,711 110,043 465,553
Deferred tax expense (benefit) 11,513 (79,525) (162,627)
Decrease in dividends and interest receivable 115,051 32,503 205,442
Changes in other assets and liabilities (247,085) (57,214) 323,092
----------------------------------------------------------
Cash flows provided by operating activities 2,078,742 2,206,504 3,963,679
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (22,469,407) (49,260,045) (79,455,679)
Maturities and redemptions 26,873,872 24,117,893 10,812,744
Sales 10,171,240 26,000,513 82,250,553
Sales, maturities and redemptions-mortgage loans and real
estate - 260,296 3,091
Repayment of certificate loans, net 39,276 22,083 87,076
----------------------------------------------------------
Cash flows provided by investing activities 14,614,981 1,140,740 13,697,785
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts paid to face-amount certificate holders (5,737,826) (13,423,346) (8,179,248)
Amounts received from face-amount certificate holders 171,612 301,208 325,456
----------------------------------------------------------
Cash flows used in financing activities (5,566,214) (13,122,138) (7,853,792)
----------------------------------------------------------
Net change in cash and cash equivalents 11,127,509 (9,774,894) 9,807,672
Cash and cash equivalents at beginning of year 3,279,970 13,054,864 3,247,192
----------------------------------------------------------
Cash and cash equivalents at end of year $ 14,407,479 $ 3,279,970 $ 13,054,864
==========================================================
SEE ACCOMPANYING NOTES.
F-7
SBM CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
SBM Certificate Company (the "Company") has been a wholly owned subsidiary
of ARM Financial Group, Inc. ("ARM") since June 14, 1995.
NATURE OF OPERATIONS
The Company is an issuer of face-amount certificates and is registered
under the Investment Company Act of 1940 (the "1940 Act"). A face-amount
certificate is an obligation of the Company requiring the Company to pay
certificate holders the original invested amount of the certificate, plus a
three-year fixed-rate return, at a given maturity date. The Company's
face-amount certificates are sold primarily in the Midwest. Face-amount
certificates, which are similar to bank certificates of deposit, generally
compete with various types of individual savings products offered by banks and
insurance companies that provide a fixed rate of return on investors' money.
BASIS OF PRESENTATION
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States.
INVESTMENTS
Fixed maturities and equity securities are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of taxes, reported as a separate component
of shareholder's equity in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The amortized cost of fixed maturities classified as
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization or accretion is computed using
the interest method and is included in investment income. Anticipated
prepayments on mortgage-backed securities are considered in determining the
effective yield on such securities. If a difference arises between anticipated
and actual prepayments, the carrying value of the investment is adjusted with a
corresponding charge or credit to investment income. Interest and dividends are
included in investment income. Certificate loans are carried at their unpaid
principal balances. Cash and cash equivalents consist of highly liquid
investments with maturities of three months or less from the time of purchase.
Security transactions are accounted for on the date the order to buy or sell is
executed. Realized gains and losses on the sale of investments are determined
based upon the specific identification method.
F-8
DEFERRED ACQUISITION COSTS
Costs of issuing new face-amount certificates, principally commissions,
have been deferred. These costs are amortized on a straight-line basis over the
initial maturity period of the certificates which is three years.
FACE-AMOUNT CERTIFICATE RESERVES
Face-amount certificates issued by the Company entitle certificate holders,
who have made either single or installment payments, to receive a definite sum
of money at maturity. Certificate reserves accrue interest, and cash surrender
values are less than accumulated certificate reserves prior to maturity dates.
The reserve accumulation rates, cash surrender values, and certificate reserves,
among other matters, are governed by the 1940 Act.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. The
Company files a consolidated federal income tax return with ARM and ARM's other
non-life insurance subsidiaries. Pursuant to a tax sharing agreement, the
consolidated income tax due is allocated among the companies based on each
company's proportionate share of taxable income. When tax benefits are
recognized for losses, (capital and operating) to the extent they can be used in
the consolidated return, the company that originally generated the loss is
reimbursed by the benefited company. However, in the event that no consolidated
tax is owed, the tax sharing agreement does not require ARM to reimburse its
subsidiaries for the use of a subsidiary's losses to offset ARM income.
USE OF ESTIMATES
The preparation of financial statements requires management of the Company
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
2. MATERIAL EVENTS OF PARENT COMPANY
As discussed in Note 1, 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 July 29, 1999, ARM announced that it was restructuring its
institutional business and positioning its retail business and technology
operations for the sale of ARM or its businesses or its assets. Following the
July 29, 1999 announcement, the ratings of ARM and Integrity were
significantly lowered several times by four major rating agencies, materially
and adversely affecting Integrity's ability to market and maintain
persistency of retail products. As a result, ARM sought protection with
respect to its insurance subsidiary, Integrity, from the Ohio Department of
Insurance. Integrity is domiciled in Ohio. On August 20, 1999, Integrity
consented to a Supervision Order issued by the Ohio Department of Insurance.
The supervision order was terminated on March 3, 2000 as a result of the
consummation of the Insurance Transaction.
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
F-9
insurance subsidiaries, Integrity Life Insurance Company ("Integrity") and
National Integrity Life Insurance Company. The acquisition of the insurance
companies by Western and Southern was implemented in a voluntary petition for
relief under chapter 11 of the Bankruptcy Code filed on December 20, 1999 in the
United States Bankruptcy Court for the District of Delaware. 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 or ARM Securities. 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 (see Item 7 below). 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.
During the fourth quarter of 1999, the Company entered into discussions
with several companies to evaluate the possibility of a sale of the Company to
one of these companies. On March 28, 2000 ARM entered into a definitive
agreement to sell the Company to 1st Atlantic Guaranty Corporation ("1st
Atlantic") for a purchase price of $650,000. Of the purchase price, $250,000
will be paid directly to ARM and $400,000 will be placed in escrow for 18
months. The escrowed proceeds shall be used to fund certain indemnifications of
ARM. Immediately prior to the closing of the sale of the Company, the Company
shall (subject to obtaining appropriate regulatory approvals) dividend to ARM an
amount equal to the Company's shareholder's equity less (i) $250,000 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 closing of this transaction is subject to
various approvals, including that of the Bankruptcy Court, and is expected to
close in the second quarter of 2000.
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.
F-10
3. INVESTMENTS
The amortized cost and estimated fair values of available-for-sale
securities were as follows:
------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------------------------
DECEMBER 31, 1999:
Fixed maturities:
Mortgage-backed securities $ 10,558,001 $ 28 $ 282,218 $ 10,275,811
Corporate securities 8,161,388 7,405 569,999 7,598,794
U.S. Treasury securities and
obligations of U.S. government
agencies 414,246 205 31,388 383,063
Foreign governments 450,602 - 13,220 437,382
Asset-backed securities 139,908 - 2,583 137,325
Obligations of state and political
subdivisions 162,449 3,435 44 165,840
------------------------------------------------------------------------
Total fixed maturities 19,886,594 11,073 899,452 18,998,215
Equity securities 290,688 62,857 - 353,545
------------------------------------------------------------------------
Total available-for-sale securities $ 20,177,282 $ 73,930 $ 899,452 $ 19,351,760
========================================================================
DECEMBER 31, 1998:
Fixed maturities:
Mortgage-backed securities $ 18,342,358 $ 74,953 $ 45,435 $ 18,371,876
Corporate securities 9,637,558 75,980 115,474 9,598,064
U.S. Treasury securities and
obligations of U.S. government
agencies 6,062,081 58,793 7,162 6,113,712
Foreign governments 450,787 - 42,056 408,731
Asset-backed securities 334,340 - 2,643 331,697
Obligations of state and political
subdivisions 161,605 11,346 - 172,951
------------------------------------------------------------------------
Total fixed maturities 34,988,729 221,072 212,770 34,997,031
Equity securities 290,688 100,088 - 390,776
------------------------------------------------------------------------
Total available-for-sale securities $ 35,279,417 $ 321,160 $ 212,770 $ 35,387,807
========================================================================
F-11
The amortized cost and estimated fair value of fixed maturity securities by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or repay
obligations with or without call or prepayment penalties and because
mortgage-backed and asset-backed securities provide for periodic payments
throughout their life.
DECEMBER 31, 1999
----------------------------------
ESTIMATED
FAIR
COST VALUE
----------------------------------
FIXED MATURITIES:
Due in one year or less $ 194,735 $ 194,940
Due after one year through five years 473,531 460,734
Due after five years through ten years 2,780,967 2,579,918
Due after ten years 5,739,452 5,349,487
Asset-backed securities 139,908 137,325
Mortgage-backed securities 10,558,001 10,275,811
----------------------------------
Total fixed maturities $ 19,886,594 $ 18,998,215
==================================
Gross gains of $101,621, $123,867 and $765,664 and gross losses of
$572,128, $95,449 and $1,082,809 were realized on sales of fixed maturities
classified as available-for-sale for the year ended December 31, 1999, 1998, and
1997, respectively.
Gross gains of $23,459 and $49,143 were recognized on equity securities
sold during 1998 and 1997, respectively. Gross losses of $1,062, were recognized
on equity securities sold for the year ended December 31, 1998. There were no
gross losses recognized on equity securities sold for the year ended December
31, 1997. There were no gross gains or losses recognized on equity securities
sold for the year ended December 31, 1999.
During 1998, the Company sold its sole investment in real estate and
realized a loss of $178,795 associated with the transaction.
4. COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources, including net income and the change in unrealized gains or
losses on the Company's available-for-sale securities.
F-12
The following table shows, for available-for-sale securities, a
reconciliation of the net unrealized gain (loss) arising during the period and
the change in net unrealized gains (losses) as reported on the accompanying
statements of shareholder's equity. Amounts are reported net of related tax at
the 35% statutory rate.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) arising
During period on available-for-sale securities $ (1,162,300) $ 99,925 $ (235,975)
Reclassification adjustment for net realized
(gains) losses included in net income 266,330 (84,200) 59,157
--------------------------------------------------------
Change in net unrealized gains (losses) on
available-for-sale securities $ (895,970) $ 15,725 $ (176,818)
=========================================================
5. CERTIFICATE RESERVES
Total certificate reserves at December 31 are summarized as follows:
MINIMUM ADDITIONAL
1999 1998 INTEREST INTEREST
-------------------------------------------------------------------------
Fully-paid certificates:
Single-payment series 503 $ 27,085,547 $ 30,754,255 2.50% 2.10% to 4.60%
Installment 1,958,776 2,084,595 2.50% to 3.50% 1.50% to 2.75%
Optional settlement 534,582 594,300 2.50% to 3.00% 2.00% to 2.75%
Due to unlocated certificate
holders 3,191 3,126 None
--------------------------------
29,582,096 33,436,276
Installment certificates:
Reserves to mature, by series:
120, and 220 256,219 302,400 3.25% 1.75% to 2.00%
315 120,540 135,104 3.50% 1.50% to 1.75%
Advance payments 157,831 194,046 * *
--------------------------------
534,590 631,550
--------------------------------
Total certificate reserves $ 30,116,686 $ 34,067,826
================================
* Minimum interest rates on advance payments are generally the same as the
rates on scheduled installment payments. Interest credited on advance
payments, however, is accruing at 5.00% and will continue at that rate
through 2000.
F-13
6. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair values of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined using available market information and
appropriate valuation methodologies. However, considerable judgement was
required to develop these estimates. Accordingly, the estimates are not
necessarily indicative of the amounts which could be realized in a current
market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the estimated fair value amounts.
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------
Assets:
Fixed maturities $18,998,215 $18,998,215 $ 34,997,031 $ 34,997,031
Equity securities 353,545 353,545 390,776 390,776
Certificate loans 124,933 124,933 164,209 164,209
Cash and cash equivalents 14,407,479 14,407,479 3,279,970 3,279,970
Liabilities:
Certificate reserves 30,116,686 30,223,837 34,067,826 34,251,701
Accounts payable and other liabilities - - 231,345 231,345
The following methods and assumptions were used in estimating fair values:
FIXED MATURITIES AND EQUITY SECURITIES
Fair values for investments in securities are based on quoted market
prices, where available. For fixed maturities and equity securities for which a
quoted market price is not available, fair values are estimated using internally
calculated estimates or quoted market prices of comparable instruments.
CERTIFICATE LOANS
The carrying value of certificate loans approximates their fair value.
CASH AND CASH EQUIVALENTS
The carrying amounts of cash and cash equivalents approximate their fair
value given the short-term nature of these assets.
CERTIFICATE RESERVES
The fair value of certificate reserves is based on a discounted cash flow
analysis, using the current interest rate offered on new certificates of 5.00%
at December 31, 1999 and 1998.
F-14
OTHER INVESTED ASSETS, OTHER ASSETS, ACCOUNTS PAYABLE AND OTHER LIABILITIES
The financial statement carrying amounts of other invested assets, other
assets, accounts payable and other liabilities are deemed to be a reasonable
approximation of their fair value.
7. FEDERAL INCOME TAXES
Deferred federal income taxes reflect the net tax effects of (i) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (ii)
operating and capital losses. Significant components of the deferred tax
liabilities and assets as of December 31, 1999 and December 31, 1998 were:
DECEMBER 31,
----------------------------------
1999 1998
----------------------------------
Deferred tax liabilities:
Net unrealized gains on available-for-sale securities $ - $ 37,936
Other 1,617 1,616
----------------------------------
Total deferred tax liabilities 1,617 39,552
Deferred tax assets:
Net unrealized losses on available for sale securities 288,933 -
Investments 96,145 73,867
Capital loss carryover 138,683 -
Net operating loss carryforward - 58,420
----------------------------------
Total deferred tax assets 523,761 132,287
Valuation allowance for deferred tax assets (522,144) (120,000)
----------------------------------
Net deferred tax assets 1,617 12,287
----------------------------------
Deferred tax liabilities shown on the accompanying balance sheets $ - $ 27,265
==================================
The Company's net operating loss carryforward of $166,915 at December 31,
1998 was fully utilized in 1999.
The components of the provision for federal income tax expense consist of
the following:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
Current $ (211,503) $ 83,268 $ 182,426
Deferred 11,513 (79,525) (162,627)
---------------------------------------------------
Total federal income tax expense (benefit) $ (199,990) $ 3,743 $ 19,799
===================================================
In the event that future tax assets are recognized on deductible temporary
differences for which a valuation allowance was provided at the Acquisition
date, such benefits are applied to first reduce the balance of goodwill. During
1997, goodwill was reduced by $89,262 as a result of realizing such
F-15
benefits. No such benefits were realized in 1999 and 1998. The 1997 reduction in
the valuation allowance of $314,521 reduced the goodwill balance to zero.
Federal income tax expense differs from that computed by using the federal
income tax rate of 35% as shown below.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
------------------------------------------------------
Income tax expense (benefit) at statutory rate $ (57,346) $ 12,035 $ 40,070
Unreimbursed capital loss carryover used by ARM - 281,842 -
Increase (decrease) in valuation allowance related to
capital loss carryover 66,700 (280,000) -
Decrease in contingent tax liability (200,000) - -
Dividend received deduction (7,211) (7,749) (12,457)
Tax-exempt interest (2,612) (4,194) (5,677)
Goodwill amortization - - 8,342
Other 479 1,809 (10,479)
------------------------------------------------------
Total federal income tax expense (benefit) $ (199,990) $ 3,743 $ 19,799
======================================================
The Company files a consolidated federal income tax return with ARM and
ARM's other non-life insurance subsidiaries. At December 31, 1999 and 1998,
($28,282) and $103,373 were due to/(from) ARM, respectively, pursuant to the tax
sharing agreement, related to ordinary losses.
8. RELATED PARTY TRANSACTIONS
Management and investment advisory fee expenses reflected in the
accompanying financial statements represent allocations of expenses from ARM.
These allocations include amounts for administrative and investment services,
including use of property, equipment and facilities. The allocations are
currently based on the proportion which such business and assets managed
represents of all of ARM's and its subsidiaries' business activities. The
allocations were $154,042, $207,135, and $246,468 for the years ended December
31, 1999, 1998, and 1997, respectively. Management believes that the methods
used to allocate such expenses are reasonable.
The Company has paid ARM Securities Corporation, an affiliate, $140,145,
$325,523 and $314,805 for the years ended 1999, 1998 and 1997, respectively, for
sales commissions and other issuance, underwriting and sales expenses.
9. SHAREHOLDER'S EQUITY AND REGULATORY MATTERS
The Company is subject to two principal restrictions relating to its
regulatory capital requirements. First, under the 1940 Act, the Company is
required to establish and maintain qualified
F-16
assets (as defined in Section 28(b) of the 1940 Act) having a value not less
than the aggregate of certificate reserves plus $250,000 ($30.4 million and
$34.3 million at December 31, 1999 and 1998, respectively). The Company had
qualified assets (at amortized cost) of $34.9 million and $38.2 million at those
respective dates.
For purposes of determining compliance with the foregoing provisions,
qualified assets are valued in accordance with District of Columbia Insurance
Laws (the "D.C. Laws") as required by the 1940 Act. Qualified assets for which
no provision for valuation is made in the D.C. Laws are valued in accordance
with rules, regulations, or orders prescribed by the SEC. These values are the
same as the financial statement carrying values, except that for financial
statement purposes, fixed maturities and equity securities classified as
available-for-sale are carried at fair value. For qualified asset purposes,
fixed maturities classified as available-for-sale are valued at amortized cost
and equity securities are valued at cost.
Second, the Minnesota Department of Commerce ("MDC") has historically
recommended to the Company that face-amount certificate companies should
maintain a ratio of shareholder's equity to total assets of a minimum of 5%
based upon a valuation of available-for-sale securities at amortized cost for
purposes of this calculation. Under this formula, the Company's capital ratio
was 14.0% and 12.6% at December 31, 1999 and 1998, respectively.
Pursuant to the required calculations of various states, the provisions of
the certificates, depository agreements, and the 1940 Act, qualified assets of
the Company were deposited with independent custodians to meet certificate
liability requirements as of December 31, 1999 and 1998, as shown in the
following table. Certificate loans, secured by applicable certificate reserves,
are deducted from certificate reserves in computing deposit requirements.
1999 1998
---------------------------------------
Qualified assets on deposit with:
Central depositary $ 34,214,584 $ 37,534,866
State governmental authorities 197,021 196,143
---------------------------------------
Total qualified assets on deposit 34,411,605 $ 37,731,009
=======================================
Required deposits (certificate reserves less certificate loans
plus $250,000) $ 30,241,753 $ 34,153,617
=======================================
Qualified assets on deposit consisted of investment securities, at cost plus
accrued interest at December 31, 1999 and 1998.
F-17
SBM CERTIFICATE COMPANY
INDEX TO FINANCIAL STATEMENT SCHEDULES
DECEMBER 31, 1999
Page
----
Schedule I Investments in Securities of Unaffiliated Issuers.............................................S-2
Schedule V Qualified Assets on Deposit...................................................................S-5
Schedule VI Certificate Reserves..........................................................................S-6
Schedule XII Valuation and Qualifying Accounts............................................................S-12
Schedules required by Article 6 of Regulation S-X other than those listed are
omitted because they are not required, are not applicable, or equivalent
information has been included in the financial statements and notes thereto, or
elsewhere herein.
S-1
SBM CERTIFICATE COMPANY
SCHEDULE I--INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS
DECEMBER 31, 1999
PRINCIPAL
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT COST (a)(b) VALUE (a)
- ---------------------------------------------------------------------------------------------------------------------
FIXED MATURITIES AVAILABLE-FOR-SALE:
U.S. TREASURY SECURITIES:
U.S. Treasury Note, 5.625%, due 5/15/2008 $ 200,000 $ 219,512 $ 188,124
U.S. Treasury Note, 5.50%, due 4/15/2000 195,000 194,734 194,939
--------------------------------
414,246 383,063
OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS:
Belmont County, Ohio, Sanitary Sewer District #3 Waterworks
Revenue Bonds, 4.25%, due 4/01/2004 24,000 22,930 23,353
Douglas County, Washington, Public Utilities District #1, Wells
Hydroelectric Revenue Bonds, 4%, due 9/01/2018 55,000 46,646 49,161
North Marshall, Kentucky, Water District, 5%, due 5/01/2006 25,000 24,076 24,573
Yuba County, California, Water Agency Bonds, 4%, due 3/01/2016 75,000 68,797 68,753
--------------------------------
162,449 165,840
FOREIGN GOVERNMENT:
Korea Development Bank, 6.5%, due 11/15/2002 450,000 450,602 437,382
CORPORATE SECURITIES:
FINANCIAL INSTITUTIONS:
Bankboston Cap. Trust III, 6.87%, due 6/15/2027 1,000,000 996,713 975,437
Central Fidelity Cap. I, Series A, 7.18%, due 4/15/2027 950,000 977,574 930,844
Citigroup Inc., 7%, due 12/01/2025 300,000 316,906 272,160
First Union Corp., 6.4%, due 4/1/2008 960,000 974,711 887,789
Mercantile Bankcorp, 7.06%, due 2/01/2027 980,000 984,205 946,309
Travelers Capital, 7.75%, due 12/01/2036 308,000 323,958 280,643
--------------------------------
4,574,067 4,293,182
PUBLIC UTILITIES:
Laclede Gas Co., Ser B, 5%, due 3/31/2011 (c) 3,000 55,595 63,000
MCI Communications Corp., 7.75%, due 3/15/2024 900,000 970,715 849,060
Nicor Inc., 5%, due 5/01/2009 (c) 800 32,842 32,000
--------------------------------
1,059,152 944,060
INDUSTRIAL:
TXU Gas Capital, 7.43%, due 7/1/2028 985,000 998,343 914,119
CBS Corp., 7.15%, due 5/20/2005 750,000 781,677 735,848
USX Corp., 6.65%, due 2/1/2006 750,000 748,149 711,585
--------------------------------
2,528,169 2,361,552
--------------------------------
TOTAL CORPORATE SECURITIES $ 8,161,388 $ 7,598,794
S-2
SBM CERTIFICATE COMPANY
SCHEDULE I--INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1999
PRINCIPAL
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT COST (a)(b) VALUE (a)
- --------------------------------------------------------------------------------------------------------------------------
FIXED MATURITIES AVAILABLE-FOR-SALE (CONTINUED):
ASSET-BACKED SECURITIES:
Auto Receivable, 96-C A, 7.3%, due 5/10/2002 $ 140,128 $ 139,908 $ 137,325
MORTGAGE-BACKED SECURITIES:
Blackrock Capital Finance BCF 97-R1 WAC, 6.38446%, due 3/25/2037 638,953 633,755 595,724
Countrywide Home Loans RAST, 1998-A8 , A6, 6.2124%, due 8/25/2028 900,000 905,653 867,087
Federal Home Loan Mortgage Corporation:
6.5%, due 5/15/2028 1,000,000 947,366 909,060
6.0%, due 1/15/2018 3,530,930 3,533,790 3,491,208
Federal National Mortgage Association, 9%, due 4/01/2021 13,478 14,056 14,081
Government National Mortgage Association:
11.5%, due 3/15/2015 387 428 430
11.5%, due 4/15/2013 668 738 739
11.5%, due 5/15/2015 316 351 352
11.5%, due 8/15/2013 870 963 962
6.38%, due 1/20/2026 274,828 279,651 278,906
Headlands Mortgage Sec. Inc., 1997-5 A17, 7.25%, due 11/25/2027 1,800,000 1,797,822 1,789,308
PNC Mortgage Securities Corp., 1998-7 1A13, 6.75%, due 9/25/2028 486,522 480,533 448,602
PNC Mortgage Securities Corp., 1998-7 1A24, 7.25%, due 9/25/2028 956,868 963,037 887,792
Residential Accredit Loans, 1997-QS8 A9, 7.375%, due 8/25/2027 1,000,000 999,858 991,560
--------------------------------
10,558,001 10,275,811
--------------------------------
TOTAL FIXED MATURITIES AVAILABLE-FOR-SALE $ 19,886,594 $ 18,998,215
S-3
SBM CERTIFICATE COMPANY
SCHEDULE I--INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1999
NUMBER OF
NAME OF ISSUER AND TITLE OF ISSUE SHARES COST (a)(b) VALUE (a)
- -----------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (d):
INDUSTRIAL:
Aluminum Company of America 200 $ 11,200 $ 11,200
EQUITY SECURITIES (CONTINUED) (d):
PUBLIC UTILITIES:
Carolina Power & Light 500 31,782 36,750
Duquesne Light Co. 400 10,800 11,525
GTE Florida, Inc. 1,500 25,875 28,500
Entergy Louisiana, Inc. 500 31,851 41,870
Entergy New Orleans, Inc. 600 31,902 42,012
Illinois Power 600 16,050 19,350
Kansas City Power & Light Company 200 11,586 13,574
Midamerican Energy Co. 600 34,200 47,292
Pacificorp 500 30,604 38,170
Pennsylvania Power Co. 200 8,838 14,302
San Diego Gas & Electric Co. 4,000 46,000 49,000
--------------------------------
279,488 342,345
--------------------------------
TOTAL EQUITY SECURITIES 290,688 353,545
--------------------------------
TOTAL INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS $ 20,177,282 $ 19,351,760
================================
(a) See Note 1 to the financial statements regarding the determination of cost
and fair value.
(b) The aggregate cost of investments in securities of unaffiliated issuers for
federal income tax purposes was $20,502,683 at December 31, 1999.
(c) These securities are redeemable preferred stocks.
(d) These securities are non-redeemable preferred stock.
S-4
SBM CERTIFICATE COMPANY
SCHEDULE V--QUALIFIED ASSETS ON DEPOSIT
DECEMBER 31, 1999
FIRST
MORTGAGES
AND OTHER
FIRST LIENS
INVESTMENTS ON
NAME OF DEPOSITARY CASH IN SECURITIES REAL ESTATE OTHER TOTAL
- --------------------------------------------------------------------------------------------------------------------------
State governmental authorities:
Securities Department
of Illinois $ - $ 197,021 $ - $ - $ 197,021
Central depositary:
First Trust, National Association 34,214,584 34,214,584
--------------------------------------------------------------------------------
Total qualified assets on deposit $ - $ 34,411,605 $ - $ - $ 34,411,605
================================================================================
S-5
SBM CERTIFICATE COMPANY
SCHEDULE VI--CERTIFICATE RESERVES
PART I - SUMMARY OF CHANGES
YEAR ENDED DECEMBER 31, 1999
BALANCE AT BEGINNING OF YEAR ADDITIONS
---------------------------------------------------------------------------------------
RESERVES
NUMBER OF (INCLUDING
ACCOUNTS ADVANCE RESERVE
WITH AMOUNT OF PAYMENTS) PAYMENTS BY CHARGED
YIELD SECURITY MATURITY WITH ACCRUED CHARGED CERTIFICATE TO OTHER
DESCRIPTION PERCENT HOLDERS VALUE INTEREST TO INCOME HOLDERS ACCOUNTS (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Reserves to mature,
Installment certificates:
Series 120 2.75 13 $ 77,000 $ 274,118 $ 9,509 $ 1,533 $ -
Series 220 2.75 15 80,000 193,385 9,840 2,967 -
Series 315 2.66 34 125,400 164,047 5,520 5,020 -
Single payment certificates:
Series 503 2.50 2,721 31,099,099 30,754,255 1,514,191 162,027 -
Fully paid installment
Certificates 2.50 473 2,391,179 2,084,595 82,952 - 88,905
Optional settlement
certificates:
Paid-up certificates 2.50 12 4,473 4,362 104 - -
Annuities 3.00 55 575,011 589,938 19,677 - 137,593
Due to unlocated certificate
Holders None 25 3,126 3,126 - 65 -
---------------------------------------------- -------------------------------------------
Total 3,348 $ 34,355,288 $ 34,067,826 $ 1,641,793 $ 171,612 $ 226,498
============================================== ===========================================
Total charged to income, per above $ 1,641,793
Less reserve recoveries from terminations
Prior to maturity (26,719)
--------------
Interest credited on certificate reserves, per
statement of operations $ 1,615,074
==============
NOTES TO PART I
(a) Transfer to/from other certificate reserves upon conversion.
(b) Direct interest payment to certificate holders.
S-6
SBM CERTIFICATE COMPANY
SCHEDULE VI--CERTIFICATE RESERVES (CONTINUED)
PART I - SUMMARY OF CHANGES (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
DEDUCTIONS BALANCE AT END OF YEAR
------------------------------------------ -------------------------------------------
RESERVES
NUMBER OF (INCLUDING
CASH ACCOUNTS ADVANCE
SURRENDERS WITH AMOUNT OF PAYMENTS)
PRIOR TO SECURITY MATURITY WITH ACCRUED
DESCRIPTION MATURITIES MATURITY OTHER (a)(b) HOLDERS VALUE INTEREST
- -------------------------------------- ------------------------------------------ -------------------------------------------
Reserves to mature, installment
certificates:
Series 120 $ - $ 22,930 $ 83,738 9 $ 54,000 $ 178,492
Series 220 - - - 15 80,000 206,192
Series 315 16,973 6,883 825 26 102,300 149,906
Single payment certificates:
Series 503 2,460,428 2,727,692 156,806 2,281 28,800,914 27,085,547
Fully paid installment certificates - 156,766 140,910 461 2,270,391 1,958,776
Optional settlement certificates:
Paid-up certificates 1,641 175 1,655 4 1,161 995
Annuities 213,621 - - 50 519,876 533,587
Due to unlocated certificate holders - - - 28 3,191 3,191
------------------------------------------ -------------------------------------------
Total $ 2,692,663 $ 2,914,446 $ 383,934 2,874 $31,831,833 $30,116,686
========================================== ===========================================
S-7
SBM CERTIFICATE COMPANY
SCHEDULE VI--CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS
YEAR ENDED DECEMBER 31, 1999
BALANCE AT BEGINNING OF YEAR
--------------------- ----------------------------------------------------------
NUMBER OF
AGE GROUPING IN ACCOUNTS WITH AMOUNT OF AMOUNT OF
YEARS SECURITY HOLDERS MATURITY VALUE RESERVES
--------------------- ----------------------------------------------------------
Series:
120 23 2 $ 14,000 $ 21,636
24 - - -
31 1 5,000 13,509
33 1 6,000 16,617
34 1 6,000 17,789
35 1 3,000 9,659
36 1 6,000 21,208
37 1 10,000 41,739
38 1 5,000 21,727
39 1 10,000 46,118
40 3 12,000 57,742
Interest reserve 303
Accrued interest payable 6,071
---------------------------------------------------------
Total 13 $ 77,000 $ 274,118
=========================================================
S-8
SBM CERTIFICATE COMPANY
SCHEDULE VI--CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
DEDUCTIONS BALANCE AT END OF YEAR
---------------------------- --------------------------------------------------------
NUMBER OF
CASH ACCOUNTS
SURRENDERS AGE WITH AMOUNT OF
PRIOR TO GROUPING SECURITY MATURITY AMOUNT OF
MATURITY OTHER IN YEARS HOLDERS VALUE RESERVES
---------------------------- --------------------------------------------------------
Series:
120 $ - $ - 23 1 $ 6,000 $ 12,426
- - 24 1 8,000 10,807
- - 31 1 5,000 13,509
- - 33 - - -
- - 34 1 6,000 17,720
- - 35 1 6,000 18,904
- 43,304 36 1 3,000 10,268
- - 37 - - -
- - 38 1 6,000 22,511
22,930 - 39 - - -
- 40,434 40 2 14,000 68,775
Interest reserve -
Accrued interest payable 3,572
---------------------------- -------------------------------------------
Total $ 22,930 $ 83,738 9 $ 54,000 $ 178,492
============================ ===========================================
S-9
SBM CERTIFICATE COMPANY
SCHEDULE VI--CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
BALANCE AT BEGINNING OF YEAR
-------------------------------------------------------------------------
NUMBER OF
AGE GROUPING ACCOUNTS WITH AMOUNT OF AMOUNT OF
IN YEARS SECURITY HOLDERS MATURITY VALUE RESERVES
-------------------------------------------------------------------------
Series:
220 22 1 $ 12,000 $ 14,787
23 - - -
27 1 4,000 7,688
29 - - -
30 1 6,000 13,743
31 7 35,000 87,423
32 3 15,000 42,166
33 2 8,000 23,169
34 - - -
-
Interest reserve
Accrued interest payable 4,409
------------------------------------------------------
Total 15 $ 80,000 $ 193,385
======================================================
Series:
315 7 1 $ 2,200 $ 836
10 1 2,200 1,273
11 1 5,500 3,536
12 - - -
13 4 22,000 17,228
14 3 8,800 7,673
15 8 22,000 21,989
16 6 23,100 28,212
17 1 2,200 2,978
18 3 13,200 19,873
19 6 24,200 49,314
20 - - -
Interest reserve 7,195
Accrued interest payable 3,940
------------------------------------------------------
Total 34 $ 125,400 $ 164,047
======================================================
S-10
SBM CERTIFICATE COMPANY
SCHEDULE VI--CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
DEDUCTIONS BALANCE AT END OF YEAR
---------------------------- ---------------------------------------------------------
NUMBER OF
CASH ACCOUNTS
SURRENDERS AGE WITH AMOUNT OF
PRIOR TO GROUPING SECURITY MATURITY AMOUNT OF
MATURITY OTHER IN YEARS HOLDERS VALUE RESERVES
---------------------------- ---------------------------------------------------------
Series:
220 $ - $ - 22 - $ - $ -
- - 23 1 12,000 16,086
- - 27 - - -
- - 29 1 4,000 8,524
- - 30 - - -
- - 31 1 6,000 14,659
- - 32 7 35,000 93,039
- - 33 3 15,000 46,069
- - 34 2 8,000 24,717
Interest reserve
Accrued interest payable 3,098
---------------------------- -------------------------------------------
Total $ - $ - 15 $ 80,000 $ 206,192
============================ ===========================================
Series:
315 $ - $ 836 7 - $ - $ -
- - 10 - - -
- - 11 - - -
- - 12 2 7,700 5,363
- - 13 - - -
2,267 - 14 4 22,000 19,018
4,616 - 15 1 2,200 2,098
- - 16 3 7,700 9,223
- - 17 7 25,300 33,771
- - 18 - - -
- - 19 3 22,000 44,932
- - 20 6 15,400 27,380
Interest reserve 3,382
Accrued interest payable 4,739
---------------------------- -------------------------------------------
Total $ 6,883 $ 836 26 $ 102,300 $ 149,906
============================ ==========================================
S-11
SCHEDULE XII-VALUATION AND QUALIFYING ACCOUNTS
Additions
---------------------------
Charged to
Beginning Charged to Other
Description of Year Expense Accounts Deductions End of Year
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Valuation allowance on deferred tax
assets:
Year ended December 31:
1999 $ 120,000 $ 140,981 $ 261,163(1) - $ 522,144
1998 $ 400,000 - - $ (280,000)(2) $ 120,000
1997 $ 714,521 - - $ (314,521)(3) $ 400,000
(1) The valuation allowance was increased as a result of establishing a full
valuation allowance on deferred tax assets for unrealized losses on assets
available-for-sale. The increase in valuation allowance resulted in a
reduction of shareholders' equity.
(2) The capital loss carryover was utilized during 1998, and therefore the
related valuation allowance was released.
(3) In the event that deferred tax assets are recognized on deductible
temporary differences for which a valuation allowance was provided at the
date of an acquisition, such benefits are applied to first reduce the
balance of intangible assets related to the acquisition, and then income
tax expense. As such, the Company reduced its valuation allowance with an
offsetting reduction to goodwill. After goodwill was reduced to zero during
1997, the reduction in valuation allowance resulted in a reduction of
income taxes.
S-12