<PAGE>
As filed with the Securities and Exchange Commission on March 5, 1996.
Registration No. 33-38066
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
POST EFFECTIVE AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SBM CERTIFICATE COMPANY
(Exact name of registrant as specified in charter)
Minnesota
(State or other jurisdiction of incorporation or organization)
6725
(Primary Standard Industrial Classification Code Number)
41-1671595
(I.R.S. Employer Identification No.)
c/o ARM Financial Group, Inc.
239 S. Fifth Street, 12th Floor
Louisville, Kentucky 40202
(502)582-7900
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
CT Corporation System Inc.
405 Second Avenue South
Minneapolis, Minnesota 55401
(612)333-4315
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale to the public: As soon after
the effective date of this Registration Statement as is practicable.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The Rule 24f-2 Notice for the issuer's most recent fiscal year was
filed on February 29, 1996.
<PAGE>
SBM Certificate Company
Cross Reference Sheet
S-1 Item and Location in Prospectus
- -----------------------------------
Item 1 Prospectus Cover
Item 2 Inside Front Cover
Item 3 Sections entitled The Company, Risk Factors
Item 4 Section entitled Use of Proceeds
Item 5 Not Applicable
Item 6 Not Applicable
Item 7 Not Applicable
Item 8 Sections entitled Underwriting Agreement and Underwriter's
Compensation
Item 9 Section entitled Description of the Certificates
Item 10 Section entitled Experts
Item 11(a) Section entitled About the Company, History and Business
Item 11(b) Section entitled About the Company, Description of Property
Item 11(c) Section entitled About the Company, Legal Proceedings
Item 11(d) Not Applicable
Item 11(e) See Index to Financial Statements
Item 11(f) Section entitled Selected Financial Data
Item 11(g) Not Applicable
Item 11(h) Section entitled Management's Discussion and Analysis of Results
of Operations and Financial Condition
Item 11(i) Not Applicable
Item 11(j) Section entitled Executive Officers and Directors of the Company
Item 11(k) Not Applicable
Item 11(l) Section entitled About the Company
Item 11(m) Section entitled Relationship with ARM and Affiliates
Item 12 Section entitled Executive Officers and Directors of the
Company
<PAGE>
SBM CERTIFICATE COMPANY
SERIES 503 CERTIFICATES
PROSPECTUS
MAY 1, 1996
The security offered by this Prospectus is a fully paid fixed-rate face-amount
certificate, as defined by the Investment Company Act of 1940 (the "1940 Act"),
designated as an investment certificate Series 503 ("Series 503 Certificate" ,
or "Certificate"). The issuer of this face-amount certificate is SBM Certificate
Company (the "Company"). A fully paid fixed-rate face-amount certificate is a
security pursuant to which the issuer promises to pay the amount invested
("face-amount"), plus accrued but unpaid interest, on a fixed future date
("maturity date"), in return for the investor making a single lump sum payment
to the issuer.
The Company's Series 503 Certificates initially mature three years from the date
of issue. The Certificates provide for automatic extensions of the maturity date
for ten additional three-year periods unless you notify the Company to the
contrary.
The Company agrees to pay interest until maturity or redemption on the face-
amount invested at a minimum interest rate of 2.50% per annum. Such interest may
be compounded annually on the anniversary date of the Certificate's issuance
(the "Certificate Anniversary Date") and paid at maturity or redemption.
Alternatively, interest may be paid, at your option, yearly on the Certificate
Anniversary Date, or quarterly on a quarterly payment date based upon the date
of the Certificate's issuance (the "Certificate Issuance Date"). The Company may
determine, in advance, to pay interest at a rate in excess of the minimum
interest rate.
As of the date of this Prospectus, the Company has determined to pay interest
for each of the three Certificate years prior to the initial maturity date at
the following combined rates, instead of the lesser rate provided in the
Certificate:
<TABLE>
<CAPTION>
If Interest is If Interest is If Interest is
Paid Quarterly Paid Annually Compounded
Annually
- ----------------------------------------------------------
<S> <C> <C> <C>
Year 1 x.xx% x.xx% x.xx%
- ----------------------------------------------------------
Year 2 x.xx% x.xx% x.xx%
- ----------------------------------------------------------
Year 3 x.xx% x.xx% x.xx%
- ----------------------------------------------------------
</TABLE>
These rates are payable for the initial three-year period only. Although the
Company intends to declare in advance additional interest rates which result
in combined interest rates above the 2.50% minimum rate for Certificate years
beyond the initial maturity date, there is no obligation to do so. See
"Description of the Certificates - Additional Interest Rates". Sales
compensation, not to exceed $30.00 per $1,000, per three-year maturity period,
will be paid to the underwriter of the Series 503 Certificates from the general
funds of the Company and will not be deducted from the amount invested.
No interest will be paid on Certificates surrendered for redemption less than
three months after the issue date. In addition, if a Certificate is redeemed
during any three-year maturity term, the interest paid or accrued will be
reduced in accordance with rates declared by the Company. If you have elected to
have interest paid quarterly or annually, the reduced interest rate may cause
the amount paid upon surrender to be less than the amount invested. A
Certificate surrendered during any three-year maturity term will receive
interest for the number of full months the Certificate was in force from the
Certificate Issuance Date (subject to the three-month limitation and interest
rate reduction referred to above) or the latest date at which interest was paid.
See "Description of the Certificates" for a complete description of the terms of
your Certificate.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER
"RISK FACTORS".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTORS ARE ADVISED TO RETAIN THE PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION BANK INSURANCE FUND,
THE FEDERAL RESERVE BOARD, OR ANY GOVERNMENTAL AGENCY. AN INVESTMENT IN THESE
SECURITIES INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- -------------------------------------------------------------------------------------------
<S> <C>
Available Information 2
The Company 3
Risk Factors 3
Underwriting Agreement 3
Underwriter's Compensation 4
Description of the Certificates 4
Investment Amounts 4
Minimum Interest Rate 4
Additional Interest Rates 4
Maturity 4
Redemption 5
Deferred Payment 5
Method of Distribution 5
Federal Income Tax Treatment 5
Transfer of Ownership 6
Reserves and Deposits with Custodian 6
Certain Financial Information 6
Use of Proceeds 6
Investment Policies 7
About the Company 7
Executive Officers and Directors of the Company 9
Relationship with ARM and Affiliates 10
Experts 11
Selected Financial Data 12
Management's Discussion and Analysis of Results of Operations and Financial Condition 13
Index to Financial Statements 14
</TABLE>
AVAILABLE INFORMATION
The Company is subject to certain of the informational requirements of the
Securities Exchange Act of 1934, as amended (the "1934 Act"). Reports and other
information on the Company are required to be filed with the Securities and
Exchange Commission ("SEC") and, when filed, are available for inspection and
copying at the public reference section of the SEC, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 and also at the public reference facilities at the
SEC's regional offices located at Room 1400, 75 Park Place, New York, New York
10007, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained at prescribed
rates by writing to the SEC, Public Reference Section, Washington, D.C.
20549.
This Prospectus does not contain all of the information set forth in the
Registration Statement and exhibits thereto (the "Registration Statement")
covering the securities offered by this Prospectus. The Company has filed such
Registration Statement with the SEC. Certain portions of such Registration
Statement have been omitted pursuant to the rules and regulations of the SEC.
Reference is made to such materials for further information with respect to the
Company and the Certificates offered by this Prospectus.
The Company is not required by applicable laws to furnish you with an annual
report. The Company will furnish an annual report, containing financial
statements that have been audited and reported upon by independent certified
public accountants, if you request a copy.
2
<PAGE>
THE COMPANY
SBM Certificate Company is a Minnesota corporation and a wholly owned subsidiary
of ARM Financial Group, Inc. ("ARM"), a financial services holding company based
in Louisville, Kentucky providing retail and institutional products and services
to the long-term savings and retirement market. The executive offices of the
Company are located at 239 S. Fifth Street, 12th Floor, Louisville, Kentucky
40202. The telephone number is (502)582-7900.
RISK FACTORS
Prospective purchasers of the Certificates should examine and carefully consider
this entire Prospectus, including the following items, for important information
concerning an investment in the Certificates.
ABSENCE OF A RATING
The Company has not applied for or received a rating for its Series 503
Certificates from any nationally recognized rating organization.
RELATIONSHIP WITH ARM
While the Company is an independent operating entity, it is also a wholly owned
subsidiary of ARM. The Company relies upon ARM and its affiliates with respect
to the provision of services which impact the management, operations,
investments, and capital of the Company. For this reason, factors affecting ARM
also may affect the Company, including ARM's operating results, consolidated
business and capital plans, and its relationship with various regulators. See
"Relationship with ARM and Affiliates".
EFFECTS OF CHANGES IN INTEREST RATES
The market value of the Company's investment portfolio, which consists primarily
of publicly traded, investment grade debt securities, is affected by economic
and market conditions and fluctuations in interest rates. Although the Company
seeks to control this interest rate risk, during periods of sharp changes in
interest rates the Company may experience unrealized losses in the value of
assets held in its investment portfolio. In such an environment, if the Company
were required to sell assets to meet liquidity needs, the Company could
recognize losses on the sale of such assets. Such losses would reduce the
overall capital resources available to the Company to provide a source of funds
for Company operations, including the making of payments on Certificates.
EARLY REDEMPTIONS OF CERTIFICATES
If a Certificate is surrendered for redemption within three months of its issue
date, no interest will be paid. In addition, if a Certificate is redeemed during
any three-year maturity term, interest on the Certificate will be paid at a
reduced rate. If you have elected to have interest paid quarterly or annually,
the reduced interest rate may cause the amount paid upon surrender to be less
than the amount invested.
ADDITIONAL INTEREST RATES
The initial rates are payable for the initial three-year period only. Although
the Company intends to declare in advance additional interest rates which result
in combined interest rates above the 2.50% minimum rate for Certificate years
beyond the initial maturity date, there is no obligation to do so.
UNDERWRITING AGREEMENT
Pursuant to an Underwriting Agreement between the Company and SBM Financial
Services, Inc. ("SBM Financial Services"), (a wholly owned subsidiary of ARM
registered as a broker-dealer under the 1934 Act) dated June 14, 1995, SBM
Financial Services has the exclusive right to solicit applications for and to
distribute the Certificates. Pursuant to such agreement, SBM Financial Services
agrees to continuously solicit such applications, as long as Certificates are
available for sale. The Company reserves the right to reject any application.
SBM Financial Services has no obligation to purchase or sell any designated
dollar amount or quantity of Certificates but is only required to use its best
efforts on the Company's behalf.
The Company's Board of Directors, including a majority of directors who are not
interested persons of SBM Financial Services or ARM, approve the Underwriting
Agreement annually. The Underwriting Agreement is terminable by either party
with sixty days' notice.
3
<PAGE>
UNDERWRITER'S COMPENSATION
In accordance with the Underwriting Agreement, the Company pays SBM Financial
Services compensation which does not exceed $30.00 per $1,000 invested per
three-year maturity period. Such compensation is paid from the general funds of
the Company. SBM Financial Services pays compensation to its representatives and
pays other selling expenses in connection with the sale of Certificates. The
Company has paid SBM Financial Services $443,579, $507,995, and $377,675, in
1995, 1994, and 1993, respectively, as compensation and other issuance,
underwriting, and sales expenses.
DESCRIPTION OF THE CERTIFICATES
INVESTMENT AMOUNTS
The Series 503 Certificate may be purchased by submitting an application and a
single payment of at least (1) $1,000 if you choose to have interest paid or
compounded annually, or (2) $5,000 if you choose to have interest paid
quarterly. The amount of your payment is the face-amount of the Certificate.
MINIMUM INTEREST RATE
The Series 503 Certificate bears a minimum rate of interest of 2.50% per annum.
Interest accrues monthly and compounds annually if not paid. Interest may be
compounded annually on the Certificate Anniversary Date and paid at maturity or
redemption. Alternatively, interest may be paid at your option, annually on the
Certificate Anniversary Date, or quarterly based upon the Certificate
Anniversary Date. The election to have interest accrued or paid may not be
changed after the Certificate has been issued.
ADDITIONAL INTEREST RATES
The Certificate may earn interest at a rate in excess of the minimum rate of
2.50% per annum. From time to time, the Company may declare additional interest
rates. The sum of the additional interest rate and the minimum rate of 2.50%
make up the combined interest rate.
For new purchases of Series 503 Certificates, the Company has declared that
interest shall be payable at the combined rate set forth on the cover page of
this Prospectus (or any applicable supplement thereto) for each of the three
years of the initial term of the Certificate.
Notwithstanding the foregoing, as market conditions warrant, the Company may
from time to time change the additional interest rates to be accrued for the
Series 503 Certificates. The combined interest rates applicable to a particular
Certificate will be the rates in effect on the date the investor's application
is accepted at the Company's administrative office. The combined interest rates
may be greater or lesser than the combined interest rates shown on the cover
page of this Prospectus. However, no such change in rates will affect the
combined interest rates of any Certificate purchased prior to the effective date
of the change.
The combined interest rate in effect at the initial maturity date and each
subsequent maturity date is the basis for the interest paid on a Certificate for
any subsequent renewal periods. There is no obligation on the part of the
Company to declare and pay additional interest in years following the initial
maturity date. Therefore, the combined interest rates on a Certificate for years
beyond the initial three-year term of the Certificate may be greater or lesser
than the rate in effect for that Certificate for the first three years. It is
the Company's current policy to pay interest on renewed Certificates at a rate
based on the combined rate in effect at the initial or any subsequent maturity
date (as applicable) plus .10%. This policy is subject to change at any time
without prior notice with respect to any renewal periods applicable to any
Certificates currently outstanding or to be issued in the future.
The prevailing investment rates available on interest-bearing instruments is a
primary consideration in deciding upon the declaration of additional interest
rates. Nonetheless, irrespective of such rates, the Company has complete
discretion as to what additional interest rates, if any, shall be declared.
MATURITY
Your Series 503 Certificate matures three years from the Certificate Issuance
Date. At maturity, you will be entitled to receive the original invested amount
if you elected to receive interest payments annually or quarterly. If you
elected to have interest compounded, you will be entitled to receive at maturity
the original invested amount plus accrued interest.
4
<PAGE>
At the end of the original three-year period, the maturity date automatically
extends for an additional three-year period unless you notify the Company to the
contrary. The Company will provide you with written notice not less than fifteen
days prior to the original maturity date, and any additional maturity date, that
the maturity date of the Certificate will be automatically extended for an
additional three-year period unless you elect by written notice to the Company
not to extend such maturity date. The total number of additional three-year
periods for which your Series 503 Certificate may be extended, beyond the
original term, is ten periods, or a total of thirty additional years beyond the
original maturity date. During any such additional maturity period or periods
for which the Certificate has been extended, the Certificate shall continue to
accrue interest, interest shall be paid out or compounded, or the Certificate
may be surrendered for redemption, all in accordance with the terms provided in
the Certificate issued for the initial three-year term of the Certificate.
REDEMPTION
You may surrender your Certificate to the Company, properly endorsed, at any
time prior to maturity and be entitled to receive in cash the face amount of
your Certificate and all interest, if any, then due and unpaid except as set
forth below. You may also withdraw at any time a portion of the original amount
invested (including any accrued but unpaid interest on the withdrawn amount).
The minimum amount you may withdraw is $1,000 and the remaining balance must not
be less than $1,000 if you elected to have interest compounded to maturity or
paid annually, nor less than $5,000 if you elected to have interest paid
quarterly. You may make such a redemption with a written request to the Company
accompanied by the Certificate, properly endorsed. If your Certificate has been
lost, the Company will require you to obtain a Lost Instrument Bond at your
expense. The written redemption request should be signed by you exactly as the
Certificate is registered. For redemptions of $20,000 or more, your signature or
signatures must be guaranteed by a national securities exchange, a member firm
of a principal stock exchange, a registered securities association, a clearing
agency, a bank or trust company, a savings association, a credit union, a broker
or dealer, a municipal securities broker or dealer, a government securities
broker or dealer, or a representative of SBM Financial Services. Further
documentation may be required from corporations, executors (executrixes),
partnerships, administrators (administratrixes), trustees or custodians. For
your protection, Certificates should be sent by registered mail.
No interest will be paid on Certificates surrendered for redemption less than
three months after the Certificate Issuance Date. In addition, if a Certificate
is redeemed during any three-year maturity term, the interest paid or accrued
will be reduced in accordance with rates declared by the Company. If you have
elected to have interest paid quarterly or annually, the reduced interest rate
may cause the amount paid upon surrender to be less than the amount invested. A
Certificate surrendered during any three-year maturity term will be entitled to
receive interest for the number of full months the Certificate was in force from
the Certificate Issuance Date (subject to the three-month limitation and
interest rate reduction referred to above) or the latest date at which interest
was paid, as applicable.
DEFERRED PAYMENT
The Company reserves the right, prior to maturity, to defer any payment for up
to thirty days. During such period, interest will accrue on the deferred amount
at not less than the minimum interest rate of 2.50%.
METHOD OF DISTRIBUTION
The Certificates are distributed by registered representatives of SBM Financial
Services and also by registered representatives of other broker-dealers that
have selling agreements with SBM Financial Services. Pursuant to the
Underwriting Agreement between the Company and SBM Financial Services, the
Company pays sales compensation to SBM Financial Services for distribution of
the Certificates. SBM Financial Services in turn pays compensation to its
representatives and pays other distribution expenses. See "Underwriting
Agreement".
FEDERAL INCOME TAX TREATMENT
Under Internal Revenue Service rules and regulations, investors holding Series
503 Certificates realize current income for tax purposes. Under these
guidelines, interest accrued on a face-amount certificate, including additional
interest, must be reported by the Certificate holder as taxable ordinary income
each year on a current basis. These regulations require a Series 503 Certificate
holder who has elected to have interest compounded annually to recognize
interest income for income tax purposes in the years in which it is accrued
despite payment of the interest to the Certificate holder in later years under
the terms of the Certificate. The Company will send you annually a report
showing the income to be reported with respect to your Certificate under these
regulations.
5
<PAGE>
Pursuant to federal law, each investor must provide the Company with a correct
taxpayer identification number. Generally, this number is the investor's Social
Security or employer identification number. Failure to provide such number may
make it necessary for the Company to withhold a portion of any accrued interest.
TRANSFER OF OWNERSHIP
There is no public market for resale of the Certificates, nor is it anticipated
that one will develop in the future. Your Certificate may be assigned on the
records of the Company if you send the Certificate to the Company, properly
endorsed, along with proper transfer information concerning the person or entity
to whom the Certificate will be transferred. You should sign the written
transfer request exactly as the Certificate is registered. For transfers of
$20,000 or more, your signature or signatures must be guaranteed by a national
securities exchange, a member firm of a principal stock exchange, a registered
securities association, a clearing agency, a bank or trust company, a savings
association, a credit union, a broker or dealer, a municipal securities broker
or dealer, a government securities broker or dealer, or a representative of SBM
Financial Services. Further documentation may be required from corporations,
executors (executrixes), partnerships, administrators (administratrixes),
trustees or custodians. For your protection, Certificates should be sent by
registered mail.
RESERVES AND DEPOSITS WITH CUSTODIAN
The Company accrues liabilities ("reserves") for its Certificate obligations in
accordance with the 1940 Act. In general, reserves are established monthly in an
amount equal to the face-amount of each Certificate plus the amount of accrued
but unpaid interest on each Certificate as of that date.
The 1940 Act requires the Company to have capital stock in an amount not less
than $250,000 and to keep on deposit, with a qualified custodian, certain kinds
of investments having a value not less than $250,000 plus the amount of its
outstanding certificate reserves. For information on the value of the Company's
investments on deposit and the Company's reserves on all outstanding
certificates, see Notes 1, 3, 4, and 8 of Notes to Financial Statements.
Most of the Company's investments are on deposit pursuant to the terms of a
custody agreement with First Bank National Association, a national banking
association, located in Minneapolis, Minnesota. The Company also maintains
separate deposits as required by certain states. The custody agreement requires
the Company to maintain investments on deposit with a value (calculated in
accordance with the provisions of the 1940 Act) in excess of the Company's
reserves for outstanding certificate obligations. The Company may not withdraw
from the custodian's possession any specific investments unless the Company
deposits in their place investment(s) with an equivalent or higher value, or the
remaining investments on deposit have a value in excess of the Company's
required certificate reserves. If the Company fails to make any payment required
by the terms of any certificate, the custodian is required, upon the request of
a Certificate holder pursuant to custody agreement, to pay such obligation from
the investments the custodian holds.
CERTAIN FINANCIAL INFORMATION
For information regarding the amounts of revenue, results of operations and
assets attributable to the Company's face-amount certificate business and
significant events relating to the Company's business, see "Selected Financial
Data", and "Management's Discussion and Analysis of Results of Operations and
Financial Condition".
USE OF PROCEEDS
The Certificates are issued and guaranteed by the Company, a wholly owned
subsidiary of ARM. The Company backs the Certificates by investing the money
received and keeping the invested assets on deposit. The Company's investments
are varied and of generally high quality. The composition and quality of the
Company's investments is subject to change from time to time at the Company's
sole discretion. At December 31, 1995, such composition was:
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents 6.5 %
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. government agencies 10.6
Corporate securities 8.3
Collateralized mortgage obligations 47.6
Other mortgage-backed securities 22.8
Other fixed maturities 1.8
Other investments 2.4
------
Total 100.0 %
======
</TABLE>
6
<PAGE>
More than 98% of our fixed maturities portfolio is rated investment grade as of
December 31, 1995. Investment grade securities are those classified as 1 or 2 by
the National Association of Insurance Commissioners, or where such
classifications are not available, having a rating on the scale used by Standard
& Poor's Corporation of BBB- or above.
INVESTMENT POLICIES
Investment decisions relating to the Company's investment portfolio are made by
the Company's Chief Investment Officer (the "CIO"). The Board of Directors
regularly reviews the decisions of the CIO. The CIO, in accordance with the
investment policies of the Company, uses his best judgment in deciding the
amount and type of investments to be purchased and sold subject to certain
limitations on investments prescribed by the 1940 Act. Section 28 of the 1940
Act requires the Company to deposit only "qualified investments". Qualified
investments are defined as those investments which life insurance companies are
permitted to invest in or hold under the provisions of the Insurance Code of the
District of Columbia.
The following policies currently govern the Company's investment decisions, but
may be changed by the Board of Directors without shareholder or Certificate
holder approval. The Company will not purchase any securities on margin or
participate on a joint or joint and several basis in any trading account in
securities. It will not effect the short sale of any security. The Company has
the authority to borrow money and may borrow in the future if management feels
it is necessary or desirable in conducting its business in the most advantageous
manner. It may do this either for temporary or extended purposes and may pledge
some of its assets as security. The Company does not generally deal in real
estate, but reserves freedom of action to do so if such arrangement would
provide a desirable investment or a source of mortgage loans. The Company does
not intend to engage in the purchase and sale of commodities or commodity
contracts. Also, the Company does not at present intend to act as underwriter of
securities issued by other persons. It may make real estate loans of various
types and may make other kinds of loans should such form of investment appear to
be desirable in the future. It is not restricted by its Articles of
Incorporation or By-Laws as to the concentration of its investments in any
particular industry or group of industries. Subject to the basic restriction of
investment in qualified investments, the Company reserves freedom of action with
regard to portfolio turnover.
In past years, the Company made mortgage loans, principally consisting of
commercial real estate mortgage loans. The current policy of the Company is not
to make any new mortgage loans, though the Company may make new loans in
connection with the disposition of its properties and may restructure existing
mortgage loans.
ABOUT THE COMPANY
HISTORY
The Company was incorporated in Minnesota on June 18, 1990, to assume the face-
amount certificate business of SBM Company ("SBM"). The Company became a wholly
owned subsidiary of ARM pursuant to ARM's purchase of substantially all of the
assets of SBM (the "Acquisition") in June 1995. SBM had issued various series of
face-amount certificates of the fully paid and installment type since 1914. The
Company was registered as an investment company under the 1940 Act and assumed
the obligations of SBM's outstanding face-amount certificates in January 1991.
SBM owned the Company directly until December 31, 1993, at which time SBM
transferred all of the shares of the Company to its subsidiary State Bond and
Mortgage Life Insurance Company ("SBM Life"). Following the Acquisition, all of
the shares of the Company were transferred from SBM Life to ARM.
BUSINESS
The Company's sole business is issuing fixed-rate face-amount certificates
registered under the 1940 Act. A face-amount certificate is an obligation of the
Company requiring the Company to pay a certain amount, plus a specified return,
to an investor at a given maturity date, or lesser amounts if the Certificate is
redeemed prior to maturity. The Company is currently offering one series of
single-payment investment certificates. The Company's face-amount certificate
operations include issuance of single-payment certificates and the servicing of
outstanding single-payment and installment certificates, the investment of
related funds, and other related service activities. The Company's face-amount
certificates are sold primarily in Minnesota, Iowa, California, South Dakota,
Wisconsin and Illinois.
The Company's face-amount certificates are distributed exclusively by SBM
Financial Services, a wholly-owned subsidiary of ARM, pursuant to an
Underwriting Agreement. See "Underwriting Agreement". SBM Financial Services is
registered with the SEC as a broker-dealer under the provisions of the 1934 Act.
In addition, ARM provides investment management services to the Company pursuant
to an Investment Services Agreement. Such services are provided in part through
ARM's wholly-owned subsidiary ARM Capital Advisors, Inc. ("ARM Capital
Advisors"). See "Relationship with ARM and Affiliates". ARM Capital Advisors is
registered with the SEC as an investment adviser under the provisions of the
Investment Advisers Act of 1940.
7
<PAGE>
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 ("investment spread"). The Company's net income is determined by
deducting investment expenses and federal income taxes. The investment spread is
affected principally by general economic conditions, government monetary policy,
the policies of regulatory authorities that influence market interest rates, and
the Company's ability to respond to changes in such rates. Changes in market
interest rates may have a negative impact on the Company's earnings. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Risk Factors".
The Company has no foreign sales.
COMPETITION
The Company's face-amount certificate business competes in general with various
types of individual savings products which offer a fixed rate of return on
investors' money, especially insurance and bank and thrift products. Some of
these other products are insured by governmental agencies or funds or private
third parties (e.g., banks and thrifts typically have federal deposit insurance
covering monies deposited with them). The Certificates offered by this
Prospectus are not guaranteed or insured by any governmental agency or fund or
independent third party. The Company's ability to offer competitive interest
rates, attractive terms, and efficient service are the Company's primary basis
for meeting competition. The Company's main competitor is IDS Certificate
Company.
EMPLOYEES
The Company currently has no employees. Investment, administrative, and
distribution services are provided pursuant to an Investment Services Agreement,
an Administrative Services Agreement, and an Underwriting Agreement, all of
which are dated as of June 14, 1995. See "Underwriting Agreement" and
"Relationship with ARM and Affiliates".
CAPITAL STRUCTURE
The Company has 1,000,000 shares of authorized common stock, $1.00 par value, of
which 250,000 shares are currently issued and outstanding. ARM owns all of the
Company's issued and outstanding shares. All such shares are currently pledged
pursuant to a credit agreement among ARM and certain lenders to secure a bank
loan made to ARM.
REGULATION
Like many financial service 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 (see "Description of the Certificates -Reserves/Deposits with
Custodian" and Note 3 of Notes to Financial Statements), 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
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 Minnesota Department of Commerce conducts examinations of the
Company on a periodic basis. The offer and sale of Series 503 Certificates also
are subject to federal and state securities laws.
The Company is not a bank, broker-dealer or insurance company. The Certificates
are not bank products, equity investments, annuities or life insurance, and are
not guaranteed or insured by any governmental agency or fund or private third
party.
DESCRIPTION OF PROPERTY
The Company's and ARM's corporate executive offices (the "Corporate Offices")
are located at 239 S. Fifth Street, 12th Floor, Louisville, Kentucky. The main
telephone number for the Corporate Offices is (502) 582-7900. The Corporate
Offices are the primary location for ARM's and the Company's investment
accounting, corporate accounting, legal and marketing activities and various
support personnel. These offices contain approximately 18,900 square feet of
office space held pursuant to a lease between ARM and the lessor that runs
through April 30, 1998, and approximately 7048 square feet of office space
leased on a month to month basis.
The Company's administrative offices are located in New Ulm, Minnesota, at 100
North Minnesota Street. The building is owned by the Company. The building has a
total office space of approximately 49,000 square feet, was built in 1936 and
was
8
<PAGE>
remodeled extensively in 1972, 1974, and 1986. A significant portion of the
building (approximately 15,000 square feet) is leased exclusively to State Bank
& Trust Company of New Ulm, a former subsidiary of SBM. Parts of the building
are leased to other persons.
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.
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS
The Company's directors and executive officers are as follows:
Steven B. Bing, age 49 - Director of the Company since January 1996. Mr Bing is
currently employed by R. Gene Smith, Inc., a private investment and venture
firm. In that capacity he reviews business opportunities and manages certain
operating companies funded by the Smith group. Previously, he served
approximately eight years as an officer (including President) of ICH
Corporation, a public holding company that owned and operated life and health
insurance companies.
John R. McGeeney, age 39 - Director and Chairman of the Board of the Company
since January 1996; President of the Company since June 1995. Mr. McGeeney is
Co-General Counsel of ARM and holds various offices with other subsidiaries of
ARM. Prior to joining ARM in October 1993, from February 1988 to October 1993,
he served successively as Attorney, Counsel and Assistant General Counsel for
the Accumulation and Investment Group of Providian Corporation. From 1986 to
1988, he was an associate with the law firm of Middleton & Reutlinger.
Theodore S. Rosky, age 59 - Director of the Company since January 1996. Mr.
Rosky retired as Executive Vice President & Chief Financial Officer of Providian
Corporation in April 1992, and he has served on several corporate boards of
directors including insurance company and mutual fund boards.
Martin Snyder, age 48 - Director of the Company since January 1996. Mr. Snyder
is currently President of Ohio Valley International, specializing in
international trade and business law. Previously, he served as Chief Executive
Officer of Taustine, Post, Sotsky, Berman, Fineman & Kohn from 1972 to 1993.
Dennis L. Carr, FSA, MAAA, age 46 - Executive Vice President--Chief Product
Development Officer and Actuary. Mr. Carr is an Executive Vice President and the
Actuary of ARM and holds various offices with other subsidiaries of ARM. Prior
to joining ARM, from July 1988 to September 1993, he was Director of Product
Development for the Accumulation and Investment Group of Providian Corporation.
From July 1983 to July 1988, Mr. Carr was a consulting actuary for Tillinghast,
being named a principal of that firm in 1987.
David E. Ferguson, age 48 - Executive Vice President--Chief Administrative
Officer. Mr. Ferguson is an Executive Vice President of ARM and holds various
offices with other subsidiaries of ARM. Mr. Ferguson has been associated with
ARM and its predecessors since March 1992. Prior to joining ARM, from 1990 to
March 1992 , he was the President and Chief Executive Officer of the James
Graham Brown Foundation, Inc., a private philanthropy in Louisville, Kentucky.
From 1984 to 1990, Mr. Ferguson was a partner at Ernst & Young LLP and National
Director of their Insurance Industry Consulting group.
Edward L. Zeman, age 41 - Executive Vice President--Chief Financial Officer. Mr.
Zeman is an Executive Vice President and the Chief Financial Officer of ARM and
holds various offices with other subsidiaries of ARM. Prior to joining ARM in
September 1995, he was Vice President, Chief Operating Officer, Chief Financial
Officer and Treasurer of SBM. From 1977 through 1990, Mr. Zeman served as a
Senior Manager for Deloitte & Touche LLP. Mr. Zeman currently also serves on the
Board of Directors of Dotronix, Inc.
Emad A. Zikry, MA, PhD, age 47 - Executive Vice President--Chief Investment
Officer. Mr. Zikry is an Executive Vice President of ARM and is a Director and
President of ARM Capital Advisors, Inc., a registered investment adviser. Prior
to joining ARM, Mr. Zikry was President and Chief Investment Officer of
Kleinwort Benson Investment Management Americas Inc. From 1987 to 1992, he
served as Managing Director and Head of Fixed Income and Quantitative Services
at Mitchell Hutchins Institutional Investors, Inc. Prior to that time, he was a
director at Bankers Trust New York Corporation.
9
<PAGE>
Peter S. Resnik, CFA, CPA, age 35 - Treasurer. Mr. Resnik is the Treasurer of
ARM and also holds this office for other ARM subsidiaries. Mr. Resnik has been
associated with ARM and its predecessors since July 1992. Prior to joining ARM,
from 1986 through July 1992, he served as Assistant Vice President of
Commonwealth Insurance, a subsidiary of Providian Corporation in various
management positions, the last of which was Director of Planning and Budgets in
the Agency Group Division.
Don W. Cummings, CPA, age 32 - Controller. Mr. Cummings is the Controller of ARM
and also holds this office for other ARM subsidiaries. Prior to joining ARM,
from 1985 to June 1992, he served in various positions within Ernst & Young
LLP's Insurance Industry Accounting and Auditing Practice, the last of which was
Manager.
Kevin L. Howard, age 31 - Secretary. Mr. Howard is Assistant General Counsel of
ARM and holds various offices with other subsidiaries of ARM. Prior to joining
ARM in 1994, from April 1992 to January 1994, he was Assistant General Counsel
for Providian Corporation, practicing primarily in the areas of securities and
real estate law. From 1989 to 1992, he was an associate with the law firm of
Greenebaum Doll & McDonald.
Rose M. Culbertson, CPA, age 40 - Tax Officer. Ms. Culbertson is the Tax Officer
of ARM and also holds this office for other ARM subsidiaries. Prior to joining
ARM in 1994, she was a Tax Manager with Coopers & Lybrand. From mid 1986 to
1990, she served in various positions with Providian Corporation, the last of
which was Manager of Tax Compliance.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the Company's Articles of Incorporation, the liability of the
Company's directors to the Company and its stockholders is eliminated to the
fullest extent permitted by Minnesota law, as it exists or may be amended from
time to time, except as prohibited by the 1940 Act. Under Minnesota law, a
director's personal liability to a corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director may be eliminated if provided
by the Articles of Incorporation, except liability resulting from a breach of
the duty of loyalty to the corporation or its stockholders, liability for an act
or omission not in good faith, involving intentional misconduct or a knowing
violation of law, liability for illegal distributions or liability for any
transaction undertaken for improper personal benefit. The 1940 Act prohibits a
company from indemnifying or by any other means limiting a director's liability
resulting from willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties. In accordance with Minnesota law, the By-Laws of
the Company provide, as modified by certain limitations specified by the SEC
under the 1940 Act, for the indemnification of an officer or director of the
Company against judgments, penalties, fines, settlements, and expenses incurred
as a result of being made a party to a proceeding by reason of his or her
official capacity with the Company.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "1933 Act") may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the 1933 Act and is therefore unenforceable.
RELATIONSHIP WITH ARM AND AFFILIATES
Pursuant to an Investment Services Agreement and an Administrative Services
Agreement entered into in June 1995 between the Company and ARM, the Company
reimburses ARM for investment management services (provided in part through ARM
Capital Advisors) as well as administrative services. ARM's charges are based
upon .20% of invested assets annually for investment management services and
.25% of total certificate reserves annually for administrative services, but may
be reduced by agreement of the parties.
Prior to the Acquisition, the Company reimbursed the costs incurred by SBM for
management services provided to the Company pursuant to a management agreement
between such parties then in effect by payment of a management fee. Such fee
equaled the costs incurred by SBM in its performance of management services for
the Company in accordance with such management agreement.
Pursuant to a Tax Allocation Agreement for taxable periods beginning January 1,
1995, the Company has agreed to reimburse ARM for any tax benefits arising from
the inclusion of the Company's separate company taxable income in ARM's
consolidated income tax returns (e.g., the potential tax benefit which may arise
if consolidated net operating losses were used to offset a portion of the
Company's income tax liability).
The Underwriting Agreement between the Company and SBM Financial Services, a
wholly owned subsidiary of ARM and a registered broker-dealer, is described
under the section entitled "Underwriting Agreement".
10
<PAGE>
Prior to the Acquisition, in accordance with an underwriting agreement then in
effect between the Company and SBM, the Company paid SBM Financial Services a
sales commission not to exceed $30.00 per $1,000 invested per three-year
Certificate maturity period.
For the period from June 14, 1995, through December 31, 1995, the Company paid
ARM $84,986 for investment management services and $66,993 for administrative
services. During such period, in the ordinary course of business, the Company
sold $4,001,345 of Federal National Mortgage Association ("FNMA") bonds to
Morgan Stanley & Co. Incorporated ("MSCI") in accordance with the Company's
investment objectives. The sales were arms-length transactions made on the open
market at prevailing market prices pursuant to a competitive bidding process and
resulted in a net profit to the Company. MSCI is registered as a broker-dealer
under the 1934 Act and is a subsidiary of Morgan Stanley Group Inc. which holds
a less than 10% beneficial interest in the voting securities of ARM. In
addition, during such period, the Company sold fixed-income instruments held in
its investment portfolio in the amount of $7,418,338 to Integrity Life Insurance
Company ("Integrity"), an ARM subsidiary, at open-market prices, and purchased
fixed-income instruments in the amount of $7,337,632 from Integrity at
open-market prices. The purpose of such purchases and sales was to diversify the
Company's investment portfolio in accordance with its investment policies.
EXPERTS
Ernst & Young LLP is the Company's independent auditors. Ernst & Young LLP, on
an annual basis, will audit certain financial statements prepared by management
and express an opinion on such financial statements based on their audits.
The financial statements and schedules included herein for the year ended
December 31, 1995, have been audited by Ernst & Young LLP as stated in their
reports appearing herein and have been included in reliance upon such reports
given their authority as experts in auditing and accounting.
The financial statements and schedules of the Company for the years ended
December 31, 1994 and 1993, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports included herein or incorporated
by reference in the Company's Registration Statement, and have been so included
or incorporated by reference in reliance upon such reports given their authority
as experts in auditing and accounting.
11
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 1995,
1994, 1993, 1992, and 1991 has been derived from the audited financial
statements and should be read in conjunction with those statements and the
related notes to the financial statements. The historical financial statements
of the Company may not necessarily reflect the results of operations or
financial position that would have been obtained had the Company been a
separate, independent company. See Note 1 of Notes to Financial Statements. Also
see "Management's Discussion and Analysis of Results of Operations and Financial
Condition" for additional comments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- -------------------------------------------------------------------------------------------
(in thousands, except per share data) 1995* 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Total investment income $ 4,889 $ 5,326 $ 5,439 $ 5,492 $ 5,837
Total investment expenses 958 1,225 1,289 1,161 1,215
Provision for certificate reserves 2,929 3,575 4,090 4,532 5,343
Net investment income (loss) 595 363 103 (64) (398)
Net realized investment gains (losses) 181 20 (2) (21) 340
Net income (loss) 777 383 101 13 (58)
Net earnings (loss) per share ** 3.11 1.53 0.40 0.05 (0.23)
BALANCE SHEET DATA (END OF PERIOD)
Total assets $60,580 $60,609 $71,021 $70,400 $69,364
Face-amount certificate reserves 52,460 60,355 67,029 66,550 67,159
Shareholder's equity 4,986 187 3,881 3,732 1,840
</TABLE>
* The Company was acquired by ARM effective as of May 31, 1995. The results of
operations for 1995 represent the historical results of the Company for the
period from January 1, 1995 to May 31, 1995 combined with the results of
operations of the Company subsequent to the acquisition from June 1, 1995 to
December 31, 1995. The operating results subsequent to the acquisition
include the effect of new accounting values assigned to invested assets and
intangibles and differences in management and investment advisory fees
charged by ARM and SBM.
** Earnings (loss) per share based on 250,000 shares issued and outstanding
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
The Company was acquired by ARM effective May 31, 1995. The results of
operations for 1995 represent the historical results of the Company for the
period from January 1, 1995 to May 31, 1995 combined with the results of
operations of the Company subsequent to the Acquisition from June 1, 1995 to
December 31, 1995. The operating results subsequent to the acquisition include
the effect of new accounting values assigned to invested assets and intangibles
and differences in management and investment advisory fees charged by ARM and
SBM.
RESULTS OF OPERATIONS
The Company's results of operations are derived primarily from the margin
between earnings on investments and amounts paid or credited on its fixed-rate
certificate deposits ("investment spread").
1995 Compared with 1994
Net investment income for 1995 was $595,354 compared to $363,420 for 1994.
The increase in net investment income is primarily due to a higher investment
spread and lower investment expenses (principally as a result of lower
management fees and lower amortization of deferred charges since the
Acquisition). Investment spread increased to $2.0 million in 1995 from $1.8
million in 1994. These amounts represent the difference between the Company's
investment yield on average cash and investments and average rate credited on
certificate deposits of 2.97% and 2.10% for 1995 and 1994, respectively.
The investment yields on average cash and investments for 1995 and 1994
were 8.21% and 7.63%, respectively. This increase is primarily attributable to
higher yields attained as a result of a restructuring of the investment
portfolio subsequent to the Acquisition, as well as accretion resulting from
purchase accounting adjustments.
The average rates of interest credited on certificate deposits for 1995 and
1994 were 5.24% and 5.53%, respectively. This decrease is a result of new and
renewal certificates issued during 1995 accumulating interest at rates lower
than those credited during 1994. The Company monitors new interest credited
rates against competitive products, mainly bank certificates of deposit.
Interest credited rate adjustments (up or down) on new certificates are made as
the Company deems necessary.
Certificate reserves decreased 13.1% during 1995, as maturities and
surrenders have exceeded sales and renewals. The Company believes a significant
factor leading to the decrease is 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. For certificates
reaching their maturity date during 1995, 72% were renewed.
Realized investment gains were $283,885 and $29,783 for the years ended
December 31, 1995 and 1994, respectively. These realized investment gains were
interest-rate related and primarily attributable to the on-going management of
the Company's fixed maturity securities classified as available-for-sale which
can result in period-to-period swings in realized investment gains and losses
since securities are sold during rising and falling interest rate environments.
1994 Compared with 1993
Net investment income for 1994 was $363,420 compared to $103,382 for the
same period in 1993. The increase in net investment income is primarily due to a
higher investment spread and lower investment expenses. Investment spread was
$1.8 million in 1994 compared to $1.3 million in 1993. These amounts represent
the difference
13
<PAGE>
between the Company's investment yield on average cash and investments and
average rate credited on certificate deposits of 2.10% and 1.42% for 1994 and
1993, respectively.
The investment yields on average cash and investments for 1994 and 1993
were 7.63% and 7.52%, respectively. The average rates of interest credited on
certificate deposits for 1994 and 1993 were 5.53% and 6.10%, respectively. The
decrease in credited rates is a result of new and renewal certificates issued
during 1994 accumulating interest at rates lower than those credited during
1993.
Certificate reserves decreased 10.0% during 1994. The Company believes the
decrease was mainly the result of the certificate of deposit marketplace being
very competitive, as many financial institutions were offering special high
rates to induce customers to open new accounts. For certificates reaching their
maturity date during 1994, 66% 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. On an amortized cost basis, the Company's investments in fixed maturities
were 98% and 100% investment grade as of December 31, 1995 and 1994,
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, having a rating on the scale used by Standard & Poor's
Corporation of BBB- or above. Additionally, the Company's investment portfolio
has minimal exposure to real estate, mortgage loans and common equity
securities, which represent 1.1% of the amortized cost of qualified assets at
December 31, 1995. As of December 31, 1995, the book value of securities in the
Company's investment portfolios which had defaulted on principal or interest
payments was zero. The Company attempts to minimize the risks associated with
the non-investment grade securities in its portfolio by limiting the exposure to
any one issuer and by closely monitoring the creditworthiness of such issuers.
To improve its investment spreads, the Company added U.S. Government agency
collateralized mortgage obligations ("CMOs") to its investment portfolio in 1993
and early 1994. The Company has been able to achieve higher yields with these
securities without assuming additional credit risk as the CMOs are primarily
backed by U.S. Government and U.S. Government agencies. All mortgage-backed
securities (including CMOs) are subject to the risk that a changing interest
rate environment might cause prepayment of the underlying obligations at speeds
slower or faster than anticipated at the time of their purchase; however, the
prepayment risk associated with individual CMO structures may vary
significantly. Since the Acquisition in June 1995, an initial restructuring of
the investment portfolio was performed to better match the duration of the
investment portfolio and related certificate deposits and improve investment
yields. In addition, the Company repositioned its mix of CMO holdings to reduce
positions in more volatile or highly leveraged securities in favor of the more
stable CMO tranches. On an amortized cost basis, CMOs represented 46.6% and
49.7% of the Company's qualified assets as of December 31, 1995 and 1994,
respectively.
In December 1995, the Company sold virtually all of its mortgage loan
portfolio resulting in a loss of approximately $65,000.
Based on the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," adopted as of January 1, 1994, 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. The
decrease in interest rates since the Acquisition, at which time the Company's
invested assets were restated to fair value in accordance with purchase
accounting rules, has resulted in unrealized gains of $885,878 (net of $477,011
in deferred income taxes) as of December 31, 1995. Volatility in reported
shareholder's equity occurs as a result of SFAS No. 115 which requires some
assets to be carried at fair value while other assets are carried at historical
cost and all liabilities are carried at historical values.
14
<PAGE>
The Company manages assets and liabilities in a closely integrated manner to
minimize the volatility of margins. 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 assets creates volatility in reported
shareholder's equity but does not reflect the underlying economics of the
Company's business.
LIQUIDITY AND FINANCIAL RESOURCES
The Company has never paid cash dividends on its common stock in order to
maintain and increase capital resources. The Company will, however, evaluate
this on an ongoing basis.
As of December 31, 1995, the Company had $6.2 million in capital 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 certain regulatory authority over the
Company. 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 6.9% at December 31, 1995. In
November 1994, based on the decline in the value of the Company's investment
portfolio, resulting from increasing interest rates in 1994, and the Company's
decreasing liquidity resulting from reduced principal payments on the Company's
CMO portfolio, the MDC recommended that the Company increase its capital level.
The MDC's concern was influenced by the Company's capital ratio, calculated
including the effects of unrealized investment losses. Therefore, on March 29,
1995, SBM Life, the former parent company of the Company, made a $1.5 million
capital contribution to the Company.
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, 1995, cash and cash equivalents totalled $3.9 million, an
increase of $2.4 million from December 31, 1994. 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 $4.1 million, $4.2 million, and $4.3 million were generated
from operating activities in 1995, 1994, and 1993, 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 $51.8 million, $10.6 million, and $35.1
million in cash flows during 1995, 1994, and 1993, respectively, which were
offset by purchases of investments of $44.2 million, $5.1 million, and $37.4
million, respectively. The higher purchases and sales of investments during 1995
were a result of the initial restructuring of the Company's investment portfolio
following the Acquisition.
15
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Auditors................................................................17
Balance Sheets as of December 31, 1995 and 1994................................................19
Statements of Income for the years ended December 31, 1995, 1994, and 1993.....................21
Statements of Shareholder's Equity for the years ended December 31, 1995, 1994 and 1993........22
Statements of Cash Flows for the years ended December 31, 1995, 1994, and 1993.................23
Notes to Financial Statements..................................................................24
</TABLE>
16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SBM Certificate Company
We have audited the balance sheet of SBM Certificate Company as of December 31,
1995, and the related statements of income, shareholder's equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides 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, 1995, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 22, 1996
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
SBM Certificate Company
We have audited the balance sheet of SBM Certificate Company (the "Company") as
of December 31, 1994 and the related statements of income and of cash flows for
each of the two years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our duties in accordance with generally accepted auditing
standards. 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, such financial statements present fairly, in all material
respects, the financial position of SBM Certificate Company as of December 31,
1994 and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
The financial statements have been prepared on a historical basis and do not
include any purchase accounting or other adjustments resulting from the sale of
the Company as discussed in Note 2 to the financial statements.
As discussed in Note 1 to the financial statements, in 1994 the Company adopted
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 29, 1995
18
<PAGE>
SBM CERTIFICATE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
- --------------------------------------------------------------------------------------- -----------
<S> <C> <C>
ASSETS
Qualified assets:
Cash and investments:
Investments in securities of unaffiliated issuers:
Fixed maturities available-for-sale, at fair value (amortized
cost: 1995-$53,166,600; 1994-$42,296,611) $54,486,378 $37,349,231
Fixed maturities held-to-maturity, at amortized cost (fair
value: 1994-$11,913,328) -- 13,944,234
Equity securities, at fair value (cost: 1995-$479,817;
1994-$803,914) 522,928 475,587
Mortgage loans on real estate 13,391 4,271,255
Certificate loans 279,463 338,879
Other invested assets 618,763 1,110,921
Cash and cash equivalents 3,900,494 1,530,899
----------- -----------
Total cash and investments 59,821,417 59,021,006
Receivables:
Dividends and interest 397,898 432,469
----------- -----------
Total qualified assets 60,219,315 59,453,475
Deferred acquisition costs 113,500 309,587
Goodwill 192,919 --
Deferred federal income taxes -- 845,629
Other assets 54,203 239
----------- -----------
Total assets $60,579,937 $60,608,930
=========== ===========
</TABLE>
See accompanying notes.
19
<PAGE>
SBM CERTIFICATE COMPANY
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
- ------------------------------------------------------------------------------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Certificate reserves:
Fully-paid certificates $51,329,262 $58,990,855
Installment certificates 1,130,462 1,364,160
----------- -----------
Total certificate reserves 52,459,724 60,355,015
Payable for investment securities purchased 2,454,325 --
Deferred federal income taxes 619,148 --
Accounts payable and other liabilities 60,582 66,992
----------- -----------
Total liabilities 55,593,779 60,422,007
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 3,740,006
Net unrealized gains (losses) on available-for-sale securities 885,878 (4,242,659)
Retained earnings 800,280 439,576
----------- -----------
Total shareholder's equity 4,986,158 186,923
----------- ------------
Total liabilities and shareholder's equity $60,579,937 $60,608,930
=========== ===========
</TABLE>
See accompanying notes.
20
<PAGE>
SBM CERTIFICATE COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest income from securities $4,276,460 $4,590,206 $4,303,521
Interest income from mortgage loans 366,321 439,709 726,717
Other investment income 246,597 296,010 408,262
------------------------------------
Total investment income 4,889,378 5,325,925 5,438,500
Investment and other expenses:
Management and investment advisory fees 358,486 516,000 490,800
Deferred acquisition cost amortization and
renewal commissions 289,875 518,782 501,377
Real estate expenses 137,777 112,772 152,070
Amortization of goodwill 92,248 -- --
Loan and real estate loss provision -- -- 55,000
Other expenses 79,207 77,876 89,966
------------------------------------
Total investment and other expenses 957,593 1,225,430 1,289,213
Provision for certificate reserves 2,929,357 3,575,075 4,089,905
------------------------------------
Net investment income before federal
income taxes 1,002,428 525,420 59,382
Federal income tax benefit (expense) (407,074) (162,000) 44,000
------------------------------------
Net investment income 595,354 363,420 103,382
Realized investment gains (losses) 283,885 29,783 (3,173)
Federal income tax benefit (expense) on
realized investment gains and losses (102,500) (10,000) 1,000
-----------------------------------
Net realized investment gains (losses) 181,385 19,783 (2,173)
-----------------------------------
Net income $ 776,739 $ 383,203 $ 101,209
-===================================
</TABLE>
See accompanying notes.
21
<PAGE>
SBM CERTIFICATE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES)
ADDITIONAL ON AVAILABLE- TOTAL
COMMON PAID-IN FOR-SALE RETAINED SHAREHOLDER'S
STOCK CAPITAL SECURITIES EARNINGS EQUITY
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $250,000 $ 3,740,006 $ (213,024) $ (44,836) $ 3,732,146
Net income 101,209 101,209
Change in net unrealized investment
losses 47,282 47,282
-------------------------------------------------------------------
Balance, December 31, 1993 250,000 3,740,006 (165,742) 56,373 3,880,637
Adjustment to beginning balance for
change in accounting method, net of
income taxes of $403, 782,000 782,000
Net income 383,203 383,203
Change in net unrealized losses on
available-for-sale securities (4,858,917) (4,858,917)
-------------------------------------------------------------------
Balance, December 31, 1994 250,000 3,740,006 (4,242,659) 439,576 186,923
Net income 776,739 776,739
Capital contribution from SBM Life 1,500,000 1,500,000
Purchase accounting adjustment
(Note 2) (2,190,006) 1,066,442 (416,035) (1,539,599)
Change in net unrealized gains
(losses) on available-for-sale
securities 4,062,095 4,062,095
-------------------------------------------------------------------
Balance, December 31, 1995 $250,000 $ 3,050,000 $ 885,878 $ 800,280 $ 4,986,158
===================================================================
</TABLE>
See accompanying notes.
22
<PAGE>
SBM CERTIFICATE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 776,739 $ 383,203 $ 101,209
Adjustments to reconcile net income to cash flows provided
by operating activities:
Provision for certificate reserves 2,929,357 3,575,075 4,089,905
Realized investment (gains) losses (283,885) (29,783) 3,173
Deferral of acquisition costs (430,852) (507,996) (377,466)
Amortization of deferred acquisition costs and
renewal commissions 289,875 518,782 501,377
Other amortization and depreciation 228,861 (75,111) 13,085
Deferred tax expense (benefit) 295,464 20,000 (35,000)
Provision for loan and real estate losses -- -- 55,000
(Increase) decrease in accrued investment income 34,571 30,851 (12,545)
Changes in other assets and liabilities 250,559 236,812 7,905
------------------------------------------
Cash flows provided by operating activities 4,090,689 4,151,833 4,346,643
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments available-for-sale:
Purchases (44,224,876) (3,922,397) --
Maturities and redemptions 2,627,400 7,563,300 --
Sales 44,977,473 -- --
Fixed maturity investments held-to-maturity:
Purchases -- (1,180,893) (37,373,431)
Maturities and redemptions 51,500 2,761,816 22,962,748
Sales -- -- 6,893,629
Sales, maturities and redemptions--mortgage loans 4,192,459 144,109 5,253,906
Additions to other invested assets (81,200) -- --
Proceeds from sale of other invested assets -- 156,453 22,968
Repayment of certificate loans, net 59,416 11,494 281
------------------------------------------
Cash flows provided by (used in) investing activities 7,602,172 5,533,882 (2,239,899)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Capital contribution 1,500,000 -- --
Amounts received from face-amount certificate holders 2,498,761 3,689,960 5,984,921
Amounts paid to face-amount certificate holders (13,322,027) (13,973,106) (9,596,304)
------------------------------------------
Cash flows used in financing activities (9,323,266) (10,283,146) (3,611,383)
------------------------------------------
Net change in cash and cash equivalents 2,369,595 (597,431) (1,504,639)
Cash and cash equivalents at beginning of year 1,530,899 2,128,330 3,632,969
------------------------------------------
Cash and cash equivalents at end of year $ 3,900,494 $ 1,530,899 $ 2,128,330
==========================================
</TABLE>
See accompanying notes.
23
<PAGE>
SBM CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
SBM Certificate Company (the "Company") was incorporated in 1990 for the
purpose of acquiring 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"), and the Company became a wholly owned
subsidiary of SBM Life.
On June 14, 1995, ARM Financial Group, Inc. ("ARM"), completed the
acquisition of substantially all of the assets and business operations of SBM,
including all of the issued and outstanding common stock of SBM's subsidiaries,
SBM Life and SBM Financial Services, Inc. ("SBM Financial Services"), and SBM's
management contracts with the State Bond Group of mutual funds (the
"Acquisition"). By virtue of the Acquisition, ARM acquired control of the
Company, a wholly owned subsidiary of SBM Life. Concurrent with the Acquisition,
ARM acquired all outstanding shares of the authorized common stock of the
Company from SBM Life for a purchase price of $3.3 million.
Nature of Operations
The Company is an issuer of face-amount certificates 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 the holder the original
invested amount, plus a specified return, at a given maturity date. The
Company's face-amount certificates are sold primarily in Minnesota, Iowa,
California, South Dakota, Wisconsin, and Illinois. Face-amount certificates
generally compete with various types of individual savings products which offer
a fixed rate of return on investors' money, especially bank and insurance
products.
Basis of Presentation
The financial statements are prepared in accordance with generally accepted
accounting principles. The 1995 financial statements reflect purchase accounting
adjustments related to the Acquisition (see Note 2). For periods prior to the
Acquisition, the financial statements reflect the historical basis of
accounting. Certain amounts from prior years have been reclassified to conform
to the current year's presentation. These reclassifications had no effect on
previously reported net income or shareholder's equity.
Investments
Fixed maturities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity. Held-to-
maturity securities are stated at amortized cost. Fixed maturities not
classified as held-to-maturity 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 in a separate component
of shareholder's equity. The amortized cost of fixed maturities classified as
held-to-maturity or available-for-sale is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed
securities, over
24
<PAGE>
Notes to Financial Statements (continued)
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 net investment income. Mortgage loans on real estate and 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 at
their 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.
Other invested assets includes real estate, which is recorded at cost,
less accumulated depreciation since the Acquisition.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" for investments held as of or acquired after January 1, 1994.
In accordance with SFAS No. 115, prior period financial statements have not been
restated to reflect the change in accounting principle. The January 1, 1994
opening balance of shareholder's equity was increased by $782,000 (net of
$403,000 in deferred income taxes) to reflect the net unrealized holding gains
on securities classified as available-for-sale previously carried at amortized
cost. The adoption of SFAS No. 115 had no effect on net income. Upon the date of
the Acquisition, the Company classified all fixed maturities classified as held-
to-maturity to the available-for-sale category.
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.
Certificate reserves are maintained for advance payments by certificate holders
and accrued interest thereon and for interest earned and accrued due to
additional interest rates declared. The reserve accumulation rates, cash
surrender values, and certificate reserves, among other matters, are governed by
the 1940 Act.
25
<PAGE>
Notes to Financial Statements (continued)
Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
uses the liability method of accounting for income taxes. The Company's taxable
income or loss is included in the consolidated federal income tax return of ARM.
The Company provides for income taxes on a separate return basis, except that
tax benefits are recognized for losses to the extent they can be used in the
consolidated return. It is the Company's and ARM's policy that any tax benefit
recorded by one entity will be reimbursed by the benefitted entity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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. ACQUISITION OF THE COMPANY
The Acquisition has been accounted for using the purchase method of
accounting. Under purchase accounting, assets and liabilities are adjusted to
their estimated fair value and reflect an allocation of the Company's portion of
the cost of the Acquisition, commonly referred to as "push-down accounting."
The purchase accounting adjustment reflected in the accompanying statement
of shareholder's equity for the year ended December 31, 1995 was recorded on May
31, 1995, the effective date of the Acquisition. The adjustment restated
shareholder's equity on that date to $3.3 million, the purchase price allocated
to the Company by ARM. The December 31, 1995, balances for "retained earnings"
and "net unrealized gains (losses) on available-for-sale securities" reflect net
income and the change in the fair value of fixed maturities and equity
securities subsequent to the Acquisition.
The following combined condensed statements of income and cash flows
present results for the five months ended May 31, 1995, prior to the
Acquisition, and the seven months ended December 31, 1995, following the
Acquisition. The combined amounts agree to the accompanying statements of income
and cash flows for the year ended December 31, 1995. The operating results
subsequent to the Acquisition include the effect of new accounting values
assigned to invested assets and intangibles.
26
<PAGE>
Notes to Financial Statements (continued)
<TABLE>
<CAPTION>
SEVEN MONTHS
FIVE MONTHS ENDED YEAR ENDED
ENDED MAY 31, DECEMBER 31, DECEMBER 31,
1995 1995 1995
------------------------------------------
<S> <C> <C> <C>
Total investment income $ 2,013,780 $ 2,875,598 $ 4,889,378
Total investment expenses 511,343 446,250 957,593
Provision for certificate reserves 1,224,738 1,704,619 2,929,357
-----------------------------------------
Net investment income before federal income taxes 277,699 724,729 1,002,428
Federal income tax expense (94,000) (313,074) (407,074)
-----------------------------------------
Net investment income 183,699 411,655 595,354
Realized investment gains (losses) (314,000) 597,885 283,885
Federal income tax benefit (expense) on realized
investment gains and losses 106,760 (209,260) (102,500)
-----------------------------------------
Net income (loss) $ (23,541) $ 800,280 $ 776,739
=========================================
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 1,462,487 $ 2,628,202 $ 4,090,689
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (21,615) (44,203,261) (44,224,876)
Maturities and redemptions 903,084 1,775,816 2,678,900
Sales 5,090,653 39,886,820 44,977,473
Sales, maturities and redemptions--mortgage loans 392,947 3,799,512 4,192,459
Additions to other invested assets, net (81,200) -- (81,200)
Repayments of certificate loans, net 66,731 (7,315) 59,416
-----------------------------------------
Cash flows provided by investing activities 6,350,600 1,251,572 7,602,172
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Capital contribution from SBM Life 1,500,000 -- 1,500,000
Amounts received from face-amount certificateholders 1,926,095 572,666 2,498,761
Amounts paid to face-amount certificateholders (7,066,042) (6,255,985) (13,322,027)
-----------------------------------------
Cash flows used in financing activities (3,639,947) (5,683,319) (9,323,266)
-----------------------------------------
Net change in cash and cash equivalents 4,173,140 (1,803,545) 2,369,595
Cash and cash equivalents at beginning of period 1,530,899 5,704,039 1,530,899
-----------------------------------------
Cash and cash equivalents at end of period $ 5,704,039 $ 3,900,494 $ 3,900,494
=========================================
</TABLE>
27
<PAGE>
Notes to Financial Statements (continued)
3. INVESTMENTS
The amortized cost and estimated fair values of available-for-sale
securities and held-to-maturity securities were as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995:
Fixed maturities:
U.S. treasury securities and obligations
of U.S. government agencies $ 6,319,243 $ 25,950 $ -- $ 6,345,193
Obligations of state and political
subdivisions 560,292 4,243 6,927 557,608
Foreign governments 500,000 8,125 -- 508,125
Corporate securities 4,868,279 96,683 173 4,964,789
Mortgage-backed securities 40,918,786 1,202,966 11,089 42,110,663
------------------------------------------------
Total fixed maturities 53,166,600 1,337,967 18,189 54,486,378
Equity securities 479,817 43,156 45 522,928
------------------------------------------------
Total available-for-sale securities $53,646,417 $1,381,123 $ 18,234 $55,009,306
================================================
DECEMBER 31, 1994:
Fixed maturities:
Mortgage-backed securities $42,031,999 $ 43,073 $4,933,343 $37,141,729
Corporate securities 264,612 4,500 61,610 207,502
------------------------------------------------
Total fixed maturities 42,296,611 47,573 4,994,953 37,349,231
Equity securities 803,914 -- 328,327 475,587
------------------------------------------------
Total available-for-sale securities $43,100,525 $ 47,573 $5,323,280 $37,824,818
================================================
HELD-TO-MATURITY SECURITIES
------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
- ------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994:
Fixed maturities:
U.S. treasury securities and obligations
of U.S. government agencies $ 168,461 $ -- $ 15,248 $ 153,213
Obligations of state and political
subdivisions 667,053 5,601 34,254 638,400
Mortgage-backed securities 13,108,720 -- 1,987,005 11,121,715
------------------------------------------------
Total fixed maturities held-to-maturity $13,944,234 $ 5,601 $2,036,507 $11,913,328
================================================
</TABLE>
28
<PAGE>
Notes to Financial Statements (continued)
The amortized cost and estimated fair value of 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
securities provide for periodic payments throughout their life.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------
ESTIMATED
FAIR
COST VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
AVAILABLE-FOR-SALE:
Due in one year or less $ 49,991 $ 49,960
Due after one year through five years 7,288,590 7,323,115
Due after five years through ten years 4,111,734 4,181,225
Due after ten years 797,499 821,415
Mortgage-backed securities 40,918,786 42,110,663
Equity securities 479,817 522,928
------------------------
Total available-for-sale securities $53,646,417 $55,009,306
========================
</TABLE>
Gross gains of $815,733 and $7,399 and gross losses of $148,041 and
$321,399 were realized on sales of fixed maturities classified as available-for-
sale for the seven months ended December 31, 1995 and the five months ended May
31, 1995, respectively. There were no sales of fixed maturities available-for-
sale in 1994. Gross gains of $1,864 and $201,597 and gross losses of zero and
$238 were realized on sales of fixed maturities classified as held-to-maturity
during the years ended December 31, 1994, and 1993, respectively.
Gross gains of zero and $2,159 and gross losses of $5,075 and $255 were
recognized on equity securities sold during 1995 and 1994, respectively. Gross
losses of $64,732 were realized on the sale of substantially all mortgage loans
in December 1995.
29
<PAGE>
Notes to Financial Statements (continued)
4. CERTIFICATE RESERVES
Total certificate reserves at December 31 are summarized as follows:
<TABLE>
<CAPTION>
MINIMUM ADDITIONAL
1995 1994 INTEREST INTEREST
------------------------------------------------------------
<S> <C> <C> <C> <C>
Fully-paid certificates:
Single-payment series 503 $48,440,527 $56,056,890 2.50% 1.85% to 4.50%
Installment 2,267,503 2,311,547 2.50% to 3.50% 2.00% to 2.50%
Optional settlement 618,419 615,811 2.50% to 3.00% 2.00% to 2.50%
Due to unlocated certificate
holders 2,813 6,607 None
-------------------------
51,329,262 58,990,855
Installment certificates:
Reserves to mature, by series:
120, 215, and 220 447,033 554,466 3.25% 2.25%
315 364,368 425,412 3.50% 1.75%
Advance payments 319,061 384,282 * *
-------------------------
1,130,462 1,364,160
-------------------------
Total certificate reserves $52,459,724 $60,355,015
=========================
</TABLE>
*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 5.25% and will continue at that rate through
1996.
5. 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
necessarily 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.
30
<PAGE>
Notes to Financial Statements (continued)
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments in securities of unaffiliated
issuers:
Fixed maturities available-for-sale $54,486,378 $54,486,378 $37,349,231 $37,349,231
Fixed maturities held-to-maturity -- -- 13,944,234 11,913,328
Equity securities 522,928 522,928 475,587 475,587
Mortgage loans on real estate 13,391 13,391 4,271,255 4,304,269
Certificate loans 279,463 279,463 338,879 338,879
Other invested assets 618,763 618,763 1,110,921 1,110,921
Cash and cash equivalents 3,900,494 3,900,494 1,530,899 1,530,899
Other assets 54,203 54,203 239 239
Liabilities:
Certificate reserves 52,459,724 52,758,441 60,355,015 60,050,268
Accounts payable and other liabilities 60,582 60,582 66,992 66,992
</TABLE>
The following methods and assumptions were used in estimating fair values:
Investments in Securities of Unaffiliated Issuers
Fair values for investments in securities of unaffiliated issuers are
based on quoted market prices, where available. For investments in securities
of unaffiliated issuers for which a quoted market price is not available, fair
values are estimated using internally calculated estimates or quoted market
prices of comparable instruments.
Mortgage Loans on Real Estate
At December 31, 1995, book value is deemed to be fair value. At
December 31, 1994, the estimated fair value is based upon discounted cashflow
analyses of the loans in the portfolio.
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.
31
<PAGE>
Notes to Financial Statements (continued)
Certificate Reserves
The fair value of certificate reserves is based on a discounted cashflow
analysis, using the current interest rate offered on new certificates of 5.60%
and 6.00% at December 31, 1995 and 1994, respectively.
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.
6. FEDERAL INCOME TAXES
Deferred income tax reflects 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, 1995 and December 31, 1994 were:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Real estate limited partnership $ 172,851 $ 189,000
Net unrealized gains on available-for-sale securities 477,011 --
Other 39,725 33,000
------------------------
Total deferred tax liabilities 689,587 222,000
Deferred tax assets:
Fixed maturities 196,991 --
Net unrealized losses on available-for-sale securities -- 1,794,000
Other investments 108,143 --
Fixed assets 39,030 --
Capital loss carryover 420,357 --
Other 20,439 34,629
------------------------
Total deferred tax assets 784,960 1,828,629
Valuation allowance for deferred tax assets (714,521) (761,000)
------------------------
Net deferred tax assets 70,439 1,067,629
------------------------
Deferred tax assets (liabilities) shown on the accompanying balance sheets $(619,148) $ 845,629
========================
</TABLE>
Current and deferred federal income tax expenses for the seven months ended
December 31, 1995 were $233,870 and $288,464, respectively. For the five months
ended May 31, 1995 the current tax benefit was $19,760 and the deferred tax
expense was $7,000. For the year ended December 31, 1994, the current and
deferred expense components were $152,000 and $20,000, respectively. For the
year ended December 31, 1993, the current expense and deferred benefit
components were $4,000 and $49,000, respectively.
32
<PAGE>
Notes to Financial Statements (continued)
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 will be applied to first reduce the balance of goodwill.
During 1995, goodwill was reduced by $189,251 as a result of realizing such
benefits. The balance of goodwill at December 31, 1995 was $192,919 and is being
amortized straight-line over the three year period subsequent to the
Acquisition.
Federal income taxes differ from that computed by using the expected
federal income tax rate of 35% for 1995 and 1994, and 34% for 1993. The sources
of the differences were:
<TABLE>
<CAPTION>
SEVEN MONTHS FIVE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31,
1995 1995 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income tax benefit (expense)
at statutory rate $(450,209) $(462,915) $ 12,706 $(194,321) $(19,111)
Tax-exempt interest 7,256 3,350 3,906 10,000 47,000
Dividend received deduction 14,379 8,000 6,379 15,000 15,000
Goodwill amortization (32,287) (32,287) -- -- --
Taxable proceeds from life
insurance (38,482) (38,482) -- -- --
Other (10,231) -- (10,231) (2,679) 2,111
-----------------------------------------------------------------------
Total federal income tax
benefit (expense) $(509,574) $(522,334) $ 12,760 $(172,000) $ 45,000
=======================================================================
</TABLE>
7. RELATED PARTY TRANSACTIONS
For the periods presented, management and investment advisory fee expenses
reflected in the accompanying financial statements represent allocations of
expenses from SBM and ARM for the respective periods prior and subsequent to the
Acquisition. 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.
Prior to the Acquisition, the allocations were primarily based on the amount of
time spent by SBM employees on the face-amount certificate business and on the
proportion which such business represents of all of SBM's and subsidiaries'
business activities. The allocations were $151,967, $206,519, $516,000, and
$490,800, for the seven months ended December 31, 1995, the five months ended
May 31, 1995 and for the years ended December 31, 1994, and 1993, respectively.
The Company owns and pays operating expenses for a building used by SBM (prior
to the Acquisition) and its affiliates. The total rent and utilities
reimbursement paid to the Company in 1994 and 1993 by SBM and affiliates was
$146,554 and $236,162, respectively. At December 31, 1994, the Company owed SBM
$46,000 related to the above. Management believes the foregoing allocations
were made on a reasonable basis; however,
33
<PAGE>
Notes to Financial Statements (continued)
they do not necessarily equal the costs which would have been or will be
incurred by the Company on a stand-alone basis.
The Company has paid SBM Financial Services, an affiliate, $443,579,
$507,995, and $377,675 for the years ended 1995, 1994, and 1993, respectively,
for sales commissions and other issuance, underwriting, and sales expenses.
8. 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 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 ($52.7 million and $60.6 million at December 31, 1995 and
1994, respectively). The Company had qualified assets of $58.9 million and $64.7
million at those respective dates (before addition of $1.4 million and reduction
of $5.3 million, respectively, for net unrealized pretax gains and losses on
fixed maturities and equity securities classified as available-for-sale).
For purposes of determining compliance with the foregoing provisions,
qualified assets are valued in accordance with such provisions of the Code of
the District of Columbia as are applicable to life insurance companies as
required by the 1940 Act. Qualified assets for which no provision for valuation
is made in such Code are valued in accordance with rules, regulations, or orders
prescribed by the Securities and Exchange Commission. These values are the same
as the financial statement carrying value, 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
securities 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 reflected at amortized
cost for purposes of this calculation. Under this formula, the Company's capital
ratio was 6.9% at December 31, 1995. In November 1994, based on the decline in
the value of the Company's investment portfolio, resulting from increasing
interest rates in 1994 and the Company's decreasing liquidity resulting from
reduced principal payments on the Company's collateralized mortgage obligations
portfolio, the MDC recommended that the Company increase its capital level. The
MDC's concern was influenced by the Company's capital ratio, calculated
including the effects of unrealized investment losses. Therefore, on March 29,
1995, SBM Life, the former parent company of the Company, made a $1.5 million
capital contribution to the Company.
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, 1995 and 1994
34
<PAGE>
as shown in the following table. Certificate loans, secured by applicable
certificate reserves, are deducted from certificate reserves in computing
deposit requirements.
<TABLE>
<CAPTION>
1995 1994
------------------------
<S> <C> <C>
Assets on deposit with:
Central depositary $57,278,134 $64,092,848
State governmental authorities 193,756 170,435
------------------------
Total deposits $57,471,890 $64,263,283
========================
Required deposits $52,430,261 $60,266,136
========================
</TABLE>
Assets on deposit consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
------------------------
<S> <C> <C>
Investment securities, at cost plus accrued interest $56,839,655 $58,871,273
First mortgage loans, at cost less allowance for loan losses 13,472 4,281,089
Other assets on deposit, at cost 618,763 1,110,921
------------------------
$57,471,890 $64,263,283
========================
</TABLE>
35
<PAGE>
Part II
Item 13 Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
<S> <C>
*Fees and expenses of accountants $ 4,000.00
*Costs of Printing $10,000.00
*Legal Fees $ 1,000.00
Registration Fees --
Federal Taxes --
State Taxes and Fees --
Trustee and Transfer Agency Fees --
Premium on Indemnification Policy --
----------
Total $15,000.00
==========
</TABLE>
*Estimated
Item 14 Indemnification of Directors and Officers
Pursuant to the Company's Articles of Incorporation, the liability of the
Company's directors is limited to the fullest extent permitted by applicable
Minnesota law, except as prohibited by the Investment Company Act of 1940.
Minnesota law allows the elimination of a director's personal liability to a
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except liability for a breach of the duty of loyalty, acts
or omissions not in good faith, involving intentional misconduct or a knowing
violation of law, liability for illegal distributions or liability for any
transaction undertaken for improper personal benefit. Under the Investment
Company Act of 1940 directors may not be protected by indemnification or other
means from liability for willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties ("disabling conduct").
The Company's By-Laws provide for indemnification of officers and directors to
the fullest extent permitted by applicable Minnesota law. Minnesota law requires
indemnification as long as the party charged acted in good faith, derived no
improper personal benefit, had no reasonable cause to believe his or her act was
unlawful and believed the act to be in the best interest of the corporation.
However, in accordance with the Company's By-Laws, such indemnification is only
allowed if either a court, a majority of a quorum of non-party, non-interested
directors, or an independent legal counsel affirmatively determines that the
officer, director or adviser involved is not liable for any disabling conduct.
In addition, the Company may not make any advances in payment for expenses
incurred by officers, directors or advisers unless such a party undertakes in
writing to repay any such advance and posts security for such undertaking, or if
the Company's insurance would cover a default on such an undertaking, or if the
majority of a quorum of non-party directors or independent legal counsel
determine such advance is justified due to the officer's, director's or
adviser's likely success on the merits.
Item 15 Not Applicable
Item 16(a) Exhibits
(1) Underwriting Agreement by and between the Company and SBM Financial
Services, Inc. dated June 14, 1995 (FILED HEREWITH).
(3)(i) Articles of Incorporation of SBM Certificate Company incorporated by
reference to Exhibit 3(i) to Form S-1 Registration Statement of SBM Certificate
Company (File No. 33-38066) filed on December 4, 1990.
(3)(ii) By-Laws of SBM Certificate Company incorporated by reference to Exhibit
3(ii) to Form S-1 Registration Statement of SBM Certificate Company (File No.
33-38066) filed on December 4, 1990.
<PAGE>
(4) Form of Series 503 Certificate incorporated by reference to SBM Certificate
Company Registration Statement of Face-Amount Certificate Company on Form N-8B-4
(File No. 811-6268) filed on April 1, 1991.
(5) Opinion of John R. McGeeney (FILED HEREWITH).
(10) Material contracts
(a) Lease by and between the Company and State Bank & Trust Company of New Ulm
dated August 13, 1992, incorporated by reference to Form 10-K of SBM Company
(File No. 811-407) filed on March 31, 1993.
(b) Underwriting Agreement by and between the Company and SBM Financial
Services, Inc. dated June 14, 1995 (filed herewith as Exhibit (1)).
(c) Administrative Services Agreement by and between the Company and ARM
Financial Group, Inc. dated as of June 14, 1995 (FILED HEREWITH).
(d) Investment Services Agreement by and between the Company and ARM Financial
Group, Inc. dated June 14, 1995 (FILED HEREWITH).
(e) Custody Agreement, as amended and supplemented, between the Company and
First Bank National Association dated December 20, 1990, incorporated by
reference to Exhibit 10(b) to Form S-1 Registration Statement of SBM Certificate
Company (File No. 33-38066) filed on January 2, 1991.
(f) Form of Tax Allocation Agreement which will be entered into by and among the
Company, ARM, and certain ARM subsidiaries for taxable periods beginning January
1, 1995 (FILED HEREWITH).
(23) Consent of Ernst & Young LLP dated February 26, 1996 and consent of
Deloitte & Touche LLP dated February 26, 1996 (FILED HEREWITH).
(27) Financial Data Schedule - Not Applicable
Item 16(b) Financial Statement Schedules
Report of Independent Auditors
Schedule I Investments in Securities of Unaffiliated Issuers - December 31,
1995
Schedule III Mortgage Loans on Real Estate and Interest Earned on
Mortgages - Year Ended December 31, 1995
Schedule V Qualified Assets on Deposit- December 31, 1995
Schedule VI Certificate Reserves - Year Ended December 31, 1995
Schedules III, IV, VI and VII as of or for the year ended December 31, 1994, and
related Independent Auditors' Report, included in the Company's Post Effective
Amendment No. 6 to Registration Statement on Form S-1 filed March 31, 1995 (File
No. 33-38066) and incorporated by reference herein.
Schedule III and IV for the year ended December 31, 1993, and related
Independent Auditors' Report, included in the Company's Post Effective Amendment
No. 5 to Registration Statement on Form S-1 filed February 25, 1994 (File
No. 33-38066) and incorporated by reference herein.
Schedules required by Article 6 of Regulation S-X for face-amount certificate
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.
<PAGE>
Item 17 Undertakings
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "1933 Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Louisville, Commonwealth
of Kentucky, on February 29, 1996.
SBM Certificate Company
By:/s/John R. McGeeney
----------------------------------
John R. McGeeney, President
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Principal Executive Officer:
/s/John R. McGeeney 02/29/96
- ------------------------------------- -----------------------------
John R. McGeeney Date
Chairman of the Board and President
Principal Financial Officer:
/s/Edward L. Zeman 02/29/96
- ------------------------------------- -----------------------------
Edward L. Zeman Date
Executive Vice President--Chief
Financial Officer
Principal Accounting Officer:
/s/Don W. Cummings 02/29/96
- ------------------------------------- -----------------------------
Don W. Cummings Date
Directors:
/s/Steven B. Bing 02/26/96
- ------------------------------------- ------------------------------
Stephen B. Bing Date
/s/John R. McGeeney 02/26/96
- ------------------------------------- ------------------------------
John R. McGeeney Date
/s/Theodore S. Rosky 02/26/96
- ------------------------------------- ------------------------------
Theodore S. Rosky Date
- ------------------------------------- ------------------------------
Martin R. Snyder Date
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SBM Certificate Company
We have audited the financial statements of SBM Certificate Company as of
December 31, 1995, and for the year then ended, and have issued our report
thereon dated February 22, 1996 (included elsewhere in this Registration
Statement). Our audit also included the financial statement schedules listed in
Item 16(b) of this Registration Statement. These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 22, 1996
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS
DECEMBER 31, 1995
PRINCIPAL COST VALUE
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT (A)(B) (A)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES AVAILABLE-FOR-SALE
U.S. TREASURY SECURITIES:
U.S. Treasury Bond, 6.875%, due 08/15/2025 $ 335,000 $ 367,606 $ 377,817
U.S. Treasury Note, 5.5%, due 04/15/2000 195,000 191,470 196,615
U.S. Treasury Note, 5.5%, due 11/15/1998 1,480,000 1,490,175 1,491,100
U.S. Treasury Note, 5.375%, due 11/30/1997 4,265,000 4,269,992 4,279,661
-----------------------
6,319,243 6,345,193
OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS:
Belmont County, Ohio, Sanitary Sewer District #3 Waterworks Revenue
Bonds, 4.25%, due 04/01/2004 30,000 27,653 28,050
Chelan County, Washington, Public Utility District #1, Rocky Reach
Hydroelectric Revenue Bonds, 5%, due 07/01/2013 116,000 115,998 115,999
Cloquet, Minnesota, Independent School District #94, 4%, due 02/01/1996 50,000 49,991 49,960
Columbia, Washington, Storage Power Exchange, 3.875%, due 04/01/2003 160,000 160,000 153,104
Douglas County, Washington, Public Utilities District #1, Wells Hydroelectric
Revenue Bonds, 4%, due 09/01/2018 55,000 45,691 46,662
Minneapolis - St. Paul, Minnesota, Metropolitan Airport, Series 16, 4.5%, due
01/01/1997 60,000 60,000 60,252
North Marshall, Kentucky, Water District, 5%, due 05/01/2006 35,000 33,097 34,300
Yuba County, California, Water Agency Bonds, 4%, due 03/01/2016 75,000 67,862 69,281
-----------------------
560,292 557,608
FOREIGN GOVERNMENT:
United Mexican States, 11.1875%, due 07/21/1997 500,000 500,000 508,125
CORPORATE SECURITIES:
FINANCIAL INSTITUTIONS
Bear Stearns Co, 6.5%, due 06/15/2000 726,000 730,952 737,362
Manufacturers Life Insurance, 144A, 7.875%, due 04/15/2005 1,080,000 1,150,327 1,171,897
Paine Weber Group, 8.875%, due 03/15/2005 1,040,000 1,152,151 1,183,728
Salomon Inc, 6.875%, due 12/15/2003 1,084,000 1,048,688 1,070,970
-----------------------
4,082,118 4,163,957
PUBLIC UTILITIES (C)
Laclede Gas Co, Ser B, 5%, due 03/31/2011 3,000 52,967 58,500
Nicor Inc, 5%, due 05/01/2008 800 30,573 30,400
San Diego Gas & Electric Co, 4.40% 4,000 46,000 50,000
South Carolina Electric & Gas Co, 9.40%, due 10/01/2022 812 39,361 40,194
Southern California Edison, 4.08% 3,300 44,345 48,263
-----------------------
213,246 227,357
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SBM CERTIFICATE COMPANY
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1995
PRINCIPAL COST VALUE
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT (A)(B) (A)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES AVAILABLE-FOR-SALE (CONTINUED)
CORPORATE SECURITIES (CONTINUED):
RETAIL
Ralphs Grocery, 10.45%, due 06/15/2004 $ 565,000 $ 572,915 $ 573,475
-----------------------
4,868,279 4,964,789
MORTGAGE-BACKED SECURITIES:
AFC Home Equity Loan Trust 93-3 A, 5.45%, due 06/20/2013 1,101,681 1,065,366 1,068,630
Aames Mortgage Trust 95-B A1A, 6.95%, due 08/15/2027 1,015,779 1,019,814 1,028,476
Federal Home Loan Mortgage Corporation
7.8724%, floating, due 11/15/2007 1,293,214 1,099,618 1,234,204
6.5%, due 12/15/2007 1,234,279 1,177,432 1,201,102
7%, due 03/15/2008 1,148,293 1,135,635 1,152,599
9.5%, due 04/15/2019 1,018,043 1,047,350 1,052,076
7%, due 11/15/2020 1,000,000 996,544 1,022,500
6.95%, due 12/15/2020 1,000,000 996,560 1,020,000
Federal National Mortgage Association
6.384%, floating, due 11/25/2007 72,863 53,622 64,347
8.25%, due 11/25/2007 858,618 610,269 827,760
6.5%, due 04/25/2008 2,000,000 1,905,247 1,952,500
6.625%, due 12/25/2016 680,566 659,116 677,374
6.5%, due 06/25/2019 2,547,991 2,425,896 2,484,291
8.5%, due 10/25/2020 1,082,586 1,097,325 1,098,825
9%, due 04/01/2021 67,563 70,577 71,797
8.5%, due 04/01/2022 888,933 918,849 931,611
6.111%, floating, due 02/25/2023 1,849,014 1,794,074 1,828,785
9.0743%, floating, due 02/25/2023 792,435 630,054 776,087
7%, due 07/25/2023 907,004 903,937 916,074
GE Capital Mtg Services 95-8 A1, 7.5%, due 10/25/2025 1,042,796 1,045,946 1,055,831
Government National Mortgage Association
9%, due 08/15/2008 5,978 6,314 6,388
9%, due 10/15/2008 172,057 181,711 183,476
9%, due 11/15/2008 197,997 209,109 211,578
9.5%, due 08/15/2009 41,823 44,347 45,396
10%, due 11/15/2009 57,618 62,590 63,369
10%, due 12/15/2009 16,000 17,401 17,626
10%, due 12/15/2010 24,593 26,751 27,093
10%, due 04/15/2013 3,431 3,727 3,791
11.5%, due 04/15/2013 2,464 2,748 2,820
10%, due 06/15/2013 29,116 31,627 32,172
11.5%, due 08/15/2013 5,219 5,821 5,972
10%, due 08/15/2013 11,510 12,502 12,725
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SBM CERTIFICATE COMPANY
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1995
PRINCIPAL COST VALUE
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT (A)(B) (A)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES AVAILABLE-FOR-SALE (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED):
Government National Mortgage Association (continued)
11.5%, due 03/15/2015 $ 543 $ 606 $ 622
11.5%, due 05/15/2015 1,125 1,255 1,289
10%, due 07/15/2015 17,477 18,987 19,316
10%, due 02/15/2016 44,147 47,961 48,777
10.5%, due 02/15/2016 350,000 388,708 391,146
9%, due 04/15/2016 16,699 17,612 17,842
9%, due 06/15/2016 441,906 465,740 471,801
9%, due 10/15/2016 365,959 385,968 391,002
9%, due 10/15/2016 256,389 270,407 273,934
9%, due 11/15/2016 207,918 219,135 221,983
9%, due 11/15/2016 148,572 156,696 158,623
9%, due 11/15/2016 18,430 19,424 19,676
9%, due 12/15/2016 204,137 215,152 217,947
9%, due 12/15/2016 258,781 272,931 276,489
9%, due 12/15/2016 381,908 402,514 407,744
9%, due 12/15/2016 191,217 201,534 204,153
9%, due 12/15/2016 106,792 112,554 114,017
9%, due 01/15/2017 372,496 392,596 397,695
9%, due 01/15/2017 385,442 406,240 411,517
9%, due 01/15/2017 104,980 110,720 112,081
9%, due 01/15/2017 278,140 293,350 297,173
9%, due 01/15/2017 304,745 321,410 325,361
9%, due 01/15/2017 319,227 336,454 340,823
9%, due 03/15/2017 179,474 189,159 191,615
9.5%, due 08/15/2017 13,169 13,980 14,241
9.5%, due 05/15/2018 28,962 30,604 31,270
9.5%, due 09/15/2018 5,639 5,986 6,098
9.5%, due 10/15/2018 42,522 44,933 45,910
9.5%, due 01/15/2019 34,334 36,281 37,070
9.5%, due 06/15/2020 44,436 46,873 47,940
9.5%, due 08/15/2020 61,584 64,960 66,388
9.5%, due 10/15/2019 17,492 18,451 18,871
9.5%, due 11/15/2019 31,838 33,584 34,348
9.5%, due 09/15/2020 49,913 52,648 53,806
9.5%, due 09/15/2020 31,560 33,290 34,022
9.5%, due 12/15/2020 24,648 25,999 26,571
9.5%, due 12/25/2020 70,678 74,690 76,309
8%, due 02/15/2022 1,010,000 1,045,343 1,052,299
GNMA I 94-2 Z, 7.9913%, due 07/16/2024 1,065,000 1,065,391 1,148,528
GNMA I 95-1 D, 8.495%, due 02/16/2018 6,038,000 6,216,051 6,321,001
</TABLE>
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
NUMBER OF COST VALUE
NAME OF ISSUER AND TITLE OF ISSUE SHARES (a) (b) (a)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES AVAILABLE-FOR-SALE (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED):
Option One CTS Arm Trust 95-2 A1, 6.4%, due 11/20/2026 $ 944,641 $ 945,822 $ 945,822
RTC 92-CHF E, 8.25%, due 12/25/2020 1,063,494 1,045,338 1,034,248
Structured Asset Sec Corp 95-C1 D, 7.375%, due 09/25/2024 1,675,000 1,535,851 1,626,844
TMS Home Equity Ln Tr 92-A A, 6.95%, due 01/15/2007 1,022,722 1,023,552 1,036,784
UCFC Home Equity Loan 93-D1 A1, 5.45%, due 07/10/2013 1,081,316 1,054,167 1,062,392
-------------------------
40,918,786 42,110,663
-------------------------
TOTAL FIXED MATURITIES AVAILABLE-FOR-SALE 53,166,600 54,486,378
EQUITY SECURITIES: (d)
INDUSTRIAL
Aluminum Co of America 200 11,200 14,500
LTV Corporation (e) 180 2,520 2,475
Melville Corporation Series B 500 31,750 31,750
-------------------------
45,470 48,725
PUBLIC UTILITIES
Carolina Power & Light 500 31,781 35,562
Connecticut Light and Power Co. 400 10,050 10,220
Duquesne Light Co. 400 10,800 11,600
GTE Fla Inc. 1,500 25,875 28,313
Gulf Power Co. 400 28,469 31,272
Illinois Power Co 600 16,050 18,225
Kansas City Power and Light Co. 200 11,586 12,727
Louisiana Power and Light Co. 500 31,852 33,506
Midwest Power Systems Inc. 600 34,200 41,550
New Orleans Public Service Inc. 600 31,902 33,113
Pacific Gas & Electric 5,000 80,625 86,250
Pacificorp 500 30,604 33,285
Pennsylvania Power Co. 200 8,838 11,600
Public Service Company of Colorado 600 37,215 39,730
Public Service Electric & Gas 200 10,750 11,500
Public Service Electric & Gas 500 33,750 35,750
-------------------------
434,347 474,203
-------------------------
TOTAL EQUITY SECURITIES 479,817 522,928
-------------------------
TOTAL INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS $53,646,417 $55,009,306
=========================
</TABLE>
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1995
(a) See Note 1 and 2 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 $54,545,095 at December 31, 1995.
(c) These securities are redeemable preferred stocks.
(d) These securities are non-redeemable preferred stock unless noted otherwise.
(e) This security is a common stock and non-income producing.
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE III - MORTGAGE LOANS ON REAL ESTATE AND INTEREST EARNED ON MORTGAGES
DECEMBER 31, 1995
Following is a reconciliation of the principal amount of mortgages for the year
ended December 31, 1995.
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
Balance at beginning of year (excluding valuation $ 4,373,567
allowance)
Collections of principal (437,422)
Cost of mortgages sold (3,922,754)
-----------
Balance at end of year $ 13,391
===========
</TABLE>
Interest income on mortgage loans for the year ended December 31, 1995 is
summarized as follows:
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
First mortgages:
Residential $ 1,479
Commercial 364,842
-----------
$ 366,321
===========
</TABLE>
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE V - QUALIFIED ASSETS ON DEPOSIT
DECEMBER 31, 1995
<TABLE>
<CAPTION>
FIRST
MORTGAGES
AND OTHER
FIRST LIENS
INVESTMENTS ON
NAME OF DEPOSITARY CASH IN SECURITIES REAL ESTATE OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
State governmental authorities:
Securities Department
of Illinois $ -- $ 193,756 $ -- $ -- $ 193,756
Central depositary:
Chase Manhattan Bank -- 56,645,899 13,472 618,763 57,278,134
-------------------------------------------------------------------
Total qualified assets on deposit $ -- $56,839,655 $13,472 $618,763 $57,471,890
===================================================================
</TABLE>
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE VI - CERTIFICATE RESERVES
PART I - SUMMARY OF CHANGES
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
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 TO CERTIFICATE TO OTHER
DESCRIPTION PERCENT HOLDERS VALUE INTEREST INCOME HOLDERS ACCOUNTS (a)
- ---------------------------------------------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Reserves to mature,
installment certificates:
Series 120 2.75 32 $ 181,000 $ 648,181 $ 22,015 $ 4,774 $ --
Series 215 2.41 2 4,800 1,215 1 67 --
Series 220 2.75 22 124,000 217,944 8,780 3,719 --
Series 315 2.66 125 427,900 496,820 20,515 19,580 --
Single payment
certificates:
Series 503 2.50 5,148 55,550,227 56,056,890 2,781,872 2,440,881 --
Fully paid installment
certificates: 2.50 552 2,659,483 2,311,547 109,100 -- 81,040
Optional settlement
certificates:
Paid-up certificates 2.50 37 28,131 25,986 748 -- 3,187
Annuities 3.00 73 575,649 589,825 29,877 -- 184,014
Due to unlocated
certificate holders: None 24 6,607 6,607 -- -- 176
--------------------------------------- ----------------------------------------
Total 6,015 $59,557,797 $60,355,015 $2,972,908 $2,469,021 $ 268,417
======================================= ========================================
Total charged to income,
per above $2,972,908
Less reserve recoveries from
terminations prior to maturity 43,551
----------
Provisions for certificate reserves,
net, per statement of income $2,929,357
==========
</TABLE>
Notes to Part I
- ---------------
(a) Transfer to/from other certificate reserves upon conversion.
(b) Direct interest payment to certificate holders.
<PAGE>
<TABLE>
<CAPTION>
SBM CERTIFICATE COMPANY
SCHEDULE -- CERTIFICATE RESERVES (CONTINUED)
PART I - SUMMARY OF CHANGES (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
DEDUCTIONS BALANCE AT END OF YEAR
-------------------------------------- -----------------------------------------------
NUMBER
OF RESERVES
CASH ACCOUNTS (INCLUDING
SURRENDERS WITH AMOUNT OF ADVANCE
PRIOR TO SECURITY MATURITY PAYMENTS) WITH
DESCRIPTION MATURITIES MATURITY OTHER (A)(B) HOLDERS VALUE ACCRUED INTEREST
- ------------------------------------------------------------------ -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Reserves to mature,
installment certificates:
Series 120 $ -- $ 35,968 $128,830 27 $ 140,000 $ 510,172
Series 215 -- -- -- 2 4,800 1,283
Series 220 -- -- 37,478 20 98,000 192,965
Series 315 31,513 37,387 41,973 102 356,400 426,042
Single payment
certificates:
Series 503 7,075,406 5,423,559 340,151 4,516 49,124,005 48,440,527
Fully paid installment
certificates: 48,338 135,065 50,781 519 2,572,645 2,267,503
Optional settlement
certificates:
Paid-up certificates 340 2,962 10,299 26 17,958 16,321
Annuities 201,617 -- -- 59 583,589 602,098
Due to unlocated
certificate holders: -- 3,970 -- 23 2,813 2,813
----------------------------------- -------------------------------------------
Total $7,357,214 $5,638,911 $609,512 5,294 $52,900,210 $52,459,724
=================================== ===========================================
</TABLE>
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE VI -- CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
BALANCE AT BEGINNING OF THE YEAR
------------------------------------------------
NUMBER OF
ACCOUNTS
AGE WITH AMOUNT OF
GROUPING SECURITY MATURITY AMOUNT OF
IN YEARS HOLDERS VALUE RESERVES
------------------------------------------------
<S> <C> <C> <C> <C>
Series:
120 19 1 $ 8,000 $ 7,204
20 -- -- --
21 1 3,000 3,245
22 1 6,000 12,208
23 -- -- --
28 1 5,000 10,331
29 2 9,000 19,600
30 1 6,000 13,840
31 1 3,000 7,523
32 1 6,000 16,598
33 -- -- --
35 2 15,000 53,534
36 6 47,000 178,253
37 9 46,000 188,045
38 3 10,000 43,812
39 2 11,000 50,387
40 1 6,000 28,496
Interest reserve -- -- -- 303
Accrued interest payable -- -- -- 14,802
---------------------------------
Total 32 $181,000 $648,181
=================================
Series:
215 5 2 $ 4,800 $ 1,165
6 -- -- --
Interest reserve -- -- -- 27
Accrued interest payable -- -- 23
---------------------------------
Total 2 $ 4,800 $ 1,215
=================================
</TABLE>
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE VI - CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
DEDUCTIONS BALANCE AT END OF YEAR
---------- ----------------------------------------------------------------
NUMBER
OF
CASH ACCOUNTS AMOUNT
SURRENDERS AGE WITH OF AMOUNT
PRIOR TO GROUPING SECURITY MATURITY OF
MATURITY IN YEARS HOLDERS VALUE RESERVES
---------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Series:
120 $ -- 19 -- $ -- $ --
-- 20 1 8,000 7,737
-- 21 1 3,000 3,315
-- 22 -- -- --
-- 23 1 6,000 12,247
-- 28 -- -- --
-- 29 1 5,000 11,252
7,122 30 1 6,000 13,052
-- 31 1 6,000 14,749
-- 32 1 3,000 8,003
-- 33 1 6,000 17,626
-- 35 1 5,000 17,706
19,917 36 1 10,000 38,149
-- 37 6 33,000 134,855
8,930 38 7 30,000 128,996
-- 39 2 8,000 36,852
-- 40 2 11,000 53,249
Interest reserve -- -- -- -- 303
Accrued interest payable -- -- -- -- 12,081
---------- ------------------------------------------------
Total $35,969 27 $140,000 $510,172
========== ================================================
Series:
215 -- 5 1 $ 2,400 $ 591
-- 6 1 2,400 641
Interest reserve -- -- -- -- 27
Accrued interest payable -- -- -- 24
---------- ------------------------------------------------
Total $ 0 2 $ 4,800 $ 1,283
========== ================================================
</TABLE>
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE VI - CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
BALANCE AT BEGINNING OF THE YEAR
---------------------------------------------------
NUMBER
OF
ACCOUNTS
AGE WITH AMOUNT OF
GROUPING SECURITY MATURITY AMOUNT
IN YEARS HOLDERS VALUE OF RESERVES
---------------------------------------------------
<S> <C> <C> <C> <C>
Series:
220 10 1 $ 4,000 $ 1,514
12 1 6,000 3,066
18 1 12,000 9,841
19 -- -- --
24 1 4,000 5,913
25 1 20,000 33,285
26 2 10,000 17,482
27 7 35,000 66,876
28 4 15,000 31,985
29 4 18,000 41,642
30 -- -- --
Interest reserve -- -- -- 1,278
Accrued interest payable -- -- -- 5,062
----------------------------------
Total 22 $124,000 $217,944
==================================
Series:
315 5 1 $ 2,200 $ 463
6 1 2,200 625
7 4 14,300 5,896
8 3 23,100 9,453
9 5 27,500 13,374
10 4 14,300 8,098
11 5 13,200 8,276
12 15 48,400 33,625
13 14 39,600 31,721
14 9 31,900 27,448
15 16 49,500 47,896
16 3 8,800 11,526
17 9 30,800 43,494
18 15 59,400 97,642
19 12 35,200 60,334
20 9 27,500 52,143
Interest reserve -- -- -- 32,849
Accrued interest payable -- -- -- 11,957
----------------------------------
Total 125 $427,900 $496,820
==================================
</TABLE>
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE VI - CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
DEDUCTIONS BALANCE AT END OF YEAR
----------------------- ---------------------------------------------------------
NUMBER
OF
CASH ACCOUNTS
SURRENDERS AGE WITH AMOUNT OF
PRIOR TO GROUPING SECURITY MATURITY AMOUNT
MATURITY OTHER IN YEARS HOLDERS VALUE OF RESERVES
----------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Series:
220 $ -- $ -- 10 1 $ 4,000 $ 1,539
-- 3,279 12 -- -- --
-- -- 18 -- -- --
-- -- 19 1 12,000 10,615
-- -- 24 -- -- --
-- -- 25 1 4,000 6,358
-- -- 26 -- -- --
-- -- 27 2 10,000 18,720
-- -- 28 7 35,000 71,464
-- -- 29 4 15,000 34,111
-- -- 30 4 18,000 44,353
Interest reserve -- -- -- -- -- 1,215
Accrued interest payable -- -- -- -- -- 4,590
----------------------- ------------------------------------------
Total $ $3,279 20 $ 98,000 $192,965
======================= ==========================================
Series: $ -- $ -- 5 1 $ 2,200 $ 483
315 -- -- 6 1 2,200 665
-- -- 7 -- -- --
-- -- 8 4 14,300 7,003
-- -- 9 3 23,100 11,034
-- -- 10 5 27,500 15,197
-- -- 11 4 14,300 9,127
-- -- 12 5 13,200 9,278
2,963 -- 13 14 45,100 34,920
-- -- 14 14 39,600 34,750
3,849 -- 15 10 34,100 32,365
14,941 -- 16 6 19,800 25,269
3,126 -- 17 1 2,200 3,034
8,823 -- 18 9 39,600 66,058
3,685 -- 19 12 40,700 68,659
-- -- 20 13 38,500 71,723
Interest reserve -- -- -- -- -- 26,265
Accrued interest payable -- -- -- -- -- 10,212
----------------------- ------------------------------------------
Total $37,387 $ -- 102 $356,400 $426,042
======================= ==========================================
</TABLE>
<PAGE>
UNDERWRITING AGREEMENT
This Agreement made the 14th day of June, 1995, by and between SBM
Certificate Company , Minnesota corporation, party of the first party,
hereinafter called "SBM" and SBM Financial Services, Inc., a Minnesota
corporation, party of the second part hereinafter called "SBM Financial".
WITNESSETH:
WHEREAS, the directors of SBM have duly authorized the issuance of certain
Investment Certificates, and caused registration of the same with the Securities
and Exchange Commission, such Certificate being hereinafter referred to as "the
Investment Certificates"; and
WHEREAS, SBM desires to enter into a contract with SBM Financial for the
solicitation of applications for such Investment Certificates to be issued by
SBM;
WHEREAS, SBM Financial is willing to take charge of the solicitation of
applications for such Investment Certificate authorized and to be issued by SBM,
on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and of the mutual covenants
hereinafter contained, the parties hereto covenant and agree as follows:
SOLICITATION OF APPLICATIONS
1. SBM hereby covenants and agrees that during the term of this contract
and any renewal or extension thereof, or until any prior termination thereof
(hereinafter referred to as the period of this contract), SBM Financial and
persons designated by it shall have the exclusive right to solicit applications
for, and to distribute any and all of the Investment Certificates, issued or to
be issued by SBM during the period of this contract, including Certificate or
series of Certificates hereinafter registered by SBM with the Securities and
Exchange Commission.
2. During the effective period of this contract, SBM Financial hereby
covenants and agrees to take charge of the solicitation of applications for the
Investment Certificates issued by SBM, and also agrees during such period to
continuously solicit or cause to be solicited, applications for such Certificate
so long as they remain available for sale, unless in the opinion of SBM
Financial, it is unable to make such solicitation legally or that SBM is legally
unable to issue such Certificates.
3. With respect to the solicitation of applications by SBM Financial for
the Certificates issued by SBM, it is mutually understood and agreed that the
Investment Certificate are to be issued only after solicitation by SBM Financial
and presentation of written application on forms approved by SBM. Every
application shall be subject to acceptance or rejection of SBM according to the
terms thereof. SBM Financial shall promptly remit to SBM the payment tendered
with each application, such payment to be in conformity with the provisions of
the Investment Certificates for which such application is made.
4. SBM Covenants and agrees to make prompt and reasonable effort to do all
and any things necessary in its opinion, or in the opinion of SBM Financial, in
connection with the carrying out of the purposes and provisions of this
Agreement, including the preparation of information necessary for SBM Financial
to file and submit registration statements, accounting statements, pamphlets,
prospectus, literature and any other data about SBM, its records or business,
and in such detail and in such form as is necessary or is requested by SBM
Financial.
<PAGE>
ALLOCATION OF FEES
1. SBM Financial covenants and agrees to pay during the effective period
of this Agreement the following expenses: All registration and/or qualification
fees, or such other sums required by statute to be paid for, or on account of,
its qualifications as a foreign corporation or broker/dealer in securities, and
all such costs as are necessary to continue registration or qualification in
effect.
2. SBM covenants and agrees to pay during the period of this Agreement the
following expenses:
a. All costs, expenses, fees of counsel, and other identifiable costs
incurred in connection with any necessary qualification of SBM as a foreign
corporation in the various states.
b. All costs of obtaining financial and other information required for
preparation and filing of registration statements, prospectuses, or other
documents required to be filed because of the registration of the Investment
Certificates in any federal, state or territorial jurisdiction.
c. All fees or other expenses required for, or in connection with, the
registration or qualification of the Investment Certificates of SBM for sale
with the Securities and Exchange Commission and in the various states.
d. Fees and expenses of counsel and others in connection with the
registration or qualification of the Investment Certificates.
e. All costs and expenses of filing, recording, preparing circulars,
pamphlets, prospectuses, or other sales material required to be filed in
connection with the registration or qualification of the Investment Certificates
in any federal, state, or territorial jurisdiction.
f. All costs and expenses of preparing, printing, issuing, and
delivering the Investment Certificates issued by SBM.
g. All other costs of registration, qualification, issuing, and
delivering the Investment Certificates not otherwise mentioned in this
Agreement.
COMPENSATION
1. SBM covenants and agrees to pay to SBM Financial, and SBM Financial
covenants and agrees to accept from SBM, in full payment for its services under
this contract the following amounts:
503
Certificate Per $1,000 of
months Cash Invested
----------- -------------
1 $17.00*
13 - 36 $ 1.25 per quarter**
37 $11.90
49 - 72 $ 1.25 per quarter**
* If a 503 Certificate is redeemed during the first 6 months, there will
be a full charge back of commission.
** Based upon cash value as of last anniversary.
2. SBM shall not be liable to SBM Financial for commissions on any
installment Investment Certificate with respect to payments which are not
received and applied as installment payments according to the terms of the
respective Certificates.
<PAGE>
3. If a new series of Certificates be issued by SBM, SBM covenants and
agrees to pay to SBM Financial those sums which the parties may subsequently
agree upon in writing as an addendum hereto for the sale of such.
MISCELLANEOUS
1. SBM Financial for all purposes herein shall be deemed to be an
independent contractor, and except as expressly provided or authorized in this
contract, shall have no authority to act for or represent SBM.
2. SBM Financial shall be free to render similar or dissimilar services to
those herein contracted for to other persons, firms and corporations.
3. Neither this contract nor any transaction pursuant thereto shall be
invalidated or in any way affected by the fact that the directors, officers,
agents, or stockholders of SBM are or may be interested in SBM Financial as
directors, officers, stockholders or otherwise; or that SBM Financial or any
successor or assignee is or may be interested in SBM as stockholders or
affiliate persons.
4. In the event that this contract be assigned by SBM Financial, it shall
be considered terminated as of the date of such assignment.
5. All the covenants, stipulations and agreements contained in this
instrument shall extend to and be binding upon the respective successors of the
parties hereto, and any person, firm association or corporation acquiring all or
substantially all of the assets in business of either party.
6. Any notice under this contract shall be given in writing address and
delivered, or mailed postpaid in care of either party to 8400 Normandale Lake
Blvd., Suite 1150, Minneapolis, MN 55437, or to such other address as the party
may designate in writing mailed to the other.
7. This Agreement shall continue in effect for one year from the date
hereof, and from year to year thereafter, provided that such continuance after
said date shall be specifically approved at least annually thereafter by a
majority of the members of the Board of Directors of SBM who are not interested
persons of SBM Financial or ARM Capital Advisors, Inc., except as directors, and
by vote of the entire Board, or by vote of the majority of its outstanding
voting securities.
8. This Agreement may be terminated by either SBM or SBM Financial at any
time, by giving the other party sixty days' notice of such intention to
terminate providing that any such termination shall be made without payment of
any penalty, and provided further that such termination by SBM may be effected
by its Board of Directors or a vote of the majority of its outstanding voting
securities.
<PAGE>
IN WITNESS WHEREOF, the parties hereunto have executed this foregoing
Agreement on the date and year first above written.
SBM CERTIFICATE COMPANY
By: /s/ John R. McGeeney
--------------------------------
Its: President
-------------------------------
SBM FINANCIAL SERVICES, INC.
By: /s/ John R. McGeeney
--------------------------------
Its: Secretary, General Counsel,
-------------------------------
and Compliance Officer
a:\cert\undrag
<PAGE>
[SBM Certificate Company letterhead]
February 28, 1996
SBM Certificate Company
239 South Fifth Street, 12th Floor
Louisville, KY 40202
Re: SBM Certificate Company - Series 503 Certificates
Dear Sirs:
This opinion is furnished in connection with the Registration Statement on Form
S-1 for SBM Certificate Company filed with the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933.
I have examined all such corporate records of SBM Certificate Company, the form
of the Series 503 Certificates issued (the "Certificates"), the prospectus
proposed to be issued by SBM Certificate Company in connection the sale of the
Certificates, and such other documents and such laws as I consider appropriate
as a basis for the opinion hereinafter expressed. On the basis of such
examination, it is my opinion that:
1. SBM Certificate Company is a corporation duly organized and validly
existing under the laws of the State of Minnesota.
2. SBM Certificate Company has corporate power and authority to issue and sell
face amount certificates on the forms examined by me.
3. The Board of Directors of SBM Certificate Company has, by resolution duly
adopted by it, approved the form of certificate, and the issuance and sales
thereof by SBM Financial Services, Inc. when duly registered and otherwise
qualified for sale.
4. When the Certificates have been duly registered with the SEC under the
Securities Act of 1933, and the Certificates have been duly registered
under applicable state law, and the Certificates are sold pursuant to the
Underwriting Agreement between SBM Certificate Company and SBM Financial
Services, Inc., the Certificates will be legally issued and binding
obligations of SBM Certificate Company in accordance with their terms.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement on Form S-1.
Sincerely,
/s/ John R. McGeeney
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
---------------------------------
This Administrative Services Agreement (this "Agreement") is made on this
14th day of June, 1995, by and between ARM Financial Group, Inc., a Delaware
corporation ("Parent") and SBM Certificate Company, a Minnesota corporation (the
"Company") which is registered as a face amount certificate company under the
Investment Company of 1940 (the " '40 Act").
WHEREAS, Parent's management has extensive experience in the administration
of fixed and variable annuity business operations; and
WHEREAS, Company desires Parent to perform certain administrative and
special services (collectively, "services") for Company in its business
operations and desires further to make use in its day-to-day operations of
certain property, equipment and facilities (collectively, "facilities") of
Parent and its subsidiaries; and
WHEREAS, Parent and Company contemplate that the availability of services
and facilities will achieve certain operating efficiencies and improve services
provided by Company to its certificateholders; and
WHEREAS, Parent and Company wish to assure that all charges for services
and the use of facilities incurred hereunder are reasonable and in accordance
with the requirements of the '40 Act, and Minnesota corporate law; and
WHEREAS, Parent and Company wish to identify the services to be rendered to
Company by Parent and the facilities to be used by Company and to provide for
the fees to be paid by Company;
NOW, THEREFORE, in consideration of the premises and of the mutual promises
set forth herein, and intending to be legally bound hereby, Parent and Company
agree as follows:
1. PERFORMANCE OF SERVICES AND USE OF FACILITIES. Subject to the terms,
conditions and limitations of this Agreement, Parent agrees to perform such
services for Company as may be reasonably necessary in the conduct of its
business operations and as set forth in Section 2 of this Agreement.
Subject to the terms, conditions and limitations of this Agreement, Parent
agrees to make available to Company such of its facilities or the facilities of
its subsidiaries as may be reasonably necessary in the conduct of Company's
business operations, including, without limitation, data processing equipment,
office facilities (whether owned or leased) and communications equipment.
1
<PAGE>
(a) CAPACITY OF PERSONNEL AND STATUS OF FACILITIES. Whenever Parent
utilizes its personnel to perform services for Company pursuant to this
Agreement, such personnel shall at all times remain employees of Parent,
and Parent shall alone retain full liability for their compensation,
employee benefits, payroll deductions and legally required employer
contributions and withholding tax obligations.
No facility of Parent or its subsidiaries used in performing services
for or subject to use by Company pursuant to this Agreement shall be deemed
to be transferred, assigned, conveyed or leased by performance or use.
(b) EXERCISE OF JUDGMENT IN RENDERING SERVICES. In providing any
services hereunder which require the exercise of judgment by Parent, Parent
shall perform such services in accordance with standards and guidelines
established by the Board of Directors of Company and communicated to
Parent.
(c) CONTROL. The performance of services by Parent for Company
pursuant to this Agreement shall in no way impair the absolute control of
the business and operations of Company by its Board of Directors. Parent
shall act hereunder so as to assure the separate operating and corporate
identity of Company.
2. SERVICES. Subject to the terms, conditions and limitations of this
Agreement, Parent shall provide on behalf of Company the services set forth
below.
(a) CERTIFICATEHOLDER SERVICES. Parent shall service the face amount
certificates of Company.
(b) ACCOUNTING, TAX AND AUDITING. Parent shall provide all accounting
services, including the following: the processing and maintenance of the
financial records of Company, the preparation of financial statements and
reports including 10-K Annual Reports and 10-Q Quarterly Reports and any
other reports required by the Securities Exchange Act of 1934 or the '40
Act, the preparation of tax returns, and the preparation of additional
financial reports used by Company in the operations of its business. Parent
shall also provide services in connection with tax and auditing matters.
(c) MARKETING AND PRODUCT DEVELOPMENT. Parent shall provide marketing
and product development services to Company.
2
<PAGE>
(d) FUNCTIONAL SUPPORT SERVICES. Parent shall provide: (i) actuarial
services, and (ii) telecommunications services and electronic data
processing services, including, without limitation, software programming
and documentation and hardware utilization.
(e) PAYROLL FUNCTIONS. Parent shall perform all payroll functions
including, but not limited to, the preparation of all payroll checks and
withholding tax reports.
(f) PERSONNEL FUNCTIONS. Parent will provide to Company all personnel
functions.
(g) LEGAL SERVICES. Parent will provide legal services to Company
including, without limitation, filing of all registrations and reports
required by the '40 Act, the Securities Exchange Act of 1934, and the
applicable securities laws of any state, and assistance with regulatory
compliance matters. Parent may in its sole discretion retain the services
of outside legal counsel to assist with legal services performed for the
Company.
(h) OTHER SUPPORT SERVICES. Parent will provide other administrative
support services to Company as needed or required by Company.
3. CHARGES. Company agrees to pay to Parent for services and facilities
provided by Parent to Company pursuant to this Agreement the fees set forth on
Appendix A attached hereto, as such Appendix may be revised by the parties from
time to time. At no time may charges invade the total of the following amounts
as required by the '40 Act:
(i) qualified investments the Company is required to maintain with an
independent custodian pursuant to the '40 Act; plus
(ii) the minimum capital required for the Company by the '40 Act.
4. PAYMENT. Parent shall submit to Company at the beginning of each
calendar month a written statement of the amount estimated to be owed by Company
for services and the use of facilities pursuant to this Agreement for that
calendar month, and Company shall pay to Parent within five (5) days following
receipt of such written statement the amount set forth in the statement. The
amount estimated to be owed by Company for the partial month of June, 1995,
shall be included in the statement for July, 1995.
3
<PAGE>
Within thirty (30) days after the end of each calendar quarter, Parent will
submit to Company a detailed written statement of the charges due from Company
to Parent in the preceding calendar quarter, including charges not included in
any previous statements, based on the computation of fees set forth on Appendix
A, and any balance payable or to be refunded as shown in such statement shall be
paid or refunded within fifteen (15) days following receipt of such written
statement by Company.
5. ACCOUNTING RECORDS AND DOCUMENTS. [Parent shall be responsible for
maintaining full and accurate accounts and records of all services rendered and
facilities used pursuant to this Agreement and such additional information as
Company may reasonably request for purposes of its internal bookkeeping and
accounting operations.] Parent shall [also] maintain such accounts and records
insofar as they pertain to the computation of charges hereunder available at its
principal offices for audit, inspection and copying by Company and persons
authorized by it or any governmental agency having jurisdiction over Company
during all reasonable business hours.
6. OTHER RECORDS AND DOCUMENTS. All other books, records, and files
established and maintained by Parent by reason of its performance of its
obligations under this Agreement which, absent this Agreement, would have been
held by Company, shall be deemed the property of Company, and shall be subject
to examination at all times by Company and persons authorized by it or any
governmental agency having jurisdiction over Company, and the originals or
copies thereof shall be delivered to Company not less frequently than quarterly.
7. RIGHT TO CONTRACT WITH THIRD PARTIES. Nothing herein shall be deemed to
grant Parent an exclusive right to provide services to Company, and Company
retains the right to contract with any third party, affiliated or unaffiliated,
for the performance of services or for the use of facilities as are available to
or have been requested by Company pursuant to this Agreement. Nothing herein
shall be deemed to prohibit Parent from providing any or all of the services to
be provided to Company hereunder to other persons, whether or not affiliated
with Parent. In addition, Company shall have the right to solicit bids and
contract with any third party for the services to be provided hereunder, in
which event this Agreement may be terminated in accordance with Section 9
hereof. Further, Parent has right to subcontract with any third party,
affiliated or unaffiliated, for services Parent is obligated to provide to
Company pursuant to this Agreement.
4
<PAGE>
8. CONTACT PERSON(S). Company and Parent each shall appoint one or more
individuals who shall serve as contact person(s) for the purpose of carrying out
this Agreement. Such contact person(s) shall be authorized to act on behalf of
their respective parties as to the matters pertaining to this Agreement.
Effective upon execution of this Agreement, the initial contact person(s) shall
be those set forth in Section 16 of this Agreement. Each party shall notify the
other, in writing, as to the name, address and telephone number of any
replacement for any such designated contact person or additional contact
persons.
9. TERMINATION AND MODIFICATION. This Agreement shall remain in effect
until terminated by either Parent or Company upon giving thirty (30) days or
more advance written notice. Upon termination, Parent shall promptly deliver to
Company all books and records that are, or are deemed by this Agreement to be,
the property of Company.
10. SETTLEMENT ON TERMINATION. No later than ninety (90) days after the
effective date of the termination of this Agreement, Parent shall deliver to
Company a detailed written statement for all charges incurred and not included
in any previous statement to the effective date of termination. The amount owed
or to be refunded hereunder shall be due and payable within thirty (30) days of
receipt of such statement.
11. INDEPENDENT CONTRACTOR. In rendering its services hereunder, Parent
shall act as an independent contractor, and any duties of Parent arising
hereunder shall be owed exclusively to Company.
12. FORCE MAJEURE. If any cause or condition shall occur beyond the control
of Parent which wholly or partially prevents the performance by Parent of its
obligations hereunder, including, without limitation, any act of God or the
public enemy, fire, explosion, flood, earthquake, war, riot, adverse weather
conditions, breakdowns in equipment or facilities, strike, slowdown, work
stoppage or other labor trouble or delays in receiving or failures to receive
any permits, licenses or approvals from any governmental authority, then Parent
shall be excused to the extent made necessary by such cause or condition and
during the continuance thereof, and Parent shall incur no liability by reason of
its failure to perform the obligations so excused. Such cause or condition shall
not, however, relieve Company of the obligation to pay to Parent fees and
charges due to Parent for services rendered and expenses incurred hereunder
prior to such stoppage.
5
<PAGE>
13. ASSIGNMENT. This Agreement and any rights pursuant hereto shall not be
assignable by either party hereto, except by operation of law. Except as and to
the extent specifically provided in this Agreement, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto, or their respective legal successors, any rights, remedies, obligations
or liabilities, or to relieve any person other than the parties hereto, or their
respective legal successors, from any obligations or liabilities that would
otherwise be applicable. The representations, warranties, covenants and
agreements contained in this Agreement shall be binding upon, extend to and
inure to the benefit of the parties hereto, their, and each of their, successors
and assigns respectively.
14. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of Minnesota
applicable to contracts made and to be performed entirely within that State.
15. ARBITRATION. In the event of any irreconcilable dispute between the
parties in connection with this Agreement, the dispute shall be submitted to
arbitration. Either party may submit the dispute to arbitration by notifying the
other of its submission and naming its arbitrator. The other party shall name
its arbitrator within 30 days after receiving such notice. The arbitrators shall
choose an umpire through the nomination of three persons by each arbitrator, the
declination by each arbitrator of two of the nominees named by the other
arbitrator, and the drawing of lots to choose between the two arbitrators within
thirty days after the arbitrators and umpire, if any, are chosen. The
arbitrators and umpire shall be disinterested insurance Company executives. The
arbitrators are relieved from judicial formalities and may refrain from
following strict rules of evidence. The decisions of the arbitrators and umpire,
or the majority of them, shall be final and binding upon the parties. Each party
shall bear the expense of its own arbitrator and one-half the other expenses of
the arbitration proceedings. Any arbitration shall take place in Louisville,
Kentucky, unless otherwise mutually agreed.
16. NOTICE. All notices, statements or requests provided for hereunder
shall be deemed to have been duly given when delivered by hand to an officer of
the other party, or when deposited with the U.S. Postal Service, as first class
certified or registered mail, postage prepaid, overnight courier services, telex
or telecopier, addressed
6
<PAGE>
(a) If to Parent to:
ARM Financial Group, Inc.
239 South Fifth Street, 12th Floor
Louisville, KY 40202-3271
Telecopier: (502) 582-7913
Attention: Robert H. Scott
(b) If to Company to:
SBM Certificate Company
239 South Fifth Street, 12th Floor
Louisville, KY 40202-3271
Telecopier: (502) 582-7913
Attention: John R. McGeeney
or to such other persons or places as each party may from time to time designate
by written notice sent as aforesaid.
17. ENTIRE AGREEMENT. This Agreement, together with such amendments as may
from time to time be executed in writing by the parties, constitutes the entire
agreement and understanding between the parties in respect to the transactions
contemplated hereby and supersedes all prior agreements, arrangements and
understandings relating to the subject matter hereof.
18. INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of Parent or Company under this Agreement will not be
materially and adversely affected thereby, (a) such provision will be fully
severable; (b) this Agreement will be construed and enforced as if such illegal,
invalid, or unenforceable provision had never comprised a part hereof; (c) the
remaining provisions of this Agreement will remain in full force and effect and
will not be affected by the illegal, invalid, or unenforceable provision or by
its severance herefrom; and (d) in lieu of such illegal, invalid, or
unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid,
7
<PAGE>
and enforceable provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible.
19. SECTION HEADINGS. Section headings contained herein are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.
20. COUNTERPARTS . This Agreement may be executed in separate counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
in duplicate by their respective officers duly authorized so to do, as of the
date and year first above written.
ARM FINANCIAL GROUP, INC.
/s/John Franco
Co-Chief Executive Officer
/s/Martin H. Ruby
Co-Chief Executive Officer
SBM CERTIFICATE COMPANY
/s/John R. McGeeney
President
9
<PAGE>
APPENDIX A
SCHEDULE OF FEES
COMPUTATION OF FEES. The annual charge to Company (the "Annual Charge") for
such services and facilities shall be twenty-five one hundredths of one percent
(.25%) of Total Certificate Reserves (as hereinafter defined). Total Certificate
Reserves is defined as the arithmetic average of the sum of certificate reserves
for the current calendar year and the immediately preceding calendar year as
reported in the 10-K Annual Report for the Company. For 1995, the annual charge
as calculated pursuant to this Schedule of Fees shall be adjusted on a pro rata
basis to reflect the June 15, 1995 effective date of the Agreement.
The Annual Charge to Company may be offset by any rents or other fees due
from ARM to the Company.
<PAGE>
INVESTMENT SERVICES AGREEMENT
-----------------------------
This Investment Services Agreement (this "Agreement") is made on this 14th
day of June, 1995, by and between ARM Financial Group, Inc., a Delaware
corporation ("Parent") and SBM Certificate Company, a Minnesota corporation (the
"Company") which is registered as a face amount certificate company under the
Investment Company Act of 1940 (the " '40 Act").
WHEREAS, Parent's management has extensive experience in asset/liability
and investment portfolio management; and
WHEREAS, Company desires that Parent provide investment services to Company
with respect to the investment portfolio maintained by Company; and
WHEREAS, Parent and Company contemplate that such an arrangement will
achieve certain operating economies and improve services to the benefit of
Parent, Company, and Company's certificateholders; and
WHEREAS, Parent and Company wish to assure that all charges incurred
hereunder are reasonable and in accordance with the requirements of the '40 Act,
and Minnesota corporate law; and
WHEREAS, Parent and Company wish to identify the services to be rendered to
Company by Parent and to provide a formula for determining the charges to be
made to Company;
NOW, THEREFORE, in consideration of the premises and of the mutual promises
set forth herein, and intending to be legally bound hereby, Parent and Company
agree as follows.
1. PERFORMANCE OF SERVICES. Subject to the terms, conditions, and
limitations of this Agreement, Parent agrees to the extent requested by Company
to perform diligently and in a professional manner the services for Company as
Company determines to be reasonably necessary in the conduct of its investment
operations, as set forth in Appendix A, which is attached hereto and made a part
of this Agreement (collectively, "services").
Parent agrees at all times to maintain sufficient facilities and trained
personnel of the kind necessary to perform this Agreement.
(a) CAPACITY OF PERSONNEL AND STATUS OF FACILITIES. Whenever Parent
utilizes its personnel to perform services for Company pursuant to this
Agreement, such personnel shall at all times be subject to Parent's
direction and control, and Company shall have no liability to such
personnel for their welfare, salaries, fringe benefits, legally
1
<PAGE>
required employer contributions, and tax obligations. No facility of Parent
used in performing services for Company shall be deemed to be transferred,
assigned, conveyed, or leased by performance or use pursuant to this
Agreement.
(b) EXERCISE OF JUDGMENT IN RENDERING SERVICES. In providing any
services hereunder which require the exercise of judgment by Parent, Parent
shall perform such services in accordance with any standards and guidelines
Company develops and communicates to Parent. In performing any services
hereunder, Parent shall at all times act in a manner reasonably calculated
to be or not opposed to the best interests of Company.
(c) CONTROL. The performance of services by Parent for Company pursuant
to this Agreement shall in no way impair the absolute control of the
business and operations of Parent or Company by their respective Boards of
Directors. Parent shall act hereunder so as to assure the separate
operating identity of Company.
2. CHARGES. Company agrees to pay to Parent for services provided by
Parent to Company pursuant to this Agreement the fees set forth on Appendix B
attached hereto, as such Appendix may be revised by the parties from time to
time. The fees provided for in this Section 3 and Appendix B attached hereto are
exclusive of any fees charged or to be charged by any custodian under a separate
custody agreement. Company agrees that Parent may direct custodians of the
Investment Portfolio as defined in Appendix A to make direct payment of fees due
hereunder.
3. PAYMENT. Parent shall submit to Company at the beginning of each
calendar month a written statement of the amount estimated to be owed by Company
for services pursuant to this Agreement for that calendar month, and Company
shall pay to Parent within five (5) working days following receipt of such
written statement the amount set forth in the statement. The amount estimated to
be owed by Company for the partial month of June, 1995, shall be included in the
statement for July, 1995.
Within thirty (30) days after the end of each calendar quarter, Parent will
submit to Company a detailed written statement of the charges due from Company
to Parent in the preceding calendar quarter, including charges not included in
any previous statement, based on the computation of fees set forth on Appendix
B, and any balance payable or to be refunded as shown in such statement shall be
paid or refunded with fifteen (15) days following receipt of such written
statement by Company.
2
<PAGE>
4. ACCOUNTING RECORDS AND DOCUMENTS. Parent shall be responsible for
preparing, maintaining, and disseminating full and accurate accounts and records
of [all services rendered pursuant to this Agreement, as well as] the financial
data with respect to the Investment Portfolio (as defined in Appendix A) which
is necessary to prepare financial statements and reports including 10-K Annual
Reports and 10-Q Quarterly Reports, and such additional information as Company
may reasonably request for purposes of its internal bookkeeping and accounting
operations. Parent shall keep such accounts and records insofar as they pertain
to the computation of charges hereunder available at its principal offices for
audit, inspection, and copying by Company and persons authorized by it or any
governmental agency having jurisdiction over Company during all reasonable
business hours.
5. OTHER RECORDS AND DOCUMENTS. All books, records, and files established
and maintained by Parent by reason of its performance under this Agreement
which, absent this Agreement, would have been held by Company, shall be deemed
the property of Company, and shall be subject to examination during all
reasonable business hours by Company and persons authorized by it or any
governmental agency having jurisdiction over Company.
With respect to original documents other than those provided for in Section
5 hereof which would otherwise be held by Company and which may be obtained by
Parent in performing under this Agreement, Parent shall deliver such documents
to Company within thirty (30) days of their receipt by Parent except where
continued custody of such original documents is necessary to perform hereunder.
6. RIGHT TO CONTRACT WITH THIRD PARTIES. Nothing herein shall be deemed
to grant Parent an exclusive right to provide services to Company, and Company
retains the right to contract with any third party, affiliated or unaffiliated,
for the performance of services as are available to or have been requested by
Company pursuant to this Agreement.
It is also understood and agreed that Parent's services are not exclusively
for Company. Parent shall remain free to provide services to other clients or
for its own account, pursuant to objectives which may or may not be similar to
the strategy adopted as appropriate for Company.
3
<PAGE>
It is also understood and agreed that Parent has the right to subcontract
with any third party, affiliated or unaffiliated, for services Parent is
obligated to provide to Company pursuant to this Agreement.
7. CONTACT PERSONS. Company and Parent each shall appoint one or more
individuals who shall serve as contact persons for the purpose of carrying out
this Agreement. Such contact persons shall be authorized to act on behalf of
their respective parties as to the matters pertaining to this Agreement.
Effective upon execution of this Agreement, the initial contact persons shall be
those set forth in Section 16 of this Agreement. Each party shall notify the
other, in writing, as to the name, address, and telephone number of any
replacement for any such designated contact person.
8. TERMINATION. This Agreement shall remain in effect until terminated by
either Parent or Company upon giving thirty (30) days or more advance written
notice. Upon termination, Parent shall promptly deliver to Company all books and
records that are, or are deemed by this Agreement to be, the property of
Company.
9. SETTLEMENT ON TERMINATION. Not later than sixty (60) days after the
effective date of termination of this Agreement, Parent shall deliver to Company
a detailed written statement for all fees due and not included in any previous
statement to the effective date of termination. The amount owed shall be due and
payable within thirty (30) days of receipt of such statement.
10. INDEPENDENT CONTRACTOR. In rendering its services hereunder, Parent
shall act as an independent contractor, and any duties of Parent arising
hereunder shall be owed exclusively to Company.
11. ASSIGNMENT. This Agreement and any rights pursuant hereto shall not
be assignable by either party hereto without the prior written consent of the
other party, except as set forth herein or by operation of law. Except as and to
the extent specifically provided in this Agreement, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto, or their respective legal successors, any rights, remedies, obligations,
or liabilities, or to relieve any person other than the parties hereto, or their
respective legal successors, from any obligations or liabilities that would
otherwise be applicable. The representations, warranties, covenants, and
agreements contained in this Agreement shall be binding upon, extend to and
inure to the benefit of the parties hereto, their, and each of their, successors
and assigns respectively.
4
<PAGE>
12. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of Minnesota
applicable to contracts made and to be performed entirely within that State.
13. CONFIDENTIALITY. Company agrees to give Parent any information in its
possession which Company deems relevant to the suitability of the investment
strategy implemented by Parent, including information on Company's liabilities,
whether this information becomes known before or after the adoption of the
strategy. Parent shall keep any information it obtains about Company's business
or investment objectives and results in confidence.
14. ARBITRATION. In the event of any irreconcilable dispute between the
parties in connection with this Agreement, the dispute shall be submitted to
arbitration. Either party may submit the dispute to arbitration by notifying the
other of his submission and naming its arbitrator. The other party shall name
its arbitrator within 30 days after receiving such notice. The arbitrators shall
choose an umpire through the nomination of three persons by each arbitrator, the
declination by each arbitrator of two of the nominees named by the other
arbitrator, and the drawing of lots to choose between the two arbitrators within
thirty days after the arbitrators and umpire, if any, are chosen. The
arbitrators and umpire shall be disinterested insurance Company executives. The
arbitrators are relieved from judicial formalities and may refrain from
following strict rules of evidence. The decisions of the arbitrators and umpire,
or the majority of them, shall be final and binding upon the parties. Each party
shall bear the expense of its own arbitrator and one-half the other expenses of
the arbitration proceedings. Any arbitration shall take place in Louisville,
Kentucky, unless otherwise mutually agreed.
15. NOTICE. All notices, statements or requests provided for hereunder
shall be deemed to have been duly given when delivered by hand to an officer of
the other party, or when deposited with the U.S. Postal Service, as first class
certified or registered mail, postage prepaid, overnight courier services, telex
or telecopier, addressed
5
<PAGE>
(a) If to Parent to:
ARM Financial Group, Inc.
239 South Fifth Street, 12th Floor
Louisville, KY 40202-3271
Telecopier: (502) 582-7913
Attention: Robert H. Scott
(b) If to Company to:
SBM Certificate Company
239 South Fifth Street, 12th Floor
Louisville, KY 40202-3271
Telecopier: (502) 582-7913
Attention: John R. McGeeney
or to such other persons or places as each party may from time to time designate
by written notice sent as aforesaid.
16. ENTIRE AGREEMENT. This Agreement, together with such amendments as
may from time to time be executed in writing by the parties, constitutes the
entire agreement and understanding between the parties in respect to the
transactions contemplated hereby and supersedes all prior agreements,
arrangements and understandings relating to the subject matter hereof.
17. INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of Parent or Company under this Agreement will not be
materially and adversely affected thereby, (a) such provision will be fully
severable; (b) this Agreement will be construed and enforced as if such illegal,
invalid, or unenforceable provision had never comprised a part hereof; (c) the
remaining provisions of this Agreement will remain in full force and effect and
will not be affected by the illegal, invalid, or unenforceable provision or by
its severance herefrom; and (d) in lieu of such illegal, invalid, or
unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid,
6
<PAGE>
and enforceable provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible.
18. SECTION HEADINGS. Section headings contained herein are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.
19. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
in duplicate by their respective officers duly authorized so to do, as of the
date and year first above written.
ARM FINANCIAL GROUP, INC.
/s/John Franco
Co-Chief Executive Officer
/s/Martin H. Ruby
Co-Chief Executive Officer
SBM CERTIFICATE COMPANY
/s/John R. McGeeney
President
8
<PAGE>
APPENDIX A
----------
INVESTMENT SERVICES
-------------------
Parent shall provide investment services to Company as follows:
1. For purposes of this Agreement, Investment Portfolio means all assets
owned by and held in the name of the Company. Company shall retain
responsibility, authority, and control with respect to management and investment
of the Company's Investment Portfolio. Except as otherwise expressly provided
herein, Parent shall be free to buy, sell, exchange, convert, or otherwise trade
assets held in the Investment Portfolio in the exercise of its sole discretion,
provided Parent acts in a manner consistent with any and all written direction
received from Company. Parent shall acquire or dispose of any specific
investment if so directed by the Board of Directors of the Company. Parent shall
comply with the '40 Act, the applicable investment provisions of the Code of the
District of Columbia, the applicable investment provisions of the insurance laws
of Minnesota, and all other applicable laws and regulations.
2. All investments made by Parent on behalf of Company shall be in those
classes of investments prescribed by Section 35-634 of the Code of the District
of Columbia, Section 61A.28 of the Insurance Laws of Minnesota, or as otherwise
permitted Company by law; provided, however, that nothing contained herein shall
authorize Parent to purchase or dispose of, without the Company's prior written
approval, any interest in real property or mortgages.
3. In the course of its investment services activity for the Company,
Parent MAY NOT pledge, mortgage or hypothecate the assets of the Company, or
enter into any investment which would violate the '40 Act, the investment
provisions of the Code of the District of Columbia, or the investment provisions
of the insurance laws of Minnesota.
4. Parent shall not have custody of any of the assets in the Investment
Portfolio. Custody of all assets of the Investment Portfolio shall at all times
be maintained in one or more custodial accounts selected by Company and held on
behalf of and in the name of Company with a qualified fiduciary agent. All
transactions authorized by this Agreement shall be carried out through such
custodial accounts. Parent shall not be responsible for any act or omission of
any custodian thereunder.
5. Parent shall keep and maintain proper books and records wherein shall
be recorded the business transacted by it on behalf of, in the name of, or on
account of Company. Any and all records maintained by Parent hereunder on behalf
of Company shall be and remain the property of Company. Parent shall make
reports to Company as requested, including, but not limited to:
(a) delivery on the tenth working day of each month of all investment
accounting data for the previous month, in an electronic format suitable for use
in updating Company's computerized accounting records; and
(b) delivery within 30 days of the end of each calendar quarter of all
investment-related data required for completion of Company's 10-Q Quarterly
Reports and 10-K Annual Report, in an
<PAGE>
electronic format suitable for use in Company's filings of such Reports with the
Securities and Exchange Commission without modification.
6. Parent does not warrant any rate of return on all or any segment of the
Investment Portfolio. Parent will endeavor to select the most favorable prices
and timing of assets purchases and sales. Parent will select brokers and dealers
on a basis which is favorable to Company, taking into account research services
provided, ability to execute orders promptly and correctly, fees charged, and
any other factors which Parent deems relevant, and such brokers and dealers may
include affiliates of Parent. Parent will pass along to Company the cost of any
and all brokers' fees, commissions, taxes, and other custodial charges related
to services provided in connection with the Accounts.
7. In the event Parent receives and collects monies for the accounts of
Company, Parent will not commingle such monies with its own, but will deposit
such monies in an appropriate account in the name of Company.
<PAGE>
APPENDIX B
----------
SCHEDULE OF FEES
----------------
COMPUTATION OF FEES. The annual charge to Company for investment services
shall be twenty one hundredths of one percent (.20%) of Invested Assets as
herein defined. Invested Assets is defined as the arithmetic average of the sum
of total qualified assets for the current calendar year and the immediately
preceding calendar year as reported in the 10-K Annual Report for the Company.
For 1995, the annual charge as calculated pursuant to this Schedule of Fees
shall be adjusted on a pro rata basis to reflect the June 15, 1995 effective
date of the Agreement.
<PAGE>
FORM OF
TAX ALLOCATION AGREEMENT
This Agreement, dated _____________, 1996, is entered into by and among ARM
Financial Group, Inc. ("ARM"), Integrity Holdings, Inc. ("Integrity Holdings"),
SBM Certificate Company ("SBM Cert"), ARM Capital Advisors, Inc. ("ARMCAP"), SBM
Financial Services, Inc. ("SBMFS"), and ARM Transfer Agency, Inc. ("ARM TA"),
(collectively the "Consolidated Companies").
WHEREAS, Integrity Holdings, SBM Cert, ARMCAP, SBMFS, and ARM TA (the
"Subsidiaries") are wholly-owned subsidiaries of ARM; and
WHEREAS, the Consolidated Companies are includible corporations of an
affiliated group within the meaning of Section 1504 of the Internal Revenue Code
of 1986 as amended (the "Code"), qualified to file federal income tax returns on
a consolidated basis pursuant to Section 1501 of the Code; and
WHEREAS, ARM and the Subsidiaries desire to file a consolidated federal
income tax return and, where permissible, consolidated state income tax returns
(a "Consolidated Return"); and
WHEREAS, the Consolidated Companies desire to enter into this Agreement to
provide for the allocation of consolidated tax liabilities among the parties
hereto, for reimbursing ARM for payment of such tax liability, for compensating
any party hereto for use of its losses or tax credits, and to provide for the
allocation and payment of any refund arising from a carryback of losses or tax
credits from subsequent tax years;
NOW, THEREFORE, in consideration of the premises and of the mutual promises
set forth herein, and intending to be legally bound hereby, the Consolidated
Companies agree as follows:
I. EFFECTIVE DATE/TAX YEARS
This Agreement shall be in effect for the taxable period beginning January
1, 1995, and for any taxable period thereafter for which ARM is required or
permitted to file a Consolidated Return, except that no Subsidiary shall be
considered to be a member of the Consolidated Companies for any period that it
would not qualify as a member thereof pursuant to the Code.
II. ALLOCATION
For each taxable period, consolidated income tax liabilities shall be
apportioned among the Consolidated Companies based upon each members'
proportionate share of taxable income determined in accordance with Section
1552(a)(1) of the Code and Regulation 1.552-1(a)(1) thereunder. Additional
amounts will be allocated among the Consolidated Companies in accordance with
Regulation 1.1502-33(d)(3) by assuming a 100% allocation of any decreased tax
liability.
<PAGE>
Each Subsidiary shall reimburse ARM for the Subsidiary's proportion of any
tax liability, and for the dollar amount of any tax benefit it received by
virtue of the filing of a Consolidated Return regardless of whether or not the
benefit resulted in a tax liability on a consolidated return basis. Any payments
received by ARM for reimbursement of tax benefits shall be allocated among the
Consolidated Companies pursuant to this Agreement.
ARM shall reimburse each Subsidiary having a loss for the Subsidiary's
proportion of any tax credit utilized to reduce the tax liability on a
consolidated return basis.
For purposes of this Agreement, the consolidated tax liability shall
include any liability for alternative minimum tax.
III. CONSENTS
The Consolidated Companies agree to file such consents, elections, and
other documents, and to take such other action as may be necessary or
appropriate to carry out the purpose of this Agreement.
IV. PAYMENTS
Within 30 days after completion of a Consolidated Return, each Subsidiary
shall pay to ARM the amount of any tax liability and any tax benefit allocated
to the Subsidiary. At least five business days prior to the due date of any
consolidated estimated tax payments which ARM determines to be payable, each
Subsidiary shall advance to ARM that portion of such estimated tax payment
attributable to the Subsidiary as determined equitably by ARM. Such advances
shall reduce any amount payable to ARM following completion of the next
subsequent federal Consolidated Return and any negative balance resulting from
such reduction shall be refunded by ARM to the Subsidiary.
Within 60 days after completion of a Consolidated Return, ARM shall pay to
each Subsidiary the amount of any tax credit and any tax benefit reimbursement
allocated to the Subsidiary.
All payments between the Consolidated Companies pursuant to this Agreement
shall be made in cash.
V. TAX ADJUSTMENTS
In the event of any adjustment to any consolidated income tax liability
determined in accordance with this Agreement, whether by reason of an amended
return, claim for refund, or an audit by the Internal Revenue Service, the
allocations under Section II shall be redetermined to give effect to any such
adjustment, including statutory interest and penalties thereon, as if it had
been made as part of the original computation of consolidated income tax
liability. Payments between the Consolidated Companies as a result of such
redetermination shall be made within 60 days after any such payments are made or
refunds are received, or, in the case of protested proceedings, within 120 days
after final resolution of the matter.
<PAGE>
VI. NEW MEMBERS
The Consolidated Companies recognize that from time to time other companies
may become members of the Consolidated Companies which are required to be
included in the Consolidated Return. ARM and the Subsidiaries hereby agree that
such new members become parties to and be bound by this Agreement.
VII. TERMINATION
This Agreement shall be terminated as to any Subsidiary as of the date that
the Subsidiary does not qualify as a member of the Consolidated Companies
pursuant to the Code. This Agreement may be terminated in its entirety by
written agreement of the then existing Consolidated Companies. Notwithstanding
such termination, this Agreement shall continue in effect with respect to any
payment or refunds due for all taxable periods prior to termination.
<PAGE>
IN WITNESS WHEREOF the parties have caused this Agreement to be executed by
their officers duly authorized to do so, as of the date first written above.
ARM FINANCIAL GROUP, INC.
BY:
-----------------------------------
TITLE:
--------------------------------
INTEGRITY HOLDINGS, INC.
BY:
-----------------------------------
TITLE:
--------------------------------
SBM CERTIFICATE COMPANY
BY:
-----------------------------------
TITLE:
--------------------------------
ARM CAPITAL ADVISORS, INC.
BY:
-----------------------------------
TITLE:
--------------------------------
SBM FINANCIAL SERVICES, INC.
BY:
-----------------------------------
TITLE:
--------------------------------
ARM TRANSFER AGENCY, INC.
BY:
-----------------------------------
TITLE:
--------------------------------
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 22, 1996, in Amendment No. 7 to the
Registration Statement (Form S-1 No. 33-38066) and related Prospectus of SBM
Certificate Company.
/s/Ernst & Young LLP
Louisville, Kentucky
February 26, 1996
