<PAGE>
As filed with the Securities and Exchange Commission on February 28, 1997.
Registration No. 33-38066
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
POST EFFECTIVE AMENDMENT NO. 8
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.
515 W. Market Street
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 19, 1997.
<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, 1997
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:
If Interest is
If Interest is If Interest is Compounded
Paid Quarterly Paid Annually Annually
Year 1 x.xx% x.xx% x.xx%
Year 2 x.xx% x.xx% x.xx%
Year 3 x.xx% x.xx% x.xx%
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
Page
----
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Deferred Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Method of Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Federal Income Tax Treatment. . . . . . . . . . . . . . . . . . . . . . . 6
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 . . . . . . . . . . . . . . . . . . . . .11
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Management's Discussion and Analysis of Results of Operations
and Financial Condition. . . . . . . . . . . . . . . . . . . . . . . . . . .13
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . .17
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.
In addition, the SEC maintains a web site that contains reports, proxies, and
other information regarding registrants that file electronically, such as SBM
Certificate Company. The address of the SEC web site is http//www.sec.gov.
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
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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 515 W. Market Street, 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. 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.
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 dated June 14, 1995, between the Company
and ARM Securities Corporation ("ARM Securities") , formerly SBM Financial
Services, Inc., (a wholly owned subsidiary of ARM registered as a broker-dealer
under the 1934 Act), ARM Securities has the exclusive right to solicit
applications for and to distribute the Certificates. Pursuant to such
agreement, ARM Securities agrees to continuously solicit such applications, as
long as Certificates are available for sale. The Company reserves the right to
reject any application. ARM Securities 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.
3
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The Company's Board of Directors, including a majority of directors who are not
interested persons of ARM Securities or ARM, approve the Underwriting Agreement
annually. The Underwriting Agreement is terminable by either party with sixty
days' notice.
UNDERWRITER'S COMPENSATION
In accordance with the Underwriting Agreement, the Company pays ARM Securities
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. ARM Securities pays compensation to its representatives and pays other
selling expenses in connection with the sale of Certificates. The Company has
paid ARM Securities $263,089, $443,579, and $507,995 in 1996, 1995, and 1994,
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.
4
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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.
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 ARM Securities. Further
documentation may be required from corporations, executors (executrixes),
partnerships, administrators (administratrices), 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 ARM Securities
and also by registered representatives of other broker-dealers that have selling
agreements with ARM Securities. Pursuant to the Underwriting Agreement between
the Company and ARM Securities, the Company pays sales compensation to ARM
Securities for distribution of the Certificates. ARM Securities in turn pays
compensation to its representatives and pays other distribution expenses. See
"Underwriting Agreement".
5
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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.
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 ARM
Securities. Further documentation may be required from corporations, executors
(executrixes), partnerships, administrators (administratrices), 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, 1996, such composition was:
6
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Cash and cash equivalents 5.9 %
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. government agencies 6.3
Corporate securities 13.9
Asset-backed securities 9.3
Collateralized mortgage obligations 53.4
Other mortgage-backed securities 6.1
Other fixed maturities 2.6
Other investments 2.5
---
Total Cash and Investments 100.0 %
-------
-------
The Company's fixed maturity portfolio is 98% investment grade as of December
31, 1996. 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.
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.
7
<PAGE>
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 and Illinois.
The Company's face-amount certificates are distributed exclusively by ARM
Securities, a wholly owned subsidiary of ARM, pursuant to an Underwriting
Agreement. See "Underwriting Agreement". ARM Securities 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.
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
8
<PAGE>
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 515 W. Market Street, 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 31,010 square feet of office
space held pursuant to a lease between ARM and the lessor which expires on
September 1, 2006, and which is subject to two five (5) year renewal options.
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 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 50 - 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 40 - Director and Chairman of the Board of the Company
since January 1996; President of the Company since June 1995. Mr. McGeeney is
the Executive Vice President-Retail Business Division 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 60 - 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 49 - Director of the Company since January 1996. Mr. Snyder
is currently President of RussianAmerican Finance Fund, specializing in
international trade. Previously, he was an attorney with Taustine, Post,
Sotsky, Berman, Fineman & Kohn from 1972 to 1993, and was Chief Executive
Officer at the time he left the firm.
Dennis L. Carr, FSA, MAAA, age 46 - Executive Vice President--Chief Product
Development Officer and Actuary. Mr. Carr is an Executive Vice President and
Chief 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 49 - Executive Vice President--Chief Administrative
Officer. Mr. Ferguson is an Executive Vice President and Chief Technology
Officer of ARM and holds various offices with other subsidiaries of ARM. Mr.
Ferguson
9
<PAGE>
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 and Chief Investment Officer
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.
Peter S. Resnik, CFA, CPA, age 36 - 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.
Barry G. Ward, CPA, age 35 - Controller. Mr. Ward is the Controller of ARM and
also holds this office for other ARM subsidiaries. Prior to joining ARM, from
January 1989 to October 1993, 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 32 - Secretary. Mr. Howard is a Legal Officer and
Assistant 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 41 - 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.
10
<PAGE>
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 ARM Securities, a wholly
owned subsidiary of ARM and a registered broker-dealer, is described under the
section entitled "Underwriting Agreement".
Prior to the Acquisition, in accordance with an underwriting agreement then in
effect between the Company and SBM, the Company paid ARM Securities a sales
commission not to exceed $30.00 per $1,000 invested per three-year Certificate
maturity period.
For the year ended December 31, 1996, the Company paid ARM $116,547 for
investment management services and $129,921 for administrative services. During
such period, the Company partially reversed a securities transaction that
occurred in December 1995 between Integrity Life Insurance Company ("Integrity")
and the Company, both wholly owned subsidiaries of ARM. The original securities
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. Due to the affiliated nature of the transaction, on April 19,
1996, some of the securities purchased in the transaction were transferred from
the Company back to Integrity for $5,249,966 on terms at least as favorable as
in the original transaction. The Company also received $61,345 from Integrity
to reflect the increase in value of one of the securities it had originally
sold. The Company's Board of Directors approved these transactions after
reviewing the duration, credit quality, and value issues related thereto.
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 of the Company included herein at
December 31, 1996 and 1995, and for the years then ended, have been audited by
Ernst & Young LLP as set forth in their reports appearing elsewhere herein and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
The financial statements and schedules of the Company for the year ended
December 31, 1994, 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 upon their
authority as experts in accounting and auditing.
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<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for the
years ended December 31, 1996, 1995, 1994, 1993, and 1992 that were derived from
audited financial statements of the Company. The report of the Company's
independent public accountants, Ernst & Young LLP, with respect to the years
ended December 31, 1996 and 1995 appears elsewhere in this Prospectus. 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. The following financial
information should be read in conjunction with "Management's Discussion and
Analysis of Results of Operations and Financial Condition " and the audited
financial statements and the related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995* 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Total investment income $ 4,290 $ 4,889 $ 5,326 $ 5,439 $ 5,492
Interest credited on certificate reserves (2,822) (2,929) (3,575) (4,090) (4,532)
----------------------------------------------------------------------
Net investment spread 1,468 1,960 1,751 1,349 960
Total investment and other expenses (815) (958) (1,225) (1,289) (1,161)
Net investment income (loss) 415 595 363 103 (64)
Net realized investment gains (losses) 317 181 20 (2) (21)
Net income 732 777 383 101 13
Earnings per share ** 2.93 3.11 1.53 0.40 0.05
BALANCE SHEET DATA (END OF PERIOD)
Total assets $ 55,726 $ 60,580 $ 60,609 $ 71,021 $ 70,400
Face-amount certificate reserves 50,186 52,460 60,355 67,029 66,550
Shareholder's equity 5,064 4,986 187 3,881 3,732
</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 per share based on 250,000 shares issued and outstanding
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
GENERAL
The Company was acquired by ARM in connection with ARM's acquisition of
substantially all of the assets and business operations of SBM effective May 31,
1995. The results of operations for the year ended December 31, 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. Historical results of
operations are not completely comparable with results of operations subsequent
to the Acquisition primarily due to differing asset/liability management
strategies and expense allocation methodologies of ARM and SBM management.
Therefore, results of operations for the year ended December 31, 1996, are not
completely comparable with the prior year.
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995
During 1996, net income was $731,981 compared to $776,739 in 1995. Net
investment income (net income excluding realized investment gains and losses net
of tax) was $414,670 and $595,354 for 1996 and 1995, respectively. The decrease
in net investment income was primarily attributable to a decrease in net
investment spread, partially offset by lower investment and other expenses and
lower federal income tax expense.
Net investment spread, which is the difference between investment income
and interest credited on certificate reserves, decreased to $1.5 million during
1996 from $2.0 million in 1995. These amounts reflect net investment spread of
2.23% and 2.97% during 1996 and 1995, respectively, between the Company's
investment yield on average cash and investments and the average rate credited
on certificate reserves. The Company's investment income decreased to $4.3
million from $4.9 million for 1996 and 1995, respectively. These amounts
represent investment yields of 7.73% and 8.21% on average cash and investments
of $54.9 million and $56.3 million for 1996 and 1995, respectively. This
decrease in investment yield on cash and investments was primarily attributable
to a reduction in the average duration of the investment portfolio during 1996
and to the December 1995 sale of the Company's mortgage loan portfolio. The
proceeds from the sale of mortgage loans were invested in fixed maturities of a
generally higher quality, but with lower yields.
Interest credited on certificate reserves was $2.8 million and $2.9 million
for 1996 and 1995, respectively. These amounts represent average rates of
interest credited of 5.50% and 5.24% on average certificate reserves of $50.4
million and $52.9 million for 1996 and 1995, respectively. The majority of the
Company's outstanding face-amount certificates are fixed-rate three year
contracts. The Company monitors credited interest rates for new and renewal
issues against competitive products, mainly bank certificates of deposit.
Credited interest rate adjustment, up or down, on new certificates are made as
the Company deems necessary. New and renewal contracts issued and outstanding
during the past year have crediting rates that are generally higher than
contracts that matured or surrendered during the period, resulting in the
overall increase in the average crediting rate.
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<PAGE>
Investment and other expenses were $815,094 and $957,593 for 1996 and 1995,
respectively. The decrease in investment and other expenses was primarily
attributable to the decrease in management and investment advisory fees.
Currently, management and investment advisory fees are computed as a percentage
of average certificate reserves and qualified assets. Such fees have been lower
since the Acquisition primarily as a result of ARM's lower marginal operating
cost attributable to greater economies of scale since the Acquisition.
Realized investment gains were $485,135 and $283,885 for 1996 and 1995,
respectively. These realized investment gains were interest-rate related and
attributable to the asset/liability management strategies of the Company. Fixed
maturities and equity securities (i.e., non-redeemable preferred stock) are sold
during rising and falling interest rate environments which can result in period-
to-period swings in realized investment gains and losses.
Certificate reserves decreased $2.3 million or 4.3% during 1996, as
maturities and surrenders exceeded sales and renewals. The Company believes a
significant factor leading to the decrease was 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 face-
amount certificates reaching their maturity date during 1996 and 1995, 73% and
72%, respectively, were renewed.
1995 COMPARED WITH 1994
During 1995, net income was $776,739 compared to $383,203 in 1994. Net
investment income was $595,354 and $363,420 for 1995 and 1994, respectively.
The increase in net investment income was primarily attributable to a higher net
investment spread and lower investment and other expenses.
Net investment spread increased to $2.0 million during 1995 from $1.8
million in 1994. These amounts reflect net investment spread of 2.97% and 2.10%
during 1995 and 1994, respectively, between the Company's investment yield on
average cash and investments and the average rate credited on certificate
reserves. The Company's investment income decreased to $4.9 million from $5.3
million for 1995 and 1994, respectively. The investment yields for 1995 and 1994
were 8.21% and 7.63% on average cash and investments of $56.3 million and $66.1
million, respectively. This increase in investment yield was 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 adjustment.
Interest credited on certificate reserves was $2.9 million and $3.6 million
for 1995 and 1994, respectively. These amounts represent average rates of
interest credited of 5.24% and 5.53% on average certificate reserves of $52.9
million and $62.2 million for 1995 and 1994, respectively. This decrease is a
result of new and renewal certificates issued during 1995 accumulating interest
at rates lower than contracts that matured or surrendered.
The decrease in investment and other expenses was primarily attributable to
the decrease in management and investment advisory fees since the Acquisition
and lower amortization of deferred charges.
Realized investment gains were $283,885 and $29,783 for 1995 and 1994,
respectively. Realized investment gains were interest-rate related and
attributable to the asset/liability management strategies of the Company.
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<PAGE>
ASSET PORTFOLIO REVIEW
The Company primarily invests in securities with fixed maturities with the
objective of providing reasonable returns while limiting liquidity and credit
risks. The Company's investments in fixed maturities were 98% investment grade
for the years ended December 31, 1996 and 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.
Additionally, the Company's investment portfolio has minimal exposure to real
estate, mortgage loans and common equity securities, which represented 1.0% and
1.1% of qualified assets at December 31, 1996 and 1995, respectively. As of
December 31, 1996, the Company held no securities which had defaulted on
principal or interest payments.
Fixed maturities include mortgage-backed and asset-backed securities,
corporate securities, U.S. Treasury securities and other government obligations.
Mortgage-backed securities ("MBSs"), which include pass-through securities and
collateralized mortgage obligations ("CMOs"), totaled $32.6 million at
December 31, 1996, representing 58.9% of total qualified assets (61.4% at
December 31, 1995). The Company's investments in CMOs, which are primarily
backed by the U.S. Government or U.S. Government agencies, represented 52.8% and
47.3% of the Company's qualified assets as of December 31, 1996 and 1995,
respectively. MBSs, including CMOs, are subject to risks associated with
prepayments of the underlying mortgage loans. Prepayments cause these securities
to have actual maturities different from those expected at the time of purchase.
The degree to which a security is susceptible to either gains or losses due to
prepayment speed adjustments is influenced by the difference between its
amortized cost and par, the relative sensitivity of the underlying mortgages
backing the assets to prepayments in a changing interest rate environment and
the repayment priority of the securities in the overall securitization
structure. Prepayment sensitivity is evaluated and monitored, giving full
consideration to the collateral characteristics such as weighted average coupon
rate, weighted average maturity and the prepayment history of the specific loan
pool. Also, the Company monitors three year cash flow projections with the goal
of maintaining an adequate level of liquidity for maturing face-amount
certificates. The Company's asset/liability management strategies not only allow
the Company to monitor its short-term liquidity needs but also aim to provide
protection to the investment portfolio from adverse changes in interest rates.
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 after the Acquisition, at which time the Company's invested
assets were restated to fair value in accordance with purchase accounting rules,
and then the subsequent rise in interest rates during the year ended December
31, 1996, have resulted in unrealized gains of $231,541 (net of $124,676 in
deferred income taxes) compared to 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 and all liabilities are
carried at historical values.
15
<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, 1996, the Company had $4.6 million of qualified assets
in excess of the minimum amount required by the 1940 Act and the rules and
regulations promulgated thereunder by the SEC, as computed in accordance with
Section 28(b) of the 1940 Act. In addition, the MDC has 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 8.7% at
December 31, 1996.
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, 1996, cash and cash equivalents totaled $3.2 million, a
decrease of $0.7 million from December 31, 1995. 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 $3.6 million, $4.1 million, and $4.2 million were generated
from operating activities in 1996, 1995, and 1994, 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 $39.4 million, $51.8 million, and $10.6
million in cash flows during 1996, 1995, and 1994, respectively, which were
offset by purchases of investments of $38.5 million, $44.2 million, and $5.1
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.
16
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . .18
Balance Sheets as of December 31, 1996 and 1995. . . . . . . . . . . . . . . .20
Statements of Operations for the Years Ended
December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . . . .22
Statements of Shareholder's Equity for the Years Ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . . . . .23
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . . . . .24
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . .25
17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SBM Certificate Company
We have audited the accompanying balance sheets of SBM Certificate Company as of
December 31, 1996 and 1995, and the related statements of income, shareholder's
equity, and cash flows for the years 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 audits.
We conducted our audits 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, the financial statements referred to above present fairly, in
all material respects, the financial position of SBM Certificate Company at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 12, 1997
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
SBM Certificate Company
We have audited the statements of income and of cash flows of SBM Certificate
Company (the "Company") for the year 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 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, such financial statements present fairly, in all material
respects, the results of SBM Certificate Company's operations and its cash flows
for the year 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 and Touche LLP
Minneapolis, Minnesota
March 29, 1995
19
<PAGE>
SBM CERTIFICATE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<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:
1996-$49,863,826; 1995-$53,076,255) $ 50,169,361 $ 54,388,115
Equity securities, at fair value (cost: 1996-$493,912; 1995-$570,162) 544,594 621,191
Certificate loans 273,368 279,463
Other invested assets 523,083 632,154
Cash and cash equivalents 3,247,192 3,900,494
------------------------------
Total cash and investments 54,757,598 59,821,417
Receivables:
Dividends and interest 533,958 397,898
Receivable for investment securities sold 122,570 --
------------------------------
Total receivables 656,528 397,898
------------------------------
Total qualified assets 55,414,126 60,219,315
Deferred acquisition cost 132,163 113,500
Goodwill 113,095 192,919
Other assets 66,163 54,203
------------------------------
Total assets $ 55,725,547 $ 60,579,937
------------------------------
------------------------------
</TABLE>
20
<PAGE>
SBM CERTIFICATE COMPANY
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Certificate reserves $ 50,186,386 $ 52,459,724
Payable for investment securities purchased -- 2,454,325
Deferred federal income taxes 445,419 619,148
Accounts payable and other liabilities 29,940 60,582
------------------------------------
Total liabilities 50,661,745 55,593,779
Shareholder's equity:
Common stock, $1 par value; 1,000,000 shares authorized;
250,000 shares issued and outstanding 250,000 250,000
Additional paid-in capital 3,050,000 3,050,000
Net unrealized gains on available-for-sale securities 231,541 885,878
Retained earnings 1,532,261 800,280
------------------------------------
Total shareholder's equity 5,063,802 4,986,158
------------------------------------
Total liabilities and shareholder's equity $ 55,725,547 $ 60,579,937
------------------------------------
------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
21
<PAGE>
SBM CERTIFICATE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest income from securities $ 4,089,948 $ 4,276,460 $ 4,590,206
Interest income from mortgage loans -- 366,321 439,709
Other investment income 200,127 246,597 296,010
-------------------------------------------------------
Total investment income 4,290,075 4,889,378 5,325,925
Investment and other expenses:
Management and investment advisory fees 246,468 358,486 516,000
Deferred acquisition cost amortization and renewal
commissions 245,126 289,875 518,782
Real estate expenses 205,029 137,777 112,772
Amortization of goodwill 79,824 92,248 --
Other expenses 38,647 79,207 77,876
-------------------------------------------------------
Total investment and other expenses 815,094 957,593 1,225,430
Interest credited on certificate reserves 2,821,912 2,929,357 3,575,075
-------------------------------------------------------
Net investment income before federal
income taxes 653,069 1,002,428 525,420
Federal income tax expense (238,399) (407,074) (162,000)
-------------------------------------------------------
Net investment income 414,670 595,354 363,420
Realized investment gains 485,135 283,885 29,783
Federal income tax expense on realized investment
gains (167,824) (102,500) (10,000)
-------------------------------------------------------
Net realized investment gains 317,311 181,385 19,783
-------------------------------------------------------
Net income $ 731,981 $ 776,739 $ 383,203
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
22
<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, 1994 $ 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 $403,000 782,000 782,000
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
Net income 731,981 731,981
Change in net unrealized gains on
available-for-sale securities (654,337) (654,337)
-----------------------------------------------------------------------------------------------
Balance, December 31, 1996 $250,000 $3,050,000 $231,541 $1,532,261 $5,063,802
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
23
<PAGE>
SBM CERTIFICATE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 731,981 $ 776,739 $ 383,203
Adjustments to reconcile net income to cash flows provided
by operating activities:
Provision for certificate reserves 2,821,912 2,929,357 3,575,075
Realized investment gains (485,135) (283,885) (29,783)
Deferral of acquisition costs (263,788) (430,852) (507,996)
Amortization of deferred acquisition costs and
renewal commissions 245,126 289,875 518,782
Other amortization and depreciation 530,429 228,861 (75,111)
Deferred tax expense 178,606 295,464 20,000
(Increase) decrease in dividends and interest receivable (136,060) 34,571 30,851
Changes in other assets and liabilities (40,816) 250,559 236,812
--------------------------------------------------------
Cash flows provided by operating activities 3,582,255 4,090,689 4,151,833
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments available-for-sale:
Purchases (38,523,432) (44,224,876) (3,922,397)
Maturities and redemptions 5,642,891 2,627,400 7,563,300
Sales 33,578,496 44,977,473 --
Fixed maturity investments held-to-maturity:
Purchases -- -- (1,180,893)
Maturities and redemptions -- 51,500 2,761,816
Sales, maturities and redemptions--mortgage loans 155,643 4,192,459 144,109
Additions to other invested assets -- (81,200) --
Proceeds from sale of other invested assets -- -- 156,453
Repayment of certificate loans, net 6,095 59,416 11,494
--------------------------------------------------------
Cash flows provided by investing activities 859,693 7,602,172 5,533,882
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts paid to face-amount certificate holders (6,063,787) (13,322,027) (13,973,106)
Amounts received from face-amount certificate holders 968,537 2,498,761 3,689,960
Capital contribution -- 1,500,000 --
--------------------------------------------------------
Cash flows used in financing activities (5,095,250) (9,323,266) (10,283,146)
--------------------------------------------------------
Net change in cash and cash equivalents (653,302) 2,369,595 (597,431)
Cash and cash equivalents at beginning of year 3,900,494 1,530,899 2,128,330
--------------------------------------------------------
Cash and cash equivalents at end of year $ 3,247,192 $ 3,900,494 $ 1,530,899
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
24
<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 (the "Acquisition"). On November 29,
1996, SBM Financial Services, Inc. changed its name to ARM Securities
Corporation ("ARM Securities"). 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 and is registered
under the Investment Company Act of 1940 (the "1940 Act"). A face-amount
certificate is an obligation of the Company requiring the Company to pay
certificate holders the original invested amount of the certificate, plus a
three-year fixed-rate return, at a given maturity date. The Company's face-
amount certificates are sold primarily in Minnesota, Iowa, South Dakota and
California. Face-amount certificates, which are similar to bank certificates of
deposit, generally compete with various types of individual savings products
offered by banks and insurance companies that provide a fixed rate of return on
investors' money.
BASIS OF PRESENTATION
The financial statements are prepared in accordance with 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 and equity securities are classified as available-for-
sale. Available-for-sale securities are stated at fair value, with the
unrealized gains and losses, net of taxes, reported as a separate component of
shareholder's equity in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The amortized cost of fixed maturities classified as
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities,
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
over the estimated life of the security. Such amortization or accretion is
computed using the interest method and is included in investment income.
Anticipated prepayments on mortgage-backed securities are considered in
determining the effective yield on such securities. If a difference arises
between anticipated and actual prepayments, the carrying value of the investment
is adjusted with a corresponding charge or credit to investment income. Interest
and dividends are included in investment income. Certificate loans are carried
at their unpaid principal balances. Cash and cash equivalents consist of highly
liquid investments with maturities of three months or less from the time of
purchase. Security transactions are accounted for on the date the order to buy
or sell is executed. Realized gains and losses on the sale of investments are
determined based upon the specific identification method.
Other invested assets includes real estate, which is recorded at cost, less
accumulated depreciation since the Acquisition.
The Company adopted the provisions of SFAS No. 115 for investments held as
of or acquired after January 1, 1994. 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.
The reserve accumulation rates, cash surrender values, and certificate reserves,
among other matters, are governed by the 1940 Act.
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 based on a proportionate share of
consolidated taxable income. Additionally, 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
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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 operations 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
operations 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 and differing asset/liability
management strategies and expense allocation methodologies of ARM and SBM
management.
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
SEVEN
MONTHS
FIVE MONTHS ENDED YEAR ENDED
ENDED DECEMBER 31, DECEMBER 31,
MAY 31, 1995 1995 1995
-------------------------------------------------------
<S> <C> <C> <C>
COMBINED CONDENSED STATEMENT OF OPERATIONS:
Total investment income $ 2,013,780 $ 2,875,598 $ 4,889,378
Total investment and other expenses 511,343 446,250 957,593
Interest credited on 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
-------------------------------------------------------
-------------------------------------------------------
COMBINED CONDENSED STATEMENT OF CASH FLOWS:
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:
Amounts paid to face-amount certificate holders (7,066,042) (6,255,985) (13,322,027)
Amounts received from face-amount certificate
holders 1,926,095 572,666 2,498,761
Capital contribution from SBM Life 1,500,000 -- 1,500,000
-------------------------------------------------------
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>
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The amortized cost and estimated fair values of available-for-sale
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, 1996:
Fixed maturities:
U.S. treasury securities and obligations
of U.S. government agencies $ 3,467,777 $ -- $ 38,359 $ 3,429,418
Obligations of state and political
subdivisions 456,112 3,498 8,838 450,772
Foreign governments 951,123 13,000 5,893 958,230
Corporate securities 7,569,178 63,776 15,206 7,617,748
Asset-backed securities 5,131,230 3,763 35,468 5,099,525
Mortgage-backed securities 32,288,406 498,888 173,626 32,613,668
----------------------------------------------------------------------------
Total fixed maturities 49,863,826 582,925 277,390 50,169,361
Equity securities 493,912 53,270 2,588 544,594
----------------------------------------------------------------------------
Total available-for-sale securities $ 50,357,738 $ 636,195 $ 279,978 $ 50,713,955
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 4,777,934 88,765 173 4,866,526
Asset-backed securities 5,108,721 33,383 -- 5,142,104
Mortgage-backed securities 35,810,065 1,169,583 11,089 36,968,559
----------------------------------------------------------------------------
Total fixed maturities 53,076,255 1,330,049 18,189 54,388,115
Equity securities 570,162 51,074 45 621,191
----------------------------------------------------------------------------
Total available-for-sale securities $ 53,646,417 $ 1,381,123 $ 18,234 $ 55,009,306
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
29
<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 and
asset-backed securities provide for periodic payments throughout their life.
DECEMBER 31, 1996
-----------------------------------
ESTIMATED
FAIR
COST VALUE
- -----------------------------------------------------------------------------
AVAILABLE-FOR-SALE:
Due in one year or less $ 1,260,417 $ 1,271,617
Due after one year through five years 5,749,018 5,760,012
Due after five years through ten years 4,375,305 4,352,148
Due after ten years 1,059,450 1,072,391
Asset-backed securities 5,131,230 5,099,525
Mortgage-backed securities 32,288,406 32,613,668
Equity securities 493,912 544,594
-----------------------------------
Total available-for-sale securities $ 50,357,738 $ 50,713,955
-----------------------------------
-----------------------------------
Gross gains of $642,039, $815,733 and $7,399 and gross losses of $175,226,
$148,041 and $321,399 were realized on sales of fixed maturities classified as
available-for-sale for the year ended December 31, 1996, the seven months ended
December 31, 1995 and the five months ended May 31, 1995, respectively.
Gross gains of $23,980 and zero and gross losses of zero and $5,075 were
recognized on equity securities sold during 1996 and 1995, respectively. Gross
losses of $64,732 were realized on the sale of substantially all mortgage loans
in December 1995.
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CERTIFICATE RESERVES
Total certificate reserves at December 31 are summarized as follows:
<TABLE>
<CAPTION>
MINIMUM ADDITIONAL
1996 1995 INTEREST INTEREST
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fully-paid certificates:
Single-payment series 503 $ 46,302,625 $ 48,440,527 2.50% 1.85% to 4.60%
Installment 2,270,515 2,267,503 2.50% to 3.50% 1.50% to 2.75%
Optional settlement 592,513 618,419 2.50% to 3.00% 2.00% to 2.75%
Due to unlocated certificate
holders 2,878 2,813 None
------------------------------------
49,168,531 51,329,262
Installment certificates:
Reserves to mature, by series:
120, 215, and 220 424,651 447,033 3.25% 1.75% to 2.00%
315 296,064 364,368 3.50% 1.50% to 1.75%
Advance payments 297,140 319,061 * *
-----------------------------------
1,017,855 1,130,462
-----------------------------------
Total certificate reserves $ 50,186,386 $ 52,459,724
-----------------------------------
-----------------------------------
</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 5.00% and will continue at
that rate through 1997.
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
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.
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-----------------------------------------------------------------------------
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 $ 50,169,361 $ 50,169,361 $ 54,388,115 $ 54,388,115
Equity securities 544,594 544,594 621,191 621,191
Certificate loans 273,368 273,368 279,463 279,463
Other invested assets 523,083 523,083 632,154 632,154
Cash and cash equivalents 3,247,192 3,247,192 3,900,494 3,900,494
Other assets 66,163 66,163 54,203 54,203
Liabilities:
Certificate reserves 50,186,386 50,767,396 52,459,724 52,758,441
Accounts payable and other liabilities 29,940 29,940 60,582 60,582
</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.
CERTIFICATE LOANS
The carrying value of certificate loans approximates their fair value.
CASH AND CASH EQUIVALENTS
The carrying amounts of cash and cash equivalents approximate their fair
value given the short-term nature of these assets.
CERTIFICATE RESERVES
The fair value of certificate reserves is based on a discounted cashflow
analysis, using the current interest rate offered on new certificates of 5.25%
and 5.60% at December 31, 1996 and 1995, 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.
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. FEDERAL INCOME TAXES
Deferred federal income taxes reflect the net tax effects of (i) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (ii)
operating and capital losses. Significant components of the deferred tax
liabilities and assets as of December 31, 1996 and December 31, 1995 were:
DECEMBER 31,
----------------------------
1996 1995
- ------------------------------------------------------------------------------
Deferred tax liabilities:
Real estate limited partnership $ 178,736 $ 172,851
Net unrealized gains on available-for-sale
securities 124,676 477,011
Other -- 39,725
------------------------------
Total deferred tax liabilities 303,412 689,587
Deferred tax assets:
Fixed maturities 45,524 196,991
Other investments 93,789 108,143
Fixed assets 38,149 39,030
Capital loss carryover 363,267 420,357
Other 31,785 20,439
------------------------------
Total deferred tax assets 572,514 784,960
Valuation allowance for deferred tax assets (714,521) (714,521)
------------------------------
Net deferred tax assets (142,007) 70,439
------------------------------
Deferred tax liabilities shown on the
accompanying balance sheets $ 445,419 $ 619,148
------------------------------
------------------------------
The components of the provision for federal income tax expense consist of the
following:
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------------------------------------
Current $ 227,617 $ 214,110 $ 152,000
Deferred 178,606 295,464 20,000
------------------------------------------
Total federal income tax expense $ 406,223 $ 509,574 $ 172,000
------------------------------------------
------------------------------------------
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.
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. No
such benefits were realized in 1996. During 1995, goodwill was
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
reduced by $189,251 as a result of realizing such benefits. Goodwill, with an
unamortized balance of $113,095 at December 31, 1996, is being amortized
straight-line over the three year period subsequent to the Acquisition.
Federal income tax expense differs from that computed by using the federal
income tax rate of 35%. The sources of the differences were:
<TABLE>
<CAPTION>
SEVEN MONTHS FIVE MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED
------------------------ DECEMBER 31, MAY 31, DECEMBER 31,
1996 1995 1995 1995 1994
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income tax expense (benefit) at
statutory rate $ 398,371 $ 450,209 $ 462,915 $ (12,706) $ 194,321
Tax-exempt interest (7,283) (7,256) (3,350) (3,906) (10,000)
Dividend received deduction (12,577) (14,379) (8,000) (6,379) (15,000)
Goodwill amortization 27,938 32,287 32,287 -- --
Taxable proceeds from life
insurance -- 38,482 38,482 -- --
Other (226) 10,231 -- 10,231 2,679
--------------------------------------------------------------------------
Total federal income tax expense
(benefit) $ 406,223 $ 509,574 $ 522,334 $ (12,760) $ 172,000
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</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 its subsidiaries'
business activities. The allocations were $246,468, $151,967, $206,519 and
$516,000 for the year ended December 31, 1996, the seven months ended December
31, 1995, the five months ended May 31, 1995 and for the year ended December 31,
1994, 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 by SBM and affiliates was
$146,554. Management believes the foregoing allocations were made on a
reasonable basis; however, 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 ARM Securities, an affiliate, $263,089, $443,579 and
$507,995 for the
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
years ended 1996, 1995 and 1994, 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 ($50.4 million and $52.7 million at December 31, 1996 and
1995, respectively). The Company had qualified assets of $55.1 million and $58.9
million at those respective dates (before addition of $0.4 million and $1.4
million, respectively, for net unrealized pretax gains 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 District of Columbia Insurance
Laws (the "D.C. Laws") as required by the 1940 Act. Qualified assets for which
no provision for valuation is made in the D.C. Laws are valued in accordance
with rules, regulations, or orders prescribed by the Securities and Exchange
Commission. These values are the same as the financial statement carrying
values, except that for financial statement purposes, fixed maturities and
equity securities classified as available-for-sale are carried at fair value.
For qualified asset purposes, fixed maturities 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 8.7% and 6.9% at December 31, 1996 and 1995, respectively. 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, 1996 and 1995 as shown in the
following table. Certificate loans, secured by applicable certificate reserves,
are deducted from certificate reserves in computing deposit requirements.
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1996 1995
------------------------------------
Assets on deposit with:
Central depositary $ 51,522,592 $ 57,278,134
State governmental authorities 245,102 193,756
------------------------------------
Total deposits $ 51,767,694 $ 57,471,890
------------------------------------
------------------------------------
Required deposits (certificate reserves
less certificate loans plus $250,000) $ 50,163,018 $ 52,430,261
------------------------------------
------------------------------------
Assets on deposit consisted of the following at December 31:
1996 1995
------------------------------------
Investment securities, at cost
plus accrued interest $ 51,244,584 $ 56,839,655
First mortgage loans 4,068 13,472
Other assets on deposit, at cost 519,042 618,763
------------------------------------
$ 51,767,694 $ 57,471,890
------------------------------------
------------------------------------
36
<PAGE>
Part II
Item 13 Other Expenses of Issuance and Distribution
*Fees and expenses of accountants $12,000
*Costs of Printing $20,000
*Legal Fees $ 1,000
Registration Fees -
Federal Taxes -
State Taxes and Fees -
Trustee and Transfer Agency Fees -
Premium on Indemnification Policy -
-------
Total $33,000
-------
-------
*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 ARM Securities
Corporation (formerly SBM Financial Services, Inc.) dated June 14, 1995
incorporated by reference to Exhibit 1 to Form S-1 Registration Statement of SBM
Certificate Company (File No. 33-38066) filed on March 5, 1996.
(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
II-1
<PAGE>
Statement of SBM Certificate Company (File No. 33-38066) filed on December 4,
1990.
(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 ARM Securities
Corporation (formerly SBM Financial Services, Inc.) dated June 14, 1995
incorporated by reference to Exhibit 1 to Form S-1 Registration Statement of SBM
Certificate Company (File No. 33-38066) filed on March 5, 1996.
(c) Administrative Services Agreement by and between the Company and ARM
Financial Group, Inc. dated as of June 14, 1995 incorporated by reference to
Exhibit 1 to Form S-1 Registration Statement of SBM Certificate Company (File
No. 33-38066) filed on March 5, 1996.
(d) Investment Services Agreement by and between the Company and ARM Financial
Group, Inc. dated June 14, 1995 incorporated by reference to Exhibit 1 to Form
S-1 Registration Statement of SBM Certificate Company (File No. 33-38066) filed
on March 5, 1996.
(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 incorporated by reference to Exhibit 1 to Form S-1 Registration
Statement of SBM Certificate Company (File No. 33-38066) filed on March 5, 1996.
(23) Consent of Ernst & Young LLP dated February 26, 1997 and consent of
Deloitte & Touche LLP dated February 26, 1997 (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,
1996
Schedule V Qualified Assets on Deposit- December 31, 1996
Schedule VI Certificate Reserves - Year Ended December 31, 1996
Schedules I, III, V, and VI as of or for the year ended December 31, 1995, and
related Report of Independent Auditors, included in the Company's Post Effective
Amendment No. 7 to Registration Statement on Form S-1 filed March 5, 1996 (File
No. 33-38066) and incorporated by reference herein.
Schedules III and VI 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.
II-2
<PAGE>
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.
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.
II-3
<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 27, 1997.
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 02/27/97
- ----------------------------------- ------------------------------
John R. McGeeney Date
Chairman of the Board and President
Principal Financial Officer:
/s/Edward L. Zeman 02/27/97
- ----------------------------------- ------------------------------
Edward L. Zeman Date
Executive Vice President--Chief
Financial Officer
Principal Accounting Officer:
/s/Barry G. Ward 02/27/97
- ----------------------------------- ------------------------------
Barry G. Ward Date
Directors:
/s/Steven B. Bing 02/27/97
- ----------------------------------- ------------------------------
Steven B. Bing Date
/s/John R. McGeeney 02/27/97
- ----------------------------------- ------------------------------
John R. McGeeney Date
/s/Theodore S. Rosky 02/27/97
- ----------------------------------- ------------------------------
Theodore S. Rosky Date
/s/ Martin R. Snyder 02/27/97
- ----------------------------------- ------------------------------
Martin R. Snyder Date
II-4
<PAGE>
SBM CERTIFICATE COMPANY
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SBM Certificate Company
We have audited the financial statements of SBM Certificate Company as of
December 31, 1996 and 1995, and for the years then ended, and have issued our
report thereon dated February 12, 1997 (included elsewhere in this Registration
Statement). Our audit also included the 1996 and 1995 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 audits.
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 herein.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 12, 1997
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
SBM Certificate Company
We have audited the financial statements of SBM Certificate Company (the
Company) for the year ended December 31, 1994 and have issued our report thereon
dated March 29, 1995 (included elsewhere in this Registration Statement). Our
audit also included the financial statement schedules listed in Item 16(b) of
this Registration Statement. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit. In our opinion, such financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 29, 1995
S-2
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
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 Note, 6.5%, due 8/15/2005 $ 2,000,000 $ 2,042,688 $ 2,012,820
U.S. Treasury Note, 5.5%, due 4/15/2000 195,000 192,215 191,527
U.S. Treasury Note, 5.5%, due 11/15/1998 530,000 532,457 526,605
U.S. Treasury Note, 5.375%, due 11/30/1997 700,000 700,417 698,466
------------------------------
3,467,777 3,429,418
OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS:
Belmont County, Ohio, Sanitary Sewer District #3 Waterworks
Revenue Bonds, 4.25%, due 4/01/2004 30,000 27,885 29,625
Chelan County, Washington, Public Utility District #1, Rocky
Reach Hydroelectric Revenue Bonds, 5%, due 7/01/2013 116,000 115,998 115,690
Columbia, Washington, Storage Power Exchange, 3.875%,
due 4/01/2003 105,000 105,000 100,800
Douglas County, Washington, Public Utilities District #1,
Wells Hydroelectric Revenue Bonds, 4%, due 9/01/2018 55,000 45,912 46,106
Minneapolis - St. Paul, Minnesota, Metropolitan Airport,
Series 16, 4.5%, due 1/01/1997 60,000 60,000 60,150
North Marshall, Kentucky, Water District, 5%, due 5/01/2006 35,000 33,237 34,650
Yuba County, California, Water Agency Bonds, 4%, due
3/01/2016 75,000 68,080 63,751
------------------------------
456,112 450,772
FOREIGN GOVERNMENT:
Korea Development Bank, 6.5%, due 11/15/2002 450,000 451,123 445,230
United Mexican States, 11.25%, due 7/21/1997 500,000 500,000 513,000
------------------------------
951,123 958,230
CORPORATE SECURITIES:
COMMUNICATIONS:
Consolidated Edison, 8.05%, due 12/15/2027 700,000 705,656 717,780
</TABLE>
S-3
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1996
<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):
CORPORATE SECURITIES (CONTINUED):
FINANCIAL INSTITUTIONS:
Chrysler Financial Corp., 7.85%, due 10/13/1998 $1,000,000 $1,024,204 $1,028,760
Ford Motor Credit Corp., 5.625%, due 1/15/1999 1,000,000 984,939 988,550
Goldman Sachs Group, 144A, 6.875%, due 9/15/1999 1,000,000 1,007,196 1,012,460
Lehman Brothers Holding, 5.75%, due 2/15/1998 1,000,000 990,538 993,780
Paine Webber Group, 8.875%, due 3/15/2005 1,040,000 1,143,211 1,128,005
------------------------------
5,150,088 5,151,555
PUBLIC UTILITIES (c):
Laclede Gas Co, Ser B, 5%, due 3/31/2011 3,000 53,724 56,250
Nicor Inc, 5%, due 5/01/2008 800 31,443 32,000
South Carolina Electric & Gas Co, 9.40%, due 10/01/2022 784 38,637 40,815
------------------------------
123,804 129,065
RETAIL:
Ralphs Grocery, 10.45%, due 6/15/2004 565,000 572,161 601,018
TOBACCO PRODUCTS:
Philip Morris, 7.375%, due 2/15/1999 1,000,000 1,017,469 1,018,330
------------------------------
TOTAL CORPORATE SECURITIES 7,569,178 7,617,748
ASSET-BACKED SECURITIES:
AFC Home Equity Loan Trust 93-3 A, 5.45%, due 6/20/2013 828,927 805,390 787,480
Aames Mortgage Trust 95-B A1A, 6.95%, due 8/15/2027 436,811 437,713 439,406
Equivantage Home Equity 96-4 A, 6.75%, due 1/25/2028 992,435 988,086 987,473
FASCO Auto Trust 96-AA, 9.504%, due 9/10/2001 827,436 844,486 837,779
First Alliance Mortgage Trust 96-2 A3, 8.225%, due 9/20/2027 900,000 945,716 935,478
Guardian National Acceptance Corp. 96-A 144A, 7.325%, due
3/15/2002 1,109,965 1,109,839 1,111,909
------------------------------
5,131,230 5,099,525
</TABLE>
S-4
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
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:
Bear Stearns Mortgage Sec 94-1 1F, 7.1%, due 10/25/2023 $ 491,110 $ 461,803 $ 434,019
Countrywide Home Loans 95-4 B2, 7.5%, due 9/25/2025 989,209 979,034 960,156
Countrywide Mortgage-Backed 94-14 A1, 7.63%, due 7/25/2024 975,188 991,700 984,330
Federal Home Loan Mortgage Corporation:
7%, due 3/15/2008 728,830 715,762 705,595
7%, due 11/15/2020 1,000,000 996,654 996,560
Interest only, due 7/15/2021 47,128 1,313,677 1,403,932
7.5%, due 10/15/2021 1,059,492 1,054,370 1,033,990
7.25%, due 3/15/2022 4,491,024 4,506,179 4,479,796
Federal National Mortgage Association:
6.625%, due 12/25/2016 727,048 709,292 716,818
6.5%, due 6/25/2019 2,547,991 2,435,335 2,431,726
9%, due 4/01/2021 66,451 69,391 70,771
8.5%, due 4/01/2022 757,918 783,215 792,236
5.834%, due 2/25/2023 1,849,014 1,796,549 1,780,249
9.72066%, due 2/25/2023 792,435 636,453 775,841
8%, due 2,086,275 603,355 697,692
Federal National Mortgage Association-Government National
Mortgage Association, 7%, due 12/15/2017 1,050,000 1,040,147 1,050,662
GE Capital Mtg Services 95-8 B2, 7.5%, due 10/25/2025 988,683 943,964 941,720
Government National Mortgage Association:
9%, due 8/15/2008 4,121 4,343 4,391
9%, due 10/15/2008 136,051 143,359 144,540
9%, due 11/15/2008 148,316 156,287 158,010
9.5%, due 8/15/2009 30,839 32,635 33,530
10%, due 11/15/2009 45,070 48,832 49,410
10%, due 12/15/2009 12,850 13,940 14,148
10%, due 12/15/2010 22,555 24,479 24,833
11.5%, due 4/15/2013 1,885 2,098 2,156
10%, due 4/15/2013 2,340 2,538 2,578
10%, due 6/15/2013 18,814 20,403 20,730
11.5%, due 8/15/2013 2,685 2,989 3,072
10%, due 8/15/2013 11,265 12,217 12,415
</TABLE>
S-5
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
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 3/15/2015 $535 $596 $616
11.5%, due 5/15/2015 742 826 854
10%, due 7/15/2015 17,188 18,649 18,951
10%, due 2/15/2016 34,117 37,023 37,600
9%, due 4/15/2016 16,384 17,264 17,583
9%, due 11/15/2016 15,981 16,830 17,160
9.5%, due 8/15/2017 11,102 11,777 12,067
9.5%, due 5/15/2018 17,526 18,508 19,044
9.5%, due 9/15/2018 2,391 2,537 2,600
9.5%, due 10/15/2018 33,313 35,181 36,209
9.5%, due 1/15/2019 33,749 35,643 36,674
9.5%, due 10/15/2019 11,470 12,093 12,461
9.5%, due 11/15/2019 20,243 21,342 21,991
9.5%, due 6/15/2020 27,081 28,553 29,410
9.5%, due 8/15/2020 41,704 43,970 45,304
9.5%, due 9/15/2020 39,529 41,677 42,930
9.5%, due 09/15/2020 23,125 24,381 25,114
9.5%, due 12/15/2020 18,582 19,592 20,181
9.5%, due 12/25/2020 69,497 73,408 75,519
GNMA I 95-1 D, 8.495%, due 2/16/2018 6,038,000 6,141,820 6,256,878
GNMA II, 7.125%, due 8/20/2022 1,512,889 1,531,271 1,544,569
Greenwich Capital Acceptance 96-B A, 7.55788%, due 1/29/2025 999,765 976,170 959,774
MDC Mortgage Funding Corp. 94-LB7 1B1, 8.45248%, due 1/25/2025 993,621 918,892 904,195
Residential Funding Mortgage 96-S3 M3, 7.25%, due 1/25/2026 793,933 759,441 754,732
Residential Funding Mortgage 96-S6 A3, 6.625%, due 3/25/2026 1,100,000 999,962 995,346
------------------------------
32,288,406 32,613,668
------------------------------
TOTAL FIXED MATURITIES AVAILABLE-FOR-SALE 49,863,826 50,169,361
</TABLE>
S-6
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF COST VALUE
NAME OF ISSUER AND TITLE OF ISSUE SHARES (a)(b) (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY SECURITIES (d):
INDUSTRIAL:
Aluminum Co of America 200 $11,200 $12,400
LTV Corporation (e) 180 2,520 2,138
------------------------------
13,720 14,538
PUBLIC UTILITIES:
Carolina Power & Light 500 31,782 35,500
Connecticut Light and Power Co. 400 10,050 8,392
Duquesne Light Co. 400 10,800 12,200
Entergy Louisiana, Inc. 500 31,852 34,085
Entergy New Orleans, Inc. 600 31,902 34,110
GTE Fla Inc. 1,500 25,875 28,688
Gulf Power Co. 400 28,469 28,976
Illinois Power Co 600 16,050 19,444
Kansas City Power and Light Co. 200 11,586 11,038
Midamerican Energy Co. 600 34,200 44,325
Pacific Gas & Electric 5,000 80,625 83,750
Pacificorp 500 30,603 33,744
Pennsylvania Power Co. 200 8,838 11,104
Public Service Company of Colorado 600 37,215 41,550
San Diego Gas & Electric Co, 4.40% 4,000 46,000 52,000
Southern California Edison, 4.08% 3,300 44,345 51,150
------------------------------
480,192 530,056
------------------------------
TOTAL EQUITY SECURITIES 493,912 544,594
------------------------------
TOTAL INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS $50,357,738 $50,713,955
------------------------------
------------------------------
</TABLE>
(a) See Note 1 to the financial statements regarding the determination of
cost and fair value.
(b) The aggregate cost of investments in securities of unaffiliated
issuers for federal income tax purposes was $50,775,257 at December
31, 1996.
(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 is non-income producing.
S-7
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE V -- QUALIFIED ASSETS ON DEPOSIT
DECEMBER 31, 1996
<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 $ -- $ 245,102 $ -- $ -- $ 245,102
Central depositary:
First Trust, N.A. -- 50,999,482 4,068 519,042 51,522,592
------------------------------------------------------------------------
Total qualified assets on deposit $ -- $51,244,584 $ 4,068 $519,042 $51,767,694
------------------------------------------------------------------------
------------------------------------------------------------------------
S-8
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE VI -- CERTIFICATE RESERVES
PART I-SUMMARY OF CHANGES
YEAR ENDED DECEMBER 31, 1996
BALANCE AT BEGINNING OF YEAR ADDITIONS
---------------------------------------------------------------------------------------
RESERVES
NUMBER OF (INCLUDING RESERVE
ACCOUNTS ADVANCE PAYMENTS CHARGED
WITH AMOUNT OF PAYMENTS) BY TO OTHER
YIELD SECURITY MATURITY WITH ACCRUED CHARGED CERTIFICATE ACCOUNTS
DESCRIPTION PERCENT HOLDERS VALUE INTEREST TO INCOME HOLDERS (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Reserves to mature,
installment certificates:
Series 120 2.75 27 $140,000 $510,172 $21,388 $4,296 $ --
Series 215 2.41 2 4,800 1,283 25 22 --
Series 220 2.75 20 98,000 192,965 9,260 3,458 --
Series 315 2.66 102 356,400 426,042 17,781 16,123 --
Single payment
certificates:
Series 503 2.50 4,516 49,124,005 48,440,527 2,686,375 944,638 --
Fully paid installment
certificates 2.50 519 2,572,645 2,267,503 110,477 -- 112,618
Optional settlement
certificates:
Paid-Up certificates 2.50 26 17,958 16,321 358 --
Annuities 3.00 59 583,589 602,098 26,297 -- 109,951
Due to unlocated
certificate holders None 23 2,813 2,813 -- -- 163
----------------------------------------------- ---------------------------------------
Total 5,294 $52,900,210 $52,459,724 $2,871,961 $968,537 $222,732
----------------------------------------------- ---------------------------------------
----------------------------------------------- ---------------------------------------
Total charged to income, per above $2,871,961
Less reserve recoveries from
terminations prior to maturity 50,049
------------
Interest credited on certificate
reserves, per statement of
operations $2,821,912
------------
------------
</TABLE>
NOTES TO PART I
(a)Transfer to/from other certificate reserves upon conversion.
(b)Direct interest payment to certificate holders.
S-9
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE VI -- CERTIFICATE RESERVES (CONTINUED)
PART I - SUMMARY OF CHANGES (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DEDUCTIONS BALANCE AT END OF YEAR
-------------------------------------------- ---------------------------------------------
RESERVES
NUMBER OF (INCLUDING
CASH ACCOUNTS ADVANCE
SURRENDERS WITH AMOUNT OF PAYMENTS) WITH
PRIOR TO SECURITY MATURITY ACCRUED
DESCRIPTION MATURITIES MATURITY OTHER (a)(b) HOLDERS VALUE INTEREST
- ---------------------------------------------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Reserves to mature, installment
certificates:
Series 120 $ -- $ -- $ 56,183 25 $ 129,000 $ 479,673
Series 215 -- -- -- 2 4,800 1,330
Series 220 -- 14,898 -- 18 91,000 190,785
Series 315 37,422 25,067 51,390 80 278,300 346,067
Single payment certificates:
Series 503 2,355,168 3,099,247 314,501 4,195 45,751,722 46,302,625
Fully paid installment certificates 22,078 127,916 70,088 505 2,537,681 2,270,516
Optional settlement certificates:
Paid-up certificates 163 3,850 3,517 19 9,678 9,149
Annuities 154,983 -- -- 52 567,197 583,363
Due to unlocated certificate holders -- 98 -- 24 2,878 2,878
-------------------------------------------- ---------------------------------------------
Total $2,569,814 $3,271,076 $ 495,679 4,920 $49,372,256 $50,186,386
-------------------------------------------- ---------------------------------------------
-------------------------------------------- ---------------------------------------------
</TABLE>
S-10
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE VI -- CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
BALANCE AT BEGINNING OF YEAR
----------------------------------------------------
NUMBER OF
ACCOUNTS
WITH AMOUNT OF
AGE GROUPING SECURITY MATURITY AMOUNT OF
IN YEARS HOLDERS VALUE RESERVES
----------------------------------------------------
<S> <C> <C> <C> <C>
Series:
120 20 1 $ 8,000 $ 7,737
21 1 3,000 3,315
22 -- -- --
23 1 6,000 12,247
29 1 5,000 11,252
30 1 6,000 13,052
31 1 6,000 14,749
32 1 3,000 8,003
33 1 6,000 17,626
34 -- -- --
35 1 5,000 17,706
36 1 10,000 38,149
37 6 33,000 134,855
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 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 2 $4,800 $1,283
-----------------------------------------
-----------------------------------------
</TABLE>
S-11
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE VI -- CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DEDUCTIONS BALANCE AT END OF YEAR
------------------------------ ----------------------------------------------------------------
NUMBER OF
CASH ACCOUNTS WITH
SURRENDERS AGE GROUPING SECURITY AMOUNT OF
PRIOR TO IN YEARS HOLDERS MATURITY VALUE AMOUNT OF
MATURITY OTHER RESERVES
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Series:
120 $ -- $ -- 20 -- $ -- $ --
-- -- 21 1 8,000 8,185
-- -- 22 1 3,000 3,682
-- -- 23 1 6,000 12,307
-- -- 29 -- -- --
-- -- 30 1 5,000 12,060
-- -- 31 1 6,000 14,572
-- -- 32 1 6,000 15,714
-- -- 33 1 3,000 8,527
-- -- 34 1 6,000 18,762
-- -- 35 -- -- --
-- -- 36 1 5,000 19,288
-- -- 37 3 26,000 106,880
-- -- 38 4 17,000 72,665
-- -- 39 7 30,000 136,479
-- 56,183 40 2 8,000 39,002
Interest reserve 303
Accrued interest payable 11,247
------------------------------ ------------------------------------------------
Total $ -- $56,183 25 $129,000 $479,673
------------------------------ ------------------------------------------------
------------------------------ ------------------------------------------------
Series:
215 $ -- 5 -- $ -- $ --
-- 6 2 4,800 1,271
Interest reserve 33
Accrued interest payable 26
------------------------------ ------------------------------------------------
Total $ -- 2 $4,800 $1,330
------------------------------ ------------------------------------------------
------------------------------ ------------------------------------------------
</TABLE>
S-12
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE VI -- CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
BALANCE AT BEGINNING OF YEAR
------------------------------------------------------
NUMBER OF
ACCOUNTS
WITH AMOUNT OF
AGE GROUPING SECURITY MATURITY AMOUNT OF
IN YEARS HOLDERS VALUE RESERVES
------------------------------------------------------
Series:
220 10 1 $ 4,000 $ 1,539
19 1 12,000 10,615
20 -- -- --
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
31 -- -- --
Interest reserve 1,215
Accrued interest payable 4,590
---------------------------------------
Total 20 $ 98,000 $ 192,965
---------------------------------------
---------------------------------------
Series:
315 5 1 $ 2,200 $ 483
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
13 14 45,100 34,920
14 14 39,600 34,750
15 10 34,100 32,365
16 6 19,800 25,269
17 1 2,200 3,034
18 9 39,600 66,058
19 12 40,700 68,659
20 13 38,500 71,723
Interest reserve 26,265
Accrued interest payable 10,212
---------------------------------------
Total 102 $ 356,400 $ 426,042
---------------------------------------
---------------------------------------
S-13
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE VI -- CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
DEDUCTIONS BALANCE AT END OF YEAR
------------------- ---------------------------------------
NUMBER OF
CASH ACCOUNTS
SURRENDERS AGE WITH AMOUNT OF AMOUNT
PRIOR TO GROUPING SECURITY MATURITY OF
MATURITY OTHER IN YEARS HOLDERS VALUE RESERVES
------------------- ---------------------------------------
Series:
220 $ -- $ -- 10 1 $ 4,000 $ 1,552
-- -- 19 -- -- --
-- -- 20 1 12,000 11,301
-- -- 25 -- -- --
-- -- 26 1 4,000 6,827
7,887 -- 27 -- -- --
-- -- 28 1 6,000 12,036
7,011 -- 29 7 35,000 76,544
-- -- 30 3 12,000 29,332
-- -- 31 4 18,000 47,302
Interest reserve 1,385
Accrued interest
payable 4,506
------------------- ------------------------------
Total $ 14,898 $ -- 18 $ 91,000 $190,785
------------------- ------------------------------
------------------- ------------------------------
Series: $ -- $ -- 5 1 $ 2,200 $ 503
315 -- -- 6 -- -- --
-- -- 7 1 2,200 711
-- -- 8 -- -- --
-- -- 9 4 14,300 8,155
9,841 -- 10 2 12,100 6,457
-- -- 11 4 22,000 13,829
-- -- 12 4 14,300 10,193
-- -- 13 5 13,200 10,315
-- -- 14 14 45,100 38,582
2,527 9,594 15 14 39,600 37,975
-- -- 16 3 13,200 16,651
-- -- 17 6 19,800 27,621
8,630 -- 18 2 13,200 25,551
-- 6,572 19 7 23,100 38,619
4,069 35,224 20 13 44,000 81,409
Interest reserve 21,319
Accrued interest
payable 8,177
------------------- ------------------------------
Total $ 25,067 $ 51,390 80 $ 278,300 $346,067
------------------- ------------------------------
------------------- ------------------------------
S-14
<PAGE>
EXHIBIT 5
[SBM Certificate Company letterhead]
February 28, 1997
SBM Certificate Company
515 W. Market Street
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 ARM Securities Corporation 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 ARM Securities
Corporation, 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>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our reports dated February 12, 1997,
in Post Effective Amendment No. 8 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, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS CONSENT
We consent to the use in this Post Effective Amendment No. 8 to Registration
Statement No. 33-38066 of SBM Certificate Company of our report dated March 29,
1995 appearing in the Prospectus, which is part of such Registration Statement,
and also consent to the incorporation by reference in this Registration
Statement of our report dated March 29, 1995 relating to the financial statement
schedules appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 26, 1997
