<PAGE>
As filed with the Securities and Exchange Commission on February 26, 1999.
Registration No. 33-38066
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
POST EFFECTIVE AMENDMENT NO. 10
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 this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registrations statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
<PAGE>
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 will be
filed in March 1998.
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PROSPECTUS
SBM CERTIFICATE COMPANY
SERIES 503 CERTIFICATES
This Prospectus describes fully paid fixed-rate face-amount certificates
designated as investment certificates Series 503 (CERTIFICATES). SBM Certificate
Company is the issuer of the Certificates. When you purchase a Certificate, you
make a single lump sum payment to us in exchange for our promise to pay the
amount invested (FACE-AMOUNT), plus accrued interest, on a fixed future date
(MATURITY DATE).
Our Certificates initially mature three years from the date of issue. We will
automatically extend the maturity date for ten additional three-year periods
unless you notify us to the contrary. The money you put into a Certificate earns
a fixed interest rate that we declare at the time of your investment, but that
will never be less than 2.5%. You may choose to have your interest:
O COMPOUNDED ANNUALLY and paid at maturity or redemption
O PAID ANNUALLY or
O PAID QUARTERLY
As of the date of this Prospectus, we'll pay interest for each of the three
years prior to the initial maturity date at the following rates, instead of the
minimum interest rate of 2.50%:
<TABLE>
<CAPTION>
If Interest is
If Interest is If Interest is Compounded
Paid Quarterly Paid Annually Annually
<S> <C> <C> <C>
Year 1 4.60% 4.65% 4.75%
Year 2 4.85% 4.90% 5.00%
Year 3 5.10% 5.15% 5.25%
</TABLE>
These rates apply to Certificates held to maturity for the initial three-year
period only. We will declare new interest rates as of each maturity date, with a
guaranteed minimum of rate 2.5%. See "Description of the Certificates" for a
complete description of the terms of your Certificate.
There is no sales charge.
This Prospectus contains information about the Certificates that you should know
before investing. You should read this Prospectus and any supplements, and
retain them for future reference.
PLEASE SEE "RISK FACTORS" ON PAGE 3 FOR A DESCRIPTION OF THE RISKS ASSOCIATED
WITH AN INVESTMENT IN CERTIFICATES.
For further information and assistance, contact our Administrative Office at 100
North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073 or call us
toll-free at 1-888-303-3636. A free copy of our registration statement,
containing additional information, and our annual report, containing financial
statements that have been audited and reported upon by independent certified
public accountants, are available upon request from our Administrative Office.
THE CERTIFICATES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY ANY
BANK, NOR ARE THEY INSURED BY THE FDIC. THEY ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
CERTIFICATES OR PASSED ON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1999.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
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<S> <C>
SBM Certificate Company...............................................................................3
Risk Factors..........................................................................................3
Absence of a Rating..........................................................................3
Relationship with ARM........................................................................3
Effects of Changes in Interest Rates.........................................................3
Early Withdrawals............................................................................3
Interest Rates for Renewal Periods...........................................................3
Year 2000....................................................................................3
Description of the Certificates.......................................................................4
Minimum Investment...........................................................................4
Interest Rates...............................................................................4
Interest Payment Options.....................................................................4
Maturity.....................................................................................5
Withdrawals..................................................................................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..............................................................................7
Investment Policies..........................................................................7
Underwriter's Agreement...............................................................................7
Underwriter's Compensation............................................................................7
About SBM Certificate Company.........................................................................7
History......................................................................................8
Business.....................................................................................8
Competition..................................................................................8
Employees....................................................................................8
Capital Structure............................................................................8
Regulation...................................................................................8
Description of Property......................................................................8
Legal Proceedings............................................................................6
Executive Officers and Directors of SBM Certificate Company...........................................9
Executive Officers and Directors.............................................................6
Limitation of Liability and Indemnification..................................................6
Relationship with ARM and Affiliates.................................................................11
Independent Auditors.................................................................................11
Selected Financial Data..............................................................................12
Management's Discussion and Analysis of Financial Condition and Results of Operations................13
General......................................................................................6
Results of Operations........................................................................6
Asset Portfolio Review.......................................................................6
Liquidity and Financial Resources............................................................6
Index to Financial Statements........................................................................16
</TABLE>
2
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SBM CERTIFICATE COMPANY
When this Prospectus uses the terms "we," "our" and "us," it means SBM
Certificate Company. SBM Certificate Company is a Minnesota corporation and a
subsidiary of ARM Financial Group, Inc. (ARM), a financial services holding
company. ARM, based in Louisville, Kentucky, specializes in providing retail and
institutional customers with products and services designed for long-term
savings and retirement. Our executive offices are located at 515 W. Market
Street, Louisville, Kentucky 40202. The telephone number is (502) 582-7900.
RISK FACTORS
We are 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
We have not applied for or received a rating for the Certificates from any
nationally recognized rating organization.
RELATIONSHIP WITH ARM
While we are an independent operating entity, we are also a wholly owned
subsidiary of ARM. We rely upon ARM and its affiliates to provide services that
impact our management, operations, investments, and capital. For this reason, we
may be affected by factors affecting ARM, 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
Economic and market conditions and fluctuations in interest rates affect the
market value of our investment portfolio, which consists primarily of publicly
traded, investment grade debt securities. Although we seek to control this
interest rate risk, the value of our investment portfolio may decrease during
periods of sharp changes in interest rates. In such an environment, if we had to
sell assets to meet liquidity needs, we could recognize losses on the sale of
these assets. These losses would reduce the overall capital resources available
to us to provide a source of funds for our operations, including the making of
payments on Certificates.
EARLY WITHDRAWALS
If you withdraw all or a portion of your investment within three months of
purchase, you will receive no interest. In addition, any amount you withdraw
during any three-year maturity period will result in a reduced interest rate. If
you have chosen to have interest paid quarterly or annually, the reduced
interest rate may cause the amount paid upon surrender to be less than the
amount you invested.
INTEREST RATES FOR RENEWAL PERIODS
The initial rates are payable for the initial three-year period only. Although
we intend to declare in advance interest rates above the 2.50% minimum rate for
Certificate years beyond the initial maturity date, we have no obligation to do
so.
YEAR 2000
ARM has undertaken a Year 2000 project that includes all of its subsidiaries,
including us.
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ARM's Year 2000 compliance project, as it relates to us, is provided for under
our Investment Services Agreement and Administrative Services Agreement with
ARM. Pursuant to these agreements, our operations are administered and managed
by ARM. The cost of ARM's Year 2000 initiatives is not expected to be material
to ARM's results of operations or financial condition. Likewise, any cost to us
related to Year 2000 compliance is not expected to be material to our results of
operations or financial condition.
ARM has completed the assessment phase of the project for all production
applications, hardware (personal computers and servers), system software,
facilities, vendors, and business partners. Although ARM is still receiving
information from a few vendors and business partners and assessing various
logistic concerns with its facilities, ARM's major production systems are
substantially Year 2000 compliant. However, it was determined that our
administrative system that processes face-amount certificate transactions cannot
correctly process Year 2000 data because it uses a two digit year field. Where
Year 2000 problems were found, as in our case, the necessary upgrades and
repairs have begun and are scheduled for completion no later than May 31, 1999.
For us specifically, management plans to replace our face-amount certificate
administrative system with an application that is Year 2000 compliant and then
convert our business to that application.
As well as assessing its facilities, ARM is currently in the repair and
certification testing phase of its project. The testing phase will serve to
verify the results of repairs and assessments. Steps needed to correct any
problems uncovered during testing will begin immediately at that time. ARM's
Year 2000 project is well underway and because management believes that it will
be completely Year 2000 compliant by May 31, 1999, it currently has no
contingency plans in place beyond its normal disaster recovery procedures. As a
precaution, ARM is developing a contingency and business resumption plan to
address various logistic concerns with its facilities. The contingency and
business resumption plan is scheduled for completion no later than September 30,
1999.
Although ARM anticipates no major interruption of business activities, that will
be dependent, in part, upon the activity of third parties. Even though ARM has
assessed and continues to assess third party issues, it has no direct ability to
influence the compliance actions of these parties. Accordingly, while ARM
believes its actions in this regard should have the effect of reducing Year 2000
risks, it is unable to eliminate them or to estimate the ultimate effect Year
2000 risks will have on ARM's operations.
The estimated date on which ARM believes it will complete its Year 2000
compliance efforts and the expenses related to ARM's Year 2000 compliance
efforts are based upon management's best estimates, which were based on
assumptions of future events, including the availability of certain resources,
third party modification plans and other factors. There can be no assurances
that these results and estimates will be achieved, and the actual results could
materially differ from those anticipated.
DESCRIPTION OF THE CERTIFICATES
MINIMUM INVESTMENT
The minimum amount you may invest is (1) $1,000 if you choose to have interest
compounded or paid 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.
INTEREST RATES
We periodically declare the interest rates payable for each of the three years
of a Certificate's initial period.
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WE WILL NEVER DECLARE AN ANNUAL INTEREST RATE OF LESS THAN 2.50%. As of the date
of this Prospectus, we have declared the interest rates listed on the cover page
of this Prospectus. As market conditions shift, however, we may declare new
rates, so that the interest rates applicable to your Certificate may be greater
or lesser than the interest rates shown on the cover page of this Prospectus. To
confirm our current rates, please contact our Administrative Office.
The interest rates applicable to your Certificate until its maturity date will
be the rates in effect on the date your application is accepted at our
Administrative Office.
The prevailing investment rates available on interest-bearing instruments are a
primary consideration for us in deciding upon the declaration of interest rates
for the Certificates. However, we have complete discretion as to what interest
rates we declare.
When a Certificate is renewed, the declared interest rates in effect at the
maturity date will determine the rates for the following three-year period.
These new interest rates may be greater or lesser than the rates in effect for
the initial three-year period. Our current policy is to pay interest on renewed
Certificates at the declared rates in effect at the maturity date plus .10%.
This policy is subject to change at any time without prior notice.
INTEREST PAYMENT OPTIONS
You may choose to:
o compound your interest annually and receive it when the Certificate
matures or when you make a withdrawal
o receive annual interest payments
o receive quarterly interest payments.
Your interest rates will vary depending on the payment option you choose. You
may not change your interest payment option once your Certificate has been
issued. Interest on the Certificates accrues monthly.
MATURITY
Your Certificate matures three years from the date it was issued. 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.
We will notify you by writing at least fifteen days prior to your Certificate's
maturity date. Unless you notify us to the contrary, we will then automatically
extend the maturity date for an additional three-year period. We may extend your
Certificate for a total of ten additional three-year periods. The terms of your
initial Certificate will continue to apply, except that as explained above under
"Interest Rates," new interest rates may apply.
WITHDRAWALS
You may withdraw all or a portion of your original investment at any time. Any
amounts you withdraw before the Certificate matures will earn a reduced rate of
interest that we predeclare. Any amounts you withdraw within three months of
purchase will earn no interest. Interest accrues monthly, so that an early
withdrawal will earn interest only for the number of full months the Certificate
was in force.
The minimum amount you may withdraw is $1,000. The minimum amount remaining must
be at least
5
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$1,000, if you chose to have interest compounded to maturity or paid annually,
and at least $5,000 if you chose to have interest paid quarterly.
To request a withdrawal, please send us a written request accompanied by the
Certificate, properly endorsed. If your Certificate has been lost, you must
obtain a Lost Instrument Bond at your expense. The written request should be
signed by you exactly as the Certificate is registered. For withdrawals 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, you should send your Certificate by registered
mail.
DEFERRED PAYMENT
We reserve the right, prior to a Certificate's maturity, to defer any payment
for up to thirty days. During any 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
SMB Certificate Company and ARM Securities, we pay 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" and "Underwriter's Compensation" below.
FEDERAL INCOME TAX TREATMENT
Under Internal Revenue Service rules and regulations, investors holding
Certificates realize current income for tax purposes. Under these guidelines,
you must report interest accrued on a Certificate as taxable ordinary income
each year on a current basis. If you have elected to have interest compounded
annually, you must recognize interest income for income tax purposes in the
years in which it is accrued even though you won't receive the interest payment
until the Certificate matures. We will report to you annually the amount of your
income from the Certificate for tax purposes.
Pursuant to federal law, you must provide us with a correct taxpayer
identification number. Generally, this number is your Social Security or
employer identification number. Failure to provide such number may make it
necessary for us to withhold a portion of any accrued interest.
TRANSFER OF OWNERSHIP
There is no public market for resale of the Certificates, nor is one likely to
develop. Your may assign your Certificate on our records if you send the us
Certificate, 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, you should send
the Certificate by registered mail.
6
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RESERVES AND DEPOSITS WITH CUSTODIAN
We accrue liabilities (RESERVES) for our Certificate obligations in accordance
with the Investment Company Act of 1940 (1940 ACT). In general, we establish
reserves monthly in an amount equal to the face-amount of each Certificate plus
accrued but unpaid interest.
The 1940 Act requires us 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 our
investments on deposit and our reserves on all outstanding certificates, see
Notes 1, 3, 4, and 8 of Notes to Financial Statements.
Most of our investments are on deposit pursuant to the terms of a custody
agreement with First Trust National Association, a national banking association
located in Minneapolis, Minnesota. We also maintain separate deposits as
required by certain states. The custody agreement requires us to maintain
investments on deposit with a value (calculated in accordance with the
provisions of the 1940 Act) in excess of our reserves for outstanding
certificate obligations. We can't withdraw any specific investments unless we
replace them with investment(s) of an equivalent or higher value, or unless the
value of our remaining investments on deposit cover our required certificate
reserves. If we fail to make a required payment on a Certificate, the custodian
is required, at the request of a Certificate holder, to make the payment from
our investments.
CERTAIN FINANCIAL INFORMATION
For information regarding the amounts of revenue, results of operations and
assets attributable to our face-amount certificate business and significant
events relating to our business, see "Selected Financial Data" and "Management's
Discussion and Analysis of Results of Operations and Financial Condition".
USE OF PROCEEDS
We back the Certificates by investing the money received and keeping the
invested assets on deposit. Our investments are varied and of generally high
quality. The composition and quality of our investments is subject to change
from time to time at our sole discretion. At December 31, 1998, this composition
was:
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents 8.4%
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. government agencies 15.7
Corporate securities 24.7
Asset-backed securities 0.9
Collateralized mortgage obligations 46.1
Other mortgage-backed securities 1.2
Other fixed maturities 1.5
Other investments (equity securities and certificate loans) 1.5
-----
Total Cash and Investments 100.0%
=====
</TABLE>
Our fixed maturity portfolio is 97% investment grade as of December 31, 1998.
Investment grade securities are those classified as 1 or 2 by the National
Association of Insurance Commissioners, or where such classifications are not
available, rated as BBB- or above by Standard & Poor's Corporation.
INVESTMENT POLICIES
Our investment adviser makes investment decisions relating to our investment
portfolio (see "About SBM Certificate Company - Business" below). Our Board of
Directors regularly reviews investment decisions. Our investment adviser, in
accordance with our investment policies, uses its best judgment in deciding the
amount and type of investments to be purchased and sold subject to certain
limitations on investments
7
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prescribed by the 1940 Act. Section 28 of the 1940 Act requires us 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 our investment decisions, but may be
changed by the Board of Directors without shareholder or Certificate holder
approval.
(1) We will not purchase any securities on margin or participate on a
joint or joint and several basis in any trading account in securities.
(2) We will not sell short any security.
(3) We may borrow money if management feels it is necessary or desirable
in conducting our business in the most advantageous manner. We may
borrow money for either temporary or extended purposes and may pledge
some of our assets as security.
(4) We don't generally deal in real estate, but we reserve freedom of
action to do so if it would provide a desirable investment or a source
of mortgage loans.
(5) We don't intend to engage in the purchase and sale of commodities or
commodity contracts.
(6) We don't currently intend to act as underwriter of securities issued
by other persons.
(7) We may make real estate and other kinds of loans if desirable in the
future.
(8) Our Articles of Incorporation and By-Laws do not restrict us from
concentrating our investments in any particular industry or group of
industries.
(9) Subject to the basic restriction of investment in qualified
investments, we reserve freedom of action with regard to portfolio
turnover.
(10) In past years, we made mortgage loans, principally consisting of
commercial real estate mortgage loans. Our current policy is not to
make any new mortgage loans.
UNDERWRITING AGREEMENT
Pursuant to an Underwriting Agreement dated June 14, 1995, between SBM
Certificate 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 Exchange Act of 1934), ARM Securities has the exclusive
right to solicit applications for and to distribute the Certificates. Pursuant
to this agreement, ARM Securities agrees to continuously solicit such
applications, as long as Certificates are available for sale. We reserve 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 our behalf.
Our Board of Directors, including a majority of directors who are not interested
persons of ARM Securities or ARM, must approve the Underwriting Agreement
annually. The Underwriting Agreement is terminable by either party with sixty
days' notice.
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UNDERWRITER'S COMPENSATION
In accordance with the Underwriting Agreement, we pay ARM Securities
compensation which does not exceed $30.00 per $1,000 invested per three-year
maturity period. We pay this compensation from our general funds, and do not
deduct anything from the amount you invest. ARM Securities pays compensation to
its representatives and pays other selling expenses in connection with the sale
of Certificates. We paid ARM Securities $325,523, $314,805, and $263,089 in
1998, 1997, and 1996, respectively, as compensation and other issuance,
underwriting, and sales expenses.
ABOUT SBM CERTIFICATE COMPANY
HISTORY
SBM Certificate Company was incorporated in Minnesota on June 18, 1990, to
assume the face-amount certificate business of SBM Company (SBM). We became a
subsidiary of ARM following ARM's purchase of most of the assets of SBM in June
1995 (ARM ACQUISITION). Together with our predecessor firm, we have issued
various series of face-amount certificates of the fully paid and installment
type since 1914. We 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 us directly until December 31, 1993, at which time SBM
transferred all of our shares to its subsidiary State Bond and Mortgage Life
Insurance Company (SBM LIFE). Following the ARM Acquisition, all of our shares
were transferred from SBM Life to ARM.
BUSINESS
Our sole business is issuing fixed-rate face-amount certificates registered
under the 1940 Act. A face-amount certificate is an obligation requiring us to
pay a certain amount, plus a specified return, to an investor at a given
maturity date, or lesser amounts if an investment in the Certificate is
withdrawn prior to maturity. We currently offer one series of single-payment
investment certificates. Our 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. Our face-amount certificates are sold primarily in the
Midwest.
ARM Securities, a subsidiary of ARM, is the exclusive distributor of our
face-amount certificates. See "Underwriting Agreement" above. ARM Securities is
registered with the Securities and Exchange Commission (SEC) as a broker-dealer.
ARM provides us with investment management services pursuant to an Investment
Services Agreement. Historically, such services were provided in part through
ARM's wholly owned subsidiary ARM Capital Advisors, Inc. (ARM CAPITAL ADVISORS).
On November 7, 1997, ARM transferred ownership of ARM Capital Advisors to a
newly formed subsidiary, ARM Capital Advisors, LLC (NEW ARMCA), and sold an 80%
interest in New ARMCA to ARM Capital Advisors Holdings, LLC, an entity
controlled by Emad A. Zikry, the President of ARM Capital Advisors prior to the
sale. Under the terms of the sale, New ARMCA provides ARM's subsidiaries
(including us) with investment management services on the same basis as in the
past. ARM may also consider retaining other investment management firms.
Our gross margin is derived primarily from the margin between earnings on
investments and amounts paid or credited on our fixed rate Certificate deposits
(INVESTMENT SPREAD). Our net income is determined by deducting investment and
other expenses and federal income taxes. The investment spread is affected
principally by general economic conditions, government monetary policy, the
policies of regulatory authorities that influence market interest rates, and our
ability to respond to changes in such rates. Changes in market interest rates
may have a negative impact on our earnings. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and "Risk Factors".
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We have no foreign sales.
COMPETITION
Our face-amount certificate business competes in general with various types of
individual savings products which offer a fixed rate of return on investors'
money, especially insurance and bank and thrift products. Some of these other
products are insured by governmental agencies or funds or private third parties.
For example, banks and thrifts typically have federal deposit insurance covering
monies deposited with them. Our Certificates are not guaranteed or insured by
any governmental agency or fund or independent third party. Our ability to offer
competitive interest rates, attractive terms, and efficient service are our
primary basis for meeting competition. IDS Certificate Company is our main
competitor in the issuance of face-amount certificates.
EMPLOYEES
We currently have 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
We have 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 our issued
and outstanding shares. ARM had pledged our shares pursuant to a credit
agreement among ARM and certain lenders to secure a bank loan made to ARM. The
pledged shares were released as collateral pursuant to a release and amended
agreement dated December 15, 1997.
REGULATION
Like many financial service companies which offer investment opportunities to
the public, we are subject to regulation and supervision by federal and state
regulators. The 1940 Act and rules issued by the SEC specify certain terms for
face-amount certificates, the method for calculating reserve liabilities on
outstanding certificates, the minimum amounts and types of investments to be
deposited with a qualified custodian to support such reserve liabilities, and a
variety of other restrictions. See "Description of the Certificates -
Reserves/Deposits with Custodian" and Note 8 of Notes to Financial Statements.
The Minnesota Department of Commerce and the Illinois Secretary of State
exercise supervisory powers over our face-amount certificate business similar to
those under the 1940 Act. In addition, the Minnesota Department of Commerce
conducts examinations of us on a periodic basis. The offer and sale of
Certificates also are subject to federal and state securities laws.
We are 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
Our and ARM's corporate executive offices (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 our 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.
10
<PAGE>
Our administrative offices are located in New Ulm, Minnesota, at 100 North
Minnesota Street. On September 15, 1998, we sold the building at 100 North
Minnesota Street to State Bank & Trust Company of New Ulm. As part of this
transaction, ARM entered into a two year lease with a one year renewal option
for certain office, storage and common area space in the building. The purpose
of this lease is to house the ARM employees who perform certain administrative
functions on our behalf.
LEGAL PROCEEDINGS
We are not a party to, nor is any of our property the subject of, any material
pending legal proceedings, other than ordinary litigation routine to our
business.
EXECUTIVE OFFICERS AND DIRECTORS OF SBM CERTIFICATE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers are as follows:
John R. McGeeney, age 42 - Director and Chairman of the Board of SBM Certificate
Company since January 1996; President 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.
Walter L. Sales, age 50 - Director of SBM Certificate Company beginning in 1998.
Since 1984 Mr. Sales has been a partner in the Louisville law firm of Ogden,
Newell & Welch where he is chairman of the firm's litigation department and
currently serves on its executive committee. From 1974 to 1984 he was a partner
with the law firm of Segal, Isenberg, Sales & Stewart.
Robert J. Marshall, Jr., age 32 - Director of SBM Certificate Company beginning
in 1998. Mr. Marshall earned his BBA in Finance from the University of Notre
Dame in 1988 and his MBA from Indiana University while working at the Notre Dame
Federal Credit Union in South Bend, IN as a Senior Accountant in 1991. He has
lived in Louisville for the past five years working for Brown & Williamson
Tobacco Corporation. Currently he is a Senior Analyst, International Markets
within the Budget & Reporting department with primary responsibilities for
foreign exchange analysis and export volume forecasting. Prior to taking this
position he was President/CEO of the Brown & Williamson Federal Credit Union. He
currently is a Level III CFA candidate.
Paul J. Houk, age 42 - Director of SBM Certificate Company beginning in 1998.
Mr. Houk is Counsel with the law firm of Stites & Harbison in Louisville,
Kentucky, and specializes in the areas of investment, finance, derivatives and
related transactional law. Mr. Houk currently serves on Stites & Harbison's
Investment Committee. From 1986 until joining Stites & Harbison in 1996, Mr.
Houk held the position of Assistant General Counsel for Providian Corporation
and had legal responsibility for a variety of investment and securities related
matters. Mr. Houk was associated with Porter, Wright, Morris & Arthur in
Columbus, Ohio from 1982-1985, and Hebb & Gitlin in Hartford, Connecticut from
1985-1986. Mr. Houk graduated SUMMA CUM LAUDE in 1979 from the State University
of New York at Albany with a BA in Economics and Political Science, and earned
membership into Phi Beta Kappa. Mr. Houk received his JD from the University of
Michigan Law School in 1982. Mr. Houk has been a Fellow in the American College
of Investment Counsel since 1986, and is a member of the American, Kentucky,
Connecticut and Ohio Bar Associations.
Dennis L. Carr, age 49 - 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
11
<PAGE>
in 1987.
David E. Ferguson, age 51 - 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 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 43 - 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.
Peter S. Resnik, age 38 - 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, age 37 - 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 34 - 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.
Michael A. Cochran, age 39 - Tax Officer. Mr. Cochran is the Tax Officer of ARM
and also holds this office for other ARM subsidiaries. Mr. Cochran has been Tax
Officer of ARM since November 1997. Prior to joining ARM, he was a tax principal
with Ernst & Young LLP from July 1984 to October 1997.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to our Articles of Incorporation, the liability of our directors to us
and our stockholders is eliminated to the fullest extent permitted by Minnesota
law and the 1940 Act. Under Minnesota law, the Articles of Incorporation may
eliminate a director's personal liability to a corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director. This does not
include 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 and SEC rules, our By-Laws provide for
the indemnification of an officer or director of 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 us.
We have been informed that in the opinion of the SEC, indemnification of our
directors, officers or persons
12
<PAGE>
controlling us for liabilities arising under the Securities Act of 1933 (1933
ACT) is against public policy as expressed in the 1933 Act and is therefore
unenforceable.
RELATIONSHIP WITH ARM AND AFFILIATES
Pursuant to an Investment Services Agreement and an Administrative Services
Agreement we entered into in June 1995 with ARM, we reimburse ARM for investment
management services (provided in part through New ARMCA) 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. These amounts may be reduced by
agreement of the parties.
Pursuant to a Tax Allocation Agreement for taxable periods beginning January 1,
1995, we have agreed to reimburse ARM for any tax benefits arising from the
inclusion of our separate company taxable income in ARM's consolidated income
tax returns (e.g., the potential tax benefit that may arise if we used
consolidated net operating losses to offset a portion of our income tax
liability).
Our Underwriting Agreement with ARM Securities, is described above under
"Underwriting Agreement". Prior to the ARM Acquisition, we 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, 1998, we paid ARM $97,346 for investment
management services and $109,789 for administrative services.
INDEPENDENT AUDITORS
Ernst & Young LLP is our independent auditor. 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.
Our financial statements and schedules included herein at December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998,
have been audited by Ernst & Young LLP as set forth in their reports appearing
elsewhere herein and are included in reliance on such reports given upon the
authority of such firm as experts in accounting and auditing.
13
<PAGE>
SELECTED FINANCIAL DATA
The following table contains selected financial data of SBM Certificate Company
for the years ended December 31, 1994 through 1998. These data were derived from
our audited financial statements. The report of our independent auditors, Ernst
& Young LLP, with respect to the years ended December 31, 1998, 1997 and 1996
appears later in this Prospectus. You should read the following financial
information along with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited financial statements and
related notes included later in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995* 1994
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Total investment income $ 2,826 $ 3,933 $ 4,290 $ 4,889 $ 5,326
Interest credited on certificate reserves (2,063) (2,795) (2,822) (2,929) (3,575)
Net investment spread 763 1,138 1,468 1,960 1,751
Total investment and other expenses (576) (755) (815) (958) (1,225)
Federal income tax (expense) benefit ( 53) (124) (238) (406) (163)
Net investment income (loss) 134 259 415 596 363
Net realized investment gains (losses) (103) (164) 317 181 20
Net income 31 95 732 777 383
Earnings per share ** 0.12 0.38 2.93 3.11 1.53
BALANCE SHEET DATA (END OF PERIOD)
Total assets $39,354 $60,270 $55,726 $60,580 $60,609
Face-amount certificate reserves 34,068 45,127 50,186 52,460 60,355
Shareholder's equity 5,028 4,982 5,064 4,986 187
</TABLE>
* We were acquired by ARM effective as of May 31, 1995. The results of
operations for 1995 represent our historical results for the period from
January 1, 1995 to May 31, 1995 combined with the results of our operations
subsequent to the ARM Acquisition from June 1, 1995 to December 31, 1995.
The operating results subsequent to the ARM 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
Net investment income (net income excluding net realized investment gains and
losses) was $133,733 and $258,205 for 1998 and 1997, respectively. The decrease
in net investment income was primarily attributable to a decrease in net
investment spread, partially offset by lower investment and other expenses.
Net investment spread, which is the difference between investment income and
interest credited on certificate reserves,
14
<PAGE>
decreased to $0.8 million during 1998 from $1.1 million in 1997. These amounts
reflect net investment spread of 1.12% and 1.63% during 1998 and 1997,
respectively, between our investment yield on average cash and investments and
the average rate credited on certificate reserves. Our investment income
decreased to $2.8 million from $3.9 million for 1998 and 1997, respectively.
These amounts represent investment yields of 6.46% and 7.43% on average cash and
investments of $43.8 million and $52.9 million for 1998 and 1997, respectively.
This decrease in annualized investment yield on cash and investments was
primarily attributable to our investing in more corporate and plain vanilla
mortgage-backed securities during 1998 compared to 1997. Further depressing the
investment yield, above normal cash balances were held to provide necessary
liquidity for maturing face-amount certificates.
Interest credited on certificate reserves was $2.1 million and $2.8 million for
1998 and 1997, respectively. These amounts represent average rates of interest
credited of 5.34% and 5.80% on average certificate reserves of $38.7 million and
$48.2 million for 1998 and 1997, respectively. The majority of our outstanding
face-amount certificates are fixed-rate three year contracts. We monitor
credited interest rates for new and renewal issues against competitive products,
mainly bank certificates of deposit. Credited interest rate adjustments (up or
down) on new certificates are made as we deem necessary. New and renewal
contracts issued during 1998 have crediting rates that are generally lower than
contracts that matured during that period, resulting in the overall decrease in
the average crediting rate.
Investment and other expenses were $575,823 and $755,256 for 1998 and 1997,
respectively. The decrease in investment and other expenses is primarily
attributable to a decrease in management and investment advisory fees and real
estate expenses in 1998 of $39,333 and $76,247, respectively, compared to 1997.
In addition, there was zero goodwill amortization during the year ended December
31, 1998 compared to the $23,833 for the year ended December 31, 1997. The
goodwill asset became fully amortized during the second quarter of 1997.
Realized investment losses were $152,977 and $268,002 for 1998 and 1997,
respectively. Realized investment losses for 1998 include a loss of $178,795
related to the write-down to fair value and subsequent sale of our real estate
investment. Other realized investment gains and losses were primarily
interest-rate related and attributable to our asset/liability management
strategies. Fixed maturities and equity securities (i.e., non-redeemable
preferred stock) classified as available-for-sale are sold during rising and
falling interest rate environments which can result in period-to-period swings
in interest-rate related realized investment gains and losses.
During 1998, net income was $30,643 compared to $94,688 in 1997. The decrease
was primarily attributable to a decrease in net investment income partially
offset by a reduction in net realized investment losses.
Certificate reserves decreased $11.1 million or 24.5% during 1998, as maturities
and surrenders exceeded sales and renewals. We believe a significant factor
leading to the decrease is that the certificate of deposit marketplace is
currently very competitive. For certificates reaching their maturity date during
1998 and 1997, 61% and 64%, respectively, were renewed.
1997 COMPARED WITH 1996
Net investment income was $258,205 and $414,670 for 1997 and 1996, 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 decreased to $1.1 million during 1997 from $1.5 million in
1996. These amounts reflect net investment spread of 1.63% and 2.28% during 1997
and 1996, respectively, between our investment yield on average cash and
investments and the average rate credited on certificate reserves. Our
investment income decreased to $3.9 million from $4.3 million for 1997 and 1996,
respectively. These amounts represent investment yields of 7.43% and 7.78% on
average cash and investments of $52.9 million and $54.5 million for 1997 and
1996, respectively. This decrease in investment yield on cash and investments
was primarily attributable to selling our mortgage-backed derivative securities
during the last half of 1997 and reinvesting the proceeds when generally lower
reinvestments rates were available. As a result of this trading activity, above
normal average cash balances were held, further depressing the investment yield.
15
<PAGE>
Interest credited on certificate reserves was $2.8 million for both 1997 and
1996. These amounts represent average rates of interest credited of 5.80% and
5.50% on average certificate reserves of $48.2 million and $50.4 million for
1997 and 1996, respectively. New and renewal contracts issued during 1997 had
crediting rates that were generally higher than contracts that matured during
1997, resulting in the overall increase in the average crediting rate.
Investment and other expenses were $755,256 and $815,094 for 1997 and 1996,
respectively. The decrease in investment and other expenses was primarily
attributable to (i) a decrease in goodwill amortization, (ii) a decrease in real
estate expenses at our Minnesota facility and (iii) a decrease in other expenses
which included decreases in annual regulatory examination expense and filing
fees. Such decreases were partially offset by an increase in renewal
commissions.
Realized investment losses were $268,002 for 1997 compared to realized
investment gains of $485,135 for 1996. Such realized investment gains and losses
were interest-rate and credit related and attributable to our asset/liability
management strategies. Fixed maturities and equity securities (i.e.,
non-redeemable preferred stock) classified as available-for-sale are sold during
rising and falling interest rate environments which can result in
period-to-period swings in interest-rate related realized investment gains and
losses.
During 1997, net income was $94,688 compared to $731,981 in 1996. The decrease
was primarily attributable to a decrease in realized investment gains and net
investment income.
Certificate reserves decreased $5.1 million or 10.1% during 1997, as maturities
and surrenders exceeded sales and renewals. We believe a significant factor
leading to the decrease was that the certificate of deposit marketplace was very
competitive, as many financial institutions offered special high rates to induce
customers to open new accounts. For face-amount certificates reaching their
maturity date during 1997 and 1996, 64% and 73%, respectively, were renewed.
ASSET PORTFOLIO REVIEW
We primarily invest in securities with fixed maturities with the objective of
providing reasonable returns while limiting liquidity and credit risks. Our
investments in fixed maturities were 97% and 99% investment grade for the years
ended December 31, 1998 and 1997, respectively. Investment grade securities are
those classified as 1 or 2 by the National Association of Insurance
Commissioners, or where such classifications are not available, securities are
classified by a nationally recognized statistical rating organization (i.e.,
Standard & Poor Corporation's rating of BBB- or above). Additionally, our
investment portfolio has no exposure to real estate, mortgage loans and common
equity securities. As of December 31, 1998, we 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 $18.4 million at December
31, 1998, representing 48.0% of total qualified assets (54.2% at December 31,
1997). Our investments in CMOs represented 46.7% and 52.4% of our qualified
assets as of December 31, 1998 and 1997, respectively. MBSs, including CMOs, are
subject to risks associated with prepayments of the underlying mortgage loans.
Prepayments cause these securities to have actual maturities different from
those expected at the time of purchase. The degree to which a security is
susceptible to either an increase or decrease in yield due to prepayment speed
adjustments is influenced by the difference between its amortized cost and par,
the relative sensitivity of the underlying mortgages backing the assets to
prepayments in a changing interest rate environment and the repayment priority
of the securities in the overall securitization structure. Prepayment
sensitivity is evaluated and monitored, giving full consideration to the
collateral characteristics such as weighted average coupon rate, weighted
average maturity and the prepayment history of the specific loan pool.
Additionally, we routinely project three year liability and asset cash flows
with the goal of maintaining an adequate level of liquidity for maturing
face-amount certificates. Our asset/liability management strategies not only
allow us to monitor our short-term liquidity needs, but also aim to provide
protection to our investment portfolio from adverse changes in interest rates.
Based on the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," we
currently classify our 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
16
<PAGE>
charged or credited directly to shareholder's equity. Fluctuations in interest
rates during 1998 resulted in unrealized gains of $70,448 (net of $37,936 in
deferred income taxes) at December 31, 1998 compared to unrealized gains of
$54,723 (net of $29,466 in deferred income taxes) at December 31, 1997.
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.
We manage assets and liabilities in a closely integrated manner to minimize the
volatility of margins. As a result, adjusting our shareholder's equity for
changes in the fair value of our fixed maturities and equity securities without
reflecting offsetting changes in the value of our liabilities or other assets
creates volatility in reported shareholder's equity but does not reflect the
underlying economics of our business.
LIQUIDITY AND FINANCIAL RESOURCES
We have never paid cash dividends on our common stock in order to maintain and
increase capital resources. We will, however, evaluate this on an ongoing basis.
As of December 31, 1998, we had $3.9 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 us.
The MDC has historically recommended to us 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, our
capital ratio was 12.6% at December 31, 1998.
Our primary liquidity requirement relates to our 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, 1998, cash and cash equivalents totaled $3.3 million, a decrease
of $9.8 million from December 31, 1997. The December 31, 1997 cash and cash
equivalents balance included $9.7 million of cash needed to settle a payable
during January 1998 for investment securities purchased in December 1997. Our
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, we may invest idle cash in short duration fixed maturities to
capture additional yield when short-term liquidity requirements permit.
Cash flows of $2.2 million, $4.0 million and $3.6 million were generated from
operating activities in 1998, 1997 and 1996, 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 $50.1 million, $93.1 million and $39.4
million in cash flows during 1998, 1997 and 1996, respectively, which were
offset by purchases of investments of $49.3 million, $79.5 million and $38.5
million, respectively.
17
<PAGE>
SBM CERTIFICATE COMPANY
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors
Balance Sheets as of December 31, 1998 and 1997
Statements of Operations for the Years Ended December 31, 1998, 1997, and 1996
Statements of Shareholder's Equity for the Years Ended December 31, 1998, 1997
and 1996 Statements of Cash Flows for the Years Ended December 31, 1998, 1997
and 1996 Notes to Financial Statements
18
<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, 1998 and 1997, and the related statements of operations,
shareholder's equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 9, 1999
19
<PAGE>
SBM CERTIFICATE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------- -------------------------------------
DECEMBER 31,
1998 1997
------------ ------------
<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:
1998B$34,136,751; 1997B$45,602,442) $ 34,149,196 $ 45,614,870
Equity securities, at fair value (cost: 1998B$290,688; 1997B$340,473) 390,776 412,234
Certificate loans 164,209 186,292
Other invested assets - 471,992
Cash and cash equivalents 3,279,970 13,054,864
------------ ------------
Cash and investments 37,984,151 59,740,252
Receivables:
Dividends and interest 296,013 328,516
Receivable for investment securities sold 22,249 -
------------ ------------
Total receivables 318,262 328,516
------------ ------------
Total qualified assets 38,302,413 60,068,768
Other fixed maturities, available-for-sale, at fair value (amortized
cost: 1998-$851,978) (unaffiliated issuer) 847,835 -
Deferred acquisition costs 204,228 157,994
Other assets - 42,948
------------ ------------
Total assets $ 39,354,476 $ 60,269,710
============ ============
</TABLE>
20
<PAGE>
SBM CERTIFICATE COMPANY
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------- -------------------------------------
DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Certificate reserves $ 34,067,826 $ 45,127,084
Payable for investment securities purchased - 9,731,948
Deferred federal income taxes 27,265 98,320
Accounts payable and other liabilities 231,345 330,686
------------ ------------
Total liabilities 34,326,436 55,288,038
Shareholder's equity:
Common stock, $1 par value; 1,000,000 shares authorized;
250,000 shares issued and outstanding 250,000 250,000
Additional paid-in capital 3,050,000 3,050,000
Accumulated other comprehensive income from net unrealized gains
on available-for-sale securities 70,448 54,723
Retained earnings 1,657,592 1,626,949
------------ ------------
Total shareholder's equity 5,028,040 4,981,672
------------ ------------
Total liabilities and shareholder's equity $ 39,354,476 $ 60,269,710
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
21
<PAGE>
SBM CERTIFICATE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Investment income:
Interest income from securities $ 2,699,491 $ 3,729,295 $ 4,089,948
Other investment income 127,006 203,810 200,127
----------- ----------- -----------
Total investment income 2,826,497 3,933,105 4,290,075
Investment and other expenses:
Management and investment advisory fees 207,135 246,468 246,468
Deferred acquisition cost amortization and renewal
commissions 279,289 288,974 245,126
Real estate expenses 90,423 166,670 205,029
Amortization of goodwill - 23,833 79,824
Other expenses (income) (1,024) 29,311 38,647
----------- ----------- -----------
Total investment and other expenses 575,823 755,256 815,094
Interest credited on certificate reserves 2,063,311 2,795,360 2,821,912
----------- ----------- -----------
Net investment income before
income taxes 187,363 382,489 653,069
Income tax expense (53,630) (124,284) (238,399)
----------- ----------- -----------
Net investment income 133,733 258,205 414,670
Realized investment gains (losses) (152,977) (268,002) 485,135
Income tax benefit (expense) on realized
investment gains and losses 49,887 104,485 (167,824)
----------- ----------- -----------
Net realized investment gains (losses) (103,090) (163,517) 317,311
----------- ----------- -----------
Net income $ 30,643 $ 94,688 $ 731,981
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
22
<PAGE>
SBM CERTIFICATE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED SHAREHOLDER'S
STOCK CAPITAL INCOME EARNINGS EQUITY
-------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $250,000 $3,050,000 $ 885,878 $ 800,280 $ 4,986,158
Comprehensive income:
Net income 731,981 731,981
Change in net unrealized
gains on available-for-sale
securities, net of tax (654,337) (654,337)
----------
Comprehensive income 77,644
-------- ---------- --------- ----------- ----------
Balance, December 31, 1996 250,000 3,050,000 231,541 1,532,261 5,063,802
Comprehensive income:
Net income 94,688
94,688
Change in net unrealized
gains on available-for-sale
securities, net of tax (176,818) (176,818)
----------
Comprehensive income (82,130)
-------- ---------- --------- ----------- ----------
Balance, December 31, 1997 250,000 3,050,000 54,723 1,626,949 4,981,672
Comprehensive income:
Net income 30,643 30,643
Change in net unrealized
gains on available-for-sale
securities, net of tax 15,725 15,725
----------
Comprehensive income 46,368
-------- ---------- --------- ----------- ----------
Balance, December 31, 1998 $250,000 $3,050,000 $ 70,448 $ 1,657,592 $5,028,040
======== ========== ========= =========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
23
<PAGE>
SBM CERTIFICATE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 30,643 $ 94,688 $ 731,981
Adjustments to reconcile net income to cash flows
provided by operating activities:
Provision for certificate reserves 2,063,311 2,795,360 2,821,912
Realized investment (gains) losses 152,977 268,002 (485,135)
Deferral of acquisition costs (325,523) (314,805) (263,788)
Amortization of deferred acquisition costs and
renewal commissions 279,289 288,974 245,126
Other amortization and depreciation 110,043 465,553 530,429
Deferred tax expense (benefit) (79,525) (162,627) 178,606
(Increase) decrease in dividends and interest receivable 32,503 205,442 (136,060)
Changes in other assets and liabilities (57,214) 323,092 (40,816)
------------ ------------ ------------
Cash flows provided by operating activities 2,206,504 3,963,679 3,582,255
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (49,260,045) (79,455,679) (38,523,432)
Maturities and redemptions 24,117,893 10,812,744 5,642,891
Sales 26,000,513 82,250,553 33,578,496
Sales, maturities and redemptionsCmortgage loans and real
estate 260,296 3,091 155,643
Repayment of certificate loans, net 22,083 87,076 6,095
------------ ------------ ------------
Cash flows provided by investing activities 1,140,740 13,697,785 859,693
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts paid to face-amount certificate holders (13,423,346) (8,179,248) (6,063,787)
Amounts received from face-amount certificate holders 301,208 325,456 968,537
------------ ------------ ------------
Cash flows used in financing activities (7,853,792) (5,095,250)
------------ ------------ ------------
Net change in cash and cash equivalents (9,774,894) 9,807,672 (653,302)
Cash and cash equivalents at beginning of year 13,054,864 3,247,192 3,900,494
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,279,970 $ 13,054,864 $ 3,247,192
============ ============ ============
</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 the Midwest. Face-amount
certificates, which are similar to bank certificates of deposit, generally
compete with various types of individual savings products offered by banks and
insurance companies that provide a fixed rate of return on investors' money.
BASIS OF PRESENTATION
The financial statements are prepared in accordance with generally accepted
accounting principles.
INVESTMENTS
Fixed maturities and equity securities are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of taxes, reported as a separate component
of shareholder's equity in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The amortized cost of fixed maturities classified as
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization or accretion is computed using
the interest method and is included in investment income. Anticipated
prepayments on mortgage-backed securities are considered in determining the
effective yield on such securities. If a difference arises between anticipated
and actual prepayments, the carrying value of the investment is adjusted with a
corresponding charge or credit to investment income. Interest and dividends are
included in investment income. Certificate loans are carried at their unpaid
principal balances. Cash and cash equivalents consist of highly liquid
investments with maturities of three months or less from the time of purchase.
Security transactions are accounted for on the date the order to buy or sell is
executed. Realized gains and losses on the sale of investments are determined
based upon the specific identification method.
Other invested assets includes real estate, which is recorded at cost, less
accumulated depreciation since the Acquisition.
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
25
<PAGE>
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 files a
consolidated federal income tax return with ARM and ARM's other non-life
insurance subsidiaries. Pursuant to a tax sharing agreement, the consolidated
income tax due is allocated among the companies based on each company's
proportionate share of taxable income. When tax benefits are recognized for
losses, (capital and operating) to the extent they can be used in the
consolidated return, the company that originally generated the loss is
reimbursed by the benefited company. However, in the event that no consolidated
tax is owed, the tax sharing agreement does not require ARM to reimburse its
subsidiaries for the use of a subsidiary's losses to offset ARM income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
26
<PAGE>
2. 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, 1998:
Fixed maturities:
Mortgage-backed securities $ 18,342,358 $ 74,953 $ 45,435 $ 18,371,876
Corporate securities 9,637,558 75,980 115,474 9,598,064
U.S. Treasury securities and
obligations of U.S. government
agencies 6,062,081 58,793 7,162 6,113,712
Foreign governments 450,787 - 42,056 408,731
Asset-backed securities 334,340 - 2,643 331,697
Obligations of state and political
subdivisions 161,605 11,346 - 172,951
------------ --------- --------- ------------
Total fixed maturities 34,988,729 221,072 212,770 34,997,031
Equity securities 290,688 100,088 - 390,776
============ ========= ========= ============
Total available-for-sale securities $ 35,279,417 $ 321,160 $ 212,770 $ 35,387,807
============ ========= ========= ============
DECEMBER 31, 1997:
Fixed maturities:
Mortgage-backed securities $ 27,284,744 $ 121,331 $ 119,474 $ 27,286,601
Corporate securities 5,102,468 40,992 - 5,143,460
U.S. Treasury securities and
obligations of U.S. government
agencies 11,343,142 11,763 2,985 11,351,920
Foreign governments 450,960 - 49,052 401,908
Asset-backed securities 1,033,932 - 2,372 1,031,560
Obligations of state and political
subdivisions 387,196 12,225 - 399,421
------------ --------- --------- ------------
Total fixed maturities 45,602,442 186,311 173,883 45,614,870
Equity securities 340,473 73,277 1,516 412,234
------------ --------- --------- ------------
Total available-for-sale securities $ 45,942,915 $ 259,588 $ 175,399 $ 46,027,104
============ ========= ========= ============
</TABLE>
27
<PAGE>
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------
ESTIMATED
FAIR
COST VALUE
----------- -----------
<S> <C> <C>
FIXED MATURITIES:
Due in one year or less $ 8,650,422 $ 8,715,545
Due after one year through five years 644,631 605,712
Due after five years through ten years 1,243,281 1,271,211
Due after ten years 5,773,697 5,700,990
Asset-backed securities 334,340 331,697
Mortgage-backed securities 18,342,358 18,371,876
----------- -----------
Total fixed maturities $34,988,729 $34,997,031
=========== ===========
</TABLE>
Gross gains of $123,867, $765,664, and $642,039 and gross losses of
$95,449, $1,082,809, and $175,226 were realized on sales of fixed maturities
classified as available-for-sale for the year ended December 31, 1998, 1997, and
1996 respectively.
Gross gains of $23,459, $49,143, and $23,980 were recognized on equity
securities sold during 1998, 1997, and 1996, respectively. Gross losses of
$1,062 for 1998 and zero for both 1997 and 1996 were recognized on equity
securities sold.
During 1998, the Company sold its sole investment in real estate and
realized a loss of $178,795 associated with the transaction.
3. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no impact
on the Company's net income or total shareholders' equity. SFAS No. 130 requires
unrealized gains or losses on the Company's available-for-sale securities to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of SFAS No. 130.
28
<PAGE>
The following table shows, for available-for-sale securities, a
reconciliation of the net unrealized gain (loss) arising during the period and
the change in net unrealized gains (losses) as reported on the accompanying
statements of shareholder's equity. Amounts are reported net of related tax at
the 35% statutory rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
-------- ---------- ----------
<S> <C> <C> <C>
Net unrealized gain (loss) arising
during period on available-for-sale securities $ 99,925 $ (235,975) $ (367,123)
Reclassification adjustment for net realized
(gains) losses included in net income (84,200) 59,157 (287,214)
-------- ---------- ----------
Change in net unrealized gains (losses) on
available-for-sale securities $ 15,725 $ (176,818) $ (654,337)
======== ========== ==========
</TABLE>
4. CERTIFICATE RESERVES
Total certificate reserves at December 31 are summarized as follows:
<TABLE>
<CAPTION>
MINIMUM ADDITIONAL
1998 1997 INTEREST INTEREST
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Fully-paid certificates:
Single-payment series 503 $ 30,754,255 $ 41,533,024 2.50% 2.25% to 4.60%
Installment 2,084,595 2,220,962 2.50% to 3.50% 1.50% to 2.75%
Optional settlement 594,300 521,643 2.50% to 3.00% 2.00% to 2.75%
Due to unlocated certificate 3,126 2,878 None
------------ ------------
33,436,276 44,278,507
Installment certificates:
Reserves to mature, by series:
120, 215, and 220 302,400 393,801 3.25% 1.75% to 2.00%
315 135,104 191,975 3.50% 1.50% to 1.75%
Advance payments 194,046 262,801 * *
------------ ------------
631,550 848,577
------------ ------------
Total certificate reserves $ 34,067,826 $ 45,127,084
============ ============
</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 1999.
29
<PAGE>
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------ ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Fixed maturities $ 34,997,031 $ 34,997,031 $ 45,614,870 $ 45,614,870
Equity securities 390,776 390,776 412,234 412,234
Certificate loans 164,209 164,209 186,292 186,292
Other invested assets - - 471,992 471,992
Cash and cash equivalents 3,279,970 3,279,970 13,054,864 13,054,864
Other assets - - 42,948 42,948
Liabilities:
Certificate reserves 34,067,826 34,251,701 45,127,084 45,340,626
Accounts payable and other liabilities 231,345 231,345 330,686 330,686
</TABLE>
The following methods and assumptions were used in estimating fair values:
FIXED MATURITIES AND EQUITY SECURITIES
Fair values for investments in securities are based on quoted market
prices, where available. For fixed maturities and equity securities for which a
quoted market price is not available, fair values are estimated using internally
calculated estimates or quoted market prices of comparable instruments.
CERTIFICATE LOANS
The carrying value of certificate loans approximates their fair value.
CASH AND CASH EQUIVALENTS
The carrying amounts of cash and cash equivalents approximate their fair
value given the short-term nature of these assets.
30
<PAGE>
CERTIFICATE RESERVES
The fair value of certificate reserves is based on a discounted cash flow
analysis, using the current interest rate offered on new certificates of 5.00%
and 5.25% at December 31, 1998 and 1997, respectively.
OTHER INVESTED ASSETS, OTHER ASSETS, ACCOUNTS PAYABLE AND OTHER LIABILITIES
The financial statement carrying amounts of other invested assets, other
assets, accounts payable and other liabilities are deemed to be a reasonable
approximation of their fair value.
6. FEDERAL INCOME TAXES
Deferred 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, 1998 and December 31, 1997 were:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Real estate limited partnership $ - $ 99,798
Net unrealized gains on available-for-sale securities 37,936 29,466
Other 1,616 2,932
--------- ---------
Total deferred tax liabilities 39,552 132,196
Deferred tax assets:
Investments 73,867 113,357
Net operating loss carryforward 58,420 C
Fixed assets - 38,677
Capital loss carryover - 281,842
--------- ---------
Total deferred tax assets 132,287 433,876
Valuation allowance for deferred tax assets (120,000) (400,000)
--------- ---------
Net deferred tax assets 12,287 33,876
--------- ---------
Deferred tax liabilities shown on the accompanying balance sheets $ 27,265 $ 98,320
========= =========
</TABLE>
31
<PAGE>
The Company's net operating loss carryforward of $166,915 at December 31,
1998, expires in the year 2018.
The components of the provision for federal income tax expense consist of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Current $ 83,268 $ 182,426 $ 227,617
Deferred (79,525) (162,627) 178,606
-------- --------- ---------
Total federal income tax expense $ 3,743 $ 19,799 $ 406,223
======== ========= =========
</TABLE>
In the event that future tax assets are recognized on deductible temporary
differences for which a valuation allowance was provided at the Acquisition
date, such benefits are applied to first reduce the balance of goodwill. During
1997, goodwill was reduced by $89,262 as a result of realizing such benefits. No
such benefits were realized in 1998 and 1996. The 1997 reduction in the
valuation allowance of $314,521 reduced the goodwill balance to zero.
Federal income tax expense differs from that computed by using the federal
income tax rate of 35% as shown below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Income tax expense at statutory rate $ 12,035 $ 40,070 $ 398,371
Unreimbursed capital loss carryover used by ARM 281,842 - -
Decrease in valuation allowance related to capital
loss carryover (280,000) - -
Dividend received deduction (7,749) (12,457) (12,577)
Tax-exempt interest (4,194) (5,677) (7,283)
Goodwill amortization - 8,342 27,938
Other 1,809 (10,479) (226)
--------- -------- ---------
Total federal income tax expense $ 3,743 $ 19,799 $ 406,223
========= ======== =========
</TABLE>
The Company files a consolidated federal income tax return with ARM and
ARM's other non-life insurance subsidiaries. At December 31, 1998 and 1997,
$103,373 and $124,435 were due to ARM, respectively, pursuant to the tax sharing
agreement, related to ordinary losses.
32
<PAGE>
7. RELATED PARTY TRANSACTIONS
Management and investment advisory fee expenses reflected in the
accompanying financial statements represent allocations of expenses from ARM.
These allocations include amounts for administrative and investment services,
including use of property, equipment and facilities. The allocations are
currently based on the proportion which such business and assets managed
represents of all of ARM's and its subsidiaries' business activities. The
allocations were $207,135 for the year ended December 31, 1998 and $246,468 for
both the years ended December 31, 1997 and 1996. Management believes that the
methods used to allocate such expenses are reasonable.
The Company has paid ARM Securities, an affiliate, $325,523, $314,805 and
$263,089 for the years ended 1998, 1997 and 1996, 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 ($34.3 million and $45.4 million at December 31, 1998 and
1997, respectively). The Company had qualified assets (at amortized cost) of
$38.3 million and $60.1 million at those respective dates.
For purposes of determining compliance with the foregoing provisions,
qualified assets are valued in accordance with District of Columbia Insurance
Laws (the "D.C. Laws") as required by the 1940 Act. Qualified assets for which
no provision for valuation is made in the D.C. Laws are valued in accordance
with rules, regulations, or orders prescribed by the SEC. These values are the
same as the financial statement carrying values, except that for financial
statement purposes, fixed maturities and equity securities classified as
available-for-sale are carried at fair value. For qualified asset purposes,
fixed maturities classified as available-for-sale are valued at amortized cost
and equity securities are valued at cost.
Second, the Minnesota Department of Commerce ("MDC") has historically
recommended to the Company that face-amount certificate companies should
maintain a ratio of shareholder's equity to total assets of a minimum of 5%
based upon a valuation of available-for-sale securities at amortized cost for
purposes of this calculation. Under this formula, the Company's capital ratio
was 12.6% and 8.2% at December 31, 1998 and 1997, respectively.
Pursuant to the required calculations of various states, the provisions of
the certificates, depository agreements, and the 1940 Act, qualified assets of
the Company were deposited with independent custodians to meet certificate
liability requirements as of December 31, 1998 and 1997, as shown in the
following table. Certificate loans, secured by applicable certificate reserves,
are deducted from certificate reserves in computing deposit requirements.
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Qualified assets on deposit with:
Central depositary $37,534,866 $48,664,004
State governmental authorities 196,143 245,772
----------- -----------
Total qualified assets on deposit $37,731,009 $48,909,776
=========== ===========
Required deposits (certificate reserves less certificate loans
plus $250,000) $34,153,617 $45,190,792
=========== ===========
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Qualified assets on deposit consisted of the following at December 31:
1998 1997
----------- -----------
<S> <C> <C>
Investment securities, at cost plus accrued interest $37,731,009 $48,437,784
First mortgage loans - 960
Other assets on deposit, at cost - 471,032
----------- -----------
Total qualified assets on deposit $37,731,009 $48,909,776
=========== ===========
</TABLE>
34
<PAGE>
PART II
Item 13 Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
*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
=======
</TABLE>
*Estimated
Item 14 Indemnification of Directors and Officers
Pursuant to Our Articles of Incorporation, the liability of our 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").
Our 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 our 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, we 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 our
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 SBM Certificate 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.
1
<PAGE>
(3)(II) By-Laws of SBM Certificate Company incorporated by reference to Exhibit
3(ii) to Form S-1 Registration Statement of SBM Certificate Company (File No.
33-38066) filed on December 4, 1990.
(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
(b) Underwriting Agreement by and between SBM Certificate 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 SBM Certificate 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 SBM Certificate 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 SBM Certificate
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 SBM
Certificate 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.
(g) Policies on Asset/Liability Risk Management and Investment Management,
adopted as of March 19, 1997 incorporated by reference herein to Exhibit 10(g)
to Form S-1 Registration Statement of SBM Certificate Company (File No.
33-38066) filed on March 2, 1998.
(h) Indemnification Agreement by and between ARM Financial Group, Inc. dated
June 26, 1997 incorporated by reference herein to Exhibit 10(h) to Form S-1
Registration Statement of SBM Certificate Company (File No.
33-38066) filed on March 2, 1998.
(23) Consent of Ernst & Young LLP dated February 23, 1999 (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,
1998
Schedule V Qualified Assets on Deposit- December 31, 1998
Schedule VI Certificate Reserves - Year Ended December 31, 1998
Schedule XII Valuation and Qualifying Accounts - December 31, 1998
Schedules I, and VI as of or for the year ended December 31, 1997 in the
Company's Post Effective Amendment No. 9 to Registration Statement on Form S-1
filed March 2, 1998 (File No. 33-38066) are incorporated by
2
<PAGE>
reference.
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.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant 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 26, 1999.
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 02/26/99
- ------------------------------------- ----------------------
John R. McGeeney Date
Chairman of the Board and President
Principal Financial Officer:
/s/ Edward L. Zeman 02/26/99
- ------------------------------------- ----------------------
Edward L. Zeman Date
Executive Vice President--Chief
Financial Officer
Principal Accounting Officer:
/s/ Barry G. Ward 02/26/99
- ------------------------------------- ----------------------
Barry G. Ward Date
Directors:
/s/ Paul J. Houk 02/26/99
- ------------------------------------- ----------------------
Paul J. Houk
/s/ Robert J. Marshall, Jr. 02/26/99
- ------------------------------------- ----------------------
Robert J. Marshall, Jr.
/s/ Walter L. Sales 02/26/99
- ------------------------------------- ----------------------
Walter L. Sales Date
4
<PAGE>
[SBM Certificate Company letterhead] EXHIBIT 5
February 24, 1999
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
------------------------------
John R. McGeeney
<PAGE>
Exhibit 16 (b)
SBM CERTIFICATE COMPANY
INDEX TO FINANCIAL STATEMENT SCHEDULES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors on Financial Statement Schedules..............................................S-2
Schedule I Investments in Securities of Unaffiliated Issuers.............................................S-3
Schedule V Qualified Assets on Deposit...................................................................S-7
Schedule VI Certificate Reserves..........................................................................S-8
Schedule XII Valuation and Qualifying Accounts............................................................S-14
</TABLE>
Schedules required by Article 6 of Regulation S-X other than those listed are
omitted because they are not required, are not applicable, or equivalent
information has been included in the financial statements and notes thereto, or
elsewhere herein.
S-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SBM Certificate Company
We have audited the financial statements of SBM Certificate Company as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, and have issued our report thereon dated February 9, 1999
(included elsewhere in this Registration Statement). Our audit also included the
financial statement schedules listed in Item 16(b) of this Registration
Statement. These schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion based on our 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 9, 1999
S-2
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT COST (a) (b) VALUE (a)
- --------------------------------- ---------- ------------ ---------
<S> <C> <C> <C>
FIXED MATURITIES AVAILABLE-FOR-SALE:
U.S. TREASURY SECURITIES:
U.S. Treasury Note, 5.625%, due 12/31/1999 .................... $5,000,000 $4,997,405 $5,048,450
U.S. Treasury Note, 5.625%, due 10/31/1999 .................... 650,000 650,264 654,875
U.S. Treasury Note, 5.625%, due 5/15/2008 ..................... 200,000 220,568 213,406
U.S. Treasury Note, 5.5%, due 12/31/1999 ...................... 195,000 193,844 196,981
----------- -----------
6,062,081 6,113,712
OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS:
Belmont County, Ohio, Sanitary Sewer District #3 Waterworks
Revenue Bonds, 4.25%, due 4/01/2004 ......................... 24,000 22,712 24,017
Douglas County, Washington, Public Utilities District #1, Wells
Hydroelectric Revenue Bonds, 4%, due 9/01/2018 .............. 55,000 46,388 52,744
North Marshall, Kentucky, Water District, 5%, due 5/01/2006 ... 25,000 23,958 25,645
Yuba County, California, Water Agency Bonds, 4%, due 3/01/2016 75,000 68,547 70,545
----------- -----------
161,605 172,951
FOREIGN GOVERNMENT:
Korea Development Bank, 6.5%, due 11/15/2002 .................. 450,000 450,787 408,731
CORPORATE SECURITIES:
FINANCIAL INSTITUTIONS:
Bankboston Cap. Trust III, 5.97063%, due 6/15/2027 ............ 1,000,000 996,664 958,913
Central Fidelity Cap I, Series A, 6.34766%, due 4/15/2027 ..... 950,000 979,239 956,014
Citigroup Inc, 7%, due 12/01/2025 ............................. 300,000 317,150 317,923
First Union Corp, 6.4%, due 4/1/2008 .......................... 960,000 976,044 1,008,144
Ford Motor Credit Corp., 5.625%, due 1/15/1999 ................ 1,000,000 999,699 1,000,170
Goldman Sachs Group, 144A, 6.875%, due 9/15/1999 .............. 1,000,000 1,001,996 1,009,700
Mercantile Bankcorp, 6.0694%, due 2/12/2027 ................... 980,000 984,622 970,775
Travelers Capital, 7.75%, due 12/01/2036 ...................... 308,000 324,580 336,684
----------- -----------
6,579,994 6,558,323
PUBLIC UTILITIES:
Enserch Corp, 6.6625%, due 7/1/2028 ........................... 985,000 987,293 963,025
Laclede Gas Co, Ser B, 5%, due 3/31/2011 (c) .................. 3,000 55,391 70,875
MCI Communications Corp., 7.75%, due 3/15/2024 ................ 900,000 981,074 964,692
Nicor Inc, 5%, due 5/01/2009 (c) .............................. 800 32,748 38,800
----------- -----------
2,056,506 2,037,392
TOBACCO PRODUCTS:
Philip Morris, 7.375%, due 2/15/1999 .......................... 1,000,000 1,001,058 1,002,349
----------- -----------
TOTAL CORPORATE SECURITIES ........................................ 9,637,558 9,598,064
</TABLE>
S-3
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
NAME OF ISSUER AND TITLE OF ISSUE SHARES COST (a) (b) VALUE (a)
- --------------------------------- --------- ------------ ---------
<S> <C> <C> <C>
FIXED MATURITIES AVAILABLE-FOR-SALE (CONTINUED):
ASSET-BACKED SECURITIES:
Auto Receivable, 96-C A, 7.3%, due 5/10/2002 ............................ $ 334,836 $ 334,340 $ 331,697
MORTGAGE-BACKED SECURITIES:
Blackrock Capital Finance BCF 97-R1 WAC, 6.38446%, due 3/25/2037 ........ 805,608 798,982 777,412
Citicorp Mortgage Securities, 1998-2 A4, 6.75%, due 4/25/2028 ........... 315,000 314,005 313,819
Countrywide Home Loans RAST, 1998-A8 , A6, 6.2124%, due 8/25/2028 ....... 900,000 904,737 918,837
Federal Home Loan Mortgage Corporation, 6.5%, due 5/15/2028 ............. 1,000,000 999,659 1,011,560
Federal National Mortgage Association:
6.5%, due 7/18/2028 .................................................. 2,600,000 2,599,113 2,625,168
9%, due 4/01/2021 .................................................... 13,667 14,267 14,547
Government National Mortgage Association:
11.5%, due 3/15/2015 ................................................. 516 573 578
11.5%, due 4/15/2013 ................................................. 857 951 957
11.5%, due 5/15/2015 ................................................. 323 359 363
11.5%, due 8/15/2013 ................................................. 905 1,004 1,009
6.875%, due 1/20/2026 ................................................ 449,627 457,617 455,882
GE Capital Mtg Services, 1995-8 A5, 7.5%, due 10/25/2025 ................ 19 19 19
Headlands Mortgage Sec Inc., 1997-5 A17, 7.25%, due 11/25/2027 .......... 1,800,000 1,805,718 1,809,000
Merrill Lynch Mortgage Investors, 1996-C1 A3, 7.42%, due 4/25/2028 ...... 1,800,000 1,925,819 1,933,875
Nationsbanc Montgomery Funding, 1998-2 A4, 6.75%, due 11/25/2025 ........ 4,365,478 4,365,478 4,349,107
PNC Mortgage Securities Corp, 1998-7 1A13, 6.75%, due 9/25/2028 ......... 562,510 565,639 566,025
PNC Mortgage Securities Corp, 1998-7 1A24, 7.25%, due 9/25/2028 ......... 1,728,801 1,737,254 1,735,825
Prudential Home Mortgage Sec, 1993-I 2B, 8.12881%, due 9-28-2023 (d) .... 852,765 851,978 847,835
Residential Accredit Loans, 1997-QS8 A9, 7.375%, due 8/25/2027 .......... 1,000,000 999,186 1,010,058
----------- -----------
18,342,358 18,371,876
----------- -----------
34,988,729 34,997,031
TOTAL FIXED MATURITIES AVAILABLE-FOR-SALE
EQUITY SECURITIES (e):
INDUSTRIAL:
Aluminum Co of America ............................................... 200 11,200 14,650
</TABLE>
S-4
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
NAME OF ISSUER AND TITLE OF ISSUE SHARES COST (a) (b) VALUE (a)
- --------------------------------- --------- ------------ ---------
<S> <C> <C> <C>
EQUITY SECURITIES (CONTINUED) (e):
PUBLIC UTILITIES:
Carolina Power & Light .............................................. 500 $ 31,782 $ 44,907
Duquesne Loght Co ................................................... 400 10,800 15,400
GTE Florida Inc. .................................................... 1,500 25,875 36,188
Entergy Louisiana Inc. .............................................. 500 31,852 40,285
Entergy New Orleans Inc. ............................................ 600 31,902 40,362
Illinois Power ...................................................... 600 16,050 24,900
Kansas City Power & Light company ................................... 200 11,586 13,060
Midamerican Energy Co. .............................................. 600 34,200 45,462
Pacificorp .......................................................... 500 30,604 36,675
Pennsylvania Power Co ............................................... 200 8,837 13,387
San Diego Gas & Electric, Co, 4.40% ................................. 4,000 46,000 65,500
----------- ----------
279,488 376,126
----------- ----------
TOTAL EQUITY SECURITIES .................................................... 290,688 390,776
----------- ----------
TOTAL INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS .................... $ 35,279,417 $ 35,387,807
----------- ----------
----------- ----------
</TABLE>
S-5
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1998
(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 $35,535,440 at December 31, 1998.
(c) These securities are redeemable preferred stocks.
(d) This security is not classified as a qualified asset.
(e) These securities are non-redeemable preferred stock.
S-6
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE V--QUALIFIED ASSETS ON DEPOSIT
DECEMBER 31, 1998
<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 ....................... $ -- $ 196,143 $ -- $ -- $ 196,143
Central depositary:
First Trust, National Association ..... 37,534,866 37,534,866
--------- -------------- ------------- ------- -------------
Total qualified assets on deposit ........ $ -- $ 37,731,009 $ -- $ -- $ 37,731,009
--------- -------------- ------------- ------- -------------
--------- -------------- ------------- ------- -------------
</TABLE>
S-7
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE VI--CERTIFICATE RESERVES
PART IBSUMMARY OF CHANGES
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
BALANCE AT BEGINNING OF YEAR ADDITIONS
------------------------------------------- --------------------------------------
RESERVES
NUMBER OF (INCLUDING
ACCOUNTS ADVANCE RESERVE
WITH AMOUNT OF PAYMENTS) PAYMENTS BY CHARGED
YIELD SECURITY MATURITY WITH ACCRUED CHARGED CERTIFICATE TO OTHER
DESCRIPTION PERCENT HOLDERS VALUE INTEREST TO INCOME HOLDERS ACCOUNTS (a)
- ------------------------------ -------- ---------- ---------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Reserves to mature,
installment certificates:
Series 120 ................. 2.75 22 $ 115,000 $ 438,061 $ 15,751 $ 2,860 $ --
Series 220 ................. 2.75 16 83,000 189,627 8,120 3,014 --
Series 315 ................. 2.66 52 180,400 220,889 10,449 8,076 --
Single payment certificates:
Series 503 ................. 2.50 3,655 40,229,971 41,533,024 1,911,009 287,259 --
Fully paid installment
certificates .................. 2.50 490 2,514,514 2,220,962 106,328 - 171,686
Optional settlement
certificates:
Paid-up certificates ....... 2.50 18 7,374 7,094 167 - --
Annuities .................. 3.00 51 501,684 514,549 26,017 - 270,743
Due to unlocated certificate
holders ...................... None 24 2,878 2,878 - 313 --
-------------- ------------ ----------- ------------ ------------ -----------
Total 4,328 $ 43,634,821 $ 45,127,084 $ 2,077,841 $ 301,522 $ 442,429
-------------- ------------ ----------- ------------ ------------ -----------
-------------- ------------ ----------- ------------ ------------ -----------
Total charged to income, per above $ 2,077,841
Less reserve recoveries from terminations
prior to maturity (14,530)
------------
Interest credited on certificate
reserves, per statement of
operations $ 2,063,311
------------
------------
</TABLE>
NOTES TO PART I
(a) Transfer to/from other certificate reserves upon conversion.
(b) Direct interest payment to certificate holders.
S-8
<PAGE>
SCHEDULE VI--CERTIFICATE RESERVES (CONTINUED)
PART I - SUMMARY OF CHANGES (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
DEDUCTIONS BALANCE AT END OF YEAR
------------------------------------------ -------------------------------------------
RESERVES
NUMBER OF (INCLUDING
CASH ACCOUNTS ADVANCE
SURRENDERS WITH AMOUNT OF PAYMENTS)
PRIOR TO SECURITY MATURITY WITH ACCRUED
DESCRIPTION MATURITIES MATURITY OTHER (a)(b) HOLDERS VALUE INTEREST
- ---------------------------------------- ------------ ---------- ------------ ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Reserves to mature,
installment certificates:
Series 120 ......................... $ -- $ 4,409 $ 178,145 13 $ 77,000 $ 274,118
Series 220 ......................... -- -- 7,376 15 80,000 193,385
Series 315 ......................... 20,133 16,814 38,420 34 125,400 164,047
Single payment certificates:
Series 503 ......................... 9,842,739 2,897,860 236,438 2,721 31,099,099 30,754,255
Fully paid installment certificates .... 50,650 146,229 217,502 473 2,391,179 2,084,595
Optional settlement certificates:
Paid-up certificates ............... 1,090 125 1,684 12 4,473 4,362
Annuities .......................... 221,371 -- -- 55 575,011 589,938
Due to unlocated certificate holders ... -- 65 -- 25 3,126 3,126
------------- ----------- --------- ---------- ------------ -------------
Total ............................ $ 10,135,983 $ 3,065,502 $ 679,565 3,348 $ 34,355,288 $ 34,067,826
------------- ----------- --------- ---------- ------------ -------------
------------- ----------- --------- ---------- ------------ -------------
</TABLE>
S-9
<PAGE>
SCHEDULE VI--CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
BALANCE AT BEGINNING OF YEAR
--------------------------------------------------------------------------
NUMBER OF
AGE GROUPING IN ACCOUNTS WITH AMOUNT OF AMOUNT OF
YEARS SECURITY HOLDERS MATURITY VALUE RESERVES
----------------- ----------------- --------------- ------------
<S> <C> <C> <C> <C>
Series:
120 22 1 $ 8,000 $ 8,710
23 2 9,000 16,494
30 1 5,000 12,159
31 -- -- --
32 1 6,000 15,569
33 1 6,000 16,727
34 1 3,000 9,079
35 1 6,000 19,954
36 -- -- --
37 2 15,000 62,183
38 1 10,000 43,551
39 3 12,000 54,458
40 8 35,000 169,126
Interest reserve 303
Accrued interest payable 9,748
------------ ------------- --------------
Total 22 $ 115,000 $ 438,061
------------ ------------- --------------
------------ ------------- --------------
</TABLE>
S-10
<PAGE>
SBM CERTIFICATE COMPANY
SCHEDULE VI--CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
DEDUCTIONS BALANCE AT END OF YEAR
------------------------------------------------------------------------------------
NUMBER OF
CASH ACCOUNTS
SURRENDERS AGE WITH AMOUNT OF
PRIOR TO GROUPING SECURITY MATURITY AMOUNT OF
MATURITY OTHER IN YEARS HOLDERS VALUE RESERVES
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Series:
120 $ -- $ -- 22 -- $ -- $ --
4,409 -- 23 2 14,000 21,636
-- -- 30 -- -- --
-- -- 31 1 5,000 13,509
-- -- 32 -- -- --
-- -- 33 1 6,000 16,617
-- -- 34 1 6,000 17,789
-- -- 35 1 3,000 9,659
-- -- 36 1 6,000 21,208
-- -- 37 1 10,000 41,739
-- -- 38 1 5,000 21,727
-- -- 39 1 10,000 46,118
-- 178,145 40 3 12,000 57,742
Interest reserve 303
Accrued interest payable 6,071
--------------------------- -------------------------------------------
Total $ 4,409 $178,145 13 $ 77,000 $ 274,118
--------------------------- -------------------------------------------
--------------------------- -------------------------------------------
</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, 1998
<TABLE>
<CAPTION>
BALANCE AT BEGINNING OF YEAR
-------------------------------------------------------------------------
NUMBER OF
AGE GROUPING ACCOUNTS WITH AMOUNT OF AMOUNT OF
IN YEARS SECURITY HOLDERS MATURITY VALUE RESERVES
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series:
220 21 1 $ 12,000 $ 13,638
22 -- -- --
26 1 4,000 7,079
27 -- -- --
29 1 6,000 12,869
30 8 38,000 88,898
31 1 5,000 12,539
32 4 18,000 50,280
33 -- -- --
--
Interest reserve
4,324
Accrued interest payable
------------------------------------------------------
Total 16 $ 83,000 $ 189,627
------------------------------------------------------
------------------------------------------------------
Series:
315 5 1 $ 2,200 $ 523
7 1 2,200 741
10 3 9,900 6,842
11 1 6,600 4,033
12 4 22,000 15,499
13 3 12,100 9,438
14 6 15,400 13,334
15 14 45,100 42,440
16 3 6,600 7,154
17 3 13,200 18,178
18 5 22,000 39,140
19 1 2,200 3,586
20 7 20,900 38,258
16,565
Interest reserve
5,158
Accrued interest payable
------------------------------------------------------
Total 52 $ 180,400 $ 220,889
------------------------------------------------------
------------------------------------------------------
</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, 1998
<TABLE>
<CAPTION>
DEDUCTIONS BALANCE AT END OF YEAR
-------------------------------------------------------------------------------------
NUMBER OF
CASH ACCOUNTS
SURRENDERS AGE WITH AMOUNT OF
PRIOR TO GROUPING SECURITY MATURITY AMOUNT OF
MATURITY OTHER IN YEARS HOLDERS VALUE RESERVES
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Series:
$ -- $ -- 21 -- $ -- $ --
220
-- -- 22 1 12,000 14,787
-- -- 26 -- -- --
-- -- 27 1 4,000 7,688
-- -- 29 -- -- --
-- 7,376 30 1 6,000 13,743
-- -- 31 7 35,000 87,423
-- -- 32 3 15,000 42,166
-- -- 33 2 8,000 23,169
--
Interest reserve
4,409
Accrued interest payable
------------------------------ -------------------------------------------
Total $ -- $ 7,376 15 $ 80,000 $ 193,385
------------------------------ -------------------------------------------
------------------------------ -------------------------------------------
Series:
$ 572 $ -- 5 -- $ -- $ --
315
-- -- 7 1 2,200 836
-- -- 10 1 2,200 1,273
-- -- 11 1 5,500 3,536
4,949 -- 12 -- -- --
11,293 -- 13 4 22,000 17,228
-- -- 14 3 8,800 7,673
-- 6,463 15 8 22,000 21,989
-- -- 16 6 23,100 28,212
-- -- 17 1 2,200 2,978
-- -- 18 3 13,200 19,873
-- -- 19 6 24,200 49,314
31,957 20 -- -- --
7,195
Interest reserve
3,940
Accrued interest payable
----------------------------- ------------------------------------------
Total $ 16,814 $ 38,420 34 $ 125,400 $ 164,047
----------------------------- ------------------------------------------
----------------------------- ------------------------------------------
</TABLE>
S-13
<PAGE>
SCHEDULE XII--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------------------------
Charged to
Beginning Charged to Other
Description of Year Expense Accounts Deductions End of Year
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Valuation allowance on deferred tax
assets:
Year ended December 31:
1998 $ 400,000 -- -- $ (280,000) (1) $ 120,000
1997 $ 714,521 -- -- $ (314,521) (2) $ 400,000
1996 $ 714,521 -- -- -- $ 714,521
</TABLE>
(1) The capital loss carryover was utilized during 1998, and therefore the
related valuation allowance was released.
(2) In the event that deferred tax assets are recognized on deductible temporary
differences for which a valuation allowance was provided at the date of an
acquisition, such benefits are applied to first reduce the balance of
intangible assets related to the acquisition, and then income tax expense.
As such, the Company reduced its valuation allowance with an offsetting
reduction to goodwill. After goodwill was reduced to zero during 1997, the
reduction in valuation allowance resulted in a reduction of income taxes.
S-14
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Independent
Auditors" and "Selected Financial Data" and to the use of our reports dated
February 9, 1999, in Post Effective Amendment No. 10 to the Registration
Statement (Form S-1 No. 33-38066) and related Prospectus of SBM Certificate
Company.
/s/ Ernst & Young LLP
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Ernst & Young LLP
Louisville, Kentucky
February 23, 1999
