As filed with the Securities and Exchange Commission on December 27, 2000.
File No. 33-38066
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
POST EFFECTIVE AMENDMENT NO. 13
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SBM CERTIFICATE COMPANY
(Formerly SBM Certificate Company, a Minnesota corporation)
(Exact name of registrant as specified in charter)
Maryland
(State or other jurisdiction of incorporation or organization)
6725
(Primary Standard Industrial Classification Code Number)
52-2250397
(I.R.S. Employer Identification No.)
5101 River Road
Suite 101
Bethesda, Maryland 20816
(301) 656-4200
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive office)
John J. Lawbaugh
5101 River Road
Suite 101
Bethesda, Maryland 20816
(301) 656-4200
(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 Post Effective Amendment as is practicable.
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.
<PAGE>
Pursuant to Rule 414 under the Securities Act of 1933, Registrant hereby
expressly adopts the registration statement, as amended, of its predecessor, SBM
Certificate Company (Minnesota), as its own for all purposes under the
Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment
Company Act of 1940.
<PAGE>
PROSPECTUS
SBM CERTIFICATE COMPANY
SERIES 503 CERTIFICATES
SERIES 505 CERTIFICATES
SERIES 507 CERTIFICATES
SERIES 510 CERTIFICATES
This Prospectus describes fully paid fixed-rate face-amount certificates
("Certificates") issued by SBM Certificate Company (the "Company"). When you
purchase a Certificate, you make a single lump sum payment to the Company in
exchange for its promise to pay the amount invested ("Face Amount"), plus
accrued interest, on a fixed future date.
The Series 503, Series 505, Series 507 and Series 510 Certificates have fixed
interest guarantee periods ("Guarantee Periods") of three, five, seven and ten
years, respectively, from the date of issue. The Guarantee Periods for the
Certificates will automatically be extended for additional Guarantee Periods of
the same duration, unless you notify the Company in writing to the contrary.
Your Certificate will mature no later than thirty years from the date it was
issued ("Maturity Date"). Your Certificate investment earns a fixed interest
rate that is declared in advance for the duration of a Guarantee Period, but
never is less than 2.5%. You may choose to have your interest:
o COMPOUNDED ANNUALLY and paid at the end of the
Guarantee Period, when the Certificate matures, or when
you make a withdrawal
o PAID ANNUALLY
o PAID QUARTERLY
As of the date of this Prospectus, depending upon the interest payment method
you have chosen, we will pay interest under the Certificates at the following
initial rates for the Guarantee Period of each Series:
<TABLE>
<CAPTION>
Interest Interest Interest
Paid Paid Compounded
CERTIFICATE QUARTERLY ANNUALLY ANNUALLY
----------- --------- -------- --------
<S> <C> <C> <C>
Series 503 6.45% 6.55% 6.70%
Series 505 6.85% 6.95% 7.10%
Series 507 7.65% 7.75% 7.90%
Series 510 8.00% 8.10% 8.25%
</TABLE>
New interest rates for each of the Guarantee Periods will be declared
periodically, with a guaranteed minimum rate of 2.5%. See "Description of the
Certificates" for a more complete description of the terms of Certificates.
THERE IS NO SALES CHARGE WHEN YOU PURCHASE YOUR CERTIFICATE. IF YOU WITHDRAW ALL
OR A PORTION OF YOUR CERTIFICATE INVESTMENT PRIOR TO THE END OF A GUARANTEE
PERIOD, A WITHDRAWAL CHARGE WILL APPLY.
<PAGE>
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" FOR A DESCRIPTION OF THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE CERTIFICATES.
For further information and assistance, contact the Company's Administrative
Office at 100 North Minnesota Street, 2nd Floor, New Ulm, MN 56073, or call the
Company toll-free at 1-888-749-4353.
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.
January __, 2001
<PAGE>
TABLE OF CONTENTS
Page
SBM Certificate Company.......................................................4
Risk Factors..................................................................4
Absence of a Rating......................................................4
Relationship with State Bond.............................................4
Effects of Changes in Interest Rates.....................................5
Withdrawals During a Guarantee
Period...................................................................5
Interest Rates for Renewal Periods.......................................5
Description of the Certificates..... .........................................5
Minimum Investment.......................................................5
Interest Rates...........................................................5
Interest Payment Options.................................................6
Guarantee Periods and
Maturity.................................................................6
Withdrawals..............................................................7
Loans....................................................................8
Deferred Payment.........................................................8
Federal Income Tax Treatment.............................................8
Transfer of Ownership....................................................8
Reserves and Deposits with Custodian..........................................8
Certain Financial Information.................................................9
Use of Proceeds...............................................................9
Investments...................................................................9
Type of Investments......................................................9
Investment Policies.....................................................11
Management of Securities Investment.....................................12
Real Estate Loan Portfolio..............................................12
Performance.............................................................12
How to Purchase Certificates.................................................12
Through the Company.....................................................13
Through Authorized Sellers..............................................13
Affinity Groups.........................................................13
Investment Amounts......................................................13
Canceling Your Order....................................................14
Application Acceptance..................................................14
About SBM Certificate Company................................................14
History.................................................................14
Business................................................................14
Competition.............................................................15
Employees...............................................................15
Capital Structure.......................................................15
Regulation..............................................................15
Description of Property.................................................16
Legal Proceedings.......................................................16
Executive Officers and Directors.............................................16
Board of Directors......................................................17
Committees of the Board of Directors....................................17
Relationship with State Bond and Affiliates..................................18
2
<PAGE>
TABLE OF CONTENTS
Page
Independent Auditors.........................................................19
Selected Financial Data......................................................19
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................20
Results of Operations...................................................20
Asset Portfolio Review..................................................23
Liquidity and Financial Resources.......................................24
Index to Financial Statements................................................27
3
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SBM CERTIFICATE COMPANY
The Company is a Maryland corporation wholly-owned by State Bond & Mortgage
Company, L.L.C. ("State Bond"), a Maryland limited liability company. The
Company's executive offices are located at 5101 River Road, Suite 101, Bethesda,
Maryland 20816. The main telephone number for the Company is (301) 656-4200.
On July 19, 2000, State Bond completed the purchase of all of the issued and
outstanding shares of common stock of SBM Certificate Company a Minnesota
corporation ("SBM MN"), from ARM Financial Group ("ARM"), a Delaware corporation
(the "Acquisition"). State Bond effected the Acquisition as assignee under a
Stock Purchase Agreement, dated March 28, 2000, by and among 1st Atlantic
Guaranty Corporation ("1st Atlantic"), a Maryland corporation, and ARM. State
Bond is wholly-owned by 1st Atlantic.
As part of the Acquisition transactions, SBM MN was merged into the Company,
which became the surviving corporation. The Company was organized on May 25,
2000, with nominal assets, and formed for purposes of redomestication from
Minnesota to Maryland. As a result, the Company has succeeded SBM MN as the
"registrant" in all filings made by SBM MN under the Securities Act of 1933,
Securities Exchange Act of 1934 ("Exchange Act") and the Investment Company Act
of 1940 ("1940 Act"), including the registration statement of which this
prospectus is a part.
The Company has assumed the face-amount certificate business of SBM MN. The
Company's predecessors have issued various series of face-amount certificates of
the fully paid and installment type since 1914. The Company is registered as an
investment company under the 1940 Act and assumed the obligations of SBM MN's
outstanding face-amount certificates as a result of the Acquisition.
RISK FACTORS
The Company is not a bank, broker-dealer or insurance company. THE CERTIFICATES
ARE NOT BANK PRODUCTS, EQUITY INVESTMENTS, ANNUITIES OR LIFE INSURANCE, AND ARE
NOT GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR FUND OR PRIVATE THIRD
PARTY.
Absence of Rating
The Company has not applied for or received a rating for the Certificates from
any nationally recognized rating organization.
Relationship with State Bond
The Company is an independent operating entity, but relies upon State Bond and
its affiliates to provide it with management, marketing and administrative
services, as well as personnel, for the conduct of the Company's business. See
"Relationship with State Bond and Affiliates."
4
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Effects of Changes in Interest Rates
Economic and market conditions and fluctuations in interest rates affect the
market value of the Company's investment portfolio, which consists primarily of
government and corporate bonds, and money market accounts. Although the Company
seeks to control this interest rate risk, the value of its investment portfolio
may decrease during periods of sharp changes in interest rates. In such an
environment, if the Company had to sell assets to meet liquidity needs, it could
recognize losses on the sale of these assets. These losses could reduce the
overall capital resources available to the Company to provide a source of funds
for its operations, including the making of payments on Certificates.
Withdrawals During a Guarantee Period
You may make withdrawals under a Certificate during a Guarantee Period. However,
the Company assesses a withdrawal charge if you withdraw some or all of your
account value prior to the end of a Guarantee Period. Your "account value"
includes the amount you invest in a certificate (your principal) together with
accrued interest. The charge will be assessed against your remaining account
value or, in the case of a complete surrender, deducted from your account value.
Therefore, you may receive less upon a withdrawal than the amount of your
investment. See "Guarantee Periods and Maturity" and "Withdrawals" below.
We assess the withdrawal charge largely because of the negative impact that
early withdrawals of principal investments could have on our reserves and our
ability to offer competitive interest rates to investors. The withdrawal charge
also helps us defray part of our cost of marketing the Certificates under which
withdrawals are made. You also may be subject to penalties if you withdraw
amounts held in a Certificate from an IRA or other tax-qualified plan. Please
consult your tax adviser.
Interest Rates for Renewal Periods
The initial interest rates applicable to the Certificates are payable for the
initial three, five, seven and ten-year Guarantee Periods only. Although the
Company intends to declare in advance interest rates above the 2.50% minimum
rate for Certificate years beyond the initial Guarantee Period, it has no
obligation to do so.
DESCRIPTION OF THE CERTIFICATES
Minimum Investment
The minimum amount you may invest is (a) $1,000 if you choose to have interest
compounded or paid annually, or (b) $5,000 if you choose to have interest paid
quarterly. The amount you invest in a Certificate is its face amount.
Interest Rates
The Company periodically declares the interest rates payable for a Certificate's
Guarantee Period. The interest rate declared will be applicable for the entire
Guarantee Period.
5
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The Company will never declare an annual interest rate of less than 2.50%. To
confirm the Company's current rates at any time, please contact the Company's
Administrative Office.
The interest rates applicable to your Certificate during its initial Guarantee
Period will be the rates in effect on the date your application is accepted at
the Company's Administrative Office ("Effective Date").
The prevailing interest rates available on interest-bearing instruments are a
primary consideration in deciding upon the interest rates declared by the
Company. However, the Company has complete discretion as to what interest rates
it declares for the Certificates. When a Certificate is renewed, the interest
rates in effect for the succeeding Guarantee Period will be the declared rates
at the end of the Guarantee Period that is expiring. These new interest rates
may be greater or lesser than the rates in effect for the expiring Guarantee
Period.
Interest Payment Options
You may choose to:
o compound your interest annually and receive it at the
end of the Guarantee Period, when the Certificate matures
or when you make a withdrawal
o receive annual interest payments
o receive quarterly interest payments
Your interest rates will be different depending on the interest payment option
you choose. You may not change your interest payment option once your
Certificate has been issued. Interest on the Certificates accrues monthly.
Guarantee Periods and Maturity
At the end of a Guarantee Period, 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 the original invested amount plus interest. In all cases, the amount you
receive will be reduced by the amount of any prior partial withdrawals of your
account value and applicable withdrawal charges. You may partially or fully
redeem your Certificate at the end of any Guarantee Period and incur no
withdrawal charge. See "Withdrawals."
The Company will notify you in writing at least fifteen days prior to the end of
your Certificate's Guarantee Period. Unless you notify the Company in writing to
the contrary, the Company will automatically extend your Series 503 Certificate,
Series 505 Certificate, Series 507 Certificate, or Series 510 Certificate for an
additional three, five, seven or ten-year period, respectively. The Company may
extend your Series 503, Series 505, Series 507 and Series 510 Certificate for a
total of nine, five, three and two additional periods, respectively, until final
maturity. The terms of your initial Certificate will continue to apply, except
that as explained above under "Interest Rates," new interest rates may apply.
6
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Series 503, Series 505 and Series 510 Certificates have final maturities of 30
years after original issuance. Series 507 Certificates have a final maturity of
28 years after original issuance. The date on which a Certificate "finally
matures" is the Maturity Date of the Certificate.
Withdrawals
The withdrawal charge imposed by the Company if you withdraw any amount of your
account value prior to the end of a Guarantee Period will be assessed against
your remaining account value or, in the case of a complete surrender of your
Certificate, deducted from the amount withdrawn, according to the following
schedule:
<TABLE>
<CAPTION>
Charge Applied to Amount Withdrawn
Year of Guarantee Period 1 2 3 4 5 6 7 8 9 10
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Series 503 3% 3% 2%
Series 505 5% 5% 4% 3% 2%
Series 507 7% 7% 6% 5% 4% 3% 2%
Series 510 10% 10% 9% 8% 7% 6% 5% 4% 3% 2%
</TABLE>
The minimum amount you may withdraw is $1,000. The minimum amount remaining must
be at least $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. The
entire account value will be withdrawn if the amount otherwise remaining is less
than the applicable minimum amount.
The withdrawal charge does not apply to scheduled withdrawals of interest. In
addition, the charge does not apply to any withdrawals made within three months
of the Maturity Date of a Certificate, or if the withdrawal is made to meet
expenses resulting from your death.
You must submit a written request for withdrawal to the Company at its
Administrative Office. The amount requested will be withdrawn first from accrued
interest and then from principal. Withdrawal requests will be processed on the
business day that they are received, and a check will be disbursed to you
generally within ten business days.
For mutual protection, a signature guarantee may be required if:
(1) you request a withdrawal of an amount in excess of $50,000,
(2) you request that your redemption proceeds be disbursed to someone other
than the registered owners, (3) you request that your redemption proceeds
be disbursed to an address other than the address of record, a
preauthorized bank account, or a preauthorized brokerage firm account,
(4) withdrawal instructions are received from an agent, not the registered
owners, or
(5) the Company believes a signature guarantee would protect against potential
claims based on the instructions received.
7
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A signature guarantee verifies the authenticity of your signature. You can
obtain a signature guarantee from certain banks, brokers or other eligible
guarantors. You should verify that the institution is an eligible guarantor
prior to signing. A notarized signature is not sufficient.
Loans
You may borrow up to 50% of your account value for a term not to exceed five
years, but not beyond the Maturity Date of your Certificate. Loans are subject
to an annual interest charge of up to 6% of the amount withdrawn, but are not
subject to the withdrawal charge. You will not earn interest on the amount
borrowed. The Company will treat a loan that you do not repay as a permanent
withdrawal. The Company will assess the withdrawal charge that would have
applied at the date the loan was due but not repaid.
Deferred Payment
The Company reserves 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%.
Federal Income Tax Treatment
Under Internal Revenue Service rules and regulations, Certificateholders 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 end of
the Certificate's Guarantee Period or until the Certificate matures. The Company
will report to you annually the amount of your income from the Certificate for
tax purposes. Please consult your tax adviser for information about any tax
consequences in your individual circumstances.
Pursuant to federal law, you must provide the Company 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 the Company to withhold a portion of any accrued interest.
Transfer of Ownership
You may transfer ownership of your Certificate by submitting a completed
transfer request form to the Administrative Office. Please note that transfers
of ownership from a tax-qualified plan may have adverse tax consequences. Please
consult your tax adviser.
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, or a government securities broker or
dealer. Further documentation may be required from corporations, executors,
partnerships, administrators, trustees or custodians.
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RESERVES AND DEPOSITS WITH CUSTODIAN
The Company accrues liabilities, or "reserves," for its Certificate obligations
in accordance with the 1940 Act. In general, the Company establishes reserves
monthly in an amount equal to the total values due to Certificateholders on its
outstanding Certificates including accrued but unpaid interest.
The 1940 Act requires the Company to have capital stock in an amount not less
than $250,000 and to keep on deposit, with a qualified custodian, certain kinds
of investments having a value not less than $250,000 plus the amount of its
outstanding certificate reserves.
Most of its investments are on deposit pursuant to the terms of a custody
agreement with U.S. Bank Trust N.A., a national banking association located in
Minneapolis, Minnesota. The Company also maintains separate deposits as required
by certain states. The custody agreement requires the Company to maintain
investments on deposit with a value (calculated in accordance with the
provisions of the 1940 Act) in excess of its reserves for outstanding
certificate obligations. If the Company fails to make a required payment on a
Certificate, the custodian is required, at the request of a Certificateholder,
to make the payment from its investments.
CERTAIN FINANCIAL INFORMATION
For information regarding the amounts of revenue, results of operations and
assets attributable to its face-amount certificate business and significant
events relating to its business see "Selected Financial Data" and "Management's
Discussion and Analysis of Results of Operations and Financial Condition".
USE OF PROCEEDS
The Company backs the Certificates by investing the money received and keeping
the invested assets on deposit. The Company's investments are diversified and of
generally high quality. The composition and quality of its investments is
subject to change from time to time at its sole discretion, subject to
requirements of the 1940 Act.
INVESTMENTS
Under provisions of the 1940 Act, we are permitted to invest our reserves only
in assets that constitute "qualified investments" under the laws of the District
of Columbia, and such other assets as the SEC may permit under the 1940 Act. Set
out below is a summary of the types of investments in which we expect to invest,
as well as a description of certain investment policies established by
management and our Board of Directors.
Types of Investments
We intend to invest our reserves, as well as the amount that we hold in excess
of the reserves, primarily in the types of securities and other investments
described below. Except as specifically noted, we may invest our reserves in
such investments without limitation. In addition, except as specifically
9
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noted, the limitations described below apply only at the time of investment. The
assets that we hold in excess of reserves are not subject to the limitations
described below.
BANK OBLIGATIONS. We may invest in CDs, bankers' acceptances, and other
short-term debt obligations of banks. CDs are short-term obligations that
commercial banks issue for a specified period of time and at a specified
interest rate. Banker's acceptances are time drafts drawn on a commercial bank
by a borrower, usually in connection with international commercial transactions.
COMMERCIAL PAPER AND OTHER CORPORATE DEBT. We may invest in commercial paper
issued by companies that meet the criteria for investment by life insurance
companies under the laws of the District of Columbia ("qualified corporations").
Commercial paper consists of short-term unsecured promissory notes that
qualified corporations issue to finance short-term credit needs. We also may
invest in longer-term debt obligations of qualified corporations. We will not
invest more than two percent of our reserves in any one issue of such
obligations of any one qualified corporation. In addition, we do not intend to
invest in any debt securities rated below investment grade by any nationally
recognized statistical rating organization.
EQUIPMENT RELATED INSTRUMENTS. We may invest in equipment trust certificates and
similar instruments (collectively, "equipment related instruments") that are
secured by transportation equipment (e.g., railroad cars, trucks, and airplanes)
that has been sold or leased to a common carrier. Equipment related instruments
are a means of financing the acquisition of equipment. A trustee, such as a
bank, holds the title to the equipment, collects purchase or lease payments from
the purchaser, and, in turn, makes principal and interest payments to the
instrument holders for a specified term. In case of default, the trustee is
authorized to sell the equipment to protect the instrument holders. We will not
invest more than two percent of our reserves in any one issue of an
equipment-related instrument by any one qualified corporation.
MUNICIPAL SECURITIES. We may invest in various types of municipal securities,
which are debt securities issued by a state, its political subdivisions,
agencies, authorities, school districts, and other governmental
instrumentalities for various public purposes, including, for example, the
construction of public facilities, hospitals, highways, and schools. We will
only invest in municipal securities that (i) represent direct and general
obligations of the issuing governmental entity, or (ii) are payable from
designated revenues pledged to the payment of the principal and interest on such
securities.
PREFERRED AND COMMON STOCK. We may invest in preferred and common stock of
qualified corporations. Preferred stock has priority over common stock as to
income and generally as to the assets of an issuer, but usually has limited
voting rights. We may invest in the common stocks of qualified corporations
whose debt and preferred stock, if any, also meet our criteria for investment.
We will not invest more than one percent of our reserves in the preferred or
common stock of any single qualified corporation.
REAL ESTATE AND REAL ESTATE LOANS. We may invest directly in real estate or in
real estate loans. We generally will only purchase or hold real estate if it is
income producing. We may, however, also receive real estate in satisfaction of
debts owed to us, and may improve or develop any real estate that we acquire. We
will not invest or agree to invest in real estate if such investment
10
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would cause us to: (i) invest more than two percent of our reserves in real
estate or improvements thereon during any period of 12 consecutive months; (ii)
invest or hold more than five percent of our reserves in real estate or
improvements thereon for the purpose of producing income; or (iii) hold more
than 10% of our reserves in real estate. We also may invest in real estate loans
secured by a first lien on the real estate, PROVIDED such loan is worth at least
33 1/3% more than the amount loaned.
U.S. GOVERNMENT SECURITIES. We may invest in direct obligations of the U.S.
Government ("U.S. Government securities"). These include bills (which have
maturities of one year or less), notes (which have maturities of between 2 and
10 years), and bonds (which have maturities greater than 10 years) issued by the
U.S. Treasury ("Treasury"). The market value of U.S. Government securities will
fluctuate with changes in interest rate levels. Thus, if interest rates increase
from the time the security was purchased, the market value of the security will
decrease. Conversely, if interest rates decrease, the market value of the
security will increase.
U.S. GOVERNMENT AGENCY SECURITIES. We may invest in securities issued by certain
federal agencies that are (i) backed by the full faith and credit of the United
States, (ii) guaranteed by the Treasury, (iii) or are supported by the agency's
right to borrow from the Treasury. Issuing agencies may include, for example,
the Government National Mortgage Association ("GNMA" or Ginnie Mae"), Federal
National Mortgage Association ("FNMA" or "Fannie Mae"), or Federal Home Loan
Mortgage Corporation ("FHLMC" or "Freddie Mac"). Although their close
relationship with the U.S. Government is believed to make them high-quality
securities with minimal credit risks, the U.S. Government is not obligated by
law to support either FNMA or FHLMC.
Investment Policies
The Company's management and the Board has established the investment policies
set out below. Subject to the approval of the Company's sole shareholder, these
policies may be changed at any time without Certificate owner approval.
BORROWING. We may borrow money to a limited extent from banks (including the
Company's custodian bank) as we deem necessary or appropriate to our business.
We currently do not intend to borrow amounts equal to more than 25% of our total
assets (including the amount borrowed). We will not buy securities on margin or
sell securities short.
COMMODITIES. We do not currently intend to engage in the
purchase or sale of commodities.
CONCENTRATION. Except as noted below, we will not invest more than 25% of our
assets in the securities of issuers in any one industry. The foregoing
limitation does not apply to investments in U.S. Government and U.S. Government
agency securities, nor to real estate and real estate loans.
LOANS. In addition to real estate loans, described above, we may make loans of
varying terms to broker-dealers and other financial institutions in amounts up
to 85% of the value of the securities pledged as collateral for the loans at the
time we make the loans. The securities pledged as collateral must be of a type
in which we can invest.
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PORTFOLIO TURNOVER. We will buy, sell, or hold our assets in the manner that we
deem prudent, without regard to the impact on the turnover rate of our
portfolio.
SENIOR SECURITIES. We are restricted by law from issuing any securities other
than face-amount certificates, common stock, and promissory notes or other paper
related to our borrowings.
UNDERWRITING SECURITIES. We do not intend to act as an
underwriter of securities issued by other persons. We may,
however, be deemed to be an underwriter when we purchase and
later sell unregistered securities.
--------------------
To the extent that the above-described investments and investment policies
differ from the investments made and policies followed prior to the Acquisition,
the Company expects to effect changes over time to conform the composition of
its investments to the Company's current investment policies. In any case, the
Company's reserves supporting its outstanding Certificates must consist only of
"qualified investments" under the 1940 Act.
Management of Securities Investments
Subject to the oversight of the Board, the Company's management is responsible
for selecting and managing the Company's securities investments to ensure that
the Company has, in cash or qualified investments, as that term is defined in
Section 28(b) of the 1940 Act, assets having an aggregate value not less than
that required by applicable law. Qualified investments are defined as those
investments which life insurance companies are permitted to invest in or hold
under provisions of the Insurance Code of the District of Columbia. Management
also is responsible for placing orders for the purchase and sale of the
Company's securities investments with brokers and dealers. The Company may in
the future engage one or more investment advisers to assist the Company in the
management of its securities investments.
Real Estate Loan Portfolio
The Company's real estate loan portfolio is managed by the Company's
wholly-owned subsidiary, Atlantic Capital Funding Corporation ("ACFC"). ACFC
performs all of the underwriting, closing and servicing of mortgage investments
for the Company. ACFC may originate and process loans directly as well as offer
its loan programs to outside mortgage brokers and bankers on a wholesale basis.
In the latter case, outside brokers will originate and process loans and ACFC
will underwrite and close the loans that meet its investment requirements. ACFC
may enter into agreements with select outside mortgage brokers, bankers and
mortage loan servicing companies to service certain types of mortgages that may
require special servicing treatment because of various factors, such as the
unique features of the underlying real estate or the credit quality of the
borrowers.
Performance
From time to time, the Company may quote current and historical yields on its
Certificates in advertisements and in sales literature. The availability of the
current yields quoted will depend on when you purchase your Certificate, how
much you invest, and the Guarantee Period you select.
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Quotations of historical yields are not indicative of future yields. The Company
also may compare its yield to those offered by competing products, such as CDs
and Treasuries, as well as other fixed income securities.
HOW TO PURCHASE CERTIFICATES
You may purchase Certificates through one of the methods described below. You
must complete an application and submit it, along with payment at the time of
purchase. THE COMPANY RESERVES THE RIGHT TO ACCEPT OR REJECT ANY APPLICATION AT
ITS SOLE DISCRETION.
Through the Company
BY MAIL. You may purchase Certificates directly from the Company by mailing a
completed application together with a check, to our Administrative Office. Your
envelope should be addressed: SBM Certificate Company, 100 North Minnesota
Street, 2nd Floor, New Ulm, MN 56073.
BY WIRE. You may also wire payments for Certificates from your financial
institution to the Company's wire receiving bank account. Before wiring funds,
please notify Certificateholder Services at 1-888-749-4353 to advise the Company
of your investment and to receive instructions as to how and where to wire your
investment funds.
The minimum amount you may wire is $1,000. Please remember to return your
completed application to Certificateholder Services at the address above. A copy
of the application must coincide with your wire funds that day and the original
application must be delivered to the Company within three (3) business days
following the transaction to ensure the Effective Date of your Certificate.
Through Authorized Sellers
You may purchase Certificates through broker-dealers that have selling
agreements with the Company. Broker-dealers will receive compensation that is
not expected to exceed 6% of the amount of the purchase payment for a
Certificate. Please call Certificateholder Services at 1-888-749-4353 to find
out if your broker-dealer is on the Company's list of authorized sellers. Any
compensation to authorized sellers is paid by the Company's general fund, so
that all of your money will be invested in your Certificate.
Affinity Groups
From time to time, the Company may seek to introduce Certificates to members of
affinity groups, including service organizations, non-profit associations, and
other types of membership organizations (collectively, "affinity groups")
through various programs including the Company's Partners in Philanthropy
program. Although affinity groups are not permitted to sell Certificates, they
may provide the Company with mailing lists and other information to enhance the
marketing of Certificates to their members. For their cooperation, the Company
may compensate affinity groups an amount that is mutually agreed upon. Please
call Certificateholder
13
<PAGE>
Services at 1-888-749-4353 for the current list of affinity groups with whom the
Company has arrangements.
Investment Amounts
For an explanation of the minimum and maximum investments in each type of
Certificate, see "Description of the Certificates." Certain additional
restrictions may apply if you use the Certificates to fund your Individual
Retirement Account ("IRA") or other qualified retirement plan account.
Canceling Your Order
You can, without incurring a withdrawal charge or other penalty, cancel your
investment in a Certificate within ten days after the date on which you
purchased your Certificate. Simply call or write Certificateholder Services at
the same telephone number or address as indicated above. You will not earn any
interest on Certificates that you cancel under this provision. The Company will
disburse a refund check to you within 30 days of your cancellation request.
Application Acceptance
All applications to purchase Certificates are subject to the Company's
acceptance or rejection in its sole discretion. If your application to purchase
a Certificate is accepted, you will receive a confirmation of such acceptance.
You will also receive an annual statement reflecting all account activity. The
Company does not issue paper certificates to evidence the purchase of
Certificates. Instead, your Certificate purchase is registered with the Company
in book registration form, thereby relieving you of the responsibility for the
safekeeping of paper certificates and the need to deliver them to the Company
upon redemption. Please refer to our Face Amount Certificate Confirmation
Statement for terms and conditions and detailed information about your
Certificate.
ABOUT SBM CERTIFICATE COMPANY
History
SBM MN was incorporated in Minnesota in June 1990 to assume the face-amount
certificate business of SBM Company ("SBM") which began in 1914. ARM purchased
most of the assets of SBM in June 1995 and continued the issuance of face-amount
certificates. As a result of the Acquisition, the Company has assumed the
obligations of SBM MN's outstanding face-amount certificates and now is the
issuer of face-amount certificates that trace their origin to the early 1900s.
Business
The Company is a face-amount certificate company registered under the 1940 Act.
Its sole business is issuing and servicing fixed-rate face-amount certificates.
A face-amount certificate is an obligation of the issuer to pay a face, or
principal, amount, plus specified interest, to the holder of the certificate.
Under the Certificates, the face amount may be paid at the end of a
Certificate's Guarantee Period or at its Maturity Date. Lesser amounts are paid
at such times if
14
<PAGE>
all or part of an investment in the Certificate is withdrawn prior to maturity
or the end of any Guarantee Period. Interest, as described above, may be paid
quarterly or annually, or may be compounded.
The Company currently offers four series of single-payment investment
Certificates. The Company's face-amount certificate operations include issuance
of single-payment certificates and the servicing of outstanding single-payment
and installment certificates, the investment of related funds, and other related
service activities.
The Company's gross income is derived primarily from the margin between earnings
on its investments and amounts paid or credited on its fixed rate Certificate
deposits ("investment spread"). The Company's 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 the Company's ability to respond to changes in such rates.
Changes in market interest rates may have a negative impact on its earnings. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Risk Factors".
State Bond provides the Company with management, marketing and administrative
services pursuant to an Administrative Services Agreement dated as of July 19,
2000 between the Company and its parent, State Bond. See "Relationship with
State Bond and Affiliates."
Competition
The Company's face-amount certificate business competes in general with various
types of individual savings products which offer a fixed rate of return on
investors' money, especially insurance and bank and thrift products. Some of
these other products are insured by governmental agencies or funds or private
third parties. For example, banks and thrifts typically have federal deposit
insurance covering monies deposited with them. The Company's Certificates are
not guaranteed or insured by any governmental agency or fund or independent
third party. The Company's ability to offer competitive interest rates,
attractive terms, and efficient service are its primary basis for meeting
competition. American Express Certificate Company (formerly IDS Certificate
Company) is the Company's main competitor in the issuance of face-amount
certificates.
Employees
The Company currently has no employees, other than its officers who are
compensated for their services to the Company under the terms of the
Administrative Services Agreement with State Bond.
Capital Structure
The Company has 10,000,000 shares of authorized common stock, $1 par value, of
which 250,000 shares are currently issued and outstanding. State Bond owns all
of the Company's issued and outstanding shares.
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<PAGE>
Regulation
Like many financial service companies which offer investment opportunities to
the public, the Company is subject to federal and state regulation. In
particular, 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" and
"Reserves and Deposits with Custodian" and Note 9 of Notes to Financial
Statements (Audited).
The Company is not a bank, broker-dealer or insurance company. THE CERTIFICATES
ARE NOT BANK PRODUCTS, EQUITY INVESTMENTS, ANNUITIES OR LIFE INSURANCE, AND ARE
NOT GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR FUND OR PRIVATE THIRD
PARTY.
Description of Property
The Company's executive offices (the "Corporate Offices") are located at 5105
River Road, Suite 101, Bethesda, Maryland. The main telephone number for the
Corporate Offices is (301) 656-4200. The Corporate Offices are the primary
location for State Bond's and the Company's investment, accounting, corporate
accounting, and marketing activities and various support personnel. These
offices are leased by State Bond which makes them available to the Company under
the Administrative Services Agreement.
Legal Proceedings
The Company is not a party to, nor is any of its property the subject of, any
material pending legal proceedings, other than ordinary litigation routine to
its business.
EXECUTIVE OFFICERS AND DIRECTORS
Certain information about the Company's directors and officers, including their
principal occupations for the past five years, is set out below. Members of the
Board who are considered "interested persons" of the Company under the 1940 Act
are indicated by an asterisk (*). The Company's directors and officers, other
than directors who are not interested persons of the Company, serve in such
capacities without compensation. Officers are appointed annually at the annual
meeting of the Company's Board of Directors.
The individuals named below became officers and directors of the Company in July
2000, upon completion of the Acquisition and the resignation of their
predecessors.
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND AGE THE COMPANY DURING THE PAST FIVE YEARS
<S> <C> <C> <C>
John J. Lawbaugh (31)* Chairman of the Managing Member, State Bond & Mortgage Company, L.L.C. (Since May
Board, President 2000); President, 1st Atlantic Guaranty Corporation (face-amount
and Treasurer certificate company); Prior to that, President, Atlantic Pension &
Trust (private pension fund management); President, Atlantic Capital
Funding Corporation (commercial and residential mortgage banking)
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND AGE THE COMPANY DURING THE PAST FIVE YEARS
<S> <C> <C> <C>
Iraline G. Barnes (52) Director Special Counsel, Roseman & Colin (since 1999); Prior to that,
Senior Judge, DC Superior Court; Prior to that, Vice President of
Corporate Relations, Potomac Electric Power Co.
Delegate to the State Senate, Maryland; Prior to that, Accountant/
Kumar Barve (40) Director Chief Financial Officer, Environmental Management Services, Inc.
(Hazardous Waste Disposal and Environmental Consulting)
Nancy Hopkinson (57) Director Currently Retired (since 1996); prior to that, Teacher and School
Administrator, Montgomery County Public Schools (Maryland)
Brian Murphy (57) Director Partner, Griffin, Griffin, Tarby & Murphy, LLP (law firm)
Brian P. Smith (45)* Director and Vice President, 1st Atlantic Guaranty Corporation; prior to that,
Secretary Operations Manager, Atlantic Pension & Trust (private pension fund
management); Operations Manager, Atlantic Capital Funding
Corporation since 1996; prior to that, Operations Manager,
Enterprise Network Applications (computer software company)
Marialice B. Williams (54) Director President of Risk Mitigation Strategists; Chairman, D.C. Housing
Finance Agency; Chairman, Advisory Committee of WPFW (89.3FM)
Radio; Prior to that, Director, Capital Markets section of the
Multifamily Division of Federal National Mortgage Association.
(from 1989-1998)
Eric Westbury Executive Executive Vice President, State Bond & Mortgage Company, L.L.C.
(37) Vice (since May 2000); Executive Vice President, 1st Atlantic Guaranty
President Corporation (since November 1999); prior to that,
President and Chief Operating Officer of The Washington
Development Group (private real estate development and
management company), from September 1997 through
November 1999. Prior to that, Vice-President, Market
Executive (commercial and retail banking) First Union
National Bank, Washington, DC.
</TABLE>
17
<PAGE>
Board of Directors
The Board of Directors is responsible for the overall management of the
Company's business. Directors are elected annually at the Company's annual
meeting of shareholders. Each Director who is not an interested person of the
Company receives an annual retainer of $500, plus a $750 fee for each regular or
special Board meeting he or she attends. The Directors also receive
reimbursement for their expenses incurred in attending any meeting of the Board.
The Board generally meets quarterly.
Committees of the Board of Directors
The Company has an Audit Committee, Executive Committee and Investments
Committee. The duties of each Committee and its present membership are as
follows:
Audit Committee: The members of the Audit Committee consult with the Company's
independent auditors if the auditors deem it desirable, and meet with the
Company's independent auditors at least once annually to discuss the scope and
results of the annual audit of the Company and such other matters as the
Committee members deem appropriate or desirable. Directors Barnes, Barve and
Williams are members of the Audit Committee.
Executive Committee: During intervals between meetings of the Board, the
Executive Committee possesses and may exercise all of the powers of the Board in
the management of the Company except as to those matters that specifically
require action by the Board. Directors Hopkinson, Lawbaugh, and Murphy are
members of the Executive Committee.
Investments Committee: The members of the Investments Committee oversee the
Company's investment activities. Directors Lawbaugh, Murphy and Williams are
members of the Investments Committee.
RELATIONSHIP WITH STATE BOND AND AFFILIATES
Pursuant to the Administrative Services Agreement dated as of July 19, 2000,
State Bond provides administrative services to the Company. Under the terms of
that Agreement, State Bond makes available certain of its property, equipment
and facilities to the Company for use in its business operations. State Bond
also provides the Company with certain administrative and special services,
including personnel. The Company's officers also are officers of State Bond. The
annual charge to the Company for the services and facilities provided by State
Bond is 2% of the Company's total certificate reserves as defined in the
Administrative Services Agreement. At no time, however, may the charge cause the
Company to have assets of less than the total of the qualified investments and
capital stock required under the 1940 Act. State Bond's parent, 1st Atlantic, is
wholly owned by John J. Lawbaugh and Brian P. Smith, officers and Directors of
the Company.
In connection with the Acquisition, certain dividend payments were made by the
Company to its former, and to its current, parent as described in Note 3 of the
Notes to Condensed Financial Statements (unaudited) of the Company as of
September 30, 2000.
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<PAGE>
INDEPENDENT AUDITORS
SBM MN's financial statements, included herein at December 31, 1999 and 1998,
and for each of the three years in the period ended December 31, 1999, 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. The Company has selected
Reznick, Fedder & Silverman as its independent auditors for the year ending
December 31, 2000.
SELECTED FINANCIAL DATA
The following table contains selected financial data of the Company for the five
years ended December 31, 1999. The financial data was derived from the audited
financial statements of SBM MN. The report of Ernst & Young LLP, independent
auditors, with respect to the three years ended December 31, 1999, appears in
this Prospectus. The financial data for the nine month periods ended September
30, 2000 and 1999 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and results of operations for these periods.
Operating results for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 2000. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, related notes, and other financial
information included in this Prospectus.
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31 SEPTEMBER 30
-------------------------------------------------------- ------------
1999 1998 1997 1996 1995* 2000 1999
---- ---- ---- ---- ----- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C> <C> <C>
Total investment income $ 2,292 $ 2,827 $ 3,933 $ 4,290 $ 4,889 $ 1,468** $ 1,725**
Interest credited on certificate (1,615) (2,063) (2,795) (2,822) (2,929) 885 1,247
reserves
Net investment spread 677 763 1,138 1,468 1,960 583 478
Total investment and other expenses (370) (576) (755) (815) (958) (236) (278)
Federal income tax (expense) benefit 102 (54) (124) (238) (406) (138) (112)
Net investment income (loss) 409 134 259 415 596 209 88
Net realized investment gains (373) (103) (164) 317 181 (454) (471)
(losses)
Net income (loss) 36 31 95 732 777 (245) (383)
Earnings (loss) per share*** 0.14 0.12 0.38 2.93 3.11 (0.98) (1.53)
BALANCE SHEET DATA (END OF PERIOD)
Total assets $ 34,285 $ 39,354 $ 60,270 $ 55,726 $ 60,580 $ 24,476 $ 35,424
Face-amount certificate reserves 30,117 34,068 45,127 50,186 52,460 22,811 31,082
Shareholder's equity 4,168 5,028 4,982 5,064 4,986 1,412 4,290
</TABLE>
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<PAGE>
* SMB MN was acquired by ARM effective as of May 31, 1995. The results of
operations for 1995 represent SBM MN's historical results for the period from
January 1, 1995 to May 31, 1995 combined with results of its 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 MN's immediate
predecessor.
** Before net realized investment gains (losses) to conform to full year
Statements of Operations format.
*** Earnings (loss) per share based on 250,000 shares issued and outstanding.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis of financial condition and results of operations for
the full years included, as set forth under this caption is based on the
discussion and analysis of management prior to the Acquisition as included in
SBM MN's Annual Report on Form 10-K for the year ended December 31, 1999. The
term "Company" should be read as SBM MN as the context and time period requires.
The Acquisition was completed on July 19, 2000, as stated earlier.
Results Of Operations
1999 COMPARED WITH 1998
Net investment income (net income excluding net realized investment gains and
losses) was $408,673 and $133,733 for 1999 and 1998, respectively. The increase
in net investment income was primarily attributable to a decrease in real estate
expenses (due to the sale of real estate in 1998), and lower investment and
other expenses.
Net investment spread, which is the difference between investment income and
interest credited on certificate reserves, decreased to $0.7 million during 1999
from $0.8 million in 1998. These amounts reflect net investment spread of 1.20%
and 1.12% during 1999 and 1998, respectively, between the Company's investment
yield on average cash and investments and the average rate credited on
certificate reserves. The Company's investment income decreased to $2.3 million
from $2.8 million for 1999 and 1998, respectively. These amounts represent
investment yields of 6.20% and 6.46% on average cash and investments of $36.9
million and $43.8 million for 1999 and 1998, respectively. This decrease in
annualized investment yield on cash and investments was primarily attributable
to the Company investing in lower yielding securities during 1999 compared to
1998.
Interest credited on certificate reserves was $1.6 million and $2.1 million for
1999 and 1998, respectively. These amounts represent average rates of interest
credited of 5.00% and 5.34% on average certificate reserves of $32.3 million and
$38.7 million for 1999 and 1998, respectively. The majority of the Company's
outstanding face-amount certificates are fixed-rate three-year contracts. The
Company monitors credited interest rates for new and renewal issues against
competitive products, mainly bank certificates of deposit. Credited interest
rate adjustments (up or down) on new certificates are made as the Company deems
necessary. New and renewal contracts issued during 1999 have crediting rates
that are generally lower than contracts that matured during that period,
resulting in the overall decrease in the average crediting rate.
Investment and other expenses were $369,825 and $575,823 for 1999 and 1998,
respectively. The decrease in investment and other expenses is primarily
attributable to a decrease in
20
<PAGE>
management and investment advisory fees, deferred acquisition cost amortization
and renewal commissions, and real estate expenses in 1999 of $53,093, $85,316
and $87,813, respectively, compared to 1998.
Realized investment losses (net of gains) were $470,507 and $152,977 for 1999
and 1998, respectively. Realized investment losses for 1998 include a loss of
$178,795 related to the write-down to fair value and subsequent sale of the
Company's real estate investment. Other realized investment gains and losses
were primarily interest-rate related and attributable to the asset/liability
management strategies of the Company. Fixed maturities and equity securities
(i.e., non-redeemable preferred stock) classified as available-for-sale are sold
during rising and falling interest rate environments which can result in
period-to-period swings in interest-rate related realized investment gains and
losses.
In the event that the Company experiences higher than historical levels of
certificate surrenders, the Company might need to liquidate investments other
than in accordance with its normal asset/liability management strategy and, as a
result, the Company could experience substantial realized investment losses.
During 1999, net income was $36,143 compared to $30,643 in 1998. The increase
was primarily attributable to an increase in net investment income partially
offset by an increase in net realized investment losses.
Certificate reserves decreased $4.0 million or 11.6% during 1999, as maturities
and surrenders exceeded sales and renewals. The Company believes a factor
leading to the decrease was the modest increase in intermediate-term market
interest rates in 1999, which enhanced the attractiveness of competing products,
such as money market funds and bank certificates of deposit. For certificates
reaching their maturity date during 1999 and 1998, 66% and 61%, respectively,
were renewed.
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, 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 its investment yield on
average cash and investments and the average rate credited on certificate
reserves. The Company 's 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 its
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.
21
<PAGE>
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 its outstanding
face-amount certificates are fixed-rate three-year contracts. The Company
monitors credited interest rates for new and renewal issues against competitive
products, mainly bank certificates of deposit. Credited interest rate
adjustments (up or down) on new certificates are made as the Company 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 its real estate
investment. Other realized investment gains and losses were primarily
interest-rate related and attributable to its 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. The Company believes a significant
factor leading to the decrease is that the certificate of deposit marketplace
was and continues to be very competitive. For certificates reaching their
maturity date during 1998 and 1997, 61% and 64%, respectively, were renewed.
Asset Portfolio Review
The Company primarily invests in securities with fixed maturities with the
objective of providing reasonable returns while limiting liquidity and credit
risks. The Company's investments in fixed maturities were 100% and 97%
investment grade as of December 31, 1999 and 1998, respectively. Investment
grade securities are those classified as 1 or 2 by the National Association of
Insurance Commissioners, or where such classifications are not available,
securities are classified by a nationally recognized statistical rating
organization (i.e., Standard & Poor Corporation's rating of BBB- or above).
Additionally, the Company's investment portfolio had no investments in real
estate, mortgage loans and common equity securities. It is expected, however,
that the Company will in the future make significant investments in real estate
mortgage loans, and common equities, as permitted by law. As of December 31,
1999, the Company held no securities that had defaulted on principal or interest
payments.
22
<PAGE>
Fixed maturities include mortgage-backed and asset-backed securities, corporate
securities, U.S. Treasury securities and other government obligations.
Mortgage-backed securities ("MBSs"), which include pass-through securities and
collateralized mortgage obligations ("CMOs"), totaled $10.3 million at December
31, 1999, representing 30.1% of total qualified assets (48.0% at December 31,
1998). The Company's investments in CMOs represented 29.2% and 46.7% of the
Company's qualified assets as of December 31, 1999 and 1998, respectively. MBSs,
including CMOs, are subject to risks associated with prepayments of the
underlying mortgage loans. Prepayments cause these securities to have actual
maturities different from those expected at the time of purchase. The degree to
which a security is susceptible to either an increase or decrease in yield due
to prepayment speed adjustments is influenced by the difference between its
amortized cost and par, the relative sensitivity of the underlying mortgages
backing the assets to prepayments in a changing interest rate environment and
the repayment priority of the securities in the overall securitization
structure. Prepayment sensitivity is evaluated and monitored, giving full
consideration to the collateral characteristics, such as weighted average coupon
rate, weighted average maturity and the prepayment history of the specific loan
pool. Additionally, the Company routinely projects three-year liability and
asset cash flows to monitor the level of liquidity for maturing face-amount
certificates.
Based on the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the
Company currently classifies its fixed maturity and equity securities as
available-for-sale. Such securities are carried at fair value and changes in
fair value, net of related deferred income taxes, are charged or credited
directly to shareholder's equity. Fluctuations in interest rates during 1999
resulted in unrealized losses of $825,522 at December 31, 1999 compared to
unrealized gains of $70,448 (net of $37,942 in deferred income taxes) at
December 31, 1998. Volatility in reported shareholder's equity occurs as a
result of the application of SFAS No. 115, which requires some assets to be
carried at fair value while other assets and all liabilities are carried at
historical values. As a result, adjusting the shareholder's equity for changes
in the fair value of the Company's fixed maturities and equity securities
without reflecting offsetting changes in the value of the Company's liabilities
or other assets creates volatility in reported shareholder's equity but does not
reflect the underlying economics of the Company's business.
Liquidity and Financial Resources
As of December 31, 1999, the Company had $4.6 million of qualified assets in
excess of the minimum amount required by the 1940 Act and the rules and
regulations promulgated thereunder by the SEC, as computed in accordance with
Section 28(b) of the 1940 Act.
The primary liquidity requirement of the Company relates to its payment of
certificate maturities and surrenders. The principal sources of cash to meet
such liquidity requirements are investment income and proceeds from maturities
and redemptions of investments.
At December 31, 1999, cash and cash equivalents totaled $14.4 million, an
increase of $11.1 million from December 31, 1998. Due to the uncertainty
surrounding ARM and the ownership of the Company significantly higher levels of
cash and cash equivalents were maintained in 1999. The Company's aim is to
manage its cash and cash equivalents position so as to satisfy short-term
liquidity needs. In connection with this management of cash and cash
equivalents, the
23
<PAGE>
Company may invest idle cash in short duration fixed maturities to capture
additional yield when short-term liquidity requirements permit.
Cash flows of $2.1 million, $2.2 million and $4.0 million were generated from
operating activities in 1999, 1998 and 1997, respectively. These cash flows
resulted principally from investment income, less management and investment
advisory fees and commissions paid. Proceeds from sales, redemptions and
maturities of investments generated $37.0 million, $50.1 million and $93.1
million in cash flows during 1999, 1998 and 1997, respectively, which were
offset by purchases of investments of $22.5 million, $49.3 million and $79.5
million, respectively.
Nine Months Ended September 30, 2000 Compared with Nine Months
Ended September 30, 1999
Net loss was $245,126 and $383,340 for the nine months ended September 30, 2000
and 1999, respectively. This decrease is due primarily to a decrease in the
realized investment losses from the sale of securities in the investment
portfolio. In addition, operating expenses for the same period were lower by
16.3% compared to the period ending September 30, 1999.
Net investment spread, which is the difference between investment income and
interest credited on certificate reserves, was $128,263 during the first nine
months of 2000 compared to $7,224 during the same period in 1999. On an
annualized yield basis, the net investment spread was .93% and 1.19% for the
nine months ended September 30, 2000 and 1999, respectively.
The Company's investment income decreased to $1,014,159 from $1,254,643 for the
nine months ended September 30, 2000 and 1999, respectively. Realized investment
losses and a reduction in the amount of invested assets were the primary reason
for the lower investment income.
These amounts represent annualized investment yields of 6.28% and 6.26% on
average cash and investments of $23.7 million and $36.6 million for the nine
months ended September 30, 2000 and 1999, respectively and realized losses on
available for sale securities. The decrease in average cash and investments is a
result of the dividends paid in the amount of approximately $5.3 million. In
addition there were redemptions of face-amount certificates without any new
sales of face-amount certificates from May 2000 to the present, which also
contributed to the lower investment income.
Interest credited on certificate reserves was $ 885,895 and $ 1,247,419 for the
nine months ended September 30, 2000 and 1999, respectively. The decrease was a
result of a decrease in the face-amount certificates outstanding in fiscal year
2000 and the withdrawal penalty charged against the reserve liability. These
amounts represent annualized average rates of interest credited of 5.35% and
5.07% on average certificate reserves of $25.0 million and $32.8 million for the
nine months ended September 30, 2000 and 1999, respectively. The majority of the
Company's outstanding face-amount certificates are fixed-rate three-year
contracts.
The Company monitors credited interest rates for new and renewal issues against
competitive products, such as bank certificates of deposit. Credited interest
rate adjustments (up or down) on new certificates are made as the Company deems
necessary.
24
<PAGE>
Investment and other expenses were $232,716 and $278,350 for the nine months
ended September 30, 2000 and 1999, respectively. The decrease in investment and
other expenses was the result of a decrease in the operating expenses related
primarily to management and investment advisory fees for the third quarter of
2000. The Company entered into an Administrative Services agreement with its
parent company, State Bond in which State Bond earns a fee from the Company of
2% of Total Certificate Reserves. State Bond waived the fee for the third
quarter.
The Company primarily invests in securities with fixed maturities with the
objective of providing reasonable returns while limiting liquidity and credit
risks. The Company's investments in fixed maturities were 100% investment grade
at both September 30, 2000 and September 30, 1999. 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's Corporation's rating of BBB- or above). As of September 30,
2000, the Company held no securities or mortgage loans which had defaulted on
principal or interest payments.
Additionally, the Company's investment portfolio has a small portion of its
assets invested in real estate consisting of mortgage loans totaling $1,029,621
for the nine months ending September 30, 2000. It is expected, however, that the
Company, will in the future make significant investments in real estate mortgage
loans as permitted by law but not at the expense of assuming more than
acceptable risk in the portfolio.
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 but
are primarily collateralized mortgage obligations ("CMOs"), totaled $5.0 million
at September 30, 2000, representing 20.8% of total qualified assets (30.4% at
September 30, 1999). 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 is due to prepayment
speed adjustments which are influenced by the differences 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.
Certificate reserves decreased $7.4 million or 24.3% during the first nine
months of 2000, as maturities and surrenders exceeded sales and renewals. The
Company believes a factor leading to the decrease was the modest increase in
intermediate-term market interest rates in 2000 which enhanced the
attractiveness of competing products, such as money market funds and bank
certificates of deposit. In addition, there were no sales of face-amount
certificates from May 1, 2000 through the present period, due to the previous
owner of the Company not updating its Form S-1 Registration Statement beyond
April 30, 2000.
For face-amount certificates reaching their maturity date during the nine months
ended September 30, 2000 and 1999, 26.8% and 65%, respectively, were renewed.
The percentage of
25
<PAGE>
renewals for the period ended September 30, 2000 was adversely impacted by the
need to suspend the offering of certificates as discussed previously.
Liquidity and Financial Resources. As of September 30, 2000, the Company had
$1,254,074 of qualified assets in excess of the minimum amount required by the
1940 Act. The payment of Certificate maturities and surrenders creates the
Company's primary liquidity requirement. As discussed above, the principal
sources of cash to meet these requirements are investment income and proceeds
from maturities and sale of investments.
At September 30, 2000, cash and cash equivalents totaled $9,082,675, a decrease
of $5,324,804 from December 31, 1999. The decrease is primarily attributable to
dividends paid. The Company manages its cash and cash equivalent position to
satisfy short-term needs. The Company may invest idle cash in short duration
fixed maturities to realize additional yield when short-term liquidity
requirements permit.
Cash flow of $666,782 was generated from operating activities in the nine months
ended September 30, 2000. This cash flow resulted principally from investment
income, less management and investment advisory fees and commissions paid.
Proceeds from sales, and maturities of investments generated $6,128,488 million,
in cash flow during the nine-month period, which was offset by purchases of
investments of $1,293,439 million.
--------------------------
Managing interest rates between those earned on the Company's investments and
those paid under its face-amount certificates is fundamental to the Company's
investment decisions. Both rates are sensitive to changes in the general level
of interest rates in the economy, as well as to competitive factors in the case
of the certificates. In addition to standard methods used to analyze interest
rate sensitivity, the Company regularly analyzes the potential impact of a range
of different interest rate models. These provide "benchmarks" for assessing the
impact on Company earnings if rates move higher or lower than the expected
targets set in the Company's investment guidelines.
26
<PAGE>
SBM CERTIFICATE COMPANY
INDEX TO FINANCIAL STATEMENTS
SBM Certificate Company (Minnesota)
Audited Financial Statements:
Report of Independent Auditors
Balance Sheets as of December 31, 1999 and 1998
Statements of Operations for the Years Ended December 31, 1999, 1998,
and 1997
Statements of Shareholder's Equity for the Years Ended December 31,
1999, 1998 and 1997
Statements of Cash Flows for the Years Ended December 31, 1999, 1998
and 1997
Notes to Financial Statements
Unaudited Financial Statements:
Condensed Balance Sheets as of September 30, 2000 (Unaudited) and
December 31, 1999
Condensed Statement of Operations for the Nine Months Ended September
30, 2000 and 1999 (Unaudited).
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 2000 and 1999 (Unaudited)
Notes to Financial Statements for the Nine Months Ended September 30,
2000 and 1999
27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SBM Certificate Company (Minnesota)
We have audited the accompanying balance sheets of SBM Certificate Company
(Minnesota) as of December 31, 1999 and 1998, and the related statements of
operations, shareholder's equity, and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
Since the date of completion of our audits of the accompanying financial
statements and initial issuance of our report thereon dated March 31, 2000,
which report contained an explanatory paragraph regarding the Company's ability
to continue as a going concern, the Company's parent, as discussed in the last
paragraph of Note 2, has completed a sale agreement with 1st Atlantic Guaranty
Corporation. Therefore, the conditions that raised substantial doubt about
whether the Company will continue as a going concern no longer exist.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SBM Certificate Company
(Minnesota) at December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Louisville, Kentucky
March 31, 2000
Except for the last paragraph of Note 2, as to which the date is
July 19, 2000
28
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
DECEMBER 31,
1999 1998
----------- -----------
<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:
(amortized cost: 1999-$19,886,594;
1998-$34,136,751) $18,998,215 $34,149,196
Equity securities, at fair value (cost: 1999-
1998-$290,688) 353,545 390,776
Certificate loans 124,933 164,209
Cash and cash equivalents 14,407,479 3,279,970
----------- -----------
Cash and investments 33,884,172 37,984,151
Receivables:
Dividends and interest 180,962 296,013
Receivable for investment securities sold 53,997 22,249
----------- -----------
Total receivables 234,959 318,262
----------- -----------
Total qualified assets 34,119,131 38,302,413
Other fixed maturities, available-for-sale, at fair value (amortized
(amortized cost: 1998-$851,978) (unaffiliated issuer) -- 847,835
Deferred acquisition costs 150,400 204,228
Other assets 15,368 --
----------- -----------
Total assets $34,284,899 $39,354,476
=========== ===========
</TABLE>
29
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Certificate reserves $ 30,116,686 $ 34,067,826
Deferred federal income taxes -- 27,265
Accounts payable and other liabilities -- 231,345
-----------------------------
Total liabilities 30,116,686 34,326,436
Shareholder's equity:
Common stock, $1 par value; 1,000,000 shares authorized;
250,000 shares issued and outstanding 250,000 250,000
Additional paid-in capital 3,050,000 3,050,000
Accumulated other comprehensive income (loss) from net unrealized
gains and losses on available-for-sale securities (825,522) 70,448
Retained earnings 1,693,735 1,657,592
-----------------------------
Total shareholder's equity 4,168,213 5,028,040
-----------------------------
Total liabilities and shareholder's equity $ 34,284,899 $ 39,354,476
=============================
</TABLE>
SEE ACCOMPANYING NOTES.
30
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Investment income:
Interest income from securities $ 2,261,957 $ 2,699,491 $ 3,729,295
Other investment income 29,602 127,006 203,810
-----------------------------------------
Total investment income 2,291,559 2,826,497 3,933,105
Investment and other expenses:
Management and investment advisory fees 154,042 207,135 246,468
Deferred acquisition cost amortization and renewal
commissions 193,973 279,289 288,974
Real estate expenses 2,610 90,423 166,670
Amortization of goodwill -- -- 23,833
Other expenses (income) 19,200 (1,024) 29,311
-----------------------------------------
Total investment and other expenses 369,825 575,823 755,256
Interest credited on certificate reserves 1,615,074 2,063,311 2,795,360
-----------------------------------------
Net investment income before
income taxes 306,660 187,363 382,489
Income tax benefit (expense) 102,013 (53,630) (124,284)
-----------------------------------------
Net investment income 408,673 133,733 258,205
Realized investment losses (470,507) (152,977) (268,002)
Income tax benefit on realized
investment losses 97,977 49,887 104,485
-----------------------------------------
Net realized investment losses (372,530) (103,090) (163,517)
-----------------------------------------
Net income $ 36,143 $ 30,643 $ 94,688
=========================================
</TABLE>
SEE ACCOMPANYING NOTES.
31
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED SHAREHOLDER'S
STOCK CAPITAL INCOME (LOSS) EARNINGS EQUITY
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 250,000 $ 3,050,000 $ 231,541 $ 1,532,261 $ 5,063,802
Net income 94,688 94,688
Change in net unrealized
Gains on available-for-sale
Securities, net of tax (176,818) (176,818)
-----------
Comprehensive loss (82,130)
----------------------------------------------------------------------------
Balance, December 31, 1997 250,000 3,050,000 54,723 1,626,949 4,981,672
Net income 30,643 30,643
Change in net unrealized
Gains on available-for-sale
Securities, net of tax 15,725 15,725
-----------
Comprehensive income 46,368
----------------------------------------------------------------------------
Balance, December 31, 1998 250,000 3,050,000 70,448 1,657,592 5,028,040
Net income 36,143 36,143
Change in net unrealized
gains (losses) on available-
for-sale securities, net of (895,970) (895,970)
tax -----------
Comprehensive loss (859,827)
----------------------------------------------------------------------------
Balance, December 31, 1999 $ 250,000 $ 3,050,000 $ (825,522) $ 1,693,735 $ 4,168,213
============================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
32
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 36,143 $ 30,643 $ 94,688
Adjustments to reconcile net income to cash flows
Provided by operating activities:
Provision for certificate reserves 1,615,074 2,063,311 2,795,360
Realized investment losses 470,507 152,977 268,002
Deferral of acquisition costs (140,145) (325,523) (314,805)
Amortization of deferred acquisition costs and
Renewal commissions 193,973 279,289 288,974
Other amortization and depreciation 23,711 110,043 465,553
Deferred tax expense (benefit) 11,513 (79,525) (162,627)
Decrease in dividends and interest receivable 115,051 32,503 205,442
Changes in other assets and liabilities (247,085) (57,214) 323,092
----------------------------------------------
Cash flows provided by operating activities 2,078,742 2,206,504 3,963,679
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (22,469,407) (49,260,045) (79,455,679)
Maturities and redemptions 26,873,872 24,117,893 10,812,744
Sales 10,171,240 26,000,513 82,250,553
Sales, maturities and redemptions-mortgage loans
and real estate -- 260,296 3,091
Repayment of certificate loans, net 39,276 22,083 87,076
----------------------------------------------
Cash flows provided by investing activities 14,614,981 1,140,740 13,697,785
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts paid to face-amount certificate holders (5,737,826) (13,423,346) (8,179,248)
Amounts received from face-amount certificate holders 171,612 301,208 325,456
----------------------------------------------
Cash flows used in financing activities (5,566,214) (13,122,138) (7,853,792)
----------------------------------------------
Net change in cash and cash equivalents 11,127,509 (9,774,894) 9,807,672
Cash and cash equivalents at beginning of year 3,279,970 13,054,864 3,247,192
----------------------------------------------
Cash and cash equivalents at end of year $ 14,407,479 $ 3,279,970 $ 13,054,864
==============================================
</TABLE>
SEE ACCOMPANYING NOTES
33
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
SBM Certificate Company (Minnesota) (the "Company") has been a wholly
owned subsidiary of ARM Financial Group, Inc. ("ARM") since June 14, 1995.
NATURE OF OPERATIONS
The Company is an issuer of face-amount certificates and is registered
under the Investment Company Act of 1940 (the "1940 Act"). A face-amount
certificate is an obligation of the Company requiring the Company to pay
certificate holders the original invested amount of the certificate, plus a
three-year fixed-rate return, at a given maturity date. The Company's
face-amount certificates are sold primarily in the Midwest. Face-amount
certificates, which are similar to bank certificates of deposit, generally
compete with various types of individual savings products offered by banks and
insurance companies that provide a fixed rate of return on investors' money.
BASIS OF PRESENTATION
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States.
INVESTMENTS
Fixed maturities and equity securities are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of taxes, reported as a separate component
of shareholder's equity in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The amortized cost of fixed maturities classified as
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization or accretion is computed using
the interest method and is included in investment income. Anticipated
prepayments on mortgage-backed securities are considered in determining the
effective yield on such securities. If a difference arises between anticipated
and actual prepayments, the carrying value of the investment is adjusted with a
corresponding charge or credit to investment income. Interest and dividends are
included in investment income. Certificate loans are carried at their unpaid
principal balances. Cash and cash equivalents consist of highly liquid
investments with maturities of three months or less from the time of purchase.
Security transactions are accounted for on the date the order to buy or sell is
executed. Realized gains and losses on the sale of investments are determined
based upon the specific identification method.
Other invested assets includes real estate, which is recorded at cost,
less accumulated depreciation since the Acquisition.
34
<PAGE>
DEFERRED ACQUISITION COSTS
Costs of issuing new face-amount certificates, principally commissions,
have been deferred. These costs are amortized on a straight-line basis over the
initial maturity period of the certificates which is three years.
FACE-AMOUNT CERTIFICATE RESERVES
Face-amount certificates issued by the Company entitle certificate
holders, who have made either single or installment payments, to receive a
definite sum of money at maturity. Certificate reserves accrue interest, and
cash surrender values are less than accumulated certificate reserves prior to
maturity dates. The reserve accumulation rates, cash surrender values, and
certificate reserves, among other matters, are governed by the 1940 Act.
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
The Company files a consolidated federal income tax return with ARM and ARM's
other non-life insurance subsidiaries. Pursuant to a tax sharing agreement, the
consolidated income tax due is allocated among the companies based on each
company's proportionate share of taxable income. When tax benefits are
recognized for losses, (capital and operating) to the extent they can be used in
the consolidated return, the company that originally generated the loss is
reimbursed by the benefited company. However, in the event that no consolidated
tax is owed, the tax sharing agreement does not require ARM to reimburse its
subsidiaries for the use of a subsidiary's losses to offset ARM income.
USE OF ESTIMATES
The preparation of financial statements requires management of the
Company to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
2. MATERIAL EVENTS OF PARENT COMPANY
As discussed in Note 1, the Company was a wholly-owned subsidiary of
ARM as of December 31, 1999, and pursuant to an Investment Services Agreement
and an Administrative Services Agreement, the Company's operations were
administered and managed by ARM. On July 29, 1999, ARM announced that it was
restructuring its institutional business and positioning its retail business and
technology operations for the sale of ARM or its businesses or its assets.
Following the July 29, 1999 announcement, the ratings of ARM and Integrity were
significantly lowered several times by four major rating agencies, materially
and adversely affecting Integrity's ability to market and maintain persistency
of retail products. As a result, ARM sought protection with respect to its
insurance subsidiary, Integrity, from the Ohio Department of Insurance.
Integrity is domiciled in Ohio. On August 20, 1999, Integrity consented to a
Supervision Order issued by the Ohio Department of Insurance. The supervision
order was terminated on March 3, 2000 as a result of the consummation of the
Insurance Transaction.
On December 17, 1999 ARM announced that it had signed a definitive
agreement whereby Western and Southern Life Insurance Company ("Western and
Southern") would acquire ARM's insurance subsidiaries, Integrity Life Insurance
Company ("Integrity") and National Integrity Life Insurance Company. The
acquisition of the insurance companies by Western and Southern was implemented
in a voluntary petition for relief under chapter 11 of the Bankruptcy Code filed
35
<PAGE>
on December 20, 1999 in the United States Bankruptcy Court for the District of
Delaware. In re: ARM Financial Group, Inc., Case No.: 99-4430 (Judge Walsh). On
March 3, 2000 ARM completed the sale of its insurance subsidiaries to Western
and Southern ("the Insurance Transaction").
Western and Southern did not acquire the Company or ARM Securities. As
a result of the consummation of the Insurance Transaction, the vast majority of
ARM's employees, including the employees who support the Company, became
employees of Integrity (see Item 7 below). Employees of Integrity are assisting
ARM in winding up ARM's affairs, including the administration of the Company,
pursuant to a Transition Services Agreement dated March 3, 2000 ("the Transition
Services Agreement"). The Transition Services Agreement has a term of eighteen
months, but may be terminated by Western and Southern after six months, upon 90
days notice.
Pursuant to a Letter Agreement dated February 17, 2000 (as amended on
March 1, 2000, the "WTR&A Agreement"), ARM retained Walker, Truesdell, Radick &
Associates ("WTR&A") as its Restructuring Agent, to provide consulting and
management services to ARM, including services related to the sale of the
Company to 1st Atlantic. On March 2, 2000, WTR&A's retention was approved by the
Bankruptcy Court. WTR&A is a consulting firm that specializes in crisis
management, bankruptcy administration and asset liquidation services.
On March 28, 2000 ARM and the Company entered into a stock purchase
agreement to sell the Company to 1st Atlantic Guaranty Corporation ("1st
Atlantic") (the "Purchase Agreement"). The Purchase Agreement was submitted to
the Bankruptcy Court for approval. An auction between interested bidders was
conducted, 1st Atlantic ultimately prevailed. The Purchase Agreement as approved
by the Bankruptcy Court provides for a purchase price of $1,400,000. Of the
purchase price, $1,000,000 will be paid directly to ARM and $400,000 will be
placed in escrow for 18 months. The escrowed proceeds shall be used to secure
certain indemnifications of ARM. Immediately prior to the closing of the sale,
the Company shall (subject to obtaining appropriate regulatory approvals)
dividend to ARM an amount equal to the Company's shareholders' equity less (i)
$450,000 and (ii) estimated deferred acquisition costs net of income taxes. The
dividend will be in the form of a transfer of certain securities, in kind, and
the balance, if any, in cash or cash equivalents. The transaction was approved
by the Bankruptcy Court on April 27, 2000, and closed on July 19, 2000.
36
<PAGE>
3. INVESTMENTS
The amortized cost and estimated fair values of available-for-sale
securities were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999:
Fixed maturities:
Mortgage-backed securities $10,558,001 $ 28 $ 282,218 $10,275,811
Corporate securities 8,161,388 7,405 569,999 7,598,794
U.S. Treasury securities and
obligations of U.S. government
agencies 414,246 205 31,388 383,063
Foreign governments 450,602 -- 13,220 437,382
Asset-backed securities 139,908 -- 2,583 137,325
Obligations of state and political
subdivisions 162,449 3,435 44 165,840
----------------------------------------------------
Total fixed maturities 19,886,594 11,073 899,452 18,998,215
Equity securities 290,688 62,857 -- 353,545
----------------------------------------------------
Total available-for-sale
securities $20,177,282 $ 73,930 $ 899,452 $19,351,760
====================================================
DECEMBER 31, 1998:
Fixed maturities:
Mortgage-backed securities $18,342,358 $ 74,953 $ 45,435 $18,371,876
Corporate securities 9,637,558 75,980 115,474 9,598,064
U.S. Treasury securities and
obligations of U.S. government
agencies 6,062,081 58,793 7,162 6,113,712
Foreign governments 450,787 -- 42,056 408,731
Asset-backed securities 334,340 -- 2,643 331,697
Obligations of state and political
subdivisions 161,605 11,346 -- 172,951
----------------------------------------------------
Total fixed maturities 34,988,729 221,072 212,770 34,997,031
Equity securities 290,688 100,088 -- 390,776
----------------------------------------------------
Total available-for-sale
securities $35,279,417 $ 321,160 $ 212,770 $35,387,807
====================================================
</TABLE>
37
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or repay obligations with or without call or prepayment penalties and because
mortgage-backed and asset-backed securities provide for periodic payments
throughout their life.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------
ESTIMATED
FAIR
COST VALUE
--------------------------
<S> <C> <C>
FIXED MATURITIES:
Due in one year or less $ 194,735 $ 194,940
Due after one year through five years 473,531 460,734
Due after five years through ten years 2,780,967 2,579,918
Due after ten years 5,739,452 5,349,487
Asset-backed securities 139,908 137,325
Mortgage-backed securities 10,558,001 10,275,811
--------------------------
Total fixed maturities $19,886,594 $18,998,215
==========================
</TABLE>
Gross gains of $101,621, $123,867 and $765,664 and gross losses of
$572,128, $95,449 and $1,082,809 were realized on sales of fixed maturities
classified as available-for-sale for the year ended December 31, 1999, 1998, and
1997, respectively.
Gross gains of $23,459 and $49,143 were recognized on equity securities
sold during 1998 and 1997, respectively. Gross losses of $1,062, were recognized
on equity securities sold for the year ended December 31, 1998. There were no
gross losses recognized on equity securities sold for the year ended December
31, 1997. There were no gross gains or losses recognized on equity securities
sold for the year ended December 31, 1999.
During 1998, the Company sold its sole investment in real estate and
realized a loss of $178,795 associated with the transaction.
4. COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources, including net income and the change in unrealized gains or
losses on the Company's available-for-sale securities.
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 accompany
statements of shareholder's equity. Amounts are reported net of related tax at
the 35% statutory rate.
38
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net unrealized gain (loss) arising
During period on available-for-sale securities $(1,162,300) $ 99,925 $ (235,975)
Reclassification adjustment for net realized
(gains) losses included in net income 266,330 (84,200) 59,157
----------------------------------------
Change in net unrealized gains (losses) on
Available-for-sale securities $ (895,970) $ 15,725 $ (176,818)
========================================
</TABLE>
5. CERTIFICATE RESERVES
Total certificate reserves at December 31 are summarized as follows:
<TABLE>
<CAPTION>
MINIMUM ADDITIONAL
1999 1998 INTEREST INTEREST
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fully-paid certificates:
Single-payment series 503 $ 27,085,547 $ 30,754,255 2.50% 2.10% to 4.60%
Installment 1,958,776 2,084,595 2.50% to 3.50% 1.50% to 2.75%
Optional settlement 534,582 594,300 2.50% to 3.00% 2.00% to 2.75%
Due to unlocated certificate 3,191 3,126 None
holders
----------------------------
29,582,096 33,436,276
Installment certificates:
Reserves to mature, by series:
120, and 220 256,219 302,400 3.25% 1.75% to 2.00%
315 120,540 135,104 3.50% 1.50% to 1.75%
Advance payments 157,831 194,046 * *
----------------------------
534,590 631,550
----------------------------
Total certificate reserves $ 30,116,686 $ 34,067,826
============================
</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 2000.
39
<PAGE>
6. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair values of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined using available market information and
appropriate valuation methodologies. However, considerable judgement was
required to develop these estimates. Accordingly, the estimates are not
necessarily indicative of the amounts which could be realized in a current
market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Fixed maturities $18,998,215 $18,998,215 $34,997,031 $34,997,031
Equity securities 353,545 353,545 390,776 390,776
Certificate loans 124,933 124,933 164,209 164,209
Cash and cash equivalents 14,407,479 14,407,479 3,279,970 3,279,970
Liabilities:
Certificate reserves 30,116,686 30,223,837 34,067,826 34,251,701
Accounts payable and other liabilities -- -- 231,345 231,345
</TABLE>
The following methods and assumptions were used in estimating fair
values:
Fair values for investments in securities are based on quoted market
prices, where available. For fixed maturities and equity securities for which a
quoted market price is not available, fair values are estimated using internally
calculated estimates or quoted market prices of comparable instruments.
CERTIFICATE LOANS
The carrying value of certificate loans approximates their fair value.
CASH AND CASH EQUIVALENTS
The carrying amounts of cash and cash equivalents approximate their
fair value given the short-term nature of these assets.
CERTIFICATE RESERVES
The fair value of certificate reserves is based on a discounted cash
flow analysis, using the current interest rate offered on new certificates of
5.00% at December 31, 1999 and 1998.
40
<PAGE>
OTHER INVESTED ASSETS, OTHER ASSETS, ACCOUNTS PAYABLE AND OTHER LIABILITIES
The financial statement carrying amounts of other invested assets,
other assets, accounts payable and other liabilities are deemed to be a
reasonable approximation of their fair value.
7. FEDERAL INCOME TAXES
Deferred federal income taxes reflect the net tax effects of (i)
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(ii) operating and capital losses. Significant components of the deferred tax
liabilities and assets as of December 31, 1999 and December 31, 1998 were:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Deferred tax liabilities:
Net unrealized gains on available-for-sale securities $ -- $ 37,936
Other 1,617 1,616
-----------------------
Total deferred tax liabilities 1,617 39,552
Deferred tax assets:
Net unrealized losses on available for sale securities 288,933 --
Investments 96,145 73,867
Capital loss carryover 138,683 --
Net operating loss carryforward -- 58,420
-----------------------
Total deferred tax assets 523,761 132,287
Valuation allowance for deferred tax assets (522,144) (120,000)
-----------------------
Net deferred tax assets 1,617 12,287
-----------------------
Deferred tax liabilities shown on the accompanying balance sheets $ -- $ 27,265
=======================
</TABLE>
The Company's net operating loss carryforward of $166,915 at December
31, 1998 was fully utilized in 1999.
The components of the provision for federal income tax expense consist
of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Current $(211,503) $ 83,268 $ 182,426
Deferred 11,513 (79,525) (162,627)
-------------------------------------
Total federal income tax expense (benefit) $(199,990) $ 3,743 $ 19,799
=====================================
</TABLE>
41
<PAGE>
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 1999 and 1998. The 1997
reduction in the valuation allowance of $314,521 reduced the goodwill balance to
zero.
Federal income tax expense differs from that computed by using the
federal income tax rate of 35% as shown below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate $ (57,346) $ 12,035 $ 40,070
Unreimbursed capital loss carryover used by ARM -- 281,842 --
Increase (decrease) in valuation allowance related to
Capital loss carryover 66,700 (280,000) --
Decrease in contingent tax liability (200,000) -- --
Dividend received deduction (7,211) (7,749) (12,457)
Tax-exempt interest (2,612) (4,194) (5,677)
Goodwill amortization -- -- 8,342
Other 479 1,809 (10,479)
-------------------------------------
Total federal income tax expense (benefit) $(199,990) $ 3,743 $ 19,799
=====================================
</TABLE>
The Company files a consolidated federal income tax return with ARM and
ARM's other non-life insurance subsidiaries. At December 31, 1999 and 1998,
($28,282) and $103,373 were due to/(from) ARM, respectively, pursuant to the tax
sharing agreement, related to ordinary losses.
8. RELATED PARTY TRANSACTIONS
Management and investment advisory fee expenses reflected in the
accompanying financial statements represent allocations of expenses from ARM.
These allocations include amounts for administrative and investment services,
including use of property, equipment and facilities. The allocations are
currently based on the proportion which such business and assets managed
represents of all of ARM's and its subsidiaries' business activities. The
allocations were $154,042, $207,135, and $246,468 for the years ended December
31, 1999, 1998, and 1997, respectively. Management believes that the methods
used to allocate such expenses are reasonable.
42
<PAGE>
The Company has paid ARM Securities Corporation, an affiliate,
$140,145, $325,523 and $314,805 for the years ended 1999, 1998 and 1997,
respectively, for sales commissions and other issuance, underwriting and sales
expenses.
9. SHAREHOLDER'S EQUITY AND REGULATORY MATTERS
The Company is subject to two principal restrictions relating to its
regulatory capital requirements. First, under the 1940 Act, the Company is
required to establish and maintain qualified assets (as defined in Section 28(b)
of the 1940 Act) having a value not less than the aggregate of certificate
reserves plus $250,000 ($30.4 million and $34.3 million at December 31, 1999 and
1998, respectively). The Company had qualified assets (at amortized cost) of
$34.9 million and $38.2 million at those respective dates.
For purposes of determining compliance with the foregoing provisions,
qualified assets are valued in accordance with District of Columbia Insurance
Laws (the "D.C. Laws") as required by the 1940 Act. Qualified assets for which
no provision for valuation is made in the D.C. Laws are valued in accordance
with rules, regulations, or orders prescribed by the SEC. These values are the
same as the financial statement carrying values, except that for financial
statement purposes, fixed maturities and equity securities classified as
available-for-sale are carried at fair value. For qualified asset purposes,
fixed maturities classified as available-for-sale are valued at amortized cost
and equity securities are valued at cost.
Second, the Minnesota Department of Commerce ("MDC") has historically
recommended to the Company that face-amount certificate companies should
maintain a ratio of shareholder's equity to total assets of a minimum of 5%
based upon a valuation of available-for-sale securities at amortized cost for
purposes of this calculation. Under this formula, the Company's capital ratio
was 14.0% and 12.6% at December 31, 1999 and 1998, respectively.
Pursuant to the required calculations of various states, the provisions
of the certificates, depository agreements, and the 1940 Act, qualified assets
of the Company were deposited with independent custodians to meet certificate
liability requirements as of December 31, 1999 and 1998, as shown in the
following table. Certificate loans, secured by applicable certificate reserves,
are deducted from certificate reserves in computing deposit requirements.
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
Qualified assets on deposit with:
Central depositary $34,214,584 $37,534,866
State governmental authorities 197,021 196,143
--------------------------
Total qualified assets on deposit 34,411,605 $37,731,009
==========================
Required deposits (certificate reserves less certificate loans
plus $250,000) $30,241,753 $34,153,617
==========================
</TABLE>
Qualified assets on deposit consisted of investment securities, at cost plus
accrued interest at December 31, 1999 and 1998.
43
<PAGE>
SBM CERTIFICATE COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Qualified assets:
Cash and investments:
Investments in securities of unaffiliated issuers:
Fixed maturities, available-for-sale, at fair value (amortized cost:
September 30, 2000 -
$13,444,268; December 31, 1999 - $19,886,594) $13,114,300 $18,998,215
Equity securities, at fair value (amortized cost: September 30,
2000 - $161,772; December 31, 1999 - $290,688) 201,312 353,545
Certificate loans 110,945 124,933
Mortgage notes receivable 1,029,621 0
Cash and cash equivalents 9,082,675 14,407,479
Escrows 364,167 0
----------- -----------
Total cash and investments 23,903,020 33,884,172
Receivables
Dividends and interests 141,216 180,962
Receivable for investment securities sold 21,254 53,997
----------- -----------
Total receivables 162,470 234,959
----------- -----------
Total qualified assets 24,065,490 34,119,131
Other assets 0 15,368
Deferred acquisition costs 145,385 150,400
Goodwill, net of accumulated amortization 265,567 0
----------- -----------
Total assets $24,476,442 $34,284,899
=========== ===========
</TABLE>
44
<PAGE>
SBM CERTIFICATE COMPANY
CONDENSED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ -------------
(Unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Liabilities:
Certificate reserves $ 22,811,416 $ 30,116,686
Federal taxes payable 101,283 0
Deferred tax liability 62,350 0
Accounts payable and other liabilities 89,443 0
------------- ------------
Total liabilties 23,064,492 30,116,686
Shareholder's equity:
Common Stock, $1 par value, 10,000,000 authorized, 250,000 shares issued
and outstanding 250,000 250,000
Additional paid-in capital 1,102,500 3,050,000
Retained earnings (deficit) (39,644) 1,693,735
Accumulated other comprehensive income (loss) 99,094 (825,522)
------------- ------------
Total shareholder's equity 1,411,950 4,168,213
------------- ------------
Total liabilities and shareholder's equity $ 24,476,442 $ 34,284,899
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
45
<PAGE>
SBM CERTIFICATE COMPANY
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
2000 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Investment income:
Interest and dividend income from securities $ 1,454,806 $ 1,705,397
Realized investment gains (losses) (453,859) (470,507)
Other investment income (losses) 13,212 19,753
----------- -----------
Total investment income 1,014,159 1,254,643
Investment and other expenses:
Management and investment advisory fees 68,700 99,474
Amortization of goodwill 2,984 0
Deferred acquisition cost amortization and renewal commissions 85,496 163,792
Other expenses 78,520 15,084
----------- -----------
Total investment and other expenses 235,700 278,350
Interest credited on certificate reserves 885,896 1,247,419
----------- -----------
Net investment income before income tax benefit (expense) (107,437) (271,126)
Income tax benefit (expense) $ (137,689) $ (112,214)
----------- -----------
Net income (loss) $ (245,126) $ (383,340)
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
46
<PAGE>
CONDENSED STATEMENTS OF CASHFLOW
For the nine month period ending September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net loss: $ (245,126) $ (383,340)
Adjustments to reconcile net loss to cash have provided by
operating activities:
Realized loss on sale of investments 453,859 470,507
Changes in other assets and liabilities 458,049 1,420,310
------------ ------------
Cash flows provided by operating activities 666,782 1,507,477
------------ ------------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Cash paid for SBM-MN (1,350,000) 0
Purchases of fixed maturity investments (263,808) (21,473,925)
Sales and redemption of fixed maturity investments 6,128,488 30,141,233
Investment in mortgage notes receivable (1,029,621) 0
Repayments of certificate loans, net 14,388 41,483
------------ ------------
Cash flows provided by investing activities 3,499,444 8,708,791
------------ ------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from the sale of common stock 2,500 0
Capital contributed to company 1,350,000 0
Amounts paid to face-amount certificate holders (5,400,850) (4,397,769)
Amounts received from face-amount certificate holders 15,681 164,612
Dividends paid (5,458,364) 0
------------ ------------
CASH FLOWS USED IN FINANCING ACTIVITIES: (9,491,033) (4,233,157)
------------ ------------
Net (decrease) increase in cash and cash equivalents (5,324,804) 5,983,111
Cash and cash equivalents at beginning of period 14,407,479 3,279,970
------------ ------------
Cash and cash equivalents at end of period $ 9,082,675 $ 9,263,081
============ ============
Supplemental disclosure of significant non-cash investing and
financing activities:
Unrealized gain on investments $ 451,559
============
Release of certificate reserve liability $ 1,526,015
============
Acquisition of SBM-MN:
Cash purchase price 1,350,000
Net assets acquired (1,081,449)
............
Goodwill $ 268,551
============
</TABLE>
SEE ACCOMPANYING NOTES.
47
<PAGE>
SBM CERTIFICATE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
1. ORGANIZATION AND BASIS OF PRESENTATION
SBM Certificate Company (the "Company" or "SBM-MD") was formed on May 24, 2000
under the laws of the State of Maryland. The Company is a wholly owned
subsidiary of State Bond and Mortgage Company, LLC ("State Bond"). The Company
is an issuer of face-amount certificates and is registered under the Investment
Company Act of 1940 (the "1940 Act"). Face-amount certificates issued by the
Company entitle the certificate holder to receive, at maturity, the principal
investment and accrued interest. The accompanying unaudited condensed financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q.
On July 19, 2000, SBM-MD completed a merger transaction with SBM Certificate
Company, a Minnesota corporation ("SBM-MN"), whereby the Company became the
surviving corporation (See note 3). In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
Operating results for the Company for the nine months ended September 30, 2000,
are not necessarily indicative of those to be expected for the year ending
December 31, 2000. For further information, refer to the Company's financial
statements and footnotes thereto for the year ended December 31, 1999, included
in this Prospectus.
2. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," requires unrealized gains or losses on the Company's
available-for-sale securities to be included in other comprehensive income.
The components of comprehensive income (loss), net of related tax, for the nine
months ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net income (loss) $ (245,126) $ (383,340)
Net unrealized gains (losses) on available-for-sale
securities, net of tax 389,209 (628,772)
----------- -----------
Comprehensive income (loss) $ 144,083 $(1,012,112)
=========== ===========
</TABLE>
48
<PAGE>
3. ACQUISITION OF COMPANY BY STATE BOND AND MORTGAGE COMPANY, L.L.C.
On July 19, 2000, State Bond completed the purchase of 100% of the issued and
outstanding shares of common stock of SBM-MN, from ARM Financial Group ("ARM"),
a Delaware corporation (the "Acquisition"). SBM-MN was a wholly owned subsidiary
of ARM and an issuer of face-amount certificates under the Investment Company
Act of 1940. The Company filed a report on Form 8-K dated July 24, 2000 to
report the Acquisition.
State Bond effected the Acquisition as assignee under a Stock Purchase
Agreement, dated March 28, 2000, by and among 1st Atlantic Guaranty Corporation
("1st Atlantic"), a Maryland corporation, SBM-MN and ARM. State Bond is a 100%
owned subsidiary of 1st Atlantic. A copy of the Stock Purchase Agreement
(exhibits omitted) was included as an exhibit to 1st Atlantic's Form 8-K dated
April 12, 2000, filed to report the then proposed acquisition.
The Stock Purchase Agreement provided for a purchase price of $1,400,000, which
allowed for an adjustment to the purchase price based on actual asset value at
the date of the Acquisition. As a result, the purchase price was reduced to
$1,350,000, of which $950,000 was paid directly to ARM and $400,000 is being
held by an escrow agent for 18 months as security for certain post-closing
obligations and liabilities of ARM under the Stock Purchase Agreement. The
transaction was accounted for as a reverse merger using the purchase method of
accounting, whereby SBM-MD became the surviving corporation.
Additionally the Acquisition resulted in goodwill calculated as follows:
Purchase Price $ 1,350,000
Less:
Total Assets at Acquisition $27,482,692
Total Liabilities at Acquisition 26,401,243
----------
Net Assets 1,081,449
-----------
Goodwill from merger $ 268,551
-----------
Goodwill is being amortized over 15 years. Accumulated amortization was $2,984
at September 30, 2000.
The Acquisition was financed by a short-term bank loan made to State Bond, in
the amount of $1,500,000. The loan provided for a floating and fluctuating rate
of interest equal to the prime rate. State Bond's President, his wife and other
officers also personally guaranteed this loan.
49
<PAGE>
On July 19, 2000, upon completion of the acquisition, the Company declared and
paid a cash dividend in the amount of $1,500,000 to its parent, State Bond,
which used these proceeds to repay the bank borrowing described above.
Immediately prior to the closing of the sale, the Company paid a dividend to ARM
in an amount equal to the Company's shareholders' equity less (i) $450,000 and
(ii) estimated deferred acquisition cost net of income taxes. The dividend,
totaling $3,708,384 was in the form of a transfer of certain securities,
in-kind, and the balance, in cash and cash equivalents. The transaction was
approved by the Bankruptcy Court on April 27, 2000.
Following the Acquisition, a new methodology for calculating the certificate
reserve liability was adopted and implemented. This methodology is in accordance
with Section 28 of the Investment Company Act of 1940, which states that the
certificate reserve balance shall at no time be less than the aggregate
surrender values and other amounts to which all certificate holders are
entitled. Application of this method of calculating reserves resulted in a
reduction of the certificate reserve liability of $1,526,015. This amount is
reflected as an adjustment to the retained earnings in the financial statements.
As a result of the Acquisition transactions, SBM-MD has succeeded SBM-MN as the
"registrant" in all filings made by SBM-MN under the Securities Act of 1933,
Securities Exchange Act of 1934 and Investment Act of 1940 ("1940 Act").
Pursuant to the Stock Purchase Agreement, the former board of directors of
SBM-MN has resigned and the incumbent board of directors of SBM-MD, appointed on
July 13, 2000, succeeded as the board of directors for the Company.
The Stock Purchase Agreement and related transactions described above were part
of the proceedings involved in a voluntary petition for relief under Chapter 11
of the Bankruptcy Code filed on December 20, 1999 in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") by ARM,
as previously reported in the Company's Form 10-Q report for the quarter ended
June 30, 2000. The Stock Purchase Agreement, ultimate purchase of SBM-MN by 1st
Atlantic (through State Bond) and dividend paid to ARM, among other
transactions, were approved by the Bankruptcy Court.
4. REGISTRATION STATEMENT
As a result of SBM-MN's lack of employees, staff assistance and the pending sale
of SBM-MN, SBM-MN did not file an updated Registration Statement on Form S-1
("S-1") with the Securities and Exchange Commission for offerings of
certificates after April 30, 2000. However, the Company has filed an amendment,
and will file a further amendment, to its S-1 so that the Company may resume its
offerings of certificates at the earliest possible date.
50
<PAGE>
PART II
Item 13 Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
<S> <C>
SEC registration fees............................................... $ *
Fees and expenses of auditors....................................... 3,000
Printing costs...................................................... 5,000
Legal fees and expenses............................................. 13,000
Miscellaneous....................................................... 1,000
-------
Total.......................................................... $22,000
=======
</TABLE>
*Paid pursuant to Rule 24f-2 of the Investment Company Act of 1940.
All amounts shown in the table above are estimated.
Item 14 Indemnification of Directors and Officers
Under Section 2-418 of Maryland General Corporation Law, a corporation may
indemnify certain Directors, officers, employees, or agents. Consistent with
Maryland law, Article Seventh (E)(viii) of Registrant's Articles of
Incorporation ("Articles") permits it to indemnify its Directors and officers to
the fullest extent permitted by law. In addition, Article X of Registrant's
By-Laws permits it to insure and indemnify its Directors, officers, and
employees and agents to the fullest extent permitted by law. The above-cited
provisions of Registrant's Articles and By-Laws, which have been filed as
exhibits to this Registration Statement, are incorporated by reference into this
Item to the extent necessary to respond to this item.
Various agreements that Registrant has entered or will enter into contain
provisions for the indemnification of Registrant's officers and directors to the
extent permitted by applicable law. These agreements have been filed as exhibits
to this Registration Statement, and are hereby incorporated by reference into
this Item to the extent necessary to respond to this item.
Item 15 Recent Sales of Unregistered Securities
Not Applicable
Item 16 Exhibits and Financial Statement Schedules
(a) Exhibits
(2) Stock Purchase Agreement dated March 28, 2000 by and among 1st
Atlantic Guaranty Corporation, SBM Certificate Company, and ARM
Financial Group (Exhibits omitted), incorporated by reference to
Exhibit (2) to Form 8-K dated March 28, 2000 of 1st Atlantic
Guaranty Corporation (File No. 333-41361).
II-1
<PAGE>
(3)(a) Articles of Incorporation of the Company*
(3)(a)(i) Certificate of Correction of Articles of Incorporation of the
Company
(3)(b) By-Laws of the Company*
(4)(a) Form of Application*
(4)(b) Form of Account Statement*
(5) Opinion of Griffin, Griffin, Tarby & Murphy, LLP
(10)(a) Administrative Services Agreement dated as of the 19th day of
July 2000, by and between the Company and State Bond & Mortgage
Company, L.L.C.
(10)(b) Custody Agreement, as amended and supplemented, between the
Company (as successor to SBM Certificate Company (Minnesota)) and
First Trust National Association (now U.S. Bank Trust N.A.) 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.
(23)(a) Consent of Ernst & Young LLP dated December 22, 2000
(23)(b) Consent of Counsel (See Exhibit (5))
(24) Powers of Attorney*
* Previously filed, on September 28, 20000, as part of Post-Effect Amendment
No. 11 to this Registration Statement.
(b) Financial Statement Schedules (SBM Certificate Company (Minnesota))
Report of Independent Auditors
Schedule I Investments in Securities of Unaffiliated Issuers - December 31,
1999
Schedule V Qualified Assets on Deposit- December 31, 1999
Schedule VI Certificate Reserves - Year Ended December 31, 1999
Schedule XII Valuation and Qualifying Accounts - December 31, 1999
Schedules required by Article 6 of Regulation S-X for face-amount certificate
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.
II-2
<PAGE>
ITEM 16(b)
SBM CERTIFICATE COMPANY (MINNESOTA)
INDEX TO FINANCIAL STATEMENT SCHEDULES
DECEMBER 31, 1999
PAGE
----
Report of Independent Auditors.............................................S-2
Schedule I Investments in Securities of Unaffiliated Issuers.............S-3
Schedule V Qualified Assets on Deposit...................................S-6
Schedule VI Certificate Reserves..........................................S-7
Schedule XII Valuation and Qualifying Accounts.............................S-13
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 (Minnesota)
We have audited the financial statements of SBM Certificate Company (Minnesota)
as of December 31, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999, and have issued our report thereon dated March 31,
2000, except for the last paragraph of Note 2, as to which the date is July 19,
2000. 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
--------------------------------
ERNST & YOUNG LLP
Louisville, Kentucky
March 31, 2000
S-2
<PAGE>
<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 5/15/2008 $ 200,000 $219,512 $188,124
U.S. Treasury Note, 5.50%, due 4/15/2000 195,000 194,734 194,939
----------------------------------
414,246 383,063
OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS:
Belmont County, Ohio, Sanitary Sewer District #3 Waterworks
Revenue Bonds, 4.25%, due 4/01/2004 24,000 22,930 23,353
Douglas County, Washington, Public Utilities District #1, Wells
Hydroelectric Revenue Bonds, 4%, due 9/01/2018 55,000 46,646 49,161
North Marshall, Kentucky, Water District, 5%, due 5/01/2006 25,000 24,076 24,573
Yuba County, California, Water Agency Bonds, 4%, due 3/01/2016 75,000 68,797 68,753
----------------------------------
162,449 165,840
FOREIGN GOVERNMENT:
Korea Development Bank, 6.5%, due 11/15/2002 450,000 450,602 437,382
CORPORATE SECURITIES:
FINANCIAL INSTITUTIONS:
Bankboston Cap. Trust III, 6.87%, due 6/15/2027 1,000,000 996,713 975,437
Central Fidelity Cap. I, Series A, 7.18%, due 4/15/2027 950,000 977,574 930,844
Citigroup Inc., 7%, due 12/01/2025 300,000 316,906 272,160
First Union Corp., 6.4%, due 4/1/2008 960,000 974,711 887,789
Mercantile Bankcorp, 7.06%, due 2/01/2027 980,000 984,205 946,309
Travelers Capital, 7.75%, due 12/01/2036 308,000 323,958 280,643
----------------------------------
4,574,067 4,293,182
PUBLIC UTILITIES:
Laclede Gas Co., Ser B, 5%, due 3/31/2011 (c) 3,000 55,595 63,000
MCI Communications Corp., 7.75%, due 3/15/2024 900,000 970,715 849,060
Nicor Inc., 5%, due 5/01/2009 (c) 800 32,842 32,000
----------------------------------
1,059,152 944,060
</TABLE>
S-3
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT COST (a) (b) VALUE (a)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INDUSTRIAL:
TXU Gas Capital, 7.43%, due 7/1/2028 $ 985,000 $ 998,343 $ 914,119
CBS Corp., 7.15%, due 5/20/2005 750,000 781,677 735,848
USX Corp., 6.65%, due 2/1/2006 750,000 748,149 711,585
----------------------------------
2,528,169 2,361,552
----------------------------------
TOTAL CORPORATE SECURITIES $ $ 8,161,388 $ 7,598,794
</TABLE>
S-4
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1999
<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 (CONTINUED):
ASSET-BACKED SECURITIES:
Auto Receivable, 96-C A, 7.3%, due 5/10/2002 $ 140,128 $ 139,908 $ 137,325
MORTGAGE-BACKED SECURITIES:
Blackrock Capital Finance BCF 97-R1 WAC, 6.38446%, due 3/25/2037 638,953 633,755 595,724
Countrywide Home Loans RAST, 1998-A8 , A6, 6.2124%, due 8/25/2028 900,000 905,653 867,087
Federal Home Loan Mortgage Corporation:
6.5%, due 5/15/2028 1,000,000 947,366 909,060
6.0%, due 1/15/2018 3,530,930 3,533,790 3,491,208
Federal National Mortgage Association, 9%, due 4/01/2021 13,478 14,056 14,081
Government National Mortgage Association:
387 428 430
11.5%, due 3/15/2015
668 738 739
11.5%, due 4/15/2013
316 351 352
11.5%, due 5/15/2015
870 963 962
11.5%, due 8/15/2013
274,828 279,651 278,906
6.38%, due 1/20/2026
Headlands Mortgage Sec. Inc., 1997-5 A17, 7.25%, due 11/25/2027 1,800,000 1,797,822 1,789,308
PNC Mortgage Securities Corp., 1998-7 1A13, 6.75%, due 9/25/2028 486,522 480,533 448,602
PNC Mortgage Securities Corp., 1998-7 1A24, 7.25%, due 9/25/2028 956,868 963,037 887,792
Residential Accredit Loans, 1997-QS8 A9, 7.375%, due 8/25/2027 1,000,000 999,858 991,560
-------------------------------
10,558,001 10,275,811
-------------------------------
TOTAL FIXED MATURITIES AVAILABLE-FOR-SALE $19,886,594 $18,998,215
</TABLE>
S-5
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
NAME OF ISSUER AND TITLE OF ISSUE SHARES COST (a)(b) VALUE (a)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY SECURITIES (d):
INDUSTRIAL:
Aluminum Company of America 200 $ 11,200 $ 11,200
EQUITY SECURITIES (CONTINUED) (d):
PUBLIC UTILITIES:
Carolina Power & Light 500 31,782 36,750
Duquesne Light Co. 400 10,800 11,525
GTE Florida, Inc. 1,500 25,875 28,500
Entergy Louisiana, Inc. 500 31,851 41,870
Entergy New Orleans, Inc. 600 31,902 42,012
Illinois Power 600 16,050 19,350
Kansas City Power & Light Company 200 11,586 13,574
Midamerican Energy Co. 600 34,200 47,292
Pacificorp 500 30,604 38,170
Pennsylvania Power Co. 200 8,838 14,302
San Diego Gas & Electric Co. 4,000 46,000 49,000
-------------------------------
279,488 342,345
-------------------------------
TOTAL EQUITY SECURITIES 290,688 353,545
-------------------------------
TOTAL INVESTMENTS IN SECURITIES OF
UNAFFILIATED ISSUERS $20,177,282 $19,351,760
===============================
</TABLE>
(a) See Note 1 to the financial statements regarding the determination of cost
and fair value.
(b) The aggregate cost of investments in securities of unaffiliated issuers for
federal income tax purposes was $20,502,683 at December 31, 1999.
(c) These securities are redeemable preferred stocks.
(d) These securities are non-redeemable preferred stock.
S-6
<PAGE>
SBM Certificate Company (Minnesota)
SCHEDULE V - QUALIFIED ASSETS ON DEPOSIT
DECEMBER 31, 1999
<TABLE>
<CAPTION>
FIRST
MORTGAGES
AND OTHER
FIRST
INVESTMENTS LIENS ON
NAME OF DEPOSITARY CASH IN SECURITIES REAL ESTATE OTHER TOTAL
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
State governmental authorities:
Securities Department
of Illinois $ -- $197,021 $ -- $ -- $ 197,021
Central depositary:
First Trust, National Association 34,214,584 34,214,584
----------------------------------------------------------------------------
Total qualified assets on deposit $ -- $34,411,605 $ -- $ -- $34,411,605
============================================================================
</TABLE>
S-7
<PAGE>
SBM Certificate Company (Minnesota)
SCHEDULE VI - CERTIFICATE RESERVES
PART I - SUMMARY OF CHANGES
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
BALANCE AT BEGINNING OF YEAR ADDITIONS
-------------------------------------------------------- ---------------------------------------
NUMBER OF RESERVES
ACCOUNTS (INCLUDING RESERVE
WITH AMOUNT OF ADVANCE PAYMENTS BY CHARGED
IELD SECURITY MATURITY PAYMENTS) WITH CHARGED CERTIFICATE TO OTHER
Description PERCENT HOLDERS VALUE ACCRUED INTEREST TO INCOME HOLDERS ACCOUNTS (a)
------------------------------------------------------------------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Reserves to mature,
Installment certificates:
Series 120 2.75 13 $ 77,000 $ 274,118 $ 9,509 $ 1,533 $ --
Series 220 2.75 15 80,000 193,385 9,840 2,967 --
Series 315 2.66 34 125,400 164,047 5,520 5,020 --
Single payment certificates:
Series 503 2.50 2,721 31,099,099 30,754,255 1,514,191 162,027 --
Fully paid installment
Certificates 2.50 473 2,391,179 2,084,595 82,952 -- 88,905
Optional settlement
certificates:
Paid-up certificates 2.50 12 4,473 4,362 104 -- --
Annuities 3.00 55 575,011 589,938 19,677 -- 137,593
Due to unlocated certificate
Holders None 25 3,126 3,126 -- 65 --
----------------------------------------------- -------------------------------------------
3,348 $34,355,288 $34,067,826 $ 1,641,793 $171,612 $226,498
=============================================== ===========================================
Total charged to income, per above $ 1,641,793
Less reserve recoveries from terminations
prior to maturity (26,719)
----------------
Interest credited on certificate
reserves, per statement of $ 1,615,074
operations ================
</TABLE>
Notes to Part I
(a) Transfer to/from other certificate reserves upon conversion.
(b) Direct interest payment to certificate holders.
S-8
<PAGE>
SBM Certificate Company (Minnesota)
SCHEDULE VI - CERTIFICATE RESERVES (CONTINUED)
PART I - SUMMARY OF CHANGES (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
DEDUCTIONS BALANCE AT END OF YEAR
--------------------------------------------- ------------------------------------------------
DESCRIPTION NUMBER OF
CASH ACCOUNTS RESERVES
SURRENDERS WITH AMOUNT OF (INCLUDING ADVANCE
PRIOR TO OTHER SECURITY MATURITY PAYMENTS) WITH
MATURITIES MATURITY (a)(b) HOLDERS VALUE ACCRUED INTEREST
--------------------------------------------------------------------------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Reserves to mature,
installment certificates:
Series 120 $ -- $ 22,930 $ 83,738 9 $ 54,000 $ 178,492
Series 220 -- -- -- 15 80,000 206,192
Series 315 16,973 6,883 825 26 102,300 149,906
Single payment certificates:
Series 503 2,460,428 2,727,692 156,806 2,281 28,800,914 27,085,547
Fully paid installment certificates -- 156,766 140,910 461 2,270,391 1,958,776
Optional settlement certificates:
Paid-up certificates 1,641 175 1,655 4 1,161 995
Annuities 213,621 -- -- 50 519,876 533,587
Due to unlocated certificate -- -- -- 28 3,191 3,191
holders
--------------------------------------------- --------------------------------------------
Total $2,692,663 $2,914,446 $ 383,934 2,874 $31,831,833 $30,116,686
============================================= ============================================
</TABLE>
S-9
<PAGE>
SBM Certificate Company (Minnesota)
SCHEDULE VI - CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS
YEAR ENDED DECEMBER 31, 1999
<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 23 2 $ 14,000 $ 21,636
24 -- -- --
31 1 5,000 13,509
33 1 6,000 16,617
34 1 6,000 17,789
35 1 3,000 9,659
36 1 6,000 21,208
37 1 10,000 41,739
38 1 5,000 21,727
39 1 10,000 46,118
40 3 12,000 57,742
Interest reserve 303
Accrued interest payable 6,071
-------------------------------------------------------
Total 13 $ 77,000 $ 274,118
=======================================================
</TABLE>
S-10
<PAGE>
SBM Certificate Company (Minnesota)
SCHEDULE VI - CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS (CONTINUED)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
DEDUCTIONS BALANCE AT END OF YEAR
---------------------- ------------------------------------------------------------
CASH NUMBER OF
SURRENDERS AGE ACCOUNTS 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 $ -- $ -- 23 1 $ 6,000 $ 12,426
-- -- 24 1 8,000 10,807
-- -- 31 1 5,000 13,509
-- -- 33 -- -- --
-- -- 34 1 6,000 17,720
-- -- 35 1 6,000 18,904
-- 43,304 36 1 3,000 10,268
-- -- 37 -- -- --
-- -- 38 1 6,000 22,511
22,930 -- 39 -- -- --
-- 40,434 40 2 14,000 68,775
Interest reserve --
Accrued interest
payable 3,572
----------------------------------- -------------------------------------------
Total $ 22,930 $ 83,738 9 $ 54,000 $ 178,492
=================================== ===========================================
</TABLE>
S-11
<PAGE>
SBM Certificate Company (Minnesota)
SCHEDULE VI - CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
<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 22 1 $ 12,000 $ 14,787
23 -- -- --
27 1 4,000 7,688
29 -- -- --
30 1 6,000 13,743
31 7 35,000 87,423
32 3 15,000 42,166
33 2 8,000 23,169
34 -- -- --
Interest reserve --
Accrued interest payable 4,409
------------------------------------------------------
Total 15 $ 80,000 $ 193,385
======================================================
Series:
315 7 1 $ 2,200 $ 836
10 1 2,200 1,273
11 1 5,500 3,536
12 -- -- --
13 4 22,000 17,228
14 3 8,800 7,673
15 8 22,000 21,989
16 6 23,100 28,212
17 1 2,200 2,978
18 3 13,200 19,873
19 6 24,200 49,314
20 -- -- --
Interest reserve 7,195
Accrued interest payable 3,940
------------------------------------------------------
Total 34 $ 125,400 $ 164,047
======================================================
</TABLE>
S-12
<PAGE>
SBM Certificate Company (Minnesota)
SCHEDULE VI - CERTIFICATE RESERVES (CONTINUED)
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
DEDUCTIONS BALANCE AT END OF YEAR
---------------------- ------------------------------------------------------------
CASH NUMBER OF
SURRENDERS ACCOUNTS WITH AMOUNT OF
PRIOR TO AGE GROUPING SECURITY MATURITY AMOUNT OF
MATURITY OTHER IN YEARS HOLDERS VALUE RESERVES
---------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Series:
220 $ -- $ -- 22 -- $ -- $ --
-- -- 23 1 12,000 16,086
-- -- 27 -- --
-- -- 29 1 4,000 8,524
-- -- 30 -- -- --
-- -- 31 1 6,000 14,659
-- -- 32 7 35,000 93,039
-- -- 33 3 15,000 46,069
-- -- 34 2 8,000 24,717
Interest reserve
Accrued interest payable 3,098
---------------------- ------------------------------------------
Total $ -- $ -- 15 $ 80,000 $206,192
====================== ==========================================
Series:
315 $ -- $ 836 7 -- $ -- $ --
-- -- 10 -- -- --
-- -- 11 -- -- --
-- -- 12 2 7,700 5,363
-- -- 13 -- -- --
2,267 -- 14 4 22,000 19,018
4,616 -- 15 1 2,200 2,098
-- -- 16 3 7,700 9,223
-- -- 17 7 25,300 33,771
-- -- 18 -- -- --
-- -- 19 3 22,000 44,932
-- -- 20 6 15,400 27,380
Interest reserve 3,382
Accrued interest payable 4,739
---------------------- ------------------------------------------
Total $ 6,883 $ 836 26 $102,300 $149,906
====================== ==========================================
</TABLE>
S-13
<PAGE>
SBM Certificate Company (Minnesota)
SCHEDULE XII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
------------------------
Charged to
Beginning of Charged to Other
Description Year Expense Accounts Deductions End of Year
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Valuation allowance on deferred tax assets:
Year ended December 31:
1999 $ 120,000 $140,981 $261,163 (1) $ 522,144
1998 $ 400,000 $ (280,000)(2) 120,000
1997 $ 714,521 $ (314,521)(3) $ 400,000
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The valuation allowance was increased as a result of establishing a full
valuation allowance on deferred tax assets for unrealized losses on assets
available-for-sale. The increase in valuation allowance resulted in a
reduction of shareholders' equity.
(2) The capital loss carryover was utilized during 1998, and therefore the
related valuation allowance was released.
(3) In the event that deferred tax assets are recognized on deductible temporary
differences for which a valuation allowance was provided at the date of an
acquisition, such benefits are applied to first reduce the balance of
intangible assets related to the acquisition, and then income tax expense.
As such, the Company reduced its valuation allowance with an offsetting
reduction to goodwill. After goodwill was reduced to zero during 1997, the
reduction in valuation allowance resulted in a reduction of income taxes.
S-14
<PAGE>
Item 17 Undertakings
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "1933 Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement, or amendment thereto, to be signed on
its behalf by the undersigned, thereunto duly authorized, in Bethesda, Maryland,
on this 27th day of December, 2000.
SBM Certificate Company
By: /s/ John J. Lawbaugh
--------------------------------
John J. Lawbaugh
President
Pursuant to the requirements of the Securities Act of 1933, this report has been
signed by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
/s/ John J. Lawbaugh President, Treasurer, and Director December 27, 2000
-------------------- (Principal Executive, Financial, and
John J. Lawbaugh Accounting Officer)
/s/ Brian P. Smith Director and Secretary December 27, 2000
------------------
Brian P. Smith
* Director
---------------------------
Iraline G. Barnes
* Director
---------------------------
Kumar Barve
* Director
---------------------------
Nancy Hopkinson
* Director
---------------------------
Brian Murphy
* Director
---------------------------
Marialice B.Williams
*By: /s/ John J. Lawbaugh
---------------------
John J. Lawbaugh
Attorney-in-Fact
December 27, 2000
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
EXHIBIT
-------
(3)(l)(i) Certificate of Correction of Articles of
Incorporation of the Company
(5) Opinion of Griffin, Griffin, Tarby & Murphy, LLP
(10)(a) Administrative Services Agreement dated as of the
19th day of July 2000, by and between the Company
and State Bond and Mortgage Company, L.L.C.
(23)(a) Consent of Ernst & Young LLP dated
December 22, 2000
