As filed with the Securities and Exchange
Commission on October 4, 2000.
File No. 33-38066
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
POST EFFECTIVE AMENDMENT NO. 12
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SBM CERTIFICATE COMPANY
(Formerly SBM Certificate Company, a (Minnesota) Company)
(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.)
c/o State Bond & Mortgage Company, L.L.C.
2 Wisconsin Circle
Suite 700
Chevy Chase, Maryland 20815
(301) 656-4200
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive office)
John J. Lawbaugh
2 Wisconsin Circle
Suite 700
Chevy Chase, Maryland 20815
(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.
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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.
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.
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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") designated as Series 503 Certificates, Series 505
Certificates, Series 507 Certificates and Series 510 Certificates. SBM
Certificate Company (the "Company"), is the issuer of the Certificates. 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 ("Maturity 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 to the contrary. Your
Certificate will mature no later than thirty years from the date it was
issued. Your Certificate investment earns a fixed interest rate that is
declared in advance for each year of a Guarantee Period, but never is less
than 2.5%. You may choose to have your interest:
* COMPOUNDED ANNUALLY and paid at the end of the Guarantee Period, when
the Certificate matures, or when you make a withdrawal
* PAID ANNUALLY
* PAID QUARTERLY
New interest rates will be declared periodically, with a guaranteed minimum
rate of 2.5%. See "Description of the Certificates" for a complete description
of the terms of your Certificate.
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 deferred sales charge will apply.
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 2 Wisconsin Circle, Suite 700, Chevy Chase Maryland, 20815 or call
the Company toll-free at 1-800-965-4999.
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.
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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.
__________ , 2000
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TABLE OF CONTENTS Page
SBM Certificate Company.......................................................3
Risk Factors..................................................................3
Absence of a Rating......................................................3
Relationship with State Bond.............................................3
Effects of Changes in Interest Rates.....................................4
Withdrawals During a Guarantee Period....................................4
Interest Rates for Renewal Periods.......................................4
Description of the Certificates...............................................4
Minimum Investment.......................................................4
Interest Rates...........................................................4
Interest Payment Options.................................................5
Guarantee Periods and Maturity...........................................5
Withdrawals..............................................................5
Loans....................................................................6
Deferred Payment.........................................................6
Federal Income Tax Treatment.............................................6
Transfer of Ownership....................................................7
Reserves and Deposits with Custodian..........................................7
Certain Financial Information.................................................8
Use of Proceeds...............................................................8
Investments...................................................................8
Type of Investments.....................................................8
Investment Policies....................................................10
Investment Adviser.....................................................10
Real Estate Loan Portfolio.............................................10
Distribution of Certificates.................................................10
About SBM Certificate Company................................................12
History.................................................................12
Business................................................................12
Competition.............................................................13
Employees...............................................................13
Capital Structure.......................................................13
Regulation..............................................................13
Description of Property.................................................14
Legal Proceedings.......................................................14
Executive Officers and Directors.............................................14
Board of Directors......................................................15
Committees of the Board of Directors....................................15
Relationship with State Bond and Affiliates..................................16
Independent Auditors.........................................................16
Selected Financial Data......................................................16
Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................17
Results of Operations...................................................17
Asset Portfolio Review..................................................20
Liquidity and Financial Resources.......................................21
Index to Financial Statements................................................24
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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. State
Bond's executive offices and the Company's Administrative Offices are located
at 2 Wisconsin Circle, Suite 700, Chevy Chase, Maryland 20815. The main
telephone number for the Company and State Bond 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 (Minnesota)
("SBM MN"), a (Minnesota) corporation, 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 had nominal assets at the time of the merger and was 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 and administrative services, as
well as personnel, for the conduct of the Company's business. See
"Relationship with State Bond and Affiliates."
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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. 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 would 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 deferred sales charge if you withdraw some or
all of your account value prior to the end of a Guarantee Period. The charge,
also referred to as a withdrawal charge, will be assessed against your
remaining account value or, in the case of a complete surrender, deducted from
the amount withdrawn. See "Maturity and Guarantee Periods" and "Withdrawals"
below.
Interest Rates for Renewal Periods
The initial rates are payable for the initial three, five, seven and ten-year
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 is the face amount of the Certificate.
Interest Rates
The Company periodically declares the interest rates payable for each year of
a Certificate's Guarantee Period. The Company will never declare an annual
interest rate of less than 2.50%. To confirm the Company's current rates,
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
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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:
* compound your interest annually and receive it at the end of the
Guarantee Period, when the Certificate matures or when you make a
withdrawal
* receive annual interest payments
* receive quarterly interest payments
Your interest rates may be different depending on the payment option you
choose. You may not change your interest payment option once your Certificate
has been issued. Interest on the Certificates accrues monthly.
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 original invested amount and any 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 to the
contrary, the Company will then automatically extend your 503 Certificate, 505
Certificate, 507 Certificate, or 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.
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.
Withdrawals
The Company assesses a deferred sales charge if you withdraw some or all of
your account value prior to the end of your Certificate's Guarantee Period.
The withdrawal charge will be assessed and charged to your remaining account
value or, in the case of a complete surrender, deducted from the amount
withdrawn, according to the following schedule:
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CHARGE APPLIED TO AMOUNT WITHDRAWN
YEAR OF GUARANTEE PERIOD 1 2 3 4 5 6 7 8 9 10
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%
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.
You may 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.
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 of up to five years
or the Maturity Date of your Certificate, whichever is earlier. 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.
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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.
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 Services Department. 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, a government
securities broker or dealer, or a representative of the Distributor (see
"Distribution of Certificates"). Further documentation may be required from
corporations, executors, partnerships, administrators, trustees or custodians.
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
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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 varied 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. 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 our Board
of Directors.
Types of Investments
We expect 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
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
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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 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.
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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 Board has established the investment policies set out below.
Subject to the approval of the Company's sale shareholder, the Board may
change these policies 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.
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.
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In any case, the Company's reserves supporting its outstanding Certificates
must consist only of "qualified investments" under the 1940 Act.
Investment Adviser
Key Asset Management, Inc. ("Key Asset Management" or the "Adviser") serves as
the Company's adviser pursuant to an investment advisory agreement ("Advisory
Agreement"). Subject to the supervision of the Board, the Adviser is
responsible under the Advisory Agreement 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. The Adviser also is
responsible for placing orders for the purchase and sale of the Company's
securities investments with brokers and dealers that the Adviser selects.
In addition, pursuant to the Advisory Agreement, the Adviser has agreed to
render regular reports to the Board regarding its investment decisions and
brokerage allocation practices for the Company, to assist the Company in
valuing portfolio securities and computing the Company's reserves, and to
furnish the Company with the assistance, cooperation, and information
necessary for it to meet various legal requirements regarding registration and
reporting. The Adviser, located at 127 Public Square, Cleveland, Ohio,
44114-1306, is a registered investment adviser with over $70 billion of assets
under management as of the date of this Prospectus. For its services, the
Adviser receives a quarterly fee payable in arrears equal to ___ % per annum
of the average daily net asset value of the Company's assets managed by the
Adviser.
Real Estate Loan Portfolio
The Company's real estate loan portfolio is managed by its 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 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 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.
DISTRIBUTION OF CERTIFICATES
Pursuant to a Distribution Agreement dated __________, 2000, between the
Company and _______________ ("Distributor"), a registered broker-dealer under
the Exchange Act, Distributor has the exclusive right to solicit applications
for and to distribute the Certificates. Pursuant to this agreement,
Distributor agrees to continuously solicit such applications, as long as
Certificates are available for sale. The Company reserves the right to reject
any application. Distributor has no obligation to purchase or sell any
designated dollar amount or quantity of Certificates but is only required to
use its best efforts on the Company's behalf.
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Pursuant to the Distribution Agreement, the Company pays sales compensation to
Distributor for distribution of the Certificates. Distributor in turn pays
compensation to its representatives and pays other distribution expenses.
The Company 's Board of Directors, including a majority of directors who are
not interested persons of Distributor, must approve the Distribution Agreement
annually. The Distribution Agreement is terminable by either party with sixty
days' notice.
In accordance with the Distribution Agreement, the Company pays Distributor
compensation as established in the Distribution Agreement. The Company pays
this compensation from its general funds, and does not deduct anything from
the amount you invest. Distributor pays compensation to its representatives
and pays other selling expenses in connection with the sale of Certificates.
Under a prior underwriting agreement, the Company's former distributor, ARM
Securities Corporation, a wholly-owned subsidiary of ARM, the former parent of
SBM-MN, was paid $140,145, $325,523 and $314,805 in 1999, 1998 and 1997
respectively, as compensation and other issuance, underwriting, and sales
expenses.
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 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 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 margin 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
12
<PAGE>
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 administrative services pursuant to an
Administrative Services Agreement.
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 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".
Capital Structure
The Company has 10,000,000 shares of authorized common stock, $.01 par value,
of which 250,000 shares are currently issued and outstanding. State Bond owns
all of the Company's issued and outstanding shares.
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.
13
<PAGE>
Description of Property
The Company's administrative offices and State Bond's executive offices (the
"Corporate Offices") are located at 2 Wisconsin Circle, Suite 700, Chevy
Chase, 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, legal and
marketing activities and various support personnel. These offices contain
approximately 1,500 square feet of office space held pursuant to a month-to
month lease between State Bond and 1st Atlantic.
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 THE PRINCIPAL OCCUPATIONS
NAME AND AGE COMPANY DURING THE PAST FIVE YEARS
<S> <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
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.
Kumar Barve (40) Director Delegate to the State Senate, Maryland; Prior to that, Accountant/
Chief Financial Officer, Environmental Management Services, Inc.
(Hazardous Waste Disposal and Environmental Consulting)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH THE PRINCIPAL OCCUPATIONS
NAME AND AGE COMPANY DURING THE PAST FIVE YEARS
<S> <C> <C>
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 (face-amount
Secretary certificate company); Prior to that Operations Manager, Atlantic
Pension & Trust (private pension fund management); Operations
Manager, Atlantic Capital Funding Corporation (commercial and
residential mortgage banking) 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)
------------------------------------------------------------------------------
</TABLE>
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
15
<PAGE>
Committee members deem appropriate or desirable. Directors Barnes, Barve and
Hopkinson 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 an 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 __% of the Company's total certificate reserves as defined in
the Administrative Services Agreement. 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
June 30, 2000.
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.
SELECTED FINANCIAL DATA
The following table contains selected financial data of the Company as SBM MN
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 six month periods
ended June 30, 2000 and 1999 are derived from unaudited financial statements.
The unaudited financial statements include all adjustments, consisting of
normal recurring accruals, which SBM MN considers necessary for a fair
presentation of the financial position and results of operations for these
periods.
Operating results for the six months ended June 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.
16
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
-------------------------------------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995* 2000 1999
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Total investment income $ 2,292 $ 2,826 $ 3,933 $ 4,290 $ 4,889 $ 1,003 $ 1,154
Interest credited on certificate reserves (1,615) (2,063) (2,795) (2,822) (2,929) (725) (850)
Net investment spread 677 763 1,138 1,468 1,960 278 304
Total investment and other expenses (370) (576) (755) (815) (958) (218) (192)
Federal income tax (expense) benefit 102 (54) (124) (238) (406) (16) (37)
Net investment income (loss) 408 134 258 415 596 44 76
Net realized investment gains (losses) (373) (103) (164) 317 181 (474) (22)
Net income (loss) 36 31 95 732 777 (429) 53
Earnings (loss) per share ** 0.14 0.12 0.38 2.93 3.11 (1.72) .22
BALANCE SHEET DATA (END OF PERIOD)
Total assets $ 33,884 $39,354 $60,270 $55,726 $60,580 $29,235
Face-amount certificate reserves 30,117 34,068 45,127 50,186 52,460 27,248
Shareholder's equity 4,168 5,028 4,982 5,064 4,986 1,929
</TABLE>
* 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.
** 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
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 and in SBM MN's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000. The term "Company"
should be read as SBM MN unless the context otherwise requires.
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
17
<PAGE>
represent investment yields of 6.20% and 6.46% on average cash and investments
of $36.9 million and $43.8 million for 1999 and 1998, respectively. This
decrease in annualized investment yield on cash and investments was primarily
attributable to the Company investing in lower yielding securities during 1999
compared to 1998.
Interest credited on certificate reserves was $1.6 million and $2.1 million
for 1999 and 1998, respectively. These amounts represent average rates of
interest credited of 5.00% and 5.34% on average certificate reserves of $32.3
million and $38.7 million for 1999 and 1998, respectively. The majority of the
Company's outstanding face-amount certificates are fixed-rate three-year
contracts. The Company monitors credited interest rates for new and renewal
issues against competitive products, mainly bank certificates of deposit.
Credited interest rate adjustments (up or down) on new certificates are made
as the Company deems necessary. New and renewal contracts issued during 1999
have crediting rates that are generally lower than contracts that matured
during that period, resulting in the overall decrease in the average crediting
rate.
Investment and other expenses were $369,825 and $575,823 for 1999 and 1998,
respectively. The decrease in investment and other expenses is primarily
attributable to a decrease in management and investment advisory fees,
deferred acquisition cost amortization and renewal commissions, and real
estate expenses in 1999 of $53,093, $85,316 and $87,813, respectively,
compared to 1998.
Realized investment losses (net of gains) were $470,507 and $152,977 for 1999
and 1998, respectively. Realized investment losses for 1998 include a loss of
$178,795 related to the write-down to fair value and subsequent sale of the
Company's real estate investment. Other realized investment gains and losses
were primarily interest-rate related and attributable to the asset/liability
management strategies of the Company. Fixed maturities and equity securities
(i.e., non-redeemable preferred stock) classified as available-for-sale are
sold during rising and falling interest rate environments which can result in
period-to-period swings in interest-rate related realized investment gains and
losses.
In the event that the Company experiences higher than historical levels of
certificate surrenders, the Company might need to liquidate investments other
than in accordance with its normal asset/liability management strategy and, as
a result, the Company could experience substantial realized investment losses.
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.
18
<PAGE>
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.
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.
19
<PAGE>
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 has 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.
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
20
<PAGE>
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 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.
Six Months Ended June 30, 2000 Compared with Six Months Ended June 30, 1999
Net investment income (net income excluding net realized investment gains and
losses) was $44,359 and $75,711 for the six months ended June 30, 2000 and
1999, respectively. The decrease in net investment income is 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, was $278,004 during the first six
months of 2000 compared to $304,133 during the same period in 1999. On an
annualized yield basis, these amounts reflect net investment spread of 1.11%
and 0.98% for the six months ended June 30, 2000 and 1999, respectively. The
Company's investment income decreased to $1.0 from $1.2 million for the six
months ended June 30, 2000 and 1999, respectively. These amounts represent
annualized investment yields of 6.10% and 6.07% on average cash and
investments of $31.9 million and $37.6 million for the six months ended June
30, 2000 and 1999, respectively. The decrease in average cash and investments
was the reason for the decrease in investment income.
21
<PAGE>
Interest credited on certificate reserves was $0.7 million and $0.9 million
for the six months ended June 30, 2000 and 1999, respectively. These amounts
represent annualized average rates of interest credited of 4.99% and 5.09% on
average certificate reserves of $28.5 million and $33.1 million for the six
months ended June 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. New and renewal contracts issued during the
past year 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 $217,977 and $191,693 for the six months
ended June 30, 2000 and 1999, respectively. The increase in investment and
other expenses was the result of and increase in operating expenses partially
offset by lower deferred acquisition cost amortization as a result of less
certificates being outstanding during the period.
Realized investment losses were $453,068 and $33,689 for the six months ended
June 30, 2000 and 1999, respectively. Realized investment gains and losses are
primarily interest-rate related and attributable to the asset/liability
management strategies of the Company. Net loss was $429,447 for the six months
ended June 30, 2000 while net income was $53,813 for the six months ended June
30, 1999. The change is explained by the items discussed in the previous
paragraphs including a lower level of net investment income in the six months
ended June 30, 2000 compared to the previous year period and greater realized
investment losses in 2000 versus 1999.
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 June 30, 2000 and December 31, 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). Additionally, the
Company's investment portfolio has 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 June 30, 2000, the Company
held no securities, which had defaulted, on principal or interest payments.
Fixed maturities include mortgage-backed and asset-backed securities,
corporate securities, U.S. Treasury securities and other government
obligations. Mortgage-backed securities ("MBSs"), which include pass-through
securities but are primarily collateralized mortgage obligations ("CMOs"),
totaled $9.1 million at June 30, 2000, representing 31.9% of total qualified
assets (30.1% at December 31, 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 due to prepayment speed
adjustments is influenced by the difference between its amortized cost and
22
<PAGE>
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 $2.9 million or 9.4% during the first six
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. For face-amount certificates reaching their maturity
date during the six months ended June 30, 2000 and 1999, 41% and 68%,
respectively, were renewed.
On June 20, 2000 the Board of Directors declared a $2.1 million dividend. The
dividend was paid to the sole shareholder of the Company, ARM Financial Group
on June 21, 2000.
23
<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 June 30, 2000 (Unaudited) and December
31, 1999
Condensed Statement of Operations for the Six Months Ended June 30, 2000
and 1999 (Unaudited).
Condensed Statements of Cash Flows for the Six Months Ended March 31,
2000 and 1999 (Unaudited)
Notes to Financial Statements for the Six Months Ended June 30, 2000 and
1999.
24
<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
25
<PAGE>
<TABLE>
<CAPTION>
SBM CERTIFICATE COMPANY (MINNESOTA)
BALANCE SHEETS
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:
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
------------ ------------
Total qualified assets 34,119,131 38,302,413
Other fixed maturities, available-for-sale, at fair value
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>
26
<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.
27
<PAGE>
<TABLE>
<CAPTION>
SBM CERTIFICATE COMPANY (MINNESOTA)
STATEMENTS OF OPERATIONS
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.
28
<PAGE>
<TABLE>
<CAPTION>
SBM CERTIFICATE COMPANY (MINNESOTA)
STATEMENTS OF SHAREHOLDER'S EQUITY
COMMON ADDITIONAL ACCUMULATED OTHER TOTAL
PAID-IN COMPREHENSIVE INCOME RETAINED SHAREHOLDER'S
STOCK CAPITAL (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
tax (895,970) (895,970)
------------
Comprehensive loss (859,827)
Balance, December 31, 1999 $250,000 $3,050,000 $(825,522) $1,693,735 $ 4,168,213
======== ========== ========== ========== ============
</TABLE>
SEE ACCOMPANYING NOTES.
29
<PAGE>
<TABLE>
<CAPTION>
SBM CERTIFICATE COMPANY (MINNESOTA)
STATEMENTS OF CASH FLOWS
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) (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.
30
<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.
31
<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 on December 20, 1999 in the United States Bankruptcy
32
<PAGE>
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.
33
<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 $35,279,417 $321,160 $212,770 $35,387,807
securities
=========== ======== ======== ===========
</TABLE>
34
<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.
35
<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>
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 1.50% to
3.50% 2.75%
Optional settlement 534,582 594,300 2.50% to 2.00% to
3.00% 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.
36
<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 VALUE ESTIMATED FAIR CARRYING VALUE ESTIMATED FAIR
VALUE 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.
37
<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>
38
<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.
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.
39
<PAGE>
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.
40
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<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:
June 30, 2000-$13,877,894; December 31, 1999-$19,886,594) $ 13,332,788 $ 18,998,215
Equity securities, at fair value (cost: June 30, 2000-$165,372;
December 31, 1999-$290,688) 175,071 353,545
Certificate loans 110,545 124,933
Cash and cash equivalents 15,228,645 14,407,479
------------ ------------
Total cash and investments 28,847,049 33,884,172
Receivables:
Dividends and interest 140,673 180,962
Receivable for investment securities sold 110,383 53,997
------------ ------------
Total receivables 251,056 234,959
------------ ------------
Total qualified assets 29,098,105 34,119,131
Other assets -- 15,368
Deferred acquisition costs 136,979 150,400
------------ ------------
Total assets $ 29,235,084 $ 34,284,899
============ ============
</TABLE>
41
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
CONDENSED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Certificate reserves $27,248,206 $ 30,116,686
Accounts payable and other liabilities 57,997 --
------------ ------------
Total liabilities 27,306,203 30,116,686
Shareholder's equity:
Common stock, 250,000 shares issued 250,000 250,000
Additional paid-in capital 3,050,000 3,050,000
Retained earnings (deficit) (835,712) 1,693,735
Accumulated other comprehensive loss from
net unrealized losses on available-for-sale securities (535,407) (825,522)
------------ ------------
Total shareholder's equity 1,928,881 4,168,213
------------ ------------
Total liabilities and shareholder's equity $29,235,084 34,284,899
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
42
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999 2000 1999
---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment income:
Interest income from securities $ 460,862 $ 561,739 $ 990,008 $ 1,139,363
Other investment income (losses) (3,707) 12,185 13,212 14,782
---------- ----------- ----------- -----------
Total investment income 457,155 573,924 1,003,220 1,154,145
Investment and other expenses:
Management and investment advisory fees 32,980 15,687 68,700 68,700
Deferred acquisition cost amortization and
renewal commissions 42,002 52,426 85,496 108,367
Other expenses 54,489 9,720 63,781 14,626
---------- ----------- ----------- -----------
Total investment and other expenses 129,471 77,833 217,977 191,693
Interest credited on certificate reserves 348,801 417,101 725,216 850,012
---------- ----------- ----------- -----------
Net investment income before federal income taxes
(21,117) 78,990 60,027 112,440
Income tax expense 2,508 (25,004) (15,668) (36,729)
---------- ----------- ----------- -----------
Net investment income (loss) (18,609) 53,986 44,359 75,711
Realized investment gains (losses) (465,599) --- (453,068) (33,689)
Income tax (expense) benefit on realized ---
investment gains (losses) (16,352) --- (20,738) 11,791
---------- ----------- ----------- -----------
Net realized investment gains (losses) (481,951) (473,806) (21,898)
---------- ----------- ----------- -----------
Net income (loss) $(500,560) $ 53,986 $ (429,447) $ 53,813
========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
43
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 950,912 $ 1,062,413
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Fixed maturity investments available-for-sale:
Purchases (263,808) (5,777,188)
Maturities and redemptions 5,813,370 3,899,986
Sales 0 2,683,159
Repayments of certificate loans, net 14,388 42,010
------------ -------------
Cash flows provided by investing activities 5,563,950 847,967
CASH FLOWS USED IN FINANCING ACTIVITIES:
Amounts paid to face-amount certificate holders (3,609,377) (2,294,503)
Amounts received from face-amount certificate holders 15,681 162,424
Dividends paid (2,100,000) ---
------------ -------------
Cash flows used in financing activities (5,693,696) (2,132,079)
------------ -------------
Net change in cash and cash equivalents 821,166 (221,699)
Cash and cash equivalents at beginning of period 14,407,479 3,279,970
------------ -------------
Cash and cash equivalents at end of period $15,228,645 $ 3,058,271
============ =============
</TABLE>
SEE ACCOMPANYING NOTES.
44
<PAGE>
SBM CERTIFICATE COMPANY (MINNESOTA)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
1. BASIS OF PRESENTATION
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 and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for SBM Certificate
Company (Minnesota) (the "Company") for the six months ended June 30, 2000,
are not necessarily indicative of those to be expected for the year ending
December 31, 2000. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
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 three and six months ended June 30, 2000 and 1999 are as follows:
<TABLE>
Three Months Ended June 30,
---------------------------
2000 1999
---------------------------
<S> <C> <C>
Net income (loss) $(500,560) $ 53,986
Net unrealized gains (losses) on available-for-sale securities 233,381 (731,865)
---------- ----------
Comprehensive income (loss) $(267,179) $(677,879)
========== ==========
Six Months Ended June 30,
---------------------------
2000 1999
---------------------------
Net income (loss) $(429,447) $ 53,813
Net unrealized gains (losses) on available-for-sale securities 290,115 (932,211)
---------- ----------
Comprehensive income (loss) $(139,332) $(878,398)
========== ==========
</TABLE>
45
<PAGE>
3. RELATIONSHIP WITH ARM FINANCIAL GROUP, INC. ("ARM") AND SALE OF COMPANY
On June 30, 2000, the Company was a wholly owned subsidiary of ARM, and
pursuant to an Investment Services Agreement and an Administrative Services
Agreement, the Company's operations were administered and managed by ARM.
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 on December 20, 1999 in the United States Bankruptcy
Court for the District of Delaware ("the Bankruptcy Court"). 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. 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. 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, and 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 was
closed on July 19, 2000. Immediately following the closing, the Company paid a
$1,500,000 cash dividend to State Bond & Mortgage Company, L.L.C., a
46
<PAGE>
wholly-owned subsidiary of 1st Atlantic to which 1st Atlantic had assigned its
rights under the Purchase Agreement.
4. REGISTRATION STATEMENT
As a result of the Company's lack of employees, and its pending sale to
1st Atlantic, the Company has not filed a Registration Statement on Form S-1
("S-1") with the Securities and Exchange Commission. The S-1 was scheduled to
be filed, and become effective, on or before May 1, 2000. Therefore, until the
S-1 is filed and becomes effective, the Company is unable to [i] sell new
certificates, and/or [ii] renew certificates which have matured. Therefore,
the Company is currently required to pay in full certificates which are
requested to be renewed by the certificate holder. The Company anticipates
that an S-1 will be prepared and filed by 1st Atlantic sometime shortly after
consummation of the sale.
47
<PAGE>
PART II
Item 13 Other Expenses of Issuance and Distribution (To be completed by
Amendment)
SEC Registration Fees........................................................$*
Fees and expenses of Accountants...............................................
Printing Costs.................................................................
Legal Fees and Expenses........................................................
Miscellaneous..................................................................
Total......................................................................$
*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
(1) Form of Distribution Agreement dated as of __, 2000, by and
between the Company and __________. (To be filed by Amendment.)
(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
II-1
<PAGE>
Exhibit (2) to Form 8-K dated March 28, 2000 of 1st Atlantic Guaranty
Corporation (File No. 333-41361).
(3)(a) 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 (To be filed by
Amendment)
(10)(a) Form of Investment Advisory Agreement dated as of the ____ day of
____, 2000, by and between the Company and Key Asset Management
Inc. *
(10)(b) Form of 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)(c) 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 October 4, 2000
(23)(b) Consent of Counsel (See Exhibit (5))
(24) Powers of Attorney *
----------
* Previously filed, on September 28, 2000, as part of Post-Effective
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
II-2
<PAGE>
Schedules required by Article 6 of Regulation S-X for face-amount certificate
companies other than those listed are omitted because they are not required,
are not applicable, or equivalent information has been included in the
financial statements and notes thereto, or elsewhere herein.
Item 17 Undertakings
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "1933 Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement, or amendment thereto, to be signed on
its behalf by the undersigned, thereunto duly authorized, in Chevy Chase,
Maryland, on this 4th day of October, 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:
Signature Capacity Date
/S/ JOHN J. LAWBAUGH President, Treasurer, and October 4, 2000
-------------------- Director (Principal Executive,
John J. Lawbaugh Financial, and Accounting
Officer)
/S/ BRIAN P. SMITH Director and Secretary October 4, 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
October 4, 2000
II-4
<PAGE>
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-7
Schedule VI Certificate Reserves......................................S-8
Schedule XII Valuation and Qualifying Accounts........................S-15
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>
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>
FIXED MATURITIES AVAILABLE-FOR-SALE:
U.S. TREASURY SECURITIES:
U.S. Treasury Note, 5.625%, due 5/15/2008 $ 219,512 $ 188,124
$ 200,000
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 (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)
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:
11.5%, due 3/15/2015 387 428 430
11.5%, due 4/15/23 668 738 739
11.5%, due 5/15/2015 316 351 352
11.5%, due 8/15/2013 870 963 962
6.38%, due 1/20/2026 274,828 279,651 278,906
Headlands Mortgage Sec. Inc., 1997-5 A17, 7.25%, due 11/25/2027 1,800,000 1,797,822 1,789,308
PNC Mortgage Securities Corp., 1998-7 1A13, 6.75%, due 9/25/2028 486,522 480,533 448,602
PNC Mortgage Securities Corp., 1998-7 1A24, 7.25%, due 9/25/2028 956,868 963,037 887,792
Residential Accredit Loans, 1997-QS8 A9, 7.375%, due 8/25/2027 1,000,000 999,858 991,560
-------------------------------
10,558,001 10,275,811
-------------------------------
TOTAL FIXED MATURITIES AVAILABLE-FOR-SALE $19,886,594 $18,998,215
</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 LIENS
INVESTMENTS ON
NAME OF DEPOSITARY CASH IN SECURITIES REAL ESTATE OTHER TOTAL
------------------ ---- ------------- ------------ ----- -----
<S> <C> <C> <C> <C> <C>
State governmental authorities:
Securities Department
of Illinois $ - $ 197,021 $ - $ - $ 197,021
Central depositary:
First Trust, National Association - 34,214,584 - - 34,214,584
----------------------------------------------------------------------------
Total qualified assets on deposit $ - $ 34,411,605 $ - $ - $34,411,605
============================================================================
S-7
<PAGE>
SBM Certificate Company (Minnesota)
SCHEDULE VI - CERTIFICATE RESERVES
PART I - SUMMARY OF CHANGES
YEAR ENDED DECEMBER 31, 1999
BALANCE AT BEGINNING OF YEAR ADDITIONS
----------------------------------------------------------------------- -----------------------------------------
RESERVES
NUMBER OF (INCLUDING
ACCOUNTS ADVANCE RESERVE
WITH AMOUNT OF PAYMENTS) WITH PAYMENTS BY CHARGED
YIELD SECURITY MATURITY ACCRUED CHARGED CERTIFICATE TO OTHER
Description PERCENT HOLDERS VALUE INTEREST TO INCOME HOLDERS ACCOUNTS (a)
----------- ------- --------- --------- --------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Reserves to mature,
Installment certificates:
Series 120 2.75 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 ==== ===== =========== =========== =========== ======== ========
Total charged to income, per above $1,641,793
</TABLE>
S-8
<PAGE>
<TABLE>
<CAPTION>
SBM Certificate Company (Minnesota)
SCHEDULE VI - CERTIFICATE RESERVES (CONTINUED)
PART I - SUMMARY OF CHANGES (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
BALANCE AT BEGINNING OF YEAR ADDITIONS
----------------------------------------------------------------------- -----------------------------------------
RESERVES
NUMBER OF (INCLUDING
ACCOUNTS ADVANCE RESERVE
WITH AMOUNT OF PAYMENTS) WITH PAYMENTS BY CHARGED
YIELD SECURITY MATURITY ACCRUED CHARGED CERTIFICATE TO OTHER
Description PERCENT HOLDERS VALUE INTEREST TO INCOME HOLDERS ACCOUNTS (a)
----------- ------- --------- --------- --------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less reserve recoveries from terminations
Prior to maturity (26,719)
-------------
Interest credited on certificate $ 1,615,074
reserves, per statement of operations ==============
</TABLE>
Notes to Part I
(a) Transfer to/from other certificate reserves upon conversion.
(b) Direct interest payment to certificate holders.
S-9
<PAGE>
SCHEDULE VI - CERTIFICATE RESERVES (CONTINUED)
PART I - SUMMARY OF CHANGES (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
DEDUCTIONS BALANCE AT END OF YEAR
---------------------------------------- -------------------------------------------
RESERVES
NUMBER OF (INCLUDING
CASH ACCOUNTS ADVANCE
SURRENDERS WITH AMOUNT OF PAYMENTS)
PRIOR TO SECURITY MATURITY WITH ACCRUED
DESCRIPTION MATURITIES MATURITY OTHER (a)(b) HOLDERS VALUE INTEREST
----------- ---------- ----------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Reserves to mature,
installment certificates:
Series 120 $ - $ 22,930 $ 83,738 9 $ 54,000 $ 178,492
Series 220 - - - 15 80,000 206,192
Series 315 16,973 6,883 825 26 102,300 149,906
Single payment certificates:
Series 503 2,460,428 2,727,692 156,806 2,281 28,800,914 27,085,547
Fully paid installment certificates - 156,766 140,910 461 2,270,391 1,958,776
Optional settlement certificates:
Paid-up certificates 1,641 175 1,655 4 1,161 995
Annuities 213,621 - - 50 519,876 533,587
Due to unlocated certificate holders - - - 28 3,191 3,191
----------- ---------- --------- ----- ----------- -----------
Total $ 2,692,663 $2,914,446 $383,934 2,874 $31,831,833 $30,116,686
=========== ========== ========= ===== =========== ===========
</TABLE>
S-10
<PAGE>
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 ACCOUNTS WITH AMOUNT OF AMOUNT OF
IN 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-11
<PAGE>
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
------------------------------------------------------------------------------------
NUMBER OF
CASH ACCOUNTS WITH
SURRENDERS AGE GROUPING SECURITY AMOUNT OF
PRIOR TO IN YEARS HOLDERS MATURITY AMOUNT OF
MATURITY OTHER 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-12
<PAGE>
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-13
<PAGE>
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
---------------------------------------------------------------------------
NUMBER OF
CASH ACCOUNTS
SURRENDERS AGE GROUPING WITH AMOUNT OF
PRIOR TO IN YEARS SECURITY MATURITY AMOUNT OF
MATURITY OTHER 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:
$ - $836 7 - $ - $ -
315
- - 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
------------------------------------------------------------------------------------
$ 6,883 $ 836 26 $102,300 $149,906
Total ====================================================================================
</TABLE>
S-14
<PAGE>
SCHEDULE XII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------------------------
Charged to
Beginning Charged to Other
Description of Year Expense Accounts Deductions End of Year
-----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Valuation allowance on deferred tax assets:
<S> <C> <C> <C> <C> <C>
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 redution 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-15
