<PAGE>






                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C.  20549
                                     ------
                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended:  December 31, 1996  Commission file number:  811-6268

                                     ------
                             SBM CERTIFICATE COMPANY
             (Exact name of registrant as specified in its charter)

               MINNESOTA                          41-1671595
     (State or other jurisdiction of         (I.R.S. Employer
     incorporation or organization)          Identification No.)

     C/O ARM FINANCIAL GROUP, INC.
        515 WEST MARKET STREET
         LOUISVILLE, KENTUCKY                        40202
     (Address of principal executive offices)     (Zip Code)

Registrant's telephone number, including area code:  (502) 582-7900

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  None

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                                             /X/   Yes     / /   No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.                                                                 / /

     As of February 15, 1997 250,000 shares of the registrant's common stock
were outstanding. The registrant is a wholly owned subsidiary and its common
stock is not traded on a public market.


                    DOCUMENTS INCORPORATED BY REFERENCE
                                   None

     The registrant meets the conditions set forth in General Instruction J (1)
(a) and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.


<PAGE>



                                TABLE OF CONTENTS

ITEM                                                                        PAGE

                                     PART I

     1.   Business . . . . . . . . . . . . . . . . . . . . . . . . . . . .  3
     2.   Properties . . . . . . . . . . . . . . . . . . . . . . . . . . .  4
     3.   Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . .  5
     4.   Submission of Matters to a Vote of Security Holders. . . . . . .  5


                                     PART II

     5.   Market for Registrant's Common Equity
            and Related Stockholder Matters. . . . . . . . . . . . . . . .  6
     6.   Selected Financial Data. . . . . . . . . . . . . . . . . . . . .  6
     7.   Management's Discussion and Analysis of
            Results of Operations and Financial Condition. . . . . . . . .  6
     8.   Financial Statements and Supplementary Data. . . . . . . . . . . 11
     9.   Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure . . . . . . . . . . . . 31


                                    PART III

     10.  Directors and Executive Officers of the Registrant . . . . . . . 32
     11.  Executive Compensation . . . . . . . . . . . . . . . . . . . . . 32
     12.  Security Ownership of Certain Beneficial Owners and Management . 32
     13.  Certain Relationships and Related Transactions . . . . . . . . . 32


                                     PART IV

     14.  Exhibits, Financial Statement Schedules, and Reports 
            on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . .  33 




                                        2


<PAGE>

                                     PART I

ITEM 1.   BUSINESS

(a)  GENERAL DEVELOPMENT OF BUSINESS
        SBM Certificate Company (the "Company") was incorporated in Minnesota in
     June of 1990, to assume the face-amount certificate business of SBM Company
     ("SBM"). Effective December 31, 1993, SBM transferred all of the Company's
     shares of common stock to its wholly owned subsidiary, State Bond and
     Mortgage Life Insurance Company ("SBM Life"). On June 14, 1995, the Company
     became a wholly owned subsidiary of  ARM Financial Group, Inc. ("ARM")
     pursuant to ARM's purchase of substantially all of the assets and business
     operations of SBM (the "Acquisition"). ARM specializes in the asset
     accumulation business, providing retail and institutional customers with
     products designed to serve the growing retirement and long-term savings
     markets as well as providing other asset management services. At
     December 31, 1996 ARM had $7.6 billion of assets under management.

(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
        The Company has one business segment.

(c)  NARRATIVE DESCRIPTION OF BUSINESS
        The Company is an issuer of fixed-rate face-amount certificates
     registered under the Investment Company Act of 1940 (the "1940 Act"). A
     face-amount certificate is an obligation of the Company requiring the
     Company to pay certificate holders the original invested amount of the
     certificate, plus a three-year fixed-rate return, at a given maturity date.
     The Company selects the interest rate offered on the face-amount
     certificates based on the short to intermediate term sections of the yield
     curve. 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. The Company's face-amount certificates are
     sold primarily in Minnesota, Iowa, South Dakota and California.

          The Company's face-amount certificates are distributed by ARM
     Securities Corporation ("ARM Securities"), a wholly owned subsidiary of
     ARM, pursuant to an Underwriting Agreement. Prior to November 29, 1996, ARM
     Securities operated under the name SBM Financial Services, Inc. ARM
     Securities currently uses a network of independent agents to sell and
     service the business. The Company continues to investigate opportunities to
     expand upon its distribution channels. ARM Securities is registered with
     the Securities and Exchange Commission (the "SEC") as a broker-dealer under
     the provisions of the Securities Exchange Act of 1934.

          The Company's gross margin is derived primarily from the margin
     between earnings on investments and amounts paid or credited on its fixed-
     rate certificate deposits ("net investment spread"). The Company's net
     income is determined by deducting investment and other expenses and federal
     income taxes from gross margin. The net investment spread is affected by
     general economic conditions, government monetary policy, the policies of
     regulatory authorities that 

                                        3


<PAGE>

     influence market interest rates, and the Company's ability to respond to 
    changes in such rates. Changes in market interest rates may have a negative
     impact on the Company's earnings.

          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 products. Some
     of these other products are insured by governmental agencies or funds or
     independent third parties. The certificates offered by the Company are not
     guaranteed or insured by any governmental agency or fund or independent
     third party. The Company's business is highly competitive and the Company
     competes with many other companies having greater financial resources,
     larger sales forces, and greater access to customers. The Company's ability
     to offer competitive interest rates, attractive terms, and efficient
     service are the Company's primary basis for meeting competition. The
     Company has no employees. Pursuant to an Investment Services Agreement and
     an Administrative Services Agreement, the Company's operations are managed
     by ARM.

          Like many financial services companies which offer investment
     opportunities to the public, the Company is subject to regulation and
     supervision by federal and state regulators. The 1940 Act and rules issued
     by the SEC thereunder specify certain terms for face-amount certificates,
     the method for calculating reserve liabilities on outstanding certificates,
     the minimum amounts and types of investments to be deposited with a
     qualified custodian to support such reserve liabilities, and a variety of
     other restrictions on the operation and governance of a face-amount
     certificate company. Pursuant to statutory authority, the Minnesota
     Department of Commerce ("MDC") and the Illinois Secretary of State exercise
     supervisory powers over the Company's face-amount certificate business
     similar to those under the 1940 Act. In addition, the MDC conducts
     examinations of the Company on a periodic basis. The offer and sale of the
     Company's face-amount certificates also are subject to federal and state
     securities laws.

(d)  FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES

        The Company has no foreign operations.

ITEM 2.   PROPERTIES

     The Company's and ARM's corporate executive offices (the "Corporate
Offices") are located at 515 West Market Street, Louisville, Kentucky. The main
telephone number for the Corporate Offices is (502) 582-7900. The Corporate
Offices are the location of the Company's executive officers and the primary
location for ARM's accounting, legal and marketing activities and various other
support personnel.

     The Company's administrative offices are located in New Ulm, Minnesota, at
100 North Minnesota Street, in a building owned by the Company. The building has
a total office space of approximately 49,000 square feet. A significant portion
of the building (approximately 15,000 square feet) is leased exclusively to
State Bank & Trust Company of New Ulm, a former subsidiary of SBM. Parts of the
building are leased to other persons.

                                        4


<PAGE>

ITEM 3.   LEGAL PROCEEDINGS

     The Company is not a party to, nor is any of the Company's property the
subject of, any material pending legal proceedings, other than ordinary
litigation routine to the Company's business.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     This information is omitted in accordance with Instruction (J)(2)(c) to
     Form 10-K.




                                        5


<PAGE>

                                     PART II

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS

     There is currently no public market or trading in the common stock of the
Company. All of the Company's 250,000 outstanding shares of common stock are
held by ARM as of December 31, 1996. The Company has never paid cash dividends
on its common stock.

     The Company is subject to two principal restrictions on its ability to pay
dividends in addition to the generally applicable restrictions and requirements
of Minnesota corporate law. First, pursuant to Section 28(b) of  the 1940 Act,
the Company is required to establish and maintain qualified assets having a
value not less than the aggregate of certificate reserves plus $250,000. Second,
the MDC has determined that face-amount certificate companies such as the
Company should maintain a ratio of shareholder's equity to total assets of a
minimum of 5%. For purposes of determining compliance with both requirements,
assets are based upon a valuation of available-for-sale securities reflected at
amortized cost. The Company could not pay dividends if it did not meet both of
these two requirements or if payment of a dividend would cause it not to meet
such requirements. As of December 31, 1996, the Company had qualified assets in
excess of certificate reserves plus $250,000 of $4.6 million and assets in
excess of the 5% ratio of $2.1 million.

ITEM 6.   SELECTED FINANCIAL DATA

     This information is omitted in accordance with Instruction (J)(2)(a) to
Form 10-K.

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
          FINANCIAL CONDITION

GENERAL

     The Company was acquired by ARM in connection with ARM's acquisition of
substantially all of the assets and business operations of SBM effective May 31,
1995. The results of operations for the year ended December 31, 1995 represent
the historical results of the Company for the period from January 1, 1995 to May
31, 1995 combined with the results of operations of the Company subsequent to
the Acquisition from June 1, 1995 to December 31, 1995. Historical results of
operations are not completely comparable with results of operations subsequent
to the Acquisition primarily due to differing asset/liability management
strategies and expense allocation methodologies of ARM and SBM management.
Therefore, results of operations for the year ended December 31, 1996, are not
completely comparable with the prior year.

                                        6


<PAGE>

RESULTS OF OPERATIONS

1996 COMPARED WITH 1995

     During 1996, net income was $731,981 compared to $776,739 in 1995. Net
investment income (net income excluding realized investment gains and losses net
of tax) was $414,670 and $595,354 for 1996 and 1995, respectively. The decrease
in net investment income was primarily attributable to a decrease in net
investment spread, partially offset by lower investment and other expenses and
lower federal income tax expense.

     Net investment spread, which is the difference between investment income
and interest credited on certificate reserves, decreased to $1.5 million during
1996 from $2.0 million in 1995. These amounts reflect net investment spread of
2.23% and 2.97% during 1996 and 1995, respectively, between the Company's
investment yield on average cash and investments and the average rate credited
on certificate reserves. The Company's investment income decreased to $4.3
million from $4.9 million for 1996 and 1995, respectively. These amounts
represent investment yields of 7.73% and 8.21% on average cash and investments
of $54.9 million and $56.3 million for 1996 and 1995, respectively. This
decrease in investment yield on cash and investments was primarily attributable
to a reduction in the average duration of the investment portfolio during 1996
and to the December 1995 sale of the Company's mortgage loan portfolio. The
proceeds from the sale of mortgage loans were invested in fixed maturities of a
generally higher quality, but with lower yields.

     Interest credited on certificate reserves was $2.8 million and $2.9 million
for 1996 and 1995, respectively. These amounts represent average rates of
interest credited of 5.50% and 5.24% on average certificate reserves of $50.4
million and $52.9 million for 1996 and 1995, respectively. The majority of the
Company's outstanding face-amount certificates are fixed-rate three year
contracts. The Company monitors credited interest rates for new and renewal
issues against competitive products, mainly bank certificates of deposit.
Credited interest rate adjustment, up or down, on new certificates are made as
the Company deems necessary. New and renewal contracts issued and outstanding
during the past year have crediting rates that are generally higher than
contracts that matured or surrendered during the period, resulting in the
overall increase in the average crediting rate.

     Investment and other expenses were $815,094 and $957,593 for 1996 and 1995,
respectively. The decrease in investment and other expenses was primarily
attributable to the decrease in management and investment advisory fees.
Currently, management and investment advisory fees are computed as a percentage
of average certificate reserves and qualified assets. Such fees have been lower
since the Acquisition primarily as a result of ARM's lower marginal operating
cost attributable to greater economies of scale since the Acquisition.

     Realized investment gains were $485,135 and $283,885 for 1996 and 1995,
respectively. These realized investment gains were interest-rate related and
attributable to the asset/liability management strategies of the Company. Fixed
maturities and equity securities (i.e., non-redeemable preferred stock) are sold
during rising and falling interest rate environments which can result in period-
to-period swings in realized investment gains and losses.

                                        7


<PAGE>

     Certificate reserves decreased $2.3 million or 4.3% during 1996, as
maturities and surrenders exceeded sales and renewals. The Company believes a
significant factor leading to the decrease was the certificate of deposit
marketplace currently being very competitive, as many financial institutions are
offering special high rates to induce customers to open new accounts. For face-
amount certificates reaching their maturity date during 1996 and 1995, 73% and
72%, respectively, were renewed.

1995 COMPARED WITH 1994

     During 1995, net income was $776,739 compared to $383,203 in 1994. Net
investment income  was $595,354 and $363,420 for 1995 and 1994, respectively.
The increase in net investment income was primarily attributable to a higher net
investment spread and lower investment and other expenses.

     Net investment spread increased to $2.0 million during 1995 from $1.8
million in 1994. These amounts reflect net investment spread of 2.97% and 2.10%
during 1995 and 1994, respectively, between the Company's investment yield on
average cash and investments and the average rate credited on certificate
reserves. The Company's investment income decreased to $4.9 million from $5.3
million for 1995 and 1994, respectively. The investment yields for 1995 and 1994
were 8.21% and 7.63% on  average cash and investments of $56.3 million and $66.1
million, respectively. This increase in investment yield was attributable to
higher yields attained as a result of a restructuring of the investment
portfolio subsequent to the Acquisition, as well as accretion resulting from
purchase accounting adjustment.

     Interest credited on certificate reserves was $2.9 million and $3.6 million
for 1995 and 1994, respectively. These amounts represent average rates of
interest credited of 5.24% and 5.53% on average certificate reserves of $52.9
million and $62.2 million for 1995 and 1994, respectively. This decrease is a
result of new and renewal certificates issued during 1995 accumulating interest
at rates lower than contracts that matured or surrendered.

     The decrease in investment and other expenses was primarily attributable to
the decrease in management and investment advisory fees since the Acquisition
and lower amortization of deferred charges.

     Realized investment gains were $283,885 and $29,783 for 1995 and 1994,
respectively. Realized investment gains were interest-rate related and
attributable to the asset/liability management strategies of the Company.

                                        8


<PAGE>

ASSET PORTFOLIO REVIEW

     The Company primarily invests in securities with fixed maturities with the
objective of providing reasonable returns while limiting liquidity and credit
risks. The Company's investments in fixed maturities were 98% investment grade
for the years ended December 31, 1996 and 1995. Investment grade securities are
those classified as 1 or 2 by the National Association of Insurance
Commissioners, or where such classifications are not available, having a rating
on the scale used by Standard & Poor's Corporation of BBB- or above.
Additionally, the Company's investment portfolio has minimal exposure to real
estate, mortgage loans and common equity securities, which represented 1.0% and
1.1% of qualified assets at December 31, 1996 and 1995, respectively. As of
December 31, 1996, the Company held no securities which had defaulted on
principal or interest payments.

     Fixed maturities include mortgage-backed and asset-backed securities,
corporate securities, U.S. Treasury securities and other government obligations.
Mortgage-backed securities ("MBSs"), which include pass-through securities and
collateralized mortgage obligations ("CMOs"), totaled $32.6 million at
December 31, 1996, representing 58.9% of total qualified assets (61.4% at
December 31, 1995). The Company's investments in CMOs, which are primarily
backed by the U.S. Government or U.S. Government agencies, represented 52.8% and
47.3% of the Company's qualified assets as of December 31, 1996 and 1995,
respectively. MBSs, including CMOs, are subject to risks associated with
prepayments of the underlying mortgage loans. Prepayments cause these securities
to have actual maturities different from those expected at the time of purchase.
The degree to which a security is susceptible to either gains or losses due to
prepayment speed adjustments is influenced by the difference between its
amortized cost and par, the relative sensitivity of the underlying mortgages
backing the assets to prepayments in a changing interest rate environment and
the repayment priority of the securities in the overall securitization
structure. Prepayment sensitivity is evaluated and monitored, giving full
consideration to the collateral characteristics such as weighted average coupon
rate, weighted average maturity and the prepayment history of the specific loan
pool. Also, the Company monitors three year cash flow projections with the goal
of maintaining an adequate level of liquidity for maturing face-amount
certificates. The Company's asset/liability management strategies not only allow
the Company to monitor its short-term liquidity needs but also aim to provide
protection to the investment portfolio from adverse changes in interest rates.

     In December 1995, the Company sold virtually all of its mortgage loan
portfolio resulting in a loss of approximately $65,000.

     Based on the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," adopted as of January 1, 1994, the Company currently classifies its
fixed maturity and equity securities as available-for-sale. Such securities are
carried at fair value and changes in fair value, net of related deferred income
taxes, are charged or credited directly to shareholder's equity. The decrease in
interest rates after the Acquisition, at which time the Company's invested
assets were restated to fair value in accordance with purchase accounting rules,
and then the subsequent rise in interest rates during the year ended December
31, 1996, have resulted in unrealized gains of $231,541 (net of $124,676 in
deferred income taxes) compared to unrealized gains of $885,878 (net of $477,011
in deferred income taxes) 

                                        9


<PAGE>

as of December 31, 1995. Volatility in reported shareholder's equity occurs 
as a result of SFAS No. 115 which requires some assets to be carried at fair 
value while other assets and all liabilities are carried at historical values.

     The Company manages assets and liabilities in a closely integrated manner
to minimize the volatility of margins. As a result, adjusting the shareholder's
equity for changes in the fair value of the Company's fixed maturities and
equity securities without reflecting offsetting changes in the value of the
Company's liabilities or other assets creates volatility in reported
shareholder's equity but does not reflect the underlying economics of the
Company's business.

LIQUIDITY AND FINANCIAL RESOURCES

     The Company has never paid cash dividends on its common stock in order to
maintain and increase capital resources. The Company will, however, evaluate
this on an ongoing basis.

     As of December 31, 1996, the Company had $4.6 million of qualified assets
in excess of the minimum amount required by the 1940 Act and the rules and
regulations promulgated thereunder by the SEC, as computed in accordance with
Section 28(b) of the 1940 Act. In addition, the MDC has certain regulatory
authority over the Company. The MDC has historically recommended to the Company
that face-amount certificate companies should maintain a ratio of shareholder's
equity to total assets of a minimum of 5% based upon a valuation of available-
for-sale securities reflected at amortized cost for purposes of this
calculation. Under this formula, the Company's capital ratio was 8.7% at
December 31, 1996.

     The primary liquidity requirement of the Company relates to its payment of
certificate maturities and surrenders. The principal sources of cash to meet
such liquidity requirements are investment income and proceeds from maturities
and redemptions of investments.

     At December 31, 1996, cash and cash equivalents totaled $3.2 million, a
decrease of $0.7 million from December 31, 1995. The Company's aim is to manage
its cash and cash equivalents position so as to satisfy short-term liquidity
needs. In connection with this management of cash and cash equivalents, the
Company may invest idle cash in short duration fixed maturities to capture
additional yield when short-term liquidity requirements permit.

     Cash flows of $3.6 million, $4.1 million, and $4.2 million were generated
from operating activities in 1996, 1995, and 1994, respectively. These cash
flows resulted principally from investment income, less management and
investment advisory fees and commissions paid. Proceeds from sales, redemptions
and maturities of investments generated $39.4 million, $51.8 million, and $10.6
million in cash flows during 1996, 1995, and 1994, respectively, which were
offset by purchases of investments of $38.5 million, $44.2 million, and $5.1
million, respectively. The higher purchases and sales of investments during 1995
were a result of the initial restructuring of the Company's investment portfolio
following the Acquisition.

                                       10


<PAGE>

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                      INDEX

FINANCIAL STATEMENTS

Reports of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . 12
Balance Sheets as of December 31, 1996 and 1995. . . . . . . . . . . . . . 14
Statements of Operations for the Years Ended December 31, 1996, 1995,
  and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Statements of Shareholder's Equity for the Years Ended December 31, 1996,
  1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Statements of Cash Flows for the Years Ended December 31, 1996, 1995
  and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 19

SUPPLEMENTARY DATA
None

                                       11


<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors
SBM Certificate Company

We have audited the accompanying balance sheets of SBM Certificate Company as of
December 31, 1996 and 1995, and the related statements of income, shareholder's
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SBM Certificate Company at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.



                                                           /s/ Ernst & Young LLP


Louisville, Kentucky
February 12, 1997

                                       12


<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
SBM Certificate Company

We have audited the statements of income and of cash flows of SBM Certificate
Company (the "Company") for the year ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the results of SBM Certificate Company's operations and its cash flows
for the year ended December 31, 1994 in conformity with generally accepted
accounting principles.

The financial statements have been prepared on a historical basis and do not
include any purchase accounting or other adjustments resulting from the sale of
the Company as discussed in Note 2 to the financial statements.

As discussed in Note 1 to the financial statements, in 1994 the Company adopted
Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES.


/s/ Deloitte and Touche LLP
Minneapolis, Minnesota
March 29, 1995

                                       13



<PAGE>

<TABLE>
<CAPTION>


                                          SBM CERTIFICATE COMPANY
                                               BALANCE SHEETS

----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
                                                                                           DECEMBER 31,
                                                                                       1996           1995
----------------------------------------------------------------------------------------------------------------

<S>                                                                                <C>            <C>
ASSETS
Qualified assets:
  Cash and investments:
    Investments in securities of unaffiliated issuers:
      Fixed maturities available-for-sale, at fair value (amortized cost:
        1996-$49,863,826; 1995-$53,076,255)                                        $ 50,169,361   $ 54,388,115
      Equity securities, at fair value (cost: 1996-$493,912; 1995-$570,162)             544,594        621,191
    Certificate loans                                                                   273,368        279,463
    Other invested assets                                                               523,083        632,154
    Cash and cash equivalents                                                         3,247,192      3,900,494
                                                                                 --------------------------------
  Total cash and investments                                                         54,757,598     59,821,417

  Receivables:
    Dividends and interest                                                              533,958        397,898
    Receivable for investment securities sold                                           122,570             --
                                                                                 --------------------------------
  Total receivables                                                                     656,528        397,898
                                                                                 --------------------------------
Total qualified assets                                                               55,414,126     60,219,315


Deferred acquisition cost                                                               132,163        113,500
Goodwill                                                                                113,095        192,919
Other assets                                                                             66,163         54,203
                                                                                 --------------------------------

Total assets                                                                       $ 55,725,547   $ 60,579,937
                                                                                 --------------------------------
                                                                                 --------------------------------

</TABLE>

                                                            14

<PAGE>

<TABLE>
<CAPTION>

                                                  SBM CERTIFICATE COMPANY
                                                BALANCE SHEETS (CONTINUED)

----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
                                                                                          DECEMBER 31,
                                                                                       1996           1995
----------------------------------------------------------------------------------------------------------------

<S>                                                                                <C>            <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
  Certificate reserves                                                             $ 50,186,386   $ 52,459,724
  Payable for investment securities purchased                                                --      2,454,325
  Deferred federal income taxes                                                         445,419        619,148
  Accounts payable and other liabilities                                                 29,940         60,582
                                                                                 --------------------------------
Total liabilities                                                                    50,661,745     55,593,779

Shareholder's equity:
  Common stock, $1 par value; 1,000,000 shares authorized;
    250,000 shares issued and outstanding                                               250,000        250,000
  Additional paid-in capital                                                          3,050,000      3,050,000
  Net unrealized gains on available-for-sale securities                                 231,541        885,878
  Retained earnings                                                                   1,532,261        800,280
                                                                                 --------------------------------
Total shareholder's equity                                                            5,063,802      4,986,158
                                                                                 --------------------------------

Total liabilities and shareholder's equity                                          $55,725,547    $60,579,937
                                                                                 --------------------------------
                                                                                 --------------------------------

</TABLE>

SEE ACCOMPANYING NOTES.


                                                            15
<PAGE>

<TABLE>
<CAPTION>

                                        SBM CERTIFICATE COMPANY
                                       STATEMENTS OF OPERATIONS

--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
                                                               YEAR ENDED DECEMBER 31,
                                                   -----------------------------------------------
                                                          1996           1995           1994
--------------------------------------------------------------------------------------------------

<S>                                                   <C>            <C>            <C>
Investment income:
  Interest income from securities                     $ 4,089,948    $ 4,276,460    $ 4,590,206
  Interest income from mortgage loans                          --        366,321        439,709
  Other investment income                                 200,127        246,597        296,010
                                                   -----------------------------------------------
Total investment income                                 4,290,075      4,889,378      5,325,925

Investment and other expenses:
  Management and investment advisory fees                 246,468        358,486        516,000
  Deferred acquisition cost amortization and renewal
    commissions                                           245,126        289,875        518,782
  Real estate expenses                                    205,029        137,777        112,772
  Amortization of goodwill                                 79,824         92,248             --
  Other expenses                                           38,647         79,207         77,876
                                                   -----------------------------------------------
Total investment and other expenses                       815,094        957,593      1,225,430

Interest credited on certificate reserves               2,821,912      2,929,357      3,575,075
                                                   -----------------------------------------------
Net investment income before federal
  income taxes                                            653,069      1,002,428        525,420
Federal income tax expense                               (238,399)      (407,074)      (162,000)
                                                   -----------------------------------------------
Net investment income                                     414,670        595,354        363,420

Realized investment gains                                 485,135        283,885         29,783
Federal income tax expense on realized investment
  gains                                                  (167,824)      (102,500)       (10,000)
                                                   -----------------------------------------------
Net realized investment gains                             317,311        181,385         19,783
                                                   -----------------------------------------------

Net income                                            $   731,981    $   776,739    $   383,203

                                                   -----------------------------------------------
                                                   -----------------------------------------------

</TABLE>

SEE ACCOMPANYING NOTES.


                                                  16
<PAGE>

<TABLE>
<CAPTION>

                            SBM CERTIFICATE COMPANY
                       STATEMENTS OF SHAREHOLDER'S EQUITY




----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
                                                                               NET
                                                                           UNREALIZED
                                                                         GAINS (LOSSES)
                                                            ADDITIONAL    ON AVAILABLE-                     TOTAL
                                               COMMON         PAID-IN       FOR-SALE       RETAINED     SHAREHOLDER'S
                                                STOCK         CAPITAL      SECURITIES      EARNINGS        EQUITY
----------------------------------------------------------------------------------------------------------------------
<S>                                         <C>            <C>              <C>          <C>            <C>
Balance, January 1, 1994                    $   250,000    $ 3,740,006      $(165,742)   $    56,373    $ 3,880,637

 Adjustment to beginning balance for
   change in accounting method, net
   of income taxes of $403,000                                                782,000                      782,000
 Net income                                                                                  383,203        383,203
 Change in net unrealized losses on
   available-for-sale securities                                           (4,858,917)                   (4,858,917)
                                         -----------------------------------------------------------------------------
Balance, December 31, 1994                      250,000      3,740,006     (4,242,659)       439,576        186,923
 Net income                                                                                  776,739        776,739
 Capital contribution from SBM Life                          1,500,000                                    1,500,000
 Purchase accounting adjustment
    (NOTE 2)                                                (2,190,006)     1,066,442       (416,035)    (1,539,599)
 Change in net unrealized gains
   (losses) on available-for-sale
   securities                                                               4,062,095                     4,062,095
                                         -----------------------------------------------------------------------------

Balance, December 31, 1995                      250,000      3,050,000        885,878        800,280      4,986,158

 Net income                                                                                  731,981        731,981
 Change in net unrealized gains on
   available-for-sale securities                                             (654,337)                     (654,337)
                                         -----------------------------------------------------------------------------
Balance, December 31, 1996                  $   250,000    $ 3,050,000    $   231,541    $ 1,532,261    $ 5,063,802
                                         -----------------------------------------------------------------------------
                                         -----------------------------------------------------------------------------

</TABLE>

SEE ACCOMPANYING NOTES.


                                                          17
<PAGE>

<TABLE>
<CAPTION>

                                                SBM CERTIFICATE COMPANY
                                               STATEMENTS OF CASH FLOWS

---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
                                                                                   YEAR ENDED DECEMBER 31,
                                                                        ---------------------------------------------
                                                                              1996           1995           1994
---------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>            <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income                                                                $   731,981    $   776,739    $   383,203
Adjustments to reconcile net income to cash flows provided
 by operating activities:
   Provision for certificate reserves                                       2,821,912      2,929,357      3,575,075
   Realized investment gains                                                 (485,135)      (283,885)       (29,783)
   Deferral of acquisition costs                                             (263,788)      (430,852)      (507,996)
   Amortization of deferred acquisition costs and
     renewal commissions                                                      245,126        289,875        518,782
   Other amortization and depreciation                                        530,429        228,861        (75,111)
   Deferred tax expense                                                       178,606        295,464         20,000
    (Increase) decrease in dividends and interest receivable                 (136,060)        34,571         30,851
   Changes in other assets and liabilities                                    (40,816)       250,559        236,812
                                                                        ---------------------------------------------
Cash flows provided by operating activities                                 3,582,255      4,090,689      4,151,833

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments available-for-sale:
 Purchases                                                                (38,523,432)   (44,224,876)    (3,922,397)
 Maturities and redemptions                                                 5,642,891      2,627,400      7,563,300
 Sales                                                                     33,578,496     44,977,473             --
Fixed maturity investments held-to-maturity:
 Purchases                                                                         --             --     (1,180,893)
 Maturities and redemptions                                                        --         51,500      2,761,816
Sales, maturities and redemptions--mortgage loans                             155,643      4,192,459        144,109
Additions to other invested assets                                                 --        (81,200)            --
Proceeds from sale of other invested assets                                        --             --        156,453
Repayment of certificate loans, net                                             6,095         59,416         11,494
                                                                        ---------------------------------------------
Cash flows provided by investing activities                                   859,693      7,602,172      5,533,882

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts paid to face-amount certificate holders                            (6,063,787)   (13,322,027)   (13,973,106)
Amounts received from face-amount certificate holders                         968,537      2,498,761      3,689,960
Capital contribution                                                               --      1,500,000             --
                                                                        ---------------------------------------------
Cash flows used in financing activities                                    (5,095,250)    (9,323,266)   (10,283,146)
                                                                        ---------------------------------------------

Net change in cash and cash equivalents                                      (653,302)     2,369,595       (597,431)
Cash and cash equivalents at beginning of year                              3,900,494      1,530,899      2,128,330
                                                                        ---------------------------------------------

Cash and cash equivalents at end of year                                  $ 3,247,192    $ 3,900,494    $ 1,530,899
                                                                        ---------------------------------------------
                                                                        ---------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES.


                                                          18
<PAGE>


                             SBM CERTIFICATE COMPANY
                          NOTES TO FINANCIAL STATEMENTS

1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION
     SBM Certificate Company (the "Company") was incorporated in 1990 for the
purpose of acquiring the face-amount certificate business of SBM Company
("SBM"). Effective December 31, 1993, SBM transferred all of the Company's
shares of common stock to its wholly owned subsidiary, State Bond and Mortgage
Life Insurance Company ("SBM Life"), and the Company became a wholly owned
subsidiary of SBM Life.

     On June 14, 1995, ARM Financial Group, Inc. ("ARM"), completed the
acquisition of substantially all of the assets and business operations of SBM,
including all of the issued and outstanding common stock of SBM's subsidiaries,
SBM Life and SBM Financial Services, Inc (the "Acquisition"). On November 29,
1996, SBM Financial Services, Inc. changed its name to ARM Securities
Corporation ("ARM Securities"). By virtue of the Acquisition, ARM acquired
control of the Company, a wholly owned subsidiary of SBM Life. Concurrent with
the Acquisition, ARM acquired all outstanding shares of the authorized common
stock of the Company from SBM Life for a purchase price of $3.3 million.

NATURE OF OPERATIONS
     The Company is an issuer of face-amount certificates and is registered
under the Investment Company Act of 1940 (the "1940 Act"). A face-amount
certificate is an obligation of the Company requiring the Company to pay
certificate holders the original invested amount of the certificate, plus a
three-year fixed-rate return, at a given maturity date. The Company's face-
amount certificates are sold primarily in Minnesota, Iowa, South Dakota and
California. Face-amount certificates, which are similar to bank certificates of
deposit, generally compete with various types of individual savings products
offered by banks and insurance companies that provide a fixed rate of return on
investors' money.

BASIS OF PRESENTATION
     The financial statements are prepared in accordance with generally accepted
accounting principles. The 1995 financial statements reflect purchase accounting
adjustments related to the Acquisition (see Note 2). For periods prior to the
Acquisition, the financial statements reflect the historical basis of
accounting. Certain amounts from prior years have been reclassified to conform
to the current year's presentation. These reclassifications had no effect on
previously reported net income or shareholder's equity.

INVESTMENTS
     Fixed maturities and equity securities are classified as available-for-
sale. Available-for-sale securities are stated at fair value, with the
unrealized gains and losses, net of taxes, reported as a separate component of
shareholder's equity in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The amortized cost of fixed maturities classified as
available-for-sale is adjusted for amortization 


                                       19
<PAGE>
                  NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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.

     The Company adopted the provisions of SFAS No. 115 for investments held as
of or acquired after January 1, 1994. The adoption of SFAS No. 115 had no effect
on net income. Upon the date of the Acquisition, the Company classified all
fixed maturities classified as held-to-maturity to the available-for-sale
category.

DEFERRED ACQUISITION COSTS
     Costs of issuing new face-amount certificates, principally commissions,
have been deferred. These costs are amortized on a straight-line basis over the
initial maturity period of the certificates which is three years.

FACE-AMOUNT CERTIFICATE RESERVES
     Face-amount certificates issued by the Company entitle certificate holders,
who have made either single or installment payments, to receive a definite sum
of money at maturity. Certificate reserves accrue interest, and cash surrender
values are less than accumulated certificate reserves prior to maturity dates.
The reserve accumulation rates, cash surrender values, and certificate reserves,
among other matters, are governed by the 1940 Act.

INCOME TAXES
     In accordance with SFAS No. 109, "Accounting for Income Taxes", the 
Company uses the liability method of accounting for income taxes. The 
Company's taxable income or loss is included in the consolidated federal 
income tax return of ARM. The Company provides for income taxes based on a 
proportionate share of consolidated taxable income. Additionally, tax 
benefits are recognized for losses to the extent they can be used in the 
consolidated return. It is the Company's and ARM's policy that any tax 
benefit recorded by one entity will be reimbursed by the benefitted entity.


                                       20
<PAGE>

                  NOTES TO FINANCIAL STATEMENTS (CONTINUED)


USE OF ESTIMATES
      The preparation of financial statements in conformity 
with generally accepted accounting principles requires management of the 
Company to make estimates and assumptions that affect the amounts reported in 
the financial statements and accompanying notes. Actual results could differ 
from those estimates.

2.   ACQUISITION OF THE COMPANY

     The Acquisition has been accounted for using the purchase method of
accounting. Under purchase accounting, assets and liabilities are adjusted to
their estimated fair value and reflect an allocation of the Company's portion of
the cost of the Acquisition, commonly referred to as "push-down accounting."

     The purchase accounting adjustment reflected in the accompanying statement
of shareholder's equity for the year ended December 31, 1995 was recorded on May
31, 1995, the effective date of the Acquisition. The adjustment restated
shareholder's equity on that date to $3.3 million, the purchase price allocated
to the Company by ARM. The December 31, 1995, balances for "retained earnings"
and "net unrealized gains on available-for-sale securities"  reflect net income
and the change in the fair value of fixed maturities and equity securities
subsequent to the Acquisition.

     The following combined condensed statements of operations and cash flows
present results for the five months ended May 31, 1995, prior to the
Acquisition, and the seven months ended December 31, 1995, following the
Acquisition. The combined amounts agree to the accompanying statements of
operations and cash flows for the year ended December 31, 1995. The operating
results subsequent to the Acquisition include the effect of new accounting
values assigned to invested assets and intangibles and differing asset/liability
management strategies and expense allocation methodologies of ARM and SBM
management.


                                       21
<PAGE>

                  NOTES TO FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                        SEVEN
                                                                       MONTHS
                                                      FIVE MONTHS       ENDED       YEAR ENDED
                                                         ENDED      DECEMBER 31,   DECEMBER 31,
                                                     MAY 31, 1995       1995           1995
                                                    ---------------------------------------------
<S>                                                   <C>            <C>           <C>
COMBINED CONDENSED STATEMENT OF OPERATIONS:
Total investment income                               $ 2,013,780    $ 2,875,598    $ 4,889,378
Total investment and other expenses                       511,343        446,250        957,593
Interest credited on certificate reserves               1,224,738      1,704,619      2,929,357
                                                    ---------------------------------------------
Net investment income before federal income taxes         277,699        724,729      1,002,428
Federal income tax expense                                (94,000)      (313,074)      (407,074)
                                                    ---------------------------------------------
Net investment income                                     183,699        411,655        595,354
Realized investment gains (losses)                       (314,000)       597,885        283,885
Federal income tax benefit (expense) on realized
  investment gains and losses                             106,760       (209,260)      (102,500)
                                                    ---------------------------------------------
Net income (loss)                                     $   (23,541)   $   800,280    $   776,739
                                                    ---------------------------------------------
                                                    ---------------------------------------------

COMBINED CONDENSED STATEMENT OF CASH FLOWS:
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES           $ 1,462,487    $ 2,628,202    $ 4,090,689

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
  Purchases                                               (21,615)   (44,203,261)   (44,224,876)
  Maturities and redemptions                              903,084      1,775,816      2,678,900
  Sales                                                 5,090,653     39,886,820     44,977,473
Sales, maturities and redemptions -- mortgage loans       392,947      3,799,512      4,192,459
Additions to other invested assets, net                   (81,200)            --        (81,200)
Repayments of certificate loans, net                       66,731         (7,315)        59,416
                                                    ---------------------------------------------
Cash flows provided by investing activities             6,350,600      1,251,572      7,602,172

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts paid to face-amount certificate holders        (7,066,042)    (6,255,985)   (13,322,027)
Amounts received from face-amount certificate
  holders                                               1,926,095        572,666      2,498,761
Capital contribution from SBM Life                      1,500,000             --      1,500,000
                                                    ---------------------------------------------
Cash flows used in financing activities                (3,639,947)    (5,683,319)    (9,323,266)
                                                    ---------------------------------------------

Net change in cash and cash equivalents                 4,173,140     (1,803,545)     2,369,595
Cash and cash equivalents at beginning of period        1,530,899      5,704,039      1,530,899
                                                    ---------------------------------------------

Cash and cash equivalents at end of period            $ 5,704,039    $ 3,900,494    $ 3,900,494
                                                    ---------------------------------------------
                                                    ---------------------------------------------
</TABLE>


                                                  22
<PAGE>

                  NOTES TO FINANCIAL STATEMENTS (CONTINUED)


3.  Investments

    The amortized cost and estimated fair values of available-for-sale
securities were as follows:

<TABLE>
<CAPTION>

                                                                  AVAILABLE-FOR-SALE-SECURITIES
                                                   -------------------------------------------------------------
                                                                        GROSS          GROSS
                                                                     UNREALIZED     UNREALIZED      ESTIMATED
                                                         COST           GAINS         LOSSES       FAIR VALUE
----------------------------------------------------------------------------------------------------------------
<S>                                                  <C>            <C>            <C>            <C>
DECEMBER 31, 1996:
  Fixed maturities:
    U.S. treasury securities and obligations
      of U.S. government agencies                    $  3,467,777   $         --   $     38,359   $  3,429,418
    Obligations of state and political subdivisions       456,112          3,498          8,838        450,772
    Foreign governments                                   951,123         13,000          5,893        958,230
    Corporate securities                                7,569,178         63,776         15,206      7,617,748
    Asset-backed securities                             5,131,230          3,763         35,468      5,099,525
    Mortgage-backed securities                         32,288,406        498,888        173,626     32,613,668
                                                   -------------------------------------------------------------
  Total fixed maturities                               49,863,826        582,925        277,390     50,169,361
  Equity securities                                       493,912         53,270          2,588        544,594
                                                   -------------------------------------------------------------
      Total available-for-sale securities            $ 50,357,738   $    636,195   $    279,978   $ 50,713,955
                                                   -------------------------------------------------------------
                                                   -------------------------------------------------------------

DECEMBER 31, 1995:
  Fixed maturities:
    U.S. treasury securities and obligations
      of U.S. government agencies                    $  6,319,243   $     25,950   $         --   $  6,345,193
    Obligations of state and political subdivisions       560,292          4,243          6,927        557,608
    Foreign governments                                   500,000          8,125             --        508,125
    Corporate securities                                4,777,934         88,765            173      4,866,526
    Asset-backed securities                             5,108,721         33,383             --      5,142,104
    Mortgage-backed securities                         35,810,065      1,169,583         11,089     36,968,559
                                                   -------------------------------------------------------------
  Total fixed maturities                               53,076,255      1,330,049         18,189     54,388,115
  Equity securities                                       570,162         51,074             45        621,191
                                                   -------------------------------------------------------------
      Total available-for-sale securities            $ 53,646,417   $  1,381,123   $     18,234   $ 55,009,306
                                                   -------------------------------------------------------------
                                                   -------------------------------------------------------------
</TABLE>


                                                            23
<PAGE>

                  NOTES TO FINANCIAL STATEMENTS (CONTINUED)


     The amortized cost and estimated fair value of securities by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or repay obligations
with or without call or prepayment penalties and because mortgage-backed and
asset-backed securities provide for periodic payments throughout their life.



                                                 DECEMBER 31, 1996
                                         ------------------------------------
                                                                 ESTIMATED
                                                                   FAIR
                                               COST                VALUE
-----------------------------------------------------------------------------

AVAILABLE-FOR-SALE:
  Due in one year or less                  $  1,260,417        $  1,271,617
  Due after one year through five years       5,749,018           5,760,012
  Due after five years through ten years      4,375,305           4,352,148
  Due after ten years                         1,059,450           1,072,391
  Asset-backed securities                     5,131,230           5,099,525
  Mortgage-backed securities                 32,288,406          32,613,668
  Equity securities                             493,912             544,594
                                         ------------------------------------
    Total available-for-sale securities    $ 50,357,738        $ 50,713,955
                                         ------------------------------------
                                         ------------------------------------

     Gross gains of $642,039, $815,733 and $7,399 and gross losses of $175,226,
$148,041 and $321,399 were realized on sales of fixed maturities classified as
available-for-sale for the year ended December 31, 1996, the seven months ended
December 31, 1995 and the five months ended May 31, 1995, respectively.

     Gross gains of $23,980 and zero and gross losses of zero and $5,075 were
recognized on equity securities sold during 1996 and 1995, respectively. Gross
losses of $64,732 were realized on the sale of substantially all mortgage loans
in December 1995.


                                       24
<PAGE>

                  NOTES TO FINANCIAL STATEMENTS (CONTINUED)


4.   CERTIFICATE RESERVES

     Total certificate reserves at December 31 are summarized as follows:


<TABLE>
<CAPTION>


                                                                       MINIMUM            ADDITIONAL
                                          1996            1995        INTEREST             INTEREST
                                    --------------------------------------------------------------------

<S>                                   <C>            <C>            <C>                 <C>
Fully-paid certificates:
   Single-payment series 503          $ 46,302,625   $ 48,440,527        2.50%          1.85% to 4.60%
   Installment                           2,270,515      2,267,503   2.50% to 3.50%      1.50% to 2.75%
   Optional settlement                     592,513        618,419   2.50% to 3.00%      2.00% to 2.75%
   Due to unlocated certificate
     holders                                 2,878          2,813        None
                                    -------------------------------
                                        49,168,531     51,329,262

Installment certificates:
   Reserves to mature, by series:
     120, 215, and 220                     424,651        447,033        3.25%          1.75% to 2.00%
     315                                   296,064        364,368        3.50%          1.50% to 1.75%
   Advance payments                        297,140        319,061          *                   *
                                    -------------------------------
                                         1,017,855      1,130,462
                                    -------------------------------
        Total certificate reserves    $ 50,186,386   $ 52,459,724
                                    -------------------------------
                                    -------------------------------
</TABLE>


     *    Minimum interest rates on advance payments are generally the same as
          the rates on scheduled installment payments. Interest credited on
          advance payments, however, is accruing at 5.00% and will continue at
          that rate through 1997.

5.   FAIR VALUES OF FINANCIAL INSTRUMENTS

     The following disclosure of the estimated fair values of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments."  The estimated fair
value amounts have been determined using available market information and
appropriate valuation methodologies. However, considerable judgement was
required to develop these estimates. Accordingly, the estimates are not
necessarily indicative of the amounts which could be realized in a current
market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the estimated fair value amounts.


                                       25
<PAGE>

                  NOTES TO FINANCIAL STATEMENTS (CONTINUED)


<TABLE>
<CAPTION>

                                             --------------------------------------------------------------
                                                     DECEMBER 31, 1996             DECEMBER 31, 1995
                                                  CARRYING       ESTIMATED      CARRYING       ESTIMATED
                                                   VALUE        FAIR VALUE       VALUE        FAIR VALUE 
-----------------------------------------------------------------------------------------------------------
<S>                                             <C>            <C>            <C>            <C>
Assets:
  Investments in securities of unaffiliated
    issuers:
      Fixed maturities available-for-sale       $ 50,169,361   $ 50,169,361   $ 54,388,115   $ 54,388,115
      Equity securities                              544,594        544,594        621,191        621,191
  Certificate loans                                  273,368        273,368        279,463        279,463
  Other invested assets                              523,083        523,083        632,154        632,154
  Cash and cash equivalents                        3,247,192      3,247,192      3,900,494      3,900,494
  Other assets                                        66,163         66,163         54,203         54,203
Liabilities:
  Certificate reserves                            50,186,386     50,767,396     52,459,724     52,758,441
  Accounts payable and other liabilities              29,940         29,940         60,582         60,582
</TABLE>


     The following methods and assumptions were used in estimating fair values:

INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS
     Fair values for investments in securities of unaffiliated issuers are based
on quoted market prices, where available. For investments in securities of
unaffiliated issuers for which a quoted market price is not available, fair
values are estimated using internally calculated estimates or quoted market
prices of comparable instruments.

CERTIFICATE LOANS
     The carrying value of certificate loans approximates their fair value.

CASH AND CASH EQUIVALENTS
     The carrying amounts of cash and cash equivalents approximate their fair
value given the short-term nature of these assets.

CERTIFICATE RESERVES
     The fair value of certificate reserves is based on a discounted cashflow
analysis, using the current interest rate offered on new certificates of 5.25%
and 5.60% at December 31, 1996 and 1995, respectively.

OTHER INVESTED ASSETS, OTHER ASSETS, ACCOUNTS PAYABLE AND OTHER LIABILITIES
     The financial statement carrying amounts of other invested assets, other
assets, accounts payable and other liabilities are deemed to be a reasonable
approximation of their fair value.


                                       26
<PAGE>

                  NOTES TO FINANCIAL STATEMENTS (CONTINUED)


6.   FEDERAL INCOME TAXES

     Deferred federal income taxes reflect the net tax effects of (i) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (ii)
operating and capital losses. Significant components of the deferred tax
liabilities and assets as of December 31, 1996 and December 31, 1995 were:

<TABLE>
<CAPTION>

                                                                             DECEMBER 31,
                                                                     ----------------------------
                                                                          1996          1995
-------------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>
Deferred tax liabilities:
  Real estate limited partnership                                      $  178,736    $  172,851
  Net unrealized gains on available-for-sale securities                   124,676       477,011
  Other                                                                        --        39,725
                                                                     ----------------------------
      Total deferred tax liabilities                                      303,412       689,587

Deferred tax assets:
Fixed maturities                                                           45,524       196,991
Other investments                                                          93,789       108,143
Fixed assets                                                               38,149        39,030
Capital loss carryover                                                    363,267       420,357
  Other                                                                    31,785        20,439
                                                                     ----------------------------
      Total deferred tax assets                                           572,514       784,960
  Valuation allowance for deferred tax assets                            (714,521)     (714,521)
                                                                     ----------------------------
      Net deferred tax assets                                            (142,007)       70,439
                                                                     ----------------------------
  Deferred tax liabilities shown on the accompanying balance sheets    $  445,419    $  619,148
                                                                     ----------------------------
                                                                     ----------------------------
</TABLE>

The components of the provision for federal income tax expense consist of the
following:

<TABLE>
<CAPTION>

                                                                 YEAR ENDED DECEMBER 31,
                                                      -------------------------------------------
                                                           1996             1995         1994
                                                      -------------------------------------------
<S>                                                     <C>             <C>           <C>
Current                                                 $ 227,617       $ 214,110     $ 152,000
Deferred                                                  178,606         295,464        20,000
                                                      -------------------------------------------
Total federal income tax expense                        $ 406,223       $ 509,574     $ 172,000
                                                      -------------------------------------------
                                                      -------------------------------------------

</TABLE>

     Current and deferred federal income tax expenses for the seven months ended
December 31, 1995 were $233,870 and $288,464, respectively. For the five months
ended May 31, 1995 the current tax benefit was $19,760 and the deferred tax
expense was $7,000.

                                       27
<PAGE>

                  NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     In the event that future tax assets are recognized on deductible 
temporary differences for which a valuation allowance was provided at the 
Acquisition date, such benefits will be applied to first reduce the balance 
of goodwill. No such benefits were realized in 1996. During 1995, goodwill 
was reduced by $189,251 as a result of realizing such benefits. Goodwill, 
with an unamortized balance of $113,095 at December 31, 1996, is being 
amortized straight-line over the three year period subsequent to the 
Acquisition.

     Federal income tax expense differs from that computed by using the federal
income tax rate of 35%. The sources of the differences were:

<TABLE>
<CAPTION>
                                                                SEVEN MONTHS   FIVE MONTHS
                                     YEAR ENDED DECEMBER 31,        ENDED          ENDED       YEAR ENDED
                                  ----------------------------  DECEMBER 31,      MAY 31,     DECEMBER 31,
                                      1996           1995           1995           1995           1994

                                  -------------------------------------------------------------------------
<S>                                 <C>            <C>           <C>             <C>            <C>
Income tax expense (benefit) at
  statutory rate                    $ 398,371      $ 450,209      $ 462,915      $ (12,706)     $ 194,321
Tax-exempt interest                    (7,283)        (7,256)        (3,350)        (3,906)       (10,000)
Dividend received deduction           (12,577)       (14,379)        (8,000)        (6,379)       (15,000)
Goodwill amortization                  27,938         32,287         32,287             --             --
Taxable proceeds from life
     insurance                             --         38,482         38,482             --             --
Other                                    (226)        10,231             --         10,231          2,679
                                  -------------------------------------------------------------------------
Total federal income tax expense
  (benefit)                         $ 406,223      $ 509,574      $ 522,334       $(12,760)      $172,000
                                  -------------------------------------------------------------------------
                                  -------------------------------------------------------------------------
</TABLE>


7.   RELATED PARTY TRANSACTIONS

     For the periods presented, management and investment advisory fee expenses
reflected in the accompanying financial statements represent allocations of
expenses from SBM and ARM for the respective periods prior and subsequent to the
Acquisition. These allocations include amounts for administrative and investment
services, including use of property, equipment and facilities. The allocations
are currently based on the proportion which such business and assets managed
represents of all of ARM's and its subsidiaries business activities. Prior to
the Acquisition, the allocations were primarily based on the amount of time
spent by SBM employees on the face-amount certificate business and on the
proportion which such business represents of all of SBM's and its subsidiaries'
business activities. The allocations were $246,468, $151,967, $206,519 and
$516,000 for the year ended December 31, 1996, the seven months ended December
31, 1995, the five months ended May 31, 1995 and for the year ended December 31,
1994, respectively. The Company owns and pays operating expenses for a building
used by SBM (prior to the Acquisition) and its affiliates. The total rent and
utilities reimbursement paid to the Company in 1994 by SBM and affiliates was
$146,554. Management believes the foregoing allocations were made on a
reasonable basis; however, they do 

                                       28
<PAGE>


                  NOTES TO FINANCIAL STATEMENTS (CONTINUED)

not necessarily equal the costs which would have been or will be incurred by 
the Company on a stand-alone basis.

     The Company has paid ARM Securities, an affiliate, $263,089, $443,579 and
$507,995 for the years ended 1996, 1995 and 1994, respectively, for sales
commissions and other issuance, underwriting, and sales expenses.

8.   SHAREHOLDER'S EQUITY AND REGULATORY MATTERS

     The Company is subject to two principal restrictions relating to its
regulatory capital requirements. First, under the 1940 Act, the Company is
required to establish and maintain qualified assets (as defined in Section 28(b)
of the 1940 Act) having a value not less than the aggregate of certificate
reserves plus $250,000 ($50.4 million and $52.7 million at December 31, 1996 and
1995, respectively). The Company had qualified assets of $55.1 million and $58.9
million at those respective dates (before addition of $0.4 million and $1.4
million, respectively, for net unrealized pretax gains on fixed maturities and
equity securities classified as available-for-sale).

     For purposes of determining compliance with the foregoing provisions,
qualified assets are valued in accordance with District of Columbia Insurance
Laws (the "D.C. Laws") as required by the 1940 Act. Qualified assets for which
no provision for valuation is made in the D.C. Laws are valued in accordance
with rules, regulations, or orders prescribed by the Securities and Exchange
Commission. These values are the same as the financial statement carrying
values, except that for financial statement purposes, fixed maturities and
equity securities classified as available-for-sale are carried at fair value.
For qualified asset purposes, fixed maturities securities classified as
available-for-sale are valued at amortized cost and equity securities are valued
at cost.

     Second, the Minnesota Department of Commerce ("MDC") has historically
recommended to the Company that face-amount certificate companies should
maintain a ratio of shareholder's equity to total assets of a minimum of 5%
based upon a valuation of available-for-sale securities reflected at amortized
cost for purposes of this calculation. Under this formula, the Company's capital
ratio was 8.7% and 6.9% at December 31, 1996 and 1995, respectively. In November
1994, based on the decline in the value of the Company's investment portfolio,
resulting from increasing interest rates in 1994 and the Company's decreasing
liquidity resulting from reduced principal payments on the Company's
collateralized mortgage obligations portfolio, the MDC recommended that the
Company increase its capital level. The MDC's concern was influenced by the
Company's capital ratio, calculated including the effects of unrealized
investment losses. Therefore, on March 29, 1995, SBM Life, the former parent
company of the Company, made a $1.5 million capital contribution to the Company.


     Pursuant to the required calculations of various states, the provisions of
the certificates, depository agreements, and the 1940 Act, qualified assets of
the Company were deposited with independent custodians to meet certificate
liability requirements as of December 31, 1996 and 1995 as shown in 

                                       29
<PAGE>


                  NOTES TO FINANCIAL STATEMENTS (CONTINUED)

the following table. Certificate loans, secured by applicable certificate 
reserves, are deducted from certificate reserves in computing deposit 
requirements.

<TABLE>
<CAPTION>

                                                                                       1996           1995
                                                                                 -------------------------------
<S>                                                                                <C>            <C>
Assets on deposit with:
  Central depositary                                                               $ 51,522,592   $ 57,278,134
  State governmental authorities                                                        245,102        193,756
                                                                                 -------------------------------
Total deposits                                                                     $ 51,767,694   $ 57,471,890
                                                                                 -------------------------------
                                                                                 -------------------------------

Required deposits (certificate reserves less certificate loans plus $250,000)      $ 50,163,018   $ 52,430,261
                                                                                 -------------------------------
                                                                                 -------------------------------
</TABLE>


Assets on deposit consisted of the following at December 31:


<TABLE>
<CAPTION>

                                                                                       1996           1995
                                                                                 -------------------------------
<S>                                                                                <C>            <C>
Investment securities, at cost plus accrued interest                               $ 51,244,584   $ 56,839,655
First mortgage loans                                                                      4,068         13,472
Other assets on deposit, at cost                                                        519,042        618,763
                                                                                 -------------------------------
                                                                                   $ 51,767,694   $ 57,471,890
                                                                                 -------------------------------
                                                                                 -------------------------------
</TABLE>


                                       30
<PAGE>

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

     There have been no changes in or disagreements with accountants on
accounting, auditing, or financial reporting matters.


                                       31
<PAGE>

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

          This information is omitted in accordance with Instruction (J)(2)(c)
          to Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION

          This information is omitted in accordance with Instruction (J)(2)(c)
          to Form 10-K.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          This information is omitted in accordance with Instruction (J)(2)(c)
          to Form 10-K.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          This information is omitted in accordance with Instruction (J)(2)(c)
          to Form 10-K.


                                       32
<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  DOCUMENTS FILED AS PART OF THIS REPORT

     1.    FINANCIAL STATEMENTS.

               See financial statements index on page 11 of this document for a
          listing of financial statements and reports of independent auditors
          included in this report.


     2.   FINANCIAL STATEMENT SCHEDULES

               The following financial statement schedules of the Company and
          the related Report of Independent Auditors are incorporated herein by
          reference and were previously filed as Part II Item 16(b) to Post
          Effective Amendment No. 8 to Registration Statement on Form S-1 of the
          Company filed February 28, 1997 (File No. 33-38066):

               Report of Independent Auditors

               Schedule I     Investments in Securities of Unaffiliated
                              Issuers--December 31, 1996
               Schedule V     Qualified Assets on Deposit--December 31, 1996
               Schedule VI    Certificate Reserves--Year Ended December 31, 1996

               Schedules I, III, V and VI as of or for the year ended December
          31, 1995, and related Report of Independent Auditors, included in the
          Company's Post Effective Amendment No. 7 to Registration Statement on
          Form S-1 filed March 5, 1996, Schedules III and VI for the year ended
          December 31, 1994, and related Independent Auditors' Report, included
          in the Company's Post Effective Amendment No. 6 to Registrant
          Statement on Form S-1 filed March 31, 1995, (File No. 33-38066), are
          incorporated herein by reference.

               Schedules required by Article 6 of Regulation S-X for face-amount
          certificate investment 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.

     3.   EXHIBITS

               See Exhibit Index on page 36 of this report.


                                       33
<PAGE>

(b)  REPORTS ON FORM 8-K

          No reports on Form 8-K were filed by the Company during the fourth
     quarter of 1996.


                                       34
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on February 26, 1997.

                                        SBM Certificate Company

                                        By:      /S/ JOHN  R. MCGEENEY

                                            ------------------------------------
                                             John R. McGeeney
                                             Chairman of the Board of Directors
                                             and President

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 26th day of February 1997.



                Name                                       Title
                ----                                       -----

        /s/ JOHN R. McGEENEY               Chairman of the Board of Directors
-------------------------------------      and President (Principal Executive
 John R. McGeeney                          Officer)


         /s/ EDWARD L. ZEMAN               Executive Vice President-Chief
-------------------------------------      Financial Officer (Principal
Edward L. Zeman                            Financial Officer)


          /s/ BARRY G. WARD                Controller (Principal Accounting
-------------------------------------      Officer)
Barry G. Ward


         /s/ STEVEN B. BING                Director
-------------------------------------
Steven B. Bing


        /s/ THEODORE S. ROSKY              Director
-------------------------------------
Theodore S. Rosky


        /s/ MARTIN R. SNYDER               Director
-------------------------------------
Martin R. Snyder


                                       35
<PAGE>


                             SBM CERTIFICATE COMPANY
                                  EXHIBIT INDEX

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
EXHIBIT
NUMBER                             DESCRIPTION
--------------------------------------------------------------------------------


3.1       Articles of Incorporation-filed as Exhibit 3(a) to Registration
          Statement No. 33-38066 dated December 4, 1990.*

3.2       By-laws-filed as Exhibit 3(b) to Registration Statement No. 33-38066
          dated December 4, 1990.*

4         Instruments defining the rights of security holders-Form of Series 503
          Certificate filed as Exhibit 4 to Registration Statement on Form N-8B-
          4, File No. 811-6268, filed April 1,  1991.*

10.1      Underwriting Agreement by and between the Company and SBM Financial
          Services, Inc. dated June 14, 1995, filed as Exhibit 10(b) to
          Amendment No. 7 to Registration Statement No. 33-38066 of the Company
          dated March 5, 1996.*

10.2      Administrative Services Agreement by and between the Company and ARM
          Financial Group, Inc. dated as of June 14, 1995, filed as Exhibit
          10(c) to Amendment No. 7 to Registration Statement No. 33-38066 of the
          Company dated March 5, 1996.*

10.3      Investment Services Agreement by and between the Company and ARM
          Financial Group, Inc. dated as of June 14, 1995, filed as Exhibit
          10(d) to Amendment No. 7 to Registration Statement No. 33-38066 of the
          Company dated March 5, 1996.*

10.4      Custody Agreement, as amended and supplemented, between the Company
          and First Bank National Association dated December 20, 1990, filed as
          Exhibit 10(b) to Amendment No. 1 to Registration Statement No. 33-
          38066 of the Company dated January 2, 1991.*

10.5      Lease between the Company and State Bank & Trust Company of New Ulm
          dated August 13, 1992, filed as Exhibit 10A to Form 10-K of SBM
          Company filed March 31, 1993 (File No. 811-407).*

10.6      Form of Tax Allocation Agreement by and among the Company, ARM
          Financial Group, Inc. and certain ARM subsidiaries dated March 21,
          1996, filed as Exhibit 10.1 to  Form  10-Q of the Company, File No.
          811-6268, filed May 14, 1996.*

23.1      Consent of Ernst & Young LLP, filed herewith.

23.2      Consent of Deloitte & Touche LLP, filed herewith.

27        Not applicable.

          *  Previously filed as indicated and incorporated herein by reference.


                                       36