SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 811-6268
SBM CERTIFICATE COMPANY
(Exact name of registrant as specified in its charter)
MARYLAND 52-2250397
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5101 RIVER ROAD, SUITE 101, BETHESDA, MARYLAND 20816 (Address of
principal executive offices) (Zip Code)
301-656-4200
(Registrant's telephone number, including area code)
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 of 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. Yes [X] 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 II of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 31, 2002, 250,000 shares of the registrant's common stock, $1 par
value, were outstanding. The registrant is a wholly-owned subsidiary and,
therefore, its common stock is not traded on a public market.
DOCUMENTS INCORPORATED BY REFERENCE
None.
EXPLANATORY NOTE
On July 19, 2000, SBM Certificate Company, a Maryland corporation
("SBM-MD") and SBM Certificate Company, a Minnesota corporation ("SBM-MN")
consummated a reverse merger transaction ("the Merger") pursuant to which SBM-MD
became the surviving corporation. As a result of the Merger and in accordance
with the provision of Accounting Principles Board Opinion No. 16, "Business
Combinations", SBM-MD will be considered the acquiring enterprise for financial
reporting purposes. Accordingly, this Form 10-K for the year ended December 31,
2001 presents SBM-MD's current financial information together with SBM-MN's
historical financial information.
TABLE OF CONTENTS
PART I
Item 1. Business ..................................................................3
Item 2. Properties.................................................................6
Item 3. Legal Proceedings..........................................................6
Item 4. Submission of Matters to a Vote of Security Holders........................6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. ...7
Item 6. Selected Financial Data....................................................7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................8
Item 7A.Quantitative and Qualitative Disclosures About Market Risk................13
Item 8. Financial Statements and Supplementary Data...............................14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................14
PART III
Item 10. Directors and Executive Officers of the Registrant.......................14
Item 11. Executive Compensation...................................................16
Item 12. Security Ownership of Certain Beneficial Owners and Management...........16
Item 13. Certain Relationships and Related Transactions...........................16
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........17
2
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
SBM Certificate Company (the "Company"), was incorporated in Maryland on
May 24, 2000. It is a wholly-owned subsidiary of State Bond & Mortgage Company,
L.L.C. ("State Bond"), a Maryland limited liability company. The Company's
executive offices are located at 5101 River Road, Suite 101, Bethesda, Maryland
20816; its telephone number is 301-656-4200.
On July 19, 2000, State Bond completed the purchase of all of the issued
and outstanding shares of common stock of SBM Certificate Company a Minnesota
corporation ("SBM MN"), from ARM Financial Group, Inc. ("ARM"), a Delaware
corporation (the "Acquisition"). State Bond effected the Acquisition as assignee
under a Stock Purchase Agreement, dated March 28, 2000, by and among 1st
Atlantic Guaranty Corporation ("1st Atlantic"), a Maryland corporation, and ARM
("Stock Purchase Agreement"). State Bond is wholly-owned by 1st Atlantic. The
Company and 1st Atlantic are face-amount certificate companies registered as
such under the Investment Company Act of 1940 ("1940 Act").
As part of the Acquisition transactions, SBM MN was merged into the
Company. The Company was formed for purposes of redomestication from Minnesota
to Maryland and had nominal assets when organized. The Company has succeeded SBM
MN, which was a registered face-amount certificate company, as the "registrant"
in all filings made by SBM MN under the Securities Act of 1933 ("1933 Act"),
Securities Exchange Act of 1934 ("1934 Act") and the 1940 Act.
The Company has assumed the face-amount certificate business of SBM MN. The
Company's predecessors have issued various series of face-amount certificates of
the fully paid and installment type since 1914. The Company has assumed the
obligations under SBM MN's outstanding face-amount certificates as a result of
the Acquisition.
On December 17, 2000, 1st Atlantic contributed its 100% ownership of
Atlantic Capital Funding Corporation ("ACFC") to the Company. ACFC is a mortgage
broker and lender in conventional and HUD mortgage programs as well as
commercial lending.
3
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company has two business segments, the investment company segment of
SBM and the mortgage company segment of ACFC. The consolidating financial
statements of the Company presented in Item 14 present the detailed financial
information of each separate business segment.
(c) NARRATIVE DESCRIPTION OF BUSINESS
General
The Company is a face-amount certificate company registered under the 1940
Act that issues and services fixed-rate face-amount certificates. A face-amount
certificate is an obligation of the issuer to pay a face, or principal, amount,
plus specified interest, to the holder of the certificate. The face-amount may
be paid at the end of a certificate's "guarantee period" or at its "maturity
date." Lesser amounts are paid at such times if all or part of an investment in
the certificate is withdrawn prior to maturity or the end of any guarantee
period. Interest may be paid quarterly or annually, or may be compounded.
The Company currently offers various series of single-payment investment
certificates with guarantee periods of three, five, seven and ten years,
respectively. Unless otherwise instructed by the holder, a certificate is
automatically renewed for another guarantee period of the same duration until
the certificate's maturity date. The certificates mature no later than 33 years
from the date they are issued. The Company's face-amount certificate operations
include issuance of single-payment certificates and the servicing of outstanding
single-payment and installment certificates, the investment of related funds,
and other related service activities.
The Company periodically declares the interest rates payable for a
certificate's guarantee period. The interest rate declared is applicable for the
entire guarantee period. The prevailing interest rates available on
interest-bearing instruments are a primary consideration in deciding upon the
interest rates declared by the Company. However, the Company has complete
discretion as to what interest rates it declares for the certificates. When a
certificate is renewed, the interest rates in effect for the succeeding
guarantee period may be greater or lesser than the rates in effect for the
expiring guarantee period.
SBM Certificate Company's gross income is derived primarily from the margin
between earnings on its investments and amounts paid or credited on its fixed
rate certificate liability ("investment spread"). The Company's net income is
determined by deducting investment and other expenses and federal income taxes.
The investment spread is affected principally by the Company's investment
decisions, general economic conditions, government monetary policy, the policies
of regulatory authorities that influence market interest rates, and the
Company's ability to respond to changes in such rates. Changes in market
interest rates may have a negative impact on its earnings. See "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition".
4
The Company accrues liabilities, for which it maintains reserves for its
certificate obligations in accordance with the 1940 Act. In general, the Company
establishes its certificate liability monthly in an amount equal to the
certificates' surrender value. Under provisions of the 1940 Act, the Company is
permitted to invest its reserves only in assets that constitute "qualified
investments" and such other assets as the Securities and Exchange Commission
("SEC") may permit under the 1940 Act.
ACFC principally originates and brokers single-family residential mortgages
(conventional and FHA) for sale to investors. Loan underwriting approval from
investors is generally obtained, before closing with the borrower, to fund the
loans. ACFC is approved as a nonsupervised lender under the HUD Title II program
which has a required net worth based on a prescribed calculation. ACFC performs
underwriting and closing services for the Company, which acquires mortgage notes
from ACFC. ACFC may originate and process real estate loans directly as well as
offer its loan programs to outside mortgage brokers and bankers on a wholesale
basis. In the latter case, outside brokers will originate and process loans and
ACFC will underwrite and close the loans that meet its investment requirements.
ACFC may enter into agreements with selected outside mortgage brokers, bankers
and mortgage loan servicing companies to service certain types of mortgages that
may require special treatment because of various factors, such as the unique
features of the underlying real estate or the credit quality of the borrowers.
Management of Investments
Subject to the oversight of the Board of Directors, the Company's
management is responsible for selecting and managing the Company's securities
investments to ensure that the Company has, in cash or qualified investments,
assets having an aggregate value not less than that required by applicable law.
Qualified investments are defined as investments of a kind which life insurance
companies are permitted to invest in or hold under provisions of the Insurance
Code of the District of Columbia. Management also is responsible for placing
orders for the purchase and sale of the Company's securities investments with
brokers and dealers. The Company may in the future engage one or more investment
advisers to assist the Company in the management of its securities investments.
Sale of Certificates and Competition
The Company sells its certificates directly and through broker-dealers who
have entered into selling agreements with the Company. Sales also may be made to
members of affinity groups, including service organizations, non-profit
associations and other types of member organizations.
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, bank and thrift products. Some of
these other products are insured by governmental agencies or funds or private
third parties. The Company's certificates are not guaranteed or insured by any
governmental agency or fund or independent third party but are supported by
reserves required by law. The Company's ability to offer competitive interest
rates, attractive terms, and efficient service are its primary basis for meeting
competition. American Express Certificate Company (formerly IDS Certificate
Company) is the Company's main competitor in the issuance of face-amount
certificates.
5
Relationship with State Bond
The Company is an independent operating entity, but relies upon State Bond
and its affiliates to provide it with management, marketing and administrative
services, as well as personnel, for the conduct of the Company's business. See
"Item 13. Certain Relationships and Related Transactions."
Regulation
Like many financial service companies which offer investment opportunities
to the public, the Company is subject to governmental regulation. In particular,
the 1940 Act and rules issued by the SEC specify certain terms for face-amount
certificates, the method for calculating reserve liabilities on outstanding
certificates, the minimum amounts and types of investments to be deposited with
a qualified custodian to support such reserve liabilities, and a variety of
other restrictions. See Note B and Note M of Notes to Consolidating Financial
Statements of the Company for more detail on the policies of the Company related
to these regulations.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
The Company has no foreign operations.
ITEM 2. PROPERTIES
The Company's executive offices are located at 5101 River Road, Suite 101,
Bethesda, Maryland. The executive offices are the primary location for State
Bond's and the Company's investment, accounting, corporate accounting, marketing
activities and various support personnel. These offices are leased by State Bond
which makes them available to the Company under the Administrative Services
Agreement. The Company also maintains administrative offices at 125 Minnesota
Street, New Ulm, Minnesota.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property the subject of,
any material pending legal proceedings, other than ordinary litigation routine
to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is 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 owned by
State Bond.
Subject to its obligation to maintain investments in qualified assets as
required under Section 28(b) of the 1940 Act, the Company may pay dividends to
its parent as declared by the Company's Board of Directors. The Company,
including its predecessor, paid total dividends in 2001 and 2000 of $579,934 and
$6,513,805, respectively. The dividends in 2000 were primarily in connection
with the Acquisition, as discussed in Note A of the Notes to Consolidating
Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The following table contains selected financial data of the Company for the
five years ended December 31, 2001. The financial data was derived from the
Company's audited financial statements. The reports of Reznick Fedder &
Silverman, independent auditors, with respect to the years ended December 31,
2001 and 2000, and of Ernst & Young LLP, independent auditors, with respect to
the year ended December 31, 1999, appear at page F-02 and F-03, respectively of
this Annual Report. The data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, related notes, and other financial
information included in this Annual Report.
7
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA
Total investment income $ 1,515 $ 1,568 $ 2,292 $ 2,827 $ 3,922
Interest credited on certificate reserves (1,173) (1,523) (1,615) (2,063) (2,795)
Net investment spread 342 45 677 763 1,138
Total investment and other expenses (1,873) (528) (376) (576) (755)
Federal income tax (expense) benefit -- 621 102 (54) (124)
Net investment income (loss) (1,531) 138 409 134 259
Net other operating loss (68) -- -- -- --
Federal income tax (expense) benefit 288 -- -- -- --
Net investment and other operating income(losses) (1,311) 138 409 134 259
Net realized investment gains (losses) 69 (429) (373) (103) (164)
Net income (loss) (1,242) (291) 36 31 95
Earnings (loss) per share* (4.97) (1.16) 0.14 0.12 0.38
BALANCE SHEET DATA (END OF PERIOD)
Total assets $ 25,277 $ 22,259 $ 34,285 $ 39,354 $ 60,270
Total liabilities 24,109 21,527 30,117 34,068 45,127
Shareholder's equity 1,168 732 4,168 5,028 4,982
- ----------
* Earnings (loss) per share based on 250,000 shares issued and outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company's predecessor, SBN MN, was incorporated in June 1990 to assume
the face-amount certificate business of SBM Company ("SBM") which began in 1914.
ARM purchased most of the assets of SBM in June 1995 and continued the issuance
of face-amount certificates through SBM MN, then a wholly-owned subsidiary of
ARM. As a result of the Acquisition, the Company has assumed the obligations of
SBM MN's outstanding face-amount certificates and currently offers various
series of single-payment face-amount certificates. The Company issues and
services fixed rate face-amount certificates and provides related services to
holders of the certificates. ACFC performs underwriting and closing services for
the Company, as well as other such services to outside brokers and bankers.
8
Financial Condition, Changes in Financial Condition and Results Of Operations
2001 compared with 2000
During 2001, total assets increased $3,018,243 from $22.3 million in 2000
to $25.3 million in 2001, while certificate liability increased $2,894,422 from
$20.9 million in 2000 to $23.8 million in 2001. The increase in total assets and
certificate liability is primarily due to certificate sales exceeding
certificate maturities, redemptions and early surrenders.
The Company's earnings are derived primarily from net investment income and
net other operating income. Net investment income is income earned from invested
assets less investment expenses and interest credited on certificate reserve
liability. Net other operating income is income earned from the origination of
loans in the mortgage broker business less operating expenses. Changes in net
investment income are largely due to changes in the rate of return on
investments. Changes in net other operating income is attributable to changes in
the volume of loans originated.
The Company had a net loss of $1,242,405 and $290,643 for the years ended
December 31, 2001 and 2000, respectively. The increase in net loss for 2001
stemmed mainly from the net investment loss before income tax of $1,530,959 for
the period ended December 31, 2001 as compared to net investment loss before
income tax of $483,116 for the period ended December 31, 2000. The increase in
net investment loss before income tax for 2001 was due mainly to an increase in
investment and other expenses.
Investment income (excluding realized investment gains and losses) in 2001
was $1,515,128 compared to investment income of $1,567,929 for 2000. Investment
income plus realized investment gains less realized investment losses represents
annualized investment yields of 8.17% and 4.10% on average cash and investments
of $19.4 million and $27.8 million for 2001 and 2000, respectively. The decrease
in investment income is attributable to a decrease in cash and investments being
held by the Company.
Net investment spread, which is the difference between investment income
and interest credited on certificate liability, was $342,576 for 2001 compared
to $44,760 in 2000. On an annualized yield basis, these amounts reflect net
investment spread for 2001 and 2000 of 1.53% and .18%, respectively.
Interest credited on certificate reserves for 2001 and 2000 was $1,172,552
and $1,523,169, respectively. These amounts represent annualized average rates
of interest credited of 5.24% and 5.97% on average certificate liability of
$22.4 million and $25.5 million for 2001 and 2000, respectively. The Company
monitors credited interest rates for new and renewal issues against competitive
products, such as bank certificates of deposit. Credited interest rate
adjustments (up or down) on new face-amount certificates are made by the Company
periodically, resulting in the overall decrease in the average crediting rate.
Investment and other expenses were $1,873,535 and $527,876 for 2001 and
2000, respectively. The increase in investment and other expenses was mainly the
result of an increase in the management fee paid to the Company's parent, State
Bond, and other expenses. The increase in the management fee was due to a
majority of the payment to State Bond in 2001 being made in the form of a
management fee, whereas, in 2000 the payment to State Bond was in the form of
both a management fee and dividends. Total dividends paid to cover management
services and management fee expense combined for 2001 and 2000 was $1,658,773
and $1,486,344, respectively. The increase in other expenses from $178,365 in
2000 to $605,073 in 2001 was mainly due to a new policy implemented after the
Acquisition as to the payment of certain direct expenses by the Company. Prior
to Acquisition, certain expenses that are currently paid by the Company were
paid by ARM.
9
Net other operating loss before income tax of $68,407 consists of the
mortgage broker operations of ACFC, which became a subsidiary of the Company in
December 2000. Other operating income of $866,901 is derived from loan
origination fees, gain on sale to investor and other processing and underwriting
loan fees relating to originating and brokering loans. Other operating expenses
of $935,308 consist of salaries and commissions paid in relation to originating
and brokering loans and other costs in operating the mortgage company.
Realized investment gains (losses) were $68,697 and ($428,582) for 2001 and
2000, respectively. Realized investment gains and losses are primarily
interest-rate related and attributable to the asset/liability management
strategies of the Company. Realized investment losses in 2000 were due to the
sale of securities as required of SBM MN in the Acquisition transaction. The
Company invests in a mixture of investments ranging from securities with fixed
maturities, mortgage notes and real estate tax lien certificates. The objective
of each investment is to provide reasonable returns while limiting liquidity and
credit risks.
In the event that the Company experiences higher than historical levels of
certificate surrenders, the Company might need to liquidate investments other
than in accordance with its normal asset liability management strategy and, as a
result, the Company could experience substantial realized investment losses.
2000 compared with 1999
The Company's earnings are derived primarily from the after tax-yield on
invested assets less investment expenses and interest credited on certificate
reserve liabilities. Changes in earnings' trends occur largely due to changes in
the rates of return on investments and the rates of interest credited to the
accounts of certificate holder. Likewise, changes in the make-up of taxable and
tax-advantaged investments will impact the Company's investment portfolio.
During 2000, total assets decreased $12,025,541, while certificate
liability decreased $9,190,058 and the deferred tax liability increased
$305,209. The decrease in total assets and the certificate liability is
primarily due to maturities, redemptions, early surrenders of certificates
exceeding certificate sales, and the certificate liability release. (See the
discussion in the last paragraph of this discussion of the results of operation
for 2000 compared to 1999 in this connection and Note B to the consolidating
financial statements of SBM Certificate Company and Subsidiary.) The $6,513,805
of dividends paid by SBM MN and SBM MD, resulting primarily from the
Acquisition, also significantly impacted total assets. The increase in the
deferred tax liability was mainly attributable to the new methodology for
calculating the certificate liability subsequent to the Acquisition offset by
the net operating loss carryforward deferred tax asset.
The Company had net income (loss) of ($290,643) and $36,143 for the years
ended December 31, 2000 and 1999, respectively. Net loss for 2000 stemmed from
the net investment income of $137,939 and net realized investment loss of
$428,582. Net income for 1999 consisted of net investment income of $408,623 and
net realized investment losses of $372,530.
Net investment income (excluding net realized investment gains and losses)
in 2000 was $137,939 compared to net investment income of $408,673 for 1999. The
net investment income in 2000 of $137,939 is comprised of net investment losses
before income taxes of $483,116 and a deferred income tax benefit of $621,055.
The net investment income in 1999 of $408,673 consists of net investment income
before income taxes of $306,660 and an income tax benefit of $102,013. The
decrease in net investment income before income taxes was a result of materially
diminished certificate sales and a decrease in investments held as a result of
redemptions of certain investments. Certificate sales generate the funds needed
to purchase various investments that can generate excess investment income over
expenses, as well as to serve as qualified investments.
10
Net investment spread, which is the difference between investment income
and interest credited on certificate liability, decreased to $43,761 during 2000
from $0.7 million in 1999. These amounts reflect net investment spread of 0.18%
and 1.20% during 2000 and 1999, 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 $1.6 million from $2.3 million
for 2000 and 1999, respectively. These amounts represent investment yields of
4.10% and 6.20% on average cash and investments of $27.8 million and $36.9
million for 2000 and 1999, respectively. The decrease in investment income is
primarily attributable to a lower amount of securities investments in 2000 as
compared to 1999.
Interest credited on certificate liability was $1.5 million and $1.6
million for 2000 and 1999, respectively. These amounts represent average rates
of 5.97% and 5.00% on average certificate liability of $25.5 million and $32.3
million for 2000 and 1999, respectively. The majority of the Company's
outstanding face-amount certificates are fixed-rate three-year contracts.
The Company monitors credited interest rates for new and renewal issues
against competitive products, mainly bank certificates of deposit. Credited
interest rate adjustments (up or down) on new certificates are made as the
Company deems necessary. New and renewal contracts issued during 2000 have
crediting rates that are generally lower than contracts that matured during that
period, resulting in the overall decrease in the average crediting rate.
Investment and other expenses were $527,876 and $369,825 for 2000 and 1999,
respectively. The increase in investment and other expenses is primarily
attributable to the costs relating to the Acquisition.
Net realized investment losses (net of gains) were $428,582 and $372,530
for 2000 and 1999, respectively. Realized investment losses for 2000 are due to
the sale of securities as required of SBM MN in the Acquisition transaction.
Other realized investment gains and losses were primarily interest-rate related
and attributable to the asset/liability management strategies of the Company.
Fixed maturities and equity securities (i.e., non-redeemable preferred stock)
classified as available-for-sale are sold during rising and falling interest
rate environments which can result in period-to-period swings in interest-rate
related realized investment gains and losses as well.
In the event that the Company experiences higher than historical levels of
certificate surrenders, the Company might need to liquidate investments other
than in accordance with its normal asset/liability management strategy and, as a
result, the Company could experience substantial realized investment losses.
Certificate liabilities decreased $9.2 million or 30.5% during 2000, as
maturities and surrenders exceeded sales and renewals. The decrease is
attributable to SBM MD's policy not to renew outstanding Certificates during
2000 and its inability to sell new Certificates after April 30, 2000. This was
due to SBM MN's decision not to update its prospectus for use in continuing the
offer and sale of Certificates after that date. The Acquisition did not close
until July 19, 2000, after which the Company filed amendments to the
registration statement that required review by the SEC. The Company began the
resumption of certificate sales in early 2001. For certificates reaching their
maturity date during 2000 and 1999, 34% and 66%, respectively, were renewed.
11
Asset Portfolio Review
The Company invests its assets in accordance with the provisions of the
1940 Act, which permits the investment of reserves only in cash or "qualified
investments." Qualified investments are investments of a kind which life
insurance companies may hold under the Insurance Code of the District of
Columbia, and other such assets as the SEC may permit under the 1940 Act. The
Company's investment policy is to invest reserves in a variety of investments
that diversify risk, provide a reasonable return on investment and allow for
liquidity consistent with the cash requirements of the Company. The Company's
three principal investment types as of December 31, 2001 are fixed maturity
securities, mortgage notes and real estate tax lien certificates. The Company
monitors its short-term liquidity needs to ensure that cash flow from
investments allows for the payment of all of its obligations due, including
expected cash outflow to certificate holders, with the goal of maintaining an
adequate level of liquidity for maturing face-amount certificates. In addition,
the investment strategy also is designed to provide protection of the investment
portfolio from adverse changes in interest rates.
The Company's investments in fixed maturity securities totaled $6,774,313
at December 31, 2001, 28.22% of the investment portfolio (60.58% at December 31,
2000). Fixed maturity investments were 100% investment grade at December 31,
2001. Investment grade securities are those classified as 1 or 2 by the National
Association of Insurance Commissioners, or where such classifications are not
available, securities are classified by a nationally recognized statistical
rating organization (i.e., Standard & Poor's Corporation's rating of BBB- or
above). As of December 31, 2001, the Company held no fixed maturity securities
that had defaulted on principal or interest payments. Fixed maturities include
mortgage-backed securities ("MBSs"), collateralized mortgage obligations
("CMOs") and asset-backed securities, which include pass-through securities.
MBSs and CMOs are subject to risks associated with prepayments of the underlying
mortgage loans. Prepayments cause these securities to have actual maturities
different from those expected at the time of purchase. The degree to which a
security is susceptible to either an increase or decrease in yield due to
prepayment speed adjustments is influenced by the difference between its
amortized cost and par, the relative sensitivity of the underlying mortgages
backing the assets to prepayments in a changing interest rate environment and
the repayment priority of the securities in the overall securitization
structure. Prepayment sensitivity is evaluated and monitored, giving full
consideration to the collateral characteristics such as weighted average coupon
rate, weighted average maturity and the prepayment history of the specific loan
pool.
Based on the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company currently classifies its fixed maturity securities as
available-for-sale. Such securities are carried at fair value and changes in
fair value, net of deferred income taxes, are charged or credited directly to
shareholder's equity. During 2001, the change in unrealized gains, net of tax
increased by $4,657 resulting in an unrealized gain, net of tax at December 31,
2001 of $217,448. Unrealized gain net of tax at December 31, 2000 was $212,791.
Volatility in reported shareholder's equity occurs as a result of the
application of SFAS No. 115, which requires some assets to be carried at fair
value while other assets and all liabilities are carried at historical values.
As a result, adjusting the shareholder's equity for changes in the fair value of
the Company's fixed maturity 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.
12
The Company's investments in residential and commercial real estate
mortgage notes receivable totaled $7,695,895 at December 31, 2001, 32.06% of the
investment portfolio. These real estate mortgage notes consist of $6,964,413 of
mortgage notes held for sale and $731,482 of mortgage notes held for investment.
The notes accrue interest at rates ranging from 8.0% to 14.5% per annum and are
secured by the underlying real property. The Company's intention is to sell the
mortgage notes held for sale to a buyer under certain favorable market
conditions and to hold the mortgage notes held for investment as a long-term
investment.
The Company's other significant investments are real estate tax lien
certificates. These certificates are comprised of delinquent real estate tax
bills purchased from municipalities. They accrue interest at the rate of 20% per
annum and are secured by a first lien on the property on which the tax is owed.
In all cases, the certificates are significantly over-collateralized by the
underlying property. As of December 31, 2001, the real estate tax lien
certificates had a balance of $2,917,063, 12.15% of the investment portfolio.
Liquidity and Financial Resources
As of December 31, 2001, the Company had $2.1 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
the 1940 Act.
The primary liquidity requirement of the Company relates to its payment of
certificate maturities and surrenders and payment of its management fee. The
principal sources of cash to meet such liquidity requirements are investment
income and proceeds from maturities and redemptions of investments.
At December 31, 2001, cash and cash equivalents totaled $5.5 million, an
increase of $1.8 million from December 31, 2000. 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 ($1.2) million, $1.6 million, and $2.1 million were generated
from (used in) operating activities in 2001, 2000, and 1999, respectively. These
cash flows resulted principally from investment income, less management fees,
and commissions paid. Proceeds from sales, redemptions and maturities of
investments generated $9.5 million, $6.4 million, and $37.0 million in cash
flows during 2001, 2000, and 1999, respectively, which were offset by purchases
of investments of $7.4 million, $3.5 million, and $22.5 million, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most of the Company's investments are represented by fixed maturity
securities (comprised of government and corporate bonds and mortgage-backed
securities), mortgage notes and real estate tax lien certificates. Managing
interest rates between those earned on the Company's investments and those paid
under the face-amount certificates is fundamental to the Company's investment
decisions. Both rates are sensitive to changes in the general level of interest
rates in the economy, as well as to competitive factors in the case of the
certificates.
Presently, the Company has a portion of its portfolio invested in real
estate loans, which includes $6.96 million of mortgage notes held for sale and
$.7 million of mortgage notes held for investment. Over time, it anticipates
increasing this segment of its investment portfolio with the view to enhancing
the Company's return on investment. Fluctuations in the value of the underlying
real estate represent the greatest risk factor for this investment strategy.
However, the Company will invest only in those loans that have a history of
producing income, are of high quality by
13
industry standards or have underlying properties that represent excellent values
and safety relative to the market. The mortgage notes must have a loan to value
ratio no higher than 75% for the investment to be a qualified asset as defined
by the provisions of the Insurance Code at the District of Columbia.
The Company also invests in real estate tax lien certificates, which have a
balance of $2.9 million at December 31, 2001. The greatest risk associated with
this investment is the time and costs of a foreclosure process when amounts
remain unpaid beyond the Company's aging policy. The risk is mitigated by the
Company's first priority lien on the property on which the tax is owed, and the
Company's general policy of securing these investments only with properties in
which the amount advanced by the Company to acquire the certificates is less
than 5% of the market value of the property that secures the investment.
The Company regularly analyzes interest rate sensitivity and the potential
impact of interest rate fluctuations based on a range of different interest rate
models. These provide "benchmarks" for assessing the impact on Company earnings
if rates moved higher or lower than the expected targets set in our investment
guidelines. The Company will continue to formulate strategies directed at
protecting earnings for the potential negative effects of changes in interest
rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements begin on page F-02. Reference is made to
the Index to Financial Statements on page F-01 of this Annual Report. The
Company's supplementary financial information as required per regulation S-X
begins on page S-01.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information about the Company's directors and officers, including
their principal occupations for the past five years, is set out below. Members
of the Board who are considered "interested persons" of the Company under the
1940 Act are indicated by an asterisk (*). The Company's directors and officers,
other than directors who are not interested persons of the Company, serve in
such capacities without compensation. Officers are appointed annually at the
annual meeting of the Company's Board of Directors.
The individuals named below became officers and directors of the Company in
May 2000, upon the organization of the Company, except that Donald N. Briggs
became a director in August 2000, Eric M. Westbury became President of the
Company in December 2000, and Trey Stafford became an officer of the Company in
July 2001. Name and Age Principal Occupations During the Past Five Years
Positions
with Principal Occupations During the Past Five
Name and Age the Company Years
- ---------------------- ----------- --------------------------------------------------
John J. Lawbaugh (32)* Chairman of the Executive Vice President, 1st Atlantic Guaranty
Board, Chief Corporation (face-amount certificate company,
Executive President until December 2000); President, State
Officer, and Bond & Mortgage Company, L.L.C. (Since May 2000);
Treasurer prior to that, President, Atlantic Capital Funding
Corporation (commercial and residential mortgage
banking); President, Atlantic Pension & Trust
(private pension fund management).
14
Iraline G. Barnes (54) Director Special Counsel, Roseman & Colin (since 1999); Prior
to that, Senior Judge, DC Superior Court; Prior to
that, Vice President of Corporate Relations, Potomac
Electric Power Co.
Kumar Barve (43) Director Delegate to the State Senate, Maryland; Prior to that,
Accountant/Chief Financial Officer, Environmental
Management Services, Inc. (Hazardous Waste Disposal
and Environmental Consulting)
Donald N. Briggs (58) Director President, Principal Owner of Briggs Associates, Inc.
(Real Estate Appraisal and Consultants) since 1974.
President, Emmitsburg Business and Professional
Association. Director, County Family Planning Center,
Emittsburg, MD. Director, Catoctin Land Trust.
Nancy Hopkinson (60) Director Currently Retired (since 1996); prior to that, Teacher
and School Administrator, Montgomery County Public
Schools (Maryland)
Brian Murphy (58)* Director Partner, Griffin, Griffin, Tarby & Murphy, LLP (law
firm)
Marialice B. Williams (56) Director President of Risk Mitigation Strategists; Chairman,
D.C. Housing Finance Agency; Chairman, Advisory
Committee of WPFW (89.3FM) Radio; Prior to that,
Director, Capital Markets section of the Multifamily
Division of Federal National Mortgage Association.
(from 1989-1998)
Dia H. Snowden (40) Secretary Secretary, SBM Certificate Company, (since March
2002); Client Services Manager, SBM Certificate
Company, (since July 2000); prior to that, Corporate
Administrator, The Washington Development Group, Inc.
(1996-1999) (private real estate development and
management company).
Trey Stafford (28) Chief Financial Vice President of Finance and Accounting, State Bond
and Accounting and Mortgage, L.L.C. (since July 2001); Secretary of
Officer Board of Directors, ACFC (since December 2001); Audit
Manager/Senior, Reznick Fedder & Silverman, CPA's
(September 1997-July 2001); Staff Accountant, Charles
E. Smith Residential Realty, (September 1996-1997).
Eric M. Westbury (38) President President, SBM Certificate Company, (since December
2000, Executive Vice President before that from
November 1999); Executive Vice President, 1st Atlantic
Guaranty Corporation (since November 1999); prior to
that, President and Chief Operating Officer of The
Washington Development Group (private real estate
development and management company), from September
1997 through November 1999. Prior to that,
Vice-President, Market Executive (commercial and
retail banking) First Union National Bank, Washington,
DC.
15
Board of Directors
The Board of Directors is responsible for the overall management of the
Company's business. Directors are elected annually at the Company's meeting of
shareholders. Each Director who is not an interested person of the Company
receives an annual retainer of $500, plus a $750 fee for each regular or special
Board meeting he or she attends. The Directors also receive reimbursement for
their expenses incurred in attending any meeting of the Board. The Board
generally meets semi-annually.
Committees of the Board of Directors
The Company has an Audit Committee. The duties of the Audit Committee and
its present membership are as follows:
Audit Committee: The members of the Audit Committee consult with the
Company's independent auditors as the auditors deem it desirable, and meet with
the Company's independent auditors at least once annually to discuss the scope
and results of the annual audit of the Company and such other matters as the
Committee members deem appropriate or desirable. Directors Barnes, Barve and
Williams are members of the Audit Committee.
ITEM 11. EXECUTIVE COMPENSATION
The Company's directors and officers, other than directors who are not
interested persons of the Company, serve in such capacities without
compensation. See "Item 13. Certain Relationships and Related Transactions,"
below.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company is a wholly-owned subsidiary of State Bond, which, in turn, is
wholly-owned by 1st Atlantic. John J. Lawbaugh, an officer and director of the
Company, is the controlling shareholder of 1st Atlantic.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an Amended and Restated Administrative Services Agreement dated
as of July 1, 2001 (the "Administrative Services Agreement"), State Bond
provides various administrative services to the Company. Under the terms of that
Agreement, State Bond makes available certain of its property, equipment and
facilities to the Company for use in its business operations. State Bond also
provides the Company with certain administrative and special services, including
personnel and furnishes or otherwise makes available accounting services to the
Company. The annual charge to the Company for the services and facilities
provided by State Bond is 1% of the Company's average certificate liability
balances, or an amount not to exceed $2.5 million. The charge will be determined
monthly by State Bond and Company management. At no time, however, may the
charge cause the Company to have assets of less than the total of the qualified
investments and capital stock required under the 1940 Act. State Bond waived its
fees due under the original Administrative Services Agreement dated July 1, 2000
through September 30, 2000. For the last quarter of 2000 a fee of $112,223 was
charged to the Company, of which $40,289 remained payable at December 31, 2000.
During 2001, a fee totaling $1,078,839 was charged and $1,119,128 was paid by
the Company to State Bond. State Bond's parent, 1st Atlantic, is controlled by
John J. Lawbaugh.
In connection with the Acquisition, certain dividend payments were made by
the Company to its former, and to its current, parent as described in Note A of
the Notes to Consolidating Financial Statements. Also, from time-to-time the
Company makes dividend payments to State Bond, which, in turn, may make dividend
payments to 1st Atlantic, State Bond's parent. During 2001, the Company paid
$579,934 of cash dividends to State Bond.
16
See Note L of Notes to Consolidating Financial Statements with respect to
the contribution of two mortgage notes as additional paid-in capital made by
State Bond to the Company on September 30, 2001.
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 F-01 for a listing of financial
statements and related 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 as follows:
Report of Independent Auditors
Schedule I Investment in Securities of Unaffiliated
Issuers-December 31, 2001
Schedule II Investments in and Advances to Affiliates and Income
Thereon - December 31, 2001
Schedule III Mortgage loans on real estate and interest earned on
mortgages - December 31, 2001
Schedule V Qualified Assets on Deposit-December 31, 2001
Schedule VI Certificate Reserves-Year Ended December 31, 2001
Schedule VII Valuation and Qualifying Accounts-December 31, 2001
17
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
NUMBER DESCRIPTION
(2) Stock Purchase Agreement dated March 28, 2000 by and among 1st
Atlantic Guaranty Corporation, SBM Certificate Company, and ARM
Financial Group Exhibits omitted), incorporated by reference to
Exhibit (2) to form 8-K dated March 28, 2000 of 1st Atlantic
Guaranty Corporation (File No. 333-41361).
(3)(a) Articles of Incorporation of the Company, incorporated by
reference to Exhibit (3)(a) of Post-effective Amendment No. 11 to
Registration Statement No. 33-38066 filed on September 28, 2000.
(3)(a) (i) Certificate of Correction of Articles of Incorporation of
the Company incorporated by reference to Exhibit (3)(a) of
Post-effective Amendment No. 13 to Registration Statement No.
33-38066 filed on January 2, 2001.
(3)(b) By-Laws of the Company incorporated by reference to Exhibit
(3)(b) of Post-effective Amendment No. 11 to Registration
Statement No. 33-38066 filed on September 28, 2000.
(4)(a) Form of Application, incorporated by reference to Exhibit (4)(a)
of Post-effective Amendment No. 11 to Registration Statement No.
33-38066 filed on September 28, 2000
(4)(b) Form of Account Statement, incorporated by reference to Exhibit
(4)(a) of Post-effective Amendment No. 11 to Registration
Statement No. 33-38066 filed on September 28, 2000.
(10)(a) Amended and Restated Administrative Services Agreement dated as
of the 1st day of July, 2001, by and between the Company and
State Bond & Mortgage Company, L.L.C.
(10)(b) Custody Agreement, as amended and supplemented, between the
Company (as successor to SBM Certificate Company (Minnesota)) and
First Trust National Association (now U.S. Bank Trust N.A.) dated
December 20, 1990, incorporated by reference to Exhibit 10(b) to
Form S-1 Registration Statement No. 33-38066 filed on January 2,
1991.
(21) Subsidiary
(24) Powers of Attorney
18
(b) REPORTS ON FORM 8-K
No Current Report on Form 8-K was filed by the Company covering an event
during 2001. No amendments to previously filed Form 8-K were filed during 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amended report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Bethesda, Maryland,
on this 11th day of April, 2002.
SBM Certificate Company
By: /s/ Eric M. Westbury
-----------------------
Eric M. Westbury
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed by the following persons in the capacities and on
the dates indicated:
SIGNATURE CAPACITY DATE
- --------- -------- ----
/s/ John J. Lawbaugh Chairman of the Board, Treasurer, and April 11, 2002
- ---------------------- Director (Principal Executive Officer)
John J. Lawbaugh
/s/ Trey Stafford Chief Financial and Accounting Officer April 11, 2002
- ----------------------
Trey Stafford
/s/ Iraline G. Barnes
- ---------------------- Director
Iraline G. Barnes
- ---------------------- Director
Kumar Barve
- --------------------- Director
Donald N. Briggs
19
*
- ---------------------- Director
Nancy Hopkinson
*
- ---------------------- Director
Brian Murphy
*
- ---------------------- Director
Marialice B. Williams
*By /s/ John L. Lawbaugh
--------------------
John L. Lawbaugh
Attorney-in-fact
April 11, 2002
20
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT F-02
REPORT OF INDEPENDENT AUDITORS F-03
FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000 F-04
CONSOLIDATING STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) FOR YEAR ENDED DECEMBER 31, 2001 AND 2000 F-06
STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEAR
ENDED DECEMBER 31, 1999 F-08
CONSOLIDATING STATEMENTS OF SHAREHOLDER'S EQUITY FOR YEAR ENDED
DECEMBER 31, 2001 AND 2000 F-09
STATEMENT OF SHAREHOLDER'S EQUITY FOR YEAR ENDED DECEMBER 31, 1999 F-10
CONSOLIDATING STATEMENTS OF CASH FLOWS FOR YEARS ENDED DECEMBER 31, 2001
AND 2000 F-11
STATEMENT OF CASH FLOWS FOR YEAR ENDED DECEMBER 31, 1999 F-14
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS FOR YEAR ENDED DECEMBER 31, 2001 F-16
SUPPLEMENTAL SCHEDULES
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS S-01
SCHEDULE II - INVESTMENTS IN AND ADVANCES TO AFFILIATES AND INCOME THEREON S-03
SCHEDULE III - MORTGAGE LOANS ON REAL ESTATE AND INTEREST EARNED ON MORTGAGES S-04
SCHEDULE V - QUALIFIED ASSETS ON DEPOSIT S-05
SCHEDULE VI - CERTIFICATE RESERVES S-06
SCHEDULE VII - VALUATION AND QUALIFYING ACCOUNTS S-12
F-01
INDEPENDENT AUDITORS' REPORT
To the Shareholder and Board of Directors
SBM Certificate Company
We have audited the accompanying consolidating balance sheets of SBM
Certificate Company and Subsidiary as of December 31, 2001 and 2000, and the
related consolidating statements of operations and comprehensive income (loss),
shareholder's equity, and cash flows for the years then ended. These
consolidating financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidating
financial statements based on our audit. The financial statements of SBM
Certificate Company (formerly SBM Certificate Company, a Minnesota Corporation)
as of December 31, 1999, were audited by other auditors whose report, dated
March 31, 2000, except for the last paragraph of note A, as to which the date is
July 19, 2000, expressed an unqualified opinion.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidating financial statements referred to above
present fairly, in all material respects, the financial position of SBM
Certificate Company and Subsidiary at December 31, 2001 and 2000, and the
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the supplemental financial statement schedules,
when considered in relation to the basic consolidating financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
/s/ Reznick Fedder & Silverman
Bethesda, Maryland
February 28, 2002
F-02
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SBM Certificate Company (Minnesota)
We have audited the accompanying statement of operations, shareholder's equity
and cash flows of SBM Certificate Company (Minnesota) for the year ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of SBM Certificate Company's (Minnesota)
operations and its cash flows for the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 31, 2000
Except for the second paragraph of Note A, as to which the date is
July 19, 2000
F-03
SBM Certificate Company and Subsidiary
CONSOLIDATING BALANCE SHEET
December 31, 2001
SBM Certificate Atlantic Capital Eliminating
Company Funding Corp. Entries Totals
-------------- -------------- -------------- --------------
Qualified assets
Cash and investments
Fixed maturities, available-for-sale, at fair value
(amortized cost: $6,440,016) $ 6,774,313 $ -- $ -- $ 6,774,313
Mortgage notes held for sale 6,493,991 470,422 -- 6,964,413
Mortgage notes held for investment 378,750 352,732 -- 731,482
Real estate tax lien certificates 2,917,063 -- -- 2,917,063
Escrows 608,037 -- -- 608,037
Certificate loans 98,137 -- -- 98,137
Cash and cash equivalents 4,676,654 861,440 -- 5,538,094
-------------- -------------- -------------- --------------
Total cash and investments 21,946,945 1,684,594 -- 23,631,539
-------------- -------------- -------------- --------------
Receivables
Dividends and interest 369,046 3,848 -- 372,894
-------------- -------------- -------------- --------------
Total receivables 369,046 3,848 -- 372,894
-------------- -------------- -------------- --------------
Total qualified assets 22,315,991 1,688,442 -- 24,004,433
Other assets
Related party receivable 80,608 16,744 (49,565) 47,787
Fixed assets, net of accumulated depreciation of $20,657 185,788 18,818 -- 204,606
Investment in subsidiary 1,619,007 -- (1,619,007) --
Goodwill, net of accumulated amortization of $61,686 591,463 -- -- 591,463
Deferred acquisition costs 420,093 -- -- 420,093
Other assets 5,815 3,404 -- 9,219
-------------- -------------- -------------- --------------
Total assets $ 25,218,765 $ 1,727,408 $ (1,668,572) $ 25,277,601
============== ============== ============== ==============
Liabilities
Statutory certificate liability $ 21,311,350 $ -- $ -- $ 21,311,350
Additional certificate liability 2,509,700 -- -- 2,509,700
Accounts payable and other liabilities 228,595 36,582 -- 265,177
Related party payable 957 71,819 (49,565) 23,211
-------------- -------------- -------------- --------------
Total liabilities 24,050,602 108,401 (49,565) 24,109,438
-------------- -------------- -------------- --------------
Shareholder's equity
Common stock, $1 par value; 10,000,000 shares
authorized; 250,000 shares issued and outstanding 250,000 -- -- 250,000
Common stock, $2 par value; 10,000 shares
authorized; 10,000 shares issued and outstanding -- 20,000 (20,000) --
Additional paid-in capital 3,930,141 1,621,481 (1,621,481) 3,930,141
Accumulated comprehensive income, net of taxes 217,448 -- -- 217,448
Retained earnings (deficit) (3,229,426) (22,474) 22,474 (3,229,426)
-------------- -------------- -------------- --------------
Total shareholder's equity 1,168,163 1,619,007 (1,619,007) 1,168,163
-------------- -------------- -------------- --------------
Total liabilities and shareholder's equity $ 25,218,765 $ 1,727,408 $ (1,668,572) $ 25,277,601
============== ============== ============== ==============
See accompanying summary of accounting policies and notes to consolidating
financial statements
F-04
SBM Certificate Company and Subsidiary
CONSOLIDATING BALANCE SHEET
December 31, 2000
SBM Certificate Atlantic Capital Eliminating
Company Funding Corp. Entries Totals
-------------- -------------- -------------- --------------
Qualified assets
Cash and investments
Investments in securities of unaffiliated issuers
Fixed maturities, available-for-sale, at fair value
(amortized cost: $12,654,435) $ 13,001,000 $ -- $ -- $ 13,001,000
Equity securities, at fair value (cost: $200,663) 200,663 -- -- 200,663
Mortgage notes held for sale 2,816,735 273,883 -- 3,090,618
Mortgage notes held for investment 375,000 352,732 -- 727,732
Escrows 250,000 -- -- 250,000
Certificate loans 110,069 -- -- 110,069
Cash and cash equivalents 2,715,502 1,000,891 -- 3,716,393
-------------- -------------- -------------- --------------
Total cash and investments 19,468,969 1,627,506 -- 21,096,475
-------------- -------------- -------------- --------------
Receivables
Dividends and interest 99,421 -- -- 99,421
Escrow receivable 266,482 -- -- 266,482
-------------- -------------- -------------- --------------
Total receivables 365,903 -- -- 365,903
-------------- -------------- -------------- --------------
Total qualified assets 19,834,872 1,627,506 -- 21,462,378
Other assets
Related party receivable -- 1,000 (1,000) --
Fixed assets 68,003 69 -- 68,072
Investment in subsidiary 1,572,958 -- (1,572,958) --
Goodwill, net of accumulated amortization of $18,143 635,006 -- -- 635,006
Deferred acquisition costs 80,436 -- -- 80,436
Other assets 13,466 -- -- 13,466
-------------- -------------- -------------- --------------
Total assets $ 22,204,741 $ 1,628,575 $ (1,573,958) $ 22,259,358
============== ============== ============== ==============
Liabilities
Certificate liability $ 20,926,628 $ -- $ -- $ 20,926,628
Accounts payable and other liabilities 239,743 2,197 -- 241,940
Related party payable 1,000 53,420 (1,000) 53,420
Deferred tax liability 305,209 -- -- 305,209
-------------- -------------- -------------- --------------
Total liabilities 21,472,580 55,617 (1,000) 21,527,197
-------------- -------------- -------------- --------------
Shareholder's equity
Common stock, $1 par value; 10,000,000 shares
authorized; 250,000 shares issued and outstanding 250,000 -- -- 250,000
Common stock, $2 par value; 10,000 shares
authorized; 10,000 shares issued and outstanding -- 20,000 (20,000) --
Additional paid-in capital 1,676,457 1,553,957 (1,553,957) 1,676,457
Accumulated comprehensive income, net of taxes 212,791 -- -- 212,791
Retained earnings (deficit) (1,407,087) (999) 999 (1,407,087)
-------------- -------------- -------------- --------------
Total shareholder's equity 732,161 1,572,958 (1,572,958) 732,161
-------------- -------------- -------------- --------------
Total liabilities and shareholder's equity $ 22,204,741 $ 1,628,575 $ (1,573,958) $ 22,259,358
============== ============== ============== ==============
See accompanying summary of accounting policies and notes to consolidating
financial statements
F-05
SBM Certificate Company and Subsidiary
CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Year ended December 31, 2001
SBM Certificate Atlantic Capital Eliminating
Company Funding Corp. Entries Totals
-------------- -------------- -------------- --------------
Investment income
Interest and dividend income $ 910,395 $ 39,653 $ -- $ 950,048
Other investment income 10,060 -- -- 10,060
Loss from investment in subsidiary (21,475) -- 21,475 --
Mortgage interest income 547,200 7,820 -- 555,020
-------------- -------------- -------------- --------------
Total investment income 1,446,180 47,473 21,475 1,515,128
-------------- -------------- -------------- --------------
Investment and other expenses
Management and investment advisory fees 1,078,839 -- -- 1,078,839
Deferred acquisition cost amortization and
renewal commissions 125,422 -- -- 125,422
Amortization of goodwill 43,543 -- -- 43,543
Depreciation expense 20,117 541 -- 20,658
Other expenses 605,073 -- -- 605,073
-------------- -------------- -------------- --------------
Total investment and other expenses 1,872,994 541 -- 1,873,535
-------------- -------------- -------------- --------------
Interest credited on certificate liability 1,172,552 -- -- 1,172,552
-------------- -------------- -------------- --------------
Net investment loss before income taxes (1,599,366) 46,932 21,475 (1,530,959)
-------------- -------------- -------------- --------------
Other operating income
Origination fee income -- 421,449 -- 421,449
Gain on sale to investor -- 378,034 -- 378,034
Other loan fee income -- 67,418 -- 67,418
-------------- -------------- -------------- --------------
Total other operating income -- 866,901 -- 866,901
-------------- -------------- -------------- --------------
Other operating expenses
Salaries and commissions -- 651,311 -- 651,311
Other expenses -- 283,997 -- 283,997
-------------- -------------- -------------- --------------
Total other operating expenses -- 935,308 -- 935,308
-------------- -------------- -------------- --------------
Net other operating loss before income taxes -- (68,407) -- (68,407)
-------------- -------------- -------------- --------------
Net investment and other operating loss before income taxes (1,599,366) (21,475) 21,475 (1,599,366)
Deferred income tax benefit 288,264 -- -- 288,264
-------------- -------------- -------------- --------------
Net investment and other operating income (loss) (1,311,102) (21,475) 21,475 (1,311,102)
-------------- -------------- -------------- --------------
Realized investment gains 68,697 -- -- 68,697
Income tax expense on realized investment gains -- -- -- --
-------------- -------------- -------------- --------------
Net realized investment gains 68,697 -- -- 68,697
-------------- -------------- -------------- --------------
Net loss (1,242,405) (21,475) 21,475 (1,242,405)
Other comprehensive income (loss):
Unrealized gains on available-for-sale
securities, net of taxes
Net unrealized gain 4,657 -- -- 4,657
-------------- -------------- -------------- --------------
Net comprehensive loss $ (1,237,748) $ (21,475) $ 21,475 $ (1,237,748)
============== ============== ============== ==============
See accompanying summary of accounting policies and notes to consolidating
financial statements
F-06
SBM Certificate Company and Subsidiary
CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Year ended December 31, 2000
SBM Certificate Atlantic Capital Eliminating
Company Funding Corp. Entries Totals
-------------- -------------- -------------- --------------
Investment income
Interest and dividend income from securities $ 1,474,281 $ -- $ -- $ 1,474,281
Other investment income 56,673 -- -- 56,673
Loss from investment in subsidiary (999) -- 999 --
Mortgage interest income 36,975 -- -- 36,975
-------------- -------------- -------------- --------------
Total investment income 1,566,930 -- 999 1,567,929
-------------- -------------- -------------- --------------
Investment and other expenses
Management and investment advisory fees 180,923 -- -- 180,923
Deferred acquisition cost amortization and
renewal commissions 150,445 -- -- 150,445
Amortization of goodwill 18,143 -- -- 18,143
Other expenses 177,366 999 -- 178,365
-------------- -------------- -------------- --------------
Total investment and other expenses 526,877 999 -- 527,876
-------------- -------------- -------------- --------------
Interest credited on certificate liability 1,523,169 -- -- 1,523,169
-------------- -------------- -------------- --------------
Net investment loss before income taxes (483,116) (999) 999 (483,116)
Deferred income tax benefit 621,055 -- -- 621,055
-------------- -------------- -------------- --------------
Net investment income (loss) 137,939 (999) 999 137,939
-------------- -------------- -------------- --------------
Realized investment losses (428,582) -- -- (428,582)
Income tax expense on realized investment losses -- -- -- --
-------------- -------------- -------------- --------------
Net realized investment losses (428,582) -- -- (428,582)
-------------- -------------- -------------- --------------
Net loss (290,643) (999) 999 (290,643)
Other comprehensive income (loss):
Unrealized gains on available-for-sale
securities, net of taxes
Net unrealized gain 502,906 -- -- 502,906
-------------- -------------- -------------- --------------
Total comprehensive income (loss) $ 212,263 $ (999) $ 999 $ 212,263
============== ============== ============== ==============
See accompanying summary of accounting policies and notes to consolidating
financial statements
F-07
SBM Certificate Company
STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
Year ended December 31, 1999
Investment income
Interest income from securities $ 2,261,957
Other investment income 29,602
-----------
Total investment income 2,291,559
-----------
Investment and other expenses
Management and investment advisory fees 154,042
Deferred acquisition cost amortization and renewal commissions 193,973
Real estate expenses 2,610
Other expenses 19,200
-----------
Total investment and other expenses 369,825
-----------
Interest credited on certificate liability 1,615,074
-----------
Net investment income before income taxes 306,660
Income tax benefit 102,013
-----------
Net investment income 408,673
-----------
Realized investment losses (470,507)
Income tax benefit on realized investment losses 97,977
-----------
Net realized investment losses (372,530)
-----------
Net income $ 36,143
===========
Other comprehensive loss:
Unrealized loss on available-for-sale securities
Unrealized holding loss in current year $ (895,970)
Income tax --
-----------
Net unrealized loss during period (895,970)
-----------
Net other comprehensive loss $ (859,827)
===========
See accompanying summary of accounting policies and notes to consolidating
financial statements
F-08
SBM Certificate Company and Subsidiary
CONSOLIDATING STATEMENTS OF SHAREHOLDER'S EQUITY
Years ended December 31, 2001 and 2000
SBM CERTIFICATE COMPANY*
------------------------------------------------------------------------------------
Accumulated
Common Additional Other Com- Total
Stock Paid-in prehensive Accumulated Shareholder's
Shares Amount Capital Income (Loss) Deficit Equity
---------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 250,000 $ 250,000 $ 3,050,000 $ (825,522) $ 1,693,735 $ 4,168,213
Net loss - SBM-MN -- -- -- -- (429,447) (429,447)
Changes in net unrealized gains (losses)
on available-for-sale securities, net of tax -- -- -- 290,115 -- 290,115
Dividends paid (3,708,384) (3,708,384)
Sale of SBM-MN as a reverse merger
transaction (July 19, 2000) -- (250,000) (3,050,000) 535,407 2,444,096 (320,497)
---------- ----------- ----------- ----------- ----------- -----------
Balance at July 19, 2000 -- -- -- -- -- --
Issuance of common stock 250,000 250,000 -- -- -- 250,000
Additional paid-in capital -- -- 1,102,500 -- -- 1,102,500
Contribution of common stock -- -- 573,957 -- -- 573,957
Changes in net unrealized gains (losses)
on available-for-sale securities, net of tax -- -- -- 212,791 -- 212,791
Retained earnings (deficit):
Dividends paid, net -- -- -- -- (2,805,421) (2,805,421)
Certificate liability release, net of tax -- -- -- -- 1,259,530 1,259,530
Net loss since Acquisition -- -- -- -- 138,804 138,804
---------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 250,000 250,000 1,676,457 212,791 (1,407,087) 732,161
Additional paid-in capital -- -- 2,253,684 -- -- 2,253,684
Changes in net unrealized gains (losses)
on available-for-sale securities, net of tax -- -- -- 4,657 -- 4,657
Retained earnings (deficit):
Dividends paid, net -- -- -- -- (579,934) (579,934)
Net loss -- -- -- -- (1,242,405) (1,242,405)
---------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 250,000 $ 250,000 $ 3,930,141 $ 217,448 $(3,229,426) $ 1,168,163
========== =========== =========== =========== =========== ===========
ATLANTIC CAPITAL FUNDING CORPORATION
--------------------------------------------------------------------------------------------
Total
Common Additional Accum- Total Consolidating
Stock Paid-in ulated Shareholder's Eliminating Shareholder's
Shares Amount Capital Deficit Equity Entries Equity
--------- --------- ---------- --------- ---------- ----------- -----------
Balance at December 31, 1999 -- $ -- $ -- $ -- $ -- $ -- $ 4,168,213
Net loss - SBM-MN -- -- -- -- -- (429,447)
Changes in net unrealized gains (losses)
on available-for-sale securities,
net of tax -- -- -- -- -- -- 290,115
Dividends paid (3,708,384)
Sale of SBM-MN as a reverse merger
transaction (July 19, 2000) -- -- -- -- -- -- (320,497)
--------- --------- ---------- --------- ---------- ----------- -----------
Balance at July 19, 2000 -- -- -- -- -- -- --
Issuance of common stock -- -- -- -- -- 250,000
Additional paid-in capital -- -- 1,000,000 -- 1,000,000 (1,000,000) 1,102,500
Contribution of common stock 10,000 20,000 553,957 -- 573,957 (573,957) 573,957
Changes in net unrealized gains (losses)
on available-for-sale securities,
net of tax -- -- -- -- -- -- 212,791
Retained earnings (deficit):
Dividends paid, net -- -- -- -- -- -- (2,805,421)
Certificate liability release,
net of tax -- -- -- -- -- -- 1,259,530
Net loss since Acquisition -- -- -- (999) (999) 999 138,804
--------- --------- ---------- --------- ---------- ----------- -----------
Balance at December 31, 2000 10,000 20,000 1,553,957 (999) 1,572,958 (1,572,958) 732,161
Additional paid-in capital -- -- 67,524 -- 67,524 (67,524) 2,253,684
Changes in net unrealized gains (losses)
on available-for-sale securities,
net of tax -- -- -- -- -- -- 4,657
Retained earnings (deficit):
Dividends paid, net -- -- -- -- -- -- (579,934)
Net loss -- -- -- (21,475) (21,475) 21,475 (1,242,405)
--------- --------- ---------- --------- ---------- ----------- -----------
Balance at December 31, 2001 10,000 $ 20,000 $1,621,481 $ (22,474) $1,619,007 $(1,619,007) $ 1,168,163
========= ========= ========== ========= ========== =========== ===========
*On July 9, 2000 SBM Certificate Company of Maryland purchased SBM Certificate
of Minnesota (see note A)
See accompanying summary of accounting policies and notes to consolidating
financial statements
F-09
SBM Certificate Company
STATEMENT OF SHAREHOLDER'S EQUITY
Year ended December 31, 1999
Accumulated
Additional Other Total
Common Paid-in Comprehensive Retained Shareholder's
Stock Capital Income (loss) Earnings Equity
----------- ----------- ------------- ----------- -----------
Balance, December 31, 1998 $ 250,000 $ 3,050,000 $ 70,448 $ 1,657,592 $ 5,028,040
Net income -- -- -- 36,143 36,143
Change in net unrealized
gains (losses) on available-
for-sale securities, net of tax -- -- (895,970) -- (895,970)
----------- ----------- ----------- ----------- -----------
Comprehensive loss (859,827)
-----------
Balance, December 31, 1999 $ 250,000 $ 3,050,000 $ (825,522) $ 1,693,735 $ 4,168,213
=========== =========== =========== =========== ===========
See accompanying summary of accounting policies and notes to consolidating
financial statements
F-10
SBM Certificate Company and Subsidiary
CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended December 31, 2001
SBM Certificate Atlantic Capital Eliminating
Company Funding Corp. Entries Totals
-------------- -------------- -------------- --------------
Cash flows from operating activities
Net loss $ (1,242,405) $ (21,475) $ 21,475 $ (1,242,405)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Loss from investment in subsidiary 21,475 -- (21,475) --
Provision for certificate liability 1,172,552 -- -- 1,172,552
Realized investment gains (68,697) -- -- (68,697)
Deferred income tax benefit (288,264) -- -- (288,264)
Deferral of acquisition costs (465,079) -- -- (465,079)
Amortization of deferred acquisition costs
and renewal commissions 125,422 -- -- 125,422
Other amortization and depreciation 63,660 541 -- 64,201
Increase in dividends and interest receivable (269,625) (3,848) -- (273,473)
Changes in other assets and liabilities (215,942) 33,636 -- (182,306)
-------------- -------------- -------------- --------------
Net cash provided by (used in) operating activities (1,166,903) 8,854 -- (1,158,049)
-------------- -------------- -------------- --------------
Cash flows from investing activities
Fixed maturity investments:
Sales and redemptions 6,532,248 -- -- 6,532,248
Purchase of mortgage notes held for sale (3,196,222) (332,421) -- (3,528,643)
Investment in mortgage notes held for investment (15,000) -- -- (15,000)
Principal payments received on mortgage notes receivable 1,775,650 135,882 -- 1,911,532
Real estate tax lien certificates:
Purchases (4,145,261) -- -- (4,145,261)
Repayments of tax lien certificates 1,228,198 -- -- 1,228,198
Investment in subsidiary (67,524) -- 67,524 --
Purchase of fixed assets (137,902) (19,290) -- (157,192)
Repayment of certificate loans, net 11,932 -- -- 11,932
-------------- -------------- -------------- --------------
Net cash provided by (used in) investing activities 1,986,119 (215,829) 67,524 1,837,814
-------------- -------------- -------------- --------------
Cash flows from financing activities
Amounts paid to face-amount certificate holders (4,750,988) -- -- (4,750,988)
Amounts received from face-amount certificate holders 6,472,858 -- -- 6,472,858
Capital contributed to company -- 67,524 (67,524) --
Net dividends paid (579,934) -- -- (579,934)
-------------- -------------- -------------- --------------
Net cash provided by (used in) financing activities 1,141,936 67,524 (67,524) 1,141,936
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,961,152 (139,451) -- 1,821,701
Cash and cash equivalents, beginning 2,715,502 1,000,891 -- 3,716,393
-------------- -------------- -------------- --------------
Cash and cash equivalents, end $ 4,676,654 $ 861,440 $ -- $ 5,538,094
============== ============== ============== ==============
Supplemental disclosure of significant noncash investing
and financing activities:
Contribution of assets from State Bond $ 2,253,684 $ -- $ -- $ 2,253,684
============== ============== ============== ==============
See accompanying summary of accounting policies and notes to consolidating
financial statements
F-11
SBM Certificate Company and Subsidiary
CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended December 31, 2000
SBM Atlantic
Certificate Capital Eliminating
Company Funding Corp. Entries Totals
-------------- -------------- -------------- --------------
Cash flows from operating activities
Net loss $ (290,643) $ (999) $ 999 $ (290,643)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Loss from investment in subsidiary 999 -- (999) --
Provision for certificate liability 1,523,169 -- -- 1,523,169
Realized investment losses 428,582 -- -- 428,582
Deferred income tax benefit (621,055) -- -- (621,055)
Deferral of acquisition costs (80,800) -- -- (80,800)
Amortization of deferred acquisition costs
and renewal commissions 150,445 -- -- 150,445
Other amortization and depreciation 18,947 -- -- 18,947
Decrease in dividends and interest receivable 41,252 -- -- 41,252
Changes in other assets and liabilities 425,769 1,890 -- 427,659
-------------- -------------- -------------- --------------
Net cash provided by (used in)
operating activities 1,596,665 891 -- 1,597,556
-------------- -------------- -------------- --------------
Cash flows from investing activities
Fixed maturity investments:
Purchases (263,808) -- -- (263,808)
Sales and redemptions 6,434,532 -- -- 6,434,532
Investment in mortgage notes held for investment (375,000) -- -- (375,000)
Investment in subsidiary (1,000,000) -- 1,000,000 --
Purchase of mortgage notes held for sale (2,816,735) -- -- (2,816,735)
Cash paid for SBM (1,350,000) -- -- (1,350,000)
Purchase of computer software (68,003) -- -- (68,003)
Repayment of certificate loans, net 14,864 -- -- 14,864
-------------- -------------- -------------- --------------
Net cash provided by investing activities 575,850 -- 1,000,000 1,575,850
-------------- -------------- -------------- --------------
Cash flows from financing activities
Amounts paid to face-amount certificate holders (8,718,868) -- -- (8,718,868)
Proceeds from issuance of common stock 250,000 -- -- 250,000
Capital contributed to company 1,102,500 1,000,000 (1,000,000) 1,102,500
Amounts received from face-amount
certificate holders 15,681 -- -- 15,681
Net dividends paid (6,513,805) -- -- (6,513,805)
-------------- -------------- -------------- --------------
Net cash provided by (used in)
financing activities (13,864,492) 1,000,000 (1,000,000) (13,864,492)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (11,691,977) 1,000,891 -- (10,691,086)
Cash and cash equivalents, beginning 14,407,479 -- -- 14,407,479
-------------- -------------- -------------- --------------
Cash and cash equivalents, end $ 2,715,502 $ 1,000,891 $ -- $ 3,716,393
============== ============== ============== ==============
(continued)
F-12
SBM Certificate Company and Subsidiary
CONSOLIDATING STATEMENT OF CASH FLOWS - CONTINUED
Year ended December 31, 2000
Supplemental disclosure of significant noncash investing
and financing activities:
Release of cerfificate liability, net of tax $ 1,259,530
============
Acquisition of SBM-MN:
Assets acquired $ 27,390,982
Liabilities assumed (26,557,263)
Legal acquisiton costs (136,868)
Goodwill 653,149
------------
Total purchase price $ 1,350,000
============
Contribution of 1st Atlantic ownership to SBM-MD $ 573,957
============
See accompanying summary of accounting policies and notes to consolidating
financial statements
F-13
SBM Certificate Company
STATEMENT OF CASH FLOWS
Year ended December 31, 1999
Cash flows from operating activities
Net income $ 36,143
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for certificate liability 1,615,074
Realized investment losses 470,507
Deferral of acquisition costs (140,145)
Amortization of deferred acquisition costs and
renewal commissions 193,973
Other amortization and depreciation 23,711
Deferred tax expense 11,513
Decrease in dividends and interest receivable 115,051
Changes in other assets and liabilities (247,085)
------------
Net cash provided by operating activities 2,078,742
------------
Cash flows from investing activities
Fixed maturity investments:
Purchases (22,469,407)
Maturities and redemptions 26,873,872
Sales 10,171,240
Repayment of certificate loans, net 39,276
------------
Net cash provided by investing activities 14,614,981
------------
Cash flows from financing activities
Amounts paid to face-amount certificate holders (5,737,826)
Amounts received from face-amount certificate holders 171,612
------------
Net cash used in financing activities (5,566,214)
------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 11,127,509
Cash and cash equivalents, beginning 3,279,970
------------
Cash and cash equivalents, end $ 14,407,479
============
See accompanying summary of accounting policies and notes to consolidating
financial statements
F-14
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
NOTE A - ORGANIZATION AND BUSINESS
Organization and Acquisitions
SBM Certificate Company and Subsidiary (the "Company") consists of SBM
Certificate Company, a Maryland Corporation ("SBM-MD"), and Atlantic
Capital Funding Corporation, a Maryland Corporation ("ACFC"). SBM-MD was
formed on May 24, 2000 under the laws of the State of Maryland. SBM-MD is a
wholly-owned subsidiary of State Bond and Mortgage Company, LLC ("State
Bond"). 1st Atlantic Guaranty Corporation ("1st Atlantic"), a Maryland
Corporation, is the sole member of State Bond. SBM-MD is an issuer of
face-amount certificates and is registered under the Investment Company Act
of 1940 (the "1940 Act").
On July 19, 2000, State Bond completed the purchase of 100% of the issued
and outstanding shares of common stock of SBM Certificate Company, a
Minnesota Corporation ("SBM-MN") (the "Acquisition"), from ARM Financial
Group, Inc. ("ARM"), a Delaware corporation. SBM-MN was a wholly-owned
subsidiary of ARM and an issuer of face-amount certificates under the
Investment Company Act of 1940.
State Bond effected the Acquisition as assignee under a Stock Purchase
Agreement, dated March 28, 2000, by and among 1st Atlantic, SBM-MN and ARM.
State Bond is a 100% owned subsidiary of 1st Atlantic.
The Stock Purchase Agreement provided for a purchase price of $1,400,000,
which allowed for an adjustment to the purchase price based on actual asset
values at the date of the Acquisition. As a result, the purchase price was
reduced to $1,350,000, of which $950,000 was paid directly to ARM and
$400,000 was held by an escrow agent as security for certain post-closing
obligations and liabilities of ARM under the Stock Purchase Agreement. In
October 2001, a final settlement was reached with ARM relating to these
post-closing obligations, whereby, the Company received $278,333 and the
remainder of the escrow monies were released to ARM. The Acquisition was
accounted for as a reverse merger using the purchase method of accounting,
whereby SBM-MD became the surviving corporation.
The Acquisition was financed by a short-term bank loan made to State Bond,
in the amount of $1,500,000. The loan provided for a floating and
fluctuating rate of interest equal to the prime rate. State Bond's
President, his wife and other officers also personally guaranteed this
loan.
F-15
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000 and 1999
NOTE A - ORGANIZATION AND BUSINESS (Continued)
Organization and Acquisitions (Continued)
On July 19, 2000, upon completion of the Acquisition, SBM-MD declared and
paid a cash dividend in the amount of $1,500,000 to its parent, State Bond,
which used these proceeds to repay the bank borrowing described above.
Immediately prior to the closing of the sale, SBM-MN paid a dividend to ARM
in an amount equal to SBM-MN's shareholders' equity less (i) $450,000 and
(ii) estimated deferred acquisition cost net of income taxes. The dividend,
totaling $3,708,384, was in the form of a transfer of certain securities,
in-kind, and the balance, in cash and cash equivalents.
As a result of the Acquisition transactions, SBM-MD has succeeded SBM-MN as
the "registrant" in all filings made by SBM-MN under the Securities Act of
1933, Securities Exchange Act of 1934 and Investment Act of 1940 (the "1940
Act").
On December 17, 2000, 1st Atlantic contributed its 100% ownership interest
in ACFC by assigning its 10,000 shares of ACFC common stock to SBM-MD (the
"Contribution"). The Contribution resulted in additional paid-in capital to
SBM-MD for the investment in ACFC, which totaled $573,957. SBM-MD also
invested $1 million into ACFC on this date. ACFC was formed under the laws
of the State of Maryland on March 27, 1997 and is a wholly-owned subsidiary
of SBM-MD.
Nature of Operations
SBM-MD is engaged in the business of issuing and servicing face-amount
certificates. A face-amount certificate is an obligation of the issuer to
pay a face, or principal amount, plus specified interest, to the holder of
the certificate. Under the certificates, the face-amount may be paid at the
end of a certificate's Guarantee Period or at its Maturity Date. Lesser
amounts are paid at such times if all or part of an investment in the
Certificate is withdrawn prior to maturity or the end of any Guarantee
Period. Interest, as described above, may be paid quarterly or annually, or
compounded.
The Company currently offers various series of single-payment investment
certificates. The Company's face-amount certificate operations include
issuance of single-payment certificates and the servicing of outstanding
single-payment and installment certificates, the investment of related
funds, and other related service activities.
F-16
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000 and 1999
NOTE A - ORGANIZATION AND BUSINESS (Continued)
Nature of Operations (Continued)
ACFC is a mortgage broker that originates residential and commercial loans
and assigns certain loans to SBM-MD at closing. SBM-MD purchases these
loans at ACFC's cost.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The preparation of consolidating financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and contingent assets and
liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
Principles of Consolidating
The consolidating financial statements include the accounts of SBM-MD and
its wholly-owned subsidiary, ACFC. All significant intercompany balances
and transactions have been eliminated.
Cash and Fixed Maturity Investments
Fixed maturities and equity securities are classified as
available-for-sale. Available-for-sale securities are stated at fair value,
with the unrealized gains and losses, net of taxes, reported as a separate
component of shareholder's equity in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." The amortized cost of fixed maturities
classified as available-for-sale is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated life of the security. Such amortization or
accretion is computed using the interest method and is included in
investment income. Anticipated prepayments on mortgage-backed securities
are considered in determining the effective yield on such securities. If a
difference arises between anticipated and actual prepayments, the carrying
value of the investment is adjusted with a corresponding charge or credit
to investment income. Interest and dividends are included in investment
income.
F-17
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000 and 1999
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Fixed Maturity Investments (Continued)
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.
Mortgage Notes Held for Sale
Mortgage notes receivable held for sale are carried at the lower of cost or
market value. Loan origination fees and discount points paid by borrowers
and the incremental direct costs of originating the loans are capitalized
until the loans are sold or paid off. The market value is determined by
evaluating, on a loan by loan basis, the note receivable expected loan
payments and the market value of the real estate securing the loan.
Mortgage Notes Held for Investment
Mortgage notes held for investment are carried at amortized cost net of
loan origination fees and discount points paid by borrowers and the
incremental direct costs of originating the loans. These fees and costs are
capitalized and amortized through maturity. If necessary, a loan loss
reserve is recognized for management's estimate of unrecoverable amounts.
Unrecoverable balances are determined by management based on an evaluation
of the borrower and the value of the real estate securing the loan.
Real Estate Tax Lien Certificates
Real estate tax lien certificates are investments comprised of delinquent
real estate tax bills purchased from municipalities. The investments are
secured by a first lien on the respective properties on which the tax is
owed. They are carried at cost and, if necessary, a reserve is recognized
for management's estimate of unrecoverable amounts.
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.
Certificate Liability
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. The certificate liability accrues interest, and
cash surrender values are less than the accumulated certificate liability
prior to maturity dates. The certificate liability accumulation rates, cash
surrender values, certificate liability and certificate reserves, among
other matters, are governed by the 1940 Act.
F-18
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000 and 1999
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Certificate Liability (Continued)
Following the Acquisition, a methodology for calculating the certificate
liability was adopted and implemented, whereby the certificate liability is
carried at the certificate's surrender value. This methodology is in
accordance with Section 28 of the Investment Company Act of 1940.
Application of this method of calculating the liability resulted in a
reduction of the certificate liability net of tax of $1,259,530 at
Acquisition. This amount is reflected as an adjustment to the accumulated
deficit in the statement of shareholder's equity.
Income Taxes
The Company accounts for income taxes using the asset and liability
approach, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the carrying and tax bases of assets and liabilities. A
valuation allowance is recorded if, based upon the evidence available, it
is more likely than not that some portion or all of the deferred tax assets
will not be realized.
Goodwill
Goodwill resulted from the Acquisition transaction and is being amortized
over 15 years. Upon the adoption of SFAS No. 142, goodwill and intangible
assets that have indefinite useful lives will not be amortized but rather
will be tested at least annually for impairment. The statement is
applicable starting with fiscal years beginning after December 15, 2001.
The Company will adopt the provisions of SFAS No. 142 on January 1, 2002.
Under the new rules, goodwill will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements.
During 2002, the Company will perform the first of the required impairment
tests of goodwill as of January 1, 2002 and has not yet determined what the
effect of these tests will be on the earnings and financial position of the
Company.
Fixed Assets
Fixed assets are carried at cost and depreciated using the straight-line
method over the estimated useful lives of the assets.
Revenue Recognition
The Company recognizes interest and dividend income on investments when
earned on an accrual basis. Revenue earned from the origination and
brokering of loans is recognized upon the sale of the loan to an investor
or third party. Gains and losses from the sales of investments are
recognized at the date of sale of the investment.
F-19
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising Costs
The Company expenses the costs of advertising as incurred. Advertising
expense for the years ended December 31, 2001 and 2000 was $93,422 and $0,
respectively.
NOTE C - FIXED MATURITY INVESTMENTS
The amortized cost and estimated fair values of available-for-sale
securities were as follows:
Gross Gross
Unrealized Unrealized
Cost Gain Loss Fair Value
---------- ---------- ---------- ----------
December 31, 2001
Fixed maturities
Mortgage-backed
securities $ 2,390,095 $ 209,896 $ 43,772 $2,556,219
Corporate securities 3,656,575 317,534 161,888 3,812,221
U.S. Treasury securities
and obligations of U.S.
government agencies 265,110 16,420 10,747 270,783
Obligations of state and
political subdivisions 128,236 10,764 3,910 135,090
----------- ---------- ---------- ----------
Total available-for-sale
securities $ 6,440,016 $ 554,614 $ 220,317 $6,774,313
=========== ========== ========== ==========
December 31, 2000
Fixed maturities
Mortgage-backed
securities $ 8,485,032 $ 236,944 $ 1,849 $8,720,127
Corporate securities 3,632,239 97,246 7,297 3,722,188
U.S. Treasury securities
and obligations of U.S.
government agencies 410,123 9,065 -- 419,188
Obligations of state and
political subdivisions 127,041 12,456 -- 139,497
---------- ---------- ---------- ----------
Total fixed maturities 12,654,435 355,711 9,146 13,001,000
Equity securities 200,663 -- -- 200,663
----------- ---------- ---------- ----------
Total available-for-sale
securities $12,855,098 $ 355,711 $ 9,146 $13,201,663
=========== ========== ========== ==========
F-20
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
NOTE C - FIXED MATURITY INVESTMENTS (Continued)
The amortized cost and estimated fair value of fixed maturity securities by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
repay obligations with or without call or prepayment penalties and because
mortgage-backed securities provide for periodic payments throughout their
life.
December 31, 2001 December 31, 2000
------------------------- -------------------------
Estimated Estimated
Cost fair value Cost fair value
----------- ----------- ----------- -----------
FIXED MATURITIES
Due in one year
or less $ -- $ -- $ -- $ --
Due after one year
through five years 951,380 1,010,344 227,452 227,702
Due after five years
through ten years 937,420 1,028,602 1,786,485 1,868,662
Due after ten years 2,161,121 2,179,148 2,155,466 2,184,509
Mortgage-backed
securities 2,390,095 2,556,219 8,485,032 8,720,127
----------- ----------- ----------- -----------
Total fixed maturities $ 6,440,016 $ 6,774,313 $12,654,435 $13,001,000
=========== =========== =========== ===========
Gains (losses) of $64,966, ($443,445), and ($470,507) were realized on
sales of fixed maturities classified as available-for-sale for the years
ended December 31, 2001, 2000, and 1999, respectively.
Gains of $3,731 and $14,863 were recognized on equity securities sold
during 2001 and 2000, respectively. There were no gains or losses
recognized on equity securities sold for the year ended December 31, 1999.
F-21
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
NOTE D - COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources, including net income and the change in unrealized gains
or losses on the Company's available-for-sale securities.
The following table shows, for available-for-sale securities, a
reconciliation of the net unrealized gain (loss) arising during the period
and the change in net unrealized gains (losses) as reported on the
accompanying consolidating statements of shareholder's equity. Amounts are
reported net of related tax.
Year Ended December 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Net unrealized gain (loss)
arising during period on
available-for-sale securities $ 50,079 $ 221,294 $(1,162,300)
Reclassification adjustment
for net realized (gains)
losses included in net
income (45,422) (8,503) 266,330
----------- ----------- -----------
Change in net unrealized gains
(losses) on available-for-
sale securities $ 4,657 $ 212,791 $ (895,970)
=========== =========== ===========
F-22
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
NOTE E - FIXED ASSETS
Fixed assets are as follows as of December 31, 2001 and 2000:
2001 2000
---------- ----------
Land and building $ 129,887 $ --
Furniture and fixtures 18,066 --
Computer equipment 77,311 68,072
---------- ----------
Total cost 225,264 68,072
Less accumulated depreciation 20,658 --
---------- ----------
$ 204,606 $ 68,072
========== ==========
NOTE F - MORTGAGE NOTES HELD FOR SALE
At December 31, 2001 and 2000, the Company held residential and commercial
mortgage notes receivable for sale of $6,964,413, net of capitalized
origination fees of $47,191 and deferred direct loan costs of $9,834. The
notes accrue interest at rates ranging from 9.25% to 14.5%, are secured by
real property and have maturity dates through October 1, 2031. The
Company's intention is to sell the notes to a buyer under certain favorable
market conditions. As of December 31, 2001, there are no commitments from
investors to purchase any of these mortgage notes.
F-23
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
NOTE G - MORTGAGE NOTES HELD FOR INVESTMENT
The Company held two mortgage notes receivable as of December 31, 2001 and
2000 as long-term investments. These notes are serviced by the Company and
are secured by real property. The notes accrue interest at rates of 12% and
8% with maturity dates through December 31, 2001.
NOTE H - REAL ESTATE TAX LIEN CERTIFICATES
The Company held investments in real estate tax lien certificates at
December 31, 2001 in the amount of $2,917,063. Interest is earned based on
a fixed rate of 20% on the outstanding taxes owed. Interest income on these
investments for the year ended December 31, 2001 was $159,354 and accrued
interest at December 31, 2001 was $142,967. The Company recovers the cost
of its investment plus accrued interest from pass through payments on the
tax bills from the municipality, which receives payments directly from the
tax payers. The Company may also recover the cost of its investment plus
accrued interest by exercising its rights to foreclose on the underlying
properties within a two year period from the date of the investment
purchase.
NOTE I - CERTIFICATE LIABILITY
The Company's certificate liability consists of the statutory certificate
liability and the additional certificate liability. The statutory
certificate liability is calculated based on section 28(a) of the 1940 Act.
The Company maintains an additional certificate liability amount in excess
of the statutory liability. This additional liability plus the statutory
liability is equal to the certificates' surrender value.
The total certificate liability at December 31 is summarized as follows:
Minimum Additional
2001 2000 Interest Interest
----------- ----------- ------------- ------------
Fully-paid certificates:
Single-payment series 503 $22,011,880 $18,926,313 2.50 2.10 to 4.60
Installment 1,226,036 1,271,625 2.50 to 3.50 1.50 to 2.75
Optional settlement 161,607 193,713 2.50 to 3.50 2.00 to 2.75
Due to unallocated
certificate holders -- -- None
----------- -----------
23,399,523 20,391,651
----------- -----------
Installment certificates:
Reserves to mature, by series
120 and 220 336,000 274,385 3.25 1.75 to 2.00
315 85,527 115,703 3.50 1.50 to 1.75
Advance payments -- 144,889
----------- -----------
421,527 534,977
----------- -----------
Total certificate liability $23,821,050 $20,926,628
=========== ===========
F-24
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
NOTE J - 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 judgment 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.
December 31, 2001 December 31, 2000
------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ----------- -----------
Assets
Fixed maturities $ 6,440,016 $ 6,774,313 $13,001,000 $13,001,000
Equity securities -- -- 200,663 200,663
Mortgage notes held
for sale 6,964,413 6,964,413 3,090,618 3,197,418
Mortgage notes held
for investment 731,482 731,482 727,732 727,732
Real estate tax lien
certificates 2,917,063 2,917,063 -- --
Certificate loans 98,137 98,137 110,069 110,069
Cash and cash
equivalents 5,538,094 5,538,094 3,716,393 3,716,393
Liabilities
Certificate liability 23,821,050 23,821,050 20,926,628 20,926,628
The following methods and assumptions were used in estimating fair values:
Fixed Maturities and Equity Securities
Fair values for investments in securities are based on quoted market
prices, where available. For fixed maturities and equity securities for
which a quoted market price is not available, fair values are estimated
using internally calculated estimates or quoted market prices of comparable
instruments.
F-25
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Certificate Loans
The carrying value of certificate loans approximates their fair value.
Mortgate Notes Held for Sale
Fair value is estimated by evaluating, on a loan-by-loan basis, the note
receivable's expected loan payments and the market value of the real estate
securing the loan.
Mortgate Notes Held for Investment
Estimated fair value of mortgage notes held for investment approximates
their carrying value.
Real Estate Tax Lien Certificates
Estimated fair value of tax lien certificates approximates their carrying
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 Liability
The fair value and carrying value of the certificate liability is based on
the surrender value of the applicable certificate prospectus.
F-26
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
NOTE K - INCOME TAXES
Deferred 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, 2001 and 2000 were:
2001 2000
----------- -----------
Deferred tax liabilities
Net unrealized gains on available-for-sale
securities $ 116,849 $ 133,774
Certificate liability 640,269 630,724
----------- -----------
Total deferred tax liabilities 757,118 764,498
----------- -----------
Deferred tax assets
Investments 185,644 311,829
Mortgage notes -- 38,136
Capital loss carryover 381,925 206,455
Net operating loss carryforward 967,671 109,324
----------- -----------
Total deferred tax assets 1,535,240 665,744
Valuation allowance for deferred tax assets (778,122) (206,455)
----------- -----------
Net deferred tax assets 757,118 459,289
----------- -----------
Deferred tax liabilities shown on the
accompanying balance sheets $ -- $ 305,209
=========== ===========
In 2001 and 2000, the Company has provided a valuation allowance for
deferred tax assets for net operating loss carryforwards and capital loss
carryforwards in which realization of these future benefits cannot be
reasonably assured as a result of recurring operating losses and the
uncertainty of the Company's ability to realize the capital loss
carryforwards. If the Company has capital gains, these capital loss
carryforwards would be available to offset such gain, subject to certain
limitations. If the Company achieves profitability, these deferred tax
assets would be available to offset future income tax liabilities and
expense, subject to certain limitations.
F-27
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2001, 2000, and 1999
NOTE K - INCOME TAXES (Continued)
At December 31, 2001 and 2000, the Company had net operating loss
carryforwards of approximately $2,506,919 and $283,223, respectively, for
income tax purposes which expire in various years through 2021. The Company
had capital loss carryforwards at December 31, 2001 and 2000 of
approximately $988,930 and $283,223, respectively, which expire in various
years through 2006.
The components of the provision for federal income tax expense consist of
the following:
Year Ended December 31,
------------------------------------
2001 2000 1999
--------- --------- ---------
Current $ -- $ -- $(211,503)
Deferred (288,264) (621,055) 11,513
--------- --------- ---------
Total federal income tax benefit $(288,264) $(621,055) $(199,990)
========= ========= =========
Federal income tax expense differs from that computed by using the income
tax rate of 35%, as shown below.
Year Ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
Income tax benefit at
statutory rate $(441,577) $(309,977) $ (57,346)
State tax benefit, net of federal
tax benefit (86,968) (24,277) --
Increase in valuation allowance
related to capital loss and
NOL carryovers 571,667 206,455 66,700
Decrease in contingent tax liability -- -- (200,000)
Dividend received deduction -- -- (7,211)
Certificate liability adjustment (287,735) (615,904) --
Mortgage notes marked to market -- 38,136 --
Tax-exempt interest (12,000) (12,000) (2,612)
Other (31,651) 96,512 479
--------- --------- ---------
Total federal income tax benefit $(288,264) $(621,055) $(199,990)
========= ========= =========
F-28
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
NOTE L - RELATED PARTY TRANSACTIONS
State Bond provides the Company with administrative services pursuant to an
Administrative Services Agreement. This agreement stipulates that State
Bond shall provide certain administrative and special services for the
Company. Services include the use of State Bond's property and equipment,
facilities and personnel needed for SBM-MD's daily operations. For
providing such services, State Bond earns an annual fee from the Company
calculated at either 1% of the Company's average certificate liability
balances, or an amount not to exceed $2.5 million. The charge is determined
monthly by State Bond and Company management. During 2001 and 2000, a fee
was charged totaling $1,078,839 and $112,223, respectively. Management fees
paid in 2001 and 2000 were $1,119,128 and $71,934, respectively, and
$40,289 remained payable at December 31, 2000.
On September 30, 2001, State Bond contributed as additional paid-in capital
two mortgage notes to the Company which totaled $2,253,684 at that date.
One of such notes in the amount of $1,127,473, is secured by real estate
that is owned by the borrower, a partnership in which 1st Atlantic has an
85% partnership interest.
A director of the Company provided legal services relating to the
Acquisition and throughout 2001. Total costs for services provided during
2001 and 2000 were $8,150 and $61,960, respectively, and $18,000 remained
payable as of December 31, 2000.
The Controlling shareholder of 1st Atlantic, State Bond's parent, is also
Chairman of the Board of Directors of SBM-MD.
NOTE M - SHAREHOLDER'S EQUITY AND REGULATORY MATTERS
The Company is subject to restrictions relating to its regulatory capital
requirements 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 (as
calculated under Section 28(a)) plus $250,000 ($21.5 million and $20.2
million at December 31, 2001 and 2000, respectively). The Company had
qualified assets (at amortized cost) of $23.6 million and $20.4 million at
those respective dates.
For purposes of determining compliance with the foregoing provisions,
qualified assets are valued in accordance with District of Columbia
Insurance Laws (the "D.C. Laws") as required by the 1940 Act. Qualified
assets for which no provision for valuation is made in the D.C. Laws are
valued in accordance with rules, regulations, or orders prescribed by the
SEC. These values are the same as the financial statement carrying values,
except that for financial statement purposes, fixed maturities and equity
securities classified as available-for-sale are carried at fair value. For
qualified asset purposes, fixed maturities classified as available-for-sale
are valued at amortized cost and equity securities are valued at cost.
F-29
SBM Certificate Company and Subsidiary
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
NOTE M - SHAREHOLDER'S EQUITY AND REGULATORY MATTERS (Continued)
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 and invested in
certain investments to meet certificate liability requirements as of
December 31, 2001 and 2000, as shown in the following table. Certificate
loans, secured by applicable certificate liabilities, are deducted from
certificate reserves in computing deposit requirements.
December 31,
----------------------------
2001 2000
------------ ------------
Qualified assets on deposit:
Central depository $ 23,301,100 $ 20,114,019
State governmental authorities 270,899 265,110
------------ ------------
Total qualified assets on deposit $ 23,571,999 $ 20,379,129
============ ============
Certificate reserve under Section 28(a) $ 21,311,350 $ 20,020,189
Less: Certificate loans (98,137) (110,069)
Plus: Base capital requirement 250,000 250,000
------------ ------------
Required deposits $ 21,463,213 $ 20,160,120
============ ============
NOTE N - CONCENTRATIONS
During 2001, the Company had selling agreements in place with six
broker-dealer firms to sell the face-amount certificates of the Company. Of
the Company's $6,472,858 of new certificate sales, $4,226,506, or 65%, were
sold by one broker-dealer, ARM Securities. To mitigate this concentration,
in 2002, the Company has executed one new selling agreement and has begun
extensive marketing to the other broker-dealers with which it has selling
agreements. In addition, the Company has implemented a new internal retail
sales division.
F-30
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS
December 31, 2001
PRINCIPAL
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT COST VALUE
- ----------------------------------------------------------- ---------- ---------- ----------
FIXED MATURITIES AVAILABLE-FOR-SALE
U.S. TREASURY SECURITIES
U.S. Treasury Note, 5.625%, due 5/15/2008 $ 50,000 $ 51,360 $ 52,407
U.S. Treasury Note, 7.25%, due 8/15/2004 200,000 213,750 218,376
---------- ----------
265,110 270,783
---------- ----------
OBLIGATIONS OF STATE AND POLITICAL
SUBDIVISIONS
Belmont County, Ohio, Sanitary Sewer District #3
Waterworks Revenue Bonds, 4.25%, due 4/01/2004 14,000 13,801 13,963
Douglas County, Washington, Public Utilities Districts
#1, Wells Hydroelectric Revenue Bonds, 4%,
due 9/01/2018 55,000 50,066 52,104
Yuba County California, Water Agency Bonds, 4%,
due 3/01/2016 75,000 64,369 69,023
---------- ----------
128,236 135,090
---------- ----------
CORPORATE SECURITIES
FINANCIAL INSTITUTIONS
Central Fidelity Cap. I, Series A, 7.18%, due 4/15/2027 950,000 926,188 884,982
Citigroup Inc., 7%, due 12/01/2025 300,000 271,225 307,077
First Union Corp., 6.4%, due 4/1/2008 960,000 886,080 976,195
---------- ----------
2,083,493 2,168,254
---------- ----------
PUBLIC UTILITIES
MCI Communications Corp., 7.75%, due 3/15/2024 900,000 849,253 865,962
---------- ----------
849,253 865,962
---------- ----------
INDUSTRIAL:
USX Corp., 6.65%, due 2/1/2006 750,000 723,829 778,005
---------- ----------
723,829 778,005
---------- ----------
TOTAL CORPORATE SECURITIES 3,656,575 3,812,221
---------- ----------
S-01
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS - CONTINUED
December 31, 2001
PRINCIPAL
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT COST VALUE
- ---------------------------------------------------- ---------- ---------- ----------
MORTGAGE-BACKED SECURITIES
Countrywide Home Loans RAST, 1998-A8, A6, 6.2124%,
due 8/25/2028 900,000 850,401 905,481
Federal Home Loan Mortgage Corporation, 6.5%,
due 5/15/2028 1,000,000 895,253 954,530
Federal National Mortgage Association, 9%,
due 4/01/2021 13,043 13,784 14,213
Government National Mortgage Association
11.5%, due 3/15/2015 98 196 113
11.5%, due 4/15/2013 434 476 501
11.5%, due 5/15/2015 127 144 147
11.5%, due 8/15/2013 787 821 909
6.875%, due 1/20/2026 139,514 137,203 142,740
PNC Mortgage Securities Corp., 1998-7 1A13, 6.75%,
due 9/25/2028 423,275 408,839 435,245
PNC Mortgage Securities Corp., 1998-7 1A24, 7.25%,
due 9/25/2028 101,864 82,978 102,340
---------- ----------
2,390,095 2,556,219
---------- ----------
TOTAL FIXED MATURITIES AVAILABLE-FOR-SALE $6,440,016 $6,774,313
========== ==========
S-02
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE II - INVESTMENTS IN AND ADVANCES TO AFFILIATES AND INCOME THEREON
Year ended December 31, 2001
AMOUNT OF DIVIDENDS OR INTEREST
-----------------------------------------
LOSS FROM
CARRYING VALUE INVESTMENT IN
NUMBER OF PAR VALUE OF OF INVESTMENT CREDITED TO SUBSIDIARY
NAME OF INVESTMENT IN SUBSIDIARY SHARES HELD SHARES HELD IN SUBSIDIARY INCOME OTHER FOR PERIOD
-------------------------------- ----------- ----------- ------------- ----------- ---------- ----------
Atlantic Capital Funding Corporation 10,000 $ 20,000 $1,619,007 $ -- $ -- $ (21,475)
========== ========== ========== ========== ==========
S-03
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE III - MORTGAGE LOANS ON REAL ESTATE AND INTEREST EARNED ON MORTGAGES
Year ended December 31, 2001
AMOUNT OF PRINCIPAL UNPAID AT
CLOSE OF PERIOD
-------------------------------
AMOUNT OF INTEREST INCOME
CARRYING SUBJECT TO MORTGAGES INTEREST DUE EARNED
AMOUNT OF DELINQUENT BEING AND ACCRUED AT APPLICABLE TO
DESCRIPTION PRIOR LIENS ASSET TOTAL INTEREST FORECLOSED END OF PERIOD PERIOD
- --------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
LIENS ON:
RESIDENTIAL NONE $ 5,604,256 $ 5,604,256 $ 2,267,316 $ 2,267,316 $ 131,050 $ 530,103
COMMERCIAL NONE 2,091,639 2,091,639 1,065,000 1,065,000 24,917 24,917
-------------- -------------- -------------- -------------- -------------- -------------- --------------
TOTAL $ -- $ 7,695,895 $ 7,695,895 $ 3,332,316 $ 3,332,316 $ 155,967 $ 555,020
============== ============== ============== ============== ============== ============== ==============
S-04
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE V - QUALIFIED ASSETS ON DEPOSIT
December 31, 2001
FIRST
MORTGAGES AND
INVESTMENTS IN OTHER FIRST
SECURITIES LIENS ON OTHER
NAME OF DEPOSITORY CASH (a) REAL ESTATE (b) TOTAL
- ------------------------------ -------------- -------------- -------------- -------------- --------------
State governmental authorities
Securities Department
of Illinois $ -- $ 265,110 $ -- $ 5,789 $ 270,899
Central depositary
US Bank 5,210,521 6,174,906 10,612,958 367,105 22,365,490
Bank of America 719,963 -- -- -- 719,963
Chase Manhattan 65,960 -- -- -- 65,960
Chevy Chase 45,648 -- -- -- 45,648
State Bank 16,799 -- -- -- 16,799
Wells Fargo 87,240 -- -- -- 87,240
-------------- -------------- -------------- -------------- --------------
Total qualified assets on
deposit $ 6,146,131 $ 6,440,016 $ 10,612,958 $ 372,894 $ 23,571,999
============== ============== ============== ============== ==============
(a) Represents amortized cost of bonds and securities.
(b) Represents dividend and interest receivable on qualified assets.
S-05
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE VI - CERTIFICATE RESERVES
PART I - SUMMARY OF CHANGES
Year ended December 31, 2001
BALANCE AT BEGINNING OF YEAR ADDITIONS
-------------------------------- -----------------------------------------------
RESERVES
NUMBER OF (INCLUDING RESERVE
ACCOUNTS ADVANCE PAYMENTS
WITH AMOUNT OF PAYMENTS BY CHARGED TO
YIELD SECURITY MATURITY WITH ACRUED CHARGED TO CERTIFICATE OTHER ACCOUNTS
DESCRIPTION PERCENT HOLDERS VALUE INTEREST INCOME HOLDER (a) Adjustment
----------- ------- ------- ----- -------- ------ ------ -------------- ----------
Reserves to mature, installment
certificates
Series 120 2.75 8 $ 50,000 $ 172,042 $ 6,058 $ 1,398 $ -- $ --
Series 220 2.75 15 80,000 221,336 10,588 3,180 -- --
Series 315 2.66 22 90,200 141,599 6,309 4,202 -- --
-----------
Single payment certificates
Series 503 2.50 1,691 21,087,286 18,926,313 849,241 2,079,484 49,589
Series 505 2.50 -- -- -- 55,306 1,361,590 --
Series 507 2.50 -- -- -- 27,133 506,043 --
Series 510 2.50 -- -- -- 129,766 2,516,961 --
Fully paid installment certificates -
(Paid Up Bonds) 2.50 404 2,099,101 1,271,625 82,452 -- 14,965
Optional settlement certificates
Paid-up certificate (Special 2.50 3 575 483 15 -- -- --
Maturity) Annuities 3.00 43 437,675 193,230 20,127 -- 69,916
Due to unlocated certificate
holders None 26 2,799 -- -- -- -- --
------ ----------- ----------- ----------- ----------- ----------- -----------
Total 2,212 $23,847,636 $20,926,628 $ 1,186,995 $ 6,472,858 $ -- $ 134,470
====== =========== =========== =========== =========== =========== ===========
Total charged to income, per above $1,186,995
Less reserve recoveries from
terminations prior to maturity (14,443)
----------
Interest credited on certificate
reserves, per statement of operations
and comprehensive income (loss) $1,172,552
==========
S-06
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE VI - CERTIFICATE RESERVES - CONTINUED
PART I - SUMMARY OF CHANGES - CONTINUED
Year ended December 31, 2001
DEDUCTIONS BALANCE AT END OF YEAR
-------------------------------------------- ---------------------------------------------
RESERVES
(INCLUDING
CASH NUMBER OF ADVANCE
SURRENDERS ACCOUNTS WITH PAYMENTS) WITH
PRIOR TO SECURITY AMOUNT OF ACCRUED
DESCRIPTION MATURITIES MATURITY OTHER HOLDERS MATURITY VALUE INTEREST
- ---------------------------------- ------------- ------------- ------------- ------------- -------------- -------------
Reserves to mature, installment
certificates
Series 120 $ 25,988 $ -- $ 25,991 7 $ 40,000 $ 127,519
Series 220 11,516 -- 15,107 13 71,000 208,481
Series 315 -- 4,182 62,401 16 61,600 85,527
Single payment certificates
Series 503 3,387,995 1,003,175 -- 1,348 17,840,500 17,513,457
Series 505 -- 8,083 2,200 152 2,441,879 1,406,613
Series 507 -- -- 1,581 68 798,935 531,595
Series 510 -- 68,888 17,624 189 3,761,918 2,560,215
Paid-up bonds -- 125,294 17,712 391 2,006,476 1,226,036
Optional settlement certificates
Paid-up certificate -- -- -- 3 575 498
Annuities 115,867 -- 6,297 38 161,608 161,109
Due to unlocated certificate
holders -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Total $ 3,541,366 $ 1,209,622 $ 148,913 2,225 $ 27,184,491 $ 23,821,050
============= ============= ============= ============= ============= =============
S-07
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE VI - CERTIFICATE RESERVES - CONTINUED
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS
Year ended December 31, 2001
BALANCE AT BEGINNING OF YEAR
---------------------------------------------------------------
NUMBER OF
AGE ACCOUNTS WITH
GROUPING SECURITY AMOUNT OF AMOUNT OF
IN YEARS HOLDERS MATURITY VALUE RESERVES
-------------- ------------------ ------------------- ------------------
Series 120 23 0 $ -- $ --
24 1 6,000 15,869
25 1 8,000 11,710
31 0 -- --
32 1 5,000 14,904
33 0 -- --
34 0 -- --
35 1 6,000 18,966
36 1 6,000 19,082
37 1 3,000 11,138
38 0 - --
40 2 16,000 75,076
Interest reserve
Accrued interest payable 5,297
------------------ ------------------- ------------------
Total 8 $ 50,000 $172,042
================== =================== ==================
Series 220 23 0 $ -- $ --
24 1 12,000 16,521
29 0 -- --
30 1 4,000 8,970
31 0 -- --
32 1 5,000 15,711
33 7 35,000 99,947
34 3 15,000 48,866
35 2 8,000 26,457
Interest reserve
Accrued interest payable 4,864
------------------ ------------------- ------------------
Total 15 $ 79,000 $221,336
================== =================== ==================
S-08
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE VI - CERTIFICATE RESERVES - CONTINUED
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS - CONTINUED
Year ended December 31, 2001
DEDUCTIONS BALANCE AT END OF YEAR
-------------------------------------- ---------------------------------------------------------------------------
CASH
SURRENDERS NUMBER OF
PRIOR TO AGE GROUPING IN ACCOUNTS WITH AMOUNT OF AMOUNT OF
MATURITY OTHER YEARS SECURITYHOLDERS MATURITY VALUE RESERVES
------------------ ------------------ ------------------- -------------------- ---------------- -------------
Series 120 23 0 $ -- $ --
24 1 6,000 15,917
25 1 8,000 12,645
31 0 -- --
32 0 -- --
33 1 5,000 16,224
34 0 -- --
35 0 -- --
36 2 12,000 41,137
37 1 3,000 11,827
38 0 -- --
25,988 40 1 6,000 25,846
Interest
reserve
Accrued
interest
payable 3,923
---------- ----------- ---------- ---------- ----------
Total $ 25,988 $ -- 7 $ 40,000 $ 127,519
========== =========== ========== ========== ==========
Series 220 23 0 $ -- $ --
24 1 12,000 18,271
29 0 -- --
30 1 4,000 9,684
31 0 -- --
11,515 32 1 6,000 16,759
15,107 33 4 21,000 63,297
34 3 14,000 47,622
35 3 14,000 48,400
Interest
reserve
Accrued
interest
payable 4,448
---------- ----------- ---------- ---------- ----------
Total $ 11,515 $ 15,107 13 $ 71,000 $ 208,481
========== =========== ========== ========== ==========
S-09
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE VI - CERTIFICATE RESERVES - CONTINUED
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS
Year ended December 31, 2001
BALANCE AT BEGINNING OF YEAR
------------------------------------------------------
AGE GROUPING ACCOUNTS WITH AMOUNT OF AMOUNT OF
IN YEARS SECURITY HOLDERS MATURITY VALUE RESERVES
-------------- ---------------- ------------------ ---------------
Series 315 12 1 $ 2,200 $ 1,644
13 1 5,500 4,401
14 0 -- --
15 4 22,000 21,766
16 2 2,200 2,657
17 5 13,200 18,161
18 4 17,600 25,633
19 2 13,200 31,399
20 4 14,300 26,376
Interest reserve 2,706
Accrued interest payable 6,856
--------------- ----------------- -----------------
Total 23 $90,200 $141,599
=============== ================= =================
(continued)
S-10
SCHEDULE VI - CERTIFICATE RESERVES - CONTINUED
PART II - INFORMATION REGARDING INSTALLMENT CERTIFICATES
CLASSIFIED BY AGE GROUPINGS - CONTINUED
Year ended December 31, 2001
DEDUCTIONS BALANCE AT END OF YEAR
-------------------------------------- ---------------------------------------------------------------------------
CASH
SURRENDERS NUMBER OF
PRIOR TO AGE GROUPING IN ACCOUNTS WITH AMOUNT OF AMOUNT OF
MATURITY OTHER YEARS SECURITYHOLDERS MATURITY VALUE RESERVES
------------------ ------------------ ------------------- -------------------- ---------------- -------------
Series 315 12 0 $ -- $ --
13 0 -- --
14 2 7,700 6,829
37,258 15 0 -- --
16 4 20,900 23,035
17 2 4,400 5,797
18 1 2,200 3,527
19 6 24,200 38,555
4,182 24,021 20 1 2,200 3,932
Interest
reserve 2,302
Accrued interest
payable 1,550
---------- ----------- ---------- ---------- ----------
Total $ 4,182 $ 61,279 16 $61,600 $85,527
========== =========== ========== ========== ==========
S-11
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE VII - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
--------------------------------
CHARGED TO CHARGED TO OTHER
DESCRIPTION BEGINNING OF YEAR EXPENSE ACCOUNTS DEDUCTIONS END OF YEAR
----------- ----------------- ---------- ---------------- ---------- -----------
Valuation allowance on
deferred tax assets
year ended
December 31,
2001 $ 206,455 $ -- $ 571,667 (1) $ -- $ 778,122
2000 $ -- $ -- $ 206,455 (1) $ -- $ 206,455
1999 $ 120,000 $ 140,981 $ 261,163 (2) $ -- $ 522,144
1998 $ 400,000 $ -- $ -- $ (280,000)(3) $ 120,000
(1) The valuation allowance was increased as a result of establishing a full
valuation allowance on deferred tax assets for capital loss carryforwards
and NOL carryforwards.
(2) The valuation allowance was increased as a result of establishing a full
valuation allowance on deferred tax assets for unrealized losses on assets
available-for-sale. The increase in valuation allowance resulted in a
reduction of shareholders' equity.
(3) The capital loss carryover was utilized during 1998, and therefore the
related valuation allowance was released.
S-12