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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended: June 30, 2003
Commission filed number: 811-6268
SBM CERTIFICATE COMPANY
(Formerly SBM Certificate Company, a Minnesota Corporation)
(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.)
c/o STATE BOND & MORTGAGE COMPANY, L.L.C.
5101 RIVER ROAD, SUITE 101
BETHESDA, MD 20816
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-656-4200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No
As of August 14, 2003, 250,000 shares of the registrant's common stock
were outstanding; all of which are privately owned and not traded on a public
market.
Because of the transactions and events described in the registrant's Form
8-K Current Reports dated August 16, 2002, October 3, 2002, and November 12,
2002, the registrant has restated its financial statements for the years ended
December 31, 2001 and December 31, 2000, and amended all of its Form 10-Q
Quarterly Reports affected since December 31, 2000. In addition, certain
narrative disclosures were revised.
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 2003
(unaudited) and December 31, 2002.................................................. 3
Condensed Consolidated Statements of Operations for the three months ended
June 30, 2003 (unaudited) and June 30, 2002 (unaudited)............................ 4
Condensed Consolidated Statements of Operations for the six months ended
June 30, 2003 (unaudited) and June 30, 2002 (unaudited)............................ 4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 (unaudited) and June 30, 2002 (unaudited)............................ 5
Notes to Consolidated Financial Statements ............................................. 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................ 8
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 15
Item 4 CONTROLS AND PROCEDURES................................................................. 16
Part II. OTHER INFORMATION...................................................................... 16
Item 1. LEGAL PROCEEDINGS ...................................................................... 16
Item 6. EXHIBITS AND REPORTS ON FORM 8-K REPORTS................................................ 17
SIGNATURES ...................................................................................... 17
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SBM Certificate Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
June 30, 2003 December 31, 2002
------------- -----------------
ASSETS (unaudited)
Cash and investments
Available-for-sale securities
(amortized cost: $6,471,538 and $11,245,510) $ 5,970,283 $ 9,190,162
Mortgage notes held for sale 9,026,901 13,163,828
Mortgage notes held for investment 2,831,435 --
Real estate tax lien certificates 822,653 1,632,437
Real estate owned 2,671,626 2,647,095
Residual mortgage certificate 3,373,321 4,038,607
Property and equipment, net 123,286 124,909
Escrows -- 100,000
Certificate loans 74,884 77,462
Cash and cash equivalents 8,720,475 2,230,886
----------- -----------
Total cash and investments 33,614,864 33,205,386
----------- -----------
Receivables
Dividends and interest 370,286 394,749
----------- -----------
Total receivables 370,286 394,749
----------- -----------
Total qualified assets 33,985,150 33,600,135
Other assets
Related party receivable 116,322 129,351
Fixed assets, net of accumulated depreciation of
$55,731 and $41,156 82,061 90,508
Goodwill 591,463 591,463
Deferred acquisition costs, net 511,025 581,534
Due from shareholder 1,359,573 1,218,181
Allowance - due from shareholder (1,359,573) (1,218,181)
Other assets 223,315 122,069
----------- -----------
TOTAL ASSETS $35,509,336 $35,115,060
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Statutory certificate liability 31,927,307 31,418,457
Additional certificate liability 1,471,396 1,770,369
Warehouse line of credit 2,208,500 2,542,600
Deferred revenue 1,399,659 1,640,425
Real estate liabilities -- 870,317
Escrow liability 318,189 --
Accounts payable and other liabilities 87,177 335,882
Related party payable 271 117,925
----------- -----------
Total liabilities 37,412,499 38,695,975
----------- -----------
Shareholder's equity (deficit)
Common stock, $1 par value; 10,000,000 shares
authorized; 250,000 shares issued and outstanding 250,000 250,000
Additional paid-in capital 3,861,818 3,861,818
Accumulated comprehensive income (loss), net of taxes (501,255) (2,055,348)
Accumulated deficit (5,513,726) (5,637,385)
----------- -----------
Total shareholder's equity (deficit) (1,903,163) (3,580,915)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT) $35,509,336 $35,115,060
=========== ===========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- 3 -
SBM Certificate Company and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------------
2003 2002 2003 2002
--------- --------- ----------- -----------
Investment income
Interest and dividend income $ 100,636 $ 176,829 $ 241,799 $ 335,226
Other investment income 5,513 6,683 28,744 17,833
Loan fee income -- -- 75,173 --
Mortgage interest income 450,928 720,891 916,912 955,995
--------- --------- ----------- -----------
Total investment income 557,077 904,403 1,262,658 1,309,054
--------- --------- ----------- -----------
Investment and other expenses
Administrative services fee 251,400 350,000 364,400 872,000
Legal and accounting fees 82,013 130,469 112,555 130,469
Deferred acquisition cost amortization and renewal commissions 68,197 35,214 134,416 79,210
Depreciation expense 8,207 6,151 16,199 12,062
Other expenses 57,575 182,408 88,145 394,251
--------- --------- ----------- -----------
Total investment and other expenses 467,392 704,242 715,715 1,487,992
--------- --------- ----------- -----------
Interest credited on certificate liability 864,824 (78,555) 1,249,710 241,585
--------- --------- ----------- -----------
Net investment income (loss) before income taxes
and realized investment gains (losses) (775,139) 278,716 (702,767) (420,523)
--------- --------- ----------- -----------
Realized investment gains 694,493 46,572 694,404 143,760
Income tax expense on realized investment gains -- -- -- --
--------- --------- ----------- -----------
Net investment income (loss) before income taxes (80,646) 325,288 (8,363) (276,763)
--------- --------- ----------- -----------
Other operating income
Origination fee income 140,974 223,567 270,219 372,611
Gain on sale to investor 683,218 168,803 1,323,961 414,494
Other loan fee income 167,295 48,577 298,455 113,347
--------- --------- ----------- -----------
Total other operating income 991,487 440,947 1,892,635 900,452
--------- --------- ----------- -----------
Other operating expenses
Salaries and commissions 648,597 228,580 1,267,116 532,549
Other expenses 154,749 146,767 298,370 275,046
Warehouse interest expense and charges, net 18,238 -- 53,735 --
--------- --------- ----------- -----------
Total other operating expenses 821,584 375,347 1,619,221 807,595
--------- --------- ----------- -----------
Net other operating income before income taxes 169,903 65,600 273,414 92,857
--------- --------- ----------- -----------
Net investment and other operating income (loss) before income taxes 89,257 390,888 265,051 (183,906)
Income tax and deferred tax asset valuation allowance expense -- -- -- (72,123)
--------- --------- ----------- -----------
Net investment and other operating income (loss) 89,257 390,888 265,051 (256,029)
--------- --------- ----------- -----------
Non operating expense:
Reserve for losses - shareholder receivable (3,547) (16,500) (141,392) (56,700)
--------- --------- ----------- -----------
Net income (loss) $ 85,710 $ 374,388 $ 123,659 $ (312,729)
========= ========= =========== ===========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- 4 -
SBM Certificate Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, (Unaudited)
2003 2002
----------- -----------
Cash flows provided by (used in) operating activities
Net income (loss) $ 123,659 $ (312,729)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Interest credited on certificate liability 1,249,710 241,585
Reserve for losses - shareholder receivable 141,392 16,500
Realized investment gains (694,404) (143,760)
Deferral of revenue 636,022 --
Income tax and deferred tax asset valuation allowance -- 72,123
Deferral of acquisition costs (19,817) (177,374)
Amortization of deferred acquisition costs and renewal commissions 90,326 79,210
Depreciation 16,199 12,062
(Increase)Decrease in dividends and interest receivable 24,463 (87,154)
Decrease in mortgage notes held for sale 885,003 --
Increase in shareholder receivable (141,392) --
Changes in other assets and liabilities 49,905 (270,281)
----------- -----------
Net cash provided by (used in) operating activities 2,361,066 (569,818)
----------- -----------
Cash flows from investing activities
Sales and redemptions of available-for-sale securities 5,268,849 2,430,191
Purchases of available-for-sale securities (900,000) (7,773,430)
Purchase of mortgage notes receivable (3,873,625) (2,713,850)
Principal payments received on mortgage notes receivable 4,248,856 1,686,584
Closing costs and real estate liabilities paid on sale of real estate (713,143) --
Principal payments received on residual mortgage certificate 665,286 --
Purchase of real estate tax lien certificates -- (2,245,527)
Repayments of real estate tax lien certificates 809,784 1,059,301
Purchase of fixed assets (6,129) (14,164)
Repayment of certificate loans, net 2,578 3,979
----------- -----------
Net cash provided by investing activities 5,502,456 (7,566,916)
----------- -----------
Cash flows from financing activities
Amounts paid to face-amount certificate holders (1,039,833) (901,584)
Amounts received from face-amount certificate holders -- 6,392,133
Warehouse line of credit borrowings, net (334,100) --
----------- -----------
Net cash provided by (used in) financing activities (1,373,933) 5,490,549
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,489,589 (2,646,185)
Cash and cash equivalents, beginning 2,230,886 5,538,094
----------- -----------
Cash and cash equivalents, end $ 8,720,475 $ 2,891,909
=========== ===========
Supplemental disclosure of significant noncash investing and financing
activities:
Contribution of assets from State Bond -- $ 639,227
=========== ===========
Transfer of mortgage notes and tax certificates to REO -- $ 2,500,912
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 5 -
SBM CERTIFICATE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2003
1. ORGANIZATION AND BASIS OF PRESENTATION
SBM Certificate Company (the "Company" or "SBM-MD") was formed on May 24,
2000 under the laws of the State of Maryland. The Company is a wholly owned
subsidiary of State Bond & Mortgage Company, LLC ("State Bond") and State Bond
is a wholly owned subsidiary of 1st Atlantic Guaranty Corporation ("1st
Atlantic"), a Maryland corporation. The Company is an issuer of face-amount
certificates and is registered under the Investment Company Act of 1940 (the
"1940 Act"). Face-amount certificates issued by the Company entitle the
certificate holder to receive, at maturity, the principal investment and accrued
interest. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States for interim financial information and with the instructions to
Form 10-Q.
On July 19, 2000, SBM-MD completed a merger transaction with SBM
Certificate Company, a Minnesota corporation ("SBM-MN"), whereby the Company
became the surviving corporation (See note 2). In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
On December 17, 2000, 1st Atlantic contributed, its 100% ownership
interest in Atlantic Capital Funding Corporation ("ACFC") by assigning its
10,000 shares of ACFC Common Stock to SBM-MD, along with two mortgage notes (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
$1,000,000 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. ACFC
is a mortgage broker and lender that originates and sells residential and
commercial real estate loans.
Operating results for the Company for the six months ended June 30, 2003,
are not necessarily indicative of those to be expected for the year ending
December 31, 2003. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 2002.
2. ACQUISITION OF COMPANY BY STATE BOND & MORTGAGE COMPANY, L.L.C.
On July 19, 2000, State Bond completed the purchase of 100% of the issued
and outstanding shares of common stock of SBM-MN, from ARM Financial Group
("ARM"), a Delaware corporation (the "Acquisition"). SBM-MN was a wholly owned
subsidiary of ARM and an issuer of face-amount certificates under the 1940 Act.
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.
The Stock Purchase Agreement provided for a purchase price of $1,400,000,
which allowed for an adjustment to the purchase price based on actual asset
value at the date of the Acquisition. As a result, the purchase price was
reduced to $1,350,000, of which $950,000 was paid directly to ARM and $400,000
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
was 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.
- 6 -
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.
On July 19, 2000, upon completion of the Acquisition, the Company declared
and paid a cash dividend in the amount of $1,500,000 to its parent, State Bond,
which used these proceeds to repay the bank borrowing described above.
Immediately prior to the closing of the sale, 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 (the "1933 Act"), Securities Exchange Act of 1934 (the "1934 Act") and the
1940 Act.
3. GOODWILL AND PURCHASED INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 requires goodwill to be tested
annually for impairment under certain circumstances, and written down when
impaired, rather than being amortized as previous standards required.
Furthermore, SFAS 142 requires purchased intangible assets other than goodwill
to be amortized over their useful lives unless these lives are determined to be
indefinite.
SFAS 142 is effective for fiscal years beginning after December 15, 2001.
In accordance with SFAS 142, the Company ceased amortizing goodwill, which
totaled $591,463 as of the beginning of fiscal year 2002, and there was no
charge to goodwill as a result of the implementation of SFAS 142. The goodwill
was initially derived from the Acquisition.
4. DUE FROM SHAREHOLDER
Due from shareholder represents amounts paid to John J. Lawbaugh, the
majority shareholder of 1st Atlantic, directly or through companies affiliated
with Mr. Lawbaugh and other costs incurred by the Company as a result of these
payments. As of June 30, 2003, these amounts totaled $1,359,573. An allowance
for uncollectible amounts due from shareholder has been recorded for the full
amount due with a corresponding charge to operations. As of June 30, 2003, the
allowance totaled $1,359,573. See "Certain Significant Events" in "Item 2:
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further description of due from shareholder.
5. 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 ($32.1 million and $31.6 million at June 30, 2003
and December 31, 2002, respectively). The Company had qualified assets (at
amortized cost) of $32.2 million and $32.3 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, available-for-sale securities are carried at fair value. For
qualified asset purposes, available-for-sale securities are valued at amortized
cost.
- 7 -
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 June 30, 2003 and
December 31, 2002, as shown in the following table. Certain assets on deposit
are not considered qualified assets for the purposes of this calculation because
they are reserved for the repayment of existing liabilities. Certificate loans,
secured by applicable certificate liabilities, are deducted from certificate
reserves in computing deposit requirements.
June 30, 2003 December 31, 2002
------------- -----------------
Total qualified assets on deposit $ 34,411,521 $ 35,453,112
Less: Qualified assets reserved by Provident warehouse line $ (2,208,500) $ (2,547,954)
Less: Qualifies assets reserved for real estate liens -- (590,000)
------------ ------------
Total qualified assets $ 32,203,021 $ 32,315,158
------------ ------------
Certificate reserve under Section 28(a) $ 31,927,307 $ 31,418,457
Less: Certificate loans (74,884) (77,462)
Plus: Base capital requirement 250,000 250,000
------------ ------------
Required deposits $ 32,102,423 $ 31,590,995
------------ ------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
SBM-MN was incorporated in (Minnesota) in June 1990 to assume the
face-amount certificate business of SBM Company ("SBM"), which began in 1914.
ARM purchased most of the assets of SBM in June 1995 and continued the issuance
of face-amount certificates. The Company was formed on May 24, 2000 under the
laws of the State of Maryland. The Company is a wholly-owned subsidiary of State
Bond. The Company is an issuer of face-amount certificates and is registered
under the 1940 Act. Face-amount certificates issued by the Company entitle the
certificate holder to receive, at maturity, the principal investment and accrued
interest. As a result of the Acquisition, the Company has assumed the
obligations of SBM MN's outstanding face-amount certificates and now is the
issuer of face-amount certificates that trace their origin to the early 1900s.
Business
The Company is a face-amount certificate company registered under the 1940
Act 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 issues 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, by its
terms, automatically continues for another guarantee period of the same duration
until the certificate's maturity date. The certificates mature no later than 30
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. As indicated below under
"Certain Significant Events," the Company
- 8 -
suspended the sale of its certificates on August 16, 2002. Any use in this Form
10-Q Annual Report of the term "offer," "sale" or "issues" and any discussion in
that context, is qualified by such suspension.
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. At the
end of a guarantee period, 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.
The Company's gross income is derived primarily from the margin between
earnings on its investments and amounts paid or credited on its fixed-rate
certificate liability ("investment spread"). The Company's net income is
determined by deducting investment and other expenses and federal income taxes
from the investment spread. 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.
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 SEC may permit under the 1940 Act.
ACFC principally is a mortgage lender and mortgage broker of single-family
residential mortgages (conventional and FHA), which are sold to investors. ACFC
is approved as a nonsupervised lender under the HUD Title II program, which has
a required net worth based on a prescribed calculation.
Competition
The Company's face-amount certificate business competes in general with
various types of individual savings products which offer a fixed rate of return
on investors' money, especially insurance, bank and thrift products. Some of
these other products are insured by governmental agencies or funds or private
third parties. For example, banks and thrifts typically have federal deposit
insurance covering monies deposited with them. The Company's certificates are
not guaranteed or insured by any governmental agency or fund or independent
third party. The Company's ability to offer competitive interest rates,
attractive terms, and efficient service are its primary basis for meeting
competition.
Certain Significant Events
In 2002, management of the Company discovered facts that came to its
attention regarding several transactions (the "Questioned Transactions")
involving the Company. The Questioned Transactions raised concerns that the
Company's former Chairman of the Board and Chief Executive Officer, John J.
Lawbaugh, failed to comply with provisions of the 1940 Act prohibiting
transactions with affiliated persons of registered investment companies, caused
the Company to fail to comply with disclosure requirements of the 1933 Act and
the 1934 Act, caused the Company to improperly report asset balances, and
diverted cash assets of the Company to himself directly or indirectly during
2000, 2001 and 2002 totaling $1,768,917, of which $900,000 was repaid by Mr.
Lawbaugh to the Company. The balance of $868,917, together with legal and
accounting costs incurred by the Company because of these matters, which totaled
$490,656 as of June 30, 2003, constitute the amounts due from shareholder
totaling $1,359,573 on the June 30, 2003 Consolidated Balance Sheet of the
Company. An allowance for uncollectible amounts due from shareholder has been
recorded for the full amount due from the shareholder with a corresponding
charge to operations.
As a result of the Questioned Transactions, on August 16, 2002, the
Company's Board of Directors removed Mr. Lawbaugh from his position as Chairman
of the Board and Chief Executive Officer and suspended his authority to act for
or bind the Company with respect to any transactions and authorized an
- 9 -
investigation into the Questioned Transactions. The investigation was performed
by the Company's management under the supervision of two directors of the Board
(the "Special Committee") and the Company's independent auditors. The Company
filed its Form 8-K Current Report dated October 3, 2002, with the SEC on October
4, 2002. That Form 8-K Current Report describes the findings of the Special
Committee created by the Board of Directors to oversee the investigation of Mr.
Lawbaugh's transactions, summarizes the nature of the transactions and discusses
various related matters. In addition, the Company suspended the sale of its
face-amount certificates on August 16, 2002. The Company restated its financial
statements and amended its Form 10-Q Quarterly Reports and Form 10-K Annual
Reports filed with the Securities and Exchange Commission (the "SEC") for the
periods affected to properly reflect the nature and effect of these
transactions. The Company has not yet resumed the sale of its face-amount
certificates and cannot, at this time, state when the sale of its certificates
will resume.
On November 12, 2002, Mr. Lawbaugh resigned from the Board of Directors of
the Company and on November 14, 2002, entered into a Stock Escrow Agreement
("Escrow Agreement"). The Escrow Agreement placed Mr. Lawbaugh's shares of 1st
Atlantic capital stock, representing majority ownership of 1st Atlantic, into
escrow and removed his voting rights associated with the shares. The Company
filed a Form 8-K Current Report dated November 12, 2002, with the SEC on
November 27, 2002. That Form 8-K Current Report describes the terms and
conditions of the Escrow Agreement.
The following summarizes the impact of the Questioned Transactions on the
Company for the respective periods indicated:
SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001 2000 TOTAL
---------------- ------------ ------------ ------------ -----------
Qualified Assets $ (141,392) $ (56,700) $(1,396,907) $(292,236) $(1,887,235)
Additional Paid in Capital $ -- $ -- $ (707,550) $ -- $ (707,550)
Shareholder's Equity $ (141,392) $(265,762) $(1,146,957) $(292,236) $(1,846,347)
Net Loss $ (141,392) $(365,763) $ (439,407) $(292,236) $(1,238,798)
Potential Impact of Certain Regulatory Concerns
Since the filing of its Form 8-K dated August 16, 2002, the Company has
been engaged in ongoing discussions with staff members (the "Staff") of the SEC
concerning the Questioned Transactions, the results of the Special Committee's
investigation and various related matters such as are referred to above. In
addition, the Staff initiated a regulatory examination of 1st Atlantic in
October 2002. In January 2003, the Staff advised 1st Atlantic that it believed
the reserves required to be maintained by 1st Atlantic under the 1940 Act to
support 1st Atlantic's outstanding face-amount certificates were inadequate. The
Company understands that the Staff's position is that certain transfers of 1st
Atlantic's assets to the Company were made without consideration resulting in a
reduction in 1st Atlantic's reserves materially below the minimum amount
required by the 1940 Act.
1st Atlantic has taken the position that the common stock of the Company
that it owns, through State Bond, and that it owned at the time of the above
transfers, may be treated as a qualified asset for purposes of the certificate
reserve requirements of the 1940 Act. Members of the Staff have stated that they
disagree with 1st Atlantic's position. At the same time, the Company has been
actively seeking a buyer for Mr. Lawbaugh's majority ownership of 1st Atlantic
common stock.
On March 17, 2003, the Staff advised 1st Atlantic, through its counsel,
that in the absence of satisfactory evidence of an imminent transaction that
would restore 1st Atlantic's reserves, the Staff would recommend to the
Commission that a civil injunctive action be brought against 1st Atlantic
seeking emergency relief, including among other things, the appointment of a
receiver. 1st Atlantic had been actively engaged in discussions with the Staff
regarding this issue and a possible resolution. Nevertheless, on April 23, 2003,
the Commission filed a complaint in the United States District Court for the
District of Maryland alleging that 1st Atlantic was in violation of Sections
28(a) and 28(b) of the 1940 Act because it was not maintaining sufficient
certificate reserves. The complaint contends that from approximately
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September 2001, as a result of the transfer of certain assets held by 1st
Atlantic to the Company, 1st Atlantic had been and currently is operating with
certificate reserves below the minimum required by the 1940 Act. Specifically,
the complaint contended that 1st Atlantic had improperly counted the value of
the common stock of its subsidiary State Bond, the Company's parent, as a
"qualified investment" for purposes of the 1940 Act.
As indicated above, 1st Atlantic has taken the position that the common
stock of the Company, owned through State Bond, and that 1st Atlantic owned at
the time of the above transfers, may be treated as a qualified asset for
purposes of the certificate reserve requirements of the 1940 Act. 1st Atlantic,
however, without admitting or denying the allegations of the complaint, agreed
to the entry of a temporary restraining order enjoining 1st Atlantic from
violating Sections 28(a) and 28(b) of the 1940 Act. In addition, 1st Atlantic
agreed to be temporarily enjoined from making any payments to 1st Atlantic
certificate holders. An order of the United States District Court for Maryland
set a hearing date of May 5, 2003 to hear the Commission's motion for
appointment of a receiver. On May 5, 2003 the Court entered an order extending
the temporary restraining order and freeze of payments to 1st Atlantic
certificate holders to May 20, 2003, and set a hearing date of May 20, 2003 to
hear the Commission's motion for a receiver and motion for a preliminary
injunction. At the hearing on May 20, 2003, an additional order extending the
temporary restraining order and freeze of payments to 1st Atlantic certificate
holders to June 3, 2003 was entered by the Court. In addition, a new hearing for
the Commission's motion for appointment of a receiver and its motion for
preliminary injunction was scheduled for June 3, 2003.
On May 29, 2003, John Lawbaugh, 1st Atlantic's majority shareholder, filed
a petition for relief under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the District of Maryland. 1st Atlantic
has filed an adversary proceeding in Mr. Lawbaugh's bankruptcy proceeding
seeking a declaration that the Escrow Agreement, described in the Company's Form
8-K Current Report dated November 12, 2002, is enforceable despite Mr.
Lawbaugh's bankruptcy.
At the hearing on June 3, 2003, the Court entered an order extending the
temporary restraining order and freeze of payments to 1st Atlantic certificate
holders to June 17, 2003, but did not grant the SEC's motion for a preliminary
injunction and for appointment of a receiver for 1st Atlantic. A telephone
status conference was also scheduled for June 17, 2003 to discuss the status of
a proposed sale of a majority of the outstanding shares of 1st Atlantic common
stock and other matters related to 1st Atlantic. During the telephone status
conference on June 17, 2003, the Court was updated on the status of the proposed
sale of 1st Atlantic's common stock and was advised of the filing by 1st
Atlantic of an adversary complaint in the Bankruptcy Court relating to Mr.
Lawbaugh's petition. The Court entered an order further extending the temporary
restraining order and freeze of payments to 1st Atlantic certificate holders to
July 8, 2003, and scheduled a telephone status conference for that date. During
the telephone status conference on July 8, 2003, the Court entered an order
further extending the temporary restraining order and freeze of payments to 1st
Atlantic certificate holders indefinitely. In addition, on July 11, 2003, the
Court entered an order transferring 1st Atlantic's adversary proceeding filed in
Mr. Lawbaugh's bankruptcy case from the United States Bankruptcy Court for the
District of Maryland to the United States District Court for the District of
Maryland. Also on July 11, 2003, the Court referred the parties in the SEC's
proceeding against 1st Atlantic to a United States Magistrate Judge for an
Alternative Dispute Resolution conference.
The Company's President, Eric M. Westbury, and certain non-affiliated
investors have formed a partnership that has submitted a proposal to the Board
of Directors of 1st Atlantic for the purchase of the majority of 1st Atlantic's
shares from John Lawbaugh. Those shares are now held in escrow, with voting
rights controlled by the Board. On April 24, 2003, the Board of Directors agreed
in principle to the proposal. The Company believes that under this proposal the
Commission's concerns regarding 1st Atlantic's compliance with the reserve
requirements of the 1940 Act would be resolved. The Company, however, cannot
provide any assurances in this regard. The Court has scheduled a settlement
conference for August 20, 2003 to discuss the proposed sale with all parties
involved.
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Financial Condition, Changes in Financial Condition and Results of Operations
For the three months ended June 30, 2003 compared with the three months ended
June 30, 2002
As of June 30, 2003, total assets increased $0.4 million from $35.1
million as of December 31, 2002 to $35.5 million as of June 30, 2003, while
certificate liability increased $0.2 million from $33.2 million as of December
31, 2002 to $33.4 million as of June 30, 2003.
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 and gains and losses from the sale of investments less
investment and other expenses and interest credited on certificate reserve
liability. Net investment income is related to the operations of the face-amount
certificate company. Net other operating income is income earned from the
origination of loans in the mortgage lender/broker business less operating
expenses. Changes in net investment income are largely due to changes in the
rate of return on investments and changes in operating costs. Changes in net
other operating income is attributable to changes in the volume and pricing of
loans originated.
The Company had net income of $85,710 and $374,388 for the three months
ended June 30, 2003 and 2002, respectively. The net income for the three months
ended June 30, 2003 stemmed mainly from net other operating income from the
mortgage operations of $169,903. The net income for the three months ended June
30, 2002 stemmed mainly from the net investment income before income tax from
the investment company operations of $325,288. The net investment income before
income tax for the three months ended June 30, 2002 was mainly due to investment
income exceeding investment and other expenses.
Investment income (excluding realized investment gains and losses) for the
three months ended June 30, 2003 was $557,077 compared to investment income of
$904,403 for the three months ended June 30, 2002. The decrease in investment
income for the three months ended June 30, 2003, was due to a high amount of
cash being held by the Company in 2003 as compared to 2002 and the recognition
of deferred origination fees related to mortgage notes that were repaid during
the three months ended June 30, 2002. Investment income plus realized investment
gains for the three months ended June 30, 2003 and 2002 was $1,251,570 and
$950,975, respectively. Investment income plus realized investment gains
represents annualized investment yields of 15.52% and 14.88% on average cash and
investments of $32.3 million and $25.6 million for the three months ended June
30, 2003 and 2002, respectively. The increase in investment income and realized
gains for the three months ended June 30, 2003 is mainly attributable to
realized gains from the sale of real estate.
Net investment spread, which is the difference between investment income
and interest credited on certificate liability, was ($307,747) for the three
months ended June 30, 2003 compared to $982,958 for the three months ended June
30, 2002. On an annualized yield basis, these amounts reflect net investment
spread for the three months ended June 30, 2003 and 2002 of (3.70%) and 14.73%,
respectively.
Interest credited on certificate liability for the three months ended June
30, 2003 and 2002 was $864,824 and ($78,555), respectively. These amounts
represent annualized average rates of interest credited of 10.39% and (1.18%) on
average certificate liability of $33.3 million and $26.7 million for the three
months ended June 30, 2003 and 2002, 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.
Investment and other expenses were $467,392 and $704,242 for three months
ended June 30, 2003 and 2002, respectively. The decrease in investment and other
expenses was the result of a decrease in the administrative services fee to the
Company's parent, State Bond, and a decrease in other expenses. The
administrative services fee for the three months ended June 30, 2003 was
$251,400 as compared to $350,000 for the three months ended June 30, 2002. This
decrease was due to lower operational costs for State Bond. State Bond's
operational costs are funded through the administrative services fee. Other
expenses were decreased by lower advertising costs for the three months ended
June 30, 2003 as compared to the three months ended June 30, 2002. There was no
advertising expense for the three months ended
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June 30, 2003 as compared to $107,221 for the three months ended June 30, 2002.
The decrease in advertising expense in 2003 was due to the halting of
advertising as certificate sales were suspended.
Realized investment gains for the three months ended June 30, 2003 and
2002 were $694,493 and $46,572, respectively. The increase in realized
investment gains was mainly due to the recognition of a deferred gain related to
the sale of real estate owned during the three months ended June 30, 2003.
Realized investment gains and losses are primarily interest-rate related and
attributable to the asset/liability management strategies of the Company. The
Company invests in a mixture of investments ranging from fixed maturity
securities, equity securities, mortgage notes, real estate, and real estate tax
lien certificates. The objective of each investment is to provide reasonable
returns while limiting liquidity and credit risks.
Net other operating income before income tax for the three months ended
June 30, 2003 and 2002, was $169,903 and $65,600, respectively. This consists of
the mortgage lender/broker operations of ACFC. For the three months ended June
30, 2003 and 2002, other operating income was $991,487 and $440,947,
respectively. This income is derived from loan origination fees, gain on sale to
investor and other processing and underwriting loan fees relating to originating
and brokering loans. The increase in other operating income for the three months
ended June 30, 2003 as compared to the three months ended June 30, 2002 was due
to an increase in the volume of loans originated and higher yields generated on
those loans. For the three months ended June 30, 2003 and 2002, other operating
expenses were $821,584 and $375,347, respectively. These expenses consist of
salaries and commissions paid in relation to originating and brokering loans and
other costs in operating the mortgage company. The increase in other operating
expenses for the three months ended June 30, 2003 as compared to the three
months ended June 30, 2002, was mainly due to higher commissions paid on the
increased revenues generated.
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.
For the three months ended June 30, 2003 and 2002, reserve for losses -
shareholder receivable was $3,547 and $16,500, respectively. See "Certain
Significant Events" under Item 2 to this Form 10-Q for further descriptions of
this item.
For the six months ended June 30, 2003 compared with the six months ended June
30, 2002
The Company had net income (loss) of $123,659 and ($312,729) for the six
months ended June 30, 2003 and 2002, respectively. The net income for the six
months ended June 30, 2003 of $123,659 stemmed mainly from net other operating
income of $273,414 less reserve for losses-shareholder receivable of $141,392.
The net loss for the six months ended June 30, 2002 stemmed mainly from the net
investment loss before income tax of $276,763. The net investment loss before
income tax for the six months ended June 30, 2002 was due mainly to the
combination of investment and other expenses and interest credited on
certificate liability exceeding the income generated from the investment
portfolio. High operational costs related to the administrative services fee and
advertising resulted in an operating loss for the six months ended June 30,
2002. The reserve for losses - shareholder receivable of $56,700 contributed
further to the net loss for the six months ended June 30, 2002.
Investment income (excluding realized investment gains and losses) for the
six months ended June 30, 2003 was $1,262,658 compared to investment income of
$1,309,054 for the six months ended June 30, 2002. Investment income plus
realized investment gains for the six months ended June 30, 2003 and 2002 was
$1,957,062 and $1,452,814, respectively. Investment income plus realized
investment gains represents annualized investment yields of 12.13% and 11.37% on
average cash and investments of $32.3 million and $25.6 million for the six
months ended June 30, 2003 and 2002, respectively. The increase in investment
income and realized gains is primarily attributable to the recognition of a
deferred gain related to the sale of real estate.
Net investment spread, which is the difference between investment income
and interest credited on certificate liability, was $12,948 for the six
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months ended June 30, 2003 compared to $1,067,469 for the six months ended June
30, 2002. On an annualized yield basis, these amounts reflect net investment
spread for the six months ended June 30, 2003 and 2002 of 0.1% and 8.0%,
respectively.
Interest credited on certificate liability for the six months ended June
30, 2003 and 2002 was $1,249,710 and $241,585, respectively. These amounts
represent annualized average rates of interest credited of 7.51% and 1.81% on
average certificate liability of $33.3 million and $26.7 million for the six
months ended June 30, 2003 and 2002, respectively.
Investment and other expenses were $715,715 and $1,487,992 for the six
months ended June 30, 2003 and 2002, respectively. The decrease in investment
and other expenses was the result of a decrease in the administrative services
fee to the Company's parent, State Bond, and a decrease in other operating
expenses. The administrative services fee for the six months ended June 30, 2003
was $364,400 as compared to $872,000 for the six months ended June 30, 2002. The
decrease in the administrative services fee was due to State Bond having lower
operational costs, which are funded through the administrative services fee.
Investment and other expenses were further decreased by lower advertising costs
for the six months ended June 30, 2003 as compared to the six months ended June
30, 2002. There was no advertising expense for the six months ended June 30,
2003 as compared to $278,102 for the six months ended June 30, 2002. The
decrease in advertising expense in 2003 was due to the halting of advertising as
certificate sales were suspended.
Net other operating income before income tax for the six months ended June
30, 2003 and 2002, was $273,414 and $92,857, respectively. This consists of the
mortgage lender/broker operations of ACFC. For the six months ended June 30,
2003 and 2002, other operating income was $1,892,635 and $900,452, respectively.
This income is derived from loan origination fees, gain on sale to investor and
other processing and underwriting loan fees relating to originating and
brokering loans. The increase in other operating income for the six months ended
June 30, 2003 as compared to the six months ended June 30, 2002 was due to an
increase in the volume of loans originated and higher yields generated on those
loans. For the six months ended June 30, 2003 and 2002, other operating expenses
were $1,619,221 and $807,595, respectively. These expenses consist of salaries
and commissions paid in relation to originating and brokering loans and other
costs in operating the mortgage company. The increase in other operating
expenses for the six months ended June 30, 2003 as compared to the six months
ended June 30, 2002, was mainly due to higher commissions paid on the increased
revenues generated.
Realized investment gains were $694,404 and $143,760 for the six months
ended June 30, 2003 and 2002, respectively. The increase in realized investment
gains was mainly due to the recognition of a deferred gain related to the sale
of real estate owned.
For the six months ended June 30, 2003 and 2002, reserve for losses -
shareholder receivable was $141,392 and $56,700, respectively. See "Certain
Significant Events" under Item to this Form 10-Q for further descriptions of
this item.
Liquidity and Financial Resources
As of June 30, 2003, the Company had $100,598 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 legal costs and
administrative services fee. The principal sources of cash to meet such
liquidity requirements are investment income and proceeds from maturities and
redemptions of investments. The Company's certificates may be surrendered by the
certificateholder at any time prior to maturity. Certificates mature 28 or 30
years after their issuance, depending on the interest guarantee period, or
series, selected. Surrenders at the end of any interest guarantee period may be
made by the certificateholder without a withdrawal charge that would otherwise
apply. The Company has $177,181 of scheduled interest disbursements and $110,965
of certificate obligations under interest guarantee periods expiring during the
six months ending December 31, 2003. The Company can make no representation as
to
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the amount of certificates that may be surrendered for payment with or without a
withdrawal charge during such period.
At June 30, 2003, cash and cash equivalents totaled $8.7 million, an
increase of $6.5 million from December 31, 2002. The increase was primarily due
to the payment of outstanding principal on certain mortgage notes held for sale
and the sale of certain available-for-sale securities. The Company's aim is to
manage its cash and cash equivalents position so as to satisfy short-term
liquidity needs. In connection with this management of cash and cash
equivalents, the Company may invest idle cash in short duration fixed maturities
to capture additional yield when short-term liquidity requirements permit.
Cash flows of $2,361,066 and ($569,818) were generated from (used in) operating
activities for the six months ended June 30, 2003 and 2002, respectively. These
cash flows resulted principally from investment income, less management fees,
changes in mortgage notes held for sale, and commissions paid. Proceeds from
investing activities generated $5,502,456 and ($7,566,916) for the six months
June 30, 2003 and 2002, respectively. The cash flows generated from investing
activities for the six months ended June 30, 2003 were mainly attributable to
the sales of available-for-sale securities and principal repayments on mortgage
notes exceeding purchases of securities and mortgage notes. The cash outflow for
the six months ended June 30, 2002 resulted from the purchase of investments
exceeding sales and repayments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's investments are represented by a mixture of
available-for-sale securities (comprised of government and corporate bonds,
mortgage-backed securities, and equity securities), mortgage notes, real estate,
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.
The Company's investments in available-for-sale securities totaled
$5,970,283 at June 30, 2003, 17.57% of the investment portfolio (27.45% at
December 31, 2002). Available-for-sale securities consist of fixed maturity
securities and equity securities. Fixed maturity securities consist of US
Treasuries, municipal bonds, mortgage-backed securities and corporate debt. As
of June 30, 2003, the Company held one fixed maturity security that had
defaulted on interest payments. The market value of available-for-sale
securities fluctuates with changing economic conditions. Fixed maturity
securities are influenced greatly by market interest rates. Corporate debt
securities market value is also weighed by the performance of the company that
issues the debt. Upgrades or downgrades in the rating of a corporate bond will
increase or decrease the market value of such investment. The Company's
investments in equity securities are subject to market risk and fluctuations in
the market value of the securities. Fluctuations in market value of equity
securities affect the yield on the investment and could result in a reduction in
the principal amount invested in the security. The Company takes into account
the current and expected future market environment in evaluating investment risk
and investment yields.
Presently, the Company has a portion of its portfolio invested directly in
real estate and real estate loans, which includes $11.9 million of mortgage
notes and $2.7 million of real estate owned. Defaults by the borrower on
payments due and fluctuations in the value of the underlying real estate
represent the greatest risk factor for this investment strategy. However, the
Company mitigates the risk associated with the mortgage notes by investing only
in those loans that have a history of producing income, are of high quality by
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 80% 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 $822,653 at June 30, 2003. The greatest risk associated with this
investment is the time and costs of the 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
policy of
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securing these investments, in most circumstances, only with properties in which
the amount advanced by the Company to acquire the certificates is less than 10%
of the market value of the property that secures the investment.
The Company's ownership of the residual mortgage certificate, which is
valued at $3,373,321 at June 30, 2003, represents a subordinate ownership
interest in a securitization trust (the "Trust"). The assets of the Trust
consist of mortgage loans secured by first liens on residential real properties.
The Company's ownership interest represents a subordinate right to receive
excess cash flow, if any, generated by the mortgage loans of the Trust. The
Company assumes the risk of default on the mortgages held within the Trust.
Defaults of principal and interest by borrowers will adversely affect the
Company's return on this investment. A reserve for defaults was calculated into
the original purchase price to mitigate the risk of loss on the investment. In
addition, risk of loss is lessened by the weighted average loan to value ratio
on the underlying mortgage notes as compared to the real estate securing the
note being approximately 60%.
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 from the potential negative effects of changes in interest
rates.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Our management evaluated, with the participation of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by the Quarterly
Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and
our Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
Changes in internal control over financial reporting.
There was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in no material legal or administrative
proceedings.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(31.1) Certification of Chief Executive Officer pursuant to rule
15d-14(a)
(31.2) Certification of Chief Financial Officer pursuant to rule
15d-14(a)
(32.1) Written Statement of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350
(b) REPORTS ON FORM 8-K
Pursuant to the requirement of Item 5 of Form 8-K, the Company filed
reports on Form 8-K dated April 23, 2003, May 5, 2003, May 20, 2003,
June 3, 2003, and June 17, 2003 during the three months ended June
30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 18, 2003.
Date: August 18, 2003 SBM CERTIFICATE COMPANY
/s/ Eric M. Westbury
----------------------------
Chief Executive Officer
Date: August 18, 2003 /s/ Trey Stafford
----------------------------
Chief Financial and Accounting Officer
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