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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, 2003
|_| 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. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
As of March 30, 2004, 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.
TABLE OF CONTENTS
PART I
Item 1. Business ................................................................. 3
Item 2. Properties ............................................................... 8
Item 3. Legal Proceedings......................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders ...................... 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .... 9
Item 6. Selected Financial Data .................................................. 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............... 21
Item 8. Financial Statements and Supplementary Data .............................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................... 22
Item 9A. Controls and Procedures................................................... 23
PART III
Item 10. Directors and Executive Officers of the Registrant ....................... 23
Item 11. Executive Compensation ................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management ........... 25
Item 13. Certain Relationships and Related Transactions ........................... 26
Item 14. Principal accounting fees and services ................................... 27
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K .......... 29
2
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
SBM Certificate Company and Subsidiaries (the "Company") consists of SBM
Certificate Company ("SBM") and its 100% owned subsidiaries, Atlantic Capital
Funding Corporation ("ACFC") and SBM Securities I ("SBMS I"). SBM is a 100%
owned subsidiary of SBM Financial, LLC ("SBM Financial"), formerly known as
State Bond & Mortgage, LLC ("State Bond"). As of December 31, 2003, SBM
Financial is 100% owned by Geneva Capital Partners, LLC ("Geneva"). See Note 1
to the Notes to the Consolidating Financial Statements, which more fully
describes the organization of the Company and basis of consolidation. Unless
otherwise indicated by the context, the terms "Company," "we," "us," or "ours,"
refers to the consolidated entities of SBM, ACFC and SBMS I. Our executive
offices are located at 5101 River Road, Suite 101, Bethesda, Maryland 20816; our
telephone number is 301-656-4200.
On July 19, 2000, State Bond completed the purchase of all of the
outstanding common stock of SBM Certificate Company, a Minnesota corporation
("SBM MN"), from ARM Financial Group, Inc. ("ARM"), a Delaware corporation (the
"Purchase"). State Bond effected the Purchase 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").
1st Atlantic became a 100% owned subsidiary of Geneva on December 5, 2003. SBM
and 1st Atlantic are face-amount certificate companies registered as such under
the Investment Company Act of 1940 ("1940 Act").
As part of the Purchase transactions, SBM MN was merged into SBM. SBM was
formed for purposes of redomestication from Minnesota to Maryland and had
nominal assets when organized. SBM 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 (the "Exchange Act") and the 1940 Act.
On December 17, 2000, 1st Atlantic contributed its 100% ownership of ACFC
to SBM. ACFC is a mortgage broker and lender in conventional and HUD mortgage
programs as well as commercial lending.
Significant Events
In 2002, management discovered facts that came to its attention regarding
several transactions (the "Questioned Transactions") involving the Company. The
Questioned Transactions raised concerns that SBM's then 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 us to fail to comply with disclosure requirements
of the 1933 Act and the Exchange Act, caused us 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 to the
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Company by Mr. Lawbaugh in 2002. The balance of $868,917, together with legal
and accounting costs incurred because of these matters constitute the amount due
from shareholder on the December 31, 2002 Consolidating Balance Sheet of the
Company of $1,218,181.
As a result of the Questioned Transactions, on August 16, 2002, SBM'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 investigation
into the Questioned Transactions. The investigation was performed by our
management under the supervision of two independent directors of the Board (the
"Special Committee") and our independent auditors. Our 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, SBM suspended the sale of its face-amount certificates on August
16, 2002. We restated our financial statements and amended our 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. SBM has not yet resumed sales. An
amendment to our 1933 Act registration statement for our face-amount
certificates is pending at the SEC.
On November 12, 2002, Mr. Lawbaugh resigned from the Board of Directors
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. We 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. See Note 14 to the Notes to the Consolidating Financial Statements
for further description of the due from shareholder and the Questioned
Transactions.
The following summarizes the impact of the Questioned Transactions on the
Company for the respective periods indicated:
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMEBR 31, 2000 TOTAL
----------------- ----------------- ----------------- ----------------- -----
Qualified Assets $ (141,392) $ (56,700) $(1,396,907) $ (292,236) $(1,745,843)
Additional Paid in Capital $ -- $ -- $ (707,550) $ -- $ (707,550)
Shareholder's Equity $ (141,392) $ (265,762) $(1,146,957) $ (292,236) $(1,704,955)
Net Loss $ (141,392) $ (365,763) $ (439,407) $ (292,236) $(1,097,406)
On May 29, 2003, John Lawbaugh, 1st Atlantic's majority shareholder at the
time, 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 ("Bankruptcy Court").
On November 7, 2003, 1st Atlantic, Geneva and the Chapter 11 Bankruptcy
Trustee (the "Trustee"), as representative of the bankruptcy estate of John J.
Lawbaugh (the "Estate"), agreed to a settlement proposal for the sale of John J.
Lawbaugh's 7,500,000 shares of 1st Atlantic
4
common stock (the "Shares") to Geneva. An emergency motion was filed in
Bankruptcy Court on November 10, 2003 for the approval of the sale of the Shares
to Geneva under such proposal. On December 2, 2003, the Bankruptcy Court granted
the motion approving the settlement proposal for the sale of the Shares free and
clear of all liens and ordered the sale of the Shares to take place immediately.
On December 5, 2003, the sale of the Shares closed pursuant to the terms of the
Stock Purchase Agreement by and between the Trustee and Geneva dated December 2,
2003 (the "Sale Agreement") (the "Acquisition"). The Trustee sold the Shares to
Geneva for $2,532,981, which was distributed to 1st Atlantic and SBM in the
amounts of $1,175,955 and $1,357,026, respectively, to repay the amounts due
from Mr. Lawbaugh to 1st Atlantic and SBM (See Note 14 to the Notes to the
Consolidating Financial Statement). In addition, Geneva contributed $3,200,000
as additional paid in capital to 1st Atlantic to resolve the SEC's concerns
regarding 1st Atlantic's compliance with the reserve requirements of Section 28
of the 1940 Act. Further, SBM Financial issued debt instruments secured by the
common stock of SBM totaling $1,616,772 to certain creditors of the Estate. The
debt matures ten years from the date of issuance and has principal and interest
payments due semi-annually with interest accruing at the rate of 1.5% per annum.
Cash flows generated from the operations of the Company may be used to pay the
interest and principal of the debt as it becomes due. A total of $125,000 was
also paid by Geneva to the Trustee and certain other creditors of the Estate.
Immediately after closing, Geneva made additional contributions to the Company,
consisting of $1,000,000 cash and partnership interests in two separate real
estate investment funds totaling $820,000. These contributions were treated as
additional paid in capital.
Geneva obtained funds to acquire the Shares from the issuance of privately
placed investment notes to unaffiliated investors. The investment notes provide
for a fixed interest rate of 3.75%, payable quarterly, and mature in 2006, three
years from the date of the issuance. The funds obtained to acquire the Shares
and the additional capital contributed by Geneva after the sale of the Shares
are projected to be repaid at their maturity from excess cash flows generated
from the operations of the Company. Geneva is owned 100% by Eric M. Westbury,
Chairman and Chief Executive Officer of SBM.
See "Item 6. Selected Financial Data" to this Form 10-K for proforma
financial information related to the Acquisition.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
We have three business segments, issuing and servicing face-amount
certificates, mortgage lending and brokerage operations, and issuing privately
placed investment notes to accredited investors. The consolidating financial
statements of the Company presented in Item 15 present the financial information
of SBM and SBMS I as consolidated and ACFC is separately presented. SBMS I has
yet to issue any investment notes and, therefore has not generated any revenue.
SBMS I has incurred expenses, most of which are legal costs, for the year ended
December 31, 2003 of $225,117. These amounts remain unpaid as of December 31,
2003.
5
(c) NARRATIVE DESCRIPTION OF BUSINESS
General
SBM 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.
SBM issues various series of single-payment face-amount 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 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 above under "Significant
Events," SBM suspended the sale of its certificates on August 16, 2002. Any use
in this Form 10-K Annual Report of the term "offer," "sale" or "issues" and any
discussion in that context, is qualified by such suspension.
SBM periodically declares the interest rates payable for its certificates,
which are applicable for the entire guarantee period. The prevailing interest
rates available to investors for similar interest-bearing instruments are a
primary consideration in deciding upon the interest rates declared. However, SBM
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.
SBM'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 investment
decisions, general economic conditions, government monetary policy, the policies
of regulatory authorities that influence market interest rates, and SBM's
ability to respond to changes in such rates. Changes in market interest rates
may have a negative impact on earnings. See "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition".
Following the Purchase by State Bond on July 19, 2000, a methodology for
calculating the certificate liability was adopted and implemented, whereby the
certificate liability is carried at the certificate's surrender value. A
certificate's surrender value is the certificate's account value, principal plus
accrued interest, less the early withdrawal charge applicable to the
certificate.
6
Following the 2003 Acquisition, the certificate liability is carried at
the account value less an estimate for early surrender charges based on SBM's
history with regard to early surrenders. These methods are in accordance with
accounting principles generally accepted in the United States of America.
SBM maintains reserves for its certificate obligations in accordance with
Section 28 of the 1940 Act. Under provisions of the 1940 Act, SBM 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 is principally 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.
SBMS I is an entity newly formed for the purpose of issuing privately
placed investment notes to accredited investors. The investment notes represent
an obligation of SBMS I to pay the investor its principal investment plus
accrued interest at its maturity date. Proceeds from the issuance of the
investment notes will be invested in real estate, mortgage notes, fixed maturity
and equity securities.
Management of Investments
Subject to the oversight of the Board of Directors and its Investment
Committee, management is responsible for selecting and managing investments to
insure 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 portfolio with brokers and
dealers. In the future, the Company may engage one or more investment advisers
to assist the Company in the management of its investment portfolio.
Sale of Certificates and Competition
As disclosed in "Item 1. Business: Significant Events", SBM suspended
sales of its face-amount certificates on August 16, 2002 due to the discovery of
the Questioned Transactions. When SBM is selling, certificates are sold directly
by SBM and through broker-dealers who have entered into selling agreements with
SBM. Sales also may be made to members of affinity groups, such as service
organizations, non-profit associations and other types of member organizations.
Our 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. SBM's certificates are not guaranteed or insured by any
7
governmental agency or fund or independent third party but are supported by
reserves required by law. Our ability to offer competitive interest rates,
attractive terms, and efficient service is our primary basis for meeting
competition.
Relationship with SBM Financial (Formerly Known as State Bond)
SBM is an independent operating entity, but relies upon SBM Financial to
provide it with management, marketing and administrative services, as well as
personnel, for the conduct of its business. See "Item 13. Certain Relationships
and Related Transactions."
Regulation
Like many financial service companies that offer investment opportunities
to the public, we are subject to governmental regulation. In particular, the
1940 Act and rules issued by the SEC specify certain terms and conditions for
face-amount certificates, the method for calculating face-amount certificate
reserves, the minimum amounts and types of investments to be deposited with a
qualified custodian to support such certificate reserves and a variety of other
restrictions. See Note 2 and Note 20 of Notes to Consolidating Financial
Statements of the Company for more detail on our policies related to these
regulations.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
We have no foreign operations.
ITEM 2. PROPERTIES
Our executive offices are located at 5101 River Road, Suite 101, Bethesda,
Maryland, 20816. The executive offices are the primary location for SBM
Financial and the Company's executive management, administrative services,
investment, accounting, corporate accounting, marketing activities and other
support personnel. These offices are leased by SBM Financial, which makes them
available to the Company under an Administrative Services Agreement. See "Item
13. Certain Relationships and Related Transactions." We also maintain
administrative offices at 125 Minnesota Street, New Ulm, Minnesota. This
property is owned by us and has a carrying value of $121,679.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to, nor is any of our property the subject of, any
material pending legal proceedings, other than ordinary litigation routine to
its business.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 SBM, all of
which is owned by SBM Financial.
Subject to its obligation to maintain investments in qualified assets as
required under Section 28(b) of the 1940 Act, SBM may pay dividends to its
parent as declared by its Board of Directors. There were no dividends declared
or paid for the years ended December 31, 2003 and 2002.
ITEM 6. SELECTED FINANCIAL DATA
The following table contains selected financial data of the Company for
the five years ended December 31, 2003. The financial data was derived from our
audited financial statements. The report of Reznick Fedder & Silverman,
independent auditors, with respect to the years ended December 31, 2003, 2002
and 2001, appear at page F-02 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.
9
YEAR ENDED DECEMBER 31
--------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA
Total investment income 2,766 2,439 1,615 1,618 2,292
Interest credited on certificate reserves (2,425) (1,349) (1,173) (1,523) (1,615)
Net investment spread 341 1,090 442 95 677
Total investment and other expenses (2,157) (2,951) (1,973) (528) (376)
Net investment income (loss) before taxes and gains (1,816) (1,861) (1,531) 188 409
Net realized investment gains (losses) 448 473 69 (429) (373)
Net investment income (loss) before taxes (1,368) (1,388) (1,462) (241) 36
Net other operating income (loss) (281) 118 (38) -- --
Net investment and other operating income (losses) (1,649) (1,270) (1,500) 188 409
Federal income tax (expense) benefit (15) -- 288 621 102
Net operating income (loss) (1,664) (1,270) (1,212) (241) 36
Non-operating expense (141) (406) (470) (342) --
Net income (loss) (1,805) (1,676) (1,682) (583) 36
Earnings (loss) per share* (7.22) (6.70) (6.73) (2.33) 0.14
BALANCE SHEET DATA (END OF PERIOD)
Total assets 51,172 35,115 23,881 21,967 34,285
Total liabilities 42,731 38,696 24,152 21,527 30,117
Shareholder's equity (deficit) 8,441 (3,581) (271) 440 4,168
- ----------
* Earnings (loss) per share based on 250,000 shares issued and outstanding.
- --------------------------------------------------------------------------------
Proforma Financial Information Related to the Change of Control
The Acquisition disclosed in "Item 1. Business: Significant Events" to this Form
10-K was accounted for using the purchase method of accounting in accordance
with Statement of Financial Accounting Standards ("SFAS") 141, "Accounting for
Business Combinations." Certain items within the financial statements had a
material change due to the Acquisition. The following proforma consolidated
balance sheet reflects the impact of the Acquisition on the financial statements
of the Company:
10
SBM Certificate Company and Subsidiaries
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
Pre-Acquisition Acquisition Post-Acquisition
December 5, 2003 Entries December 5, 2003
---------------- ------------ ----------------
Qualified assets
Cash and investments
Available-for-sale securities $ 6,665,571 42,427 1 $ 6,707,998
Mortgage notes held for sale 7,587,230 44,959 1 7,632,189
Mortgage notes held for investment 7,700,738 94,467 1 7,795,205
Warehouse line of credit receivable -- -- --
Investment in real estate partnerships 7,903,001 -- 7,903,001
Real estate tax lien certificates 602,609 -- 602,609
Real estate owned 2,760,509 (475,000) 1 2,285,509
Residual mortgage certificate 2,660,409 24,796 1 2,685,205
Certificate loans 68,575 -- 68,575
Cash and cash equivalents 600,654 1,357,026 2 1,957,680
------------ ------------ ------------
Total cash and investments 36,549,296 1,088,675 37,637,971
------------ ------------ ------------
Dividends and interest receivable 318,297 -- 318,297
------------ ------------ ------------
Total qualified assets 36,867,593 1,088,675 37,956,268
Other assets
Related party receivable 254,385 (4,989) 1 249,396
Fixed assets, net 198,684 -- 198,684
Investment in subsidiary -- -- --
Goodwill and intangible assets 591,463 (591,463) 1
3,636,030 1
7,045,080 3 10,681,110
Deferred acquisition costs, net 442,308 (442,308) 1 --
Due from shareholder 1,359,573 (2,547) 1
(1,357,026) 2 --
Allowance - due from shareholder (1,359,573) 1,359,573 1 --
Other assets 164,360 -- 164,360
------------ ------------ ------------
Total assets $ 38,518,793 10,731,025 $ 49,249,818
============ ============ ============
Liabilities
Statutory certificate liability $ 33,788,203 2,008,015 1 $ 35,796,218
Additional certificate liability -- --
Warehouse line of credit 2,068,000 2,068,000
Deferred revenue 1,295,890 (1,295,890) 1 --
Subscription and note payable 3,902,802 3,902,802
Accounts payable and other liabilities 419,634 419,634
Related party payable 18,084 18,084
------------ ------------ ------------
Total liabilities 41,492,613 712,125 42,204,738
------------ ------------ ------------
Shareholder's equity
Common stock, $1 par value; 10,000,000 shares
authorized; 250,000 shares issued and outstanding 250,000 (250,000) 1
250,000 3 250,000
Common stock, $2 par value; 10,000 shares
authorized; 10,000 shares issued and outstanding -- --
Additional paid-in capital 3,861,818 (3,861,818) 1
6,795,080 3 6,795,080
Accumulated comprehensive loss, net of taxes (246,339) 246,339 1 --
Accumulated deficit (6,839,299) 6,839,299 1 --
------------ ------------ ------------
Total shareholder's equity (2,973,820) 10,018,900 7,045,080
------------ ------------ ------------
Total liabilities and shareholder's equity $ 38,518,793 10,731,025 $ 49,249,818
============ ============ ============
1 - Adjust assets and liabilities to fair value in accordance with SFAS 141
2 - Record receipt of cash for repayment of due from shareholder
3 - To push down unallocated purchase price to reporting unit of value, SBM, in
accordance with SFAS 141
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
SBM's predecessor, SBN MN, was incorporated in June 1990 to assume the
face-amount certificate business of SBM Company, which began in 1914. ARM
purchased most of the assets of SBM Company 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 Purchase on July 19, 2000, SBM assumed the
obligations of SBM MN's outstanding face-amount certificates. On December 5,
2003 a change of control of ownership of 1st Atlantic occurred as disclosed in
"Item 1. Business: Significant Events." As of the Acquisition date, SBM
Financial, the parent company of SBM, was a 100% owned subsidiary of 1st
Atlantic. Effective December 31, 2003, Geneva became the sole member of SBM
Financial through a dividend by 1st Atlantic to Geneva of the 100% ownership
interest of SBM Financial. 1st Atlantic was previously the sole member of SBM
Financial and its subsidiaries.
SBM issues and services fixed rate face-amount certificates and provides
related services to holders of the certificates. ACFC performs mortgage lender
and mortgage broker activities and SBMS I is an entity newly formed for the
purpose of issuing privately placed investment notes to accredited investors.
SBMS I has yet to issue any investment notes or generate any revenue.
The Questioned Transactions involving John J. Lawbaugh, referred to in
"Item 1. Business: Significant Events," that are more fully described in Note 14
and Note 15 of the Notes to Consolidating Financial Statements in "Item 8.
Financial Statements and Supplementary Data," have had a materially adverse
impact upon the Company's financial condition, operations and ability to carry
on the sale of its face-amount certificates, which were suspended on August 16,
2002.
Financial Condition, Changes in Financial Condition and Results Of Operations
2003 compared with 2002
During 2003, total assets increased $16.1 million from $35.1 million in
2002 to $51.2 million in 2003, while certificate liability increased $2.8
million from $33.2 million in 2002 to $36.0 million in 2003. As of December 31,
2003, subscription and notes payable totaling $4.9 million were outstanding. The
increase in total assets during 2003 was mainly from cash and other assets
received by us from the Acquisition and the goodwill that resulted from the
Acquisition. Cash of $1,357,026 as repayment of the due from shareholder was
received in connection with the Acquisition. In addition, cash of $1,000,000 and
non-cash assets of $820,000 were received as additional paid in capital, which
occurred after the Acquisition as described in Note 1 to the Notes to the
Consolidating Financial Statements.
12
Goodwill with a carrying value of $9,032,609 as of December 31, 2003
resulted from the Acquisition. Goodwill was due to the fair value of the
purchase price being greater than the net assets acquired. The purchase price
was comprised of the following components, which are detailed by the
consideration's cost and fair value:
Description Cost Fair Value
- ----------- ---------- ----------
Cash for purchase of shares $2,532,981 $2,532,981
Required 1940 Act reserve contribution (cash) 3,200,000 3,200,000
Debt issued by SBM Financial 1,616,772 781,414
Legal costs to creditors of Estate 125,000 125,000
---------- ----------
Total consideration $7,474,753 $6,639,395
---------- ----------
The fair value of the purchase price of $7,474,753 is less than the cost
of the purchase price of $6,639,395 due to the notes issued by SBM Financial
totaling $1,616,772 having a fair value of $781,414. The fair value of the notes
is less than the cost due to the risk associated with the notes and the low
stated interest rate on the debt (1.5%). Since the notes are secured by the
common stock of SBM and will possibly be repaid from excess cash flow from the
operations of SBM, there is significant risk to the holder of these notes. This
risk, coupled with an interest rate that does not compensate for such risk,
would cause the fair value of the notes to be at a discount from their face
value. Net liabilities assumed through the Acquisition, including 1st Atlantic
and its subsidiaries, was $4,041,715, resulting in a purchase price in excess of
net liabilities assumed of $10,681,110. Of this amount, $1,648,501 was assigned
to intangible assets and $9,032,609 was assigned to goodwill.
The increase in certificate liability of $2,753,596 is primarily due to
the change in the estimate for early surrender of the liability following the
Acquisition. This change in the estimate resulted in an increase of certificate
liability at the Acquisition date of $2,008,015. The new estimate of certificate
liability is the account value less an estimate for early surrender charges
based on our history with regards to early surrender charges, which we estimate
to be approximately 4% of outstanding certificates will have early withdrawal
charges applied. We previously estimated that 100% of outstanding certificates
would have early withdrawal charges. The change in estimate is a result of our
operating history.
During 2003, qualified assets increased $1.3 million. The increase was a
result of the $2,357,026 of cash and $820,000 of non-cash assets received at the
time of Acquisition and thereafter. This increase in qualified assets was
decreased by operating losses of $1,805,032 for the year ended December 31,
2003. Certificate reserve deposits required by the 1940 Act increased $1,501,779
in 2003 due to interest credited on the certificate reserve liability.
Our earnings are derived primarily from net investment income and net
other operating income. Net investment income is income earned from invested
assets less investment and other expenses and interest credited on
thecertificate reserve liability. 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
13
return on investments. Changes in net other operating income is attributable to
changes in the volume and pricing of loans originated.
We had a net loss of $1,805,032 and $1,676,316 for the years ended
December 31, 2003 and 2002, respectively. The net loss for the years ended
December 31, 2003 and 2002, stemmed mainly from the net investment loss before
income tax of $1,367,253 and $1,388,507, respectively. The net other operating
loss before income taxes of $281,197 and reserve for losses - shareholder
receivable of $141,392 for the year ended December 31, 2003 also attributed to
the net loss for 2003. The reserve for losses - shareholder receivable of
$405,963 for the year ended December 31, 2002 added further to the net loss for
2002. See "Item 1. Business: Significant Events" to this Form 10-K and Note 14
and Note 15 of the Notes to the Consolidating Financial Statements for further
description of the reserve for losses - shareholder receivable. The net
investment loss before income taxes for 2003 and 2002 was due to the combination
of investment and other expenses and interest credited on certificate liability
exceeding the income generated from the investment portfolio. During 2003 and
2002, we held several non-revenue producing assets, which had a negative impact
on the income generated from the investment portfolio. However, the primary
reason for the net losses was the income generated from the investment portfolio
was not sufficient to cover the certificate interest costs and the fixed
operational costs related to the administrative services fee and legal and
accounting fees. When sales resume and the investment portfolio increases, the
fixed operational costs will have less of a negative impact on SBM as there is a
larger portfolio of assets generating income to cover the fixed costs. We do not
expect a significant increase in fixed costs as the investment portfolio
increases.
Investment income (excluding realized investment gains and losses) in 2003
was $2,765,689 compared to investment income of $2,438,503 for 2002. Total
investment income plus realized gains for 2003 and 2002 was $3,213,775 and
$2,911,224, respectively. Investment income plus realized investment gains
represents annualized investment yields of 10.17% and 10.69% on average cash and
investments of $31.6 million and $27.2 million for 2003 and 2002, respectively.
The increase in investment income is attributable to an increase in cash and
investments being held by the Company. The increase in average qualified assets
in 2003 was the result of the increased assets from the sale of face-amount
certificates in 2002, which were maintained throughout 2003.
Net investment spread, which is the difference between investment income
and interest credited on certificate liability, was $341,228 for 2003 compared
to $1,089,179 in 2002. On an annualized yield basis, these amounts reflect net
investment spread for 2003 and 2002 of 0.99% and 3.82%, respectively.
Interest credited on certificate liability for 2003 and 2002 was
$2,424,461 and $1,349,324, respectively. These amounts represent annualized
average rates of interest credited of 7.01% and 4.73% on average certificate
liability of $34.6 million and $28.5 million for 2003 and 2002, respectively. We
monitor 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 periodically
by SBM. In addition, during
14
2002 there were surrender charges recognized on 100% sales of new face-amount
certificates that reduced interest credited on certificate liability for 2002.
Investment and other expenses were $2,156,567 and $2,950,407 for 2003 and
2002, respectively. The decrease in investment and other expenses was mainly the
result of a decrease in advertising expense and a decrease in the administrative
services fee to SBM's parent, SBM Financial. Legal and accounting fees increased
from 2002 to 2003 as did other expenses. There were no advertising expenses in
2003 as compared to $361,739 for 2002. The decrease in advertising expense in
2003 was due to the halting of advertising as certificate sales were suspended.
The administrative services fee for the year ended December 31, 2003 and 2002
was $1,029,800 and $1,794,700, respectively. The decrease in the administrative
services fee of $715,861 was due to SBM Financial lowering its operational
costs, which are funded through the administrative services fee. Legal and
accounting fees for 2003 and 2002 were $553,747 and $371,090, respectively. The
increase in legal and accounting fees was due to legal and accounting costs
related to the Questioned Transactions being charged to due from shareholder
during 2002. In 2003 legal and accounting costs were charged to due from
shareholder until Mr. Lawbaugh filed for bankruptcy on May 29, 2003. After the
bankruptcy filing, any legal and accounting costs could not be charged to Mr.
Lawbaugh under Bankruptcy Law. Other expenses for 2003 and 2002 were $378,450
and $231,880, respectively. The increase in other expenses was attributable to
higher insurance costs and trail commissions paid to brokers. An increase in
directors' fees as a result of more Board meetings related to the Questioned
Transactions and the Acquisition by Geneva added further to the increase in
other expenses.
Net other operating income (loss) before income tax for the years ended
December 31, 2003 and 2002, was ($281,197) and $118,154, respectively. This
consists of the mortgage lender/broker operations of ACFC. For the years ended
December 31, 2003 and 2002, other operating income was $2,738,902 and
$2,261,801, 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 2003 as compared to 2002 was due to an increase in the volume of
loans originated. The first seven months of 2003 resulted in a higher volume of
loan originations from the same period in 2002. This increased loan origination
volume in 2003 was due to a low interest rate environment resulting in a high
volume of mortgage refinances. ACFC experienced a sharp decline in loan
origination volume in the last five months of 2003 as compared to the first
seven months of 2003. This was the result of an increase in market interest
rates, as well as, the sales division of the mortgage operations was
restructured and resulted in a significant reduction of staff. Both of these
events had a material negative impact on the financial results of ACFC in the
last five months of 2003, causing the net loss for 2003. By early 2004, ACFC had
replaced a significant portion of the loan sales staff that was lost in 2003 and
intends to continue increasing the sales staff throughout 2004 to increase
revenues. For the years ended December 31, 2003 and 2002, other operating
expenses were $3,020,099 and $2,143,647, 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 2003 as compared to 2002, was mainly due to higher commissions paid
on the increased revenues generated and higher interest expense from an increase
in the use of the warehouse line of credit.
15
Realized investment gains were $448,086 and $472,721 for 2003 and 2002,
respectively. The realized investment gains for 2003 were the result of a gain
of $828,503 recognized from the sale of property (see Note 12 to the Notes to
the Consolidating Financial Statements), loss on the sale of a loan of $20,474
and losses of $359,943 from the sale of available for sale securities. The
realized investment gains of $472,721 for 2002 was due to the sale of certain
available-for-sale securities, which had significant increases in their market
value from their amortized cost. Realized investment gains and losses are
primarily interest-rate related and attributable to our asset/liability
management strategies. We invest 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.
In the event that SBM experiences higher than historical levels of
certificate surrenders, SBM might need to liquidate investments other than in
accordance with its normal asset/liability management strategy and, as a result,
SBM could experience substantial realized investment losses.
For the year ended December 31, 2003 and 2002, reserve for losses -
shareholder receivable was $141,392 and $405,963, respectively. See "Item 1.
Business: Significant Events" and Note 14 of the Notes to Consolidating
Financial Statements for further descriptions of this item.
2002 compared with 2001
During 2002, total assets increased $11.2 million from $23.9 million in
2001 to $35.1 million in 2002, while certificate liability increased $9.4
million from $23.8 million in 2001 to $33.2 million in 2002. The increase in
total assets and certificate liability is primarily due to certificate sales
exceeding certificate maturities, redemptions and early surrenders.
Our earnings are derived primarily from net investment income and net
other operating income. Net investment income is income earned from invested
assets less investment and other expenses and interest credited on certificate
reserve liability. 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. Changes in net other operating income is
attributable to changes in the volume and pricing of loans originated.
We had a net loss of $1,676,316 and $1,681,812 for the years ended
December 31, 2002 and 2001, respectively. The net loss for the years ended
December 31, 2002 and 2001, stemmed mainly from the net investment loss before
income tax of $1,388,507 and $1,462,053, respectively, and the reserve for
losses - shareholder receivable of $405,963 and $469,982, respectively. See
"Item 1. Business: Recent Significant Events" to this Form 10-K and Note 14 and
Note 15 of the Notes to the Consolidating Financial Statements for further
description of the reserve for losses - shareholder receivable. The net
investment loss before income tax for 2002 and 2001 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.
16
During 2002 and 2001, we held several non-revenue producing assets, which had a
negative impact on the income generated from the investment portfolio. In
addition, high operational costs related to the administrative services fee,
legal fees and advertising resulted in an operating loss. The reserve for losses
- - shareholder receivable contributed further to the net loss for the years ended
December 31, 2002 and 2001.
Investment income (excluding realized investment gains and losses) in 2002
was $2,438,503 compared to investment income of $1,615,128 for 2001. Total
investment income plus realized gains for 2002 and 2001 was $2,911,224 and
$1,683,825, respectively. Investment income plus realized investment gains
represents annualized investment yields of 10.69% and 7.90% on average cash and
investments of $27.2 million and $21.3 million for 2002 and 2001, respectively.
The increase in investment income is attributable to an increase in cash and
investments being held by us and an increase in the yield of the investment
portfolio. The increase in investment portfolio yield was primarily due to
realized gains totaling $472,721 resulting from the sale of available-for-sale
securities.
Net investment spread, which is the difference between investment income
and interest credited on certificate liability, was $1,089,179 for 2002 compared
to $442,576 in 2001. On an annualized yield basis, these amounts reflect net
investment spread for 2002 and 2001 of 3.82% and 1.98%, respectively.
Interest credited on certificate liability for 2002 and 2001 was
$1,349,324 and $1,172,552, respectively. These amounts represent annualized
average rates of interest credited of 4.73% and 5.24% on average certificate
liability of $28.5 million and $22.4 million for 2002 and 2001, 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 SBM
periodically. In addition, there are surrender charges on new face-amount
certificates resulting in the overall decrease in the average crediting rate.
Investment and other expenses were $2,950,407 and $1,973,326 for 2002 and
2001, respectively. The increase in investment and other expenses was the result
of an increase in the administrative services fee to SBM's parent, SBM
Financial, and an increase in other operating expenses. The increase in the
administrative services fee was due to the payment of the fee to SBM Financial
in 2002 being classified solely as an administrative services fee, whereas, in
2001, the payment to SBM Financial was in the form of both an administrative
services fee totaling $1,078,839 and dividends of $579,934. Total dividends paid
plus the administrative services fee in 2002 and 2001 was $1,794,700 and
$1,658,773, respectively. Investment and other expenses were further increased
by higher advertising costs for the year ended December 31, 2002, as compared to
the year ended December 31, 2001. Advertising expense for the year ended
December 31, 2002 was $361,739 as compared to $93,422 for the year ended
December 31, 2001. The increase in advertising expense in 2002 was due to SBM's
advertising campaign associated with its retail sales division.
Net other operating income (loss) before income tax for the years ended
December 31, 2002 and 2001, was $118,154 and ($38,041), respectively. This
consists of the mortgage
17
lender/broker operations of ACFC. For the years ended December 31, 2002 and
2001, other operating income was $2,261,801 and $897,267, 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 year ended December 31,
2002 as compared to the year ended December 31, 2001 was due to an increase in
the volume of loans originated. For the years ended December 31, 2002 and 2001,
other operating expenses were $2,143,647 and $935,808, 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 year ended December 31, 2002 as compared to
the year ended December 31, 2001, was mainly due to higher commissions paid on
the increased revenues generated.
Realized investment gains were $472,721 and $68,697 for 2002 and 2001,
respectively. The increase in realized investment gains was due to the sale of
certain available-for-sale securities, which had significant increases in their
market value over their amortized cost. Realized investment gains and losses are
primarily interest-rate related and attributable to our asset/liability
management strategies. We invest 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.
In the event that SBM experiences higher than historical levels of
certificate surrenders, SBM might need to liquidate investments other than in
accordance with its normal asset/liability management strategy and, as a result,
SBM could experience substantial realized investment losses.
For the year ended December 31, 2002 and 2001, reserve for losses -
shareholder receivable was $405,963 and $469,982, respectively. See "Item 1.
Business: Significant Events" and Note 14 of the Notes to Consolidating
Financial Statements for further descriptions of this item.
Asset Portfolio Review
We invest our 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 as amended in 2003, and other such assets as the SEC may permit under
the 1940 Act. Our 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 our cash requirements. We have various
investment types as of December 31, 2003, which include fixed maturity
securities, equity securities, mortgage notes, real estate, real estate
partnerships, a residual mortgage certificate and real estate tax lien
certificates. We monitor our short-term liquidity needs to ensure that cash flow
from investments allows for the payment of all of our 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
18
investment strategy also is designed to provide protection of the investment
portfolio from adverse changes in interest rates.
Our investments in available-for-sale securities totaled $6,900,227 at
December 31, 2003, 20.51% of the investment portfolio (28.44% 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, corporate debt and closed-end mutual funds.
As of December 31, 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
market value is effected by market interest rates and 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. Our 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. We take into account
the current and expected future market environment in evaluating investment risk
and investment yields.
Based on the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," we classify our fixed maturity and
equity 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 2003, the fair value of
available-for-sale securities increased by $2,252,250. Due to the Acquisition,
the market value of the available for sale securities at the Acquisition date,
December 5, 2003, is now the cost basis of the securities. Any changes in market
value subsequent to the Acquisition date are adjusted to the carrying value of
the security with a corresponding charge to unrealized gains (losses).
Unrealized gain (loss), net of tax at December 31, 2003 and 2002 was $194,902
and ($2,055,348), respectively. 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 our available-for-sale securities without
reflecting offsetting changes in the value of our liabilities or other assets
creates volatility in reported shareholder's equity but does not reflect the
underlying economics of the Company's business.
Our investments in residential and commercial real estate mortgage notes
receivable totaled $15,991,009 at December 31, 2003, 47.54% of the investment
portfolio (40.73% at December 31, 2002). These real estate mortgage notes accrue
interest at rates ranging from 4.125% to 14.5% per annum and are secured by the
underlying real property. Our intention is to sell the mortgage notes held for
sale to a buyer under certain favorable market conditions. See Note 6 to the
Notes to Consolidating Financial Statements.
We hold investments in certain real estate partnerships with a carrying
value of $9,736,335 as of December 31, 2003. These partnerships directly acquire
or develop residential and commercial real estate and as of December 31, 2003 we
are obligated for future funding commitments to the partnerships of $4,902,802.
As of December 31, 2003, we have invested
19
$4,820,000 of our portfolio funds into the partnerships, 14.33% of the
investment portfolio. See Note 13 to the Notes to the Consolidating Financial
Statements.
Our investment in real estate tax lien certificates are comprised of
delinquent real estate tax bills purchased from municipalities at a premium.
They accrue interest at the rate of 20% per annum on the outstanding principal
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, 2003, the real estate tax lien certificates had a
balance of $460,252, 1.37% of the investment portfolio (5.05% at December 31,
2002). See Note 9 to the Notes to Consolidating Financial Statements.
We hold an investment in a residual mortgage certificate with a principal
balance of $2,685,180 as of December 31, 2003, 7.98% of the investment portfolio
(12.50% at December 31, 2002). The investment was purchased in 2002 and
represents an ownership interest in a trust (the "Trust") that owns a
securitized pool of mortgage loans. The residual interest we own is a
subordinate interest in the Trust. The individual mortgage notes held in the
Trust generate income to the Trust, which then pays certain operating costs of
the Trust and pays the owners with a guaranteed interest in the Trust. Any
excess income generated after these payments is then paid to us. We will only
receive payments if there is cash generated by the Trust in excess of operating
costs and payments to guaranteed interest holders. The weighted average coupon
rate of the underlying pool of mortgages is approximately 10.50% and the
weighted average pass-through rate paid to guaranteed interest holders is 4.70%,
the difference being the excess income generated by the Trust to pay operating
expenses, cover reserve losses and then make payments to us. See Note 10 to the
Notes to Consolidating Financial Statements.
We also own two parcels of real estate totaling $2,285,509 as of December
31, 2003, 6.80% of the investment portfolio (8.19% at December 31, 2002). These
properties were acquired through foreclosure of delinquent mortgage notes held
by us and are currently held for sale. See Note 11 to the Notes to Consolidating
Financial Statements. One of the properties was determined to have a decrease in
fair value of $475,000 as of the Acquisition date and the carrying value was
therefore adjusted. The fair value was based on a contract with a third party to
purchase the property.
Liquidity and Financial Resources
As of December 31, 2003, we had $542,410 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 SBM 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. SBM has $12.4 million of certificate obligations
coming due in 2004. In 2003, SBM experienced an 84% renewal rate; therefore,
management expects principal and interest payments to certificate holders to be
approximately $1.9 million in
20
2004. In connection with the Acquisition, SBM Financial issued debt instruments
totaling $1,616,772 with interest payable semi-annually at a rate of 1.5% per
annum. Cash flows generated from the Company may be used to service the debt
payments in 2004 and in subsequent years. Principal and interest payments to be
made for such debt in 2004 total $185,322. See Note 1 to the Notes to the
Consolidating Financial Statements.
At December 31, 2003, cash and cash equivalents totaled $1.4 million, a
decrease of $0.8 million from December 31, 2002. We aim to manage our cash and
cash equivalents position so as to satisfy short-term liquidity needs. In
connection with this management of cash and cash equivalents, we may invest idle
cash in short duration fixed maturities to capture additional yield when
short-term liquidity requirements permit.
Cash flows of $5.8 million, ($6.1) million and ($1.2) million were
generated from (used in) operating activities in 2003, 2002, and 2001,
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 $16.0 million, $8.9 million, and
$9.7 million in cash flows during 2003, 2002, and 2001, respectively, which were
offset by purchases of investments of $20.6 million, $16.6 million, and $7.9
million, respectively.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investments are represented by a mixture of available-for-sale
securities (comprised of government and corporate bonds, mortgage-backed
securities, closed-end mutual funds and equity securities), mortgage notes, real
estate, real estate partnerships and real estate tax lien certificates. Managing
interest rates between those earned on our investments and those paid under the
face-amount certificates is fundamental to our 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, we have a portion of our portfolio invested in real estate and
real estate loans, which includes $16.0 million of mortgage notes held for sale
and $2.3 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, we mitigate 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.
As of December 31, 2003 we also have investments in real estate
partnerships with a carrying value of $9,736,335 and future funding commitments
of $4,902,802, which are reflected as subscription and notes payable in the
financial statements. These partnerships were formed for the purpose of
acquiring and developing residential and commercial real estate. Acquiring or
developing commercial and residential real estate has risk related to the
construction and the
21
leasing and rental market for the respective properties, since leasing and
rental revenue is the source of cash flows for the properties. A strong leasing
and rental market could have a positive impact on projected performance, while a
weaker leasing and rental market could have a negative impact on future
projected cash flows from the investment. The partnership guidelines have
certain requirements on the type and quality of the real estate to be acquired
or developed. By investing in markets with low leasing vacancy rates, high
quality real estate and partnering with other groups with extensive building
management experience, we are able to moderate the risk for such investments in
relation to the expected return.
We also invest in real estate tax lien certificates, which have a balance
of $460,252 at December 31, 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 our first
priority lien on the property on which the tax is owed, and our general policy
of securing these investments, in most circumstances, only with properties in
which the amount paid by us to acquire the certificates is less than 10% of the
market value of the property that secures the investment.
Our ownership of the residual mortgage certificate was $2.7 million at
December 31, 2003 and represents a subordinate ownership interest in the Trust.
We assume the risk of default on the mortgages held within the Trust. Defaults
of principal and interest by borrowers will adversely affect our return on this
investment. A reserve for defaults was calculated into the original purchase
price to account for 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%.
We regularly analyze 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 our earnings if rates
moved higher or lower than the expected targets set in our investment
guidelines. We 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.
22
ITEM 9A. 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 Annual Report
on Form 10-K. 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 Annual Report on Form 10-K that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS
Certain information about the Company's directors and officers, including
their principal occupations for the past five years, is set out below. Members
of the Board who are considered "interested persons" of the Company under the
1940 Act are indicated by an asterisk (*). Officers are appointed annually at
the annual meeting of the Company's Board of Directors.
Each of the directors named below became a director of the Company in May 2000,
upon the organization of the Company, except that Eric M. Westbury became a
director and Chairman of the Board on January 28, 2004.
23
Positions with
Name and Age the Company Principal Occupations During the Past Five Years
- ------------------------------- -------------------------- --------------------------------------------------------
Eric M. Westbury (40)*......... Chairman of the Board and Chairman of the Board of Directors of the Company (since
President, Chief Executive January 28, 2004); President and Chief Executive
Officer Officer, of the Company, (since August 2002,; President
(since August 2000) and Executive Vice President (from
November 1999 to August 2000) of 1st Atlantic; 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.
Iraline G. Barnes (56)......... Director Director - Public Affairs Management, Duane Morris and
Associates; Special Counsel, Roseman & Colin (since
1999); Prior to that, Senior Judge, District of Columbia
Superior Court; Prior to that, Vice President of
Corporate Relations, Potomac Electric Power Co.
Kumar Barve (45)............... Director Majority Leader (since January 2003) and Delegate to the
Maryland House of Delegates (since January 1991);
Accountant/Chief Financial Officer, Environmental
Management Services, Inc. (Hazardous Waste Disposal and
Environmental Consulting)
Nancy Hopkinson (62)........... Director Retired (since 1996); prior to that, Teacher and School
Administrator, Montgomery County Public Schools
(Maryland)
Brian Murphy (60)*............. Director Partner, Griffin Farmer & Murphy LLP (law firm) and
predecessor law firms.
Marialice B. Williams(58) ..... Director Special Counsel to the Office of Public Charter School
Financing and Support; President, Risk Mitigation
Strategists, LLC; serving as consultant to develop
financial structuring for affordable supportive housing
transactions for the DC Department of Mental Health.
Trey Stafford (30) ............ Chief Financial and Chief Financial Officer (since July 2001) of the
Accounting Officer Company; Vice President of Finance and Accounting, SBM
Financial (since July 2001); Secretary of 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).
Dia H. Snowden (42) ........... Secretary Vice President of SBM Financial (since January 2004);
Secretary (since March 2002) of the Company; Client
Services Manager of the Company, (since July 2000);
prior to that, Corporate Administrator, The Washington
Development Group, Inc. (1996-1999) (private real estate
development and management company).
24
Board of Directors
The Board of Directors is responsible for the overall management of the
Company's business. Directors are elected annually at the Company's annual
meeting of shareholders. Each Director of the Company receives a $1,250 fee for
each regular or special Board meeting he or she attends. A Director who is also
an officer of the Company, however, receives no additional compensation for
service as a Director of the Company. Directors also are reimbursed for their
expenses incurred in attending any meeting of the Board. The Board generally
meets quarterly.
Audit Committee
The members of the Audit Committee consult with the Company's independent
auditors and meet as a committee at least four times annually to discuss the
scope and results of the annual audit of the Company and such other matters as
required by law or as the Committee members deem appropriate or desirable.
Iraline G. Barnes, Kumar Barve and Marialice B.Williams are members of the Audit
Committee. Members of the Audit Committee receive a fee of $750 for each meeting
and also receive a fee for time incurred related to Audit Committee duties
outside of scheduled meetings. Such a fee is based on a predetermined hourly
rate.
Investment Committee
The Board of Directors has recently formed an Investment Committee whose
members currently also are members of the Audit Committee. The Investment
Committee is responsible for ongoing oversight of the Company's investment
portfolio and its investment activities and practices, consistent with the
requirements of the Insurance Code of the District of Columbia as applicable to
face-amount certificate companies. The Investment Committee will meet with the
Company's management periodically to review the Company's investment portfolio,
activities and practices, and will receive reports from management on at least a
quarterly basis. At this time members of the Investment Committee receive no
compensation for their services in addition to their compensation as 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 SBM Financial. On December 5,
2003 Geneva acquired the majority of outstanding shares of common stock of 1st
Atlantic, which, at that date, was the sole member of SBM Financial. Effective
December 31, 2003, Geneva
25
became the sole member of SBM Financial through a dividend by 1st Atlantic to
Geneva of the 100% ownership interest of SBM Financial. Eric M. Westbury is the
sole member of Geneva.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 5, 2003, the Acquisition by Geneva closed as described more
fully in Note 1 to the Notes to the Consolidating Financial Statements. Geneva's
sole member is SBM's President and Chief Executive Officer, Eric M. Westbury.
SBM Financial provides the Company with administrative services pursuant
to an Administrative Services Agreement. This agreement stipulates that SBM
Financial shall provide certain administrative and support services for the
Company. Services include use of SBM Financial's property and equipment,
facilities and personnel needed for SBM-MD's daily operations. For providing
such services, SBM Financial 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 $2,500,000. The charge is determined monthly by SBM Financial and
the Company's management based on the costs incurred by SBM Financial for such
administrative and support services. During 2003, 2002 and 2001, a fee was
charged totaling $1,029,800, $1,794,700 and $1,078,839, respectively, and
payments for such fees were $1,029,800, $1,794,700 and $1,119,128, respectively.
From time-to-time the Company makes dividend payments to SBM Financial,
which, in turn, may make dividend payments to Geneva, SBM Financial's parent
since December 5, 2003. There have been no dividends paid since the Acquisition
by Geneva. During 2001, the Company paid $579,934 of cash dividends to SBM
Financial.
On December 12, 2003, Geneva contributed as additional paid in capital a
$500,000 interest in a real estate partnership and $1,000,000 cash to the
Company. In addition, on December 31, 2003, Geneva contributed as additional
paid in capital a $320,000 limited partner interest in a real estate
partnership.
On December 19, 2002, the Company made a mortgage loan in the amount of
$88,638, with interest at the rate of 12.5% per annum, to James M. Barnes,
husband of Iraline G. Barnes, a director of the Company. The loan, by its terms,
matured on May 1, 2003, and remains outstanding. However, the Company has been
advised by Mr. Barnes that he is in the process of seeking a refinancing of the
mortgage note held by the Company.
On September 30, 2001, SBM Financial contributed as additional paid in
capital a mortgage note to the Company which totaled $1,136,047 at that date. On
June 30, 2002 SBM Financial contributed an additional mortgage note which
totaled $639,227.
On September 30, 2001, SBM Financial through its then sole member, 1st
Atlantic, contributed as additional paid in capital to the Company a beneficial
interest in a property consisting of land and building held for sale which
totaled $410,087 at the date of the contribution. The basis in the property at
the contribution date is the original cost basis of the shareholders of 1st
Atlantic at the date of the original contribution to 1st Atlantic (September 30,
26
1998), increased for the expenditures made by 1st Atlantic and subsequently by
the Company in connection with the investment in the property held for sale. As
of December 31, 2001, the carrying amount of the property was $419,923. On
December 31, 2002, this property was sold (See Note 12 to the Notes to
Consolidating Financial Statements).
The Company made a mortgage loan to a partnership in which an affiliate
owned a 51% interest. As of December 31, 2001, the outstanding principal balance
of the mortgage note was $378,950 and accrued interest totaled $59,104. In April
2002, the outstanding principal balance of the mortgage note and accrued
interest was paid in full satisfaction on the receivable in the amount of
$533,120.
Due from shareholder totaling $1,218,181 as of December 31, 2002,
represents amounts paid to John J. Lawbaugh, the majority shareholder of 1st
Atlantic, directly or through companies affiliated with the shareholder and
other costs incurred by the Company related to those transactions. An allowance
has been recorded in the full amount due from shareholder (See Notes 14 and 15
to the Notes to Consolidating Financial Statements).
Related party receivable and related party payable represents certain
advances made by the Company to affiliates and advances the Company has received
from affiliates. Most advances relate to operational transactions. As of
December 31, 2003 and 2002, related party receivables total $219,371 and
$129,351 respectively. As of December 31, 2003 and 2002, related party payables
total $49,130 and $117,925, respectively.
A warehouse line of credit has been established between SBM and ACFC (See
Note 8 to the Notes to Consolidating Financial Statements).
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Following table shows fees that we paid (or accrued) for professional
services by our independent auditors for fiscal years 2003 and 2002:
Fiscal Fiscal
Fee Category 2003 2002
- ----------------------------- --------- ---------
Audit Fees $ 149,286 $ 33,942
Audit-Related Fees 2,825 16,947
Tax Fees 17,700 17,440
All Other Fees 7,437 --
--------- ---------
Total All Fees $ 177,248 $ 68,329
========= =========
27
Audit Fees
Consists of fees billed for professional services rendered for the audit
of our financial statements and review of the interim financial statements
included in quarterly reports.
Audit-Related Fees
Consists of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of our financial
statements that are not reported under "Audit Fees," and services that are
normally provided by our independent auditors in connection with statutory and
regulatory filings or engagements. These services include accounting
consultations in connection with acquisitions and consultations concerning
financial accounting and reporting standards.
Tax Fees
Consists of fees billed for professional services for tax compliance, tax
advice and tax planning. These services include tax planning, assistance with
the preparation of various tax returns, services rendered in connection with
acquisitions and advice on other tax-related matters.
All Other Fees
Consists of other fees not reported in the above categories. In fiscal
2002 and 2003, these services were in connection with the Questioned
Transactions.
Policy on Audit Committee Pre-Approval of Services Performed by the Independent
Auditors.
The Audit Committee's policy is to pre-approve at the beginning of each
fiscal year all audit and permissible non-audit services to be provided by the
independent auditors during that fiscal year. The Audit Committee pre-approves
these services by authorizing specific projects within the categories of
services outlined above, subject to a budget for each category. In addition, the
Audit Committee may also pre-approve particular services on a case-by-case
basis. The independent auditor and management must report to the Audit Committee
actual fees versus the budget periodically throughout the fiscal year.
28
ITEM 15. 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, 2003
Schedule II Investments in and Advances to Affiliates and Income Thereon -
December 31, 2003
Schedule III Mortgage loans on real estate and interest earned on Mortgages -
December 31, 2003
Schedule IV Real Estate Owned and Rental Income - December 31, 2003
Schedule V Qualified Assets on Deposit - December 31, 2003
Schedule VI Certificate Reserves-Year Ended December 31, 2003
Schedule VII Valuation and Qualifying Accounts-December 31, 2003
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.
29
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
(4)(b) Form of Account Statement
(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) Subsidiaries
(24) Powers of Attorney, incorporated by reference to Exhibit (24) of
Form 10-K for the year ended December 31, 2001 of SBM Certificate
Company (File No. 811-06268).
(31.1) Certification of Chief Executive Officer
(31.2) Certification of Chief Financial Officer
30
(32.1) Written Statement of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350
(99.1) Escrow Agreement dated November 14, 2002, among 1st Atlantic
Guaranty Corporation, John J. Lawbaugh and Baker Botts, as escrow
agent, incorporated by reference to Exhibit 99.1 to the Company's
Form 8-K dated November 12, 2002 (File No. 811-6268).
(99.2) Order Approving Settlement Agreement Between Chapter 11 Trustee, 1st
Atlantic Guaranty Corporation, Geneva Capital Partners, LLC, APT
Creditors, SBM Financial, LLC, SBM Certificate Company, Atlantic
Capital Funding Corporation and Escrow Agent dated December 2, 2003,
incorporated by reference to Exhibit 99.1 to Company's Form 8-K
dated December 2, 2003 (File No. 811-6268).
(99.3) Term Sheet Between Trustee, 1st Atlantic, Geneva, APT Creditors, SBM
Financial, SBM Certificate Company, ACFC, and Escrow Agent dated
November 7, 2003, incorporated by reference to Exhibit 99.2 to
Company's Form 8-K dated December 2, 2003 (File No. 811-6268).
(99.4) Stock Purchase Agreement By and Between Mark D. Taylor, Bankruptcy
Trustee, in his Capacity as Representative of John J. Lawbaugh
Bankruptcy Estate and Geneva Capital Partners, LLC dated as of
December 2, 2003, incorporated by reference to Exhibit 99.3 to
Company's Form 8-K dated December 2, 2003 (File No. 811-6268).
(99.5) Settlement and Release Agreement By and Between the Trustee, APT
Creditors and Geneva dated December 2, 2003, incorporated by
reference to Exhibit 99.4 to Company's Form 8-K dated December 2,
2003 (File No. 811-6268).
(99.6) Secured Promissory Notes By and Between SBM Financial, LLC, formerly
State Bond & Mortgage, LLC, and APT Creditors, incorporated by
reference to Exhibit 99.5 to Company's Form 8-K dated December 2,
2003 (File No. 811-6268).
(99.7) Security Agreement By and Between SBM Financial, LLC (formerly State
Bond & Mortgage, LLC), Escrow Agent and Noteholders pursuant to the
Settlement Agreement, incorporated by reference to Exhibit 99.6 to
Company's Form 8-K dated December 2, 2003 (File No. 811-6268).
(99.8) Consent to Entry of Final Judgment and Permanent Injunction Between
the Securities and Exchange Commission and 1st Atlantic Guaranty
Corporation dated December 2, 2003, incorporated by reference to
Exhibit 99.7 to Company's Form 8-K dated December 2, 2003 (File No.
811-6268).
31
(99.9) Final Judgment as to Defendant 1st Atlantic Guaranty Corporation
Entered by the United States District Court for the District of
Maryland dated December 8, 2003, incorporated by reference to
Exhibit 99.8 to Company's Form 8-K dated December 2, 2003 (File No.
811-6268).
(99.10) Letter of Preferrable Accounting Treatment from Reznick Fedder &
Silverman dated January 23, 2004.
(b) REPORTS ON FORM 8-K
SBM filed the following Current Reports on Form 8-K during the quarter
ended December 31, 2003:
Current Report on Form 8-K dated December 2, 2003 providing
information under Item 1 and Item 5.
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 30th day of March, 2004.
SBM Certificate Company
By: /s/ Eric M. Westbury
-----------------------
Eric M. Westbury
Chief Executive Officer
32
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/ Eric M. Westbury President & Chief Executive Officer March 30, 2004
- -------------------------
Eric M. Westbury
/s/ Trey Stafford Chief Financial and Accounting March 30, 2004
- ------------------------- Officer
Trey Stafford
/s/ Iraline G. Barnes Director March 30, 2004
- -------------------------
Iraline G. Barnes
/s/ Kumar Barve Director March 30, 2004
- -------------------------
Kumar Barve
/s/ Nancy Hopkinson Director March 30, 2004
- -------------------------
Nancy Hopkinson
/s/ Brain Murphy Director March 30, 2004
- -------------------------
Brian Murphy
/s/ Marialice B. Williams Director March 30, 2004
- -------------------------
Marialice B. Williams
33
SBM Certificate Company and Subsidiary
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT F-02
FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEETS F-03
CONSOLIDATING STATEMENTS OF OPERATIONS F-05
CONSOLIDATING STATEMENTS OF SHAREHOLDER'S EQUITY F-08
CONSOLIDATING STATEMENTS OF CASH FLOWS F-09
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS F-12
SUPPLEMENTAL SCHEDULES
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED
ISSUERS S-01
SCHEDULE II - INVESTMENTS IN ADVANCES TO AFFILIATES
AND INCOME THEREON S-03
SCHEDULE III - MORTGAGE LOANS ON REAL ESTATE AND
INTEREST EARNED ON MORTGAGES S-04
SCHEDULE IV - REAL ESTATE OWNED AND RENTAL INCOME S-05
SCHEDULE V - QUALIFIED ASSETS ON DEPOSIT S-06
SCHEDULE VI - CERTIFICATE RESERVES S-07
SCHEDULE VII - VALUATION AND QUALIFYING ACCOUNTS S-13
Schedules required by Article 6 of Regulation S-X other than those listed are
omitted because they are not required, are not applicable, or equivalent
information has been included in the financial statements and notes thereto, or
elsewhere herein.
F-01
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
SBM Certificate Company
We have audited the accompanying consolidating balance sheets of SBM
Certificate Company and Subsidiaries as of December 31, 2003 and 2002, and the
related consolidating statements of operations, shareholder's equity, and cash
flows for the years ended December 31, 2003, 2002 and 2001. 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 audits.
We conducted our audit 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 Subsidiaries at December 31, 2003 and 2002, and the
results of their operations and cash flows for the years ended December 31,
2003, 2002 and 2001, 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
January 23, 2004
F-02
SBM Certificate Company and Subsidiaries
CONSOLIDATING BALANCE SHEET
December 31, 2003
SBM Certificate
Company and Atlantic Capital Eliminating
SBMS I Funding Corp. Entries Totals
--------------- ---------------- ------------- -------------
Qualified assets
Cash and investments
Available-for-sale securities
(amortized cost: $6,705,325) $ 6,900,227 $ -- $ -- $ 6,900,227
Mortgage notes held for sale 5,653,398 2,542,405 -- 8,195,803
Mortgage notes held for investment 7,795,206 -- -- 7,795,206
Warehouse line of credit receivable 934,750 (934,750) --
Investments in real estate partnerships 9,736,335 -- -- 9,736,335
Real estate tax lien certificates 460,252 -- -- 460,252
Real estate owned 1,784,545 500,964 -- 2,285,509
Residual mortgage certificate 2,685,180 -- -- 2,685,180
Certificate loans 69,738 -- -- 69,738
Cash and cash equivalents 1,332,442 59,673 -- 1,392,115
------------- ------------- ------------- -------------
Total cash and investments 37,352,073 3,103,042 (934,750) 39,520,365
------------- ------------- ------------- -------------
Dividends and interest receivable 352,783 29,485 -- 382,268
------------- ------------- ------------- -------------
Total qualified assets 37,704,856 3,132,527 (934,750) 39,902,633
Other assets
Related party receivable 236,549 5,074 (22,252) 219,371
Fixed assets, net of accumulated depreciation
of $330 & $748 187,310 43,017 -- 230,327
Investment in subsidiary 990,203 -- (990,203) --
Goodwill 9,032,609 -- -- 9,032,609
Intangible asset - registration statement 755,202 -- 755,202
Intangible asset - client list 893,299 -- 893,299
Deferred acquisition costs, net 802 -- -- 802
Other assets 124,318 13,083 -- 137,401
------------- ------------- ------------- -------------
Total assets $ 49,925,148 $ 3,193,701 $ (1,947,205) $ 51,171,644
============= ============= ============= =============
Liabilities
Statutory certificate liability $ 32,912,452 $ -- $ -- $ 32,912,452
Additional certificate liability 3,029,970 -- -- 3,029,970
Warehouse line of credit -- 2,156,750 (934,750) 1,222,000
Subscription and note payable 4,902,802 -- -- 4,902,802
Accounts payable and other liabilities 607,018 7,290 -- 614,308
Related party payable 31,924 39,458 (22,252) 49,130
------------- ------------- ------------- -------------
Total liabilities 41,484,166 2,203,498 (957,002) 42,730,662
------------- ------------- ------------- -------------
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 8,615,080 1,082,548 (1,082,548) 8,615,080
Accumulated comprehensive income, net of taxes 194,902 -- -- 194,902
Accumulated deficit (619,000) (112,345) 112,345 (619,000)
------------- ------------- ------------- -------------
Total shareholder's equity 8,440,982 990,203 (990,203) 8,440,982
------------- ------------- ------------- -------------
Total liabilities and shareholder's equity $ 49,925,148 $ 3,193,701 $ (1,947,205) $ 51,171,644
============= ============= ============= =============
See accompanying summary of accounting policies and notes to
consolidating financial statements
F-03
SBM Certificate Company and Subsidiary
CONSOLIDATING BALANCE SHEET
December 31, 2002
SBM Certificate Atlantic Capital Eliminating
Company Funding Corp. Entries Totals
--------------- ---------------- ------------- -------------
Qualified assets
Cash and investments
Available-for-sale securities
(amortized cost: $11,245,510) $ 9,190,162 $ -- $ -- $ 9,190,162
Mortgage notes held for sale 7,124,110 6,039,718 -- 13,163,828
Warehouse line of credit receivable 3,008,900 -- (3,008,900) --
Real estate tax lien certificates 1,632,437 -- -- 1,632,437
Residual mortgage certificate 4,038,607 -- -- 4,038,607
Real estate owned 2,188,092 459,003 -- 2,647,095
Escrows 100,000 -- -- 100,000
Certificate loans 77,462 -- -- 77,462
Cash and cash equivalents 1,888,269 342,617 -- 2,230,886
------------- ------------- ------------- -------------
Total cash and investments 29,248,039 6,841,338 (3,008,900) 33,080,477
------------- ------------- ------------- -------------
Dividends and interest receivables 360,801 33,948 -- 394,749
------------- ------------- ------------- -------------
Total qualified assets 29,608,840 6,875,286 (3,008,900) 33,475,226
Other assets
Related party receivable 105,000 51,491 (27,140) 129,351
Fixed assets, net of accumulated depreciation
of $38,180 and $7,954 169,834 45,583 -- 215,417
Investment in subsidiary 1,188,857 -- (1,188,857) --
Goodwill 591,463 -- -- 591,463
Deferred acquisition costs, net 581,534 -- -- 581,534
Due from shareholder 1,218,181 -- -- 1,218,181
Allowance - due from shareholder (1,218,181) -- -- (1,218,181)
Other assets 108,923 13,146 -- 122,069
------------- ------------- ------------- -------------
Total assets $ 32,354,451 $ 6,985,506 $ (4,224,897) $ 35,115,060
============= ============= ============= =============
Liabilities
Statutory certificate liability $ 31,418,457 $ -- $ -- $ 31,418,457
Additional certificate liability 1,770,369 -- -- 1,770,369
Warehouse line of credit -- 5,551,500 (3,008,900) 2,542,600
Deferred revenue 1,640,425 -- -- 1,640,425
Real estate liabilities 870,317 -- -- 870,317
Accounts payable and other liabilities 208,457 127,425 -- 335,882
Related party payable 27,341 117,724 (27,140) 117,925
------------- ------------- ------------- -------------
Total liabilities 35,935,366 5,796,649 (3,036,040) 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
Common stock, $2 par value; 10,000 shares
authorized; 10,000 shares issued and outstanding -- 20,000 (20,000) --
Additional paid-in capital 3,861,818 1,621,481 (1,621,481) 3,861,818
Accumulated comprehensive income (loss), net of taxes (2,055,348) -- -- (2,055,348)
Accumulated deficit (5,637,385) (452,624) 452,624 (5,637,385)
------------- ------------- ------------- -------------
Total shareholder's equity (deficit) (3,580,915) 1,188,857 (1,188,857) (3,580,915)
------------- ------------- ------------- -------------
Total liabilities and shareholder's equity (deficit) $ 32,354,451 $ 6,985,506 $ (4,224,897) $ 35,115,060
============= ============= ============= =============
See accompanying summary of accounting policies and notes to
consolidating financial statements
F-04
SBM Certificate Company and Subsidiaries
CONSOLIDATING STATEMENT OF OPERATIONS
Year ended December 31, 2003
SBM Certificate
Company and Atlantic Capital Eliminating
SBMS I Funding Corp. Entries Totals
--------------- ---------------- ------------ ------------
Investment income
Interest and dividend income $ 478,171 $ 2,446 $ -- $ 480,617
Other investment income 61,762 -- -- 61,762
Loss from investment in subsidiary (183,208) -- 183,208 --
Loan fee income 90,173 -- -- 90,173
Mortgage interest income 2,008,818 293,156 (168,837) 2,133,137
------------ ------------ ------------ ------------
Total investment income 2,455,716 295,602 14,371 2,765,689
------------ ------------ ------------ ------------
Investment and other expenses
Administrative services fee 1,029,800 -- -- 1,029,800
Legal and accounting fees 553,747 -- -- 553,747
Deferred acquisition cost amortization and
renewal commissions 166,640 -- -- 166,640
Depreciation expense 14,344 13,586 -- 27,930
Other expenses 378,450 -- -- 378,450
------------ ------------ ------------ ------------
Total investment and other expenses 2,142,981 13,586 -- 2,156,567
------------ ------------ ------------ ------------
Interest credited on certificate liability 2,424,461 -- -- 2,424,461
------------ ------------ ------------ ------------
Net investment income (loss) before income taxes
and realized investment gains (2,111,726) 282,016 14,371 (1,815,339)
------------ ------------ ------------ ------------
Realized investment gains 448,086 -- -- 448,086
------------ ------------ ------------ ------------
Net investment income(loss) before income taxes (1,663,640) 282,016 14,371 (1,367,253)
------------ ------------ ------------ ------------
Other operating income
Origination fee income -- 583,966 -- 583,966
Gain on sale to investor -- 1,657,568 -- 1,657,568
Other loan fee income -- 497,368 -- 497,368
------------ ------------ ------------ ------------
Total other operating income -- 2,738,902 -- 2,738,902
------------ ------------ ------------ ------------
Other operating expenses
Salaries and commissions -- 1,922,604 -- 1,922,604
Other expenses -- 885,841 -- 885,841
Warehouse interest expense and charges -- 380,491 (168,837) 211,654
------------ ------------ ------------ ------------
Total other operating expenses -- 3,188,936 (168,837) 3,020,099
------------ ------------ ------------ ------------
Net other operating loss before income taxes -- (450,034) 168,837 (281,197)
------------ ------------ ------------ ------------
Net investment and other operating loss
before income taxes (1,663,640) (168,018) 183,208 (1,648,450)
Income tax expense -- (15,190) -- (15,190)
------------ ------------ ------------ ------------
Net investment and other operating loss (1,663,640) (183,208) 183,208 (1,663,640)
------------ ------------ ------------ ------------
Non operating expense:
Reserve for losses - shareholder receivable (141,392) -- -- (141,392)
------------ ------------ ------------ ------------
Net loss $ (1,805,032) $ (183,208) $ 183,208 $ (1,805,032)
============ ============ ============ ============
See accompanying summary of accounting policies and notes to
consolidating financial statements
F-05
SBM Certificate Company and Subsidiary
CONSOLIDATING STATEMENT OF OPERATIONS
Year ended December 31, 2002
SBM Certificate Atlantic Capital Eliminating
Company Funding Corp. Entries Totals
--------------- ---------------- ------------ ------------
Investment income
Interest and dividend income $ 594,509 $ 5,760 $ -- $ 600,269
Other investment income 46,490 13,613 -- 60,103
Income from investment in subsidiary 190,350 -- (190,350) --
Loan fee income 128,084 -- 128,084
Mortgage interest income 1,589,811 149,457 (89,221) 1,650,047
------------ ------------ ------------ ------------
Total investment income 2,549,244 168,830 (279,571) 2,438,503
------------ ------------ ------------ ------------
Investment and other expenses
Administrative services fee 1,794,700 -- -- 1,794,700
Legal and accounting fees 371,090 -- -- 371,090
Advertising and marketing 361,739 -- -- 361,739
Deferred acquisition cost amortization and
renewal commissions 165,522 -- -- 165,522
Depreciation expense 18,063 7,413 -- 25,476
Other expenses 231,880 -- -- 231,880
------------ ------------ ------------ ------------
Total investment and other expenses 2,942,994 7,413 -- 2,950,407
------------ ------------ ------------ ------------
Interest credited on certificate liability 1,349,324 -- -- 1,349,324
------------ ------------ ------------ ------------
Net investment income (loss) before income taxes
and realized investment gains (losses) (1,743,074) 161,417 (279,571) (1,861,228)
------------ ------------ ------------ ------------
Realized investment gains 472,721 -- -- 472,721
Income tax expense on realized investment gains -- -- -- --
------------ ------------ ------------ ------------
Net investment income(loss) before income taxes (1,270,353) 161,417 (279,571) (1,388,507)
------------ ------------ ------------ ------------
Other operating income
Origination fee income -- 435,561 -- 435,561
Gain on sale to investor -- 1,467,825 -- 1,467,825
Other loan fee income -- 358,415 -- 358,415
------------ ------------ ------------ ------------
Total other operating income -- 2,261,801 -- 2,261,801
------------ ------------ ------------ ------------
Other operating expenses
Salaries and commissions -- 1,620,017 -- 1,620,017
Other expenses -- 507,460 -- 507,460
Warehouse interest expense and charges, net -- 105,391 (89,221) 16,170
------------ ------------ ------------ ------------
Total other operating expenses -- 2,232,868 (89,221) 2,143,647
------------ ------------ ------------ ------------
Net other operating income before income taxes -- 28,933 89,221 118,154
------------ ------------ ------------ ------------
Net investment and other operating income
(loss) before income taxes (1,270,353) 190,350 (190,350) (1,270,353)
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net investment and other operating income (loss) (1,270,353) 190,350 (190,350) (1,270,353)
------------ ------------ ------------ ------------
Non operating expense:
Reserve for losses - shareholder receivable (405,963) -- -- (405,963)
------------ ------------ ------------ ------------
Net income (loss) $ (1,676,316) $ 190,350 $ (190,350) $ (1,676,316)
============ ============ ============ ============
See accompanying summary of accounting policies and notes to
consolidating financial statements
F-06
SBM Certificate Company and Subsidiary
CONSOLIDATING STATEMENT OF OPERATIONS
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 647,200 7,820 -- 655,020
------------ ------------ ------------ ------------
Total investment income 1,546,180 47,473 21,475 1,615,128
------------ ------------ ------------ ------------
Investment and other expenses
Administrative services fee 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 704,864 -- -- 704,864
------------ ------------ ------------ ------------
Total investment and other expenses 1,972,785 541 -- 1,973,326
------------ ------------ ------------ ------------
Interest credited on certificate liability 1,172,552 -- -- 1,172,552
------------ ------------ ------------ ------------
Net investment income (loss) before income taxes
and realized investment gains (losses) (1,599,157) 46,932 21,475 (1,530,750)
------------ ------------ ------------ ------------
Realized investment gains 68,697 -- -- 68,697
Income tax expense on realized investment gains -- -- -- --
------------ ------------ ------------ ------------
Net investment income(loss) before income taxes (1,530,460) 46,932 21,475 (1,462,053)
------------ ------------ ------------ ------------
Other operating income
Origination fee income 30,366 421,449 -- 451,815
Gain on sale to investor -- 378,034 -- 378,034
Other loan fee income -- 67,418 -- 67,418
------------ ------------ ------------ ------------
Total other operating income 30,366 866,901 -- 897,267
------------ ------------ ------------ ------------
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 income (loss) before income taxes 30,366 (68,407) -- (38,041)
------------ ------------ ------------ ------------
Net investment and other operating loss before income taxes (1,500,094) (21,475) 21,475 (1,500,094)
Deferred income tax benefit 288,264 -- -- 288,264
------------ ------------ ------------ ------------
Net investment and other operating loss (1,211,830) (21,475) 21,475 (1,211,830)
------------ ------------ ------------ ------------
Non operating expense:
Reserve for losses - shareholder receivable (469,982) -- -- (469,982)
------------ ------------ ------------ ------------
Net loss $ (1,681,812) $ (21,475) $ 21,475 $ (1,681,812)
============ ============ ============ ============
See accompanying summary of accounting policies and notes to
consolidating financial statements
F-07
SBM Certificate Company and Subsidiaries
CONSOLIDATING STATEMENTS OF SHAREHOLDER'S EQUITY
Years ended December 31, 2003, 2002 and 2001
SBM CERTIFICATE COMPANY and SBMS I
---------------------------------------------------------------------------------
Accumulated
Common Additional Other Com- Total
Stock Paid-in prehensive Accumulated Shareholder's
Shares Amount Capital Income (Loss) Deficit Equity
---------- ----------- ----------- ------------- ----------- -------------
Balance at December 31, 2000 250,000 $ 250,000 $ 1,676,457 $ 212,791 $(1,699,323) $ 439,925
Additional paid-in capital-noncash -- -- 1,546,134 -- -- 1,546,134
Changes in net unrealized gains (losses)
on available-for-sale securities, net of tax -- -- -- 4,657 -- 4,657
Net loss -- -- -- -- (1,681,812) (1,681,812)
-----------
Comprehensive loss (1,677,155)
Dividends paid, net -- -- -- -- (579,934) (579,934)
---------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 250,000 250,000 3,222,591 217,448 (3,961,069) (271,030)
Additional paid-in capital-noncash -- -- 639,227 -- -- 639,227
Changes in net unrealized gains (losses)
on available-for-sale securities, net of tax -- -- -- (2,272,796) -- (2,272,796)
Net loss -- -- -- -- (1,676,316) (1,676,316)
-----------
Comprehensive loss (3,949,112)
Dividends paid -- -- -- -- -- --
---------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2002 250,000 250,000 3,861,818 (2,055,348) (5,637,385) (3,580,915)
Changes in net unrealized gains (losses)
on available-for-sale securities, net of tax -- -- -- 1,809,009 -- 1,809,009
Net loss -- -- -- -- (1,186,032) (1,186,032)
-----------
Comprehensive income 622,977
Contributions (Dividends) -- -- -- -- -- --
Sale of SBM stock
(December 5, 2003) (250,000) (250,000) (3,861,818) 246,339 6,823,417 2,957,938
---------- ----------- ----------- ----------- ----------- -----------
Balance at December 5, 2003 -- -- -- -- -- --
Issuance of common stock 250,000 250,000 -- -- -- 250,000
Assets in excess of liabilities at
acquisition -- -- -- -- -- --
Allocation of purchase price to
reporting unit -- -- 6,795,080 -- -- 6,795,080
Additional paid-in-capital -- -- 1,000,000 -- -- 1,000,000
Additional paid-in-capital - noncash -- -- 820,000 -- -- 820,000
Changes in net unrealized gains (losses)
on available-for-sale securities, net of tax -- -- -- 194,902 -- 194,902
Net loss -- -- -- -- (619,000) (619,000)
---------- ----------- ----------- ----------- ----------- -----------
Comprehensive loss (424,098)
-----------
Balance at December 31, 2003 250,000 $ 250,000 $ 8,615,080 $ 194,902 $ (619,000) $ 8,440,982
========== =========== =========== =========== =========== ===========
ATLANTIC CAPITAL FUNDING CORPORATION
-------------------------------------------------------------------------------------
Total
Common Additional Total Consolidating
Stock Paid-in Accumulated Shareholder's Eliminating Shareholder's
Shares Amount Capital Deficit Equity Entries Equity
------- -------- ----------- ----------- ------------- ----------- -------------
Balance at December 31, 2000 10,000 $ 20,000 $ 1,553,957 $ (999) $ 1,572,958 $(1,572,958) $ 439,925
Additional paid-in capital-noncash -- -- 67,524 -- 67,524 (67,524) 1,546,134
Changes in net unrealized gains (losses)
on available-for-sale securities, net of tax -- -- -- -- -- -- 4,657
Net loss -- -- -- (21,475) (21,475) 21,475 (1,681,812)
-----------
Comprehensive loss (1,677,155)
Dividends paid, net -- -- -- -- -- -- (579,934)
------- -------- ----------- --------- ----------- ----------- -----------
Balance at December 31, 2001 10,000 20,000 1,621,481 (22,474) 1,619,007 (1,619,007) (271,030)
Additional paid-in capital-noncash -- -- -- -- -- -- 639,227
Changes in net unrealized gains (losses)
on available-for-sale securities, net of tax -- -- -- -- -- -- (2,272,796)
Net loss -- -- -- 190,350 190,350 (190,350) (1,676,316)
-----------
Comprehensive loss (3,949,112)
Dividends paid -- -- -- (620,500) (620,500) 620,500 --
------- -------- ----------- --------- ----------- ----------- -----------
Balance at December 31, 2002 10,000 20,000 1,621,481 (452,624) 1,188,857 (1,188,857) (3,580,915)
Changes in net unrealized gains (losses)
on available-for-sale securities, net of tax -- -- -- -- -- -- 1,809,009
Net loss -- -- -- (70,863) (70,863) 70,863 (1,186,032)
-----------
Comprehensive income 622,977
Contributions (Dividends) -- -- 97,000 (198,849) (101,849) 101,849 --
Sale of SBM stock
(December 5, 2003) (10,000) (20,000) (1,718,481) 722,336 (1,016,145) 1,016,145 2,957,938
------- -------- ----------- --------- ----------- ----------- -----------
Balance at December 5, 2003 -- -- -- -- -- -- --
Issuance of common stock 10,000 20,000 -- -- 20,000 (20,000) 250,000
Assets in excess of liabilities at
acquisition -- -- 983,548 -- 983,548 (983,548) --
Allocation of purchase price to
reporting unit -- -- -- -- -- -- 6,795,080
Additional paid-in-capital -- -- 99,000 -- 99,000 (99,000) 1,000,000
Additional paid-in-capital - noncash -- -- -- -- -- -- 820,000
Changes in net unrealized gains (losses)
on available-for-sale securities, net of tax -- -- -- -- -- -- 194,902
Net loss -- -- -- (112,345) (112,345) 112,345 (619,000)
------- -------- ----------- --------- ----------- ----------- -----------
Comprehensive loss (424,098)
-----------
Balance at December 31, 2003 10,000 $ 20,000 $ 1,082,548 $(112,345) $ 990,203 $ (990,203) $ 8,440,982
======= ======== =========== ========= =========== =========== ===========
See accompanying summary of accounting policies and notes to
consolidating financial statements
F-08
SBM Certificate Company and Subsidiaries
CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended December 31, 2003
SBM
Certificate
Company and Atlantic Capital Eliminating
SBMS I Funding Corp. Entries Totals
------------ ---------------- ------------ ------------
Cash flows from operating activities
Net income (loss) $ (1,805,032) $ (183,208) $ 183,208 $ (1,805,032)
Adjustments to reconcile net loss to net
cash provided by operating activities
Loss from investment in subsidiary 183,208 -- (183,208) --
Interest credited on certificate liability 2,424,461 -- -- 2,424,461
Reserve for losses-shareholder receivable 141,392 -- -- 141,392
Realized investment gains (448,086) -- -- (448,086)
Deferral of revenue 589,681 -- -- 589,681
Amortization of deferred acquisition costs and renewal commissions 166,640 -- -- 166,640
Depreciation 14,344 13,586 -- 27,930
Decrease in mortgage notes held for sale -- 3,399,935 -- 3,399,935
Decrease in dividends and interest receivable 8,018 4,463 -- 12,481
Decrease in shareholder receivable 1,218,181 -- -- 1,218,181
Changes in other assets and liabilities 244,587 (165,999) -- 78,588
------------ ------------ ------------ ------------
Net cash provided by operating activities 2,737,394 3,068,777 -- 5,806,171
------------ ------------ ------------ ------------
Cash flows from investing activities
Purchases of available-for-sale securities (2,193,422) -- -- (2,193,422)
Sales and redemptions of available-for-sale securities 6,237,633 -- -- 6,237,633
Warehouse line of credit fundings and repayments, net 2,074,150 -- (2,074,150) --
Purchase of mortgage notes receivable (13,276,411) -- -- (13,276,411)
Principal payments received on mortgage notes receivable 7,089,862 98,859 -- 7,188,721
Cash invested in real estate and real estate partnership interests (4,071,453) (41,961) -- (4,113,414)
Principal payments received on residual mortgage certificate 1,353,427 -- -- 1,353,427
Closing costs and real estate liabilities paid on sale of real estate (979,065) -- -- (979,065)
Proceeds from of real estate tax lien certificates 1,172,185 -- -- 1,172,185
Dividends from subsidiary 198,849 -- (198,849) --
Contributions to subsidiary (196,000) -- 196,000 --
Purchase of fixed assets (31,820) (11,020) -- (42,840)
Repayment of certificate loans, net 7,724 -- -- 7,724
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities (2,614,341) 45,878 (2,076,999) (4,645,462)
------------ ------------ ------------ ------------
Cash flows from financing activities
Amounts paid to face-amount certificate holders (1,678,880) -- -- (1,678,880)
Capital contributed to company 1,000,000 196,000 (196,000) 1,000,000
Warehouse line of credit borrowings, net -- (3,394,750) 2,074,150 (1,320,600)
Dividends paid -- (198,849) 198,849 --
------------ ------------ ------------ ------------
Net cash used in financing activities (678,880) (3,397,599) 2,076,999 (1,999,480)
------------ ------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (555,827) (282,944) -- (838,771)
Cash and cash equivalents, beginning 1,888,269 342,617 -- 2,230,886
------------ ------------ ------------ ------------
Cash and cash equivalents, end $ 1,332,442 $ 59,673 $ -- $ 1,392,115
============ ============ ============ ============
Cash paid for interest $ -- $ 174,449 $ -- 174,449
============ ============ ============ ============
Supplemental disclosure of significant noncash investing
and financing activities:
Contribution of assets from SBM Financial $ 820,000 $ -- $ -- $ 820,000
============ ============ ============ ============
See accompanying summary of accounting policies and notes to
consolidating financial statements
F-09
SBM Certificate Company and Subsidiary
CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended December 31, 2002
SBM
Certificate Atlantic Capital Eliminating
Company Funding Corp. Entries Totals
------------ ---------------- ------------ ------------
Cash flows from operating activities
Net income (loss) $ (1,676,316) $ 190,350 $ (190,350) $ (1,676,316)
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Income from investment in subsidiary (190,350) -- 190,350 --
Interest credited on certificate liability 1,349,324 -- -- 1,349,324
Reserve for losses-shareholder receivable 405,963 -- -- 405,963
Realized investment gains (472,721) -- -- (472,721)
Deferral of revenue 698,073 -- -- 698,073
Deferral of acquisition costs (326,963) -- -- (326,963)
Amortization of deferred acquisition costs and renewal commissions 165,522 -- -- 165,522
Depreciation 18,063 7,413 -- 25,476
Increase in mortgage notes held for sale -- (5,569,296) -- (5,569,296)
(Increase)Decrease in dividends and interest receivable 8,245 (30,100) -- (21,855)
Increase in shareholder receivable (405,963) -- -- (405,963)
Changes in other assets and liabilities (300,150) (14,012) -- (314,162)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (727,273) (5,415,645) -- (6,142,918)
------------ ------------ ------------ ------------
Cash flows from investing activities
Purchases of available-for-sale securities (8,895,620) -- -- (8,895,620)
Sales and redemptions of available-for-sale securities 4,679,696 -- -- 4,679,696
Warehouse line of credit fundings and repayments, net (3,008,900) -- 3,008,900 --
Purchase of mortgage notes receivable (942,340) -- -- (942,340)
Principal payments received on mortgage notes receivable 1,467,840 -- -- 1,467,840
Purchase of residual mortgage certificate (4,500,000) -- -- (4,500,000)
Principal payments received on residual mortgage certificate 461,393 -- -- 461,393
Purchase of real estate tax lien certificates (2,245,527) -- -- (2,245,527)
Proceeds from of real estate tax lien certificates 2,264,828 -- -- 2,264,828
Dividends from subsidiary 620,500 -- (620,500) --
Purchase of fixed assets (2,109) (34,178) -- (36,287)
Repayment of certificate loans, net 20,675 -- -- 20,675
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities (10,079,564) (34,178) 2,388,400 (7,725,342)
------------ ------------ ------------ ------------
Cash flows from financing activities
Amounts received from face-amount certificate holders 9,878,885 -- -- 9,878,885
Amounts paid to face-amount certificate holders (1,860,433) -- -- (1,860,433)
Warehouse line of credit borrowings, net -- 5,551,500 (3,008,900) 2,542,600
Dividends paid -- (620,500) 620,500 --
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 8,018,452 4,931,000 (2,388,400) 10,561,052
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,788,385) (518,823) -- (3,307,208)
Cash and cash equivalents, beginning 4,676,654 861,440 -- 5,538,094
------------ ------------ ------------ ------------
Cash and cash equivalents, end $ 1,888,269 $ 342,617 $ -- $ 2,230,886
============ ============ ============ ============
Cash paid for interest $ -- $ 195,186 $ -- $ 195,186
============ ============ ============ ============
Supplemental disclosure of significant noncash investing
and financing activities:
Contribution of assets from SBM Financial $ 639,227 $ -- $ -- $ 639,227
============ ============ ============ ============
Transfer of mortgage note receivable to REO $ 2,188,092 $ 352,732 $ -- $ 2,540,824
============ ============ ============ ============
Sale of property for mortgage note $ 2,232,342 $ -- $ -- $ 2,232,342
============ ============ ============ ============
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 $ (1,681,812) $ (21,475) $ 21,475 $ (1,681,812)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Loss from investment in subsidiary 21,475 -- (21,475) --
Interest credited on certificate liability 1,172,552 -- -- 1,172,552
Reserve for losses-shareholder receivable 469,982 -- -- 469,982
Realized investment gains (117,674) -- -- (117,674)
Deferred income tax benefit (239,287) -- -- (239,287)
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 (246,517) 33,636 -- (212,881)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (1,166,903) 8,854 -- (1,158,049)
------------ ------------ ------------ ------------
Cash flows from investing activities
Sales and redemptions of available-for-sale securities 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 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 SBM Financial $ 1,546,134 $ -- $ -- $ 1,546,134
============ ============ ============ ============
See accompanying summary of accounting policies and notes to
consolidating financial statements
F-11
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 1 - ORGANIZATION AND BUSINESS
Organization and Acquisitions
SBM Certificate Company and Subsidiaries (the "Company") consists of SBM
Certificate Company, a Maryland Corporation ("SBM"), Atlantic Capital
Funding Corporation, a Maryland Corporation ("ACFC"), and SBM Securities
I, LLC, a Delaware limited liability company ("SBMS I"). SBM was formed on
May 24, 2000 under the laws of the State of Maryland. SBM is a
wholly-owned subsidiary of SBM Financial, LLC ("SBM Financial"), formerly
known as State Bond and Mortgage Company, LLC ("State Bond"). Effective
December 31, 2003, Geneva Capital Partners, LLC, a Delaware limited
liability company ("Geneva"), became the sole member of SBM Financial
through a dividend to Geneva of the 100% ownership interest of SBM
Financial by 1st Atlantic Guaranty Corporation ("1st Atlantic"). 1st
Atlantic was previously the sole member of SBM Financial and its
subsidiaries.
SBM is an issuer of face-amount certificates and is registered under the
Investment Company Act of 1940 (the "1940 Act"). ACFC and SBMS I are both
wholly owned subsidiaries of SBM. ACFC was formed on March 27, 1997 under
the laws of the state of Maryland and SBMS I was formed on July 1, 2003
under the laws of the state of Delaware.
On May 29, 2003, John Lawbaugh, 1st Atlantic's majority shareholder at the
time, 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 ("Bankruptcy Court").
On November 7, 2003, 1st Atlantic, Geneva and the Chapter 11 Bankruptcy
Trustee (the "Trustee"), as representative of the bankruptcy estate of
John J. Lawbaugh (the "Estate"), agreed to a settlement proposal for the
sale of John J. Lawbaugh's 7,500,000 shares of 1st Atlantic common stock
(the "Shares") to Geneva. An emergency motion was filed in Bankruptcy
Court on November 10, 2003 for the approval of the sale of the Shares to
Geneva under such proposal. On December 2, 2003, the Bankruptcy Court
granted the motion approving the settlement proposal for the sale of the
Shares free and clear of all liens and ordered the sale of the Shares to
take place immediately. On December 5, 2003, the sale of the Shares closed
pursuant to the terms of the Stock Purchase Agreement by and between the
Trustee and Geneva dated December 2, 2003 (the "Sale Agreement") (the
"Acquisition"). The Trustee sold the Shares to Geneva for $2,532,981,
which was distributed to 1st Atlantic and the Company in the amounts of
$1,175,955 and $1,357,026, respectively, to repay the amounts due from Mr.
Lawbaugh to 1st Atlantic and SBM (See Note 13). In addition, Geneva
contributed $3,200,000 as additional paid in capital to 1st Atlantic to
resolve the SEC's
F-12
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 1 - ORGANIZATION AND BUSINESS (Continued)
Organization and Acquisitions (Continued)
concerns regarding 1st Atlantic's compliance with the reserve requirements
of Section 28 of the 1940 Act. Further, SBM Financial issued debt
instruments secured by the common stock of SBM totaling $1,616,772 to
certain creditors of the Estate. The debt matures ten years from the date
of issuance and has principal and interest payments due semi-annually with
interest accruing at the rate of 1.5% per annum. Cash flows generated from
the operations of the Company may be used to pay the interest and
principal of the debt as it becomes due. A total of $125,000 was also paid
by Geneva to the Trustee and certain other creditors of the Estate.
Immediately after closing, Geneva made an additional cash and non-cash
contribution to the Company of $1,000,000 cash and a $820,000 partnership
interest in two separate real estate investment funds, which was treated
as additional paid in capital.
Geneva obtained funds to acquire the Shares from the issuance of privately
placed investment notes to unaffiliated investors. The investment notes
provide for a fixed interest rate of 3.75%, payable quarterly, and mature
in 2006, three years from the date of the issuance. The funds obtained to
acquire the Shares and the additional capital contributed by Geneva after
the sale of the Shares are projected to be repaid at their maturity from
excess cash flows generated from the operations of the Company.
The acquisition was accounted for using the purchase method of accounting
in accordance with Statements of Financial Accounting Standards ("SFAS")
141, "Accounting for Business Combinations."
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of the Acquisition and the
significant non-cash investing and financing activities related to the
Acquisition:
At December 5, 2003
Qualified Assets $ 36,599,242
Other Assets 612,440
Due From Shareholder 1,357,026
Intangible Assets 1,648,501
Goodwill 9,032,609
------------
Total Assets Acquired $ 49,249,818
------------
F-13
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 1 - ORGANIZATION AND BUSINESS (Continued)
Organization and Acquisitions (Continued)
Certificate Liability $ 35,796,218
Warehouse Line of Credit 2,068,000
Other Liabilities 4,340,520
------------
Total Liabilities Assumed $ 42,204,738
------------
Net Assets Acquired $ 7,045,080
------------
Of the $1,648,501 of intangible assets, $755,202 was assigned to SBM's
registration statement to sell face-amount certificates, which is not
subject to amortization, and $893,299 was assigned to SBM's existing
client list and will be amortized over the expected remaining life of the
client list of 10 years.
As a result of the Acquisition, goodwill of $9,032,609 was assigned to the
Company, which is not deductible for tax purposes.
Nature of Operations
SBM 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.
SBM offers various series of single-payment investment certificates. SBM'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.
ACFC is a mortgage broker and lender that originates residential and
commercial loans. SBMS I is an issuer of privately placed investment notes
to accredited investors, but has not yet completed any offerings to
investors.
F-14
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 2 - 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 and its
wholly-owned subsidiaries, ACFC and SBMS I. SBM and SBMS I are presented
in consolidated form and ACFC is separately presented in the consolidating
financial statements. All significant intercompany balances and
transactions have been eliminated.
Reclassification
Certain balances on the December 31, 2001 Statements of Operations have
been reclassified to conform to the December 31, 2003 and 2002 financial
statement presentation.
Cash and Available-for-Sale Securities
Fixed maturity 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 SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
amortized cost of fixed maturity securities 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-15
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Available-for-Sale Securities (Continued)
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.
Investment in Real Estate Partnerships
Investment in real estate partnerships consists of ownership in three
partnerships that directly acquire or develop real estate. The Company is
a limited partner in all three partnerships and, therefore, accounts for
the investment using the equity method. Profits and losses and
distributions are governed by the individual partnership agreements.
The investment in real estate partnerships is recorded in accordance with
the equity method of accounting. Under the equity method of accounting,
the investment in the partnerships is carried at cost and is adjusted for
the Company's share of the partnerships' results of operations, is
increased by the cash contributions made and commitments to make future
additional contributions and is decreased by the cash distributions
received by the Company.
F-16
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Real Estate Partnerships (Continued)
The equity in the loss of each partnership allocated to the Company is not
recognized to the extent that the investment balance would become
negative.
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 estimates of unrecoverable amounts.
Residual Mortgage Certificate
The residual mortgage certificate represents an ownership interest in a
securitization trust. The assets of the securitization trust consist of
mortgage loans secured by first liens on residential real properties
having original terms to stated maturity of not greater than 30 years.
The residual mortgage certificate represents a subordinate right to
receive excess cash flow, if any, generated by the related mortgage pool.
A holder of a residual mortgage certificate has the right to receive the
difference, if any, between the interest payments due on the mortgage
loans sold to the securitization trust and the interest payments due, at
the pass-through rates, to the holders of the pass-through certificates of
the same series, less contractual servicing fees, trustee fees and any
insurer premiums, reimbursements and other costs and expenses of
administering the securitization trust. The Company will receive cash
payments only if there are any amounts remaining following payment by the
securitization trust of all amounts owing on all other securities issued
by that securitization trust and the payment of expenses.
The excess cash flow of a securitization trust in any month is applied:
o first, to cover any losses on the mortgage loans in the
related mortgage pool;
o second, to reimburse the insurer, if any, of the related
series of pass-through certificates for amounts paid by or
otherwise owing to that insurer;
o third, to build or maintain the overcollateralization for that
securitization trust at the required level by being applied as
an accelerated payment of principal to the holders of the
pass-through certificates of the related series;
F-17
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Residual Mortgage Certificate (Continued)
o fourth, to reimburse holders of the subordinated certificates of the
related series of pass-through certificates for unpaid interest and
for any losses previously allocated to those certificates;
o fifth, to the related residual mortgage certificate.
The fair value of a residual mortgage certificate is determined by using certain
assumptions regarding the underlying mortgage loans. These estimates primarily
include: future rate of prepayment, credit losses, and the discount rate used to
calculate present value. The value of the residual mortgage certificate
represents the discounted future cash flows from such certificate based upon
management's best estimate. Management monitors the performance of the loans
underlying each certificate and any changes in the estimates and assumptions
(and consequent changes in value of the certificate) is reflected in interest
income in the quarter in which any such change in estimate is made. Although
management believes that the assumptions it uses are reasonable, there can be no
assurance as to accuracy of the assumptions or estimates. Interest is recognized
based on an effective yield over the estimated life of the certificate. Cash in
excess of the income earnings under the effective yield is either a reduction of
principal or deferred and reflected as deferred revenue on the balance sheet
based on management's estimates of future cash flows.
Real Estate Owned
Real estate properties acquired through, or in lien of, loan foreclosure are
initially recorded at the lower of cost or market value at the date of
foreclosure. After foreclosure, valuation analyses are periodically performed by
management to determine whether subsequent write-downs to the carrying value are
necessary. Additional expenditures related to maintaining the value of the
property are capitalized to the basis of the real estate. Real estate owned by
the Company is held for sale.
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.
F-18
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Following the acquisition of SBM's predecessor by State Bond on July 19, 2000, a
methodology for calculating the certificate liability was adopted and
implemented, whereby the certificate liability is carried at the certificate's
surrender value. 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 of shareholder's equity.
Following the Acquisition by Geneva on December 5, 2003, the certificate
liability is carried at the account value less an estimate for early surrender
charges based on the Company's history with regard to early surrenders. These
methods are in accordance with accounting principles generally accepted in the
United States of America.
Subscription and Note Payable
Subscription and note payable represent contractual commitments of the Company
to invest funds in real estate partnerships at a future date.
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.
F-19
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill
Goodwill for the year ended December 31, 2003 resulted from the
Acquisition transaction that closed on December 5, 2003 (See Note 1).
Goodwill for the year ended December 31, 2002 resulted from a previous
acquisition transaction, which closed on July 19, 2000. Beginning in
fiscal year 2002 with 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 Company
adopted the provisions of SFAS No. 142 on January 1, 2002.
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 and
mortgage interest income when earned on an accrual basis. Income from
investment on the residual mortgage certificate is earned on an effective
yield method. 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.
Advertising Costs
The Company expenses the costs of advertising as incurred. Advertising
expense for the years ended December 31, 2003, 2002 and 2001 was $0,
$361,739, and $93,422, respectively.
F-20
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 3 - AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated fair values of available-for-sale securities
were as follows:
Gross Gross
December 31, 2003 Cost Unrealized Gain Unrealized Loss Fair Value
------------ --------------- --------------- ------------
Fixed Maturities
Corporate debt securities $ 1,173,538 $ 3,000 $ 13,500 $ 1,163,038
U.S. Treasury securities
and obligations of U.S.
government agencies 322,739 -- 178 322,561
Obligations of state and
political subdivisions 5,000 5 -- 5,005
------------ ------------ ------------ ------------
Total fixed maturities 1,501,277 3,005 13,678 1,490,604
Equity Securities 5,204,048 205,575 -- 5,409,623
------------ ------------ ------------ ------------
Total available-for-sale
securities $ 6,705,325 $ 208,580 $ 13,678 $ 6,900,227
============ ============ ============ ============
December 31, 2002
Fixed Maturities
Corporate debt securities $ 4,063,076 $ -- $ 504,361 $ 3,558,715
U.S. Treasury securities
and obligations of U.S.
government agencies 366,298 1,997 -- 368,295
Foreign governments --
Asset-backed securities --
Obligations of state and
political subdivisions 70,156 5,096 -- 75,252
------------ ------------ ------------ ------------
Total fixed maturities 4,499,530 7,093 504,361 4,002,262
Equity Securities 6,745,980 -- 1,558,080 5,187,900
------------ ------------ ------------ ------------
Total available-for-sale
securities $ 11,245,510 $ 7,093 $ 2,062,441 $ 9,190,162
============ ============ ============ ============
F-21
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 3 - AVAILABLE-FOR-SALE SECURITIES (Continued)
The amortized cost and estimated fair value of fixed maturity available-for-sale
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, 2003 December 31, 2002
-------------------------- --------------------------
Estimated Estimated
Cost fair value Cost fair value
----------- ----------- ----------- -----------
FIXED MATURITIES
Due in one year
or less $ 547,976 $ 547,981 $ 780,640 $ 749,768
Due after one year
through five years 55,078 55,078 1,291,607 1,382,023
Due after five years
through ten years 321 299 51,360 56,735
Due after ten years 897,902 887,246 2,375,923 1,813,736
----------- ----------- ----------- -----------
Total fixed maturities $ 1,501,277 $ 1,490,604 $ 4,499,530 $ 4,002,262
=========== =========== =========== ===========
Gains of $71,757, $389,709, and $64,966 were realized on sales of fixed
maturities classified as available-for-sale for the years ended December 31,
2003, 2002, and 2001, respectively.
Gains (losses) of ($431,700), $83,012, and $3,731 were recognized on
equity securities sold during 2003, 2002 and 2001, respectively.
F-22
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 4 - COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources, including net income and the change in unrealized gains
or losses on the Company's available-for-sale securities.
The following table reconciles, for available-for-sale securities, 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,
---------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net unrealized gain (loss)
arising during period on
available-for-sale securities $ 1,667,399 $ (1,985,559) $ 50,079
Reclassification adjustment
for net realized (gains)
losses included in net
income 336,512 (287,237) (45,422)
Acquisition Adjustment
(Fair value) 246,339 -- --
------------ ------------ ------------
Change in net unrealized gains
(losses) on available-for-
sale securities $ 2,250,250 $ (2,272,796) $ 4,657
============ ============ ============
F-23
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 5 - FIXED ASSETS
Fixed assets are as follows as of December 31, 2003 and 2002:
2003 2002
---------- ----------
Land and building $ 125,236 $ 129,887
Furniture and fixtures 22,085 23,512
Computer equipment 84,084 108,152
---------- ----------
Total cost 231,405 261,551
Less accumulated depreciation 1,078 46,134
---------- ----------
$ 230,327 $ 215,417
========== ==========
NOTE 6 - MORTGAGE NOTES HELD FOR SALE
At December 31, 2003, the Company held residential and commercial mortgage notes
for sale of $8,195,803. Mortgage notes held for sale totaling $2,009,750 have
purchase commitments from investors and in 2004 the Company sold these mortgage
notes. As a result of the sale of these mortgage notes, the Company received
funds totaling $2,029,592 from the sale, recognized income in the amount of
$19,842, and repaid borrowings from the warehouse lines of credit of $2,009,750.
The remaining $6,186,053 of mortgage notes held for sale do not have purchase
commitments from investors, but it is the Company's intention to sell the notes
to a buyer under certain favorable market conditions. The notes accrue interest
at rates ranging from 4.125% to 14.5%, are secured by real property and have
maturity dates through February 2033. The Company has begun foreclosure
proceedings on mortgage notes held for sale totaling $382,110. At December 31,
2002, the Company held residential and commercial mortgage notes receivable for
sale of $13,163,828, net of capitalized origination fees of $153,509 and
deferred direct loan costs of $48,204.
F-24
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 7 - MORTGAGE NOTES HELD FOR INVESTMENT
The Company holds mortgage notes receivable as of December 31, 2003 as
long-term investments with a total carrying value of $7,795,206. These
notes are serviced by the Company and are secured by real property. The
notes accrue interest at rates ranging from 6% to 12% with maturity dates
through November 2006.
NOTE 8 - WAREHOUSE FACILITIES
As part of its mortgage lender operations, ACFC has established warehouse
lines of credit . The warehouse facilities provide funds to ACFC to
purchase mortgage notes in connection with ACFC's mortgage lender
operations.
SBM Certificate Company
A warehouse line of credit was established on May 21, 2002 between SBM-MD
and ACFC. The available line of credit is for an amount up to $4,500,000.
Interest is payable at the Wall Street Journal's Prime plus 2% (prime was
4.0% at December 31, 2003). Borrowings under the line are secured by the
mortgage note receivable purchased with the funds advanced. Borrowings are
repaid to SBM when ACFC sells the loans to investors. As of December 31,
2003, the outstanding principal on the line of credit is $934,750.
Mortgage notes receivable held for sale with an aggregate carrying value
of $934,798 are collateral for the line of credit. Such amount has been
eliminated in consolidation.
Provident Bank
ACFC established a warehouse line of credit with Provident Bank for an
amount up to $3,000,000. Interest is payable at the earlier of 45 days
from when funded or when the mortgage notes are sold. Interest is payable
at the 30-day LIBOR Rate plus 2% (30-day LIBOR Rate was 1.12% at December
31, 2003). As of December 31, 2003, the outstanding balance of this
warehouse line of credit is $1,222,000, which is secured by mortgage notes
held for sale with an aggregate carrying value of $1,225,939.
F-25
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 9 - REAL ESTATE TAX LIEN CERTIFICATES
The Company held investments in real estate tax lien certificates at
December 31, 2003 in the amount of $460,252. These certificates are
purchased at a premium and 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, 2003 and 2002, was $106,289 and $259,768,
respectively, and accrued interest at December 31, 2003 and 2002, was
$121,803 and $195,877, respectively. The Company recovers the cost of its
investment plus unpaid accrued interest from pass through payments from
the municipality, which receives payments directly from the taxpayers. 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 investment purchase.
NOTE 10 - RESIDUAL MORTGAGE CERTIFICATE
The Company holds a residual mortgage certificate in the amount of
$2,685,180 as of December 31, 2003. The fair value of the investment
represents the discounted cash flows the Company expects to receive in the
future from the investment based on management's estimate. The primary
factors in determining future cash flows are future rate of prepayment of
the mortgage loans in the securitization trust, credit losses on these
mortgage loans, the unpaid principal balance of the mortgage loans, and
the discount rate used to calculate present value. Interest income from
the residual mortgage certificate for the year ended December 31, 2003 was
$869,601. Interest is calculated based on the Company's estimates of the
effective yield of the investment. Factors in determining the effective
yield include the weighted average coupon rate of the underlying mortgage
notes, the interest rate of the pass-through certificates in the
securitization trust, and the rate of default on interest payments. Cash
received from the securitization trust in excess of the estimated
effective yield is recorded as deferred revenue or applied to principal,
based on management's estimates of future cash flows.
NOTE 11 - REAL ESTATE OWNED
As of December 31, 2003 and 2002, the Company has real estate owned
consisting of two properties with a total carrying value of $2,285,509 and
$2,647,095, respectively. These properties are held for sale.
F-26
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 12 - PROPERTY HELD FOR SALE
On September 30, 2001, SBM Financial through its sole member, 1st
Atlantic, contributed a beneficial interest in a property consisting of
land and building held for sale as additional paid in capital to the
Company which totaled $410,087 at the date of contribution to the Company.
The basis in the property at the contribution date is the original cost
basis of the shareholders of 1st Atlantic at the date of the original
contribution to 1st Atlantic (September 30, 1998), increased for the
expenditures made by 1st Atlantic and subsequently by the Company in
connection with the investment in the property held for sale. As of
December 31, 2001, the carrying amount of the property was $419,923.
On December 31, 2002, the Company closed on a contract with an unrelated
third party for the sale of this property, which had a carrying value of
$524,648 at December 31, 2002. Under the terms of the contract, the sales
price was $2,332,000. Proceeds were received in the form of mortgage notes
of $1,742,000 and $490,000 and cash held in an escrow in the amount of
$100,000. In connection with the sale, the Company paid $979,065 for real
estate tax liens and other costs during 2003. The amount of $865,000 was
accrued as a real estate liability at December 31, 2002. The gain on the
sale of the property was not realized in 2002 and was classified as
deferred revenue as of December 31, 2002 in accordance with SFAS 66,
"Accounting for Sales of Real Estate." The gain is recognized under the
installment method as cash is received in accordance with SFAS 66. On June
17, 2003, net proceeds of $1,624,174 were received by the Company as
payment for the outstanding mortgage notes. This payment was net of
certain real estate tax liens and other closing costs. In addition, the
Company paid an additional $271,473 of real estate liabilities, resulting
in a realized gain of $828,053 from the sale of the property during 2003.
NOTE 13 - INVESTMENT IN REAL ESTATE PARTNERSHIPS
On December 12, 2003, Geneva contributed, as additional paid in capital,
its limited partner interest in a real estate partnership to the Company.
Geneva had funded $500,000 to the real estate partnership as of December
12, 2003 and also had a subscription commitment to fund an additional
$1,000,000 at a future date. At the date of this contribution, the Company
assumed the interest in the partnership of $1,500,000 and the subscription
payable of $1,000,000. The $1,000,000 subscription payable was funded by
the Company in 2004.
The Company is a member of a partnership formed for the purpose of
developing certain commercial real estate. The Company's ownership
percentage is 16% of the partnership and under the terms of the operating
agreement the Company is obligated to make total equity contributions
totaling $8,000,000. The Company is also entitled to a preferred
distribution of
F-27
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 13 - INVESTMENT IN REAL ESTATE PARTNERSHIPS (Continued)
4% per annum on its total funds contributed to the partnership. On August
31, 2003 the Company funded $2,000,000 of its equity contribution
obligation and entered into a note agreement with a total principal due of
$5,900,000 and interest accruing at the rate of 4% per annum for its
remaining equity contributions. Total principal and interest payments to
be made under the note agreement are $6,000,000. On December 4, 2003 the
Company made its first payment obligation of principal and interest under
the note totaling $2,000,000. As of December 31, 2003, the carrying value
of the investment is $7,916,335 and the note payable plus accrued interest
is $3,902,802. The note bears interest at 4% per annum and the entire note
obligation becomes due in 2004. Principal and interest payments to be made
by the Company in 2004 for the note obligation will total $4,000,000. The
Company's partnership interest secures the note payable. For the year
ended December 31, 2003, the partnership had a net loss of $443,849. As of
December 31, 2003, the partnership had assets of $11,814,628, liabilities
of $373,469 and equity of $11,441,159.
On December 31, 2003, Geneva contributed to the Company as additional paid
in capital a limited partner interest in a partnership formed to acquire
certain commercial real estate. Geneva had funded $320,000 to the real
estate partnership as of December 31, 2003, which is the Company's
carrying value of the investment as of December 31, 2003.
NOTE 14 - DUE FROM SHAREHOLDER
During 2002, members of management of the Company discovered facts
regarding several transactions which raised concerns that certain conduct
by the Company's 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
Securities Act of 1933 and the Securities Exchange Act of 1934, and
diverted cash assets of the Company during 2000, 2001, and 2002 to himself
directly or indirectly in the amount of approximately $1,769,000, of which
$900,000 was repaid by him to the Company.
As a result, on August 16, 2002, the 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. The Company filed its Form 8-K, Current
Report dated October 3, 2002, with the SEC on October 4, 2002. The Form
8-K summarizes the nature of the transactions and discusses various
related matters. The financial statements for 2001 and 2000 were reissued
to give effect to the transactions discussed below in the financial
statements of the respective years.
F-28
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 14 - DUE FROM SHAREHOLDER (Continued)
Due from shareholder represents amounts paid to John J. Lawbaugh, directly
or through companies affiliated with Mr. Lawbaugh and other costs incurred
by the Company as a result of these transactions. As of December 31, 2002,
and 2001, these amounts totaled $1,218,181 and $812,218, respectively. An
allowance for uncollectible amounts due from shareholder has been recorded
for the full amount due as of December 31, 2002 and 2001 with a
corresponding charge to operations. The allowance totaled $1,218,181, and
$812,218, as of December 31, 2002 and 2001, respectively. For the year
ended December 31, 2003, the charge for reserve for losses for the due
from shareholder totaled $141,392. In conjunction with the Acquisition,
the Company received $1,357,026 as payment for the due from shareholder
amount of $1,359,573 outstanding as of the date of the Acquisition (See
Note 1).
Due from shareholder consists of the following transactions:
(a) During 2002, origination and other fees totaling $56,700 were paid
to other entities controlled by Mr. Lawbaugh with respect to two
loans held by the Company. $16,500 was previously recorded in the
mortgage notes receivable balance and was adjusted as a reduction of
the mortgage notes held for sale and a corresponding amount due from
shareholder. The remaining $40,200 was credited to income and a
corresponding amount due from shareholder.
(b) During 2001, origination and other fees totaling $154,952 were paid
to other entities controlled by Mr. Lawbaugh with respect to two
loans originated by the Company. The amounts were previously
recorded in the mortgage notes receivable balance and are adjusted
to record a reduction of the mortgage notes held for sale and a
corresponding amount due from shareholder.
(c) During 2001, pursuant to the instructions of Mr. Lawbaugh, a cash
payment of $84,000 was made to Mr. Lawbaugh's personal bank account
by an escrow agent from funds provided by the Company to the escrow
agent for the purchase of a mortgage note. The amounts were
previously recorded in the mortgage notes receivable balance and are
adjusted to record a reduction of the mortgage notes held for sale
and a corresponding amount due from shareholder. With respect to the
origination fees of $111,279 on one of the loans discussed in (b)
above and the $84,000 discussed in (c) above, the borrower sold the
property out of bankruptcy court to an unrelated third party in
2002. The Company entered into a new loan agreement with the
purchaser in the amount of $1,050,000. This note was subsequently
paid in full in 2003.
F-29
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 14 - DUE FROM SHAREHOLDER (Continued)
(d) An interest escrow account was established for the benefit of a
borrower in the amount of $42,286. This amount was funded by the
Company in connection with a mortgage loan at the closing of the
loan. Mr. Lawbaugh subsequently transferred the interest escrow
account to his personal control. The liability to the borrower was
previously omitted from the Company's financial statements and is
adjusted to record an amount due from shareholder and a
corresponding liability for the benefit of the borrower.
(e) Cash payments of $188,744 were made to a bank account controlled by
Mr. Lawbaugh in connection with the purchase of real estate tax lien
certificates held for investment by the Company. The payment was
made to an account controlled by Mr. Lawbaugh by the settlement
agent pursuant to the instructions of Mr. Lawbaugh. The amount was
previously recorded as an investment in real estate tax lien
certificates and is adjusted to record a reduction of the tax lien
certificates and a corresponding amount due from shareholder.
(f) During 2000, an escrow held by a title company in the amount of
$250,000 was transferred, pursuant to the instructions of Mr.
Lawbaugh, to a bank account controlled by Mr. Lawbaugh. The amount
was reflected as a cash escrow as of December 31, 2000 and was
adjusted to record a reduction of the escrow and a corresponding
amount due from shareholder.
(g) During 2000, origination fees totaling $42,236 with respect to two
loans originated by the Company were diverted from the Company to
bank accounts controlled by Mr. Lawbaugh. The amounts were
previously recorded in the mortgage notes receivable balance and are
adjusted to record a reduction of the mortgage notes held for sale
and mortgage notes held for investment and a corresponding amount
due from shareholder.
(h) During 2000, extension fees of $50,000 paid by a borrower related to
the purchase of a mortgage loan from a third party by the Company
were diverted from the Company and deposited to a bank account
controlled by Mr. Lawbaugh. An adjustment has been made to record
the fees as income to the Company during 2000 with a corresponding
amount due from shareholder.
(i) The Company has incurred legal, accounting and other costs in
connection with the above transactions. These costs total $490,655
and have been billed to Mr. Lawbaugh and recorded to due from
shareholder.
F-30
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 14 - DUE FROM SHAREHOLDER (Continued)
The following summarizes the impact of those transactions on the Company
for the respective periods:
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 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)
NOTE 15 - SIGNIFICANT EVENTS
During 2002, management of the Company discovered facts that came to its
attention regarding several transactions involving the Company (See Note
14). Due to the discovery of these 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. The Board of Directors
also authorized an investigation to determine the scope and impact of the
transactions on the financial statements and to determine if there were
any other inappropriate transactions involving the Company. The
investigation was performed by the Company's management and overseen by
two independent directors and the Company's independent auditors. As a
result of this investigation, it was determined that assets of the Company
were diverted to Mr. Lawbaugh, directly or indirectly, in the amount of
approximately $1,769,000, of which $900,000 was repaid by Mr. Lawbaugh to
the Company, and certain federal securities laws were violated (See Note
14).
Based on these facts, the Company amended and restated its financial
statements for the years ended December 31, 2001 and 2000, and amended all
annual and quarterly SEC filings affected to properly disclose the nature
and affects of these transactions. Also, due to the discovery of these
transactions, the Company suspended the sale of its face-amount
certificates on August 16, 2002 and sales have not yet resumed as of the
date of the audit report.
F-31
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 16 - 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' account value, less an
estimate for early surrender charges.
The total certificate liability at December 31 is summarized as follows:
2003 2002 Average
Interest Rate
------------ ------------ -------------
Fully-paid certificates:
Single-payment 500 series $ 33,623,006 $ 31,477,064 6.19%
Installment 1,636,347 1,148,426 6.19%
Optional settlement 336,188 157,767 6.19%
------------ ------------
35,595,541 32,783,257
------------ ------------
Installment certificates:
Reserves to mature, by series
120 and 220 314,348 323,515 6.19%
315 32,533 82,054 6.19%
------------ ------------
346,881 405,569
------------ ------------
Total certificate liability $ 35,942,422 $ 33,188,826
============ ============
F-32
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 17 - 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, 2003 December 31, 2002
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
Assets
Available-for-sale
Securities $ 6,900,227 $ 6,900,227 $ 9,190,162 $ 9,190,162
Mortgage notes held
for sale 8,195,803 8,215,645 13,163,828 13,389,186
Mortgage notes held
for investment 7,795,206 7,795,206 -- --
Investment in real estate
partnerships 9,736,335 9,736,335 -- --
Real estate tax lien
certificates 460,252 460,252 1,632,437 1,632,437
Real estate owned 2,285,509 2,285,509 2,647,095 2,805,000
Residual mortgage
certificates 2,685,180 2,685,180 4,038,607 4,038,607
Certificate loans 69,738 69,738 77,462 77,462
Cash and cash
equivalents 1,392,115 1,392,115 2,230,886 2,230,886
Liabilities
Certificate liability 35,942,422 35,942,422 33,188,826 33,188,826
The following methods and assumptions were used in estimating fair values:
Available-for-sale Securities
Fair values for investments in securities are based on quoted market
prices, where available. For available-for-sale 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-33
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Mortgate Notes Held for Sale
Fair value is estimated by evaluating, on a loan-by-loan basis, the note
receivable's stated interest rate compared to current market interest
rates for a comparable note.
Mortgate Notes Held for Investment
Fair value of mortgage notes held for investment is estimated by
evaluating, on a loan-by-loan basis, the note receivable's stated interest
rate compared to current market interest rates for a comparable note.
Investment in Real Estate Partnerships
Estimated fair value of the investments in real estate partnerships
approximates its carrying value.
Real Estate Tax Lien Certificates
Estimated fair value of real estate tax lien certificates approximates
their carrying value.
Real Estate Owned
Fair value is estimated based on the appraised market value of the real
estate.
Residual Mortgage Certificate
Estimated fair value of the residual mortgage certificate approximates its
carrying value.
Property Held for Sale
Estimated fair value of property held for sale is based on a contract for
the sale of the property to an unrelated third party.
Certificate Loans
The carrying value of certificate loans approximates their fair value.
Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents approximate their fair
value given the short-term nature of these assets.
Certificate Liability
The fair value and carrying value of the certificate liability is based on
the cumulative account value of certificateholders less an estimate for
early surrender charges.
F-34
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 18 - 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, 2003 and 2002 were:
2003 2002
------------ ------------
Deferred tax liabilities
Net unrealized gains on available-for-sale
securities $ 75,232 $ --
Certificate liability 39,335 859,894
------------ ------------
Total deferred tax liabilities 114,567 859,894
------------ ------------
Deferred tax assets
Investments 65,275 --
Mortgage notes and real estate owned 183,350 74,131
Capital loss carryover 121,895 --
Net operating loss carryforward 2,759,846 1,950,481
------------ ------------
Total deferred tax assets 3,130,366 2,024,612
Valuation allowance for deferred tax assets (3,015,799) (1,164,718)
------------ ------------
Net deferred tax assets 114,567 859,894
------------ ------------
Deferred tax liabilities shown on the
accompanying consolidating balance sheets $ -- $ --
============ ============
In 2003 and 2002, 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-35
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 18 - INCOME TAXES (Continued)
As of December 31, 2003 and 2002, the Company had net operating loss
carryforwards of approximately $7,146,158 and $5,053,059, respectively,
for income tax purposes which expire in various years through 2023. The
Company had capital loss carryforward at December 31, 2003 of
approximately $315,625, which will expire in 2007.
The components of the provision for federal income tax expense consist of
the following:
Year Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Current $ -- $ -- $ --
Deferred -- -- (288,264)
----------- ----------- -----------
Total federal income tax benefit $ -- $ -- $ (288,264)
=========== =========== ===========
Federal income tax expense differs from that computed by using the income tax
rate of 34%, as shown below.
Year Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Income tax benefit at
statutory rate $ (711,654) $ (915,618) $ (441,577)
State tax benefit, net of federal
tax benefit (96,282) (188,510) (86,968)
Increase in valuation allowance
related to capital loss and
NOL carryovers 1,851,081 740,601 571,667
Decrease in contingent tax liability -- -- --
Dividend received deduction -- -- --
Certificate liability adjustment (820,559) 289,396 (287,735)
Mortgage notes marked to market 19,842 74,131 --
Tax-exempt interest -- -- (12,000)
Other (242,428) -- (31,651)
----------- ----------- -----------
Total federal income tax benefit $ -- $ -- $ (288,264)
=========== =========== ===========
F-36
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 19 - RELATED PARTY TRANSACTIONS
SBM Financial provides the Company with administrative services pursuant
to an Administrative Services Agreement. This agreement stipulates that
SBM Financial shall provide certain administrative and support services
for the Company. Services include use of SBM Financial's property and
equipment, facilities and personnel needed for SBM-MD's daily operations.
For providing such services, SBM Financial 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 $2,500,000. The charge is
determined monthly by SBM Financial and the Company's management based on
the costs incurred by SBM Financial for such administrative and support
services. During 2003, 2002 and 2001, a fee was charged totaling
$1,029,800, $1,794,700 and $1,078,839, respectively, and payments for such
fees were $1,029,800, $1,794,700 and $1,119,128, respectively.
On December 12, 2003, Geneva contributed as additional paid in capital a
$500,000 interest in a real estate partnership and $1,000,000 cash to the
Company. In addition, on December 31, 2003, Geneva contributed as
additional paid in capital a $320,000 limited partner interest in a real
estate partnership.
On September 30, 2001, SBM Financial contributed as additional paid in
capital a mortgage note to the Company which totaled $1,136,047 at that
date. On June 30, 2002 SBM Financial contributed an additional mortgage
note which totaled $639,227.
On September 30, 2001, SBM Financial through its sole member, 1st
Atlantic, contributed as additional paid in capital to the Company a
beneficial interest in a property consisting of land and building held for
sale which totaled $410,087 at the date of the contribution. The basis in
the property at the contribution date is the original cost basis of the
shareholders of 1st Atlantic at the date of the original contribution to
1st Atlantic (September 30, 1998), increased for the expenditures made by
1st Atlantic and subsequently by the Company in connection with the
investment in the property held for sale. As of December 31, 2001, the
carrying amount of the property was $419,923. On December 31, 2002, this
property was sold (See Note 12).
The Company made a mortgage loan to a partnership in which an affiliate
owned a 51% interest. As of December 31, 2001, the outstanding principal
balance of the mortgage note was $378,950 and accrued interest totaled
$59,104. In April 2002, the outstanding principal balance of the mortgage
note and accrued interest was paid in full satisfaction on the receivable
in the amount of $533,120.
A director of the Company provided legal services to the Company
throughout 2001 totaling $8,150.
F-37
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 19 - RELATED PARTY TRANSACTIONS (Continued)
Due from shareholder totaling $1,218,181 as of December 31, 2002,
represents amounts paid to John J. Lawbaugh, the majority shareholder of
1st Atlantic, directly or through companies affiliated with the
shareholder and other costs incurred by the Company related to those
transactions. An allowance has been recorded in the full amount due from
shareholder (See Notes 14 and 15).
Related party receivable and related party payable represents certain
advances made by the Company to affiliates and advances the Company has
received from affiliates. Most advances relate to operational
transactions. As of December 31, 2003 and 2002, related party receivables
total $219,371 and $129,351 respectively. As of December 31, 2003 and
2002, related party payables total $49,130 and $117,925, respectively.
A warehouse line of credit has been established between SBM and ACFC (See
Note 8).
NOTE 20 - 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 ($33.1 million and $31.6
million at December 31, 2003 and 2002, respectively). The Company had
qualified assets (at amortized cost) of $33.6 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.
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, 2003 and 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.
F-38
SBM Certificate Company and Subsidiaries
NOTES TO CONSOLIDATING FINANCIAL STATEMENTS - CONTINUED
December 31, 2003, 2002, and 2001
NOTE 20 - SHAREHOLDER'S EQUITY AND REGULATORY MATTERS (Continued)
December 31,
-----------------------------
2003 2002
------------ ------------
Qualified assets on deposit:
Central depositories $ 39,496,410 $ 35,182,213
State governmental authorities 263,516 270,899
------------ ------------
Total qualified assets on deposit $ 39,759,926 $ 35,453,112
Less: Qualified assets reserved by
Provident warehouse line $ (1,222,000) $ (2,547,954)
Less: Qualified assets reserved by
subscription and note payable $ (4,902,802) $ --
Less: Qualified assets reserved for
real estate liens -- (590,000)
------------ ------------
Total qualified assets $ 33,635,124 $ 32,315,158
============ ============
Certificate reserve under Section 28(a) $ 32,912,452 $ 31,418,457
Less: Certificate loans (69,738) (77,462)
Plus: Base capital requirement 250,000 250,000
------------ ------------
Required deposits $ 33,092,714 $ 31,590,995
============ ============
F-39
SBM Certificate Company and Subsidiaries
SUPPLEMENTAL SCHEDULES
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS
December 31, 2003
PRINCIPAL
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT COST VALUE
- ---------------------------------------------------- ---------- ----------- -----------
AVAILABLE-FOR-SALE SECURITIES
U.S. TREASURY SECURITIES
U.S. Treasury Note, 5.625%, due 5/15/2008 $ 50,000 $ 55,078 $ 55,078
U.S. Treasury Note, 7.25%, due 8/15/2004 200,000 208,438 208,438
----------- -----------
263,516 263,516
----------- -----------
OBLIGATIONS OF STATE AND POLITICAL
SUBDIVISIONS
Belmont County, Ohio, Sanitary Sewer District #3
Waterworks Revenue Bonds, 4.25%, due 4/01/2004 5,000 5,000 5,005
----------- -----------
5,000 5,005
----------- -----------
CORPORATE DEBT SECURITIES
FINANCIAL INSTITUTIONS
Riggs Capital II Trust Preferred Securities
8.875%, due 3/15/27 100,000 101,000 104,000
PUBLIC UTILITIES
MCI Communications Corp., 7.75%, due 3/15/2024 900,000 738,000 724,500
CONVERTIBLE DEBT SECURITIES
Intel Corporation, Reverse Exchangeable Securities
Medium-Term Notes, Series A, 14%, due 3/18/2004 330,000 334,538 334,538
----------- -----------
TOTAL CORPORATE DEBT SECURITIES $ 1,173,538 $ 1,163,038
----------- -----------
(continued)
S-01
SBM Certificate Company and Subsidiaries
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE I - INVESTMENTS IN SECURITIES OF UNAFFILIATED ISSUERS - CONTINUED
December 31, 2003
PRINCIPAL
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT COST VALUE
- ---------------------------------------------- ---------- ----------- -----------
CORPORATE EQUITY SECURITIES
SPDR Trust Series 1 20,000 2,137,000 2,225,600
Diamonds Trust, Series 1 10,000 988,000 1,045,700
AT&T Corporation 275 5,541 5,582
Comcast Corporation Class A 450 14,207 14,756
Verizon Communications, Inc. 6,003 200,500 210,585
----------- -----------
3,345,248 3,502,223
----------- -----------
CLOSED-END MUTUAL FUNDS
Calamos Convertible and High Income Fund
Commom Shares 60,000 993,000 900,000
Neuberger Berman Income oppurtuniy Fund Inc. 60,000 865,800 1,007,400
----------- -----------
1,858,800 1,907,400
----------- -----------
MORTGAGE-BACKED SECURITIES
Government National Mortgage Association
11.5%, due 4/15/2013 262 321 299
11.5%, due 5/15/2015 118 135 134
5.375%, due 1/20/2026 57,622 58,767 58,612
----------- -----------
59,223 59,045
----------- -----------
TOTAL AVAILABLE-FOR-SALE SECURITIES $ 6,705,325 $ 6,900,227
=========== ===========
S-02
SBM Certificate Company and Subsidiaries
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE II - INVESTMENTS IN AND ADVANCES TO AFFILIATES AND INCOME THEREON
Year ended December 31, 2003
AMOUNT OF DIVIDENDS OR INTEREST
---------------------------------------
CARRYING INCOME FROM
VALUE OF INVESTMENT
PAR VALUE INVESTMENT IN
NAME OF INVESTMENT IN NUMBER OF OF SHARES IN CREDITED SUBSIDIARY
SUBSIDIARY SHARES HELD HELD SUBSIDIARY TO INCOME OTHER FOR PERIOD
- ------------------------------------ ----------- ---------- ---------- ---------- ---------- -----------
Atlantic Capital Funding Corporation 10,000 $ 20,000 $ 990,203 $ -- $ 198,849 $ (183,208)
========== ========== ========== ========== ==========
SBM Securities I, LLC 100% -- (120,116) -- -- (120,116)
========== ========== ========== ========== ==========
(1) During 2003, SBM-MD made additional contributions to ACFC totaling
$196,000.
S-03
SBM Certificate Company and Subsidiaries
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE III - MORTGAGE LOANS ON REAL ESTATE AND INTEREST EARNED ON MORTGAGES
Year ended December 31, 2003
AMOUNT OF PRINCIPAL
UNPAID AT CLOSE OF PERIOD
---------------------------
INTEREST INTEREST
AMOUNT OF DUE AND INCOME
CARRYING SUBJECT TO MORTGAGES ACCRUED AT EARNED
AMOUNT OF DELINQUENT BEING END OF APPLICABLE
DESCRIPTION PRIOR LIENS ASSET TOTAL INTEREST FORECLOSED PERIOD TO PERIOD
- -------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
LIENS ON:
RESIDENTIAL NONE $ 4,313,454 4,313,454 $ 158,334 $ 80,277 $ 34,399 $ 485,699
COMMERCIAL NONE 11,677,555 11,677,555 1,304,403 301,833 115,235 777,837
RESIDUAL MORTGAGE
CERTIFICATE NONE 2,685,180 -- -- -- 60,856 869,601
------------ ------------ ------------ ------------ ------------ ------------ ------------
TOTAL $ -- $ 18,676,189 $ 15,991,009 $ 1,462,737 $ 382,110 $ 210,490 $ 2,133,137
============ ============ ============ ============ ============ ============ ============
S-04
SBM Certificate Company and Subsidiaries
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE IV - REAL ESTATE OWNED AND RENTAL INCOME
December 31, 2003
Initial Cost of Carrying Reserve for Total Rental
Property Type Encumbrances Cost Improvements Value Losses Rents Due Income
- --------------------- ------------ ----------- ------------ ----------- ----------- ----------- ------------
Farms $ -- $ -- $ -- $ -- $ -- $ -- $ --
Residential -- -- -- -- -- -- --
Apartments and
business -- 500,964 -- 500,964 -- -- --
Unimproved -- 1,784,545 -- 1,784,545 -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ -- $ 2,285,509 $ -- $ 2,285,509 $ -- $ -- $ --
=========== =========== =========== =========== =========== =========== ===========
Rent from properties
sold during period $ -- $ -- $ -- $ -- $ -- $ -- $ --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ -- $ -- $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== =========== =========== ===========
S-05
SBM Certificate Company and Subsidiaries
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE V - QUALIFIED ASSETS ON DEPOSIT
December 31, 2003
FIRST
MORTGAGES
AND OTHER
INVESTMENTS FIRST LIENS
IN SECURITIES ON REAL OTHER
NAME OF DEPOSITORY CASH (a) ESTATE (b) TOTAL
- ----------------------------------- ------------ ------------- ------------ ------------ ------------
State governmental authorities
Securities Department of Illinois $ -- $ 263,516 $ -- $ 5,789 $ 269,305
Central depositories
US Bank 1,073,452 6,441,809 20,321,883 10,112,814 37,949,958
Provident Bank 19,870 -- 1,222,000 -- 1,241,870
Bank of America 289,953 -- -- -- 289,953
Wells Fargo 8,840 -- -- -- 8,840
------------ ------------ ------------ ------------ ------------
Total qualified assets on deposit $ 1,392,115 $ 6,705,325 $ 21,543,883 $ 10,118,603 $ 39,759,926
============ ============ ============ ============ ============
(a) Represents amortized cost of bonds and securities.
(b) Represents dividend and interest receivable on qualified assets and
investments in real estate partnerships.
S-06
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE VI - CERTIFICATE RESERVES
PART I - SUMMARY OF CHANGES
Year ended December 31, 2003
BALANCE AT BEGINNING OF YEAR
----------------------------------------------------
RESERVES
(INCLUDING
NUMBER OF ADVANCE
ACCOUNTS PAYMENTS
WITH AMOUNT OF WITH
YIELD SECURITY MATURITY ACCRUED
DESCRIPTION PERCENT HOLDERS VALUE INTERERST)
- ----------------------------------------------------- --------- ----------- ----------- -----------
Reserves to mature, installment certificates
Series 120 6.19 6 $ 32,000 $ 121,369
Series 220 6.19 12 59,000 202,146
Series 315 6.19 14 53,900 82,054
Single payment certificates
Series 503 6.19 1,627 23,692,260 21,732,002
Series 505 6.19 276 4,147,235 3,621,656
Series 507 6.19 98 1,243,089 1,044,416
Series 510 6.19 304 6,059,720 5,078,990
Fully paid installment certificates - (Paid Up Bonds) 6.19 371 1,905,776 1,148,426
Optional settlement certificates
Paid-up certificate (Special Maturity) 6.19 -- -- --
Annuities 6.19 17 157,767 157,767
Due to unlocated certificate holders 0.00 -- -- --
----------- ----------- -----------
Total 2,725 $37,350,747 $33,188,826
=========== =========== ===========
Total charged to income, per above
Less reserve recoveries from terminations prior to maturity
Interest credited on certificate reserves per statement of
operations and comprehensive income (loss)
ADDITIONS
-----------------------------------------------------
RESERVE
PAYMENTS CHARGED
BY TO OTHER
CHARGED TO CERTIFICATE ACCOUNTS
DESCRIPTION INCOME HOLDERS (a) ROLLUPS
- ----------------------------------------------------- ----------- ----------- ----------- -----------
Reserves to mature, installment certificates
Series 120 $ 5,511 $ 614 $ -- $ --
Series 220 10,408 2,515 -- --
Series 315 3,203 1,905 -- --
Single payment certificates
Series 503 1,609,414 -- 996,275 270,470
Series 505 240,208 -- 191,138 18,928
Series 507 79,629 -- 57,598 15,680
Series 510 408,259 -- 281,455 264,612
Fully paid installment certificates - (Paid Up Bonds) 73,896 -- 481,550 61,892
Optional settlement certificates
Paid-up certificate (Special Maturity) -- -- -- --
Annuities 18,671 -- -- 253,603
Due to unlocated certificate holders -- -- -- --
----------- ----------- ----------- -----------
Total $ 2,449,199 $ 5,034 $ 2,008,015 $ 885,185
=========== =========== =========== ===========
Total charged to income, per above $ 2,449,199
Less reserve recoveries from terminations prior to maturity (24,738)
-----------
Interest credited on certificate reserves per statement of
operations and comprehensive income (loss) $ 2,424,461
===========
NOTE (a) - December 5, 2003 Acquisition adjustment
(continued)
S-07
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE VI - CERTIFICATE RESERVES - CONTINUED
PART I - SUMMARY OF CHANGES - CONTINUED
Year ended December 31, 2003
DEDUCTIONS BALANCE AT END OF YEAR
------------------------------------------------ -----------------------------------
RESERVES
(INCLUDING
NUMBER OF ADVANCE
CASH ACCOUNTS PAYMENTS)
SURRENDERS WITH AMOUNT OF WITH
PRIOR TO OTHER NOTE OTHER NOTE SECURITY MATURITY ACCRUED
DESCRIPTION MATURITIES MATURITY (a) (b) HOLDERS VALUE INTEREST
- -------------------------------------------- ---------- ---------- ----------- ---------- --------- ----------- -----------
Reserves to mature, installment certificates
Series 120 $ -- $ -- $ 28,215 5 $ 26,000 $ 98,665
Series 220 -- -- -- 12 59,000 212,554
Series 315 13,193 -- 41,437 6 22,000 30,627
Single payment certificates
Series 503 306,386 736,764 496,715 421,287 1,586 22,993,770 22,647,009
Series 505 -- 68,941 5,973 38,269 277 4,548,408 3,958,747
Series 507 -- -- 2,580 1,824 98 1,573,328 1,192,919
Series 510 -- 63,621 55,260 85,069 306 8,425,617 5,829,366
Paid-up bonds 35,098 70,306 24,012 -- 359 1,885,012 1,636,348
Optional settlement certificates
Paid-up certificate -- -- -- -- -- -- --
Annuities 90,335 -- 3,518 -- 35 336,188 336,188
Due to unlocated certificate holders -- -- -- -- -- -- --
---------- ---------- ----------- ---------- --------- ----------- -----------
Total $ 445,012 $ 939,632 $ 657,710 $ 546,449 2,684 $39,869,323 $35,942,422
========== ========== =========== ========== ========= =========== ===========
NOTE (a) - Rolled to other company products
NOTE (b) - Interest payments to certificate holders
(continued)
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
Year ended December 31, 2003
BALANCE AT BEGINNING OF YEAR
-------------------------------------------
NUMBER OF
ACCOUNTS
AGE WITH AMOUNT OF
GROUPING SECURITY MATURITY AMOUNT OF
IN YEARS HOLDERS VALUE RESERVES
---------- --------- --------- ---------
Series 120 23 1 $ 6,000 $ 18,249
24 0 -- --
25 0 -- --
31 0 -- --
32 0 -- --
33 0 -- --
34 1 5,000 17,685
35 0 -- --
36 0 -- --
37 2 12,000 45,261
38 1 3,000 12,654
40 1 6,000 27,520
--------- --------- ---------
Total 6 $ 32,000 $ 121,369
========= ========= =========
Series 220 23 0 $ -- $ --
24 0 -- --
29 0 -- --
30 0 -- --
31 1 4,000 10,453
32 0 -- --
33 2 10,000 30,771
34 3 17,000 56,229
35 2 14,000 34,718
36 3 9,000 52,479
38 1 5,000 17,496
--------- --------- ---------
Total 12 $ 59,000 $ 202,146
========= ========= =========
(continued)
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 - CONTINUED
Year ended December 31, 2003
DEDUCTIONS BALANCE AT END OF YEAR
--------------------------------------- -------------------------------------
TRANSFER OR NUMBER OF
CASH ROLL TO ACCOUNTS
SURRENDERS OTHER AGE WITH AMOUNT OF
PRIOR TO PRODUCT IN GROUPING SECURITY MATURITY AMOUNT OF
MATURITY COMPANY IN YEARS HOLDERS VALUE RESERVES
---------- ----------- ---------- --------- --------- ---------
Series 120 $ -- $ -- 23 0 $ -- $ --
-- 5,458 24 1 6,000 19,203
-- -- 25 0 -- --
-- -- 31 0 -- --
-- -- 32 0 -- --
-- -- 33 0 -- --
-- -- 34 0 -- --
-- 5,283 35 1 5,000 18,590
-- -- 36 0 -- --
-- -- 37 0 -- --
-- -- 38 2 12,000 47,449
-- 13,659 39 1 3,000 13,423
-- 3,815 40 0 -- --
--------- --------- --------- --------- ---------
Total $ -- $ 28,215 5 $ 26,000 $ 98,665
========= ========= ========= ========= =========
Series 220 $ -- $ -- 23 0 $ -- $ --
-- -- 24 0 -- --
-- -- 29 0 -- --
-- -- 30 0 -- --
-- -- 31 0 -- --
-- -- 32 1 4,000 10,988
-- -- 33 0 -- --
-- -- 34 2 10,000 32,751
-- -- 35 3 17,000 57,834
-- -- 36 2 9,000 36,859
-- -- 37 3 14,000 55,731
-- -- 38 0 -- --
-- -- 39 1 5,000 18,391
--------- --------- ---------
Total $ -- $ -- 12 $ 59,000 $ 212,554
========= ========= ========= ========= =========
(continued)
S-10
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, 2003
BALANCE AT BEGINNING OF YEAR
--------------------------------------------
NUMBER OF
ACCOUNTS
AGE WITH AMOUNT OF
GROUPING SECURITY MATURITY AMOUNT OF
IN YEARS HOLDERS VALUE RESERVES
---------- -------- -------- ---------
Series 315 12 0 $ -- $ --
13 0 -- --
14 2 7,700 8,335
15 0 -- --
16 4 17,600 24,205
17 1 2,200 3,268
18 1 2,200 3,952
19 6 24,200 42,294
20 0 -- --
-------- -------- --------
Total 14 $ 53,900 $ 82,054
======== ======== ========
(continued)
S-11
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, 2003
DEDUCTIONS BALANCE AT END OF YEAR
------------------------ ---------------------------------------------------
TRANSFER OR NUMBER OF
CASH ROLL TO ACCOUNTS
SURRENDERS OTHER AGE WITH AMOUNT OF
PRIOR TO PRODUCT IN GROUPING SECURITY MATURITY AMOUNT OF
MATURITY COMPANY IN YEARS HOLDERS VALUE RESERVES
---------- ---------- -------- -------- --------- ---------
Series 315 $ -- $ -- 12 0 $ -- $ --
-- -- 13 0 -- --
-- -- 14 0 -- --
1,120 3,518 15 1 2,200 2,600
-- -- 16 0 -- --
8,645 27,152 17 3 15,400 20,069
1,533 4,814 18 1 2,200 3,558
1,895 5,953 19 1 2,200 4,400
-- -- 20 0 -- --
-------- -------- -------- -------- --------
Total $ 13,193 $ 41,437 6 $ 22,000 $ 30,627
======== ======== ======== ======== ========
S-12
SBM Certificate Company and Subsidiary
SUPPLEMENTAL SCHEDULES - CONTINUED
SCHEDULE VII - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
------------------------------
CHARGED
BEGINNING CHARGED TO TO OTHER
DESCRIPTION OF YEAR EXPENSE ACCOUNTS DEDUCTIONS END OF YEAR
- ------------------------ ----------- ---------- ------------- ---------- -----------
Valuation allowance on
deferred tax assets
year ended
December 31,
2003 $ 1,164,718 $ -- $ 1,851,081(1) $ -- $ 3,015,799
2002 $ 778,122 $ -- $ 386,596(1) $ -- $ 1,164,718
2001 $ 206,455 $ -- $ 571,667(1) $ -- $ 778,122
2000 $ -- $ -- $ 206,455(1) $ -- $ 206,455
Valuation allowance on
shareholder receivable
year ended
December 31,
2003 $ 1,218,181 $ 141,392(2) $ -- $ 1,359,573(2) $ --
2002 $ 812,218 $ 405,963(2) $ -- $ -- $ 1,218,181
2001 $ 342,236 $ 469,982(2) $ -- $ -- $ 812,218
2000 $ -- $ 342,236(2) $ -- $ -- $ 342,236
(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) See Note 14 of the Notes to the Consolidating Financial Statements for the
year ended December 31, 2003.
S-13