UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

 (Mark One)

þ   ANNUAL REPORT PURSUANT TO SECTION 30 OF THE INVESTMENT COMPANY ACT OF 1940 AND SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR FISCAL YEAR ENDED DECEMBER 31, 2007

¨  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.)

8100 OAK STREET, 2ND FLOOR, VIENNA, VIRGINIA 22182

(Address of principal executive offices) (Zip Code)

703-584-2045

(Registrant's telephone number, including area code)

SECUTIRIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE

SECUTIRIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES o  NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. YES o  NO þ

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer , a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer  o

Accelerated Filer  o  

Non-Accelerated Filer þ  

Smaller Reporting Company  o

       (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). YES o  NO þ

As of April 14, 2008, there were 250,000 Common Shares of beneficial interest, par value $1 per share, outstanding. The registrant is a wholly-owned and, subsidiary and therefore, its common stock is not traded on a public market.

Documents Incorporated By Reference

None

7872776.5

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TABLE OF CONTENTS

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PART I

ITEM 1. Business

Unless the context otherwise requires or indicates, references in this Annual Report on Form 10-K to “SBM,” and “the Company” refer to SBM Certificate Company, a Maryland based investment company, together with its consolidated subsidiaries.

Overview

SBM Certificate Company is a face-amount certificate company.  Its wholly-owned subsidiaries include SBM Mortgage Company (formerly known as Atlantic Capital Funding Corporation) (“SBM Mortgage”) and SBM Securities I (“SBMS I”).  SBM  is a wholly-owned subsidiary of SBM Financial, LLC (“SBM Financial”), formerly known as State Bond & Mortgage, LLC (“State Bond”), which is a wholly-owned subsidiary of SBM Financial Group, LLC (“SBM Group”).  SBM Group is wholly-owned by Geneva Capital Partners, LLC (“Geneva”).   The Company’s executive offices are located at 8100 Oak Street, 2^nd Floor, Vienna, VA 22182 and its telephone number is (888) 665-2814.

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, in a transaction the Company refers to as 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.

As part of the Purchase transactions, SBM MN was merged into SBM.  SBM was formed for purposes of re-domiciling SBM MN 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, as amended (1933 Act”), the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Investment Company Act of 1940, as amended (the “1940 Act”).

On December 17, 2000, 1st Atlantic contributed its 100% ownership of SBM Mortgage to SBM.  As of December 31, 2007, SBM Mortgage was a mortgage broker offering conventional and HUD mortgage programs, however it ceased originating loans in 2008.

1st Atlantic became a wholly-owned subsidiary of Geneva on December 5, 2003 and was subsequently renamed SBM Investment Certificates, Inc. (“SBMIC”).  SBM and SBMIC (together, the “SBM Companies”) are face-amount certificate companies registered as such under the Investment Company Act of 1940.

Key Dates

1914:

State Bond and Mortgage Company of Minnesota is founded and begins issuing fixed-rate installment certificates with various durations to retail investors.

1940:

Following the Investment Company Act of 1940, State Bond and Mortgage Company registers with the Securities and Exchange Commission as a face-amount certificate investment company.

1991:

SBM Certificate Company was created by SBM Company (formerly known as State Bond and Mortgage) to assume its face-amount certificate business.

1995:

ARM Financial Group of Louisville, KY, acquires the financial businesses of SBM Company, including SBM Certificate Company.

1998:

Private entrepreneurs establish 1st Atlantic Guaranty Corporation in Maryland and the company becomes the first new face-amount certificate company to issue certificates in more than a decade.

2000:

1st Atlantic forms a new operating company that would become known as SBM Financial, LLC, to acquire SBM Certificate Company from ARM as part of the Purchase transaction.

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2002:

SBM Mortgage Company, originally known as Atlantic Capital Funding Corporation, expands to seven states in the mid-Atlantic.  

2003:

Geneva Capital Partners, a Maryland-based investment holding company owned and controlled by SBM CEO Eric M. Westbury, acquires the controlling shareholder interest in 1st Atlantic, including SBM Financial and its face-amount certificate and mortgage businesses (the “2003 Acquisition”).

2005:

Geneva establishes SBM Financial Group as the sole parent company of SBM Financial, LLC.  The SBM organization becomes certified as a minority-owned business.  SBM Capital Management is established as the organization’s institutional asset manager.  SBM Capital Management and SBM Financial, LLC each register with the SEC as registered investment advisers.

Face-Amount Certificate Company

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 redeemed prior to maturity or the end of any guarantee period.  Interest may be paid quarterly or annually, or may be compounded.  SBM Financial, an independent investment adviser registered under the Investment Advisers Act of 1940 as amended (the “Advisers Act”), served as investment adviser to SBM during 2007 and until August 26, 2011.  SBM Group currently provides the administrative services necessary for SBM to operate.

SBM issues various series of single-payment face-amount certificates with guarantee periods of three, five, seven and ten years.  Unless otherwise instructed by the certificateholder, a certificate, by its terms, automatically continues for its remaining guarantee periods of the same duration until the certificate's maturity date.   The certificates mature no later than 30 years from the date they are issued.

SBM’s operations include issuance of single-payment certificates, the investment of related funds, and other related service activities.  The certificates issued by SBM are not insured by any government agency.  SBM voluntarily suspended the issuance of its certificates on August 16, 2002 due to the discovery and reporting by Eric M. Westbury, the Company’s current Chairman and Chief Executive Officer, of certain questionable transactions involving SBM’s then Chairman and Chief Executive Officer, John Lawbaugh.  Any use in this Form 10-K Annual Report of the term “offer,” “sale” or “issue” 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 offered on similar interest-bearing instruments are a primary consideration in determining 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 net investment income is derived primarily from the margin between earnings on its investments and amounts paid or credited on its fixed-rate certificate liability, which the Company refers to as its investment spread.  SBM'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.

Following the Purchase on July 19, 2000, a methodology for calculating the certificate liability for reserve purposes in accordance with Section 28 of the 1940 Act was adopted and implemented, whereby the certificate liability for regulatory purposes has been carried at the certificate’s Surrender Value.  Under the 1940 Act, a certificate’s Surrender Value is the certificate’s Account Value (principal plus accrued and payable interest, if any) less the early surrender charge applicable to the certificate.

Following the 2003 Acquisition, the certificate liability for GAAP reporting purposes has been carried at the Account Value.  SBM believes this method is in accordance with accounting principles generally accepted in the United States.

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SBM maintains reserve assets for its certificate obligations in accordance with Section 28 of the 1940 Act.  Under Section 28 of the 1940 Act, SBM is permitted to invest a portion of its portfolio equal to the required reserve amount only in cash or other assets that constitute “qualified investments,” as defined in Section 28.  See “Regulation” below for more information on the reserve requirements under the 1940 Act.

SBM – Business Strategy

Although face-amount certificate operations are the primary business of SBM Group, it seeks to develop additional business lines in order to establish a more-diversified financial services organization.  One of SBM Group's primary strategies for growth is to create a more diversified financial services organization, which the Company anticipates will:

·

Create operational and financial economies of scale;

·

Substantially improve profit margins for SBM by consolidating overhead, which will benefit from revenues from other business lines, and establishing an “expense cap” for the Company;

·

Enhance SBM Group’s ability to offer additional financial products and services to a growing customer base;

·

Promote customer loyalty; and

·

Enhance the internal rate of return and capital appreciation to shareholders.

Investment Advisory Agreement

SBM Financial served as the Company’s investment adviser pursuant to an investment advisory agreement between SBM and SBM Financial (the “Investment Advisory Agreement”) during 2007 and until 2011.  During the time that SBM Financial served as SBM’s investment adviser, it was registered as an investment adviser under the Advisers Act.  On August 26, 2011, SBM Financial resigned as SBM’s investment advisor.  As of that date, SBM’s executive committee, consisting of the same individuals who were principals of SBM Financial and responsible for investment decisions pertaining to the Company, assumed the role of directly managing the investments of the Company.

Under the Company’s prior Investment Advisory Agreement with SBM Financial, it received a management fee, payable quarterly in arrears, equal to 0.50% of the average daily asset value of the Company’s assets managed by SBM Financial.

Subject to the overall supervision of the Company’s Board of Directors (“Board”) and its Investments Committee, SBM’s executive committee (specifically the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)) manages the Company’s day-to-day operations including managing its investments.  SBM’s executive committee determines the composition of the Company’s portfolio, the nature and timing of the changes to its portfolio and the manner of implementing such changes.  SBM’s CEO and CFO are each compensated through a consulting agreement with SBM and SBM Group.

Administrative Services Agreement

Pursuant to a separate administrative services agreement (the “Administrative Services Agreement”), SBM Group furnishes the Company with office facilities, together with equipment and clerical, bookkeeping and record keeping services at such facilities.  Under the Administrative Services Agreement, SBM Group also performs, or oversees the performance of the Company’s required administrative services, which includes responsibilities for financial records which the Company is required to maintain and preparing reports filed with the SEC.  In addition, SBM Group assists the Company in overseeing the preparation and filing of the Company’s tax returns, and generally overseeing the payment of its expenses and the performance of administrative and professional services rendered to the Company by others.  Payments under the Administrative Services Agreement are based upon the Company’s allocable portion of overhead and other expenses incurred by SBM Group in performing its obligations under the Administrative Services Agreement, including a portion of the rent and the compensation of the Company’s executive officers and other administrative support personnel.  The Administrative Services Agreement may be terminated by either party without penalty upon 30 days’ written notice to the other party.

 

Issuance of Certificates

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SBM voluntarily suspended issuance of its face-amount certificates on August 16, 2002 due Eric M. Westbury’s discovery of certain questionable transactions involving its then Chief Executive Officer, John Lawbaugh.  

As a fixed-income issuer, the Company’s face-amount certificate business competes in general with various types of corporate bonds and other types of fixed-income instruments, including savings products that offer a fixed-rate of return on a purchasers' money, including insurance, bank and thrift products.  Some of these other products are insured by governmental agencies or funds or private third parties.  Other issuers and products are rated by Nationally Recognized Statistical Rating Organizations (“NRSRO”) such as Standard & Poor’s, Moody’s Investors Service, Fitch Ratings and A.M. Best.  SBM’s certificates are not NRSRO-rated, nor guaranteed or insured by any governmental agency or fund or independent third party, but are supported by reserve assets as required by the 1940 Act.  The Company’s ability to offer competitive interest rates, attractive terms, and efficient service is its primary basis for meeting competition for investment dollars.

Regulation

General

Like many financial service companies that issue securities to the public, the Company is subject to governmental regulation.  As with other companies regulated by the 1940 Act, a face-amount certificate company must adhere to certain substantive regulatory requirements.  In general, a majority of the Company’s directors must be persons who are not “interested persons,” as that term is defined in the 1940 Act.  Furthermore, the Company is prohibited from protecting any director or officer of SBM against any liability to the Company or its stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard for the duties involved in the conduct of such person’s office.  SBM may also be prohibited under the 1940 Act from knowingly participating in certain transactions with its affiliates without the prior approval of its directors who are not interested persons and, in some cases, prior approval by the SEC.   

As required by Rule 17j-1 under the 1940 Act, the Company maintains a Code of Ethics that establishes procedures for personal investments and restricts certain transactions by its personnel.  In addition, the Company and its investment adviser (as applicable until August 26, 2011), SBM Financial, have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws, and are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a Chief Compliance Officer to be responsible for administering the policies and procedures.

As a result of the Company’s registration under the 1940 Act, the Company has certain reporting obligations under the Exchange Act, including the requirement that the Company files annual and quarterly reports with the SEC.  Although the Exchange Act requires that the Company’s annual reports on Form 10-K contain financial statements audited and reported on by its independent registered public accounting firm, the financial statements for the period ending December 31, 2007 contained in this report have not been audited.

With particular respect to face-amount certificate companies, 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.

In particular, Section 28 of the 1940 Act requires that the Company maintains a portion of its investment portfolio solely in cash or “qualified investments,” as such term is defined in Section 28.  Section 28 defines “qualified investments” to include investments of a kind which life insurance companies are permitted to invest in or hold.  SBM refers to the portion of its portfolio that must be held in either cash or qualified investments as its reserve assets.  Section 28 likewise dictates the required amount of such reserve assets, which the Company refers to as the reserve amount.  

SBM is currently in the process of reviewing its compliance with the applicable requirements under the 1940 Act.  See “—1940 Act Compliance Review.”

Calculation of Required Reserve Amount

In accordance with Section 28, the reserve amount is generally equal to the higher of (i) the Surrender Value of the Company’s outstanding face-amount certificates and (ii) the amount or amounts payable when due under its outstanding face-amount

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certificates, discounted back to present value at an assumed annual rate of return not exceeding 3.5%.  Surrender value is generally equal to a certificate’s Account Value (principal plus accrued and payable interest, if any), less the early surrender charge applicable to that certificate.  Set forth below is an example of the calculation of Surrender Value for a hypothetical certificate:

Assumptions
Face-amount:	$1,000
Interest rate	8.0%
Interest paid:	Annually
Guarantee period:	2 years
Surrender charge:	5.0%

	Surrender Value
	Purchase Date	6 Months	12 Months	18 Months	24 Months
Face-amount:	$1,000	$1,000	$1,000	$1,000	$1,000
Interest earned and paid:	–	–	$     80	–	$     80
Surrender charge:	$  (50)	$  (50)	$  (50)	$  (50)	–
Surrender value:	$   950	$   950	$   950	$   950	$1,000

Given changes in market interest rates since the adoption of Section 28 in 1940, the Company has sought exemptive relief from the SEC to permit the Company to use a revised discount rate when calculating the second portion of the reserve amount test equal to the rolling average of the initial yields of each issuance of 30-year U.S. Treasury Bonds during the prior 30-year period, which rolling average would be updated annually as of December 31 of each fiscal year.  As of December 31, 2007, this revised discount rate would have been approximately 8.25%.  Set forth below is an example of the calculation of the required reserve amount for a hypothetical certificate, based on the proposed revised discount rate:

Assumptions
Face-amount:	$1,000
Interest rate:	8.00%
Interest paid:	Annually
Guarantee period:	2 years
Discount rate:	8.25%

	Reserve Amount
	Purchase Date	6 Months	12 Months	18 Months	24 Months
Face-amount:	$1,000	$1,000	$1,000	$1,000	$1,000
Interest earned and paid:	–	–	$     80	–	$     80
Account value:	$1,000	$1,000	$1,000	$1,000	$1,000
Applicable discount:	$   147	$   112	$     76	$     39	–
Reserve amount:	$   853	$   888	$   924	$   961	$1,000

Qualified Investment Determination

Section 28(b) under the 1940 Act makes it unlawful for a face-amount certificate company to issue or to sell certificates unless it has, “in cash or qualified investments, assets having a value not less than” the sum of (i) the capital stock amount required under Section 28 ($250,000 in SBM’s case), plus (ii) the amount of certificate reserves calculated in accordance with Section 28(a).  Section 28(b) in turn defines the term “qualified investments” to mean “investments of a kind which life insurance companies are permitted to invest in or hold under the provisions of the Code of the District of Columbia.”

For the following reasons, SBM believes that the determination of whether an investment is a “qualified investment” for a face-amount certificate company under the 1940 Act should look only to the type of investment to be acquired, and not the value of such investment relative to a face-amount certificate company’s total investment portfolio.  In the event a diversification test is

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deemed to apply to face-amount certificate companies under Section 28(b), SBM believes that subsequent changes in the valuations of its investment portfolio should not alter the qualification of such investments under Section 28(b).

At the time the 1940 Act was enacted, including Section 28(b) therein, the provisions of the Code of the District of Columbia (the “DC Code”) applicable to life insurance companies limited only the kind of investments such life insurance companies could invest in or hold, but not the amount of specific types of investments that could be invested in or held by such companies.  In April 2003, as part of the enactment of the D.C. Investment of Insurers Act of 2002 (the “DCIIA”), the DC Code for the first time imposed general limits on the value of specific types of investments that could be held by life insurance companies.  Specifically, the DCIIA imposed a diversification test which placed percentage limitations on specific types of investment that could be held by life insurance companies in the District of Columbia.  The DCIIA is a product of the D.C. Council and the D.C. Mayor.  At the time the 1940 Act was enacted, only Congress had the authority to adopt revisions to the DC Code, suggesting that Congress did not intend to cede to the District of Columbia authority to amend Section 28(b) or otherwise to legislate or to regulate face amount certificate companies.  SBM therefore does not believe the revisions to the DC Code enacted through the DCIIA should be viewed is imposing a diversification requirement under Section 289(b) of the 1940 Act.  Specifically, SBM believes that Section 28(b) restricts only the types of investments that a face amount certificate company may invest in or hold, but that Section 28(b) should not be interpreted to impose a diversification test limiting the percentage of a face mount certificate company’s aggregate investments that may be comprised of a specific type of investment.

Notwithstanding the foregoing, in the event the diversification test set forth in the DCIIA could be deemed to apply to face-amount certificate companies, SBM believes that the qualified status of each investment under Section 28(b) and the DCIIA should be evaluated as of the time of investment, rather than on an ongoing basis.  Specifically, DC Code Section 31-1371.03, which governs general investment qualifications for domestic insurers in the District of Columbia, evaluates the appropriateness of the acquisition of holding of an investment based upon the attributes of that investment “at the time of acquisition.”  Further, DC Code Section 31-1372.02, which governs the investment practices of domestic life insurers in the District of Columbia, tests whether an investment is qualified by evaluation the status of the portfolio “as a result of and after giving effect to the investment.”  Neither provision suggests that qualification of an investment should be re-evaluated subsequent to its acquisition, until and unless a further investment is contemplated.  An investment that would no longer be considered “qualified” solely as a result of changes in valuation or in the portfolio mix would not lose its “qualified investment” status for purposes of Section 28(b).

1940 Act Compliance Review

In conjunction with the preparation of the Company’s financial statements included in this Form 10-K, the Company has initiated a review of its ongoing compliance with the applicable requirements under the 1940 Act.  In connection with the review, the Company has determined that the Company may be deemed to have violated certain provisions of Section 17 under the 1940 Act related to custody of its assets and certain prohibitions on transactions with its affiliates.  SBM has taken steps to remedy these matters, and to prevent them from occurring in the future.  While the Company has at all times attempted to act in a manner the it believed was consistent with its obligations under the 1940 Act, its 1940 Act compliance review has not yet been completed, and the Company may discover additional possible violations of the 1940 Act upon completion of its review.  While the Company will promptly correct any such violations that may be discovered during its review, it cannot ascertain at this time the extent of any such violations, or the potential impact any such violations may have on SBM.

On June 10, 2011, US Bank resigned as the Company’s custodian and the Company has not yet engaged a replacement custodian.  Because of this, SBM is not currently in compliance with the requirement that it maintain its reserve assets with a qualified custodian under Section 18 of the 1940 Act.  

At December 31, 2007, the Surrender Value of certificateholder liability exceeded qualified assets by $4,090,036.  This indicates that SBM was not in compliance at that time with the reserve requirements under Section 18 of the 1940 Act.  This reserve deficiency has continued since 2007.  As of December 31, 2011, SBM’s certificateholder liability exceeded qualified assets by $19,620,268.

Competition

 The Company’s primary competitors for investment opportunities include real estate investment trusts and partnerships, private equity and venture capital funds, other equity and non-equity based investment funds, including mutual funds and business development companies, and investment banks and other sources of financing, including traditional financial services companies

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such as commercial banks and specialty finance companies.  Many of these entities have greater financial and managerial resources than the Company will have.

SEC Litigation

The Company has been a direct party to SEC litigation (the “SEC Proceeding”) since 2006, and has experienced other regulatory issues that date back to 2003.  These items continue to have a significant effect on the Company’s business.  See ITEM 3. Legal Proceedings.   

Mortgage Services

SBM Mortgage is a wholly-owned subsidiary of SBM.  SBM Mortgage was a mortgage broker and lender of mortgage loan products primarily for residential properties.  Between 2000 and 2004, the mortgage operations originated more than $673.2 million in loans.  Those loans originated as a lender were generally sold to investors who pooled them for sale in the secondary markets. From 2002 to 2004, SBM Mortgage was approved as a non-supervised lender by the United States Department of Housing and Urban Development (“HUD”) and operated as a full service mortgage lender during that period.  In 2004, SBM Mortgage terminated its lending operations based on a change it perceived was occurring in the mortgage industry that would increase the risk associated with mortgage lending operations.

 

SBM Mortgage operated as a mortgage broker between 2002 and 2008, providing a broad range of commercial and residential mortgage products, including first mortgages, second mortgages and home equity loans to a host of borrowers with a broad range of credit standings.

SBM Mortgage also increased its focus on originating prime and sub-prime residential mortgages to individual borrowers on a retail basis during this period. Loan officers work directly with mortgage borrowers who can be identified through telemarketing, advertising to include direct mail, promotional materials and educational seminars or referrals through local real estate agents, builders and others (accountants, etc.).

SBM Mortgage's revenues were generated primarily from the fees it charges borrowers on the origination of mortgage loans through the mortgage brokerage services it provides, and from its lenders on the yield spread premium.

Specific Characteristics of Various Mortgage Loans

Mortgage loans were classified by SBM according to a number of factors related to the borrower and to the underlying property to be financed. These factors are based on government, industry and institutional standards and experience, and are widely employed by mortgage lenders as well as mortgage investors in the secondary trading market.  Government agencies classify mortgage loans in order to assess those which qualify for certain government-sponsored programs and enable purchasers of mortgages to resell them in the form of asset-backed securities.  These classifications help create and maintain a substantial liquid secondary market for these financial assets.  This liquidity in turn ensures that lenders and borrowers will be able to access the mortgage market.

SBM Mortgage established classifications with respect to the credit profiles of loans to sub-prime borrowers based on certain of the applicant's characteristics.  Each applicant for a sub-prime loan was placed into one of four letter credit risk categories, credit grade "A" through "D.”  Ratings were based upon a number of factors, including the applicant's credit history, the value of the property and the applicant's employment status, and were subject to the discretion of SBM's underwriting staff.  Terms of loans made by SBM, as well as the maximum LTV and debt service-to-income coverage (calculated by dividing fixed monthly debt payments by gross monthly income), varied depending upon the classification of the borrower.  Borrowers with lower credit ratings generally pay higher interest rates and loan origination fees.

The following table shows mortgage loan origination volume for each of the 5 years ended December 31, 2007, 2006, 2005, 2004 and 2003.  It is noteworthy to mention the significant occurrences that impacted SBM, including the mortgage operation, during this period.

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		YEAR ENDED		YEAR ENDED		YEAR ENDED		YEAR ENDED		YEAR ENDED
		DECEMBER 31, 2007		DECEMBER 31, 2006		DECEMBER 31, 2005		DECEMBER 31, 2004		DECEMBER 31, 2003
Total Loans:
Volume		6,610,680		17,404,496		33,355,418		29,555,590		167,503,422
Number of loans		25		72		171		141		780
Average loan size		264,427		241,729		195,061		209,614		214,748

Marketing

The primary audience of SBM Mortgage's marketing programs was residential home owners and home buyers.  SBM Mortgage used a combination of direct marketing and third party contacts through real estate professionals, such as real estate brokers, attorneys, accountants, and financial planners to develop new business.

SBM Mortgage’s marketing programs have included market-sensitive advertising in key newspapers and other publications, public relations, promotional materials customized for consumers and real estate professionals, specific materials supporting particular product promotions, educational seminars, trade shows, telemarketing, and sponsoring or promoting other special events. SBM Mortgage has also conducted seminars in conjunction with other real estate professionals, targeting potential home buyers.

Competition

The mortgage banking industry is highly competitive across the United States and within the states where SBM Mortgage conducts business.  SBM Mortgage's competitors included other local mortgage brokers, financial institutions such as other mortgage bankers, state and national commercial banks, savings and loan associations, credit unions, insurance companies, and other finance companies.  Most of these competitors are substantially larger and have considerably greater financial, technical, and marketing resources than SBM Mortgage.

Competition in the mortgage banking industry can take many forms, including convenience in obtaining a loan, customer service, marketing and distribution channels, amount and term of the loan, and interest rates.  SBM Mortgage believes that it is able to compete on the basis of providing prompt and responsive service.

Since a significant investment is required to establish a network of retail branches, potential barriers to market entry exist for any company seeking to provide a full range of mortgage banking services.

Information Systems

SBM Mortgage has designed and integrated into its operations the ability to access critical information for management on a timely basis.  The Company used various software programs designed specifically for the mortgage lending industry.  The information system has provided weekly and monthly detailed information on loans in process, fees, commissions, closings, detailed monthly financial statements and all other aspects of running and managing the business.

Private Placement Notes

SBMS I was formed as a “special purpose entity” 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 were to be invested in real estate, mortgage notes, fixed maturity and equity securities.  The Company has not issued any privately placed investment notes.

 

Re-Emergence Plan

The SEC Proceeding has placed an enormous burden on SBM and its affiliated entities, its management, the employees of SBM Group, the broker-dealers and broker-dealer representatives who have distributed SBM face-amount certificates and third-party supporters.  This proceeding has also damaged SBM’s relationships with its certificateholders.  In addition, the rebuilding will extend to the global financial services community with which it has had relationships prior to this chapter of its existence.  

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SBM’s goals for its certificate holders, broker-dealers, other creditors and other stakeholders after the full resolution of the SEC Proceeding, the outcome of which cannot be predicted at this time, are as follows:  

1.

To determine the optimal corporate structure for the Company going forward, which may result in the Company opting for a reorganization, restructuring and/or recapitalization.

2.

To provide liquidity for all certificateholders, providing them the option to realize value for their investment, possibly through the establishment of a secondary trading market for the interests owned by today’s certificateholders.

3.

To satisfy the Company’s other liabilities, including debts owed to its broker-dealers, SBM Group employees, officers, directors, consultants and professional service firms, among others.  

4.

To re-establish an effective Registration Statement to enable SBM or a successor entity to raise capital in the future.   

5.

To rebuild SBM’s reputation as an investor and lender.

6.

To effect the successful implementation of SBM’s business plan that was curtailed by the matters of the post 2003 Acquisition and the current SEC Proceeding.

The strategy for achieving these goals is outlined in the plan below.  

As of June 30, 2008 SBM Certificate Company had $743,460 of unpaid interest payments, $6,188,364 of unpaid requested early redemptions and $10,808,445 of unpaid request for redemptions from certificates that have become due in the ordinary course of business.  As of December 31, 2011, the Company had approximately $25,316,881 of total redemption and maturity obligations, which includes demands for early redemption of principal and interest plus ordinary-course principal and interest.

SBM Certificate Company
	Demands for Early Redemption of Principal and Interest		Ordinary Course of Business -- Principal and interest		Ordinary Course of Business -- Interest
Total
(as of 6/30/2008)	$6,188,364		$10,808,445		$743,460

The following table estimates the end-of-guarantee value of face-amount certificates (held at 12/31/07) that have and will become due in the ordinary course of business between 2008 and 2016.

SBM Certificate Company
Year		Ordinary Course of Business Guaranty Period End
2008	…………………………………………………………………………..	$8,161,982
2009	…………………………………………………………………………..	$1,122,054
2010	…………………………………………………………………………..	$144,526
2011	…………………………………………………………………………..	$5,237,971
2012	…………………………………………………………………………..	$3,292,888
2013	…………………………………………………………………………..	$12,371
2014	…………………………………………………………………………..	$291,752
2015	…………………………………………………………………………..	$167,682
2016	…………………………………………………………………………..	$95,742
Total	…………………………………………………………………………..	$18,526,968

As noted above, much of SBM’s plans going forward depend upon the final outcome of the SEC Proceeding.  Although a Settlement has been reached, SBM cannot assure when, or if, it will be successful implementing all the terms of the Settlement.  SBM cautions you that the plans discussed above represent only its anticipated plans for operating subsequent to any final resolution

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to the SEC Proceeding.  SBM cannot assure that it will be able to successfully implement the above-referenced plans in the manner it has contemplated, or that its plans will not be changed as a result of external factors, including the lack of necessary financing, an erosion in the value of its existing portfolio of investments, or other general economic factors present at the time the SEC Proceeding is finally resolved.  

1940 Act Compliance

The following chart reflects SBM’s compliance (as of and through December 31, 2007) with Section 28 of the 1940 Act.  Based on the proposed reserve methodology discussed above under “Regulation,” SBM has maintained $1,646,681 and $1,936,654 in excess of its reserve requirement for fiscal years 2005 and 2006, respectively.  In 2007, the Surrender Value of the certificate holder liability exceeded the qualified assets by $4,087,054.   Although the following table indicates that SBM was not in compliance with the reserve requirements under Section 28 of the 1940 Act, it is primarily attributed to the reserves held against assets of $4,626,694.  

Reserve Requirement/Qualified Asset Chart
FY 2004 thru FY 2006
	FY 2005	FY 2006	FY 2006
Account Values
Compounded 500 Series	$ 23,363,177	$ 23,995,335	$ 25,237,984
Annual 500 Series	$ 3,237,591	$ 3,362,588	$ 3,542,756
Quarterly 500 Series	$ 2,941,057	$ 3,030,802	$ 3,196,330
Paid-Up Bonds	$ 1,664,700	$ 1,656,884	$ 1,761,898
Installment Certificates	$ 305,209	$ 284,180	$ 239,486
Income Coupons	$ 306,823	$ 330,394	$ 378,587
Unlocated Certificates	$ 2,218	$ 2,149	$ 2,149
Total Account Value	$ 31,820,776	$ 32,662,332	$ 34,359,190
Calculated Reserve Amounts (1)
Compounded 500 Series	$ 17,376,739	$ 18,233,905	$ 21,067,054
Annual 500 Series	$ 2,489,708	$ 2,695,159	$ 2,930,704
Quarterly 500 Series	$ 221,450	$ 2,369,724	$ 2,576,815
Paid-Up Bonds	$ 1,664,700	$ 1,656,884	$ 1,762,940
Installment Certificates	$ 305,209	$ 284,180	$ 239,589
Income Coupons	$ 306,823	$ 330,394	$ 379,088
Unlocated Certificates	$ 2,218	$ 2,149	$ 2,149
Total Calculated Reserve Requirement	$ 22,366,847	$ 25,572,395	$ 28,958,339
Surrender Value
Compounded 500 Series	$ 19,183,611	$ 19,650,253	$ 27,795,304
Annual 500 Series	$ 2,982,007	$ 2,990,214	$ 3,119,630
Quarterly 500 Series	$ 2,755,407	$ 2,758,725	$ 2,861,124
Paid-Up Bonds	$ 1,664,700	$ 1,656,884	$ 1,761,898
Installment Certificates	$ 305,209	$ 284,180	$ 239,486
Income Coupons	$ 306,823	$ 330,394	$ 378,586
Unlocated Certificates	$ 2,218	$ 2,149	$ 2,149
Total Surrender Value	$ 27,199,976	$ 27,672,799	$ 30,158,179
Total Qualified Assets(2)	$ 29,476,656	$ 29,657,540	$ 26,071,125
Excess/(Shortage) Reserves using Surrender Value	$ 1,646,681	$ 1,936,654	$ (4,087,054)

____________

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(1)

Calculated Reserve Amounts were calculated using a proposed revised discount rate for purposes of calculating the Company’s required reserve amounts under Section 28 of the 1940 Act.  The proposed revised discount rate is equal to the rolling average of the initial yields of each issuance of 30-year U.S. Treasury Bonds during the prior 30-year period, which rolling average would be updated annually as of December 31 of each fiscal year.  As of December 31, 2007, this revised discount rate would have been equal to 8.25%. See “Regulation.”

(2)

Qualified Assets are based on fair value, calculated in accordance with SFAS 107, as permitted by Section 28 of the 1940 Act. See “Note 10 to the Notes to Consolidated Financial Statements”.

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Corporate Information

 The Company’s executive offices are located at 8100 Oak Street, 2^nd Floor, Vienna, VA 22182, and its telephone number is (888) 665-2814.  The Company’s annual and periodic reports are available on the SEC’s website at www.sec.gov.

Employees

SBM has no employees other than its Chief Executive Officer and Chief Financial Officer, who are compensated under consulting agreements with SBM and SBM Group.   The Company’s day-to-day investment operations are managed by its executive committee, which consists of its Chief Executive Officer and Chief Financial Officer.  In addition, the Company reimburses its administrator, SBM Group, for an allocable portion of expenses incurred by it in performing its obligations under the Administrative Services Agreement, including its rent, various administrative expenses, and the compensation of its executive officers, consultants and other administrative support personnel.

ITEM 1A. Risk Factors

The risks described below are not the only ones facing us.   The Company’s business is also subject to the risks that affect many other companies, such as competition, technological obsolescence, labor relations, general economic conditions and geopolitical events.  Additional risks not currently known to the Company or that the Company currently believes are immaterial also may impair its business operations and its liquidity.

Risks Relating to Current Litigation

Continued scrutiny resulting from ongoing litigation may have an adverse effect on the Company’s business.  SBM and others have received subpoenas and requests from the SEC's Division of Enforcement, the Unites States Attorney of Baltimore, Maryland, the United States Attorney General in Washington, D.C. and others seeking the production of voluminous documents in connection with various investigations into the Company’s governance, management, operations, accounting and related controls.  Certain current and former employees have received notices for voluntary informational interviews from the SEC's Division of Enforcement, Office of the Inspector General for the Department of Education and the Internal Revenue Service (“IRS”) seeking testimony related to past financial and accounting practices.  At this time, the Company cannot predict when these investigations will be completed, nor can the Company predict what the results of these investigations may be.  It is possible that the Company will be required to pay material fines, consent to injunctions on future conduct, lose the ability to conduct business with government entities (which in turn could negatively impact its business with non-governmental customers) or suffer other penalties, each of which could have a material adverse effect on its business.  SBM cannot provide assurance that the effects and results of these or other investigations will not be material and adverse to its business, financial condition, results of operations or cash flows.

The SEC Proceeding may require the Company to further amend or restate its public disclosures.  The Company is engaged in legal proceedings with the SEC as described above and below.  SBM cannot provide assurance that the resolution of the SEC Proceeding will not necessitate further amendments or restatements to its previously-filed periodic reports or lead to some enforcement proceedings against SBM.  Final resolution of the SEC Proceeding is subject to a number of uncertainties.

Material adverse legal judgments, fines, penalties or settlements could adversely affect the Company’s financial health and prevent the Company from fulfilling its obligations under its outstanding indebtedness.   The Company’s available cash and its cash flow from operations may not be adequate to fund its operations and service its certificate liability for the foreseeable future.  Any material adverse legal judgments, fines, penalties or settlements arising from the Company’s pending investigations and litigation could require additional funding.  If such developments require the Company to obtain additional funding, the Company cannot provide assurance that the Company will be able to obtain the additional funding that the Company needs on commercially reasonable terms or at all, which could have a material adverse effect on its results of operations and cash flows.

Such an outcome could have important consequences for SBM’s stakeholders.  For example, it could:

·

require the Company to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness, thereby reducing the availability of its cash flow to fund working capital, and other general corporate purposes;

·

increase the Company’s vulnerability to general adverse economic and industry conditions;

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·

limit the Company’s flexibility in planning for, or reacting to, changes in its businesses and the industries in which the Company operates;

·

restrict the Company’s ability to retain current certificate holders;

·

make it more difficult for the Company to satisfy its payment obligations with respect to its outstanding indebtedness; and

·

increase the difficulty and/or cost to the Company of refinancing its indebtedness.

Additional negative publicity may adversely affect the Company’s business.  As a result of actions taken by the SEC’s Division of Enforcement, the Company has been the subject of continuing negative publicity focusing on these actions.  This negative publicity has contributed to significant declines in the Company’s mortgage business (ultimately resulting in that business ceasing operations in 2008) and reduction of its certificate holders, and has brought increased regulatory scrutiny upon the Company from various non-related government agencies.  Additional negative publicity related to current senior corporate management's actions could have a material adverse effect on the Company’s results of operations and cash flows and the ability of SBM Group or the Company to obtain external financing if sought.

 The Company’s Senior Corporate Management team is required to devote significant attention to matters arising from the current civil action brought against the company from the SEC.  SBM cannot provide assurance that the accompanying distractions related to matters arising from the civil action filed by the SEC against certain management will not adversely affect the Company’s results of operations.

Risks Relating to the Company’s Businesses

SBM does not have sufficient cash to pay its independent registered public accounting firm for the required financial audit of its 2007 financial statements.  Due to the Company’s lack of cash resources, the Company did not have sufficient cash to pay its independent registered public accounting firm to complete its audit of the Company’s 2007 financial statements that are included in this Annual Report on Form 10-K.  Since the Company’s Annual Report on Form 10-K for the period ending December 31, 2007 has been filed without audited financial statements and without the required audit opinion of the Company’s current independent registered public accounting firm, its Form 10-K is deficient and does not comply with the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”).   However, the 2004 – 2006 financial information that is included in this Annual Report on Form 10-K is presented with the required audit opinion of the Company’s independent registered public accounting firm.  

SBM intends to complete the required audit of its financial statements for the period ending December 31, 2007 as soon as the Company obtains the necessary funds.  When the Company completes the audits of the annual financial statements, the Company intends to file an amended Annual Report on Form 10-K for the year 2007.   This amended filing may include adjustments to the Company’s financial statements and results of operations as compared to this report filed without audit procedures performed by the Company’s independent registered public accounting firm.

SBM may determine that a restructuring or a reorganization is its best option to continue as a viable business.  SBM and/or one or more of its affiliates therefore may decide to petition for bankruptcy protection pursuant to Chapter 11 of the United States Bankruptcy Code.  As described below in “Legal Proceedings,” SBM has reported to the Court overseeing the SEC Proceeding that the Company is considering attempting to deregister as a registered investment company and embarking upon a corporate reorganization, either through a voluntary exchange by debt-holders or through a prepackaged bankruptcy.  The Company believes that such reorganization would allow it to restructure its balance sheets, including its investments, and could enable it to raise capital in the equity and/or fixed-income markets to provide liquidity for stakeholders and for new investments.  However, SBM can provide no assurance that it will ultimately decide to pursue such reorganization or if such would be successful.

Although the Company continues to maintain investment assets, at the time of this report the Company does not have cash available to fully satisfy its obligations to make payments of certificate interest and principal for redemptions and maturities.    SBM intends to generate cash by investing in income-producing investments and by the purchase and sale of qualified investments.  

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However, SBM can provide no assurance that its investments will be able to generate sufficient cash to enable it to satisfy its obligations to make payments of principal and interest when due.

SBM may be required to liquidate assets in order to pay amounts due on the face-amount certificates currently outstanding.  SBM may be required to liquidate all or a portion of its assets at certain times in order to raise funds necessary to pay amounts of principal and interest due on face-amount certificates upon maturity or at times when principal and interest are otherwise due on such face-amount certificates.  Such liquidations may be required at times when only unattractive liquidation values are available, and thus may materially adversely affect the Company’s financial condition.  SBM has been, and may continute to be unable to liquidate assets on terms that enable it to meet its obligations as they become due.

Little, if any, secondary trading market exists for SBM’s outstanding certificates.   The Company’s face-amount certificates are not issued with “CUSIPs,” the alphanumeric codes used for facilitating clearing and settlement of securities transactions, meaning that they cannot be traded like most other bonds and fixed-income instruments.  Certificate holders may therefore have difficulty liquidating their certificates if the Company continues to be unable to redeem them for cash.  Furthermore, without a secondary trading market from which prices of the Company’s outstanding certificates would be quoted or published, certificate holders may have difficulty determining the actual value of their certificates.  

SBM may issue additional debt.  SBM has the ability, and may determine it is in its best interest, to borrow additional funds or issue additional note securities in the future. You can have no assurance that the face-amount certificates will be the Company’s only outstanding debt or that its assets will not be encumbered by other debt in the future.

 The Company’s investments in real estate and real estate partnerships are subject to risks.  Real estate investments, which represent a significant portion of the Company’s portfolio, are subject to the risks generally incident to the ownership of real property, including liquidity, the need to meet fixed obligations, uncertainty regarding adverse local market conditions due to zoning laws, neighborhood characteristics, interest rates, availability of mortgage funds, changes in real estate property tax rates and other operating expenses, governmental rules and fiscal policies, and other factors which are beyond the Company’s control.  SBM may be unable to resell real estate assets at a profit as a result of adverse conditions in local real estate markets or other factors or the imposition of regulations governing the use of the properties that have an adverse impact on the value of the assets.  Many of these inherent risks may be intensified by economic recession and by other potential economic developments and uncertainties, including the recent downturn in the real estate market generally.

Investments in real property create a potential for environmental liability on the part of the owner of, or any mortgage lender on, such real property.  If hazardous substances are discovered on or emanating from the Company’s investment properties, the owner or operator of the property (including Geneva) may be held strictly liable for all costs and liabilities relating to such hazardous substances.

Ownership and operation of real estate involves certain risks that may be beyond the Company’s control, including:

·

adverse changes in general or local economic conditions;

·

adverse changes in local conditions, such as excessive building resulting in an oversupply;

·

reduction in the appeal of particular types of properties;

·

reduction in the cost of operating competing properties or decreases in employment that reduce the demand for properties in the area;

·

the possible need for unanticipated design changes;

·

adverse changes in surrounding land values;

·

adverse changes in zoning laws, other laws and regulations and real property tax rates;

·

damage from earthquakes or other natural disasters (which may result in uninsured losses);

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·

acts of God (which may result in uninsured losses);

·

acts of terrorism (which may result in uninsured losses);

·

the availability and expense of liability insurance; and

·

our ability to adequately maintain the Company’s property pending sale.

There can be no assurance that any property will be promptly sold to ensure sustained operations or allow adequate cash flows.

 The Company’s investment in construction and development activities, if any, will expose it to certain risks such as cost overruns, carrying costs, availability and costs of materials and labor, weather conditions and government regulation.  Additionally, the Company’s investment in any construction and development activities may require that the Company provides funding for costs in connection with the design and implementation of any development and costs in connection with performing certain oversight and review functions, including costs for reviewing construction design proposals, negotiating and contracting for feasibility studies and supervising compliance with local, state or federal laws and regulations.

Undeveloped land and development properties involve more risk than properties on which development has been completed.  Undeveloped land and development properties do not generate any operating revenue, while costs are incurred to develop the properties.  In addition, undeveloped land and development properties incur expenditures prior to completion, including property taxes and development costs. Also, construction may not be completed within budget or as scheduled and projected sales prices may not be achieved and other unpredictable contingencies beyond the Company’s control could occur.  SBM will not be able to recoup any of such costs until such time as these properties or units are sold.  Accordingly, the greater the length of time it takes to develop or dispose of these properties, or such parcels, the greater will be the costs incurred by SBM without the benefit of income from these properties, which may adversely affect its ability to successfully develop additional properties.  Furthermore, the ultimate disposition price of these properties may be less than the Company’s costs incurred with respect thereto.

 The Company’s financial condition and results of operations may be adversely affected by market fluctuations and other economic factors.  Economic and market conditions and fluctuations in interest rates affect the market value of the Company’s investment portfolio.  Although the Company seeks to control this interest rate risk, the value of its investment portfolio may decrease during periods of sharp changes in interest rates.  If the Company had to sell assets to meet liquidity needs at such a time, the Company could recognize losses on the sale of such assets. These losses could reduce the overall capital resources available to provide a source of funds for the Company’s operations.

Many of the Company’s investments are relatively illiquid.  There may be a limited trading market for many of the assets currently in its portfolio and in certain instances there may be effectively no trading market therefore.   The Company’s investment in illiquid assets may restrict its ability to dispose of such investments in a timely fashion and for an attractive price.  Illiquid assets may trade at a discount from comparable, more liquid investments.

In addition, the Company’s transfer of certain assets will be subject to the satisfaction of legal requirements applicable to transfers that do not require registration or qualification under the 1933 Act or any applicable state securities laws and upon satisfaction of certain other provisions of the respective agreements pursuant to which the collateral assets were issued.  The Company expects that such transfers will also be subject to satisfaction of certain other transfer restrictions.  The existence of such transfer restrictions will negatively affect the liquidity of, and consequently the price that may be realized upon a sale of, such securities.

The illiquidity of assets and the restrictions on transfer of assets, in each case as described above, may affect the value of and the amount and timing of receipt of proceeds from the sale of assets in connection with the exercise of remedies following an event of default.

SBM could be adversely affected by operating and originating loans with in a specific geographic region.  A majority of the Company’s mortgage brokerage business is geographically concentrated in certain states, including Delaware, Maryland, Virginia and the District of Columbia.  Any adverse economic conditions or a tightening of credit standards in these markets could cause the number of loans originated to decrease, likely resulting in a corresponding decline in revenues.  Also, the Company could

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be adversely affected by business disruptions triggered by natural disasters, including the effects of any future hurricanes, or acts of war or terrorism in these geographic areas.

SBM relies on SBM Group to provide the Company with administrative services.  SBM relies upon SBM Group to provide the Company with management and accounting and tax preparation services, as well as office facilities and personnel, for the conduct of the Company’s business under an Administrative Services Agreement.  Any material adverse change to SBM Group could therefore have a material adverse effect on the Company’s ability to conduct its business.

 The Company’s business and growth strategies could be harmed if key personnel terminate their employment with us.   The Company’s success depends, to a significant extent, on the continued services of Eric M. Westbury, its Chief Executive Officer, , and P. Brady Hayden, its Chief Financial Officer, who have extensive market knowledge and long-standing business relationships critical to its operations and growth.  If any of the Company’s senior management team, particularly its Chief Executive Officer and Chief Financial Officer left the SBM organization and the Company failed to effectively manage a transition to new personnel, or if the Company fails to attract and retain qualified and experienced personnel on acceptable terms, its business, financial condition and results of operations could be adversely affected.

 The Company’s investments may not perform as well as past funds managed by SBM Financial or the members of the Company’s executive committee.  Prior investment performance of the personnel managing the Company’s investments may not be indicative of their performance in managing its assets.  The nature of, and risks associated with, the future investment strategies employed by the Company’s investment personnel on its behalf may differ substantially from the types of investments and strategies undertaken historically by such personnel and there can be no assurance that investments made on the Company’s behalf will perform as well as any past or current funds managed by the personnel employed by SBM Financial or the Company’s executive committee.

Conflicts of interest may arise in connection with the Company’s relationship with SBM Group.  Various potential and actual conflicts of interest may arise from the overall activities of SBM Group and their respective and employees, and from possible transactions between SBM and its affiliates.  The following briefly summarizes some of these conflicts, but is not intended to be an exhaustive list of all such conflicts.

SBM Group serves as the Company’s administrator and provides the administrative services necessary for the Company to operate.  Eric M. Westbury, the Company’s Chairman and Chief Executive Officer, is the sole shareholder of Geneva, the sole member of SBM Group.  As a result, he may be deemed to control SBM Group and SBM Financial, its wholly-owned subsidiary, which owns SBM.  As a result, conflicts of interest may arise in connection with the Company’s relationship with SBM Financial and SBM Group.

SBM may also acquire assets via transactions with Geneva Capital Partners, LLC, an affiliate and indirect parent of SBM that makes real estate and equity investments.  Any purchases of real estate assets from Geneva Capital Partners which have processing fees included could become the assets of SBM.

ITEM 1B. Unresolved Staff Comments

Not applicable.

ITEM 2. Properties

As of December 31, 2007 and 2006, SBM owns real estate with a total carrying value of $1,174,931 and $883,407 respectively.  These properties are available for sale.  

In 2001 SBM acquired a mortgage note which was secured by properties in the City of Salem, New Jersey.  The Company subsequently foreclosed on those properties after default by the borrower and has continued to invest in properties in Salem in conjunction with a community redevelopment project, and currently owns 30 noncontiguous properties as part of this project.  As of December 31, 2007 and December 31, 2006, the carrying value of these properties is $1,065,445 and $883,407, respectively.  

SBM also owns a commercial, mixed-use building located at 125 N. Minnesota Street, New Ulm, Minnesota, with a carrying value of $109,486 as of December 31, 2007.  This building currently houses a branch of SBM Group’s Administrative Services division, which provides office space to the Company, and is also partially leased to residential tenants.

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ITEM 3. Legal Proceedings

SEC Litigation

In October 2002, the SEC staff (the “Staff”) initiated a regulatory examination of 1st Atlantic.  In January 2003, the Staff advised 1st Atlantic that it believed 1st Atlantic’s reserves required to be maintained under the 1940 Act to support 1st Atlantic’s outstanding face-amount certificates were inadequate.  In particular, the Staff took the position that 1st Atlantic’s indirect investment in State Bond could not be treated as a qualified investment under the 1940 Act and, therefore, could not be used to satisfy the face-amount certificate reserve requirements of the 1940 Act.

In March 2003, the Staff advised 1st Atlantic that in the absence of satisfactory evidence of an imminent transaction that would restore 1st Atlantic’s reserves, the Staff would recommend to the SEC that a civil injunctive action be brought against 1st Atlantic seeking emergency relief, including among other things, the appointment of a receiver.  On April 23, 2003, the SEC filed a complaint in the United States District Court for the District of Maryland (the “District Court”) alleging that 1st Atlantic was in violation of Sections 28(a) and 28(b) of the 1940 Act because it was not maintaining sufficient certificate reserves (the “1st Atlantic Complaint”). Without admitting or denying the allegations of the 1st Atlantic Complaint, 1st Atlantic agreed to the entry of a temporary restraining order enjoining 1st Atlantic from violating Sections 28(a) and 28(b) of the 1940 Act relating to reserves and qualified investments.

On May 29, 2003, John J. Lawbaugh, the SBM Companies’ then Chief Executive Officer, and owner of the majority shares of 1st Atlantic, filed a voluntary petition for bankruptcy protection pursuant to Chapter 11 of the United States Bankruptcy Code (“Lawbaugh Bankruptcy”).

On November 7, 2003, 1st Atlantic, Geneva Capital Partners, LLC (“Geneva”), a Delaware limited liability company wholly-owned by Eric M. Westbury, the current Chairman of the Board, President and Chief Executive Officer of SBM, and certain other parties in interest agreed to a settlement proposal and filed an emergency motion in the Lawbaugh Bankruptcy Court on November 10, 2003 for the approval of the sale of the equity shares of 1^st Atlantic to Geneva under that proposal.

On December 5, 2003, Geneva acquired control of the 1st Atlantic and SBM.  The SEC Staff participated in the negotiations leading to the terms and consummation of a stock purchase agreement that resulted in the December 5, 2003 sale of 1st Atlantic to Geneva.  Prior to the sale of the 1st Atlantic and SBM to Geneva, the parties entered into a settlement proposal with the SEC Staff. After the settlement agreement was implemented and after the completion of the stock purchase agreement, Geneva contributed $3.2 million of cash to 1st Atlantic and $1.5 million in cash to SBM, amounts agreed to by the SEC Staff as being sufficient to replenish reserves for the benefit of certificate holders.  The Settlement Agreement for this matter was approved and ordered by the Court in the Lawbaugh Bankruptcy after review and consent by the SEC Staff.

For several months prior to April 2006, the Philadelphia staff of the SEC had been conducting an examination of the operations of the SBM Companies.  The SBM Companies had produced documents to the SEC, but no depositions were taken.  

On April 4, 2006, the SEC filed an enforcement action (the “SEC Proceeding”) against the SBM Companies and Geneva and Eric M. Westbury (collectively, the “Defendants”) alleging that since approximately January 2003, the SBM Companies have failed to maintain the statutorily required minimum reserves in cash or qualified investments on their outstanding face-amount certificates, other fraudulent interstate transactions and manipulative and deceptive devices, and requesting emergency relief.

In its complaint SEC v. SBM Investments Certificates Inc., Civil Action No. 06-866-DKC (U.S.D.C. Md.) (the “SBM Complaint”), the Staff alleged that as of December 31, 2005, SBM’s financial statements reflected that it was below what the Staff believed was the applicable reserve requirement.  In addition, the Staff claimed that at the time of the SEC’s last examination of its books and records, SBM’s books and records revealed “obstacles” to the company becoming compliant with those reserve requirements, among them:

·

SBM’s year-end financials for 2002, 2003, and 2004 showed losses of approximately $1.6 million, $1.8 million, and $3.3 million, respectively.

·

Delinquent mortgage loans in SBM’s portfolio represented a significant portion of SBM’s total qualified assets.

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·

Geneva contributed cash and securities to SBM in an attempt to help SBM comply with applicable reserve requirements and, without these contributions, SBM would not have had the necessary assets to continue as a viable investment company.

·

The majority of SBM’s total investments were unqualified.

The SEC’s Complaint, including its allegations and prayer for relief, and its related press release are available online at www.sec.gov/litigation/litreleases/2006/lr19638.htm.  

On April 4, 2006, a hearing was held before U.S. District Court Judge Deborah K. Chasanow in Greenbelt, Maryland.  The Court did not freeze the SBM Companies’ assets or appoint a receiver.  The Court did issue an Order having a material effect on the SBM Companies and certificate holders.  

In its Order, the Court directed the defendants “. . . to notify the court and counsel for the SEC immediately upon receiving any demand, from any investor, for payment of any funds . . . ” and enjoined the defendants “. . . from making any payment based on such demand for a period of seven days from the date of notification to the court and counsel for the SEC . . .”  (the “Freeze Order”).  The effect of the Freeze Order, and a May 12, 2006 Memorandum and Order of the Court, was that the SBM Companies could no longer pay principal and interest to certificate holders, although interest continues to accrue.  The SBM Companies have made periodic reports to the Court of demands from certificate holders for payment of any principal and interest.  

Two additional hearings took place before Judge Chasanow, namely, on May 12 and June 19, 2006.  Between mid-2006 and early February 2007, various reports, pleadings and motions were filed with the Court.  

On February 22, 2007, the SBM Companies filed a 25-page Status Report with the Court.  In the report, there was, among other things, (a) a discussion of business operations, assets and obligations to certificate holders, and (b) a request that the Court’s Orders forbidding payment of interest to certificate holders be modified.  

On the next day, February 23, 2007, Judge Chasanow issued a 59-page Memorandum Opinion and a two page Order granting and denying various motions made by the parties.  The Judge, among other things, ordered that the Court’s April 4 and May 12, 2006 Orders prohibiting payment of principal and interest to certificate holders remain in effect.  She also established a procedure for SBMIC and SBMCC to sell assets.  The Judge did not appoint a receiver, and did not issue a preliminary injunction.  As a result of the Freeze Order, SBM was not free to conduct business in the ordinary course, and was not been able to pay principal and interest on certificates as they would have come due in the ordinary course.

Judge Chasanow addressed each of the parties’ requests and motions in her Memorandum Opinion.   First, Judge Chasanow concluded that the SEC “. . . has not yet provided sufficient evidence as to scienter to support an injunction against future violations of the anti-fraud provisions of the securities laws” and “. . . has not provided sufficient evidence that Geneva and Westbury committed securities fraud against the District of Columbia and would commit future securities fraud to justify a preliminary injunction against future violations of the securities fraud provisions.”  Second, Judge Chasanow held that “Under the circumstances of this case, appointment of a receiver to provide an accounting of Defendants’ affairs is not necessary to preserve the status quo.”  Third, Judge Chasanow held that “. . . the SEC makes a persuasive argument that certificate rollovers constitute the sale or issuance of face-amount certificates under section 28(a)” of the Investment Company Act of 1940.  Fourth, Judge Chasanow concluded that the SEC “. . . has made a sufficient showing, at this preliminary stage, that it is likely to prevail on the question of whether Defendants SBMCC and SBMIC are required to maintain qualified reserves under section 28 of the Investment Company Act of 1940” and “. . . has offered sufficient evidence to conclude at this stage that SBMCC and SBMIC have likely violated the qualified reserve requirements and will likely continue to be in violation during the pendency of this action.”  

Following Judge Chasanow’s Memorandum Opinion, very preliminary discussions were initiated with the SEC staff toward an amicable resolution of this proceeding.  

On June 22, 2007 the Reznick Group, P.C. and SBM agreed that Reznick would conclude its services as the the Company’s’ independent registered public accounting firm, which agreement was reached after Reznick concluded, in the exercise of its sole discretion and without input from the Company, that risk associated with continuing its engagement with the Company precluded a continued engagement.  A Current Report on Form 8-K was filed with the SEC reporting on the resignation of Reznick.  A copy of the Form is available online at http://www.sec.gov/Archives/edgar/data/870398/000115752307006458/a5437117.txt.

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On June 22, 2007 the Boards of Directors approved the engagement of RBSM LLP as new independent registered public accountants for the SBM Companies.  RBSM has begun its accounting work for the Companies.  A Current Report on Form 8-K was filed with the SEC reporting on the engagement of RBSM as new accountants.  A copy of the Form is available online at http://www.sec.gov/Archives/edgar/data/870398/000115752307006926/a5449810.txt.

On February 5, 2008, Judge Chasanow directed that the civil litigation be referred to Judge William Connelly, then United States Magistrate Judge for the District of Maryland, for settlement purposes.  

On May 5, 2008, as ordered by Judge Chasanow, SBM filed its Form 10-K for the years ending December 31, 2006, 2005, and 2004.  These audited financial statements reflect that the fair value of qualified assets exceed the Surrender Value of certificate holder liability for the years ended December 31, 2006, 2005 and 2004, which is in compliance with Section 28 of the 1940 Act for all three years.

Judge Connelly held mediation sessions with the parties on various dates between 2008 and 2010, including specifically May 29, 2008, July 15, 2008, September 16, 2008, and April 28, 2010, during which a framework for a final settlement began to take shape, however no settlement was yet reached.  During this period and as settlement discussions continued, SBM filed various applications for exemptive relief with the SEC under various securities laws, including the 1940 Act and the Advisers Act.  One of the primary objectives of these applications was to provide for terms of a potential settlement that allowed for the Company’s executive management team to remain in place.  

As the parties continued settlement discussions, Judge Chasanow set trial dates for December 2010 and the parties began their discovery.  Judge Chasanow subsequently postponed the December 2010 trial dates given that a settlement at that point was immanent.

On February 28, 2011, the parties reached a settlement (“Settlement”).  Without admitting or denying the allegations in the lawsuit, the SBM Companies consented to a Final Consent Judgment and a Cease-and-Desist Order pursuant to various federal securities laws.  Also without admitting or denying the SEC’s allegations, Geneva and Eric M. Westbury consented to a Cease-and-Desist Order; however the SEC dismissed all allegations against them.  Specific terms of the FCJ include:

·

The SBM Companies were to engage an Independent Consultant who is charged with, among other items, completing an inventory of their reserve assets and outstanding certificates, perform a comprehensive review of their accounting practices, procedures and internal controls and make recommendations to their Boards of Directors (“Boards”).  Additionally the Consultant is to provide various reports to the Boards and provide recommendations to the SBM Companies with regard to their accounting policies and procedures including their compliance with the 1940 Act.

·

All prior Orders under the action, including the Freeze Order, were dissolved.

·

Within nine months and twelve months of the entry of the FCJ, the SBM Companies were to resume the payments of interest and principal, respectively, owed under the face-amount certificates.  

·

The SBM Companies were responsible for completing various other undertakings, including a timeframe by which SBM’s delinquent annual reports are to be filed.

·

While a Settlement has been reached, the Court retained jurisdiction over the Proceeding for the purpose of enforcing the FCJ.

Pursuant to the terms of the Settlement, on March 4, 2011 Eric M. Westbury resigned as President of the SBM Companies.  Mr. Westbury remains Chairman and Chief Executive Officer of the SBM Companies.  

On June 29, 2011, the SEC and the SBM Companies filed a Joint Status Report with the Court.  In this report, the parties acknowledged that the SBM Companies had requested several extensions with regard to the deadlines of the FCJ, and were otherwise non-compliant with certain terms of the settlement, notably the engagement of the Independent Consultant.  The parties also reported to the Court in this filing that the SBM Companies were considering attempting to deregister as investment companies and reorganize and restructure their balance sheets, including their investments.  

On August 24, 2011, the SEC filed with the Court a Motion to hold the SBM Companies in Civil Contempt of Court for failing to comply with the FCJ.  Hearings were held on September 13, October 17, November 18 and November 29, 2011 to consider the SEC’s motion.

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Pursuant to the terms of the Settlement, on August 26, 2011, SBM Financial resigned as investment adviser to the SBM Companies.  As of that date, SBM’s executive committee, consisting of the same individuals who were principals of SBM Financial and responsible for investment decisions pertaining to the Company for SBM Financial, assumed the role of directly managing the investments of the Company.

 

On October 31, 2011, the SBM Companies engaged Laurence A. Friend as Independent Consultant and he subsequently began his work to complete the inventory of reserve assets of the SBM Companies, among other items.

Due to liquidity constraints, the SBM Companies were not able to resume the payment of interest and principal as required by the FCJ.

On March 2, 2012, the Court found the SBM Companies in Civil Contempt.  On April 27, 2011, a hearing was held to determine the proper remedies for the contempt.  On that date, the Court issued an order outlining the remedies, which include, among other items, various undertakings regarding the SBM Companies’ monthly reports to be filed with the SEC and the Court, the opening of bank accounts by SBMCC, and requiring the SBM Companies to provide notice to the SEC prior to certain asset sales.

Furthermore, SBMCC has committed to filing its delinquent annual reports for the years 2008 – 2010 with the SEC.

Other Matters

The Company recognizes an obligation of $99,013.29 to the Law Office of John M. Fedders, one of the SBM Companies’ former law firms representing them in the SEC litigation.  On August 3, 2009, the Circuit Court for Montgomery County Civil System entered a judgment against the SBM Companies for this amount.

ITEM 4. Submission of Matters to a Vote of Security Holders

Not applicable.

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PART II

ITEM 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   

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, 2004, 2005, 2006 and 2007.

  

ITEM 6. SELECTED FINANCIAL DATA

The following table contains selected financial data of SBM for the five years ended December 31, 2007.  The financial data was derived from the Company’s unaudited financial statements.  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.

____________

* Earnings (loss) per share based on 250,000 shares issued and outstanding.

	YEAR ENDED DECEMBER 31
	2007		2006		2005		2004		2003
			(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA
Total investment income	340		5,852		583		1,198		2,705
Interest credited on certificate reserves	(1,692)		(1,714)		(1,845)		(2,037)		(2,424)
Net investment spread	(1,352)		4,138		(1,262)		(839)		280
Total investment and other expenses	(3,533)		(2,030)		(3,083)		(3,212)		(2,160)
Net investment income (loss) before taxes and gains	(4,886)		2,108		(4,345)		(4,051)		(1,879)
Net realized investment gains (losses)	92		(13)		(428)		237		150
Net investment income (loss) before taxes	(4,794)		2,095		(4,773)		(3,814)		(1,729)
Net other operating income (loss)	(90)		143		(185)		(326)		(281)
Net investment and other operating income (losses)	(4,885)		2,238		(4,958)		(4,140)		(2,011)
Federal income tax (expense) benefit	-		-		-		1		(15)
Net operating income (loss)	(4,885)		2,238		(4,958)		(4,140)		(2,026)
Non-operating expense	(1,569)		(896)		(846)		(1,103)		(461)
Net income (loss)	(6,454)		1,341		(5,805)		(5,243)		(2,487)
Earnings (loss) per share*	(25.82)		5.36		(23.22)		(20.97)		(9.95)
BALANCE SHEET DATA (END OF PERIOD)
Total assets	31,045		37,822		37,493		44,280		50,594
Total liabilities	35,301		35,445		36,631		37,815		42,844
Shareholder's equity (deficit)	(4,256)		2,376		863		6,464		7,749
*Earnings (loss) per share based on 250,000 shares issued and outstanding.

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ITEM 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following information should be read in conjunction with the accompanying unaudited financial statements and related notes included elsewhere in this report.  This annual report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties.  These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about the Company’s industry, its beliefs, and its assumptions.  Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” and “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements.  These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond the Company’s control and difficult to predict, and which could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

 

	•		an economic downturn could impair the Company’s customers’ ability to repay their loans and increase its non-performing assets,

	•		a contraction of available credit and/or an inability to access the equity markets could impair the Company’s lending and investment activities,

 

	•		interest rate volatility could adversely affect the Company’s results, and

 

	•		the risks, uncertainties and other factors the Company identifies in “Risk Factors” and elsewhere in this Form 10-K and in the Company’s filings with the SEC.

Although the Company believes that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate.  Important assumptions include the Company’s ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this annual report should not be regarded as a representation by the Company that its plans and objectives will be achieved.  These risks and uncertainties include those described or identified in “Risk Factors” and elsewhere in this annual report.  You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report.

The following analysis of the Company’s financial condition and results of operations should be read in conjunction with its financial statements and the related notes thereto contained elsewhere in this Form 10-K.

Overview

SBM is a face-amount certificate company registered under the 1940 Act that issues and services fixed-rate face-amount certificates.  During 2007, and until August 26, 2011, SBM Financial, formerly an independent adviser registered under the Advisers Act, served as investment adviser to SBM.  SBM Group provides the administrative services necessary for the Company to operate.

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, the investment of related funds, and other related service activities.  The certificates issued by SBM are not insured by any government agency.  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 “issue” 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

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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, which the Company refers to as its investment spread.  SBM'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.

As of December 31, 2007 and 2006, the Company’s total assets were approximately $31 million and $37.8 million, respectively, while its aggregate certificate liability was approximately $34.4 million and $32.7 million, respectively.  As of the end of the 2007 and 2006 fiscal years, the Company’s outstanding liabilities excluding certificate liability totaled approximately $0.9 million and $2.8 million, respectively.

Portfolio Review

SBM invests its assets in accordance with the provisions of the 1940 Act, which requires that the Company maintains a portion of its investment portfolio solely in cash or “qualified investments,” as such term is defined in Section 28.  Section 28 defines “qualified investments” to include investments of a kind which life insurance companies are permitted to invest in or hold under the provisions of the Code of the District of Columbia.  SBM refers to the portion of its portfolio that must be held in either cash or qualified investments as its reserves.  Likewise Section 28 dictates the required amount of such reserves, which the Company refers to as the reserve amount.  In accordance with Section 28, the reserve amount is generally equal to the higher of (i) the Surrender Value of the Company’s outstanding face-amount certificates and (ii) the amount or amounts payable when due under its outstanding face-amount certificates, discounted back to present value at an assumed annual rate of return.  Surrender value is generally equal to a certificate’s Account Value (principal plus accrued and payable interest, if any), less the early surrender charge applicable to that certificate.

 The Company’s investment policy is to invest reserves in a variety of investments that diversify risk, provide a reasonable return on investment and allow for liquidity consistent with its cash requirements.  The Company’s portfolio as of December 31, 2007 included fixed maturity securities, equity securities, mortgage notes, real estate, real estate partnerships, a CMO residual and real estate tax lien certificates.  SBM monitors its short-term liquidity needs in an attempt to ensure that cash flow from investments allows for the payment of all of its obligations due, including expected cash outflow to certificate holders, with the goal of maintaining an adequate level of liquidity for maturing face-amount certificates.  In addition, the investment strategy also is designed to provide protection of the investment portfolio from adverse changes in interest rates.

 The Company’s investments in available-for-sale securities totaled approximately $29,382 at December 31, 2007, representing approximately 0.1% of its total investment portfolio, compared to approximately 2% of its total investment portfolio at December 31, 2006.  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 fund investments.  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 affected 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.   The Company’s investments in equity securities are subject to market risk and fluctuations in the market value of the securities.  Fluctuations in market value of equity securities affect the yield on the investment and could result in a reduction in the principal amount invested in the security.  SBM takes 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,” the Company classifies its fixed maturity and equity securities as available-for-sale.  Such securities are carried at fair value and changes in fair value, net of deferred income taxes, are charged or credited directly to shareholder’s equity.  Volatility in reported shareholder’s equity occurs as a result of the application of SFAS No. 115, which requires some assets to be carried at fair value while other assets and all liabilities are carried at historical values.  As a result, adjusting the shareholder’s equity for changes in the fair value of the Company’s available-for-sale securities without reflecting offsetting changes in the value of its liabilities or other assets creates volatility in reported shareholder’s equity but does not reflect the underlying economics of SBM’s business.

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 The Company’s investments in residential and commercial real estate mortgage notes receivable totaled approximately $8.0 million at December 31, 2007, representing approximately 34% of the total investment portfolio, compared to approximately 31% of the Company’s total investment portfolio at December 31, 2006.  These real estate mortgage notes are secured by the underlying real property and other assets as well.

SBM holds an investment in a real estate limited liability corporation (LLC) with a carrying value of approximately $10.2 million at of December 31, 2007, representing 43% of the investment portfolio, compared to approximately 47% of its total investment portfolio at December 31, 2006.

 The Company’s investment in real estate tax lien certificates are comprised of delinquent real estate tax bills purchased from municipalities at a discount.  They are generally 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, 2007, the real estate tax lien certificates had a balance of approximately $207,051, or 0.88% of the total investment portfolio, compared to approximately 0.79% of the Company’s total investment portfolio at December 31, 2006.

SBM holds an investment in a residual tranche of a collateralized mortgage obligation (“CMO residual”) with a principal balance of $1.3 million as of December 31, 2007, representing 5.4% of the total investment portfolio, compared to approximately 4.9% of its total investment portfolio at December 31, 2006.  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 CMO residual interest 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.  SBM will only receive payments if there is cash generated by the Trust in excess of operating costs and payments to guaranteed interest holders.

SBM also owns real estate investments totaling approximately $1.2 million as of December 31, 2007, representing approximately 5.0% of the investment portfolio, compared to approximately 4.8% of its total investment portfolio at December 31, 2006.

Results of Operations

In the normal course of operations, SBM’s net income is derived primarily from its yield on investments, or investment income, and realized capital gains (losses), less investment expenses and interest credited on certificate liability reserves.   Changes in net income trends occur largely due to changes in investment returns in SBM’s portfolio, from realization of capital gains (losses), and from changes in interest crediting rates to certificate products.  SBM follows U.S. generally accepted accounting principles.   As a result of the Current SEC Proceedings and the Freeze Order, SBM has not been free to conduct business in the ordinary course, which has had a significant and negative impact on its business operations.

Comparison of years ended December 31, 2007 and December 31, 2006

Investment Income

Investment income for the year ended December 31, 2007 was $340,120, compared to approximately $5.9 million for the year ended December 31, 2006, representing a change of approximately ($5.6) million from the prior year.  This amount consisted primarily of interest and dividend income, other investment income, mortgage interest income, and other income, offset by losses on SBM’s investment in SBM Mortgage.

Interest and dividend income was $135,835 for the year ended December 31, 2007, compared to approximately $5.46 million for the year ended December 31, 2006, representing a change of approximately ($5.3) million from the prior year.   Mortgage interest income was $204,285 for the year ended December 31, 2007, compared to $388,835 for the year ended December 31, 2006, representing a change of ($184,550) from the prior year.  Other investment income was approximately $0 for the year ended December 31, 2007, compared to $4,715 for the year ended December 31, 2006, representing a change of ($4,715) from the prior year.

Realized Gains (Losses) on Investments

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SBM had realized gains on investments of $91,504 for the year ended December 31, 2007, compared to ($13,457) for the year ended December 31, 2006, representing an increase of $104,961 from the prior year.

Operating Expenses

Operating expenses for the year ended December 31, 2007 were approximately $5.45 million, compared to approximately $3.96 million for the year ended December 31, 2006, representing an increase of approximately $1.49 million from the prior year. This amount consisted primarily of interest credited on the Company’s certificate liability, administrative services fees, legal and accounting fees and other expenses.

Interest credited on the Company’s certificate liability was approximately $1.69 million for the year ended December 31, 2007, compared to approximately $1.71 million for the year ended December 31, 2006, representing a change of approximately ($.02) million from the prior year. Administrative services fees were approximately $2.35 million for the year ended December 31, 2007, compared to approximately $1.73 million for the year ended December 31, 2006, representing an increase of approximately ($0.62) million from the prior year.  Legal and accounting fees were $804,018 for the year ended December 31, 2007, compared to $197,829 for the year ended December 31, 2006, representing an increase of $606,189 from the prior year.  Other expenses were $228,123 for the year ended December 31, 2007, compared to $214,996 for the year ended December 31, 2006, representing a change of ($13,127) from the prior year.

Net Loss from Operations

SBM had a net loss from operations of approximately $4.88 million for the year ended December 31, 2007, compared to a net income from operations of approximately $2.24 million for the year ended December 31, 2006, representing a change of approximately ($7.12) million from the prior year.  As a result of the Freeze Order, SBM was not been free to conduct business in the ordinary course during 2007, which had a significant and negative impact on its business operations during the year.

Comparison of years ended December 31, 2006 and December 31, 2005

Investment Income

Investment income for the year ended December 31, 2006 was approximately $5.9 million, compared to $582,632 for the year ended December 31, 2005, representing an increase of approximately $5.3 million from the prior year.  This amount consisted primarily of interest and dividend income, other investment income, mortgage interest income, and other income, offset by losses on SBM’s investment in SBM Mortgage.

Interest and dividend income was approximately $5.5 million for the year ended December 31, 2006, compared to approximately $0.3 million for the year ended December 31, 2005, representing an increase of approximately $5.2 million from the prior year.  Mortgage interest income was $388,835 for the year ended December 31, 2006, compared to $321,869 for the year ended December 31, 2005, representing a change of $69,966 from the prior year.  Other investment income was $4,715 for the year ended December 31, 2006, compared to $2,354 for the year ended December 31, 2005, representing an increase of $2,361 from the prior year.

Realized Gains (Losses) on Investments

SBM had realized losses on investments of ($13,457) for the year ended December 31, 2006, compared to ($428,331) for the year ended December 31, 2005 representing a change of $414,874 from the prior year.

Operating Expenses

Operating expenses for the year ended December 31, 2006 were approximately $3.96 million, compared to approximately $5.78 million for the year ended December 31, 2005 representing a change of approximately ($1.8) million from the prior year.  This amount consisted primarily of interest credited on the Company’s certificate liability, administrative services fees, legal and accounting fees and other expenses.

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Interest credited on the Company’s certificate liability was approximately $1.71 million for the year ended December 31, 2006 compared to approximately $1.84 million for the year ended December 31, 2005 representing a change of ($130,775) from the prior year. Administrative services fees were approximately $1.73 million for the year ended December 31, 2006 compared to approximately $2.13 million for the year ended December 31, 2005 representing a change of approximately ($0.4) million from the prior year.  Legal and accounting fees were $197,821 for the year ended December 31, 2006 compared to $679,398 for the year ended December 31, 2005 representing a change of ($481,577) from the prior year.  Other expenses were $214,996 for the year ended December 31, 2006 compared to $847,680 for the year ended December 31, 2005 representing a change of ($632,684) from the prior year.

Net Income (Loss) From Operations

SBM had net income from operations of approximately $2.24 million for the year ended December 31, 2006 compared to a net loss from operations of approximately ($4.96) million for the year ended December 31, 2005 representing a change of approximately $7.20 million from the prior year.

Liquidity and Capital Resources

As of December 31, 2007, December 31, 2006 and December 31, 2005 the Company had ($4,087,054), $1,936,655 and $1,646,681, respectively, of cash and qualified investments in excess of (below) the minimum reserve amount required by Section 28 under the 1940 Act, as computed in accordance therewith.

During the year ended December 31, 2007, cash and cash equivalents decreased from $441,664 at the beginning of the period to $27,774 at the end of the period.  Net cash used by operating activities for the year ended December 31, 2007, consisting primarily of the items described in “— Results of Operations,” was approximately $240,345. SBM engaged in no financing activities during the year ended December 31, 2007.

As shown in the accompanying financial statements during the year ended December 31, 2007, the Company incurred a loss of $6,453,876 which resulted in a deficiency in shareholder’s equity of ($4,256,162) and it sustained negative cash flows from operating and financing activities.  SBM’s future existence is dependent upon management’s ability to transact business and develop profitable operations.  During 2007, SBM operated under the terms of a Freeze Order imposed in the U.S. District Court for the District of Maryland (See Footnote 18) rendering it unable to transact business in accordance with its usual operations.  The civil litigation matter is presently in the midst of mediation sessions, and management is diligently working with the Court and the SEC to settle the matter. In addition, to improve the Company’s liquidity, management is actively pursuing additional equity financing through discussions with investment bankers and private investors.  While the Company is continuing the above efforts, no assurance can be given that management’s actions will result in a favorable settlement with the SEC, developing profitable operations, attract additional equity financing or the improvement of its liquidity position.

During the year ended December 31, 2006, cash and cash equivalents increased from $165,365 at the beginning of the period to $441,664 at the end of the period. Net cash used by operating activities for the year ended December 31, 2006, consisting primarily of the items described in “— Results of Operations,” was approximately $4.6 million. SBM engaged in no financing activities during the year ended December 31, 2006.

Off-Balance Sheet Arrangements

Currently, the Company does not engage in any off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

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CONTRACTUAL OBLIGATIONS

The following table shows the Company’s significant contractual obligations as of December 31, 2007.

			Payments Due by Period (in thousands)
Contractual Obligations			Total	Less than 1 year	1-3 years	3-5 years	More than 5 years
Face-amount certificates (1)			$34,359,190	$18,017,396	$10,857,399	$3,003,444	$2,480,951
(1)	Reflects the respective maturity dates of the Company’s face-amount certificates outstanding as of December 31, 2006.  Under normal circumstances, face-amount certificates may be redeemed prior to maturity at the end of specified periodic guarantee periods without penalty by the holders thereof, or at any time prior to maturity subject to payment of the surrender charge applicable to such certificate.  Amounts listed under “Less than 1 year” include face-amount certificates that have matured or been redeemed prior to December 31, 2006, but which SBM has been prohibited from making payments on as a result of the ongoing SEC legal proceeding.

In addition, the Company had certain obligations with respect to the investment advisory and administrative services the Company received during the year ended December 27, 2007.  See “—Overview.”  SBM incurred approximately $2.35 million for administrative services for the year ended December 31, 2007.

Borrowings

Other than the liabilities discussed above, at December 31, 2007 and 2006 the Company had outstanding borrowings of $0.

Re-Emergence Plan

The SEC Proceeding has placed an enormous burden on SBM and its affiliated entities, its management, employees, broker-dealers and broker-dealer representatives and third-party supporters.  This proceeding has also created an enormous challenge for SBM to rebuild its relationships with its certificate holders and the investing community to which it has provided its services. In addition, the rebuilding will extend to the global financial services community with which it has had relationships prior to this chapter of its existence.  

SBM’s goals for its certificate holders, broker-dealers, other creditors and other stakeholders after the full resolution of the SEC Proceeding, the outcome of which cannot be predicted at this time, are as follows:  

1.

To determine the optimal corporate structure for the Company going forward, which may result in a reorganization or restructuring and/or recapitalization of the Company.

2.

To provide liquidity for all certificateholders, providing them the option to realize value for their investment, optimally through the establishment of a secondary trading market for the interests owned by today’s certificateholders.

3.

To satisfy the Company’s other liabilities, including debts owed to its broker-dealers, employees, officers, directors, consultants and professional service firms, among others.  

4.

To re-establish an effective Registration Statement to enable SBM to raise capital in the future.   

5.

To rebuild SBM’s reputation as an investor and lender.

6.

To effect the successful implementation of SBM’s business plan that was curtailed by the matters of the post 2003 acquisition and the Current SEC Proceeding.

The strategy for achieving these goals is outlined in the plan below.  

As of June 30, 2008 SBM Certificate Company has $743,460 of unpaid interest payments, $6,188,364 of unpaid requested early redemptions and $10,808,445 of unpaid request for redemptions from certificates that have become due in the ordinary course of business.  As of December 31, 2011, the Company had approximately 25,316,881 of total redemption and maturity obligations, which includes demands for early redemption of principal plus interest plus ordinary-course principal plus interest.

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SBM Certificate Company
	Demands for Early Redemption of Principal and Interest		Ordinary Course of Business -- Principal and interest		Ordinary Course of Business -- Interest
Total
(as of 6/30/2008)	$6,188,364		$10,808,445		$743,460

The following table estimates the end-of-guarantee period Account Value of face-amount certificates (held at 12/31/07) that have and will become due in the ordinary course of business between 2008 and 2016.

SBM Certificate Company
Year		Ordinary Course of Business Guaranty Period End
2008	…………………………………………………………………………..	$8,161,982
2009	…………………………………………………………………………..	$1,122,054
2010	…………………………………………………………………………..	$144,526
2011	…………………………………………………………………………..	$5,237,971
2012	…………………………………………………………………………..	$3,292,888
2013	…………………………………………………………………………..	$12,371
2014	…………………………………………………………………………..	$291,752
2015	…………………………………………………………………………..	$167,682
2016	…………………………………………………………………………..	$95,742
Total	…………………………………………………………………………..	$18,526,968

As noted above, much of SBM’s plans going forward depend upon the final outcome of the SEC Proceeding.  Although a Settlement has been reached, SBM cannot assure when, or if, it will be successful implementing all the terms of the Settlement.  SBM cautions you that the plans discussed above represent only its anticipated plans for operating as it moves forward after the settlement.  SBM cannot assure that it will be able to successfully implement the above-referenced plans in the manner it has contemplated, or that its plans will not be changed as a result of external factors, including the lack of necessary financing, an erosion in the value of the Company’s existing portfolio of investments, or other general economic factors present at the time the SEC Proceeding is finally resolved.

1940 Act Compliance

Although the following table indicates that SBM was not in compliance with the reserve requirements under Section 28 of the 1940 Act as of December 31, 2007, the value of its qualified assets is reflected net of reserves recorded against assets of $4,626,694.  

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Reserve Requirement/Qualified Asset Chart
FY 2004 thru FY 2006
	FY 2005	FY 2006	FY 2006
Account Values
Compounded 500 Series	$ 23,363,177	$ 23,995,335	$ 25,237,984
Annual 500 Series	$ 3,237,591	$ 3,362,588	$ 3,542,756
Quarterly 500 Series	$ 2,941,057	$ 3,030,802	$ 3,196,330
Paid-Up Bonds	$ 1,664,700	$ 1,656,884	$ 1,761,898
Installment Certificates	$ 305,209	$ 284,180	$ 239,486
Income Coupons	$ 306,823	$ 330,394	$ 378,587
Unlocated Certificates	$ 2,218	$ 2,149	$ 2,149
Total Account Value	$ 31,820,776	$ 32,662,332	$ 34,359,190
Calculated Reserve Amounts (1)
Compounded 500 Series	$ 17,376,739	$ 18,233,905	$ 21,067,054
Annual 500 Series	$ 2,489,708	$ 2,695,159	$ 2,930,704
Quarterly 500 Series	$ 221,450	$ 2,369,724	$ 2,576,815
Paid-Up Bonds	$ 1,664,700	$ 1,656,884	$ 1,762,940
Installment Certificates	$ 305,209	$ 284,180	$ 239,589
Income Coupons	$ 306,823	$ 330,394	$ 379,088
Unlocated Certificates	$ 2,218	$ 2,149	$ 2,149
Total Calculated Reserve Requirement	$ 22,366,847	$ 25,572,395	$ 28,958,339
Surrender Value
Compounded 500 Series	$ 19,183,611	$ 19,650,253	$ 27,795,304
Annual 500 Series	$ 2,982,007	$ 2,990,214	$ 3,119,630
Quarterly 500 Series	$ 2,755,407	$ 2,758,725	$ 2,861,124
Paid-Up Bonds	$ 1,664,700	$ 1,656,884	$ 1,761,898
Installment Certificates	$ 305,209	$ 284,180	$ 239,486
Income Coupons	$ 306,823	$ 330,394	$ 378,586
Unlocated Certificates	$ 2,218	$ 2,149	$ 2,149
Total Surrender Value	$ 27,199,976	$ 27,672,799	$ 30,158,179
Total Qualified Assets(2)	$ 29,476,656	$ 29,657,540	$ 26,071,125
Excess/(Shortage) Reserves using Surrender Value	$ 1,646,681	$ 1,936,654	$ (4,087,054)

____________

(1)

Calculated Reserve Amounts were calculated using a proposed revised discount rate for purposes of calculating the Company’s required reserve amounts under Section 28 of the 1940 Act. The proposed revised discount rate is equal to the rolling average of the initial yields of each issuance of 30-year U.S. Treasury Bonds during the prior 30-year period, which rolling average would be updated annually as of December 31 of each fiscal year. As of December 31, 2007, this revised discount rate would have been equal to 8.25%. See “Regulation.”

(2)

Qualified Assets are based on fair value, calculated in accordance with SFAS 107, as permitted by Section 28 of the 1940 Act. See “Note 10 to the Notes to Consolidated Financial Statements”.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

 The Company’s investments are represented by a mixture of available-for-sale securities (comprised of government and corporate bonds, mortgage-backed securities, 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 the Company’s investments and

30

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those paid under the face-amount certificates is fundamental to its 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.  

To illustrate the potential impact of a change in the underlying interest rate on the Company’s net income, the Company has assumed a 1% increase in the rates payable on its outstanding certificates and those investments the Company holds with variable interest rates, and no other change in its portfolio as of December 31, 2007.  Under this analysis, net income would increase by approximately $0.3 million annually.  Although management believes that this analysis is indicative of the Company’s existing interest rate sensitivity, it does not adjust for changes in the credit quality, size and composition of its portfolio, and other business developments that could affect its net income.  Accordingly, no assurances can be given that actual results would not differ materially from the results under this hypothetical analysis.

SBM regularly analyzes interest rate sensitivity and the potential impact of interest rate fluctuations based on a range of different interest rate models.  These provide "benchmarks" for assessing the impact on the Company’s earnings if rates moved higher or lower than the expected targets set in its investment guidelines.  SBM continues to formulate strategies directed at protecting earnings for the potential negative effects of changes in interest rates.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements
Consolidated Balance Sheets of SBM as of December 31, 2007 and 2006	33
Consolidated Statements of Operations of SBM for the years ended   December 31, 2007 and 2006	35
Consolidated Statements of Shareholders’ Equity and Partners’ Capital for SBM for   the years ended  December 31, 2007 and 2006	38
Consolidated Statements of Cash Flows of SBM for the years ended   December 31, 2007 and 2006	39
Notes to Consolidated Financial Statements	42
Supplemental Schedules
Schedule I — Investments in Securities of Unaffiliated Issuers	63
Schedule II — Investments in Advances to Affiliates and Income Thereon	64
Schedule III — Mortgage Loans on Real Estate and Interest Earned on Mortgages	65
Schedule IV — Real Estate Owned and Rental Income	66
Schedule V — Qualified Assets on Deposit	67
Schedule VI — Certificate Reserves	68
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.

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SBM Certificate Company and Subsidiaries

CONSOLIDATING BALANCE SHEET

December 31, 2007

	SBM Certificate Company and SBMS I	SBM Mortgage	Eliminating Entries	Total
Qualified Assets
Cash and investments
Available-for-sale securities	$ 29,392	$ -	$ -	$ 29,382
Mortgage notes held for sale	-	296,460	-	296,460
Mortgage notes held for investment	8,001,107	-	-	8,001,107
Investments in real estate limited liability company	10,200,000	-	-	10,200,000
Real estate tax lien certificates	207,051	-	-	207,051
Real estate owned	1,174,931	-	-	1,174,931
CMO Residual	1,267,516	-	-	1,267,516
Certificate loans	73,441	-	-	73,441
Cash and Cash equivalents	27,774		-	27,774
Cash in trust	1,279,663			1,279,662
Restricted Cash	50,403	164,555	-	214,957
Total cash and investments	22,311,267	461,015	-	22,772,282
Dividends and interest receivable	742,490	22,635	-	765,125
Total qualified assets	23,053,757	483,650	-	23,537,407
Other assets
Related party receivable	1,138,443	9,859	(16,333)	1,131,969
Fixed assets, net of accumulated depreciation  of $330 & $748	1,417	20,192	-	21,609
Investment in subsidiary	513,088	-	(513,088)	-
Goodwill	5,689,715	-	-	5,689,715
Intangible assets	535,979	-	-	537,979
Deferred acquisition costs, net	73,250	-	-	73,250
Other assets	54,937	-	-	54,937
Total assets	$ 31,060,587	$ 513,701	$ (529,421)	$ 31,044,867
Liabilities
Statutory certificate liability	$ 34,359,190	$ -	$ -	$ 34,359,190
Accounts payable and other liabilities	929,972	613	-	930,585
Related party payable	27,587	-	(16,333)	11,254
Total liabilities	35,316,749	613	(16,333)	35,301,029
Shareholders’ equity
Common stock, $1 par value; 10,000,000 shares  authorized; 250,0000 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	13,066,581	4,421,956	(4,421,956)	13,066,581
Accumulated comprehensive income, net of taxes	(9,993)	—	—	(9,993)
Accumulated deficit	(17,562,750)	(3,928,868)	3,928,868	(17,562,750)
Total Shareholders’ Equity	(4,256,162)	513,088	(513,088)	(4,256,162)
Total Liabilities and Shareholders’ Equity	$ 31,060,587	$ 513,701	$ (529,421)	$ 31,044,867

See accompanying notes to consolidated financial statements.

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SBM Certificate Company and Subsidiaries

CONSOLIDATING BALANCE SHEET

December 31, 2006

See accompanying notes to consolidated financial statements.

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 SBM Certificate Company and Subsidiaries

CONSOLIDATING STATEMENTS OF OPERATIONS

For the Year Ended December 31, 2007

	SBM Certificate Company and SBMS I	SBM Mortgage	Eliminating Entries	Total
Investment income
Interest and dividend income	$ 125,058	$ 10,777	$ —	$ 135,835
Loss from investment in subsidiary	(81,834)	—	81,834	—
Mortgage interest income	204,285	—	—	204,285
Total investment income	247,509	10,777	81,834	340,120
Investment and other expenses
Administrative service fee	2,213,156	132,760	—	2,345,916
Legal and accounting fees	799,295	4,72	—	804,018
Deferred acquisition cost amortization and  renewal commissions	132,962	—	—	132,962
Client list amortization	89,330	—	—	89,330
Depreciation expense	158,446	2,698	—	161,144
Other expenses – investment	—	—	—	—
Total investment and other expenses	3,393,189	140,182	—	3,533,370
Interest credited on certificate liability	1,692,471	—	—	1,692,471
Net investment income (loss)  before income taxes and  realized investment gains	(4,838,150)	(129,404)	81,834	(4,885,721)
Realized investment gains	91,504	—	—	91,504
Net investment income (loss) before  income taxes	(4,746,647)	(129,404)	81,834	(4,794,218)
Other operating income
Origination fee income	—	97,815	—	97,815
Other loan fee income	11,250	28,666	—	39,916
Total other operating income	11,250	126,481	—	137,731
Other operating expenses
Other expenses – operating	149,213	78,911	—	228,123
Total other operating expenses	149,213	78,911	—	228,123
Net other operating (loss)  before income taxes	(137,963)	47,571	—	(90,392)
Net investment and other operating (loss)  before income taxes	(4,884,609)	(81,834)	81,834	(4,884,609)
Income tax expense	—	—	—	—
Net investment and other operating (loss) income	(4,884,609)	(81,834	81,834	(4,884,609)
Non-operating expense
Reserve for losses – shareholder receivable	(1,569,267)	—	—	(1,569,267)
Net income (loss)	$ (6,453,876)	$ (81,834)	$ 81,834	$ (6,453,876)

See accompanying notes to consolidated financial statements.

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SBM Certificate Company and Subsidiaries

CONSOLIDATING STATEMENTS OF OPERATIONS

For the Year Ended December 31, 2006

	SBM Certificate Company and SBMS I	SBM Mortgage	Eliminating Entries	Total
Investment income
Interest and dividend income	$ 5,458,296	$ —	$ —	$ 5,458,296
Other investment income	4,715	—	—	4,715
Loss from investment in subsidiary	(278,942)	—	278,942	—
Mortgage interest income	388,835	—	—	388,835
Total investment income	5,572,904	—	278,942	5,851,846
Investment and other expenses
Administrative service fee	1,130,849	600,882	—	1,731,731
Legal and accounting fees	195,381	2,440	—	197,821
Client list amortization	89,330	—	—	89,330
Depreciation expense	3,900	6,831	—	10,731
Total investment and other expenses	1,419,460	610,153	—	2,029,613
Interest credited on certificate liability	1,713,911	—	—	1,713,911
Net investment income (loss)  before income taxes and  realized investment gains	2,439,533	(610,153)	278,942	2,108,322
Realized investment gains	(13,457)	—	—	(13,457)
Net investment income (loss) before  income taxes	2,426,076	(610,153)	278,942	2,094,865
Other operating income
Origination fee income	11,000	284,094	—	295,094
Other loan fee income	10,202	52,351	—	62,553
Total other operating income	21,202	336,445	—	357,648
Other operating expenses
Other expenses – operating	209,762	5,234	—	214,996
Warehouse interest expense and charges	—	—	—	—
Total other operating expenses	209,762	5,234	—	214,996
Net other operating (loss)  before income taxes	(188,560)	331,211	—	142,651
Net investment and other operating (loss)  before income taxes	2,237,516	(278,942)	278,942	2,237,516
Income tax expense	—	—	—	—
Net investment and other operating (loss) income	2,237,516	(278,942)	278,942	2,237,516
Non-operating expense
Reserve for losses	(896,312)	—	—	(896,312)
Net income (loss)	$ 1,341,203	$ (278,942)	$ 278,942	$ 1,341,203

See accompanying notes to consolidated financial statements.

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SBM Certificate Company and Subsidiaries

CONSOLIDATING STATEMENTS OF OPERATIONS

For the Year Ended December 31, 2005

	SBM Certificate Company and SBMS I	SBM Mortgage	Eliminating Entries	Total
Investment income
Interest and dividend income	$ 255,312	$ 3,096	$ —	$ 258,408
Other investment Income	(8,282)	10,637	—	2,354
Loss from investment in subsidiary	(1,285,757)	—	1,285,757	—
Mortgage interest income	248,049	73,820	—	321,869
Total investment income	(790,679)	87,553	1,285,757	582,632
Investment and other expenses
Administrative service fee	793,862	1,337,352	—	2,131,214
Investor Advisory fees	124,009		—	124,009
Legal and accounting fees	658,576	20,822	—	679,398
Deferred acquisition cost amortization and  renewal commissions	36,345	—	—	36,345
Client list amortization	89,330	—	—	89,330
Depreciation expense	3,940	18,341	—	22,282
Total investment and other expenses	1,706,062	1,376,516	—	3,082,578
Interest credited on certificate liability	1,844,686	—	—	1,844,686
Net investment income (loss)  before income taxes and  realized investment gains	(4,341,427)	(1,288,963)	1,285,757	(4,344,633)
Realized investment gains	(417,564)	(10,768)	—	(428,331)
Net investment income (loss) before  income taxes	(4,758,991)	(1,299,730)	1,285,757	(4,772,964)
Other operating income
Origination fee income	—	573,683	—	573,683
Other loan fee income	12,843	75,866	—	88,708
Total other operating income	12,843	649,549	—	662,391
Other operating expenses
Salaries and commissions	—	584,115	—	584,115
Other expenses – operating	212,105	51,460	—	263,565
Total other operating expenses	212,105	635,576	—	847,680
Net other operating (loss)  before income taxes	(199,262)	13,973	—	(185,289)
Net investment and other operating (loss)  before income taxes	(4,958,253)	(1,285,757)	1,285,757	(4,958,253)
Income tax expense	—	—	—	—
Net investment and other operating (loss) income	(4,958,253)	(1,285,757)	1,285,757	(4,958,253)
Non-operating expense
Reserve for losses	(846,312)	—	—	(846,312)
Net income (loss)	$ (5,804,565)	$ (1,285,757)	$ 1,285,757	$ (5,804,565)

See accompanying notes to consolidated financial statements.

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SBM Certificate Company and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND PARTNERS’ CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005