SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
Commission File Number 0-28375
SILVERADO FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
Nevada 86-0824125
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5976 W. Las Positas Blvd., Suite 112, Pleasanton, CA 94588
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(Address of principal executive offices) (Zip Code)
Telephone Number: (925) 227-1500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
--------------------------------- ---------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No [
]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. [ ]
The Registrant's revenues for the year ended December 31, 2003 were $115,823.
The approximate aggregate market value of Common Stock shares held by
non-affiliates of the Registrant on December 31, 2003 was $2,034,994; based on
14,839,492 total outstanding shares less 2,120,777 shares held by affiliates for
a total of 12,718,715 non-affiliated shares and a closing price of $0.16 per
share on December 31, 2003.
On December 31, 2003, the Registrant had outstanding 14,839,492 shares of Common
Stock, $0.001 par value.
1
TABLE OF CONTENTS PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS ............................................ 3
ITEM 2. PROPERTIES ......................................................... 24
ITEM 3. LEGAL PROCEEDINGS .................................................. 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................ 25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ............................................. 26
ITEM 6. MANAGEMENT'S PLAN OF OPERATION ..................................... 27
ITEM 7. FINANCIAL STATEMENTS ............................................... 29
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ......................................... 52
ITEM 8A. CONTROLS AND PROCEDURES ........................................... 52
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ...... 53
ITEM 10. EXECUTIVE COMPENSATION ............................................ 54
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .... 57
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS .............. 57
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K .................................. 58
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ............................ 59
SIGNATURES ................................................................. 60
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
Background of the Company
Silverado Financial, Inc. (the "Company", "We", "Us" and "Our") is incorporated
under the laws of the State of Nevada and based in Campbell, California in the
San Francisco Bay Area. We provide first and second mortgage products to
borrowers in California through our operating subsidiary, Realty Capital
Corporation (RCC).
The corporation was initially formed on February 26, 1987 as Toledo Medical
Corporation. Our name was changed to Almaz Space Corporation on February 9, 1991
and to Ready When You Are Funwear, Inc. on April 14, 1992. On December 30, 1994
a group of individuals acquired control of the Company. On February 17, 1995,
they changed the name to Rhombic Corporation. On March 19, 2003, the company
changed its name to Silverado Financial, Inc.
Our efforts, since inception, until October of 2002, had been primarily focused
on the acquisition of the rights to intellectual property that could lead to the
development of innovative scientific technologies. During the years 1999 and
2000 we began to focus on the research and development of our portfolio of
acquired intellectual property. During 2001, our main objective was to identify
and develop specific applications from our intellectual property in order to
make them commercially marketable. In November 2002, we acquired Financial
Software, Inc. as the first part of its strategy to enter the lucrative
financial services sector.
During 2003 the company had six wholly owned subsidiaries. They are:
* Financial Software, Inc. ("FSI");
* Realty Capital Corporation ("RCC");
* Rockford Technology Associates, Inc. ("Rockford");
* Nanophase Diamond Technologies, Inc. ("Nanophase");
* AEP Technologies, Inc. ("AEPT"); and
* Rhombic Detection Technologies, Inc. ("RDT").
Rockford, Nanophase, AEPT and RDT are inactive and have no assets, liabilities
or operations and never were active, held any assets or had any liabilities or
operations. These subsidiaries were created for the purpose of developing
specific applications from our scientific intellectual property. We never
implemented our plans to develop our scientific intellectual property and all of
our scientific intellectual properties, together with certain marketable
securities held for sale, were sold, in 2003 to a director, in exchange for the
return of 62,000 shares of our Common Stock and the cancellation of $1,100 in
debt.
We acquired Financial Software, Inc. (formerly Wall Street Web, Inc.) on
November 19, 2002 a share for share exchange basis for 4,400,000 shares of
common stock and the assumption of a note in the amount of $275,000. Financial
Software, Inc.(FSI), a New Jersey corporation engaged in the development of
Internet and Intranet financial software in addition to operating several
financial industry publishing web-sites. We acquired FSI in order to gain access
to certain proprietary software products owned by FSI which we intend to further
develop and extend into a comprehensive back office platform necessary to
accomplish our business objectives.
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ITEM 1. DESCRIPTION OF BUSINESS - continued
On May 9, 2003, we acquired Realty Capital Corporation in exchange for 729,452
shares of restricted common stock from John E. Hartman, the president of the
Company and a director. Realty Capital Corporation (RCC) is a mortgage brokerage
company licensed by the California Department of Real Estate and is currently
seeking licensure by the California Department of Corporations as a Consumer
Finance Lender. RCC generated all of the Company's 2003 revenue and has offices
in Campbell California and Pleasanton, California.
In addition to continuing and expanding the operation of RCC, our other
activities have consisted of developing the business plan, obtaining a warehouse
line of credit, raising capital, business plan implementation and recruiting a
management team. From inception to December 31, 2003, the Company has had
revenues of $129,052 of which $115,823 was earned during 2003, and has expensed
operating costs in the amount of $9,492,482 due in part to the write down of
scientific intellectual properties in the amount of $2,168,038 and research and
development expenses of $688,563. Historically, the Company has had nominal cash
resources and has been largely dependent on the direct financial support from a
few shareholders, directors and officers along with limited revenue to pay for
cash expenditures. In addition, the Company has been dependent on its officers,
directors and certain key vendors accepting restricted common stock for their
services.
Business of the Issuer
General
We provide mortgage products to borrowers in California through our operating
subsidiary, Realty Capital Corporation (RCC). We offer mortgage products
designed for borrowers who generally satisfy the credit, documentation or other
underwriting standards prescribed by conventional mortgage lenders and loan
buyers, such as Fannie Mae and Freddie Mac as well as those who do not. We
originate loans on the basis of the borrower's ability to repay the mortgage
loan, the borrower's historical pattern of debt repayment and the amount of
equity in the borrower's property (as measured by the borrower's loan-to-value
ratio, or LTV). We have been originating these types of loans since our
acquisition of RCC on May 9, 2003 and believe we have developed a comprehensive
and sophisticated plan to grow the company going forward.
RCC operates out offices in Campbell and Pleasanton, California with more
offices slated to open during 2004. Our plan is to expand throughout California,
Nevada and Arizona during 2004 with offices in Sacramento, Woodland Hills, San
Diego, Las Vegas, Reno, Phoenix and Tucson. We have developed sophisticated
information technologies to allow us to move into these areas with a minimum of
cost and start up while allowing the company to maintain tight control over
regional offices.
In 2003, we originated 100% of our loans in California. Of the loans that we
originated, 65% were refinances of existing mortgages and 35% were for the
purchase of residential property. Of the refinance transactions, 80% were
cash-out refinances in which the borrower receives additional proceeds to pay
off other debt or meet other financial needs.
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ITEM 1. DESCRIPTION OF BUSINESS - continued
Recent Operating Highlights
We achieved several significant operational milestones during 2003, including
the following:
o Revenues. We achieved revenues of $115,823 in 2003. This is
significant as it is the first time that we have achieved any
significant revenues.
o Current Assets. Current Assets including cash, cash equivalents,
receivables and marketable securities held for sale equaled $30,410 at
December 31, 2003 which represents a 231% increase over 2002 year-end
current assets of $13,188.
Strengths and Competitive Advantages
We believe that we have several strengths and competitive advantages that allow
us to compete effectively in our business, including:
o High Quality Customer Service. We strive to make the origination
process easy for our borrowers and sales executives by providing
prompt responses, consistent and clear procedures and an emphasis on
ease of use through technology.
o Performance-Based Compensation Structure. We have implemented a
performance-based compensation structure, which allows us to attract,
retain and motivate qualified personnel.
o FinanCenter(C) Software. We plan to enhance our proprietary
FinanCenter(C) Software to provide our sales executives with a wide
array of unique products and services offered by no other mortgage
company.
Product Types
We offer both fixed-rate loans and adjustable-rate loans, or ARMs. We also offer
loans with an interest rate that is initially fixed for a period of time and
subsequently converts to an adjustable rate. At each interest rate adjustment
date, rates are adjusted, subject to certain limitations on the amount of any
single adjustment and a cap on the aggregate of all adjustments.
In addition, our products are available at different interest rates and with
different origination and application points and fees, depending on the
particular borrower's risk classification. See "Business--Underwriting
Standards." Borrowers may choose to increase or decrease their interest rate
through the payment of different levels of origination fees. Our maximum loan
amount is generally $500,000 with a loan-to-value ratio of up to 90%. We do,
however, offer larger loans with lower loan-to-value ratios through a special
jumbo program. We also offer products that permit a loan-to-value ratio of up to
95% for selected borrowers with an internal risk classification of "A+" or of up
to 90% for selected borrowers with an internal risk classification of "A-". We
also offer our "AA" product designed to appeal to borrowers of higher credit
quality.
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ITEM 1. DESCRIPTION OF BUSINESS - continued
Marketing
RCC's operations rely primarily on outbound telemarketing and on targeted direct
mail and to attract borrowers. Our telemarketing programs are managed by a
centralized staff that create a targeted mailing list oversee operations by our
telemarketing staff. All calls or written inquiries from potential borrowers
that result from the telemarketing are tracked centrally and then forwarded to a
branch location and handled by branch loan officers. Under the telemarketing
program, our staff solicits prospective borrowers, makes a preliminary
evaluation of the applicant's credit and the value of the collateral property
and refers qualified leads to loan officers in the retail branch closest to the
customer. In addition, this unit maintains a comprehensive database on all
customers with whom it has had contact and markets to these potential customers
as well.
The direct mail program uses the Retail Division's Web site,
www.silveradofinancial.com, to provide information to prospective borrowers and
to allow them to complete an application online
Financing Loan Originations and Loans Held for Sale
We require access to credit facilities in order to originate and purchase
mortgage loans and to hold them pending their sale or securitization. Currently,
we do not have any such facilities, but we are in the process of obtaining a
warehouse line of credit and are finishing negotiations and application
documentation.
Underwriting Standards
When we obtain a warehouse line of credit, the loans we intend to originate or
purchase will have to meet the underwriting guidelines of the warehouse lender.
These guidelines take into account the applicant's credit history and capacity
to repay the proposed loan as well as the secured property's value and adequacy
as collateral for the loan. Each applicant completes an application that
includes personal information on the applicant's liabilities, income, credit
history and employment history. Based on review of the loan application and
other data from the applicant against our underwriting guidelines, we determine
the loan terms, including the interest rate and maximum loan-to-value ratio.
Credit History
Underwriting guidelines require a credit report on each applicant from a credit
reporting company. In evaluating an applicant's credit history, we utilize
credit bureau risk scores, generally known as a FICO score, which is a
statistical ranking of likely future credit performance developed by Fair, Isaac
& Company and the three national credit data repositories--Equifax, TransUnion
and Experian.
Collateral Review
A qualified independent appraiser inspects and appraises each mortgage property
and verifies that it is in acceptable condition. Following each appraisal, the
appraiser prepares a report that includes a market value analysis based on
recent sales of comparable homes in the area and, when appropriate, replacement
cost analysis based on the current cost of constructing a similar home. All
appraisals must conform to the Uniform Standards of Professional Appraisal
Practice adopted by the Appraisal Foundation's Appraisal Standards Board and are
generally on forms acceptable to Fannie Mae and Freddie Mac. Our underwriting
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ITEM 1. DESCRIPTION OF BUSINESS - continued
guidelines require a review of the appraisal by one of our qualified employees
or by a qualified review appraiser that we have retained. Our underwriting
guidelines then require our underwriters to be satisfied that the value of the
property being financed, as indicated by the appraisal, currently supports the
outstanding loan balance.
Income Documentation
Underwriting guidelines include three levels of income documentation
requirements, referred to as the "full documentation," "limited documentation"
and "stated income documentation" programs. Under the full documentation
program, we generally require applicants to submit two written forms of
verification of stable income for at least 24 months. Under the limited
documentation program, we generally require applicants to submit 12 consecutive
monthly bank statements on their individual bank accounts. Under the stated
income documentation program, an applicant may be qualified based upon monthly
income as stated on the mortgage loan application if the applicant meets certain
criteria. All of these documentation programs require that, with respect to
salaried employees, the applicant's employment be verified by telephone. In the
case of a purchase money loan, we require verification of the source of funds,
if any, to be deposited by the applicant into escrow. Under each of these
programs, we review the applicant's source of income, calculate the amount of
income from sources indicated on the loan application or similar documentation,
review the applicant's credit history, and calculate the debt service-to-income
ratio to determine the applicant's ability to repay the loan. We also review the
type, use and condition of the property being financed. Our underwriters use a
qualifying rate that is equal to the initial interest rate on the loan to
determine the applicant's ability to repay an adjustable-rate loan. We use a
qualifying rate that is 3% higher than the start rate for determining the
repayment ability of applicants for our interest-only product.
Competition
We face intense competition in the business of originating, purchasing and
selling mortgage loans. Our competitors include other consumer finance
companies, mortgage banking companies, commercial banks, credit unions, thrift
institutions, credit card issuers and insurance finance companies. Other
financial institutions have gradually expanded their lending capabilities. Many
of these companies have greater access to capital at a cost lower than our cost
of capital under our warehouse, aggregation, and asset backed commercial paper
facilities. Federally chartered banks and thrifts can preempt some of the state
and local lending laws to which we are subject, thereby giving them a
competitive advantage. In addition, many of these competitors have considerably
greater technical and marketing resources than we have.
Competition among industry participants can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of the loan, loan origination fees and interest rates.
Additional competition may lower the rates we can charge borrowers, thereby
potentially lowering gain on future loan sales and securitizations. In 2003, the
most significant form of competition was pricing pressure among mortgage
originators. Some of our competitors lowered rates and fees to preserve or
expand their market share.
Our results of operations, financial condition and business prospects could be
materially adversely affected if competition intensifies or if any of our
competitors significantly expands its activities in our markets. Fluctuations in
interest rates and general economic conditions may also affect our competitive
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ITEM 1. DESCRIPTION OF BUSINESS - continued
position. During periods of rising rates, competitors that have locked in low
borrowing costs may have a competitive advantage. During periods of declining
rates, competitors may solicit our customers to refinance their loans.
Regulation
Our business is regulated by federal, state, and local government authorities
and is subject to extensive federal, state and local laws, rules and
regulations. We are also subject to judicial and administrative decisions that
impose requirements and restrictions on our business. At the federal level,
these laws and regulations include the:
o Equal Credit Opportunity Act;
o Federal Truth and Lending Act and Regulation Z;
o Home Ownership and Equity Protection Act;
o Real Estate Settlement Procedures Act;
o Fair Credit Reporting Act;
o Fair Debt Collection Practices Act;
o Home Mortgage Disclosure Act;
o Fair Housing Act;
o Telephone Consumer Protection Act;
o Gramm-Leach-Bliley Act;
o Fair and Accurate Credit Transactions Act;
o CAN-SPAM Act;
o Sarbanes-Oxley Act; and
o USA PATRIOT Act.
These laws, rules and regulations, among other things:
o impose licensing obligations and financial requirements on us;
o limit the interest rates, finance charges, and other fees that we may
charge;
o prohibit discrimination;
o impose underwriting requirements;
o mandate disclosures and notices to consumers;
o mandate the collection and reporting of statistical data regarding our
customers;
o regulate our marketing techniques and practices;
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ITEM 1. DESCRIPTION OF BUSINESS - continued
o require us to safeguard non-public information about our customers;
o regulate our collection practices;
o require us to prevent money-laundering or doing business with
suspected terrorists; and
o impose corporate governance, internal control and financial reporting
obligations and standards.
Our failure to comply with these laws can lead to:
o civil and criminal liability;
o loss of approved status;
o demands for indemnification or loan repurchases from buyers of our
loans;
o class action lawsuits; and
o administrative enforcement actions.
Compliance, Quality Control and Quality Assurance
We regularly monitor the laws, rules and regulations that apply to our business
and analyze any changes to them. We also maintain policies and procedures, and
summaries and checklists to help our origination personnel comply with these
laws.
Licensing
As of December 31, 2003, we were licensed only in California under the
California Department of Real Estate (DRE). As of March 28, 2004, we have
applied for licensure under the California Department of Corporations (DOC) as a
Consumer Finance Lender (CFL). This change from the DRE to the DOC will enable
us to hire W-2 employees to act as sales executives instead of licensed real
estate agents. This will allow us to pay lower commissions and hire from the
significantly larger pool of available sales professionals who are not licensed
by the DRE.
We are currently interviewing law firms to assist us in gaining licensure in all
50 States and the District of Columbia. Our next license applications will be in
the States of Arizona and Nevada.
Regulatory Developments
During 2003, federal and state legislators and regulators adopted a variety of
new or expanded regulations, particularly in the areas of privacy and consumer
protection.
Privacy
The federal Gramm-Leach-Bliley financial reform legislation imposes additional
obligations on us to safeguard the information we maintain on our borrowers.
Regulations have been proposed by several agencies that may affect our
obligations to safeguard information. In addition, regulations that could affect
the content of our notices are being considered by several federal agencies.
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ITEM 1. DESCRIPTION OF BUSINESS - continued
Also, several states are considering even more stringent privacy legislation.
California has passed legislation known as the California Financial Information
Privacy Act and the California On-Line Privacy Protection Act. Both pieces of
legislation are effective July 1, 2004, and will impose additional notification
obligations on us that are not pre-empted by existing federal law. If other
states choose to follow California and adopt a variety of inconsistent state
privacy legislation, our compliance costs could substantially increase.
Fair Credit Reporting Act
The Fair Credit Reporting Act provides federal preemption for lenders to share
information with affiliates and certain third parties and to provide
pre-approved offers of credit to consumers. Congress acted in late 2003 to make
this preemption permanent, otherwise it would have expired at the end of the
year and states could have imposed more stringent and inconsistent regulations
regarding the use of pre-approved offers of credit and other information
sharing. Congress also amended the Fair Credit Reporting Act to place further
restrictions on the use of information shared between affiliates, to provide new
disclosures to consumers when risk based pricing is used in the credit decision,
and to help protect consumers from identity theft. All of these new provisions
impose additional regulatory and compliance costs on us and reduce the
effectiveness of our marketing programs.
Home Mortgage Disclosure Act
In 2002, the Federal Reserve Board adopted changes to Regulation C promulgated
under the Home Mortgage Disclosure Act ("HMDA"). Among other things, the new
regulations require lenders to report pricing data on loans with annual
percentage rates that exceed the yield on treasury bills with comparable
maturities by 3%. The expanded reporting takes effect in 2004 for reports filed
in 2005. We anticipate that a majority of our loans would be subject to the
expanded reporting requirements.
The expanded reporting does not provide for additional loan information such as
credit risk, debt-to-income ratio, loan-to-value ratio, documentation level or
other salient loan features. As a result, lenders like us are concerned that the
reported information may lead to increased litigation as the information could
be misinterpreted by third parties.
Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003
The CAN-SPAM Act of 2003 applies to businesses, such as ours, that use
electronic mail for advertising and solicitation. This law, generally
administered by the Federal Trade Commission, preempts state laws to the
contrary, and establishes, among other things, a national uniform standard that
gives consumers the right to stop unwanted emails. New requirements are imposed
for the header caption in emails, as well as return email addresses, and
consumers are granted the right to `opt out' from receiving further emails from
the sender. These new provisions impose additional regulatory and compliance
costs on us and reduce the effectiveness of our marketing programs.
The Alternative Mortgage Transaction Parity Act
This law was enacted to enable state chartered housing creditors to make,
purchase and enforce alternative mortgage transactions (i.e., loans that are not
fixed rate, fully amortized) without regard to any state law on the subject, so
long as these creditors complied with the same regulatory guidelines as
federally chartered housing lenders. The Office of Thrift Supervision, under
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ITEM 1. DESCRIPTION OF BUSINESS - continued
whose guidelines we operate, amended its regulations, effective July 1, 2003, to
eliminate from the preemptive effect of the Act the regulation of prepayment and
late charges on alternative mortgage loans. States can now regulate prepayment
penalty and late charge provisions on alternative mortgage loans, and so on July
1, 2003, in less than a dozen states, we became subject to more restrictive
state laws as to these issues.
Telephone Consumer Protection Act and Telemarketing Consumer Fraud and Abuse
Prevention Act
These laws, enacted in 1991 and 1994, respectively, are designed to restrict
unsolicited advertising using the telephone and facsimile machine. Since they
were enacted, however, telemarketing practices have changed significantly due to
new technologies that make it easier to target potential customers while at the
same time making it more cost effective to do so. The Federal Communications
Commission and the Federal Trade Commission have responsibility for regulating
various aspects of these laws, such as regulating unwanted telephone
solicitations and the use of automated telephone dialing systems, prerecorded or
artificial voice messages, and telephone facsimile machines. In 2003, both
agencies adopted `do-not-call' registry requirements, which, in part, mandate
that companies such as us maintain and regularly update lists of consumers who
have chosen not to be called. These requirements also mandate that we do not
call consumers who have chosen to be on the list. During this same time, over 25
states have also adopted similar laws, with which we also comply. As with other
regulatory requirements, these provisions impose additional regulatory and
compliance costs on us and reduce the effectiveness of our marketing programs.
Predatory Lending Legislation
The Home Ownership and Equity Protection Act of 1994 ("HOEPA") identifies a
category of mortgage loans and subjects them to more stringent restrictions and
disclosure requirements. In addition, liability for violations of applicable law
for loans covered by HOEPA extends not only to the originator, but also to the
purchaser of the loans. HOEPA generally covers loans with either (i) total
points and fees upon origination in excess of the greater of eight percent of
the loan amount or $499 (an annually adjusted dollar amount), or (ii) an annual
percentage rate (APR) of more than eight percentage points higher than United
States Treasury securities of comparable maturity on first mortgage loans, and
ten percentage points above Treasuries of comparable maturity for junior
mortgage loans.
We do not originate loans covered by HOEPA because of the higher legal risks as
well as the potential negative perception of originating loans that are
considered to be "high cost" under federal law.
Several federal, state and local laws and regulations have been adopted or are
under consideration that are intended to eliminate so-called "predatory" lending
practices. Many of these laws and regulations go beyond targeting abusive
practices by imposing broad restrictions on certain commonly accepted lending
practices, including some of our practices. In addition, some of these laws
impose liability on assignees of mortgage loans such as loan buyers, lenders and
securitization trusts. Such provisions deter loan buyers from purchasing loans
covered by the applicable law. For example, after the October 1, 2002 effective
date of the Georgia Fair Lending Act, many lenders and secondary market buyers
refused to finance or purchase Georgia loans. As a result, many companies were
forced to cease providing mortgages in Georgia until the law's amendment a few
months later. Similar laws have gone into effect in New Jersey, as of November
27, 2003 ("New Jersey Home Ownership Act of 2002"), and in New Mexico, as of
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ITEM 1. DESCRIPTION OF BUSINESS - continued
January 1, 2004 ("New Mexico Home Loan Protection Act"), that have impacted
origination of loans in those states.
However, there can be no assurance that other similar laws, rules or
regulations, won't be adopted in the future. Adoption of these laws and
regulations could have a material adverse impact on our business by
substantially increasing the costs of compliance with a variety of inconsistent
federal, state and local rules, or by restricting our ability to charge rates
and fees adequate to compensate us for the risk associated with certain loans.
Adoption of these laws could also have a material adverse effect on our loan
origination volume, especially if our lenders and secondary market buyers elect
not to finance or purchase loans covered by the new laws.
Efforts to Avoid Abusive Lending Practices
In an effort to prevent the origination of loans containing unfair terms or
involving predatory practices, we have adopted many policies and procedures,
including the following:
Product Policies
o We do not originate "high cost loans" as defined by HOEPA.
o We do not originate loans containing single premium credit life,
disability or accident insurance.
o We do not originate loans containing balloon payments, negative
amortization, mandatory arbitration clauses or interest rate increases
triggered by borrower default.
o We offer loans with and without prepayment penalties. When a borrower
opts for a loan with a prepayment charge, the borrower benefits from a
lower interest rate or pays lower upfront fees.
o Prepayment penalties do not extend beyond three years from the
origination date. On fixed rate loans, the maximum prepayment penalty
term is three years. Prepayment penalties on adjustable rate loans do
not extend beyond the first adjustment date.
o We do not originate loans that pay off zero interest rate mortgages
provided by charitable organizations or the government without
borrower third-party counseling.
Loan Processing Policies
o We only originate loans from applications that evidence a borrower's
ability to repay the loan.
o We consider whether the loan terms are in the borrower's best
interests.
o We do not solicit our loan portfolio within twelve months of loan
origination.
o We do not ask appraisers to report a predetermined value or withhold
disclosure of adverse features. Appraisers are paid by the borrower
either at closing of form the borrowers own funds regardless of
whether or not the loans are closed.
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ITEM 1. DESCRIPTION OF BUSINESS - continued
We plan to continue to review, revise and improve our practices to enhance our
fair lending efforts and support the goal of eliminating predatory lending
practices.
Environmental
In the course of our business, we may acquire properties securing loans that are
in default. There is a risk that hazardous or toxic waste could be found on such
properties. If this occurs, we could be held responsible under applicable law
for the cost of cleaning up or removing the hazardous waste. This cost could
exceed the value of the underlying properties.
Employees
At December 31, 2003, we employed no employees. As is standard practice in the
industry, all of our loan officers and processors are independent contractors.
We have no collective bargaining agreements. We believe that our relations with
our independent contractors are satisfactory.
Available Information
We make available, free of charge, on the Investor Relations Section of our Web
site (http:/www.silveradofinancial.com/investors.htm) a link to the Securities
and Exchange Commission Web Site where all of our filings may be found.
RISK FACTORS
Stockholders and prospective purchasers of our common stock should carefully
consider the risks described below before making a decision to buy our common
stock. If any of the following risks actually occurs, our business could be
harmed. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment. When determining whether to buy our
common stock, stockholders and prospective purchasers should also refer to the
other information in this Form 10-K, including our financial statements and the
related notes.
A prolonged economic slowdown or a lengthy or severe recession could hurt our
operations, particularly if it results in a decline in the real estate market.
The risks associated with our business are more acute during periods of economic
slowdown or recession because these periods may be accompanied by decreased
demand for consumer credit and declining real estate values. Declining real
estate values reduce the ability of borrowers to use home equity to support
borrowings because they negatively affect loan-to-value ratios of the home
equity collateral. In addition, because we make a substantial number of loans to
credit-impaired borrowers, the actual rates of delinquencies, foreclosures and
losses on these loans could be higher during economic slowdowns. Any sustained
period of increased delinquencies, foreclosures or losses could adversely affect
our ability to sell loans, the prices we receive for our loans, the value of our
mortgage loans held for investment or our residual interests in securitizations,
which could have a material adverse effect on our results of operations,
financial condition and business prospects.
Our earnings may decrease because of increases or decreases in interest rates.
Our profitability may be directly affected by changes in interest rates. The
following are some of the risks we face related to an increase in interest
rates:
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ITEM 1. DESCRIPTION OF BUSINESS - continued
o An interest rate increase may affect our earnings by reducing the
spread between the interest we receive on our loans and our funding
costs.
o A substantial and sustained increase in interest rates could adversely
affect our loan origination volume because refinancing an existing
loan would be less attractive and qualifying for a purchase loan may
be more difficult.
o During periods of rising interest rates, the value and profitability
of our loans may be negatively affected between the date of
origination or purchase and the date we sell or securitize the loan.
o When and if we securitize loans, the value of residual interests we
retain and the income we receive from the securitizations structured
as financings are based primarily on the London Inter-Bank Offered
Rate ("LIBOR"). This is because the interest on the underlying
mortgage loans is based on fixed rates payable on the loans for the
first two or three years while the bondholders are generally paid
based on an adjustable LIBOR-based yield. An increase in LIBOR reduces
the net income we would receive from, and the value of, these mortgage
loans and residual interests.
o Our adjustable-rate mortgage loans have periodic and lifetime interest
rate caps above which the interest rate on the loans may not rise. In
the event of general interest rate increases, the rate of interest on
these mortgage loans could be limited, while the rate payable on the
senior certificates representing interests in a securitization trust
into which these loans are sold may be uncapped. This would reduce the
amount of cash we receive over the life of the loans in
securitizations structured as financings and our residual interests,
and could require us to reduce the carrying value of our residual
interests.
We are also subject to risks from decreasing interest rates. For example, a
significant decrease in interest rates could increase the rate at which loans
are prepaid, which also could require us to reduce the carrying value of any
residual interests. If prepayments are greater than expected, the cash we would
receive over the life of our residual interests would be reduced.
Higher-than-expected prepayments could also have a negative effect on the value
of any servicing portfolio.
Any such changes in interest rates could have a material adverse effect on our
results of operations, financial condition and business prospects.
An interruption or reduction in the securitization and whole loan markets could
hurt our financial position.
As we implement our plan to become a full service mortgage banking company, we
will become increasingly dependent on the securitization market for the sale of
our loans because we intend to securitize loans directly in the future and many
of the whole loan buyers who purchase loans do so with the intention to
securitize them. The securitization market is dependent upon a number of
factors, including general economic conditions, conditions in the securities
market generally and conditions in the asset-backed securities market
specifically. In addition, poor performance of previously securitized loans
could harm our access to the securitization market. Accordingly, a decline in
the securitization market or a change in the market's demand for loans could
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ITEM 1. DESCRIPTION OF BUSINESS - continued
have a material adverse effect on our results of operations, financial condition
and business prospects.
If we are unable to maintain adequate financing sources, our earnings and our
financial position will suffer and jeopardize our ability to continue
operations.
We require substantial cash to support our operating activities and growth
plans. Our primary sources of cash are profits generated by sales of mortgage
products and the sale of our capital stock; however, we intend to generate
income from warehouse and aggregation credit facilities, asset-backed commercial
paper and the proceeds from the sales and securitizations of loans. We also
intend to finance residual interests in securitization transactions using Net
Interest Margin, or NIM, structures. As of December 31, 2003, we had no
short-term warehouse and aggregation credit facilities or asset-backed
commercial paper providing us with any committed or uncommitted borrowing
capacity to fund loan originations and purchases pending the pooling and sale of
such loans. As of March 27, 2004, we are in negotiations to acquire a short term
warehouse facility. If we cannot maintain or replace these facilities on
comparable terms and conditions, we may incur substantially higher interest
expense that would reduce our profitability.
During volatile times in the capital and secondary markets, access to warehouse,
aggregation and residual financing as well as access to the securitization and
secondary markets for the sale of loans has been severely constricted. If we are
unable to maintain adequate financing or other sources of capital are not
available, we would be forced to suspend or curtail our operations, which could
have a material adverse effect on our results of operations, financial condition
and business prospects.
New legislation could restrict our ability to make mortgage loans, which could
adversely impact our earnings.
Several states and cities are considering or have passed laws, regulations or
ordinances aimed at curbing predatory lending practices. The federal government
is also considering legislative and regulatory proposals in this regard. In
general, these proposals involve lowering the existing federal Homeownership and
Equity Protection Act thresholds for defining a "high-cost" loan, and
establishing enhanced protections and remedies for borrowers who receive such
loans. However, many of these laws and rules extend beyond curbing predatory
lending practices to restrict commonly accepted lending activities, including
some of our planned activities. For example, some of these laws and rules
prohibit any form of prepayment charge or severely restrict a borrower's ability
to finance the points and fees charged in connection with his or her loan. In
addition, some of these laws and regulations provide for extensive assignee
liability for warehouse lenders, whole loan buyers and securitization trusts.
Because of enhanced risk and for reputational reasons, many whole loan buyers
elect not to purchase any loan labeled as a "high cost" loan under any local,
state or federal law or regulation. Accordingly, these laws and rules could
severely constrict the secondary market for a significant portion of our loan
production. This would effectively preclude us from continuing to originate
loans that fit within the newly defined thresholds. For example, after the
October 1, 2002 effective date of the Georgia Fair Lending Act, many lenders and
secondary market buyers refused to finance or purchase Georgia loans. As a
result, many companies were forced to cease providing mortgages in Georgia until
the law's amendment a few months later. Similar laws have gone into effect in
New Jersey, as of November 27, 2003 ("New Jersey Home Ownership Act of 2002"),
and in New Mexico, as of January 1, 2004 ("New Mexico Home Loan Protection
15
ITEM 1. DESCRIPTION OF BUSINESS - continued
Act"), that have impacted origination of loans in those states. The potential
long term reduction in loans in New Jersey and in New Mexico could be quite
severe. Moreover, some of our competitors who are national banks or federally
chartered thrifts may not be subject to these laws and may as a consequence be
able to capture market share from us and other lenders. For example, the Office
of the Comptroller of the Currency recently issued regulations effective January
7, 2004 that preempt state and local laws that seek to regulate mortgage lending
practices. Passage of such laws could increase compliance costs, reduce fee
income and reduce origination volume, all of which would have a material adverse
effect on our results of operations, financial condition and business prospects.
We are no longer able to rely on the Alternative Mortgage Transactions Parity
Act to preempt certain state law restrictions on prepayment penalties, which
could adversely impact our earnings.
The value of a mortgage loan depends, in part, upon the expected period of time
that the mortgage loan will be outstanding. If a borrower pays off a mortgage
loan in advance of this expected period, the holder of the mortgage loan does
not realize the full value expected to be received from the loan. A prepayment
penalty payable by a borrower who repays a loan earlier than expected helps
offset the reduction in value resulting from the early payoff. Consequently, the
value of a mortgage loan is enhanced to the extent the loan includes a
prepayment penalty, and a mortgage lender can offer a lower interest rate and/or
lower loan fees on a loan which has a prepayment penalty. Prepayment penalties
are an important feature used to obtain value on loans.
Certain state laws restrict or prohibit prepayment penalties on mortgage loans,
and until July 2003, lenders could rely on the federal Alternative Mortgage
Transactions Parity Act (the "Parity Act") and related rules issued in the past
by the Office of Thrift Supervision (the "OTS") to preempt state limitations on
prepayment penalties. The Parity Act was enacted to extend to financial
institutions, other than federally chartered depository institutions, the
federal preemption that federally chartered depository institutions enjoy.
However, on September 25, 2002, the OTS released a new rule that reduced the
scope of the Parity Act preemption and, as a result; we are not able to rely on
the Parity Act to preempt state restrictions on prepayment penalties. The
effective date of the new rule, originally January 1, 2003, was subsequently
extended by the OTS until July 1, 2003 in response to concerns from interested
parties about the burdens associated with compliance. The elimination of this
federal preemption requires us to comply with state restrictions on prepayment
penalties. These restrictions prohibit us from charging any prepayment penalty
in eight states and limit the amount or other terms and conditions of our
prepayment penalties in several other states. This may place us at a competitive
disadvantage relative to financial institutions that continue to enjoy federal
preemption of such state restrictions. Such institutions are able to charge
prepayment penalties without regard to state restrictions and, as a result, may
be able to offer loans with interest rate and loan fee structures that are more
attractive than the interest rate and loan fee structures that we are able to
offer.
The scope of our lending operations exposes us to risks of noncompliance with an
increasing and inconsistent body of complex laws and regulations at the federal,
state and local levels.
Currently, we are licensed to originate mortgage loans only in California,
however we are in the process of applying for licenses to generate loans in all
50 states, and when licensed we will be forced to comply with the laws and
regulations, as well as judicial and administrative decisions, for all of these
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ITEM 1. DESCRIPTION OF BUSINESS - continued
jurisdictions, as well as an extensive body of federal law and regulations. The
volume of new or modified laws and regulations has increased in recent years,
and, individual cities and counties have begun to enact laws that restrict
non-prime loan origination activities in those cities and counties. The laws and
regulations of each of these jurisdictions are different, complex and, in some
cases, in direct conflict with each other. As our operations continue to grow,
it may be more difficult to comprehensively identify, to accurately interpret
and to properly program our technology systems and effectively train our
personnel with respect to all of these laws and regulations, thereby potentially
increasing our exposure to the risks of noncompliance with these laws and
regulations.
Our failure to comply with these laws can lead to:
o civil and criminal liability;
o loss of approved status;
o demands for indemnification or loan repurchases from purchasers of our
loans;
o class action lawsuits; or
o administrative enforcement actions.
Any of these results could have a material adverse effect on our results of
operations, financial condition and business prospects.
If warehouse lenders and securitization underwriters face exposure stemming from
legal violations committed by the companies to whom they provide financing or
underwriting services, this could increase our borrowing costs and negatively
affect the market for whole loans and mortgage-backed securities.
In June 2003, a California jury found a warehouse lender and securitization
underwriter liable in part for fraud on consumers committed by a lender to whom
it provided financing and underwriting services. The jury found that the
investment bank was aware of the fraud and substantially assisted the lender in
perpetrating the fraud by providing financing and underwriting services that
allowed the lender to continue to operate, and held the bank liable for 10% of
the plaintiff's damages. This is the first case we know of in which an
investment bank was held partly responsible for violations committed by the
bank's mortgage lender customer. If other courts or regulators adopt this
theory, investment banks may face increased litigation as they are named as
defendants in lawsuits and regulatory actions against the mortgage companies
with which they do business. Some investment banks may exit the business, charge
more for warehouse lending or reduce the prices they pay for whole loans in
order to build in the costs of this potential litigation. This could, in turn,
have a negative effect on our results of operations, financial condition and
business prospects.
High delinquencies or losses on mortgage loans in securitizations may decrease
cash flows or impair our ability to sell or securitize loans in the future.
Loans made to lower credit grade borrowers, including credit-impaired borrowers,
entail a higher risk of delinquency and higher losses than loans made to
borrowers with better credit. We plan to make a substantial portion of our loans
to borrowers who do not qualify for loans from conventional mortgage lenders. No
assurance can be given that our underwriting criteria or methods will afford
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ITEM 1. DESCRIPTION OF BUSINESS - continued
adequate protection against the higher risks associated with loans made to lower
credit grade borrowers. We will be subject to risks of default and foreclosure
following the sale of loans through securitization. To the extent such losses
are greater than expected; the cash flows received through residual interests
and from securitizations structured as financings would be reduced. Increased
delinquencies or losses may also reduce or eliminate our ability to sell or
securitize loans in the future and could have a substantial, material adverse
effect on our operations, financial condition and business prospects.
Our inability to realize cash proceeds from loan sales and securitizations in
excess of the loan acquisition cost could adversely affect our financial
position.
The net cash proceeds received from loan sales consist of the premiums received
on sales of loans in excess of the outstanding principal balance, plus the cash
proceeds received from securitizations, minus the discounts on any loans that
are sold for less than the outstanding principal balance. If we are unable to
originate loans at a cost lower than the cash proceeds realized from loan sales,
our results of operations, financial condition and business prospects could be
materially adversely affected.
Warehouse and aggregation financing is subject to margin calls based on the
lender's opinion of the value of loan collateral. An unanticipated large margin
call could adversely affect our liquidity.
The amount of financing we may receive under any warehouse and aggregation
financing agreements depends in large part on the lender's valuation of the
mortgage loans that secure the financings. Asset-backed commercial paper
facilities have similar provisions. Each such facility provides the lender the
right, under certain circumstances, to reevaluate the loan collateral that
secures outstanding borrowings at any time. In the event the lender determines
that the value of the loan collateral has decreased, it has the right to
initiate a margin call. A margin call would require us to provide the lender
with additional collateral or to repay a portion of the outstanding borrowings.
Any such margin call could have a material adverse effect on our results of
operations, financial condition and business prospects.
We face intense competition that could adversely affect our market share and our
revenues.
We face intense competition from finance and mortgage banking companies and from
Internet-based lending companies. In addition, certain government-sponsored
entities, such as Fannie Mae and Freddie Mac, are also expanding their
participation in the non-prime mortgage industry. These government-sponsored
entities have a size and cost-of-funds advantage that allows them to purchase
loans with lower rates or fees than we are willing to offer. While the
government-sponsored entities presently do not have the legal authority to
originate mortgage loans, including non-prime loans, they do have the authority
to buy loans. A material expansion of their involvement in the market to
purchase non-prime loans could change the dynamics of the industry by virtue of
their sheer size, pricing power and the inherent advantages of a government
charter. In addition, if as a result of their purchasing practices, these
government-sponsored entities experience significantly higher-than-expected
losses, such experience could adversely affect the overall investor perception
of the non-prime mortgage industry.
Competitors with lower costs of capital have a competitive advantage over us. In
addition, establishing a lending operation such as ours requires a relatively
18
ITEM 1. DESCRIPTION OF BUSINESS - continued
small commitment of capital and human resources. This low barrier to entry
permits new competitors to enter our markets quickly and compete with us. This
could have a material adverse effect on our results of operations, financial
condition and business prospects.
Some thrifts, national banks and their operating subsidiaries are also expanding
their lending activities. By virtue of their charters, these institutions are
exempt from complying with many of the state and local laws that affect our
operations. For example, they can offer loans with prepayment charges in many
jurisdictions where we cannot. If more of these federally chartered institutions
are able to use their preemptive ability to provide more competitive pricing and
terms than we can offer, it could have a material adverse effect on our results
of operations, financial condition and business prospects.
The intense competition in the mortgage industry has also led to rapid
technological developments, evolving industry standards and frequent releases of
new products and enhancements. As mortgage products are offered more widely
through alternative distribution channels, such as the Internet, we may be
required to make significant changes to our information systems to compete
effectively. Our inability to continue enhancing our current capabilities, or to
adapt to other technological changes in the industry, could have a material
adverse effect on our results of operations, financial condition and business
prospects.
Our hedging strategies may not be successful in mitigating our risks associated
with changes in interest rates.
We intend to use various derivative financial instruments to provide a level of
protection against changes in interest rates, but no hedging strategy can
protect us completely. When rates change we expect to record a gain or loss on
derivatives which would be offset by an inverse change in the value of loans or
residual interests. We cannot assure you, however, that our use of derivatives
will offset the risks related to changes in interest rates. It is likely that
there will be periods in the future, during which we will incur losses after
accounting for our derivative financial instruments. The derivative financial
instruments we select may not have the effect of reducing our interest rate
risk. In addition, the nature and timing of hedging transactions may influence
the effectiveness of these strategies. Poorly designed strategies or improperly
executed transactions could actually increase our risk and losses. In addition,
hedging strategies involve transaction and other costs. We cannot assure you
that our hedging strategy and the derivatives that we use will adequately offset
the risk of interest rate volatility or that our hedging transactions will not
result in losses.
The complex federal, state and municipal laws governing loan servicing
activities could increase our exposure to the risk of noncompliance.
We intend to service the loan we originate on a nationwide basis. Therefore, we
must comply with the laws and regulations, as well as judicial and
administrative decisions, of all relevant jurisdictions pertaining to loan
servicing, as well as an extensive body of federal laws and regulations. The
volume of new or modified laws and regulations has increased in recent years,
and, in addition, some individual municipalities have begun to enact laws that
restrict loan servicing activities. The laws and regulations of each of these
jurisdictions are different, complex and, in some cases, in direct conflict with
each other. As our servicing operations continue to grow, it may be more
difficult to comprehensively identify, to accurately interpret and to properly
program our technology systems and effectively train our personnel with respect
19
ITEM 1. DESCRIPTION OF BUSINESS - continued
to all of these laws and regulations, thereby potentially increasing our
exposure to the risks of noncompliance with the laws and regulations pertaining
to loan servicing. Our failure to comply with these laws could lead to, among
other things: (i) civil and criminal liability, including potential monetary
penalties; (ii) legal defenses causing delaying or otherwise adversely affecting
the servicer's ability to enforce loans, or giving the borrower the right to
rescind or cancel the loan transaction; (iii) class action lawsuits; and (iv)
administrative enforcement actions. This could result in a material adverse
effect on our results of operations, financial condition and business prospects.
Any non-prime loans we originate will generally have higher delinquency and
default rates, which could result in losses on loans that we are required to
repurchase.
Non-prime mortgage loans generally have higher delinquency and default rates
than prime mortgage loans. Delinquency interrupts the flow of projected interest
income from a mortgage loan, and default can ultimately lead to a loss if the
net realizable value of the real property securing the mortgage loan is
insufficient to cover the principal and interest due on the loan. Also, our cost
of financing and servicing a delinquent or defaulted loan is generally higher
than for a performing loan. We bear the risk of delinquency and default on loans
beginning when we originate them. In whole loan sales our risk of delinquency
typically only extends to the first payment, but when we securitize we continue
to bear some exposure to delinquencies and losses through our residual interests
and the loans underlying our on-balance sheet securitization transactions. We
are required to establish reserves based on our anticipated delinquencies and
losses. We also re-acquire the risks of delinquency and default for loans that
we are obligated to repurchase. We attempt to manage these risks with risk-based
loan pricing and appropriate underwriting policies and loan collection methods.
However, if such policies and methods are insufficient to control our
delinquency and default risks and do not result in appropriate loan pricing and
appropriate loss reserves, our business, financial condition, liquidity and
results of operations could be harmed.
We are subject to losses due to fraudulent and negligent acts on the part of
loan applicants, mortgage brokers, other vendors and our employees.
When we originate mortgage loans, we rely heavily upon information supplied by
third parties including the information contained in the loan application,
property appraisal, title information and employment and income documentation.
If any of this information is intentionally or negligently misrepresented and
such misrepresentation is not detected prior to loan funding, the value of the
loan may be significantly lower than expected. Whether a misrepresentation is
made by the loan applicant, the mortgage broker, another third party or one of
our employees, we generally bear the risk of loss associated with the
misrepresentation. A loan subject to a material misrepresentation is typically
unsaleable or subject to repurchase if it is sold prior to detection of the
misrepresentation, and the persons and entities involved are often difficult to
locate and it is often difficult to collect any monetary losses that we have
suffered from them.
There are controls and processes designed to help us identify misrepresented
information in our loan origination operations. We cannot assure you, however,
that we have detected or will detect all misrepresented information in our loan
originations.
We may be subject to fines or other penalties based upon the conduct of our
independent brokers.
20
ITEM 1. DESCRIPTION OF BUSINESS - continued
The mortgage brokers from which we obtain loans have parallel and separate legal
obligations to which they are subject. While these laws may not explicitly hold
the originating lenders responsible for the legal violations of mortgage
brokers, increasingly federal and state agencies have sought to impose such
assignee liability. Recently, for example, the United States Federal Trade
Commission ("FTC") entered into a settlement agreement with a mortgage lender
where the FTC characterized a broker that had placed all of its loan production
with a single lender as the "agent" of the lender. The FTC imposed a fine on the
lender in part because, as "principal," the lender was legally responsible for
the mortgage broker's unfair and deceptive acts and practices. The United States
Justice Department in the past has sought to hold a non-prime mortgage lender
responsible for the pricing practices of its mortgage brokers, alleging that the
mortgage lender was directly responsible for the total fees and charges paid by
the borrower under the Fair Housing Act even if the lender neither dictated what
the mortgage broker could charge nor kept the money for its own account.
Accordingly, we may be subject to fines or other penalties based upon the
conduct of our independent mortgage brokers.
Our business is dependent upon conditions in California where we conduct a
significant amount of our business.
In 2003, 100% of the mortgage loans we originated were secured by property in
California. An overall decline in the economy or the residential real estate
market, or the occurrence of a natural disaster, such as an earthquake, or a
major terrorist attack in California could adversely affect the value of the
mortgaged properties in California and increase the risk of delinquency,
foreclosure, bankruptcy, or loss on mortgage loans in our portfolio. This would
negatively affect our ability to purchase, originate and securitize mortgage
loans, which could have a material adverse effect on our business, financial
condition and results of operations.
If many of our borrowers become subject to the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended our cash flows from our residual securities and
our securitizations structured as financings may be adversely affected.
Under the Soldiers' and Sailors' Civil Relief Act of 1940, a borrower who enters
military service after the origination of his or her mortgage loan generally may
not be charged interest above an annual rate of 6% during the period of the
borrower's active duty status. The Act also applies to a borrower who was on
reserve status and is called to active duty after origination of the mortgage
loan. A prolonged, significant military mobilization as part of the war on
terrorism or the war in Iraq could increase the number of the borrowers in our
securitized pools who are subject to this Act and thereby reduce the interest
payments collected from those borrowers. To the extent the number of borrowers
who are subject to this Act is significant, the cash flows we receive from loans
underlying our on-balance sheet securitizations and from our residual interests
would be reduced, which could cause us to reduce the carrying value of our
residual interests and would decrease our earnings. In addition, the Soldiers'
and Sailors' Civil Relief Act of 1940, imposes limitations that would impair the
ability of the servicer to foreclose on an affected mortgage loan during the
borrower's period of active duty status, and under certain circumstances, during
an additional three month period thereafter. Any such reduction in our cash
flows or impairment in our performance could have a material adverse effect on
our results of operations, financial condition and business prospects.
The inability to attract and retain qualified employees could significantly harm
our business.
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ITEM 1. DESCRIPTION OF BUSINESS - continued
We are dependent on our account executives and retail loan officers to attract
borrowers by, among other things, developing relationships with financial
institutions, other mortgage companies and brokers, real estate agents,
borrowers and others. We believe that these relationships lead to repeat and
referral business. The market for skilled account executives and loan officers
is highly competitive and historically has experienced a high rate of turnover.
In addition, if a manager leaves New Century, there is an increased likelihood
that other members of his or her team will follow. Competition for qualified
account executives and loan officers may lead to increased hiring and retention
costs. If we are unable to attract or retain a sufficient number of skilled
account executives at manageable costs, we will be unable to continue to
originate quality mortgage loans that we are able to sell for a profit, which
would have a material adverse effect on our results of operations, financial
condition and business prospects.
An interruption in or breach of our information systems may result in lost
business.
We rely heavily upon communications and information systems to conduct our
business. Any failure or interruption or breach in security of our information
systems or the third-party information systems on which we rely could cause
underwriting or other delays and could result in fewer loan applications being
received, slower processing of applications and reduced efficiency in loan
servicing. We are required to comply with significant federal and state
regulations with respect to the handling of customer information, and a failure,
interruption or breach of our information systems could result in regulatory
action and litigation against us. We cannot assure you that such failures or
interruptions will not occur or if they do occur that they will be adequately
addressed by us or the third parties on which we rely. The occurrence of any
failures or interruptions could have a material adverse effect on our results of
operations, financial condition and business prospects.
The success and growth of our business will depend upon our ability to adapt to
and implement technological changes.
Our mortgage loan origination business is currently dependent upon our ability
to effectively interface with our brokers, borrowers and other third parties and
to efficiently process loan applications and closings. The origination process
is becoming more dependent upon technological advancement, such as the ability
to process applications over the Internet, accept electronic signatures, provide
process status updates instantly and other customer-expected conveniences that
are cost-efficient to our process. In addition, we are in the process of
implementing a new loan origination system. Implementing and becoming proficient
with the new loan origination system and other new technology will require
significant financial and personnel resources. There is no guarantee that the
implementation of our new loan origination system or other new technology will
be successful. To the extent that we become reliant on any particular technology
or technological solution, we may be adversely affected to the extent that such
technology or technological solution (i) becomes non-compliant with existing
industry standards, (ii) fails to meet or exceed the capabilities of our
competitors' equivalent technologies or technological solutions, or (iii)
becomes increasing expensive to service, retain and update. Any failure to
acquire technology or technology solutions when necessary could limit our
ability to remain competitive in our industry and could also limit our ability
to increase the cost-efficiencies of our operating model, which would have a
material adverse effect on our results of operations, financial condition and
business prospects.
22
ITEM 1. DESCRIPTION OF BUSINESS - continued
We may be required to repurchase mortgage loans or indemnify investors if we
breach representations and warranties, which could adversely impact our
earnings.
When we sell loans, we are required to make customary representations and
warranties about such loans to the loan purchaser. Our whole loan sale
agreements require us to repurchase or substitute loans in the event we breach a
representation or warranty given to the loan purchaser or make a
misrepresentation during the mortgage loan origination process. In addition, we
may be required to repurchase loans as a result of borrower fraud or in the
event of early payment default on a mortgage loan. Likewise, we are required to
repurchase or substitute loans if we breach a representation or warranty in
connection with our securitizations. The remedies available to a purchaser of
mortgage loans are generally broader than those available to us against the
originating broker or correspondent. Further, if a purchaser enforces its
remedies against us, we may not be able to enforce the remedies we have against
the sellers. The repurchased loans typically can only be financed at a steep
discount to their repurchase price, if at all. They are also typically sold at a
significant discount to the unpaid principal balance. Significant repurchase
activity could negatively affect our cash flow and results of operations.
We are exposed to risk of environmental liabilities with respect to properties
to which we take title.
In the course of our business, we may foreclose and take title to residential
properties, and could be subject to environmental liabilities with respect to
these properties. We may be held liable to a governmental entity or to third
parties for property damage, personal injury, investigation, and clean-up costs
incurred by these parties in connection with environmental contamination, or may
be required to investigate or clean up hazardous or toxic substances, or
chemical releases at a property. The costs associated with investigation or
remediation activities could be substantial. In addition, as the owner or former
owner of a contaminated site, we may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from the property. If we ever become subject to significant
environmental liabilities, our business, financial condition and results of
operations could be materially and adversely affected.
Our charter and bylaws and Nevada law contain provisions that could discourage a
takeover.
Our amended and restated certificate of incorporation and our amended and
restated bylaws include various provisions that could delay, defer or prevent a
takeover attempt that may be in the best interest of our stockholders. These
provisions include the existence of a classified board of directors, the ability
of our board of directors to issue shares of our preferred stock without any
further stockholder approval and requirements that (i) our stockholders give
advance notice with respect to certain proposals they may wish to present for a
stockholder vote, (ii) our stockholders act only at annual or special meetings
and (iii) two-thirds of all directors approve a change in the number of
directors on our board of directors. Issuance of our preferred stock could
discourage bids for the common stock at a premium as well as create a depressive
effect on the market price of our common stock.
We are also subject to Nevada General Corporation Law which could discourage
potential acquisition proposals, delay or prevent a change of control and
prevent changes in our management.
23
ITEM 1. DESCRIPTION OF BUSINESS - continued
If we do not manage our growth effectively, our financial performance could be
harmed.
Rapid growth places, and will continue to place, certain pressures on our
management, administrative, operational and financial infrastructure. As of
December 31, 2003, we had no employees as all of our personnel were independent
contractors; however, we have recently applied for licensure under the
California Department of Corporations as a Consumer Finance Lender and will
begin hiring loan executives as employees. Many of these employees have a
limited understanding of our systems and controls. The increase in the size of
our operations may make it more difficult for us to ensure that we originate
quality loans and that we service them effectively. We will need to attract and
hire additional sales and management personnel in an intensely competitive
hiring environment in order to preserve and increase our market share. At the
same time, we will need to continue to upgrade and expand our financial,
operational and managerial systems and controls.
Various factors may cause the market price of our common stock to become
volatile, which could adversely affect our ability to access the capital markets
in the future.
The market price of our common stock may experience fluctuations that are
unrelated to our operating performance. In particular, the price of our common
stock may be affected by general market price movements as well as developments
specifically related to the consumer finance industry and the financial services
sector. These could include, among other things, interest rate movements,
quarterly variations or changes in financial estimates by securities analysts,
or a significant reduction in the price of the stock of another participant in
the consumer finance industry. This volatility may make it difficult for us to
access the capital markets through additional secondary offerings of our common
stock, regardless of our financial performance.
ITEM 2. PROPERTIES
None.
ITEM 3. LEGAL PROCEEDINGS
On January 27, 2004 DL Pacific Center LP ("DL Pacific") filed a lawsuit for
$40,444 plus costs and attorney's fees against us in San Diego County Superior
Court. The suit alleges that, after we purchased San Francisco Funding, Inc.
("SFF") in November 2003, we assumed SFF's obligations pursuant to DL Pacific's
lease with SFF by accepting the benefits of such lease and by negotiating with
DL Pacific for amendments to the lease. We are vigorously defending the lawsuit.
It is managements opinion, that we have meritorious defenses based upon the
facts that (1) we did not accept the benefits of the lease and/or (2) the
alleged promise(s) made by us is (are) unenforceable under the California
Statute of Frauds because the alleged lease was for more than one year and was
not in writing, as required under the Statute.
On March 9, 2004 Robert E. Vener ("Vener") filed an amendment to his lawsuit for
$7,500 per month from November 2003 to March 2006 plus costs and attorney's fees
against us in Marin County Superior Court. The suit alleges that, after we
purchased San Francisco Funding, Inc. ("SFF") in November 2003, we assumed SFF's
obligations pursuant to Vener's lease with SFF by stating and representing to
Vener that we would be responsible for any amounts due from SFF pursuant to the
lease, and that Vener relied on our representations by allowing SFF to remain on
the premises following SFF's default in the payment of rent on the lease. We are
24
ITEM 3. LEGAL PROCEEDINGS - continued
vigorously defending the lawsuit. It is managements opinion, that we have
meritorious defenses based upon the facts that (1) we did not state or represent
that we would be responsible for any amounts due from SFF pursuant to the lease
and/or (2) the alleged promise(s) made by us is (are) unenforceable under the
California Statute of Frauds because the alleged lease was for more than one
year and was not in writing, as required under the Statute.
In regard to the DL Pacific and/or Vener lawsuit(s), management intends to file
a cross-complaint against the SFF and its major stockholder(s) MR. and Mrs.
Daniel Selis, for indemnity for the cost of defending the actions and for breach
of contract, fraud and/or interference with our advantageous business
relationships because of : (1) SFF's material breaches of the SFF stock purchase
agreement and SFF's material misrepresentations to us of their liabilities and
obligations, (2) SFF's written false statements to its creditors that we had
assumed their debts, and (3) SFF's forwarding of its phone calls tour offices
and directing their creditors to call our offices concerning payment of their
liabilities and obligations. We anticipate that SFF will file a non-meritorious
cross-complaint against us for breach of the stock purchase agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
GENERAL
The Company has an authorized capitalization of 20,000,000 shares of common
stock and 1,000,000 shares of preferred stock, $0.001 par value per share of
which 14,839,492 were issued and outstanding at December 31, 2003. On April 3,
2003 the Company increased the common shares authorized to 100,000,000 shares
and the preferred stock to 5,000,000 shares. On April 29, 2003 the company
reversed the number of authorized shares from 100,000,000 common and 5,000,000
preferred to 20,000,000 and 1,000,000 respectively. The issued and outstanding
were similarly reversed on a five for one basis.
MARKET INFORMATION
The Company's common stock is traded in the over-the-counter market on the OTC
Bulletin Board under the symbol "SLVO". The following table sets forth the range
of high and low bid quotes of the Company's Common Stock per calendar quarter
which reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
2003
Low High
Fourth Quarter (1) $ 0.150 $ 0.420
Third Quarter (1) $ 0.100 $ 0.220
Second Quarter (1) $ 0.150 $ 0.210
First Quarter (1) $ 0.200 $ 0.350
2002
Low High
Fourth Quarter (1) $ 0.100 $ 0.900
Third Quarter (1) $ 0.110 $ 0.600
Second Quarter (1) $ 0.110 $ 0.275
First Quarter (1) $ 0.080 $ 0.300
(1) As adjusted by the April 29, 2003 five for one rollback.
On March 10, 2000 the Company's common shares began trading on the Berlin and
Frankfurt Stock Exchanges in Germany under the symbol "919335".
HOLDERS
The Company estimates that there are approximately 200 shareholders of record of
the Company's Common Stock and approximately 300 additional shareholders holding
Common Stock in street name.
RECENT SALES OF UNREGISTERED SECURITIES
On December 2, 2003 the company issued 20,000 restricted Common shares to an
accredited investor in consideration of the cancellation of $2,500 in debt. The
issuance of the stock was exempt from registration under Section 4(2) of the
Securities Act. No underwriter was involved in the offer of sale of the shares.
26
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS - continued
On December 12, 2003 the company issued 400,000 restricted Common shares to an
accredited investor for $14,000 in cash and a $16,000 retainer for legal
services. The issuance of the stock was exempt from registration under Section
4(2) of the Securities Act. No underwriter was involved in the offer of sale of
the shares.
DIVIDENDS
The Company has never declared or paid cash dividends on its common stock and
anticipates that future earnings, if any, will be retained for development of
its business. Payment of cash dividends in the future will be wholly dependent
upon the Company's earnings, financial condition, capital requirements and other
factors deemed relevant by them. It is not likely that cash dividends will be
paid in the foreseeable future. In the event of the acquisition of or merger
with a business by the Company, control of the Company and its Board of
Directors may pass to others. In that event, the payment of dividends would be
wholly dependent upon such persons.
ITEM 6. MANAGEMENT'S PLAN OF OPERATION
THIS REPORT (AND ESPECIALLY THIS SECTION) CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
BELIEFS, INTENTIONS, PLANS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS
"EXPECTS", "PLANS" "ANTICIPATES", "INTENDS", "BELIEVES", OR SIMILAR LANGUAGE.
SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE SEEKING OF
REVENUE PRODUCING ACQUISITIONS, THE DEVELOPMENT PLANS FOR THE TECHNOLOGIES OF
THE COMPANY, TRENDS IN THE RESULTS OF THE COMPANY"S DEVELOPMENT, ANTICIPATED
DEVELOPMENT PLANS, OPERATING EXPENSES AND THE COMPANY'S ANTICIPATED CAPITAL
REQUIREMENTS AND CAPITAL RESOURCES. THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED
IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE
HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE RISK FACTORS DISCUSSED IN THIS
ANNUAL REPORT ON FORM 10-KSB ARE AMONG THOSE FACTORS THAT IN SOME CASES
MAYAFFECT THE COMPANY'S RESULTS AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER
MATERIALLY AND ADVERSELY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
SUBJECT TO THE ABOVE QUALIFICATIONS AND SUCH RISK FACTORS, THE FOLLOWING
DISCUSSION IS INTENDED TO PROVIDE AN ANALYSIS OF MANAGEMENT'S PLAN OF OPERATION
AND SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND
THE NOTES THERETO.
Silverado Financial is incorporated under the laws of the State of Nevada. Our
principal business consists of the origination, funding, sale and servicing of
mortgage loans, primarily secured by first and second trust deeds against
residential and commercial properties. We are planning to expand our operations
in this market by opening new offices and through acquisitions of established
companies engaged in real estate related financial services.
We plan to raise capital to open new offices throughout the Western United
States. It is our belief that by leveraging recent technological advances
including, but not limited to, new Internet based communications strategies, and
the development of new software platforms, that we can rapidly open new offices
with substantially lower capital cost than is common in the industry. Although
there can be no assurance that we will be successful in this endeavor, it is
management's belief that we can be successful. To that end, we have recently
opened our second office, in Pleasanton, California, and have moved our
corporate office from Campbell, California to Pleasanton.
27
ITEM 6. MANAGEMENT'S PLAN OF OPERATION - cotinued
We plan to consolidate consumer lending, mortgage brokerage and mortgage banking
companies throughout the Western United States and, eventually, nationwide. Our
goal is to attain a 12.5% internal Year-Over-Year growth rate; of course there
can be no assurance that we will be able to achieve that goal. Our challenge
will be to tie various revenue centers together into one contiguous
infrastructure. Given current changes occurring within the lending industry, we
believe that there will be a migration of non-affiliated brokerage companies to
link directly with the mortgage banking institutions as semi-captive agents. We
intend to capitalize on this migration and plan to acquire companies in order to
do so. However, there can be no assurance that such companies will be available
for acquisition on acceptable terms and conditions or that we will be able to
obtain the necessary financing to complete such acquisitions.
To that end, we are currently attempting to acquire established, profitable
mortgage brokerage and mortgage banking companies in the United States to
consolidate with our current operations in order to increase profitability in
wholesale and secondary operations and to create economies of scale by further
consolidating vendors and suppliers on a regional, and, hopefully on a national
basis. We intend to act as the marketing arm of any companies we may acquire,
centralizing technology, advertising, lead generation, accounting and purchasing
in order to allow any acquired companies to focus on increasing sales volume.
While there can be no assurance that we will be successful in implementing this
strategy, we believe that if we are, we will create a marriage of
entrepreneurial energy and public capital which may result in the creation of a
more efficient loan distribution system which could provide a broad range of
loan products and services to our clientele.
28
ITEM 7. FINANCIAL STATEMENTS
The following financial information is filed as part of this report:
REPORT OF INDEPENDENT AUDITORS ....................................... F-1 - F-2
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2003 ......................... F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2003 AND 2002 ................................................. F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE
YEARS ENDED DECEMBER 31, 2003 AND 2002 ..................................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2003 AND 2002 ............................................ F-6 - F7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .......................... F-8 - F-22
29
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholders and Board of Directors of Silverado Financial, Inc.:
We have audited the accompanying balance sheet of Silverado Financial, Inc. (the
Company), a development stage company, as of December 31, 2003 and the related
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Silverado Financial, Inc. as of
December 31, 2003, and the results of its operations and cash flows the year
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
As disclosed in Note 1, the accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced material operating losses and has a working capital deficit of
$352,479 at December 31, 2003. Should additional financial resources be required
prior to the Company attaining profitability and/or cash flow breakeven levels,
the Company would be required to seek additional financial resources from its
existing investors or others. There can be no assurances that the Company will
obtain sufficient capital or that operations will become profitable. These and
other conditions raise substantial doubt about the Company's ability to continue
as a going concern. The accompanying financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.
/s/EPSTEIN, WEBER & CONOVER, PLC
Scottsdale, Arizona
May 7, 2004
F-1
30
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors of
SILVERADO FINANCIAL, INC.
(Formerly known as Rhombic Corporation):
We have audited the accompanying consolidated balance sheets of Silverado
Financial, Inc., formerly Rhombic Corporation, (a Development Stage Company) and
subsidiaries as of December 31, 2002, and the related consolidated statements of
operations, stockholders' equity and cash flows for the two years then ended and
the period from inception to December 31, 2002. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Silverado Financial, Inc.,
formerly Rhombic Corporation, and its consolidated subsidiaries as of December
31, 2002, and the results of their operations and cash flows for the two years
then ended and the period from inception to December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
As disclosed in Note 1, the accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced material operating losses and has yet to commence significant
revenue producing operations. Ultimate realization of material investments in
intellectual properties is uncertain. These and other conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern.
/s/ James C. Marshall, CPA, P.C
--------------------------------
James C. Marshall
Scottsdale, Arizona
April 14, 2003
F-2
31
SILVERADO FINANCIAL, INC.
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 2003
ASSETS
------
CURRENT ASSETS
Cash $ 1,230
Receivables 11,405
Marketable securities held for sale 17,775
Total Current Assets 30,410
OTHER ASSETS
Intellectual property 1,398,020
Furniture, fixtures & equipment-net 116,370
Other 6,900
----------------
Total assets $ 1,551,700
================
LIABILITIES
CURRENT -----------
Accounts Payable $ 244,821
Accrued interest 28,068
Convertible notes payable 36,000
Due to affiliates 74,000
----------------
Total current liabilities 382,889
OTHER LIABILITIES
Note payable 275,000
----------------
Total liabilities 657,889
STOCKHOLDERS' EQUITY
--------------------
Preferred stock, $.001 par value,
1,000,000 shares authorized, none issued
Common stock, $.001 par value, 20,000,000 shares 14,839
authorized, 14,839,492 issued and outstanding
Deferred Stock Compensation (16,000)
Additional paid-in capital 10,455,513
Accumulated Deficit (9,560,541)
----------------
Total stockholders' equity 893,811
----------------
Total liabilities and stockholders' equity $ 1,551,700
================
See accompanying notes to consolidated financial statements.
F-3
32
SILVERADO FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
For the years ended December 31,
2003 2002
---------------- ----------------
Revenues
Commission & processing revenue $ 115,823 $ 7,500
Cost of sales 91,016 0
---------------- ----------------
Gross profit 24,807 7,500
---------------- ----------------
Operating expenses
Research & development 0 (9,184)
Write down on intellectual property 0 276,250
Consulting 584,137 0
General and administrative 326,428 136,587
Depreciation 18,537 0
---------------- ----------------
Total operating expenses 929,102 403,653
---------------- ----------------
Other Income and Expense
Interest income 9 0
Interest (expense) (26,304) (6,820)
---------------- ----------------
Total non-operating income (26,295) (6,820)
---------------- ----------------
Net (Loss) from operations (930,590) (402,973)
Other revenues and expenses
(Loss) gain on sale of investments (6,201) 0
(Loss) gain on disposal of equipment (1,269) 0
---------------- ----------------
Net (Loss) $ (938,060) $ (402,973)
================ ================
Net (Loss) per share:
Basic $ (0.07) $ (0.06)
================ ================
Diluted $ (0.07) $ (0.06)
================ ================
Weighted Average Shares Outstanding
Basic 12,534,235 6,389,045
================ ================
Diluted 12,534,235 6,389,045
================ ================
See accompanying notes to consolidated financial statements
F-4
33
SILVERADO FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Net
Unrealized
Holding loss
Common Stock Additional on available
----------------------- Paid-In Deferred Accumulated for sale
Shares Amount Capital Compensation Deficit securities Total
------------ ---------- -------------- ----------- ----------- ------------ ------------
Balance at December 31, 2001 5,339,408 $ 5,739 $ 8,475,587 $(8,219,508) $ (7,476) $ 254,342
Shares issued for services 260,592 261 54,937 55,198
Shares issued for Financial Software, Inc. 4,400,000 4,400 1,085,503 1,089,903
Net unrealized holding gain on available
for sale securities 14,875 14,875
Net (loss) (402,973) (402,973)
------------ ---------- -------------- ----------- ----------- ------------ ------------
Balance at December 31, 2002 10,400,000 $ 10,400 $ 9,616,027 $(8,622,481) $ 7,399 $ 1,011,345
Net unrealized holding (loss) on
securities available held for sale (7,399) (7,399)
Shares issued for cash 186,666 186 13,814 14,000
Shares issued for payables 566,367 566 170,109 170,675
Shares issued for services 2,770,635 2,771 493,408 (16,000) 480,179
Shares issued for Realty Capital Corp. 729,452 730 126,924 127,654
Shares issued for debt 248,372 248 51,853 52,101
Cancellation of shares (62,000) (62) (16,622) (16,684)
Net loss (938,060) (938,060)
------------ ---------- -------------- ----------- ----------- ------------ ------------
Balance at December 31, 2003 14,839,492 $ 14,839 $ 10,455,513 $ (16,000)$(9,560,541) $ - $ 893,811
============ ========== ============== =========== =========== ============ ============
See accompanying notes to consolidated financial statements
F-5
34
SILVERADO FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
2003 2002
-------------- --------------
OPERATING ACTIVITIES
Net (loss) income for the period $ (938,060) $ (402,973)
Adjustments to reconcile net
cash used by operations:
Depreciation expense 18,537 -
Write down on intellectual property and patents 276,250
Loss (gain) on sale of marketable securities 6,201 -
Loss (gain) on disposal of equipment 1,268 -
Common stock issued for services and trade payables 650,854 55,198
(Increase)/decrease in accounts receivable 33,648 (12,627)
(Increase)/decrease in prepaid expenses - 300
(Increase)/decrease in other assets 292 (6,899)
Increase/(decrease) in accounts payable 148,433 (1,880)
Increase/(decrease) in accrued interest 24,976 3,092
Increase/(decrease) in due to affiliates and officers 19,000 55,000
-------------- --------------
Net Cash (Used) by Operating Activities (34,851) (34,539)
-------------- --------------
FINANCING ACTIVITIES
Proceeds from private placements 14,000 -
Proceeds from convertible debentures 10,000 26,000
-------------- --------------
Cash provided from financing activities 24,000 26,000
-------------- --------------
INVESTING ACTIVITIES
Cash obtained from acquisition of Realty Capital Corp. 1,245
Proceeds from the sale of marketable securities 10,275 -
-------------- --------------
Cash (used) in investment activities 11,520 -
-------------- --------------
Increase (decrease) in cash 669 (8,539)
Cash at beginning of period 561 9,100
-------------- --------------
Cash at end of period $ 1,230 $ 561
============== ==============
F-6
35
SILVERADO FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the years ended December 31,
2003 2002
-------------- --------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest expense $ 26,304 $ 6,820
============== ==============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Issuance of 4,400,000 common shares for Financial Software, Inc. $ 1,089,903
==============
Issuance of 729,452 common shares to John E. Hartman
for all assets and liabilities of Realty Capital Corporation $ 127,654
==============
Issuance of 248,372 common shares in exchange for cancellation
of debt $ 52,101
==============
Receipt and cancellation of 62,000 shares from a director
for the sale of all scientific intellectual property $ (16,684)
==============
See accompanying notes to consolidated financial statements.
F-7
36
SILVERADO FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003 AND 2002
Note 1 - ORGANIZATION AND BASIS OF PRESENTATION
Silverado Financial, Inc. (the "Company", "We", "Us" and "Our") is incorporated
under the laws of the State of Nevada and based in Campbell, California in the
San Francisco Bay Area. We provide first and second mortgage products to
borrowers in California through our operating subsidiary, Realty Capital
Corporation (RCC).
The corporation was initially formed on February 26, 1987 as Toledo Medical
Corporation. Our name was changed to Almaz Space Corporation on February 9, 1991
and to Ready When You Are Funwear, Inc. on April 14, 1992. On December 30, 1994
a group of individuals acquired control of the Company. On February 17, 1995,
they changed the name to Rhombic Corporation. On March 19, 2003, the company
changed its name to Silverado Financial, Inc.
Our efforts, since inception, until October of 2002, had been primarily focused
on the acquisition of the rights to intellectual property that could lead to the
development of innovative scientific technologies. During the years 1999 and
2000 we began to focus on the research and development of our portfolio of
acquired intellectual property. During 2001, our main objective was to identify
and develop specific applications from our intellectual property in order to
make them commercially marketable. In November 2002, we acquired Financial
Software, Inc. as the first part of its strategy to enter the lucrative
financial services sector.
During 2003 the company had six wholly owned subsidiaries. They are:
* Financial Software, Inc. ("FSI");
* Realty Capital Corporation ("RCC");
* Rockford Technology Associates, Inc. ("Rockford");
* Nanophase Diamond Technologies, Inc. ("Nanophase");
* AEP Technologies, Inc. ("AEPT"); and
* Rhombic Detection Technologies, Inc. ("RDT").
Rockford, Nanophase, AEPT and RDT are inactive and have no assets, liabilities
or operations and never were active, held any assets or had any liabilities or
operations. These subsidiaries were created for the purpose of developing
specific applications from our scientific intellectual property. We never
implemented our plans to develop our scientific intellectual property and all of
our scientific intellectual properties, together with certain marketable
securities held for sale, were sold, in 2003 to a director, in exchange for the
return of 62,000 shares of our Common Stock and the cancellation of $1,100 in
debt.
On November 19th, 2002, the Company acquired all of the issued and outstanding
shares of Financial Software, Inc., (FSI) a New Jersey corporation engaged in
the development of Internet and Intranet financial software in edition to
operating several Financial Industry publishing web-sites. This acquisition was
completed on a share for share exchange basis for 4,400,000 shares of the
Company's common stock. FSI was acquired in order to gain access to certain
proprietary software products owned by FSI which the Company intends to further
develop and extend into comprehensive mortgage platforms called MortgageCenter
and FinanCenter.
A majority of the shareholders of record on February 10, 2003 voted to amend the
Articles of Incorporation of the Registrant to change the name of the Company to
K-8
37
Note 1 - ORGANIZATION AND BASIS OF PRESENTATION - continued
Silverado Financial, Inc. and to change the authorized common shares to
100,000,000 and the authorized preferred shares to 5,000,000 as described in an
information statement filed on Form 14C with the Securities and Exchange
Commission on February 11, 2003. The Registrant filed with the Secretary of
State of Nevada a Certificate of Amended Articles of Incorporation on March 21,
2003. Subsequently, on April 29, 2003 the company effected a one for five
reversal of its authorized shares. See Note 2 below.
On May 9, 2003, in a non-arms length transaction with John E. Hartman, the
company's president, the company issued 729,452 shares of restricted common
stock at a purchase price of $0.175 per share, which was based on the prior five
days average trading price, in exchange for all of the outstanding shares of
Realty Capital Corporation. The purchase price of Realty Capital Corporation was
$127,654 and was the net asset value of Realty Capital Corporation, as
determined by an independent, third party valuation. The shares were issued
under Section 4(2) of the 1933 Securities Act.
GOING CONCERN AND PLAN OF OPERATIONS
The accompanying consolidated financial statements have been prepared on the
basis of accounting principles applicable to a going concern, which contemplates
the realization of assets and extinguishment of liabilities in the normal course
of business.
As shown in the accompanying financial statements, the Company had a net loss of
$938,060 and $402,973 for the years ended December 31, 2003 and 2002,
respectively. It has incurred an accumulated deficit of $9,560,541 and has a
deficit in working capital of $352,479 as of December 31, 2003. The ability of
the Company to continue as a going concern is dependent on obtaining additional
capital and financing and operating at a profitable level. The Company intends
to seek additional capital either through debt or equity offerings, or a
combination thereof, and to seek acquisitions which will generate sales volume
with operating margins sufficient to achieve profitability. The financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENT OF SHARE AMOUNTS
Effective April 29, 2003 the Company changed its trading name and trading symbol
to "SLVO" on the OTCBB and decreased the number of issued and outstanding shares
of common stock by issuing one new share for each five shares held. This action
was authorized by the board of directors at a meeting of the board on April 3,
2003
CONSOLIDATION
The consolidated financial statements include the results of operations, account
balances and cash flows of the Company and its wholly owned subsidiaries after
elimination of inter-company transactions. Realty Capital Corporation's
operations are consolidated from May 9, 2003 through December 31, 2003.
CASH
Cash includes all short-term highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three
months or less. At times cash deposits may exceed government insured limits.
F-9
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Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
PROPERTY AND EQUIPMENT
Property and equipment consists of computer equipment, office furniture and
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is recorded on a straight-line basis the estimated useful lives of
the assets ranging from 3 to 10 years. Depreciation expense for the year ended
December 31, 2003 was $18,537.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Commissions generated from brokering loans are recognized at the date of close.
FINANCIAL INSTRUMENTS
Financial instruments consist primarily of cash, investments in marketable
securities and obligations under accounts payable and accrued expenses. The
carrying amounts of cash, accounts receivable, accounts payable, notes payable
and accrued expenses approximate fair value because of the short term maturity
of those instruments.
INVESTMENTS
Statements of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, ("SFAS 115") requires that all
applicable investments be classified as trading securities, available for sale
securities or held to maturity securities. The Company did not have any
investments classified as trading securities or held-to-maturity securities. The
statement further requires that available for sale securities be reported at
fair value, with unrealized gains and losses excluded from earnings but reported
in a separate component of shareholders' equity (net of the effect of income
taxes) until they are sold. At the time of sale, any gains or losses will be
recognized as a component of operating results.
At December 31, 2003 and 2002, respectively, the Company's investments were held
for sale.
INTELLECTUAL PROPERTY
The Company's intellectual property is comprised of a software platform acquired
with the acquisition of Financial Services Inc. in 2002. The Company
periodically evaluates the recoverability of intangible assets and takes into
account events or circumstances that warrant revised estimates of useful lives
or that indicate that an impairment exists. The Company's intangible assets will
be subject to amortization when put into productive use.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the cost of long-lived
assets, primarily intellectual property and patents, may be impaired, the
Company performs a recoverability evaluation. If an evaluation is required, the
F-10
39
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
discounted estimated future cash flows associated with the assets are compared
to the assets' carrying amount to determine whether a write-down to fair value
is required.
On January 1, 2002, the Company has adopted SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which requires that long-lived
assets to be held and used be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.
The Company evaluates its long-lived assets for impairment whenever changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted cash flows
expected to be generated by the asset. If assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amounts exceed the fair values of the assets. Assets to be disposed of are
reported at the lower of carrying values or fair values, less costs of disposal.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123") as amended by SFAS No. 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure", established
accounting and disclosure requirements using a fair-value based method of
accounting for stock-based employee compensation. The Company periodically
issues options to consultants and members of the Board of Directors. The
estimated value of these options is determined in accordance with SFAS No. 123
and expensed as the granted options vest to the grantees.
INCOME TAXES
The Company has adopted the provisions of SFAS No. 109, "Accounting for Income
Taxes". SFAS 109 requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
LOSS PER SHARE
(Loss) per common share is computed based on the weighted average number of
common shares outstanding during each period. Convertible equity instruments
such as convertible debentures and warrants are not considered in the
calculation of net loss per share, as their inclusion would be antidilutive.
NEW TECHNICAL PRONOUNCEMENTS
TECHNICAL PRONOUNCEMENTS
In June 2002, FASB issued Statement No. 146 (SFAS No. 146), "Accounting for
Costs Associated with Exit or Disposal Activities," effective for activities
that are initiated after December 31, 2002, with early application encouraged.
This Statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
F-11
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Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Restructuring)." The adoption of SFAS No. 146 did not have a material effect on
the Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 expands on the accounting
guidance of SFAS No. 5, 57 and 107 and incorporates without change the
provisions of FASB Interpretation No. 34, which is being superseded. FIN 45
elaborates on existing disclosure requirements for most guarantees, including
standby letters of credit. It also clarifies that guarantees must be recognized
as an initial liability for fair value, or market value, of the obligations
assumed under the guarantee and that this information must be disclosed in
interim and annual financial statements. FIN 45 applies on a prospective basis
to guarantees issued or modified after December 31, 2002. The adoption of FIN 45
did not have a material effect on the Company's financial position or results of
operations.
In December 2002, FASB issued Statement No. 148 (SFAS No. 148), "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company is required to follow the prescribed format and provide the additional
disclosures required by SFAS No. 148 in its annual financial statements for the
year ended December 31, 2002 and must also provide the disclosures in its
quarterly reports containing condensed financial statements for interim periods
beginning with the quarterly period ended March 31, 2003. The adoption of SFAS
No. 148 did not have a material effect on the Company's financial position or
results of operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46") which is an interpretation of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements." FIN 46 requires a variable interest
entity (VIE) to be consolidated by a company that is considered to be the
primary beneficiary of that VIE. In December 2003, the FASB issued FIN No. 46
(revised December 2003); "Consolidation of Variable Interest Entities" ("FIN
46-R") to address certain FIN 46 implementation issues. The effective dates and
impact of FIN 46 and FIN 46-R for our consolidated financial statements are as
follows: Special purpose entities ("SPEs") created prior to February 1, 2003. We
must apply either the provisions of FIN 46 or early adopt the provisions of FIN
46-R at the end of the first interim or annual reporting period ending after
December 15, 2003. We have completed our assessment and determined that we have
no SPE's.
1. Non-SPEs created prior to February 1, 2003. We are required to adopt
FIN 46-R at the end of the first interim or annual reporting period
ending after March 15, 2004. While not required, we could elect to
adopt FIN 46 or FIN 46-R for these non-SPEs as of the end of the first
interim or annual reporting period ending after December 15, 2003. We
have not entered into any material joint venture or partnership
agreements prior to February 1, 2003.
F-12
41
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
2. All entities, regardless of whether a SPE, that were created
subsequent to January 31, 2003. We are required to apply the
provisions of FIN 46 unless we elect to early adopt the provisions of
FIN 46-R as of the first interim or annual reporting period ending
after December 15, 2003. If we do not elect to early adopt FIN 46-R,
then we are required to apply FIN 46-R to these entities as of the end
of the first interim or annual reporting period ending after March 15,
2004. We have not entered into any material joint venture or
partnership agreements subsequent to January 31, 2003 and we do not
expect to enter into any such material agreements during our first
interim period ended January 31, 2004. If we enter into any
significant joint venture and partnership agreements in the future
that would require consolidation under FIN 46 or FIN 46-R, it could
have a material impact on our consolidated financial statements in
future filings.
EITF 00-21, "Revenue Arrangements with Multiple Deliverables," was first
discussed at the July 2000 EITF meeting and was issued in February 2002. Certain
revisions to the scope language were made and finalized in May 2003. It
addresses the accounting for multiple element revenue arrangements, which
involve more than one deliverable or unit of accounting in circumstances where
the delivery of those units takes place in different accounting periods. EITF
00-21 requires disclosures of the accounting policy for revenue recognition of
multiple element revenue arrangements and the nature and description of such
arrangements. The accounting and reporting requirements are effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. Adoption of EITF 00-21 does not have a significant impact on our financial
statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The accounting and reporting
requirements will be effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003.
Currently, we do not have any derivative instruments and do not anticipate
entering into any derivative contracts. Accordingly, adoption of SFAS 149 does
not have a significant impact on our financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. Adoption of SFAS 150 does not have a significant impact on our
financial statements.
In December of 2003, the FASB issued Statement of Financial Accounting Standards
No. 132 (Revised) ("Revised SFAS 132"), "Employer's Disclosure about Pensions
and Other Postretirement Benefits." Revised SFAS 132 retains disclosure
requirements in original SFAS 132 and requires additional disclosures relating
to assets, obligations, cash flows and net periodic benefit cost. Revised SFAS
132 is effective for fiscal years ending after December 15, 2003, except that
certain disclosures are effective for fiscal years ending after June 15, 2004.
F-13
42
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Interim period disclosures are effective for interim periods beginning after
December 15, 2003. The adoption of SFAS No. 132 (Revised) did not have a
material effect on the Company's financial position or results of operations.
Note 3 - INTELLECTUAL PROPERTY
Since its inception, the Company entered into numerous agreements as a result of
having acquired certain rights to various complex intellectual scientific
properties. On November 19, 2002 the Company acquired intellectual property
comprised of a software platform acquired with Financial Services Inc. during
2002.
During the quarter ended June 30, 2003, in a non-arms length transaction with
Robert George Krushnisky, a director of the company, the company received 62,000
shares of its own common stock together with cancellation of an outstanding debt
in the amount of $1,100 in exchange for all of the scientific intellectual
property assets acquired prior to the acquisition of FSI in November of 2002 as
well as all shares of Rockford Technology held for sale by the company.
The Company periodically analyzes its investment in intellectual property for
impairment. The stages of development in which the intellectual property is in
make estimation of value or determination of impairment a difficult task. There
has been no substantive revenues generated or value derived from the technology
since its acquisition. The Company has determined that there is no evidence that
the book value of the intellectual property is impaired until it has been
determined that there is no likely commercial application or one that will
produce adequate cash flow to support those values.
On November 19, 2002, in connection with the acquisition of Financial Software,
Inc., the Company acquired certain software, web sites and intellectual property
which can aggregate financial information from a large number of data sources on
an individual basis, amalgamate the data and provide accurate and detailed
insight into an individual's personal financial picture on a real time basis.
This software can manage a host of disparate objectives as they relate to a
persons financial goals, be they investment or debt related or any combination.
This software suite, together with mortgage generation capabilities can create a
variety of new and different mortgage, investment or insurance products. The
Company recorded the software on its books at the seller's basis of $1,398,020.
The company engaged an experienced software developer based in Palo Alto,
California to perform an independent, third party valuation of the software
during 2003. The Company anticipates putting the software into service during
the fourth quarter of 2004 and intends to amortize the software over a three
year period commencing upon the in-service date. Estimated amortization expense
on this intangible asset is estimated to be as follows for the years December
31:
2004 $ 233,010
2005 466,000
2006 466,000
2007 233,010
-----------------
Total $1,398,020
=================
F-14
43
Note 4 - INVESTMENTS
The Company has the following investments at December 31, 2003:
December 31, 2003
--------------------------------
Estimated
Cost Fair Value
------------- ---------------
AVAILABLE FOR SALE SECURITIIES
Limelight Media Group, Inc., fka
Showintel Networks, Inc. $ 17,775 $ 17,775
------------- ---------------
Totals $ 17,775 $ 17,775
============= ===============
During the year ended 2003, the Company reversed its unrealized gain on
securities held for sale by $7,476. During 2003, the Company sold 100,000 shares
of Showintel Networks, Inc. and recorded a gain of $1,275 which resulted in an
overall loss of $6,201 from the sale of securities held for sale.
The estimated fair value of the 197,500 shares of Limelight Media Group Inc.
held by the Company was estimated based on the quoted trading price of the
security at December 31, 2003. The security began trading under its new name of
Limelight Media Group Inc. on November 10, 2003.
Note 5 - ACQUISITIONS
On November 19th, 2002, the Company acquired all of the issued and outstanding
shares of Financial Software, Inc., (FSI) a New Jersey corporation engaged in
the development of Internet and Intranet financial software in edition to
operating several Financial Industry publishing web-sites. This acquisition was
completed on a share for share exchange basis for 4,400,000 shares of the
Company's common stock. FSI was acquired in order to gain access to certain
proprietary software products owned by FSI which the Company intends to further
develop and extend into comprehensive mortgage platforms called MortgageCenter
and FinanCenter.
Through the acquisition of FSI, we acquired assets of $26,775 in marketable
securities, $1,398,020 in Intellectual property (MortgageCenter and FinanCenter
software), and $1,904 in computer equipment. We also acquired liabilities of
$61,796 in accounts payable and $275,000 through the assumption of a note
payable.
On April 8, 2003 the company entered into a binding Letter of Intent with Realty
Capital Corporation whereby the Company will acquire Realty Capital Corporation
for a purchase price to be determined by the net asset value of Realty Capital
as determined by an independent, third party valuation. The transaction was
subject to receipt by the Company of said valuation as well as financial
statements and the affirmative vote of the majority of the shareholders of
Realty Capital Corporation. Realty Capital Corporation was majority controlled
by the President of Silverado Financial, Inc., John E. Hartman and his spouse.
On May 9, 2003 the board of directors approved the acquisition of Realty Capital
Corporation, a mortgage brokerage company, from John Hartman for 729,452
restricted common shares. Mr. Hartman abstained from the vote. The acquisition
was made at a trading value of $127,654 which was the net asset value of Realty
Capital and the average closing bid price of the Company on the prior five
trading days. Mr. Hartman's holdings of Silverado Financial, Inc. Common stock
were 103,511 shares (0.87% of total shares outstanding) prior to acquisition and
F-15
44
Note 5 - ACQUISITIONS - continued
832,963 shares (6.59% of total shares outstanding) after the acquisition of
Realty Capital Corporation, respectively.
Through the acquisition of Realty Capital Corporation, we acquired total assets
of $168,233, consisting of $33,963 in accounts receivable and prepaid expenses,
$49,284 in computers and equipment, and $84,986 in furniture. We also acquired
liabilities of $7,871 in accounts payable and $32,708 through the assumption of
notes payable.
Had the Realty Capital acquisition occurred at January 1, 2003, consolidated
revenues and net income of the Company would have been $196,766 and ($919,400)
respectively for the year ended December 31, 2003 (unaudited). There would not
have been any affect on the pro forma loss per share.
Note 6 - INCOME TAXES
The Company does not provide any current or deferred income tax provision or
benefit for any period presented because it has experienced operating losses
since inception. The Company has provided a full valuation allowance because of
the uncertainty regarding the utilization of the net operating loss carry
forwards.
For the year ended December 31,
----------------------------
2003 2002
Current income tax benefit $ 348,504 $ 51,956
Deferred income tax benefit (charge) (348,504) 113,263
Total current and deferred income tax benefit -0- 165,219
-------------- -------------
Valuation allowance -0- (165,219)
-------------- -------------
Benefit of income taxes $ -0- $ -0-
============== =============
Income tax expense does not differ from amounts computed by applying the U.S.
Federal income tax rate of 34% and the state rate of 8.84%, except for the
valuation allowance for the year ended December 31, 2002.
The following is a reconciliation of differences between effective and statutory
income tax rate for the year ended December 31, 2003.
Federal Statutory Rates $ (318,940) (34%)
State Rates (56,284) (6%)
Change in Valuation Allowances 323,504 34%
Expiration of Net Operating Loss Carry Forward 51,720 6%
------------ --------
$ -0- - %
============ ========
At December 31, 2003, the Company had realized Federal net operating losses of
approximately $7,833,932. California net operating losses are carried forward 5
or 10 years at 50% to 60% of the amount realized. Future realization of the net
deferred tax assets is dependent on generating sufficient taxable income prior
to their expiration. The realized net operating losses expire, as follows:
F-16
45
Note 5 - ACQUISITIONS - continued
Expiration Federal State
------------------- ------------- ------------
2004 $ 520,465
2009 $ 44,994
2010 379,485 2,109,954
2011 461,101 318,228
2012 236,028 76,034
2013 871,260
2018 861,526
2019 603,950
2020 3,670,269
2021 578,596
2022 126,723
2023 871,260
------------- ------------
Total net operating loss available $7,833,932 $3,962,186
============= =============
At December 31, 2003, there was a total deferred income tax asset of $3,079,000,
comprised of book/tax differences in compensation payables of $24,000 and other
accrued expense of $40,000 and $3,014,000 related to net operating loss carry
forwards. There is a deferred income tax liability of $74,000 related to
book/tax differences in intangible assets. The valuation increased during the
year ended December 31, 2003 to $3,004,000.
Note 7 - ACCOUNTS AND NOTES PAYABLE
Accounts Payable
The Company owes its vendors a total of $244,821 of which $86,518 are
outstanding payables over ninety days.
Notes Payable
As part of the acquisition of Financial Services Software, the Company became
obligated under a note for $275,000 at 8% per annum, payable monthly, in arrears
and amortized over eighteen equal installments of $16,258. Principal and
interest payments due under the note will not be paid until the Company has
raised sufficient capital through the sale of stock and /or notes to raise a
minimum of four times the monthly payment due. Further, additional monthly
payments are abated until the Company is able to maintain sufficient capital to
allow it to remain cash flow positive and continue making the payments. There
was $24,531 of accrued unpaid interest at December 31, 2003.
Convertible Notes payable
The Company has three convertible notes payable totaling $36,000 at 10% per
annum maturing during 2004 as a result of the Company's extensions of two
convertible notes that were originated during 2002. There was $3,537 of accrued
unpaid interest at December 31, 2003.
A Schedule of the maturity dates of the convertible debentures with their
attached warrants are as follows:
F-17
46
Note 7 - ACCOUNTS AND NOTES PAYABLE - continued
Amount Original Extended
Maturity Date Maturity Date Warrants Outstanding
$16,000 10/11/03 10/11/04 40,000 shares at $.40 per share
$10,000 11/16/03 11/16/04 25,000 shares at $.40 per share
$10,000 7/23/04 7/23/05 25,000 shares at $.40 per share
All debentures can be converted into common stock for the same amount of shares
as their right to purchase the same number of shares through their warrants.
Assuming the Company has the ability to make all note payments under their terms
commencing October 1, 2003 and does not convert or extend the convertible notes
payable, the minimum annual payments are as follows:
Year Amount
-------- -------------
2004 $ 221,096
2005 89,904
-------------
$311,000
=============
Note 8 - COMMITMENTS
During May 2003, the Company became responsible for a lease entered into by its
subsidiary, Realty Capital Corporation, during October 2002 for 3,179 square
feet in an office building in Campbell, California. The lease is for a period of
two years ending on October 31, 2004. The base rental under the lease is $80,111
per annum ($6,675.90 per month) during the first twelve month period and $82,514
($6,876.17 per month) during the second twelve month period. The lease provides
for the Company to pay its proportionate share of the landlord's common costs
during second twelve month period.
Rent expenses totaled $53,808 and $15,773 for the twelve months ended December
31, 2003 and 2002, respectively.
Minimum future commitments under all operating leases are as follows:
Years Ending Amount
December 31,
----------------- -------------
2004 $68,762
=============
Note 9 - STOCKHOLDERS' EQUITY
At December 31, 2003 and 2002, the Company had 14,839,492 and 6,000,000 shares
outstanding, respectively. The Company has 20,000,000 shares of $0.001 par value
authorized and 1,000,000 shares of Preferred stock.
During 2003, the Company issued a total of 4,501,493 common shares at a trading
value of $861,609 and cancelled 62,000 common shares at a trading value of
$16,684. A total of 3,075,277 shares issued were restricted and had a trading
value of $539,755 and 1,426,216 shares were issued without restriction under the
registered compensation plan and had a trading value of $321,854. The Company
also cancelled 62,000 restricted shares that had a trading value of $16,684.
F-18
47
Note 9 - STOCKHOLDERS' EQUITY - continued
During the first two quarters of 2003 the company issued a total of 2,382,884
common shares at a trading value of $500,224. A total of 1,090,056 shares were
issued for services at a trading value of $198,519, 563,376 common shares were
issued for debt and payables at a trading value of $174,051, issued 729,452
common shares to its president John E. Hartman, for all of the outstanding
shares of Realty Capital Corporation at a trading value of $127,654. Mr.
Hartman's holdings of Silverado Financial, Inc. Common stock were 103,511 shares
(0.87% of total shares outstanding) prior to acquisition and 832,963 shares
(6.59% of total shares outstanding) after the acquisition of Realty Capital
Corporation, respectively.
During June of 2003, 62,000 common shares were returned to the treasury and
cancelled in a transaction involving the sale of the scientific intellectual
property to a director of the Company at a trading value of $16,684.
During the quarter ended September 30, 2003, the Company issued 300,000
restricted common shares to an individual for investor relations services valued
at $45,000. The shares were issued under Section 4(2) of the 1933 Securities
Act. The Company also issued 226,363 restricted common shares to the officers of
the Company for accrued compensation of $45,000. The shares were issued under
Section 4(2) of the 1933 Securities Act. The Company also issued 300,000
restricted common shares to a public relations firm at a trading value of
$62,000 for investor relations services and issued 466,591 restricted common
shares to officers of the Company for services rendered during the quarter and
the previous quarter at a trading value of $81,000. All of the shares were
issued under Section 4(2) of the 1933 Securities Act.
During the quarter ended September 30, 2003, the Company issued 5,000
unrestricted shares under its S-8 2003 Employees and Compensation Plan to an
individual at a trading value of $700 for legal services rendered during the
prior quarter ended June 30, 2003.
During the quarter ended September 30, 2003, the Company issued 284,591
unrestricted shares to two consultants under its S-8 2003 Employees and
Compensation Plan at a trading value of $49,000 for various consulting services
rendered during the current quarter ended September 30, 2003 relating to matters
of corporate governance, software consulting, legal and other services.
During the quarter ended December 31, 2003, the Company issued 342,246
unrestricted shares to consultants under its S-8 2003 Employees and Compensation
Plan at a trading value of $90,660 for various consulting services rendered
during the current quarter ended December 31, 2003 relating to matters of
corporate governance, software consulting, legal and other services.
During the fourth quarter of 2003, a total of 20,000 restricted common shares
were issued for $3,025 in full satisfaction of a debt. Also 400,000 restricted
common shares were issued for $14,000 in cash and a $16,000 legal retainer for
future legal services in a private placement to an accredited investor.
Note 10 - STOCK OPTIONS
The Company issues stock options periodically to consultants and members of the
Board of Directors. The Company has adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation". For options
granted in the years ended December 31, 2003 and 2002, which were granted to
individuals other than employees, the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
F-19
48
Note 10 - STOCK OPTIONS - continued
Employees", does not apply. Accordingly, compensation cost has been recognized
for the stock options granted to other than employees.
Under the provisions of SFAS No. 123, there was no charge to expense for the
value of options during the periods ended December 31, 2003 and 2002 as no
options were issued.
The Board of Directors authorized the granting of no options during the years
ended December 31, 2003 and 2002, respectively. The price of any options granted
pursuant to these grants is not to be less than 100 percent of the fair market
value of the shares on the date of grant. The options expire one year from date
of grant and are immediately vested.
Note 11 - LOSS PER SHARE
At December 31, 2003, there were no outstanding options; however, there were
convertible debentures with exercisable warrants outstanding. Outstanding
options, warrants and convertible securities to purchase common stock were not
considered in the calculation for diluted earnings per share for the years ended
December 31, 2003 and 2002 because the effect of their inclusion would be
antidilutive. A reconciliation of the numerator and denominator of the basic and
diluted per share calculations for the loss from continuing operations is as
follows:
2003 2002
-------------------------------------- -------------------------------------
Loss Shares Per share Loss Shares Per share
------------ ----------- ----------- ----------- ----------- -----------
Net (Loss) $ (938,060) $ (402,973)
BASIC LOSS PER SHARE
Loss available to common
stockholders $ (938,060) 14,839,492 $ (0.07) $ (402,973) 6,389,045 $ (0.06)
Effect of dilutive securities
DILUTED LOSS PER SHARE $ (0.07) $ (0.06)
Convertible notes and warrants to purchase 90,000 and 65,000 shares and options
to purchase 90,000 and 65,000 shares of common stock were outstanding at
December 31, 2003 and 2002, respectively. All shares which could be exercised
from convertible notes, warrants and stock options were excluded from the
computation of diluted loss per share because the effect of their inclusion
would be anti-dilutive.
Note 12 - RELATED PARTY TRANSACTIONS
On December 18, 2002, the Company entered into a memorandum of understanding
with Realty Capital Corporation whereby Realty Capital Corporation would utilize
office space and telephone services at the company's offices in Campbell,
California in exchange for payment of $15,000 per month. Realty Capital
Corporation was majority controlled by the President of Silverado Financial,
Inc., John E. Hartman and his spouse.
F-20
49
Note 12 - RELATED PARTY TRANSACTIONS - continued
On April 8, 2003 the company entered into a binding Letter of Intent with Realty
Capital Corporation whereby the Company will acquire Realty Capital Corporation
for a purchase price to be determined by the net asset value of Realty Capital
as determined by an independent, third party valuation. The transaction was
subject to receipt by the Company of said valuation as well as financial
statements and the affirmative vote of the majority of the shareholders of
Realty Capital Corporation. Realty Capital Corporation was majority controlled
by the President of Silverado Financial, Inc., John E. Hartman and his spouse.
On May 9, 2003 the board of directors approved the acquisition of Realty Capital
Corporation, a mortgage brokerage company, from John Hartman for 729,452
restricted common shares. Mr. Hartman abstained from the vote. The acquisition
was made at a trading value of $127,654 which was the net asset value of Realty
Capital and the average closing bid price of the Company on the prior five
trading days. Mr. Hartman's holdings of Silverado Financial, Inc. Common stock
were 103,511 shares (0.87% of total shares outstanding) prior to acquisition and
832,963 shares (6.59% of total shares outstanding) after the acquisition of
Realty Capital Corporation, respectively.
As of December 31, 2003, Sherry Hartman, the broker of record for Realty Capital
Corporation and the spouse of the President of Silverado Financial, Inc. had an
outstanding debt to the company in the amount of $11,405.
Note 13 - SUBSEQUENT EVENTS
On May 5, 2004 the Company acquired of all of the issued and outstanding shares
of Lendingtech.com, Inc., (Lendingtech), from Michael Petrullo, its sole owner
and shareholder, for $520,000 of debt with the following terms:
$200,000 15% Promissory Note
$144,000 8% Promissory Note
$176,000 5% Convertible Promissory Note
---------------------------------------
$520,000 Purchase Price
The Company did not issue any of its shares or pay any cash as consideration for
the acquisition. The Company acquired two computer servers, its web site, client
base of approximately 24,000 persons and loans in a pipeline which were all
valued at $520,000.
The acquisition was determined at arms length between the owners of Lendingtech
and the registrant.
Lendingtech.com was established in 1988 as a mortgage brokerage company called
Calabasas Mortgage. It has had a history of providing California homeowners and
investors with real estate financing options. Using Internet technology combined
with customer service it has been able to offer competitive rates in its product
line. Its technology enables loans to close quickly, at a low cost by combining
the use of the Internet along with its processing software and automated
underwriting systems.
Lendingtech generated unaudited year-end 2003 revenue of $960,000, with an
adjusted EBITDA of $375,000 and generated unaudited year-end 2002 revenue of
961,000, with an adjusted EBITDA of $379,000. The Company believes that it can
increase Lendingtech's gross revenue to as much as $3,000,000 and $1,500,000
EBITDA within the next 12-months of operation.
F-21
50
Note 13 - SUBSEQUENT EVENTS - continued
As a result of this transaction, Lendingtech has become and shall continue to
operate as a wholly-owned subsidiary of the Registrant.
F-22
51
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. The Company's chief
executive officer and principal financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the
end of the period covered by this annual report (the "Evaluation Date"), has
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and designed to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
him by others within those entities.
(b) Changes in internal control over financial reporting. There were no
significant changes in the Company's internal control over financial reporting
during the fourth fiscal quarter that materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
52
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer of the Company. Each serves until the next annual meeting of
the stockholders.
Name of Executive
Officers & Directors Age Title Since
-------------------------- ----- ----------------------------- ----------
R.G. Krushnisky 42 Director 1/1/1995
Albert Golusin 49 C.F.O & Chairman of the Board 2/5/1999
John Hartman 38 President, CEO & Director 9/26/2002
Ilja (Sean) Radetich 35 Director 1/10/2003
R.G. Krushnisky, Director of the Company. Mr. Krushnisky served as past
President of Rockford Technology Corporation which is a Canadian company
involved in Hydrogeneration plants. Since 1984, Mr. Krushnisky has been the
owner and operator of International Laser Games, Ltd., a British Columbia,
Canada, and coin-operated arcade machinery business. He is a graduate of the
United States International University at San Diego with a Bachelor Science
degree in Business and International Commerce
Albert Golusin, Chief Financial Officer, Chairman of the Board and Director, is
a Certified Public Accountant in Phoenix, Arizona. Since 1992, Mr. Golusin has
been in private practice as an accounting consultant to public companies. He has
also served as a controller for Glenayre Electronics, a NASDAQ company, from
1984 - 1991. From 1983 to 1984, Mr. Golusin worked for Kenneth Leventhal &
Company. From 1979 to 1981, Mr. Golusin worked for the international accounting
firm of Grant Thornton & Company. Mr. Golusin graduated from Brigham Young
University in 1978. Mr. Golusin worked full-time for Silverado during part of
2000 and has continued working on a part-time basis.
John Hartman is President, Chief Executive Officer and a member of the Board of
Directors of Rhombic Corporation. Prior to joining Rhombic, he was Chief
Executive Officer and Chairman of the Board for NEXT Advisors, Inc. in San Jose
California. Before joining NEXT Advisors, Inc., he was Managing Partner of
Hartman and Kauffman, which was subsequently merged into NEXT Advisors. As the
Managing Partner of Hartman & Kauffman he increased the gross sales of the San
Jose office 400% and grew the sales force from 2 to 30. From 1995 to January
1999, Mr. Hartman was a Financial Advisor with Morgan Stanley. Prior to
beginning his career at Morgan Stanley, he was a Partner of Realty Capital
Partners of Scotts Valley, California. Prior to Realty Capital Partners, he held
several positions with Grubb & Ellis and Company, a commercial real estate firm
headquartered in San Francisco, California. He received his Masters in Business
Administration (MBA) from California Coast University in Santa Ana, California
and Bachelor of Science Degree in Business Administration from San Jose State
University in San Jose, California.
Ilja (Sean) Radetich has over 12 years of hands-on experience in investment
banking and corporate finance, and has spent his professional career identifying
and working with emerging growth companies. In that time, his main focus has
been on PIPE (Private Investment in Public Equities) financings. His PIPE
experience includes straight equity, convertible preferred equity, convertible
debenture and subordinated debentures of NASDAQ/AMEX, OTCBB, and foreign
securities. Since 1991 Sean has structured and negotiated the risk capital
53
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT - continued
investments for some of Europe's largest banks and asset management
institutions. Sean is the founder and managing director of Odyssey Advisors LLC,
an investment firm specializing in PIPE financing. Sean also has worked for LBI
Group and SBC Warburg in the Private Placement Divisions. Over the past 10 years
Sean has identified and developed key financial advisory relationships with
public and private firms including Wall Street Web, eLiberation, Clearworks
Technologies, CyberMerchants Exchange and Cekatel, and has managed transactions
for them including PIPE's, private company investments, and secondary offerings.
In addition to investment banking, Sean served as Chief Financial Officer for
WebCash Corporation, a B2B infrastructure company backed by Berg McAfee and
Silicon Valley Angel Fund, and presently in acquisition negotiations. Sean is
currently active on several boards, including Navigate Network, GoNet2k board of
directors, and Wall Street Web board of advisors. He received his B.S. in
International Economics from the University of Oldenburg, Germany, and attended
the Haas School of Business, University of California at Berkeley.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the securities Exchange Act of 1934, as amended, requires the
Company's directors, executive officers and persons who own more than 10% of a
class of the Company's equity securities which are registered under the Exchange
Act to file with the Securities and Exchange Commission initial reports of
ownership and reports of changes of ownership of such registered securities.
Such executive officers, directors and greater than 10% beneficial owners are
required by Commission regulation to furnish the Company with copies of all
Section 16(a) forms filed by such reporting persons.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and on representations that no other reports
were required, no person required to file such a report failed to file during
fiscal 2003. Based on stockholder filings with the SEC, SunnComm Technologies,
Inc. is subject to Section 16(a) filing requirements.
CODE OF ETHICS
The Company has not adopted a Code of Ethics as of the date of this report.
Resources and time necessary to adopt written standards reasonably designed to
deter wrongdoing have not been available as of the date of this report. The
Company plans to engage a consultant to assist in drafting of a Code of Ethics.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the compensation
paid by the Company for services rendered in all capacities to the Company for
the three fiscal years ended December 31, 2003, 2002 and 2001 for all officers,
individually, and, as a group, for all officers and directors.
54
ITEM 10. EXECUTIVE COMPENSATION - continued
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards
Securities
Other Annual Restricted Stock Underlying All Other
Name and Principle Position Year Salary ($) Bonus ($) Compensation ($) Award(s) ($) Options/SARs (#) Compensation ($)
------------------------------------- ---- ---------- --------- ---------------- ------------- ------------------ ----------------
John E. Hartman, CEO (4) 2003 - - - $ 105,000 None -
2002 - - - - None -
2001 - - - - None -
Albert Golusin CFO & CEO (3)
2003 - - - $ 60,000 None -
2002 - - - - None -
2001 - - - - None -
Ilya "Sean" Radetich, VP (7) 2003 - - - $ 33,000 None -
2002 - - - - None -
2001 - - - - None -
Roger Duffield, CEO (2) 2003 - - - - None -
2002 - - $ 10,000 - None -
2001 $7 0,000 - - - None -
All Officers & Directors as a group
(two persons) (3)(4)(5)(6)(7)(8) 2003 - - - $ 203,000 None -
2002 - - - $ 85,675 None -
2001 $ 145,000 - $ 46,000 - None -
(2) During the year 2001, the Company issued 125,000 restricted common shares at
a trading value of $10,000 to reimburse Roger Duffield for moving expenses.
(3) During 2001, Albert Golusin, Chief Financial Officer and Director of the
Company, received $60,000 in cash for his services. During 2002 he served as the
Chief Financial Officer and the Chief Executive Officer from January 1, 2002 to
September 25, 2002. During 2002 he received 1,189,156 restricted common shares
at a trading value of $48,153. During 2003, he received 280,228 restricted
common shares at a trading value of $60,000
(4) John Hartman became the Chief Executive Officer on September 26, 2002.
During 2002 he received 238,610 restricted common shares at a trading value of
$15,000. During 2003, he received 503,913 restricted common shares at a trading
value of $105,000
(5) R.G. Krushnisky, Vice President and Director of the Company, provides his
consulting services on a part-time basis. During 2001, Mr. Krushnisky received
$15,000 for services as a Vice President. He also earned $18,000 for director
fees during 2001. During 2002 he received 304,532 restricted common shares at a
trading value of $15,261. During 2003, he received 25,014 restricted common
shares at a trading value of $5,000
55
ITEM 10. EXECUTIVE COMPENSATION - continued
(6) Stanley Porayko, Secretary and former Director of the Company, provided his
consulting services on a part-time basis. He did not receive any shares during
2001 for services. During 2001, he earned $18,000 in director fees. During 2002,
he received 181,532 restricted common shares at a trading value of $7,261. He
did not receive any shares during 2003 for services.
(7) Ilya "Sean" Radetich, Vice President and Director of the Company, provides
his consulting services on a part-time basis. During 2003, he received 137,014
restricted common shares at a trading value of $33,000
(8) All of the current directors collectively had an option to purchase
1,000,000 shares at $0.50 per share until June 30, 2002 and did not exercise
their option. The options expired and the directors and officers did not have
any options outstanding at December 31, 2002.
There are no current plans to pay cash or stock dividends on the Company's
stock.
VALUE OF OPTIONS AT DECEMBER 31, 2003
The Company had no options outstanding from which it could obtain cash during
the entire year 2003.
OPTION GRANTS IN THE LAST FISCAL YEAR
The Company granted no options during 2003.
COMPENSATION OF DIRECTORS
The company compensates all independent directors $500 for each meeting
attended. The amount is paid in Common shares, the price of which is determined
by the average closing price of the Common stock during the month in which the
meeting is held. No compensation is paid to any employee director for attendance
at any meeting or any other services provided as a director.
STOCK OPTION PLAN
The Board of Directors of the Company has approved its year 2000 Incentive Stock
Option Plan ("Plan") that authorizes the Company to grant incentive stock
options. The Plan relates to a total of 500,000 shares of common stock including
all unexercised options from prior plans. All options which may be outstanding
at any point in time must be exercised no later than three months after
termination of employment or service as a director, except that any optionee who
is unable to continue employment or service as a director due to total and
permanent disability may exercise such options within one year of termination
and the options of an optionee who is employed or disabled and who dies must be
exercised within one year after the date of death.
The Plan is to be administered by the Company's Board of Directors or a
committee thereof which determines the terms of options granted, including the
exercise price, the number of shares of common stock subject to the option, and
the terms and conditions of exercise. Options granted under the plan are
transferable by the optionee.
56
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information, as of December 31, 2003, regarding the
shareholdings of (1) The Company's current directors and executive officers, (2)
those persons or entities who beneficially own more than 5% of its common stock
and (3) all of the directors and executive officers as a group (giving effect to
the exercise of the warrants held by each such person or entity). Unless
otherwise indicated, the person or entity listed in the table is the beneficial
owner of the shares and has sole voting and investment power with respect to the
share indicated:
Number of shares of Common Percent of Common Stock
Name Stock Beneficially Owned Beneficially Owned (1)
John Hartman
Chief Executive Officer, Director
1475 South Bascom Ave. # 210
Campbell, CA. 95008-0629 1,121,087 7.55%
Albert Golusin
Chief Financial Officer, Director
10641 North 44th Street
Phoenix, Arizona 85028 582,060 3.92%
R.G. Krushnisky
Director
93 English Bluff Road
Tsawwassen, British Columbia
Canada V4M 2M4 170,022 1.15%
Ilya (Sean) Radetich
Director
1475 South Bascom Ave. # 210
Campbell, CA. 95008-0629 247,608 1.67%
Total shares owned by Directors and
Officers of the Company (4 persons) 2,120,777 14.29%
(1) Based upon 14,839,492 outstanding shares of common stock on December 31,
2003.There were no options outstanding at December 31, 2003.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On December 18, 2002, the Company entered into a memorandum of understanding
with Realty Capital Corporation whereby Realty Capital Corporation would utilize
office space and telephone services at the company's offices in Campbell,
California in exchange for payment of $15,000 per month. Realty Capital
Corporation was majority controlled by the President of Silverado Financial,
Inc., John E. Hartman and his spouse.
On April 8, 2003 the company entered into a binding Letter of Intent with Realty
Capital Corporation whereby the Company will acquire Realty Capital Corporation
for a purchase price to be determined by the net asset value of Realty Capital
as determined by an independent, third party valuation and that no value for
goodwill or intellectual property would be included in the purchase price and
that in exchange for eliminating any such value, the company would agree to
57
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS - continued
forgive any debt owed under the December 18, 2002 memorandum of understanding.
The transaction is subject to receipt by the Company of said valuation as well
as financial statements and the affirmative vote of the majority of the
shareholders of Realty Capital Corporation. Realty Capital Corporation was
majority controlled by the President of Silverado Financial, Inc., John E.
Hartman and his spouse.
On May 9, 2003 the board of directors approved the acquisition of Realty Capital
Corporation, a mortgage brokerage company, from John Hartman for 729,452
restricted common shares. Mr. Hartman abstained from the vote. The acquisition
was made at a trading value of $127,654 which was the net asset value of Realty
Capital and the average closing bid price of the Company on the prior five
trading days.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following exhibits required by Item 601 to be filed herewith
are incorporated by reference to previously filed documents:
Exhibit No. Description and Method of Filing
----------- -----------------------------------------------------------------
2.1 The Agreement and Plan of Reorganization between Rhombic
Corporation and Emerald Acquisition Corporation filed in an 8-K
on January 21, 2000.
3.1 Certificate of Incorporation of Emerald Acquisition Corporation
filed on December 3, 1999 in the Form 10SB
3.2 The corporate by-laws filed on December 3, 1999 in the Form 10SB
10.1 Stock Option Plan filed in the 10-QSB on May 17, 2000.
10.2 Letter Agreement to purchase Financial Software Inc., dated
November 15, 2002, incorporated by reference to Exhibit 10.1 to
Form 8-K dated November 26, 2002.
10.3 Audited financial statements of Financial Software Inc. through
April 30, 2002 and 2001, respectively, and unaudited statements
through October 31, 2002, incorporated by reference to Form 8-K/A
dated February 6, 2003.
16 Letter on change of accountant, incorporated by reference to Form
8/K filed on March 19, 2004 and on Form 8-K/A on April 7, 2004
21.1 Subsidiaries of Issuer as of December 31, 2003
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer pursuant to Section 1350
32.2 Certification of Chief Financial Officer pursuant to Section 1350
(b) REPORTS ON FORM 8-K
1. Form 8-K dated December 2, 2003 relating to the acquisition of San Francisco
Funding, Inc. 2. Form 8-K dated December 24, 2003 relating to the rescission of
the acquisition of San Francisco Funding, Inc.
58
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
James C. Marshall C.P.A., P.C., "Marshall", was the Company's independent
auditor for the year ended December 31, 2002 and reviewed the quarterly
financial statements for the first three quarters during 2003. Marshall
performed the services listed below and was paid the fees listed below.
AUDIT FEES
Marshall billed aggregate fees of approximately $9,300 for the review of the
financial statements included in the Company's Quarterly Reports on Form 10-QSB
for each of the three quarters ended September 30, 2003 and approximately
$15,000 for year ended December 31, 2002 for professional services rendered for
the audit of the Company's annual financial statements and review of the
financial statements included in the Company's Quarterly Reports on Form 10-QSB.
Marshall billed aggregate fees of approximately $8,700 for the review of the
financial statements included in the Company's Quarterly Reports on Form 10-QSB
for each of the three quarters ended September 30, 2002 and approximately
$12,000 for year ended December 31, 2001 for professional services rendered for
the audit of the Company's annual financial statements and review of the
financial statements included in the Company's Quarterly Reports on Form 10-QSB
TAX FEES
Marshall billed $600 for the preparation of its tax returns for the year ended
December 31, 2002. Marshall did not provide any services pertaining to tax
advice or strategies.
ALL OTHER FEES
Marshall did not provide or bill for any other professional services during the
two years ended December 31, 2003.
59
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SILVERADO FINANCIAL, INC.
Date: May 15, 2004 By /s/ John E. Hartman
--------------------------------------------
John E. Hartman, Chief Executive Officer
Date: May 15, 2004 By /s/ Albert Golusin
--------------------------------------------
Albert Golusin, Principal Accounting Officer
In accordance with the Exchange Act, the report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.
Date: May 15, 2004 By /s/ John E. Hartman
--------------------------------------------
John E. Hartman, Director
Date: May 15, 2004 By /s/ Albert Golusin
--------------------------------------------
Albert Golusin, Director
Date: May 15, 2004 By /s/ Ilja (Sean) Radetich
--------------------------------------------
Ilja (Sean) Radetich, Director
Date: May 15, 2004 By /s/ R.G. Krushnisky
--------------------------------------------
R.G. Krushnisky, Director
60