Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EX
CHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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For Quarter Ended March 31, 1996 Commission File Number 811-407
-------------- -------
1150 LIQUIDATING CORPORATION
(formerly SBM Company)
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0557530
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4440 IDS Center
Minneapolis, Minnesota 55402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 338-5254
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
2,179,714 Common Shares were outstanding as of March 31, 1996
1150 LIQUIDATING CORPORATION
I N D E X
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Net Assets in Liquidation 1
Statement of Changes in Net Assets in Liquidation 2
Condensed Statement of Income 3
Condensed Statement of Cash Flows 4
Notes to Condensed Financial Statements 5-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION 10-11
Part I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
1150 LIQUIDATING CORPORATION
(formerly SBM COMPANY AND SUBSIDIARIES)
STATEMENT OF NET ASSETS IN LIQUIDATION
March 31, December 31,
ASSETS 1996 1995
(Unaudited) (Audited)
------------ ----------
Cash and cash equivalents $5,746,584 $6,048,325
Federal income tax refund 118,831 118,831
Escrowed funds 857,253 846,419
Other assets 29,601 13,188
---------- ----------
Total assets 6,752,269 7,026,763
LIABILITIES
Accounts payable 56,074 55,166
Reserve for estimated costs
during the period of liquidation 602,513 577,527
Deferred compensation and retirement
benefits for officers -- 92,968
---------- ----------
Total liabilities 658,587 725,661
Common stock held by employee
benefit plans - 304,693 shares 1,589,231 1,608,906
---------- ----------
Net assets $4,504,451 $4,692,196
========== ==========
Common shares outstanding - 2,179,714
less 304,693 shares
held by employee benefit plans 1,875,021 1,875,021
========== ==========
Net assets per common share outstanding $ 2.40 $ 2.50
========== ==========
See Notes to Financial Statements.
1150 LIQUIDATING CORPORATION
STATEMENT OF CHANGES IN NET ASSETS IN
LIQUIDATION For the Period from December 31,
1994 to March 31, 1996
NET ASSETS (DEFICIT) AT DECEMBER 31, 1994 $(31,976,759)
Income from liquidating activities 42,662,596
Preferred stock liquidation amount in excess
of carrying value (1,279,805)
Common stock dividend distribution - $2.75 per share (5,994,214)
Allocation of common stock dividend distribution to
common stock held by employee benefit plans 837,906
Allocation of net loss and carrying value to common
stock held by employee benefit plans 442,472
------------
NET ASSETS AT DECEMBER 31, 1995 4,692,196
Income (loss) from liquidating activities
(January 1, 1996 through March 31, 1996) (207,420)
Allocation of net loss and carrying value to
common stock held by employee benefit plans 19,675
------------
NET ASSETS AT MARCH 31, 1996 (unaudited) $ 4,504,451
============
See Notes to Financial Statements.
1150 LIQUIDATING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 1995
(going concern historical cost basis)
(Unaudited)
Revenues:
Net investment income $ 15,104,765
Underwriting, sales service and distribution fees 732,943
Life insurance premiums 100,840
Advisory and other fees from affiliated mutual funds 370,501
Realized investment (losses) gains, net (451,613)
Other income 617,492
------------
Total revenues 16,474,928
Benefits and expenses:
Provisions for benefits:
Annuities and life insurance 10,880,260
Face amount certificate reserves (interest) 735,938
Death and other benefits 120,934
Commissions, wages and benefits 1,851,756
Amortization of deferred policy acquisition costs 1,778,235
Occupancy and equipment 315,345
State guaranty association assessments 75,550
Other expenses 727,051
------------
Total benefits and expenses 16,485,069
------------
Loss from operations before income taxes (10,141)
Income taxes (benefit) (9,000)
------------
Net loss $ (1,141)
Mandatory redeemable voting convertible
preferred stock dividends $ 402,952
Discount accretion on preferred stock 34,212
------------
Net loss applicable to common stock $ (438,305)
============
Earnings per common share:
Primary $ (.20)
============
Fully diluted $ (.20)
============
Weighted average common shares outstanding (primary) 2,179,714
============
Weighted average common shares outstanding (fully diluted) 2,179,714
============
See Notes to Financial Statements.
1150 LIQUIDATING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS Three Months Ended March 31, 1995
(going concern historical cost basis)
(Unaudited)
Net cash provided by operating activities $ 16,582,530
Cash flows from investing activities:
Proceeds from maturities and repayment of debt securities 4,050,543
Proceeds from sales of debt securities available-for-sale 29,887,528
Sales (purchases) of short-term investments, net (21,537,220)
Loan principal repayments 5,625,316
Loans funded (3,277,477)
Proceeds from (additions to) land, building
and equipment, net (36,944)
------------
Net cash provided by investing activities 14,711,746
Cash flows from financing activities:
Payments to face amount certificate holders (7,823,103)
Reserve payments from face amount certificate holders 3,957,062
Deposits received from annuitants, net 15,468,103
Payments to annuitants (44,786,452)
------------
Net cash used in financing activities (33,184,390)
Net decrease in cash (1,890,114)
Cash:
Beginning of period 3,565,693
------------
End of period $ 1,675,579
============
See Notes to Financial Statements.
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Sale and Liquidation of the Company:
Effective May 31, 1995, SBM Company (the "Company") sold
substantially all of the business operations and assets of the
Company to ARM Financial Group, Inc. (ARM) (the Transaction) for a
purchase price of $34.5 million, net of $4.1 million of
liabilities assumed, pursuant to an Amended and Restated Stock and
Asset Purchase Agreement dated February 16, 1995 between the
Company and ARM. As part of the Transaction, ARM acquired all of
the outstanding stock of the Company's wholly owned subsidiaries
(State Bond and Mortgage Life Insurance Company ("SBM Life"), SBM
Certificate Company ("SBMC") and SBM Financial Services, Inc.) and
certain assets of the Company, including the investment adviser
function of six mutual funds, and assumed certain liabilities of
the Company. The following summarizes the proceeds from and net
assets sold of the Transaction:
Proceeds from the sale $ 34,445,877
Assets sold:
Investments 808,543,939
Receivable from reinsurer 85,202,588
Deferred acquisition costs 61,683,713
Other assets 14,863,970
-------------
970,294,210
Liabilities assumed:
Future policy benefits 861,067,924
Face amount certificate reserves 56,439,745
Accounts payable and other liabilities 12,508,983
-------------
930,016,652
Net assets sold 40,277,558
Less costs of the Transaction, including income
taxes of $408,000 710,927
-------------
Net loss on sale of Company operations $ (6,542,608)
=============
The Company intends to wind up and liquidate the Company as soon as practicable.
The Company has adopted a Plan of Dissolution effective May 31, 1995. At
closing, the Series A Preferred Stock was redeemed for $20.5 million (including
$1.5 million of dividends in arrears) as a result of its senior rights over the
common stock.
The Company's shareholders approved the Transaction and the Plan of Dissolution
(the "Plan") at their regular shareholder meeting on May 18, 1995. The Company
also changed its name to "1150 Liquidating Corporation" effective June 14, 1995.
The accompanying financial statements for March 1996 have been prepared on a
liquidation basis of accounting and include adjustments which would result from
the Transaction and Plan of Dissolution. Accordingly, assets have been valued at
estimated net realizable value and liabilities include estimated costs
associated with carrying out the plan of liquidation. The statement of net
assets in liquidation as of March 31, 1996 includes accruals for general and
administrative expenses anticipated by the Company to be incurred with resolving
such known matters in a reasonably timely fashion, as expected at that date. In
addition, the financial statements do not reflect any investment income that is
anticipated to be earned subsequent to March 31, 1996.
The financial statements included in this Form 10-Q have been prepared by the
Company without audit. The condensed consolidated statements of income and the
condensed consolidated statements of cash flows as of March 31, 1995 have been
prepared using the going concern historical cost basis of accounting. In the
opinion of management, all adjustments necessary to present fairly the financial
positions, results of operations and cash flows for all periods presented have
been made.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the SBM Company and Subsidiaries' Annual Report on Form 10-K for the year
ended December 31, 1995.
Note 2. Common Stock Held by Employee Benefit Plans:
The Company's two employee benefit plans ("Plans") own 304,693 shares of Company
common stock. The value of such shares has been classified as a separate line
outside of net assets in liquidation on the Company's statement of net assets in
liquidation as of March 31, 1996 and outside of stockholders' equity on the
Company's consolidated balance sheet as of December 31, 1995 because of the
Company's obligation to repurchase such shares, under certain circumstances,
under a stock agreement, or stock repurchase agreement or put agreement ("Put
Agreement"), between the Company and the Plans' trustee dated September 30,
1993.
On the March 31, 1996 statement of net assets in liquidation, the liability to
the Plans has been shown as the pro-rata estimated liquidation value of all of
the Company's common shares, plus the $2.75 dividend escrowed in September,
1995, pursuant to the Plan of Dissolution described above in Note 1, plus
interest earned on such escrowed amounts.
Escrowed funds represents distributions and related interest thereon allocated
to the Employee Benefit Plans which is currently being retained in a court
ordered trust account pending settlement of the amounts owed them.
In January 1995, the trustee of the Plans notified the Company that it was
tendering all shares held by the Plans to the Company for purchase by the
Company under the Put Agreement. Under the Put Agreement, in certain
circumstances, the Company has agreed to purchase common shares tendered to it
by the Plans at a price equal to the higher of adjusted book value (as defined
in the Put Agreement) or fair market value. The Plans' trustee asserted in its
tender that the correct basis under the Put Agreement to determine the value of
the shares for purposes of the Company's repurchase obligation is to determine
their adjusted book value at December 31, 1994 based on the books of the Company
but using the amortized cost of the Company's investment portfolios, rather than
their fair market value. The Company maintains that such value under the Put
Agreement must be based on the books of the Company which, after the
effectiveness of the SFAS 115 on January 1, 1994, must use the market value,
rather than the amortized cost, of the substantial portion of the Company's
investment portfolios which must be classified as "available-for-sale" under
applicable accounting principles. In the alternative, the Company maintains that
the tender was invalid in the circumstances under which it was made and, even if
valid, that the correct value under such circumstances is the pro-rata estimated
liquidation value of all of the Company's common shares pursuant to the Plan of
Dissolution, rather than any value based upon the books of the Company as
prepared on the going concern historical cost basis.
The Company declined to repurchase such shares for various reasons including
those stated above and commenced a declaratory judgment action in Minnesota
District Court in March 1995 to determine its repurchase obligation and the
applicable price under the Put Agreement. If the views of the Company or those
of a large shareholder (the Schonlau Trust) which is a party to such litigation
prevail, either the Company will have no obligation to purchase the shares held
by the Plans under the Put Agreement or the price at which any such repurchase
obligation exists will be based either on the December 31, 1994 appraised value
of the shares ($5.38 per share) less the 1995 escrowed dividend distribution
($2.75 per share) or the pro-rata estimated liquidation value of all of the
Company's common shares pursuant to the Plan of Dissolution (estimated for
purposes of the March 31, 1996 statement of net assets in liquidation to be
$2.40 per share). If the view of the Plans' trustee prevail, the Company will
have the obligation to repurchase all of the shares held by the Plans at the
December 31, 1994 adjusted book value of such shares on the books of the Company
using the amortized cost of the Company's investment portfolios net of the
dividend distribution already received in 1995 (estimated to be approximately
$10-$11 per share).
While the Company believes its interpretation of the Put agreement is correct,
the determination that the views of the Trustee are correct would have the
effect at March 31, 1996 of increasing the value of the shares held by the Plans
by approximately $2.6 million and reducing net assets in liquidation available
for other shareholders by a like amount, thereby reducing the anticipated per
share liquidating value under the Plan of Dissolution of all other shares by
about $1.35 per share.
On October 16, 1995, the court heard the motion for summary judgment of the
Schonlau Trust on its state law claims as well as the Company's second motion
for summary judgment. After the hearing, the parties asked the court to defer
ruling on the motions pending settlement negotiations.
On November 13, 1995, the Company, the Trustee and the Schonlau Trust agreed
upon a settlement of the litigation and executed a settlement agreement in
principle. After several months interruption, counsel for the parties are
working actively on a final and more formal settlement agreement, although no
assurance can be given that final agreement will be reached, or when it will be
reached. In addition, any final settlement agreement will be subject to approval
by one or more courts after notice to all shareholders and Plan participants and
an opportunity for such persons to be heard, as may be determined by the court
or courts, and no assurances can be given that any such final agreement will be
approved by such court or courts. In general, the preliminary settlement
contemplates payment by the Company of $1.15 million to the Plans in addition to
the pro rata amounts otherwise distributable in liquidation with respect to the
304,693 shares of common stock held by the Plans. This amount includes payment
of a portion of the Trustee's costs incurred in connection with the litigation.
In addition, the Company will pay up to $100,000 of the costs incurred by the
Schonlau Trust in the litigation. These amounts payable as part of the
settlement would reduce the amounts available for distribution in liquidation to
non-Plan shareholders.
Note 3. Other Matters:
The Company recently was notified that The Trust Under the Will of T.H. Schonlau
("Schonlau Trust"), its largest shareholder, has retained legal counsel for the
purpose of investigating whether the Schonlau Trust has claims or rights against
current or former officers, directors, employees, shareholders, representatives,
agents, auditors, accountants, attorneys or anyone acting on its behalf (i)
arising out of or relating to its ownership of SBM common shares and (ii)
arising out of or relating to the management of SBM, or otherwise. The Trust has
requested the Company to produce certain corporate records and documents in
connection with its investigation.
At this time, it is impossible to anticipate whether the Schonlau Trust, or
other shareholders, will commence suit with respect to the above, or other
matters, and, if so, who would be named as defendants. Presumably, the Schonlau
Trust would not commence any such action unless it believed that a substantial
likelihood exited that the liquidation value of the Company, net to
shareholders, would be materially enhanced by its efforts. Such a determination
would have to factor in the following, and other considerations: (i) likely
expenses to be incurred by the Company in supporting any such litigation; (ii)
the expenses to be incurred by the Company in connection with its obligations to
defend and indemnify present and past officers and directors in the event they
were to become involved in any such litigation; (iii) expenses to be incurred by
the Company in defending against probable third part claims, including claims
for indemnity and contribution.
Any such shareholder action, even if successful in the long-term, would have the
effect of delaying the liquidation and dissolution of the Company and of
increasing its administrative and professional expenses in the short-term.
The Company has increased its reserve as of March 31, 1996 for estimated costs
during the remaining period of liquidation activity by $294,000 ($.135 per
share) to reflect greater than expected costs during the past three months,
anticipated costs to finally resolve the pending litigation with the Plans over
its obligations under the Put Agreement, and to anticipate some costs to be
incurred in connection with supporting the investigation by the Schonlau Trust
and the likely extension of the period to conclude the liquidation and
dissolution of the Company. No provision has been made to support any actual
litigation by the Schonlau Trust, claims for indemnity by present or former
officers or directors, or related litigation which may result, because the
Schonlau Trust has not decided at this time to bring any such action.
1150 LIQUIDATING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sale of Company Operations
The Company closed on the sale of its operations to ARM Financial Group, Inc.
("ARM") on June 14, 1995 which for accounting purposes became effective May 31,
1995 and incurred a loss of $6.5 million (see Note 1 to the consolidated
financial statements). The purchase price was determined pursuant to an Amended
and Restated Purchase Agreement dated February 16, 1995 between the Company and
ARM. The gain or loss on the sale recorded by the Company was subject to
fluctuation through the effective date based on the market value of the
available-for-sale securities and the associated unrealized gains/losses.
In 1994, as a result of a combination of factors as discussed below, the Company
was required to look to outside sources for capital and ultimately entered into
the sale of the Company's operations to ARM. The events leading to the sale of
the Company's operations to ARM included the following: The required adoption of
Statement of Financial Accounting Standards No. 115 (SFAS 115) effective January
1, 1994, in combination with the rapidly rising interest rates in 1994 resulted
in significantly reduced market values in the Company's investment portfolio,
especially its CMOs, which adversely impacted stockholders' equity through the
recording of unrealized losses. This decline in investment portfolio value and
stockholders' equity caused regulatory concerns regarding the capital adequacy
of the Company. In addition, A.M. Best reduced the Company's rating to B+ (as
discussed below) which caused significant concern in the marketplace along with
further concern by regulators as to the adequacy of the Company's capital base.
As such the sale of the Company's operations became the solution to the capital
issues.
Subsequent to the sale, the Company has no operations. Upon closing of the sale,
the Company redeemed its preferred stock at liquidation value ($19 million) plus
$1.5 million of dividends in arrears. The remaining proceeds from the
Transaction have been invested in a short-term government money market fund. The
Company is in the process of paying its remaining liabilities and has made an
initial distribution to shareholders. The remaining proceeds will be distributed
once the litigation with the trustee of the employee benefit plans has been
resolved (see Note 2 to the consolidated financial statements) and all other
liabilities are satisfied.
Capital Resources and Liquidity
As noted in Note 1 to the consolidated financial statements and under "Sale of
the Operations of the Company" herein, the Company has no remaining operations
and therefore no capital resources or liquidity issues. As previously discussed,
the Company is in the process of liquidating and distributing the proceeds from
the sale of its operations to the Company's shareholders. Additional
distributions will be made as soon as practicable after the litigation
(mentioned in Note 2 to the consolidated financial statements) is resolved and
all other liabilities are satisfied.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1150 LIQUIDATING CORPORATION
Date By: /s/ Charles A. Geer
Charles A. Geer
Its: President and Chief Financial Officer
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996<F1>
<DEBT-HELD-FOR-SALE> 0
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0
0
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<FN>
<F1>The Company is currently using Liquidation Accounting.
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