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 September 30, 1996
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EX
CHANGE ACT OF 1934
For the transition period from _____________ to___________
For Quarter Ended September 30, 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 September 30, 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
Notes to Condensed Financial Statements 3-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Changes in Net Assets in Liquidation 8
PART II. OTHER INFORMATION 9-10
Part I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
1150 LIQUIDATING CORPORATION
(formerly SBM COMPANY AND SUBSIDIARIES)
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS IN LIQUIDATION
September 30, December 31,
ASSETS 1996 1995
------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents $5,845,430 $6,048,325
Federal income tax refund 15,541 118,831
Escrowed funds 878,595 846,419
Other assets 42,055 13,188
---------- ----------
Total assets 6,781,621 7,026,763
LIABILITIES
Accounts payable 55,374 55,166
Reserve for estimated costs during the period of liquidation 377,500 577,527
Deferred compensation and retirement benefits for officers -- 92,968
---------- ----------
Total liabilities 432,874 725,661
Common stock held by employee benefit plans - 304,693 shares (see Note 2) 1,643,244 1,608,906
---------- ----------
Net assets $4,705,503 $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 $ 2.51 $ 2.50
========== ==========
See Notes to Financial Statements.
</TABLE>
1150 LIQUIDATING CORPORATION
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
For the Period from December 31, 1994 to September 30, 1996
<S> <C>
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 from liquidating activities (January 1, 1996 through September 30, 1996) 47,645
Allocation of net income and carrying value to
common stock held by employee benefit plans (34,338)
------------
NET ASSETS AT SEPTEMBER 30, 1996 (unaudited) $ 4,705,503
============
See Notes to Financial Statements.
</TABLE>
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.
As a result, the Company has adopted the liquidation basis of
accounting effective January 1, 1995. Assets have been valued at
estimated net realizable value and liabilities provide for all expenses
to be incurred during the period of liquidation. The reserve for
estimated costs during the period of liquidation includes what
management anticipates are reasonable estimates of costs required to
liquidate the Company's remaining assets and to defend known legal
claims, as well as the estimated costs of directors and officers and
legal, audit and other professional fees and expenses expected to be
incurred during the period of liquidation. The net assets ultimately
available for distribution to shareholders will depend almost entirely
upon the remaining time involved in winding up the affairs of the
Company, particularly the litigation involving the Employee Benefit
Plans and any now unknown liabilities or additional litigation
(including any litigation resulting from the Schonlau investigation
described in Note 3) and the expenses and liabilities incurred in
connection therewith. The statement of net assets in liquidation at
September 30, 1996 includes accruals for general and administrative
expenses anticipated by management with respect to resolving such known
matters in a reasonably timely fashion, as expected at that date. Net
assets ultimately available for distribution will be reduced by the
amount of any other unknown liabilities as may arise in the future, and
to any extent general and administrative expenses incurred exceed the
estimates included in the statement of net assets in liquidation at
September 30, 1996. In addition, the financial statements do not
reflect any investment income that is anticipated to be earned
subsequent to September 30, 1996.
The financial statements included in this Form 10-Q have been prepared
by the Company without audit. In the opinion of management, all
adjustments necessary to present fairly the statement of net assets in
liquidation and changes therein 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.
The preparation of financial statements in accordance 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 amount of revenues
and expenses during the reporting period. For example, estimates and
assumptions are used in determining the Reserve for Estimated Costs
During the Period of Liquidation and Common Stock Held by Employee
Benefit Plans. While these estimates are based on the best judgment of
management, actual results and revised estimates could differ from
current estimates and are reflected in the period of change.
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 September 30,
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 ("Stock Agreement"), between the Company and
the Plans' trustee dated September 30, 1993.
On the September 30, 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 represent distributions and related interest thereon
allocated to the 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 Stock Agreement. Under the Stock 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 Stock Agreement) or fair market value.
The Plans' trustee asserted in its tender that the correct basis under
the Stock Agreement to determine the price 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 price
under the Stock 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 price 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 at the price demanded by
the Trustee 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 Stock Agreement ("Plan Litigation"). If the views of
the Company or those of the largest non-plan 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 Stock 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 September 30, 1996
statement of net assets in liquidation to be $2.51 per share). If the
view of the Plans' trustee prevails, 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-$12 per share).
While the Company believes its interpretation of the Stock agreement is
correct, the determination that the views of the Trustee are correct
would have the effect at September 30, 1996 of increasing the value of
the shares held by the Plans by approximately $1.9 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 $1.01 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 preliminary settlement of the litigation and executed a
settlement agreement in principle. After several months of further
negotiation, counsel for the parties agreed on the final settlement
documentation the week of September 9 and the principals of each party
thereafter agreed to the documentation, as well. The documentation has
been forwarded to the Department of Labor ("DOL") for review in
accordance with the procedure described in the following paragraph.
Upon resolution of the allegations which have been made by the DOL and
the Internal Revenue Service ("IRS"), the process of seeking approval
of the settlement in Minnesota District Court will be commenced. The
final settlement agreement is subject to approval by the Court after
notice to all shareholders and Plan participants and an opportunity for
such persons to be heard, as may be determined by the Court, and no
assurances can be given that any such final agreement will be approved
by the Court. In general, the 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 $100,000 toward 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.
In early June 1996, the U.S. Department of Labor ("DOL") advised the
Company by letter of its position that Charles A. Geer, members of the
Administrative Committee of the SBM Profit Sharing Stock Plan and
certain of the Company's officers and directors "may have violated
several provisions of ERISA," apparently principally in connection with
positions taken with respect to the Plan Litigation and alleges that
such persons "are in violation of ERISA and will remain so until the
. . . [Plan Litigation] is resolved." The DOL letter "invites the . . .
[Company] to discuss with [the DOL] the final terms of the settlement"
and has advised that "if the Company take[s] proper corrective action
it will not bring a law suit with regard to . . . [such issues]." The
Company has strongly opposed the position taken by the DOL. The Company
has communicated with the DOL and now understands that the Department
does not intend to take enforcement action so long as the Plan
Litigation is resolved consistent with the November 13, 1995 settlement
agreement in principle. Accordingly, a procedure has been worked out to
obtain written acknowledgement from the DOL that "it will not take
enforcement action" if the proposed settlement of the valuation
litigation is completed.
On October 10, 1996, the Company was advised by the IRS that the DOL
had referred the SBM Company Profit Sharing Stock Plan for "prohibited
transctions under Internal Revenue Code Section 4975" and requested
certain information. The Company has been in contact with the IRS and
the DOL regarding this referral and has supplied all information which
was requested. The Company is awaiting further advice from the DOL and
the IRS regarding the referral.
Note 3. Other Matters:
The Company was notified several months ago 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 existed 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. 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
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
None
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
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996<F1>
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 0
<CASH> 5,845,430
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 6,781,621
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 4,705,503<F2>
<TOTAL-LIABILITY-AND-EQUITY> 6,781,621
0
<INVESTMENT-INCOME> 0
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,645
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>THE COMPANY IS CURRENTLY USING LIQUIDATION ACCOUNTING.
<F2>NET ASSETS IN LIQUIDATION.
</FN>
</TABLE>
