SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1994 Commission File No. 811-407
1150 LIQUIDATING CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-0557530
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
IDS Center 55402
80 South 8th Street (Zip Code)
Suite 4440
Minneapolis, Minnesota
(Address of Principal Executive Offices)
Registrant's Telephone Number (612) 338-5254
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate value of the voting stock held by non-affiliates of the registrant
is not available. The common stock of the registrant is not publicly traded;
consequently, there is no definitive available price for the stock.
Number of shares of common stock outstanding at March 31, 1996 2,179,714
Documents Incorporated By Reference
None
PART I
ITEM 1. BUSINESS
GENERAL
On June 14, 1995, ARM Financial Group, Inc. ("ARM Financial") purchased
substantially all of the assets and assumed certain of the liabilities of the
Company pursuant to the Amended and Restated Stock and Asset Purchase Agreement
dated as of February 16, 1995 (the "Sale Transaction"). The assets sold to ARM
Financial included the outstanding capital stock of State Bond and Mortgage Life
Insurance Company ("SBM Life"), SBM Certificate Company ("SBM Certificate") and
SBM Financial Services, Inc. ( ("SBM Financial" and together with SBM Life and
SBM Certificate, the "Subsidiaries"). The Company filed a Notice of Intent to
Dissolve with the Secretary of State of the State of Minnesota immediately after
the consummation of the Sale Transaction. The Company has therefore taken the
first step required under Minnesota law to dissolve and cannot carry on any
business other than is necessary to wind up the affairs of the Company. The
Company's activities subsequent to the Sale Transaction have consisted solely of
making liquidating distributions to shareholders, attempting to resolve and
satisfy outstanding liabilities, managing ongoing litigation and managing the
cash proceeds of the Sale Transaction. The Company has no employees. The Chief
Executive Officer of the Company is paid an hourly fee for services rendered to
the Company.
DISTRIBUTIONS
Immediately after the closing of the Sale Transaction, the Company made
liquidating distributions to the holders of the Series A Mandatory Redeemable
Voting Convertible Preferred Stock of the Company (the "Preferred Stock") in the
aggregate amount of $20.5 million, representing an aggregate liquidation
preference of $19.0 million and accrued and unpaid dividends of $1.5 million. No
further liquidation payments are required with respect to the Preferred Stock.
Holders of Common Stock of the Company (the "Common Stock") have received
liquidating distributions equal to an aggregate of $5,994,214 million or $2.75
per share since the Sale Transaction. The remaining proceeds of the Sale
Transaction of approximately $6.0 million are being invested in a short-term
government money market fund pending the resolution of certain known liabilities
of the Company and the resolution of certain pending litigation. The Company is
currently involved in litigation with the trustee of the Company's Thrift Plan
and Profit Sharing Stock Plan (collectively, the "Plans"). In addition, the
Company is currently undergoing an audit by the Internal Revenue Service. See
"Litigation" below. The Company will not distribute all of the remaining cash
proceeds of the Sale Transaction until all known liabilities as of the date
hereof, including the ongoing litigation, and any liabilities which arise after
the date hereof, are resolved.
HISTORICAL BUSINESS DISCUSSION
For detailed information regarding historical activities of the Company
prior to the Sale Transaction, see the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 and the Company's Quarterly Reports on Form
10-Q for the quarters ended March 31, 1995 and June 30, 1995.
ITEM 2. PROPERTIES
Since the Sale Transaction, the Company's principal executive offices
have been located at IDS Center, 80 South 8th Street, Minneapolis, Minnesota.
The Company occupies the private offices of its Chief Executive Officer on a
rent-free basis.
ITEM 3. LEGAL PROCEEDINGS
Pursuant to the terms of the stock agreement (the "Stock Agreement")
between the Company and Firstar Trust Company of Minnesota, the trustee of the
Plans (the "Trustee"), is entitled, under certain circumstances, to "put" shares
of Common Stock in the Plans back to the Company at the higher of fair market
value or adjusted book value. There are currently 304,693 shares of Common Stock
in the Plans. The Company has historically calculated adjusted book value by
reference to its financial statements, which are prepared in accordance with
generally accepted accounting principles. Effective January 1, 1994, Statement
of Financial Accounting Standards 115 ("SFAS 115") required the Company to
reflect on its financial statements the fair values for trading and
available-for-sale debt securities. Specifically, SFAS 115 requires the Company
to reflect on its financial statements the unrealized losses on those
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Resources".
In January 1995, the Trustee notified the Company of an attempted
exercise of a put back to the Company of all shares of Common Stock in the
Plans. The Company and the Trust under the Will of T.H. Schonlau, a shareholder
of the Company (the "Schonlau Trust"), objected to the attempted put. The
Trustee has indicated that the adjusted book value of the shares in the Plans
should be computed based upon a pre-SFAS 115 amortized cost method of valuing
portfolio securities, resulting in a value at December 31, 1994 of approximately
$14.50 per share. As a result of the adoption of SFAS 115 and the depreciation
in the market value of the Company's debt securities in 1994, the "book value"
of the Common Stock decreased significantly. A valuation performed during 1995
as of December 31, 1994 for purposes of a fair market valuation of the Common
Stock in the Plans showed a value of $5.38 per share. The adjusted book value of
the Common Stock, computed in accordance with SFAS 115, was a negative value at
December 31, 1994. See Note 2 of the Company's Financial Statements in Item 8
hereto.
On March 1, 1995, the Company filed a state court declaratory judgment
action in this matter seeking an interpretation of the Stock Agreement. The
action names as defendants the Trustee and the Schonlau Trust, which holder
alleges that it fairly and adequately represents the interests of the Company's
other holders of Common Stock. The Company in its complaint asserts that (i) the
put right that the Trustee has with regard to the Common Stock in the Plans is a
liquidity put, and cannot be used to put the entire block of Common Stock back
to the Company; (ii) the book value of the Common Stock must be computed in
accordance with SFAS 115; (iii) the Stock Agreement terminates upon dissolution
of the Company, and the Company is in the process of dissolving; and (iv) the
Trustee waived and/or is estopped from asserting its alleged interpretation of
the Stock Agreement. The Company also requested a declaratory judgment
determining the merits of the state law claims asserted by the Schonlau Trust
set forth in the counterclaim and crossclaim by the Schonlau Trust. The Schonlau
Trust seeks a declaratory judgment that (i) the stock redemption contemplated by
the Trustee's attempted put would constitute an illegal distribution in
violation of Section 302A.551 of the Minnesota Statutes and (ii) the holders of
all of the Common Stock of the Company other than the Plans are entitled to
demand dissenters' rights pursuant to Section 302A.471 and are further entitled
to prior payment of the fair value of their shares of Common Stock owned as of
September 1, 1993 (the date the redemption right and preference was allegedly
established pursuant to the Stock Agreement). In a counterclaim, the Trustee
also sought to hold the Company liable as a "fiduciary" of the Plans under the
Employee Retirement Income Security Act ("ERISA").
On June 16, 1995, the court heard the Company's and the Trustee's
cross-motions for summary judgment and on July 5, 1995 entered an order (i)
dismissing the Trustee's counterclaim alleging breach of fiduciary duty under
ERISA for lack of subject matter jurisdiction, (ii) ruling that the Trustee
could put all of the shares of Common Stock owned by it at one time, (iii)
ruling that the provisions in the Stock Agreement dealing with dissolution are
ambiguous as to when dissolution occurs, and (iv) ruling that the Stock
Agreement is ambiguous as to the meaning of "book value" and as to whether
"unrealized losses on debt securities" should be included in calculating "book
value".
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. Counsel for the parties are working on a final and more formal
settlement agreement, although no assurance can be given that final agreement
will be reached because of, among other things, presently unresolved differences
as to the procedural approach regarding court approval. 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.
The Company is also undergoing an audit by the Internal Revenue Service
of the years 1986-1990 and 1991-1993. An adjustment agreement, which is not
material to the Company's financial condition, has been executed by the Company
and the Internal Revenue Service with respect to the years 1986-1990 and will be
effective if and when approved by the Joint Committee of Congress. A report is
expected in mid-1996 with respect to the audit of the years 1991-1993, and
preliminary information is to the effect that any adjustments will not be
material to the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
GENERAL. As of March 31, 1996, there were approximately 225 holders of
the Common Stock. The Common Stock is not listed on any securities exchange, nor
is it traded or quoted through the facilities of any national market system or
automated quotations system or traded in the over-the-counter market. Any
trading in the Common Stock has been either (i) in privately negotiated
transactions among shareholders or between shareholders and third parties or
(ii) in transactions between shareholders and the Company (primarily between the
Company and the Plans pursuant to the terms of the Plans). The Company believes
that there has not been sufficient trading in the Common Stock to establish any
readily ascertainable market value for the Common Stock. Nor, generally, does
the Company have knowledge of the price or other terms upon which Common Stock
is traded among shareholders.
DIVIDENDS. The Company has not paid dividends with respect to its
Common Stock since the second quarter of 1994 and has no current intentions of
paying dividends on its Common Stock, other than liquidating distributions.
Prior to the time the Company made full liquidating distributions on the
Preferred Stock, the Company was in arrears for six quarterly dividends, or $1.5
million. The following table sets forth the dividends per share paid by the
Company in the last two fiscal years.
1995 1994
-------------- --------------
Common Stock --- $.10
Dividends Per Share
Preferred Stock --- $40.00
Dividends Per Share
Prior to the Sale Transaction, the Company's cash flow and its ability
to pay dividends was largely dependent upon management fees and on the receipt
of dividends from the Subsidiaries. The payment of dividends and fees by SBM
Life was subject to legal restrictions primarily imposed by applicable insurance
laws and regulations and the capital required to be maintained for rating agency
purposes. At the time of the Sale Transaction, SBM Life was prohibited from
paying dividends without the written approval of the Minnesota Department of
Commerce. Payment of dividends by SBM Certificate was subject to capital
maintenance requirements applicable to that company imposed under the Investment
Company Act of 1940 and by the Minnesota Department of Commerce. The terms of
the Preferred Stock also contained restrictions on the Company's ability to pay
dividends with respect to its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following financial data of the Company is presented for the year
ended December 31, 1995 on a liquidation basis.
STATEMENT OF NET ASSETS IN LIQUIDATION AS OF DECEMBER 31, 1995
ASSETS
Cash and Cash Equivalents $ 6,048,325
Federal Income Tax Refund 118,831
Escrowed Funds 846,419
Other Assets 13,188
------------
7,026,763
LIABILITIES
Accounts Payable 55,166
Reserve for Estimated Costs During the Period of
Liquidation 577,527
Deferred Compensation and Retirement Benefits for
Officers 92,968
------------
Total Liabilities 725,661
Common Stock Held by Employee Benefit Plans -
304,693 shares 1,608,906
------------
Net Assets $ 4,692,196
============
Common Shares Outstanding - 2,179,714 less 304,693
Shares Held by Employee Benefit Plans 1,875,021
============
Net Assets per Common Share Outstanding $ 2.50
============
STATEMENT OF CHANGES IN NET ASSETS
IN LIQUIDATION - YEAR ENDED DECEMBER 31, 1995
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
============
The following selected financial data of the Company is presented
for the four years ended December 31, 1994 on a going concern basis.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------
1994 1993 1992 1991
---------- ---------- ---------- ----------
(in thousands, except for per share data)
<S> <C> <C> <C> <C>
Total Revenues $ 59,932 $ 72,047 $ 69,027 $ 65,199
Income (Loss) From Continuing
Operations(1) (3,604) 3,748 3,039 3,043
Net Income (Loss) (3,604) 3,748 2,778 2,723
Per Common Share:
Primary:
Continuing Operations (2.40) 1.35 1.32 1.32
Net Income (Loss) (2.40) 1.35 1.21 1.18
Fully diluted:
Continuing Operations (2.40) 1.32 1.32 1.32
Net Income (Loss) (2.40) 1.32 1.21 1.18
Dividends declared per share:
Common Stock .10 .40 .10 0
Mandatory Redeemable Voting
Convertible Preferred Stock 40.00 80.00
As of December 31,
--------------------------------------------------
1994 1993 1992 1991
---------- ---------- ---------- ----------
(in thousands)
Total Assets(1) 969,364 1,024,910 933,367 827,042
Face Amount Certificate Reserves 60,355 67,029 66,550 67,159
Future Policy Benefits 910,104 891,923 810,963 708,330
Mandatory Redeemable Voting
Convertible Preferred Stock 18,486 17,590 3,850
Common Stock Held by Employee
Benefit Plans 1,917 4,809 4,856 4,496
Stockholders' Equity (Deficit)(2) (31,977) 31,959 29,919 27,705
Total Assets of Affiliated Mutual Fund
Companies 203,691 209,461 200,088 183,734
</TABLE>
- ------------------
(1) During 1992 the Company completed the sale of State Bank & Trust
Company of New Ulm. These operations have been reported as discontinued
operations.
(2) Effective January 1, 1994, the Company adopted SFAS 115 which has a
significant effect on stockholders' equity. See Notes 3 and 4 of the
Company's Financial Statements in Item 8 hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SALE OF COMPANY OPERATIONS
The Company sold its operations to ARM Financial on June 14, 1995
(which for accounting purposes was effective May 31, 1995) and incurred a loss
of $6.5 million. See Note 1 to the Company's Financial Statements in Item 8
hereof. The purchase price was determined pursuant to the Amended and Restated
Purchase Agreement dated as of February 16, 1995 between the Company and ARM
Financial. The gain or loss on the sale recorded by the Company was subject to
fluctuation through the effective date of the Sale Transaction 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 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 Financial. The events
leading to the sale of the Company's operations to ARM Financial included the
required adoption of SFAS 115 effective January 1, 1994 and the rapidly rising
interest rates in 1994. These factors resulted in significantly reduced market
values in the Company's investment portfolio, especially its Collateralized
Mortgage Obligations ("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. The sale of the Company's operations became the solution to the
capital issues.
Subsequent to the Sale Transaction, the Company had no operations. Upon
closing of the Sale Transaction, the Company redeemed the Preferred Stock at its
liquidation value ($19 million) plus $1.5 million of dividends in arrears. The
remaining proceeds from the Sale 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 holders of the
Common Stock. The remaining proceeds will be distributed once the litigation
with the Trustee of the Plans has been resolved and all other liabilities have
been satisfied. See Note 2 to the Company's Financial Statements in Item 8
hereof.
FISCAL YEAR ENDED DECEMBER 31, 1995
The terms of the Sale Transaction were largely established in January
1995 and were finalized as of February 16, 1995. Such terms were not subject to
variation due to changes in the market value of the Company's available-for-sale
securities or the Company's results of operations through the closing of the
Sale Transaction.
As a result of the sale of its operations effective May 31, 1995, the
Company believes that performance and results of operations for fiscal 1995 are
not comparable with results of fiscal 1994 and prior fiscal years. Revenue for
the period June 1, 1995 to December 31, 1995 consisted almost entirely of
earnings on invested assets. Expenses for the same period consisted primarily of
general and administrative expenses incurred in connection with winding up the
affairs of the Company, expenses associated with reconciling payments made at
the June 15, 1995 closing of the Sale Transaction to final accounting and tax
obligations at May 31, 1995, and expenses incurred in connection with litigation
with the Trustee of the Plans. See "Litigation" and Note 2 to the Company's
Financial Statements in Item 8 hereof.
Net assets ultimately available for distribution to shareholders of the
Company will vary substantially depending upon the remaining time involved in
winding up the affairs of the Company, including the litigation with the Trustee
of the Plans, payment of additional known liabilities as of the date hereof and
liabilities which arise hereafter, and the expenses and liabilities incurred in
connection therewith. The Statement of Net Assets in Liquidation as of December
31, 1995 includes accruals for general and administrative expenses anticipated
by the Company to be incurred with respect to resolving such known matters in a
reasonably timely fashion, as expected at that date. Such Statement does not
reflect any premium above a pro-rata distribution to all shareholders which the
Company may be obligated to pay the Plans as result of the resolution of the
litigation with the Trustee of the Plans. See "Litigation" and Note 2 to the
Company's Financial Statements in Item 8 hereof. Net assets ultimately available
for distribution will be reduced by the amount of any such premium, amounts
needed to satisfy currently known liabilities and the amount of any other
liabilities that may arise in the future, and to any extent general and
administrative expenses incurred exceeds the estimates included in the Statement
of Net Assets in Liquidation as of December 31, 1995.
As noted in Note 1 to the Company's Financial Statements in Item 8
hereof and under "Sale of Company Operations" above, 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. An initial distribution was made in August 1995 and a final
distribution will be made as soon as practicable after the litigation with the
Trustee of the Plan is resolved and all other known liabilities are satisfied.
THREE YEARS ENDED DECEMBER 31, 1994
RESULTS OF OPERATIONS
Pretax results of operations by business segment is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1994 1993 1992
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Pretax income (loss):
Annuities and Life Insurance $(4,406) $ 5,832 $ 5,949
Face Amount Certificates 555 56 (235)
Mutual Fund Investment Advisory 240 302 324
Corporate (1,260) (642) (1,458)
------- ------- -------
Pretax income (loss) from continuing operations $(4,871) $ 5,548 $ 4,580
Income tax expense (benefit) (1,267) 1,800 1,541
------- ------- -------
Income from continuing operations before
cumulative effect of change in accounting
principle (3,604) 3,748 3,039
Discontinued operations -- -- 3
Cumulative effect of change in accounting principle -- -- (264)
------- ------- -------
Net income (loss) $(3,604) $ 3,748 $ 2,778
======= ======= =======
</TABLE>
The following discussion of results of operations refers to the above
segment results on amounts before income taxes.
Effective July 31, 1992, the Company completed the sale of its banking
subsidiary, State Bank & Trust Company of New Ulm ("State Bank"). As such, the
results of operations of State Bank have been presented as discontinued
operations.
Annuities and Life Insurance Segment
In November 1994, A.M. Best informed SBM Life that its rating was being
reduced from A- (excellent) to B+ (very good). A.M. Best indicated that the
reasons for the rating change were SBM Life's concentration in CMOs even after
the disposition of $186 million of CMOs (discussed in the Bond Portfolio section
below) and its desire that SBM Life increase its capital level. Also, during the
third quarter of 1994, several adverse newspaper articles were written
concerning SBM Life's investment portfolio and the unrealized depreciation
associated with it. The combination of these announcements and the reduction by
A.M. Best of SBM Life's rating continued to negatively impact new sales,
especially in the Tax Sheltered Annuity ("TSA") marketplace. Policy withdrawals
and surrenders also increased as a result of the above. These factors should be
considered in the review of the following discussion.
The main emphasis of SBM Life's business was the sale of deferred
annuities. Annuity premium for the years ended December 31, 1994, 1993, and 1992
was $71 million, $98 million, and $98 million, respectively. The decrease was
mainly in both single premium deferred annuities and first year premium on sales
of 403(b) tax sheltered flexible premium deferred annuities. SBM Life believed
that this was a result of competition from competitive products such as variable
annuities, changes to SBM Life's TSA product line which had not been fully
accepted by some agents, the goal of SBM Life to increase its investment spread
on annuity products, consumer concern about the soundness of the insurance
industry and the lowering by A.M. Best of its rating of SBM Life in the spring
of 1992 from A to A- (Excellent) and the further reduction of the rating in
November 1994 from A- to B+ (Very Good), along with the adverse newspaper
articles noted above.
During 1993 SBM Life discontinued several annuity products in its TSA
product line and replaced them with several new products. These products were
not fully accepted by some agents as commission levels were decreased and
certain policy liquidity features were reduced in the new products. In the third
quarter of 1994, SBM Life restructured the commissions on these products which
was favorably received by the agents. However, the A.M. Best rating reduction
and newspaper articles noted above significantly reduced SBM Life's sales in the
TSA marketplace. The TSA marketplace was very sensitive to claims paying ratings
and, with SBM Life's rating reduction, all of its major competitors had higher
ratings.
Direct life insurance sales continued to decline because SBM Life
placed substantially all of its emphasis on the annuity marketplace.
Return on invested assets excluding realized gains and losses and loan
and real estate losses for the years ended December 31, 1994, 1993, and 1992,
were 7.59% 7.86%, and 8.62%, respectively. The average rate of interest credited
on annuities was 5.48%, 6.18%, and 6.79% for the years ended December 31, 1994,
1993, and 1992, respectively. The interest rate spread increase in 1994 was
mainly the result of management reducing credited rates on January 1, 1994 for
older blocks of annuities. In 1993 the spread was 15 basis points lower than
that in 1992 as a result of significant prepayments in SBM Life's
mortgage-backed security portfolio being reinvested at lower rates as interest
rates declined in 1993. See below for a discussion of SBM Life's investment
portfolio repositioning program.
BOND PORTFOLIO OF SBM LIFE. Over the past several years, SBM Life had
invested mainly in U.S. Government Agency/Instrumentality CMOs. The CMO
marketplace was very actively traded during this period and CMOs were considered
a favorable investment for life insurance companies. These securities had the
highest credit rating and no default risk, though the securities did involve
interest rate and extension risk. SBM Life was able to achieve higher yields
with these securities compared to other securities with comparable default risk.
Beginning toward the end of the first quarter of 1994, the CMO
marketplace became very depressed. This was the result of two main factors.
First, interest rates increased dramatically in the first six months of 1994 and
continued to rise throughout 1994. As such, the economic value of any fixed
income security declined significantly. In this declining bond market, CMOs were
dramatically affected. As interest rates rose, prepayments on mortgages
underlying the CMOs decreased, resulting in reduced principal cash flows and
extensions of the average maturities of these bonds. Such factors had a very
negative effect on the market value of CMOs. Second, combined with the rise in
interest rates, the CMO marketplace was negatively impacted due to the
technical/emotional change in the marketplace as a result of several
well-publicized problems in several broker/dealers, mutual funds and other
companies. The effect of these factors has been a significant decrease in price
of CMOs which has resulted in significant unrealized losses in SBM Life's CMO
portfolio.
Toward the end of the second quarter of 1994, SBM Life determined it
should reduce the level of CMOs in its investment portfolio. This was based on
its analysis of the portfolio and discussions with regulators and the A.M. Best
rating service. As such, SBM Life developed an investment portfolio
repositioning program in which, in the third and fourth quarters of 1994, it
would sell a significant level of CMOs from all of the various types of CMOs it
held with emphasis on the more volatile CMOs including accrual bond, TTIB, and
inverse floater tranches.
Through this program, SBM Life sold CMOs with an amortized cost of
approximately $186 million realizing $9.4 million in pre-tax losses. CMOs in the
following tranches were sold: PACs - $91 million; Accrual Bonds - $45 million;
TTIBs - $28 million; Sequentials - $15 million; Inverse Floaters - $5 million;
Other - $2 million. This reduced the level of CMOs in SBM Life's investment
portfolio, based on amortized cost, from 77% at December 31, 1993 to 54% at
December 31, 1994.
As a result of this investment portfolio repositioning program,
effective June 30, 1994 SBM Life transferred approximately $234 million of
securities classified as held-to-maturity to the available-for-sale category
with an unrealized loss of $15.9 million. For a discussion of SBM Life's
adoption of SFAS 115 and its investment portfolio see "Capital Resources" below
and Notes 3 and 4 of the Company's Financial Statements in Item 8 hereof.
The following table summarizes the distributions of CMOs held by SBM
Life, at carrying value, as of December 31 of each year:
<TABLE>
<CAPTION>
Type of CMO 1994 1993
- -------------------------------- ----------------------- -----------------------
(Dollars in Millions) (Dollars in Millions)
<S> <C> <C> <C> <C>
Planned amortization class (PAC) $257.2 72% $361.4 61%
Accrual Bonds 29.5 8% 82.5 14%
Two tiered index bonds (TTIB) 27.0 8% 69.2 12%
Sequential pay 4.3 1% 24.6 4%
Inverse floater 11.9 3% 16.7 3%
Targeted amortization class 14.0 4% 16.9 3%
Other 15.1 4% 19.8 3%
------ -------- ------- ---------
$359.0 100% $591.1 100%
</TABLE>
At December 31, 1994, SBM Life was not purchasing new CMOs. Proceeds
from the sale of CMOs described above and current cash flows were being invested
in commercial paper, U.S. Government or Agency securities and investment grade
debt securities. The repositioning program initially reduced the overall yield
on SBM Life's investment portfolio by approximately 25 to 35 basis points which
reduced future profitability. At December 31, 1994, SBM Life had no investments
in interest only or principal only CMOs. Additionally, SBM Life did not utilize
speculative derivative products, such as swaps, futures or options.
Realized investment gains were a significant source of income to SBM
Life in 1993 and 1992 of $3,845,000, and $4,400,000, respectively. Realized
investment gains resulted primarily from the sale of GNMA and FNMA
mortgage-backed securities. SBM Life's investment policy was to hold investments
to maturity. However, market conditions and other factors sometimes dictated
changes in investment portfolios which resulted in realized gains or losses.
Effective January 1, 1994, SBM Life adopted a new accounting standard which
established new criteria for classifying SBM Life's investment portfolio. See
"Capital Resources" below.
MORTGAGE AND REAL ESTATE PORTFOLIO. Loss provisions of $320,000,
$663,908, and $2,124,952 were recognized for the years ended December 31, 1994,
1993, 1992, respectively. As a result of the gradually improving economy and
active management of the loan portfolio, management was able to reduce
non-performing loans and the 1994 and 1993 loss provisions. Management believed
the loss reserves provided at December 31, 1994 were adequate. SBM Life's
strategy with respect to owned real estate was to lease the properties to
enhance marketability and then sell them in an orderly fashion. This sometimes
required SBM Life to hold the properties for extended periods of time.
GUARANTY FUND ASSESSMENTS. SBM Life was adversely impacted as a result
of guaranty fund assessments. For the years ended December 31, 1994, 1993, and
1992, SBM Life recognized a charge to operations of $1,791,617, $1,463,411, and
$1,296,293, respectively, for these assessments. The assessments were made by
state guaranty associations to obtain funds to pay off policy holders of
insolvent insurance companies. The assessments are based on the proportion of
SBM Life's premiums in a particular state to total premiums for all companies in
that state. Assessments received by SBM Life in 1993 and 1992 were mainly for
the insolvencies of Executive Life Insurance Company and Midwest Life Insurance
Company and in 1994 for Executive Life and Investors Equity Life Insurance
Company of Hawaii.
Face Amount Certificate Segment
The Company's face amount certificate subsidiary, SBM Certificate,
offered at December 31, 1994 one type of face amount certificate, the Series 503
Certificate.
The following table summarizes face amount certificate activity for the
three years ended December 31, 1994:
<TABLE>
<CAPTION>
Redemptions
Certificates ----------- Certificate
------------ At Prior to Reserves
Sold Renewed Anniversary Anniversary (at End of Period)
---- ------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1994....................... $5,332,840 $16,849,478 $ 8,321,218 $7,294,768 $60,355,015
Year Ended December 31,
1993....................... 5,984,921 7,431,998 3,391,651 6,204,653 67,028,639
Year Ended December 31,
1992....................... 9,771,496 19,437,653 10,484,137 4,428,308 66,550,117
</TABLE>
Face amount certificate sales decreased by $.7 million in 1994 compared
to 1993 and decreased by $3.8 million in 1993 compared to 1992. As interest
rates in general decreased, sales of certificates tended to decrease as
investors looked for other investments that had a higher yield. The sale of
certificates was very sensitive to interest rates offered on competitive
products, mainly bank certificates of deposit. SBM Certificate reviewed its
certificate interest rate structure to ensure it was competitive in the
marketplace while still being profitable. The changes in sales between years
reflects SBM Certificate's monitoring of competitive rates and adjusting its
rates accordingly.
The increase in renewed certificates in 1994 compared to 1993 was a
result of increased scheduled maturities in 1994. The decrease in renewed
certificates in 1993 compared to 1992 was due to there being significantly less
certificates with anniversary dates in 1993 compared to 1992. Overall, the
renewal rate has held fairly steady at an average of 65% to 70%. Scheduled
maturities of certificates in 1995, 1996, and 1997 were approximately $25.7
million, $10.1 million, and $19.4 million, respectively. In order to maintain
SBM Certificate's historical certificate renewal rate, SBM Certificate needed to
remain competitive in the marketplace with bank certificates of deposit.
Otherwise, both new sales and renewal rates would decrease.
SBM Certificate believed that the increase in redemptions prior to
anniversary in 1994 and 1993 was due to investors using the certificates for
investing cash for short term periods while they considered alternative
investment vehicles. Investors received a reduced rate of interest when they
redeemed their certificates prior to the anniversary date, but the rate received
still tended to be equal to or higher than typical bank savings rates.
Sales of new certificates for the first two months of 1995 were
approximately one-half the level of sales for the comparable period in 1994. In
addition, during the first two months of 1995, certificate renewal rates
decreased by approximately 10% from historical renewal levels. SBM Certificate
believed these decreases were mainly the result of the certificate of deposit
marketplace currently being very competitive as many financial institutions were
offering special high rates to induce customers to open new accounts. SBM
Certificate had increased its rates to remain as competitive as possible in
order to attempt to maintain its historical certificate renewal rates and
generate new certificate sales while still maintaining adequate operating
spreads.
During 1993 and 1994, SBM Certificate was able to improve its
investment spreads by lowering interest rates in 1993 offered on new and renewed
Series 503 Certificates and enhancing its investment yield by adding U. S.
Government Agency CMOs to its investment portfolio. For 1992, operating losses
were incurred due to insufficient spreads between income earned on investment
assets and rates paid on certificate liabilities. This was due primarily to
investment rates decreasing and not maintaining a sufficient spread over rates
paid on certificates. For the years ended December 31, 1994, 1993, and 1992, the
average gross yield on SBM Certificate's investment portfolio was 7.89%, 7.69%,
and 8.16%, respectively. The average yield paid to certificate holders for the
years ended December 31, 1994, 1993, and 1992 was 5.69%, 6.28%, and 7.05%,
respectively. As can be seen from the above, over the three years ended December
31, 1994 there was an increasing spread which resulted in positive investment
income in 1993 and 1994.
To improve its investment spreads and as a result of the decreasing
interest rate environment, SBM Certificate had lowered the interest rates
offered on new Series 503 Certificates several times during 1992 and 1993. In
1994, interest rates offered on new Series 503 Certificates were increased
several times to be competitive with other investment products and the
increasing interest rate environment. SBM Certificate was closely monitoring
these new rates against competitive products, mainly bank certificates of
deposit.
In order to enhance investment yields during 1993 and early 1994, SBM
Certificate added U.S. Government Agency CMOs to its investment portfolio. SBM
Certificate was able to achieve higher yields with these securities without
taking on additional credit risk. However, these securities had additional
interest rate risk in that volatility in the interest rate market caused the
fair value of these securities to fluctuate significantly. In addition, the
average lives of these investments can significantly extend. See "Liquidity"
below.
In addition to the spread between investment income and interest
expense which contributed to the operating results discussed above, operating
results were impacted by provisions for losses on SBM Certificate's loan and
real estate assets. During the years ended December 31, 1993 and 1992 SBM
Certificate provided a loan loss provision of $55,000 and $60,000 respectively.
No additional provision was required in 1994.
During 1994, 1993, and 1992 SBM Certificate realized net investment
gain (losses) before income tax of $29,783, ($3,173), and ($33,397)
respectively. This included realized net security gains of $3,768, $201,359, and
$141,603 in 1994, 1993, and 1992, respectively. SBM Certificate's investment
policy was to hold investments until maturity. However, market conditions and
other factors sometimes dictated changes in investment portfolios which resulted
in realized gains or losses. During 1993 and 1992, it was SBM Certificate's
decision to liquidate specific mortgage-backed security pools which were
experiencing accelerated principal paydowns. Also, during 1993 and 1992, SBM
Certificate recognized losses of $175,000 in each year on its investment in a
real estate limited partnership. In 1994, SBM Certificate recognized a gain of
$26,015 compared to a loss of $29,532 in 1993 on certain properties held for
investment.
Mutual Fund Investment Advisory Segment
Mutual fund assets under management saw minimal change over the three
years ended December 31, 1994 and were $203 million, $209 million, and $200
million at December 31, 1994, 1993, and 1992, respectively. Advisory and other
fees collected from the funds remained relatively stable each year as the funds
fluctuated in size, with total fees being $1,399,000, $1,401,000 and $1,316,000
in 1994, 1993 and 1992, respectively. However, the Company incurred increased
operating expenses. As such, the Company showed a decrease in operating income
in this segment in each of the three years ended December 31, 1994. Mutual fund
sales (excluding the State Bond Cash Management Fund) were $17 million, $19
million and $25 million, for the years ended December 31, 1994, 1993 and 1992,
respectively. Mutual fund sales slowed during 1994 and 1993 as the Company's
limited distribution system was unable to maintain and grow mutual fund sales in
today's competitive mutual fund marketplace. Mutual fund redemptions in 1994,
1993 and 1992 were $19 million, $20 million and $12 million, respectively. The
increase in redemptions in 1994 and 1993 over 1992 was result of the competitive
marketplace described above and the funds aging shareholder base.
Corporate Segment
The increase in the corporate pretax loss in 1994 related to a $490,000
loss on the sale of the Company's aircraft. The decrease in corporate pretax
loss in 1993 compared to 1992 was due primarily to a decrease in unrecovered
costs from the Subsidiaries.
Operating Expenses
Operating expenses continued to increase in 1994. The increases in 1993
and 1992 primarily related to the growth in SBM Life. In 1994, expense increased
mainly related to consulting, actuarial and other professional fees analyzing
various strategies regarding the capital of the Company including
recapitalization, issuance of shares, tender offer and sale of the Company.
Income Taxes
The effective tax rate for continuing operations for the Company was
(26.0%), 32.4% and 33.7% for the years ended December 31, 1994, 1993 and 1992,
respectively. The rate differed from the Federal rate of 35% in 1994 and 1993
and 34% in 1992, mainly due to tax exempt interest in the face amount
certificate segment in 1994 and 1993, the benefit of graduated income tax rates,
and in 1994 the change in estimate of the income tax valuation allowance.
Effective January 1, 1992, the Company adopted FASB Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). The statement changed the practice of recognition and measurement of
deferred tax assets and liabilities. The Company recorded a decrease in net
income of $264,000 as a cumulative effect of change in accounting principle in
1992. In addition, the Company began recording the unrealized depreciation on
marketable equity securities net of income tax benefit.
CAPITAL RESOURCES
Except for the mutual fund adviser operations, each of the Company's
business segments was capital intensive and required certain levels of capital
based on requirements of regulators or rating agencies.
SFAS 115
Effective January 1, 1994, the Company adopted Financial Accounting
Standards Board Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. The primary
impact of SFAS 115 was to require the Company to classify its debt securities
into categories based upon the Company's intent relative to the eventual
disposition of the securities. SFAS 115 established three categories of
securities: (1) Held-to-maturity securities, comprised of securities which a
company has the positive intent and ability to hold to maturity. These
securities are carried at amortized cost. SFAS 115 prevented the Company from
classifying a security as held-to-maturity if the security might be sold for
liquidity needs or based on changes in interest rates. (2) Available-for-sale
securities may be sold to address liquidity and other needs of a company. These
securities are held at "fair value" on the balance sheet with an increase or
decrease to stockholders' equity for unrealized gains or losses after the
recording of deferred income taxes. (3) Trading securities would be securities
acquired for the purpose of selling them in the near term.
Upon adoption of SFAS 115, the Company analyzed its debt securities and
determined that to maintain flexibility in its investment portfolio it would
classify a significant portion of its investment portfolio as available-for-sale
even though management did not have the intention of selling these securities.
As such, as of January 1, 1994, approximately $505.6 million of its debt
securities were classified as available-for-sale with approximately $254.2
million classified as held-to-maturity. The market value of the
available-for-sale securities created a net unrealized after tax gain of $3.8
million, after adjustment for deferred acquisition costs, at January 1, 1994.
Due to an investment portfolio repositioning program, in mid-1994, SBM Life
transferred approximately $234 million of securities classified as
held-to-maturity to the available-for-sale category with an unrealized loss of
$15.9 million. With the significant increase in interest rates in 1994, the
market value of the available-for-sale securities at December 31, 1994 resulted
in a net pre-tax unrealized loss of $79.1 million and a deferred tax benefit of
approximately $6.5 million. A tax valuation allowance of approximately $20.3
million was established for the additional tax benefit that could be recognized
at that time. In addition, deferred policy acquisition costs were increased by
$12.8 million, net of a deferred tax liability of $6.5 million, in conjunction
with SFAS 115. As a result of the implementation of SFAS 115, the Company's
stockholders' equity as of December 31, 1994 was a deficit of $(32) million due
to the reporting of the unrealized losses, net of income tax benefit and
deferred acquisition cost adjustment, on debt securities classified as
available-for-sale of $(59.7) million. During 1994, changes in market interest
rates caused fluctuations in the value of securities classified as
available-for-sale which created volatility in the Company's stockholders'
equity (deficit). At February 28, 1995, the unrealized pre-tax loss had
decreased from December 31, 1994 by approximately $26 million.
Capital Issues
During the period 1992 through 1993, SBM Life had significant growth
and to support this growth the Company made capital infusions in SBM Life of
$7,880,000 in 1993 and $8,950,000 in 1992 from the sources described below.
However, in 1994, as a result of the adoption of SFAS 115 and its impact on
stockholders' equity as a result of rising interest rates and the resulting
unrealized losses in the Company's investment portfolios, regulatory concerns
regarding capital, and the reduction in SBM Life's A.M. Best rating, the Company
had to look to outside sources of capital and entered into the Sale Transaction.
See "Sale of Company Operations".
During the past years the Company had recognized its need to raise
capital to support growth. During 1992 the Company retained an investment banker
and in December 1992 the Company entered into a Preferred Stock and Note
Purchase Agreement to raise $l9,000,000 of capital. This transaction was
completed in September of 1993. The investors were a group composed of SBM
Partners L.P. (of which Head Insurance Investors L.P. and Jupiter Industries,
Inc. are the general partners), and Georgia International Life Insurance
Company. For an additional description of this transaction and the Preferred
Stock, see Note 13 to the Company's Financial Statements in Item 8 hereof.
The proceeds from the sale of the Preferred Stock were used as follows:
$11,250,000, as a capital infusion into SBM Life, $1,450,000 for Preferred Stock
issuance costs, $3,000,000 to repay the Company's outstanding line of credit,
$1,500,000 for common stock repurchase as described below, and $1,800,000 for
general corporate purposes.
In December of 1993, the Company commenced a tender offer for up to
98,296 shares of its outstanding common stock. The tender offer was completed in
January of 1994. The Company received tenders of approximately 530,000 shares
and, in accordance with the terms of its offer, re-acquired 98,296 shares, or
approximately 18.6% of the total tendered shares, at a price of $15.26 per
share. The re-acquired stock represented 4.3% of the Company's total outstanding
common stock and 2.8% of the Company's total outstanding voting stock.
Effective December 31, 1993 the Company transferred the stock of its
wholly-owned subsidiary, SBM Certificate, to SBM Life as a capital contribution.
As such, SBM Certificate is an indirect subsidiary of the Company. The initial
effect of the capital contribution was to increase the capital of SBM Life by
$3,880,000.
The Company completed the sale of State Bank in August of 1992. The
proceeds from the sale were used to repay the Company's secured loan ($5
million) and for additional capital infusions of $1,700,000 and $750,000 to SBM
Life and SBM Certificate, respectively.
To improve its capital position, SBM Life entered into an annuity
coinsurance agreement. The total account value ceded in annuity coinsurance as
of December 31, 1994 and 1993 was approximately $105 million and $117 million,
respectively.
Dividends and Regulatory Matters
The ability of the Company to pay cash dividends to shareholders was
dependent upon the amount of dividends received from the Subsidiaries as well as
regulatory and rating agency requirements. See Note 13 of the Company's
Financial Statements in Item 8 hereof for a summary of dividend restrictions and
capital requirements for each Subsidiary.
For regulatory purposes, SBM Life was required to maintain its
financial statements in accordance with statutory accounting principals. The
Company's life insurance subsidiary had strengthened its reserves on five policy
forms in accordance with Proposed Actuarial Guideline GGG. The Minnesota
Department of Commerce and the California Insurance Department, the Company's
domiciliary and commercially domiciliary states, respectively, had approved the
reserve strengthening over a three-year period beginning in 1994. The
strengthening totaled $12.3 million and according to the three year phase-in
provision, one-third of this total, or $4.1 million, was included in reserves in
the 1994 statutory basis financial statements of the subsidiary with the
remaining two-thirds to be reflected equally in 1995 and 1996. The NAIC also
enacted certain changes to these principles for 1992, which included the
establishment of an Asset Valuation Reserve ("AVR") and the Interest Maintenance
Reserve ("IMR") to replace the Mandatory Securities Valuation Reserve. The
combination of the reserve change, AVR and IMR would have reduced statutory
capital and surplus over time, and may have reduced the dividend-paying ability
of SBM Life.
The NAIC developed minimum risk-based capital requirements for life
insurance companies. The formulas for determining the amount of risk-based
capital specified various weighting factors that are applied to financial
balances or various levels of activity based on the perceived degree of risk.
Regulatory compliance is determined by a ratio of a company's regulatory total
adjusted capital, as defined, to its authorized control level risk-based
capital, as defined. Companies below specific trigger points or ratios are
classified within certain levels, each of which requires specified corrective
action. As of December 31, 1994, SBM Life had sufficient capital under these
risk-based capital requirements.
For regulatory matters see Note 13 of the Company's Financial
Statements in Item 8 hereof.
LIQUIDITY
Liquidity for the Company was measured by the ability of each
Subsidiary or other business segment (as described above) to provide adequate
cash flows to meet the needs of the financial instruments it had issued and its
operating expenses. Each of the Subsidiaries maintained liquidity based on past
history and expected future cash flow needs.
Annuity and Life Insurance Segment
The liquidity requirements of SBM Life were based upon its required
ability to pay scheduled and unscheduled benefit payments (mainly on annuities)
and operating expenses. SBM Life had performed cash flow testing which did not
reveal any significant liquidity inadequacies which could not be handled in the
normal course of business. Sources of liquidity include interest payments on
investments, scheduled and unscheduled principal payments on investments,
premium payments and deposits, and the sale of investments. The changes in the
CMO marketplace had extended the lives of SBM Life's CMO portfolio and had
significantly reduced the amount of principal received by SBM Life from its CMO
investments. In addition, the A.M. Best rating reduction and the adverse
newspaper articles had increased surrender and withdrawal requests. All of these
items indicated the need for additional liquidity for SBM Life. As such, SBM
Life increased its short term investments including short-term corporate bonds
to $57 million as of December 31, 1994, and as of mid-March 1995 increased its
short term investments, including short-term corporate bonds, by an additional
$22 million. SBM Life believed that this provided it with ample liquidity for
payment of surrenders and withdrawals.
Annuity surrenders and withdrawals for SBM Life for 1994, 1993 and 1992
were $84 million, $64 million and $40 million, respectively. During the seven
years ended December 31, 1994, SBM Life had significant growth with its annuity
reserves increasing from $143 million at December 31, 1987 to $787 million (net
of ceded reserves) at December 31, 1994. With this increasing level of reserves,
a corresponding increase in surrenders and withdrawals was expected. Many of the
annuities sold by SBM Life allowed the annuitant a 10% per year free withdrawal
privilege. As the number of outstanding policies increased, a certain percentage
of annuities elected to use this feature. Also, each year a larger number of
policies had the surrender charge period expire, which allowed annuitants to
surrender their policies without any penalty. On one particular product a
significant number of policies had reached that point and surrenders on that
product increased. In addition, the higher interest rates during 1994 caused
some increase in withdrawals as annuity holders looked for other investments
which had higher rates of return. As mentioned previously, the change in SBM
Life's A.M. Best rating and the adverse newspaper articles also caused an
increase in withdrawals. In the fourth quarter of 1994, withdrawals and
surrenders (exclusive of withdrawals and surrenders on ceded business) totaled
approximately $22.9 million. This activity continued into 1995, with withdrawals
and surrenders through March 31, 1995 totaling approximately $44.2 million.
Face Amount Certificate Segment
The asset/liability strategy of SBM Certificate had been to use a
combination of longer-term assets (mainly GNMA and FNMA securities, GNMA and
U.S. Government Agency CMOs, and mortgages) and short-term commercial paper to
match against its face amount certificate liabilities. While GNMA and FNMA
securities have a stated maturity of 30 years, the typical average life of such
securities is seven to twelve years due to prepayments. However, due to the
increasing interest rate environment in 1994 the remaining average life of SBM
Certificate's GNMA and FNMA Certificates was approximately nine to ten years.
During 1993 and early 1994 SBM Certificate increased the portion of the
portfolio invested in U.S. Government Agency CMOs backed by U.S. Government
Agency securities to approximately 43% at December 31, 1994. SBM Certificate
purchased these CMOs with a weighted average life of 4.5 years and the CMO
portfolio at December 31, 1994 had a weighted average life of seven to eight
years.
The average lives of the GNMAs, FNMAs, and CMOs had, in the past,
provided a relatively good match with the certificates, which had an initial
term of three years, but historically had had a high level of retention by
certificate holders (approximately 65-70% of all matured certificates had been
renewed). As such, the certificate's average life (6-7 years based on the
historical renewal rates above) was considerably longer than the initial stated
term of three years, and approached the GNMA, FNMA and CMO average lives. In
1994, however, the interest rate environment extended the average lives of these
securities, as noted above, beyond the average life of the certificates and
principal prepayments on the securities slowed considerably. As a result, to
assure adequate liquidity, in the first quarter of 1995, SBM Certificate sold
$5.4 million of available-for-sale portfolio securities and recognized pre-tax
losses on the sales of $314,000. SBM Certificate believed that it had sufficient
resources to meet its liquidity needs at December 31, 1994.
The residential and commercial mortgages held by SBM Certificate,
which, at December 31, 1994, made up approximately 6.7% of SBM Certificate's
qualified investments, had an average weighted maturity of approximately six
years.
The GNMA and FNMA certificates, CMOs, bonds, and other securities
invested in by SBM Certificate were readily marketable, and in most instances
provided monthly principal and interest payments as a source of liquidity. It
should be noted, however, that in connection with certain types of investments
in which SBM Certificate invested, depending upon the terms of such amount of
prepayments of principal may not have begun until a certain date, or may have
been affected in timing and amount by prepayments of underlying obligations. In
1993, prepayments increased significantly as many higher interest rate mortgages
were refinanced as a result of the low interest rate environment. However, in
1994 prepayments decreased due to generally increasing interest rates in 1994
which dramatically slowed down mortgage refinancing and the related prepayments
on the CMOs and GNMA and FNMA certificates.
Inflation
The primary effect of inflation on the Company had been increases in
operating expenses of which salaries were a significant portion. In addition,
government economic policy resulted in changes in interest rates which affected
the Company's sales of products, investment income, stockholders' equity and
overall interest spread.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
1150 Liquidation Corporation
(formerly SBM Company)
Minneapolis, Minnesota
We have audited the accompanying statement of net assets in liquidation of 1150
Liquidation Corporation, formerly SBM Company (the Company), as of December 31,
1995, and the related statement of changes in net assets for the year then
ended. In addition, we have audited the accompanying consolidated balance sheet
of 1150 Liquidation Corporation as of December 31, 1994, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the two years in the period ended December 31, 1994. 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 audits.
We conducted our audits in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, the Board of Directors of
1150 Liquidation Corporation approved a plan of liquidation in May 1995, and the
Company commenced liquidation shortly thereafter. As a result, the Company
changed its basis of accounting from the going concern basis to the liquidation
basis, effective January 1, 1995.
In our opinion, such financial statements present fairly, in all material
respects, the net assets in liquidation of 1150 Liquidation Corporation at
December 31, 1995, the changes in its net assets in liquidation for the year
then ended in conformity with generally accepted accounting principles on the
bases described in the preceding paragraph. Also, in our opinion, the
consolidated financial statements of the Company present fairly, in all material
respects, their financial position (going concern basis) at December 31, 1994,
and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 1994, in conformity with generally accepted
accounting principles.
/s/Deloitte & Touche LLP
Minneapolis, Minnesota
April 11, 1996
115O LIQUIDATION CORPORATION
(FORMERLY SBM COMPANY)
STATEMENT OF NET ASSETS IN LIQUIDATION (LIQUIDATION BASIS)
AS OF DECEMBER 31, 1995
ASSETS
Cash and Cash Equivalents $ 6,048,325
Federal Income Tax Refund 118,831
Escrowed Funds (Note 2) 846,419
Other Assets 13,188
------------
7,026,763
LIABILITIES
Accounts Payable 55,166
Reserve for Estimated Costs
During the Period of Liquidation (Note 2) 577,527
Deferred Compensation for Former Directors 92,968
------------
Total Liabilities 725,661
Common Stock Held by Employee
Benefit Plans - 304,693 shares (Note 2) 1,608,906
------------
Net Assets $ 4,692,196
============
Common Shares Outstanding --
2,179,714 less 304,693 Shares
Held by Employee Benefit Plans 1,875,021
============
Net Assets per Common Share Outstanding (Note 2) $ 2.50
============
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION (LIQUIDATION BASIS)
YEAR ENDED DECEMBER 31, 1995
NET ASSETS (DEFICIT) AT DECEMBER 31, 1994 $(31,976,759)
Income from Liquidating Activities (Note 1) 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
============
See notes to financial statements.
115O LIQUIDATION CORPORATION
(FORMERLY SBM COMPANY)
CONSOLIDATED BALANCE SHEET (GOING CONCERN BASIS)
AS OF DECEMBER 31, 1994
ASSETS
Investments:
Debt securities available-for-sale at market $ 653,207,076
Debt securities held-to-maturity at amortized cost 13,944,234
Marketable equity securities at market 683,089
Mortgage loans 36,257,214
Policy loans 22,153,936
Other invested assets 1,694,506
Short-term investments 37,602,490
-------------
Total investments 765,542,545
Cash and cash equivalents 3,565,693
Accrued investment income 8,470,103
Receivable from reinsurer 105,806,093
Deferred policy acquisition costs, less accumulated amortization 76,950,470
Land, building, and equipment, net 1,417,796
Deferred income 3,091,000
Refundable income taxes 3,003,386
Other assets 1,517,067
-------------
$ 969,364,153
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Future policy benefits $ 910,104,179
Face amount certificate reserves 60,355,015
Accounts payable and other liabilities 9,252,047
Deferred compensation and retirement benefits for officers 1,227,284
-------------
Total liabilities 980,938,525
-------------
Mandatory redeemable voting convertible preferred stock,
par value $1,000 (1994 includes $760,000 dividends in
arrears). Authorized 19,000 shares, issued 19,000 shares,
liquidation value $19,000,000 plus dividends in arrears 18,485,868
Common stock held by employee benefit plans; 304,693 shares 1,916,519
Common stock, no par value. Authorized 20,000,000 shares;
issued and outstanding 2,179,714 shares, less 304,693
shares held by employee benefit plans 2,945,606
Unrealized losses on marketable equity securities (254,388)
Unrealized losses on debt securities (59,691,765)
Retained earnings 25,023,788
-------------
Total stockholders' deficit (31,976,759)
-------------
$ 969,364,153
=============
See notes to financial statements.
115O LIQUIDATION CORPORATION
(FORMERLY SBM COMPANY)
CONSOLIDATED STATEMENTS OF INCOME (GOING CONCERN BASIS)
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Revenues:
Net investment income $ 62,887,722 $ 60,884,031
Underwriting, sales service and distribution fees 3,124,299 3,618,848
Life insurance premiums 392,801 415,141
Advisory and other fees from affiliated mutual funds 1,481,074 1,486,052
Realized investment (losses) gains, net (9,799,377) 3,828,598
Other income 1,845,231 1,814,676
------------ ------------
Total revenues 59,931,750 72,047,346
------------ ------------
Benefits and expenses:
Provisions for benefits:
Annuities and life insurance 42,466,335 44,659,544
Face amount certificate reserves (interest) 3,575,075 4,089,905
Loan and real estate losses 320,000 718,908
Death and other benefits 471,419 489,768
Commissions, wages and benefits 7,148,918 6,795,909
Interest expense 124,363 598,450
Amortization of deferred policy acquisition costs 4,275,361 4,076,736
Occupancy and equipment 1,370,685 1,433,732
State guaranty association assessments 1,791,617 1,463,441
Other expenses 3,259,408 2,173,256
------------ ------------
Total benefits and expenses 64,803,181 66,499,649
------------ ------------
Income (loss) before income taxes (4,871,431) 5,547,697
Income taxes (benefits) (1,267,000) 1,800,000
------------ ------------
Net income (loss) $ (3,604,431) $ 3,747,697
============ ============
Discount accretion on preferred stock $ 136,188
Mandatory redeemable voting convertible preferred stock dividends $ 1,520,000 $ 657,802
============ ============
Net income (loss) applicable to common stock $ (5,260,619) $ 3,089,895
============ ============
Earnings per common share:
Primary:
Net income (loss) $ (2.40) $ 1.35
============ ============
Fully diluted:
Net income (loss) $ (2.40) $ 1.32
============ ============
Weighted average common shares outstanding (primary) 2,187,481 2,281,673
Weighted average common shares outstanding (fully diluted) 2,187,481 2,971,923
</TABLE>
See notes to financial statements.
115O LIQUIDATION CORPORATION
(FORMERLY SBM COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIT) (GOING CONCERN BASIS)
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED
LOSSES ON UNREALIZED TOTAL
MARKETABLE LOSSES STOCKHOLDERS'
COMMON EQUITY ON DEBT RETAINED EQUITY
STOCK SECURITIES SECURITIES EARNINGS (DEFICIT)
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1992 $ 3,101,197 $ (213,024) $ $ 27,031,218 $ 29,919,391
Net income 3,747,697 3,747,697
Dividends declared:
Common stock, $.40 per share (911,925) (911,925)
Mandatory redeemable voting
convertible preferred stock, 8% (657,802) (657,802)
Decrease in unrealized loss on
marketable equity securities, net
of income tax benefit 47,282 47,282
Accretion of discount on mandatory
redeemable voting convertible
preferred stock (38,994) (38,994)
Allocation of net income in excess of
dividends to common stock held by
employee benefit plans (146,175) (146,175)
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1993 3,101,197 (165,742) 29,024,019 31,959,474
Net loss (3,604,431) (3,604,431)
Dividends declared:
Common stock, $.10 per share (217,971) (217,971)
Mandatory redeemable voting
convertible preferred stock, 8% (760,000) (760,000)
Dividends in arrears on mandatory
redeemable voting convertible
preferred stock, 8% (760,000) (760,000)
Adoption of SFAS No. 115 (Note 3) 3,800,000 3,800,000
Increase in unrealized loss on
marketable equity securities, net
of income tax benefit (88,646) (88,646)
Accretion of discount on mandatory
redeemable voting convertible
preferred stock (136,188) (136,188)
Allocation of net loss, dividends and
carrying value to common stock
held by employee benefit plans 2,876,307 2,876,307
Increase in unrealized loss on
debt securities (63,491,765) (63,491,765)
Purchase of 100,041 shares including
acquisition costs of $42,193 (155,591) (1,397,948) (1,553,539)
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1994 $ 2,945,606 $ (254,388) $(59,691,765) $ 25,023,788 $(31,976,759)
============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
115O LIQUIDATION CORPORATION
(FORMERLY SBM COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(GOING CONCERN BASIS)
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,604,431) $ 3,747,697
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating
activities
Provisions for losses and benefits:
Annuities and life insurance 42,466,335 44,659,544
Face amount certificate reserves (interest) 3,575,075 4,089,905
Loan and real estate losses 320,000 718,908
Depreciation 302,491 318,025
Amortization of deferred policy acquisition costs 4,275,361 4,076,736
Deferred income taxes (786,000) (252,000)
Premium amortization, net (4,537,537) (4,396,269)
Realized investment (gains) losses, net 9,799,377 (3,828,598)
Decrease (increase) in operating assets:
Accrued investment income (2,764,904) (120,792)
Receivable from reinsurer (300,934) 363,943
Deferred policy acquisition costs capitalized (5,205,762) (7,932,570)
Refundable income taxes (2,648,568) 282,256
Other assets (160,953) 991,081
Increase (decrease) in operating liabilities:
Accounts payable and other liabilities 899,236 1,388,655
Deferred compensation and retirement benefits for officers (8,764) (68,268)
------------- -------------
Net cash provided by operating activities 41,620,022 44,038,253
Cash flows from investing activities:
Proceeds from maturities and repayments of debt securities:
Available-for-sale 67,792,568
Held-to-maturity 22,833,787 311,637,232
Proceeds from other investments sold 314,979
Proceeds from sales of debt securities:
Available-for-sale 176,422,655
Held-to-maturity 11,983 103,871,141
Cost of debt securities acquired:
Available-for-sale (242,280,515)
Held-to-maturity (16,678,534) (513,801,212)
Cost of other investments purchased (2,880)
Sales (purchase) of short-term investments, net (28,729,158) 6,710,632
Loan principal repayments 17,472,582 22,503,776
Loans funded (11,142,529) (10,654,812)
Proceeds from (additions to) land, building and equipment, net 2,170,973 (203,697)
------------- -------------
Net cash used in investing activities (11,814,089) (79,936,940)
Cash flows from financing activities:
Payments to face amount certificate holders (15,615,986) (9,596,304)
Reserve payments from face amount certificate holders 5,332,840 5,984,921
Deposits received from annuitants, net 73,987,946 99,636,112
Payments to annuitants (86,284,317) (65,545,851)
Sale of preferred stock 11,000,000
Expenses on issuance of preferred stock (1,299,314)
Purchase of common stock (1,569,268) (193,375)
Dividends on common stock (217,971) (683,925)
Dividends on preferred stock (760,000) (657,802)
Principle payments on notes payable (2,012,210) (3,175,575)
------------- -------------
Net cash provided by financing activities (27,138,966) 35,468,887
Net increase (decrease) in cash 2,666,967 (429,800)
Cash at beginning of year 898,726 1,328,526
------------- -------------
Cash at end of year $ 3,565,693 $ 898,726
============= =============
</TABLE>
See notes to financial statements
115O LIQUIDATION CORPORATION
(FORMERLY SBM COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
(LIQUIDATION BASIS)
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
BASIS OF PRESENTATION
The financial statements at December 31, 1995 and the year then ended
include the accounts of 1150 Liquidation Corporation, formerly SBM
Company (the Company). These financial statements have been prepared in
accordance with generally accepted accounting principles.
PLAN OF LIQUIDATION
A Plan of Liquidation and Dissolution (the Plan of Dissolution) was
adopted by the Company's Board of Directors and approved by the holders
of a majority of the Company's outstanding shares of common stock at
the annual meeting on May 18, 1995. The Plan of Dissolution provides
for the proposed sale of substantially all the assets and business
operations of the Company, including State Bond and Mortgage Life
Insurance Company, SBM Certificate Company, SBM Financial Services,
Inc. (the Subsidiaries), and the State Bond Mutual Funds as well as the
liquidation and dissolution of the Company.
As a result, the Company has adopted the liquidation basis of
accounting, effective January 1, 1995. This basis of accounting is
considered appropriate when the Company has adopted a plan of
liquidation and liquidation appears imminent, the Company is no longer
considered a going concern, and the net realizable value of the
Company's assets are reasonably determined. Under the liquidation basis
of accounting, assets are stated at their estimated net realizable
values and liabilities are stated at their anticipated settlement
amounts.
NATURE OF OPERATIONS
Effective May 31, 1995, 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 (and not reflected in the
liabilities assumed in the first table below), 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
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 certain amounts related to 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 operations and assets $ (6,542,608)
============
At the closing of the above transaction, 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.
A summary of significant activities from January 1 to December 31, 1995
are as follows:
Loss from liquidating activities $ (1,531,534)
Decrease in unrealized losses on marketable equity
and debt securities, net of taxes and deferred
acquisition costs at date of sale 50,736,738
Loss from sale of Company operations (6,542,608)
------------
$ 42,662,596
============
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LIQUIDATION BASIS OF ACCOUNTING
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 anticipated at that date were
reasonable estimates of costs required to liquidate its remaining
assets and to defend 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 and various IRS audits, and the expenses and
liabilities incurred in connection therewith. The statement of net
assets in liquidation at December 31, 1995 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 exceeds the estimates included in the
statement of net assets in liquidation at December 31, 1995. In
addition, the financial statements do not reflect any investment income
that is anticipated to be earned subsequent to December 31, 1995.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that effect 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.
INCOME TAXES
The federal income tax refund is based on the amounts currently due
from the Internal Revenue Service as reflected on the Company's 1995
federal tax return. Deferred income taxes were not significant at
December 31, 1995. Cash paid for income taxes for the year ended
December 31, 1995 was $637,000.
The Company also is undergoing an audit by the Internal Revenue Service
of the years 1986-1990 and 1991-1994. An adjustment agreement, which is
not material to the Company's financial condition, has been executed by
the Company and the Internal Revenue Service with respect to the former
years and will be effective if and when approved by the Joint Committee
of Congress. A report is expected in mid 1996 with respect to the audit
of the later years and preliminary information is to the effect that
any adjustments will not be material to the Company's financial
condition.
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 on the statement of net assets in liquidation at
December 31, 1995 and outside of stockholders' equity on the
consolidated balance sheet at December 31, 1994 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.
The value of the shares owned by the Plans on the statement of net
assets in liquidation at December 31, 1995 has been shown as the
pro-rata estimated liquidation value of all of the Company's common
shares, after the $2.75 dividend paid in September 1995, pursuant to
the Plan of Dissolution described in Note 1. In the December 31, 1994
consolidated balance sheet the share value was shown as the appraised
fair market value of the shares ($6.29) since such value significantly
exceeded the adjusted book value of such shares as determined by the
Company. The appraised value at June 30, 1994 was used in the December
31, 1994 consolidated balance sheet as an approximation of the December
31, 1994 appraised value because the Company had not yet
received an appraisal as of the later date.
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 value. The Company maintains that such value under the Put
Agreement must be based on the books of the Company which, after the
implementation of the SFAS 115 on January 1, 1994, must use the fair
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 against the Trustee of the Plans in Minnesota District Court in
March 1995 to determine its repurchase obligation and the applicable
price under the Put Agreement. Additionally, the Company's largest
shareholder (Schonlau Trust) is a party to the action. If the views of
the Company or those of the Schonlau Trust 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 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 December 31, 1995 statement of net assets in
liquidation to be $5.25 per share before the 1995 dividend distribution
of $2.75 per share). If the view of the Plans' trustee prevail, the
Company will be required to repurchase all of the shares held by the
Plans at December 31, 1994 at the adjusted book value of such shares on
the books of the Company using the amortized cost of the Company's
investment portfolios, estimated to be approximately $14.50 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 December 31, 1995 of increasing the value of
the shares held by the Plans by approximately $2.8 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 $1.50 per
share.
The litigation is expected to reach the trial state in late 1996 and
the court's decision at trial may be appealed. Accordingly, there may
not be a definitive resolution of this matter for two years or longer.
However, on November 13, 1995, the parties agreed upon a settlement of
the litigation and executed a settlement agreement in principle.
Counsel for the parties are working on a final and more formal
settlement agreement, although no assurance can be given that the final
agreement will be reached because of, among other things, presently
unresolved differences as to the procedural approach regarding court
approval. 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 of 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 in connection with
litigation. In addition, the Company would pay up to $100,000 of the
costs incurred by the Schonlau trust in the litigation. If paid, these
amounts would reduce the amounts available for distribution in
liquidation to non-Plan shareholders by approximately $0.66 per
non-Plan share.
ESCROWED FUNDS
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
YEARS ENDED DECEMBER 31, 1994 AND 1993
(GOING CONCERN BASIS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of SBM
Company (the Company) and all wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated
in consolidation. In addition, for comparability, certain prior year
amounts have been reclassified to conform with the current year
presentation.
The financial statements for the two years ended December 31, 1994 and
1993 were prepared on a historical basis of accounting and do not
include any purchase accounting, liquidation accounting or other
adjustments which would result upon completion of the proposed sale and
resulting liquidation.
INVESTMENTS
Effective January 1, 1994, the Company adopted Financial Accounting
Standards Board Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities.
The primary impact of SFAS No. 115 is to require the Company to
classify its debt securities into categories based upon the Company's
intent relative to the eventual disposition of the securities. SFAS No.
115 establishes three categories of securities: (1) Held-to-maturity
securities are comprised of securities which the Company has the
positive intent and ability to hold to maturity. These securities are
carried at amortized cost. SFAS No. 115 prevents the Company from
classifying a security as held-to-maturity if the security might be
sold for liquidity needs or based on changes in interest rates. (2)
Available-for-sale securities may be sold to address liquidity and
other needs of the Company. These securities are held at fair value on
the balance sheet with an increase or decrease to stockholders' equity
for unrealized gains or losses after the recording of deferred income
taxes. (3) Trading securities are securities acquired for the purpose
of selling them in the near term. The Company does not intend to
classify any of its securities as trading securities.
Upon adoption of SFAS No. 115, the Company analyzed its debt securities
and determined that to maintain flexibility in its investment portfolio
it would classify a significant portion of its investment portfolio as
available-for-sale even though management did not have the intention of
selling these securities. As such, as of January 1, 1994, approximately
$505.6 million of its debt securities were classified as
available-for-sale with approximately $254.2 million classified as
held-to-maturity. The fair value of the available-for-sale securities
created a net unrealized after-tax gain of $3.8 million, after
adjustment for deferred acquisition costs, at January 1, 1994. Due to
an investment portfolio repositioning program in mid-1994, the
Company's life insurance subsidiary transferred approximately $234
million of securities classified as heldto-maturity to the
available-for-sale category with an unrealized loss of $15.9 million.
With the significant increase in interest rates in 1994, the market
value of the available-for-sale securities at December 31, 1994
resulted in a net pretax unrealized loss of $79.1 million and a
deferred tax benefit of approximately $6.6 million. A tax valuation
allowance of approximately $20.3 million has been established for the
additional tax benefit that cannot be recognized at this time. In
addition, deferred policy acquisition costs have been increased by
$12.8 million, net of a deferred tax liability of $6.5 million, in
conjunction with SFAS No. 115. This amount is included in the
stockholders' equity section for unrealized losses on debt securities
available-for-sale. During 1994, changes in market interest rates and
other factors have caused fluctuations in the value of securities
classified as available-for-sale, thereby creating volatility in the
Company's stockholders' equity.
Marketable equity securities are carried at fair value, and any change
in unrealized losses, net of deferred income taxes, is recorded
directly against stockholders' equity (deficit).
The fair values for actively traded bonds, such as GNMA and FNMA
Certificates, are based on quoted market prices. The fair values of
collateralized mortgage obligations (CMOs) are based on quotes from
independent brokers. Considerable judgment is required in interpreting
market data to develop estimates of fair value for CMOs; accordingly,
these quotes are not necessarily indicative of the amounts that could
be realized or would be paid in a current sale of the security. The
fair values of equity securities are based on closing market quotations
or on estimates from independent broker-dealers and pricing services.
When evidence indicates there is decline in the underlying value of
individual investments that may not be temporary, such investments are
written down to reflect such impairment by a charge to realized gains
(losses) in the consolidated statements of income. Realized gains or
losses on the sale of investments are computed on the basis of specific
identification of investment costs.
Mortgage loans on real estate are carried at amortized cost less an
allowance for loan losses.
Real estate acquired in satisfaction of loans is stated at the lower of
cost or fair value, less cost of disposition, at the date acquired. If
there are subsequent declines in market value, the property is adjusted
to fair value through current earnings. Foreclosed real estate is
included as a component of other invested assets.
Securities held-for-sale were carried at the lower of amortized cost or
market.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses provides for potential losses when
other-than-temporary declines have occurred in the value of the real
estate and other assets securing the loans. The allowance is based upon
management's evaluation of a number of factors, including loan loss
experience, a continuing review of problem loans and current and
anticipated economic conditions that may affect the borrower's ability
to repay the loan. The allowance is increased by provisions charged to
operating expense and reduced by net charge-offs. Loans are placed on
nonaccrual status when management believes the collection of interest
is uncertain, generally when payments are more than three months past
due.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring and issuing new life insurance policies, annuity
contracts and face amount certificates, principally commissions,
expenses of issuance and underwriting and certain sales expenses have
been deferred. Deferred policy acquisition costs applicable to annuity
contracts are amortized over the lives of the policies in relation to
the present value of estimated gross profits from investment and
expense margins. The deferred policy acquisition costs applicable to
traditional life insurance policies are amortized to income over the
premium-paying periods of the related policies in proportion to the
ratio of the expected annual premium revenues to total anticipated
premium revenues from the life insurance policies. Expected premium
revenue was estimated using the same actuarial assumptions as were used
in calculating the liabilities for future policy benefits. Deferred
acquisition costs applicable to face amount certificates are amortized
on a straight-line basis over three years.
LAND, BUILDING AND EQUIPMENT
Depreciation is computed using the straight-line method over estimated
useful lives of thirty-three years for the building and related
improvements and from three to twenty years for equipment. Accumulated
depreciation was $2,470,302 at December 31, 1994.
FUTURE POLICY BENEFITS
The liability for future policy benefits for traditional life insurance
has been computed by a net level premium method based on assumptions as
to investment yields, mortality, withdrawals and dividends. The
assumptions are based on projections of past experience and include
provisions for possible unfavorable deviation. These assumptions are
made at the time the contract is issued.
The liability for future policy benefits for flexible premium and
single premium deferred annuities represents accumulated account values
with interest currently at 4.50% to 8.0%.
The Company records ceded reinsurance receivables, including amounts
related to paid and unpaid benefits and amounts related to liabilities
for future policy benefits, as assets and liabilities on the Company's
consolidated balance sheet. As of December 31, 1994, receivable from
reinsurer and future policy benefits on the consolidated balance sheet
include reinsurance receivables of $105,428,796.
FACE AMOUNT CERTIFICATE RESERVES
Face amount certificates issued by the Company's subsidiary entitle
certificate holders, who have made either single or installment
payments, to receive a definite sum of money at maturity. Certificate
reserves earn interest and cash surrender values are less than
accumulated certificate reserves prior to maturity dates. Certificate
reserves are maintained for advance payments by certificate holders and
accrued interest thereon, and for interest earned and accrued due to
additional interest rates declared. The reserve accumulation rates,
cash surrender values and certificate reserves, among other matters,
are governed by the Investment Company Act of 1940.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes (SFAS No. 109) in accounting for
income taxes.
EARNINGS PER SHARE
Primary earnings per share were computed by dividing net income (loss),
less dividends on mandatory redeemable voting convertible preferred
stock, by the weighted average number of common shares outstanding
during each year. The mandatory redeemable voting convertible preferred
stock is not considered to be a common stock equivalent. Fully diluted
earnings per share for 1993 assumes conversion of the mandatory
redeemable voting convertible preferred stock into 690,250 weighted
average common shares and a $180,000 adjustment for interest, net of
tax, paid on the convertible promissory note. For 1994, the warrant
(Note 12) and the assumed conversion of the mandatory redeemable voting
convertible preferred stock would have been anti-dilute and are not
considered in primary or fully diluted common shares, respectively.
MANDATORY REDEEMABLE VOTING CONVERTIBLE PREFERRED STOCK
The discount on the mandatory redeemable voting convertible preferred
stock is being accreted through a charge against retained earnings over
ten years using the effective interest method.
UNDERWRITING, SALES SERVICE AND DISTRIBUTION FEES
Sales service fees for selling and servicing life insurance policies
and annuity contracts are recognized at the time a new policy or
contract is written and as premiums are collected from policy and
contract holders thereafter. Underwriting fees for sale of mutual fund
shares and other products are recognized at the time of sale. All
significant intercompany transactions have been eliminated with no
effect on net income since fees received by the Company's sales
subsidiary approximate the costs incurred by the Company and its other
subsidiaries.
PREMIUM REVENUE
Life insurance premiums are reported as earned when due. Benefits and
expenses are associated with earned premiums in a manner that results
in recognition of policy profits over the lives of the related
policies.
Annuity contracts which do not subject the Company to significant risks
arising from policyholder mortality or morbidity are considered
interest-sensitive insurance contracts. Amounts received as payments
for such contracts are not reported as revenues. Revenues for
investment products consist of investment income and policy
administration charges. Contract benefits that are charged to expense
include benefit claims incurred in the period in excess of related
contract values and interest credited to contract values.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL CASH FLOW INFORMATION - Cash paid for interest during the
years ended December 31, 1994 and 1993, was $4,062,114 and $4,784,118,
respectively. Cash paid for income taxes, net of refunds received, for
the years ended December 31, 1994 and 1993, was $2,062,899 and
$2,057,832, respectively.
NONCASH INVESTING AND FINANCING ACTIVITIES - At December 31, 1994, the
Company was $760,000 in arrears for dividends on the mandatory
redeemable voting convertible preferred stock.
During 1993, the Company sold real estate owned property and financed
$2,235,000, of the purchase price. During 1993, the Company foreclosed
on certain mortgage loans and acquired the underlying real estate
collateral. This real estate was then transferred to other invested
assets at the lower of cost or fair value less cost of disposition of
$2,374,951.
During 1993, the Company's $4,000,000 Convertible Promissory Note was
converted into 4,000 shares of the Company's Series A Mandatory
Redeemable Voting Convertible Preferred Stock.
IMPACT OF ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED IN THE FUTURE
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 114 (SFAS No. 114), Accounting by
Creditors for Impairment of a Loan. SFAS No. 114 is effective for
fiscal years beginning after December 15, 1994. The primary effect of
the statement for the Company will be related to the accounting for
impaired commercial mortgage loans. The significant issue addressed is
the utilization of fair value in establishing allowances for impaired
loans. The Company estimates that the effect of adoption of SFAS No.
114 will not be material.
4. INVESTMENTS
Investment securities by type and gross unrealized gains and losses at
December 31, 1994 are presented below:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------- Fair
Cost Gains Losses Value
<S> <C> <C> <C>
Debt securities available-for-sale:
CMOs $ 444,647,746 $ (70,647,798) $ 373,999,948
GNMA certificates 88,584,779 $ 224,202 (2,399,982) 86,408,999
FNMA certificates 19,483,095 11,277 (958,581) 18,535,791
Corporate bond obligations 78,968,327 77,713 (1,580,342) 77,465,698
U.S. Government obligations 100,578,894 (3,782,254) 96,796,640
------------- ------------- ------------- -------------
$ 732,262,841 $ 313,192 $ (79,368,957) $ 653,207,076
============= ============= ============= =============
Debt securities held-to-maturity
CMOs $ 13,108,720 $ (1,987,005) $ 11,121,715
GNMA certificates
FNMA certificates
Corporate bond obligations
State and municipal obligations 667,053 $ 5,601 (34,254) 638,400
U.S. Government obligations 168,461 (15,248) 153,213
------------- ------------- ------------- -------------
$ 13,944,234 $ 5,601 $ (2,036,507) $ 11,913,328
============= ============= ============= =============
Marketable equity securities:
Preferred stocks $ 1,065,645 $ 6,932 $ (392,368) $ 680,209
Common stocks 2,880 2,880
Affiliated mutual funds
------------- ------------- ------------- -------------
$ 1,068,525 $ 6,932 $ (392,368) $ 683,089
============= ============= ============= =============
</TABLE>
CMOs are a discreet pool of mortgage-backed securities which are
generally issued in several classes. Each such class bears or accrues
any interest to which it is entitled at a specified rate or at a rate
calculated in a specified manner. Principal on the mortgage loans
ultimately underlying a series of CMOs may be allocated among the
several classes within such series in a variety of ways, resulting in
classes of CMOs which return principal based on a specified or
scheduled order. By varying the rates or methods of calculating
interest on several classes within a series of CMOs and the allocations
of principal among such classes, a CMO issuer can create "derivative"
securities with a wide range of payment characteristics. These
securities include the inverse floaters and the two-tier index bonds
held by the Company. All of the CMOs held by the Company are
collateralized by mortgage pass-through certificates which are
guaranteed by either FNMA or FHLMC.
As of December 31, 1994, the Company's CMO portfolio consisted of the
following classes based on carrying value:
Available- Held-to-
for-Sale Maturity
Planned amortization class (PACs) 70.5% 38.1%
Two-tiered index bonds (TTIBs) 8.3 20.4
Accrual bond (Z bond) 7.9 12.3
Targeted amortization class (TACS) 3.8 19.1
Inverse floating rate 3.6 .6
Companion bonds (SUPS) 3.5 9.5
Sequential 1.1
Very accurately determined maturity (VADMS) .8
Floating rate .5
----- -----
100.0% 100.0%
===== =====
A PAC CMO has a fixed interest rate and is a class that is designed to
receive fixed principal payments using a predetermined schedule over a
predetermined time period under a wide range of prepayment scenarios
which makes the average life of the security more predictable. A
sequential pay class ("Sequential") has a fixed interest rate and
receives principal payments in a prescribed sequence continuously from
the first payment date until the class is paid off. The average life of
the class will shorten or lengthen based on prepayments.
A TTIB is a CMO class whose coupon is fixed until the applicable index
such as the Cost of Funds Index ("COFI") reaches a specified level
known as the first strike. When the index is higher than a first
strike, the TTIB becomes an inverse floater whose coupon declines to
its floor at the second strike. The floor at the second strike
typically will be zero. On initial purchase date the first strike on a
TTIB is generally two to three hundred basis points (2 - 3%) above the
current level of the applicable index. Consequently, it is unlikely at
the date of purchase that the first strike would be reached in the near
future. At December 31, 1994, the weighted average first strike on the
TTIBs held by the Company was 2.41% above the applicable index and,
accordingly, none of these securities have become inverse floaters. The
Company would purchase TTIBs in anticipation of an interest rate and
prepayment environment in which prepayments would remain at moderate to
high levels, in which event the TTIBs generally would pay off before
the first strike is reached. Nevertheless, if the index applicable to a
TTIB reaches its first strike, the value of the TTIB would be expected
to decline. The average life of a CMO TTIB can vary greatly, depending
upon prepayments.
An accrual bond class of CMOs, also known as Z bond, does not pay
periodic interest, but rather accumulates interest at a specified rate
until the principal of the class becomes payable. The accumulated
interest then is paid when the principal is repaid. An accrued bond
class of CMOs enables the holder to avoid reinvestment risk. However,
in a period of increasing interest rates, an accrual bond class of CMOs
is likely to experience a greater decline in value than a
current-interest class with the same interest rate and principal
payment schedule.
A TAC is similar to a PAC, in that they both have a schedule of
principal repayments. TACs provide more protection against call risk,
but offer less protection against extension risk.
A floating rate security has an interest rate that is based on a known
index such as COFI and is adjusted periodically, typically monthly, as
such index rate changes. The interest rate of the security moves in the
same direction as the index. Inverse floating rate classes are
securities with a coupon that moves in the reverse direction to an
applicable index such as COFI. Accordingly, the coupon rate thereon
will increase as interest rates decrease and decrease as rates
increase, in some cases by a greater amount than the amount of change
in the related index rate. Inverse floating rate securities are
typically more volatile than fixed or floating rate securities. The
current yield on the Company's inverse floating rate securities was
approximately 10.4% at December 31, 1994. Inverse floating securities
would be purchased by the Company to attempt to protect against a
reduction in the income earned on the Company's investments due to a
decline in interest rates and a corresponding increase in prepayments.
The Company would be adversely affected by the purchase of such
securities in the event of an increase in interest rates since the
coupon rates thereon will decrease as interest rates increase, and,
like other fixed income securities, the value will decrease as interest
rates increase.
The Companion (Support) Class acts as a shock absorber. It takes excess
cash flow or does not get a payment so that the PAC and TAC classes can
be paid. This is a CMO class that receives principal payments on any
payment date only if scheduled payments have been made on specific PAC
and TAC classes.
VADMs or Accretion Directed class pays principal from specified
accretions of accrual bonds. VADMs may, in addition, receive principal
from the collateral paydowns. This class is a CMO that has a very
stable average life because the cash flows are directed from the Z
bonds, which receive no principal payments.
The amortized cost and fair value of debt securities at December 31,
1994, by contractual maturity are shown below. Actual maturities may
differ from contractual maturities because the borrower may have the
right to call or prepay with or without call or prepayment penalties.
Amortized Fair
Cost Value
Debt securities available-for-sale:
Due in one year or less $ 33,491,503 $ 33,111,737
Due after one year through five years 141,053,572 136,436,774
Due after five years through ten years 4,950,702 4,665,156
Due after ten years 51,444 48,671
------------ ------------
179,547,221 174,262,338
Mortgage-backed securities 552,715,620 478,944,738
------------ ------------
$732,262,841 $653,207,076
============ ============
Debt securities held-to-maturity:
Due in one year or less $ 50,000 $ 50,000
Due after one year through five years 110,000 109,153
Due after five years through ten years 217,228 214,576
Due after ten years 458,286 417,884
------------ ------------
835,514 791,613
Mortgage-backed securities 13,108,720 11,121,715
------------ ------------
$ 13,944,234 $ 11,913,328
============ ============
The weighted average stated maturity of mortgage-backed securities was
in excess of 20 years as of December 31, 1994. However, after factoring
in estimated prepayments of the underlying loans, the weighted average
duration of the Company's GNMA and FNMA Certificates and CMO portfolio,
in the aggregate, is 8.5 years. Changes in interest rates would affect
the prepayment speed of the underlying mortgages and the average lives
of the securities. If interest rates increased, it would be expected
that the average life of these securities would increase and,
correspondingly, if interest rates decreased, the average life would
decrease.
Gross gains and (losses) in 1994 from debt securities
available-for-sale were $852,201 and $(10,193,636), respectively. Gross
gains from debt securities held-to-maturity in 1994 were $1,864. Gross
gains of $3,976,052 and gross losses of $0 were recognized in 1993,
respectively.
At December 31, 1994, debt securities of the life insurance subsidiary
carried at $14,845,594 were on deposit with various states pursuant to
legal deposit requirements.
Short-term investments consist of commercial paper with maturities of
less than 35 days.
Real estate acquired in satisfaction of loans included in other
invested assets was $1,462,149 at December 31, 1994. During 1994 and
1993, the Company recognized losses on real estate owned of $320,000
and $258,908, respectively.
Net investment income summarized by investment category for the two
years ended December 31, is as follows:
1994 1993
Debt securities available-for-sale $54,509,734
Debt securities held-to-maturity 953,519 $55,147,353
Marketable equity securities 60,154 66,328
Mortgage loans 4,586,675 5,019,123
Policy loans 851,780 717,164
Short-term investments 2,412,970 654,426
----------- ----------
Total investment income 63,374,832 61,604,394
Less investment expenses (487,110) (720,363)
----------- -----------
$62,887,722 $60,884,031
=========== ===========
5. MORTGAGE LOANS
A summary of the changes in the allowance for loan losses as of
December 31 is as follows:
1994 1993
Balance at beginning of year $ 1,609,000 $ 1,617,000
Provision for loan losses 460,000
Less loans charged off (18,000) (468,000)
-------------- ---------------
Balance at end of year $ 1,591,000 $ 1,609,000
============== ===============
At December 31, 1994 and 1993, non-performing loans (past due three
months or more) totaled $0 and $1,836,890, and restructured loans
totaled $6,380,264 and $4,621,475, respectively. Had such loans been
accruing interest in accordance with the original terms, interest
income would have been $706,129 and $770,554 for the years ended
December 31, 1994 and 1993, respectively. Interest income received on
restructured and non-performing loans was $595,296 and $501,154 for the
years ended December 31, 1994 and 1993, respectively.
As of December 31, 1994, approximately 51% of the mortgage loan
property was in Minnesota and 12% was located in Arizona, with the
remainder in various geographic areas of the United States. Mortgage
loans by significant types as of December 31, 1994 were as follows:
industrial/warehouse - 41%; office/warehouse - 35%; office - 12%;
multifamily housing - 5%.
6. DEFERRED POLICY ACQUISITION COSTS
The changes in deferred acquisition costs for the three years ended
December 31 are summarized as follows:
<TABLE>
<CAPTION>
1994 1993
-------------------------- --------------------------
Annuities Face- Annuities Face-
and Life amount and Life amount
Insurance Certificates Insurance Certificates
<S> <C> <C> <C> <C>
Balance at beginning of year $56,399,696 $ 320,373 $52,419,951 $ 444,284
Acquisition costs deferred during the year
(primarily commissions) 4,697,766 507,996 7,555,104 377,466
Acquisition costs amortized during the year 3,756,579 518,782 3,575,359 501,377
SFAS No. 115 adjustment 19,300,000
----------- ----------- ----------- -----------
Balance at end of year $76,640,883 $ 309,587 $56,399,696 $ 320,373
=========== =========== =========== ===========
</TABLE>
7. DEPOSITS OF ASSETS AND MAINTENANCE OF QUALIFIED ASSETS
Under the provisions of its face amount certificates and the Investment
Company Act of 1940 (the Act), the Company's face amount certificate
subsidiary was required to have qualified assets (as defined in Section
28(b) of the Act) of $60,605,015 at December 31, 1994. The Company had
qualified assets of $64,729,182 (such amounts are before reduction of
$385,437 for net unrealized pretax losses on marketable equity
securities and net unrealized pretax losses on debt securities of
$4,890,270 in 1994).
For purposes of determining compliance with the foregoing provisions,
qualified assets are valued in accordance with such provisions of the
Code of the District of Columbia (the "Code") as are applicable to life
insurance companies as required by the Act. Qualified assets for which
no provision for valuation is made in such Code are valued in
accordance with rules, regulations, or orders prescribed by the
Securities and Exchange Commission. These values are the same as the
financial statement carrying value, except that for financial statement
purposes, marketable equity securities and debt securities classified
as available-for-sale are carried at fair value. For qualified asset
purposes, marketable equity securities are carried at cost and debt
securities classified as available-for-sale are carried at amortized
cost.
Pursuant to the requirements of various states, the provisions of the
certificates, depository agreements and the Act, qualified assets were
deposited with custodians to meet certificate liability requirements as
follows at December 31, 1994:
Assets on deposit with:
State government authority $ 170,435
Bank - central depository 64,092,848
--------------
Total deposits $ 64,263,283
==============
Required deposits $ 60,266,136
==============
Certificate loans, secured by applicable certificate reserves, are
deducted from certificate reserves in computing deposit requirements.
Assets on deposit consisted of the following at December 31, 1994:
Investment securities, at cost plus
accrued interest $ 58,871,273
Mortgage loans, at cost less allowances
for loan losses 4,281,089
Other assets on deposit, at cost 1,110,921
--------------
$ 64,263,283
==============
Investment securities consist mainly of GNMA and FNMA certificates,
CMOs, and commercial paper.
8. FACE AMOUNT CERTIFICATE RESERVES
Total Reserves at Minimum
December 31, Interest
1994 (a)
Installment certificates:
Reserves to mature, by series:
120, 215, and 220 $ 554,466 3.25(b)(c)
315 425,412 3.50(c)
------------
979,878
Advance payments 384,282 (d)
Fully paid certificates:
Installments 2,311,547 2.50 - 3.50(c)(e)
Optional settlement 615,811 2.50 - 3.00(c)
Single-payment series 503 56,056,890 2.50(f)
Due to unlocated certificate holders 6,607 None
------------
$ 60,355,015
============
(a) The amount of interest accrued on installment certificates is
reduced by delays in certificate holders making specified
payments. After a nonpayment period of six months, the
certificate is converted to an optional settlement
certificate.
(b) Series 120 certificates provide for additional interest at a
rate dependent upon the Company earning in excess of rates
specified in the certificates. Such additional interest is
credited to the certificate holder's account upon attainment
of the annual anniversary date.
(c) As of December 31, 1994, the Board of Directors has declared
additional interest to be credited on anniversary dates
through 1995 and 1996 as follows:
1995 1996
Series 215 and 220:
Installment certificates 2.25% 2.75%
Optional settlements elected
at maturity 2.25% 2.75%
Unapplied advance payments 2.25% 2.75%
Series 315:
Installment certificates 1.75% 2.25%
Optional settlements elected
at maturity 1.75% 2.25%
Unapplied advance payments 1.75% 2.25%
(d) Minimum interest rates on advance payments are generally the
same as the rates on scheduled installment payments. Interest
on advance payments, however, is accruing at 5.25% and will
continue at this rate through 1995.
(e) Effective July 1, 1980, the rate of reserve accumulation on
fully paid installment certificates having loans outstanding
is limited to the greater of the minimum interest, as set
forth in the certificate, or the interest rate applicable to
the loan.
(f) The Company's Executive Committee declares interest rates for
Series 503 certificates purchased during the designated time
periods. Additional interest rates are assigned based on the
three-year life of the certificate and vary between first,
second, and third anniversary dates. Since 503 certificates
were first issued on July 17, 1986, the combined minimum and
additional interest rates have ranged from 4.20% to 9.50%.
9. NOTES PAYABLE
The Company had a note payable secured by an airplane with interest at
8.5% through December 2000. The airplane was sold at a loss of
approximately $490,000 and the related note was retired in 1994.
10. REINSURANCE
The Company retains up to $50,000 of life insurance and waiver of
premium benefits on any one life, depending on age and classification
of the risk. The excess over the maximum retention is reinsured with
other life insurance companies. Reinsurance ceded could become a
liability in the event that the reinsurers became unable to meet the
obligations assumed under the reinsurance agreements. Life insurance in
force on direct business aggregated approximately $105,929,000 at
December 31, 1994 of which $25,284,000 was ceded.
In a prior year, the Company entered into an annuity coinsurance
agreement in which it ceded a 90% interest in a block of annuity
contracts to a reinsurers. As of December 31, 1994, the account value
and statutory value of the ceded annuities was $105,428,796 and
$103,586,535. Provision for benefits for annuities excludes interest
credited on coinsured annuities of approximately $6.4 million and $7.2
million for the years ended December 31, 1994 and 1993, respectively.
Under the coinsurance agreement, the reinsurer is required to maintain
assets with a statutory value equal to or greater than the statutory
value of the annuities in a trust with the Company as the beneficiary
to secure the obligations of the reinsurer under the coinsurance
agreement. As of December 31, 1994, the statutory value of the assets
securing the coinsurance agreement was $103,487,006.
11. INCOME TAXES
The provision for income taxes (benefit) for the years ended December
31 was as follows:
1994 1993
Current:
Federal $ (675,000) $ 2,069,000
State 86,000 29,000
Deferred federal and state (678,000) (298,000)
------------- --------------
$ (1,267,000) $ 1,800,000
============= ==============
The components of deferred income taxes as of December 31, are
summarized as follows:
<TABLE>
<CAPTION>
1994
---------------------------------------------
Assets Liabilities Total
<S> <C> <C> <C>
Future policy benefits $ 21,002,000 $ (590,000) $ 20,412,000
Unrealized losses on debt securities available-for-sale 26,879,000 26,879,000
Deferred acquisition costs (DAC) (19,496,000) (19,496,000)
DAC recovery on SFAS 115 unrealized losses (6,500,000) (6,500,000)
Depreciation on building and equipment (98,000) (98,000)
Write down of investments not currently deductible for taxes 625,000 625,000
Guaranty fund assessments accrual 1,088,000 1,088,000
Deferred compensation 444,000 444,000
Real estate limited partnership (189,000) (189,000)
Premium capitalization 464,000 464,000
Unrealized losses on marketable equity securities 131,000 131,000
Other 260,000 (214,000) 46,000
------------ ------------ ------------
Total 50,893,000 (27,087,000) 23,806,000
Valuation allowance (20,715,000) (20,715,000)
------------ ------------ ------------
$ 30,178,000 $(27,087,000) $ 3,091,000
============ ============ ============
</TABLE>
Federal income tax expense (benefit) in the consolidated financial
statements is different than the federal statutory rate applied to
pretax income. The reasons for these differences are summarized as
follows:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Federal income tax expense (benefit) at statutory rate $ (1,705,000) $ 1,942,000
Change in estimate of valuation allowance 400,000
Tax-exempt interest (10,000) (46,000)
State income taxes, net of federal benefit 22,000 17,000
Benefit of graduated income tax rates 37,000 (56,000)
Other, net (11,000) (57,000)
------------- --------------
$ (1,267,000) $ 1,800,000
============= ==============
</TABLE>
12. PROFIT SHARING PLANS, COMPENSATION, AND COMMITMENTS FOR FUTURE
RETIREMENT BENEFITS
The Company has a noncontributory employee profit sharing plan whereby
contributions are made to a trust based on percentages of participants'
annual compensation. The Company also has a noncontributory profit
sharing stock plan whereby employees can participate in the ownership
of the Company. Under this plan, the contributions are used by the
trustee primarily to purchase common shares of the Company. During 1994
and 1993, the Company purchased 1,000 and 12,500, respectively, from
the plan.
The two plans generally cover all full-time employees, age twenty-one
and over, with six months of service. Total employer contributions to
the two plans cannot exceed 15% of the total compensation of the
participants. Profit sharing expense for these plans aggregated
$197,851 in 1994 and $270,587 in 1993.
Directors' fees were $200,367 and $79,957 in 1994 and 1993,
respectively, and aggregate salaries of executive officers for the
respective years was $1,187,087 and $1,043,870, excluding amounts under
the agreements described in the following paragraphs.
Under employment agreements with two retired officers, the Company is
required to make payments after retirement to each individual until
death and, thereafter, reduced payments during the lifetimes of their
spouses. The required payments are adjusted for the annual change in
the Consumer Price Index. Required payments by the Company for the two
retired officers for 1995 will be $144,288. The estimated present
value, using a 6% discount rate, of the retirement benefits of the
retired officers at December 31, 1994 was $913,865. The Company has
been accruing the liability for such deferred retirement benefits over
remaining active employment periods by annual charges to expense. In
addition, deferred compensation related to other agreements for certain
officers was $313,419 at December 31, 1994. One of the employment
agreements also contains provisions for consultation and noncompete
restrictions for an aggregate compensation of $66,000 annually through
December 31, 1999.
Total expense provisions for deferred compensation and future
retirement benefits under these agreements aggregated $83,772 in 1994
and $93,252 in 1993.
During 1994, the Company entered into an employment agreement with the
Company's Chief Executive Officer (CEO). The agreement requires the
Company to make a bonus payment of $135,000 if the CEO is terminated
for other than cause or $270,000 if for constructive termination or due
to a change in control of the Company. In addition, the agreement
provides for a bonus of 1% of the net amount of value received by the
Company in any new capital financing which includes substantial sale of
assets by the Company or any subsidiary, issuance of shares or
securities by the Company or any tender offer for shares of the
Company, if such transaction is commenced during the CEO's tenure.
In connection with execution of the employment agreement, the Company
issued the CEO a warrant to purchase five percent of the fully diluted
outstanding stock of the Company at $6.29 per share. The warrant
provides that the CEO may require the Company to repurchase the warrant
if employment is terminated prior to December 31, 1996, other than for
cause, at a redemption price of $300,000 if notice is given before a
change in control and $500,000 if the notice is given subsequent to a
change in control. The Company may also repurchase the warrant
subsequent to the termination of employment at the same terms as
described above.
13. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
MANDATORY REDEEMABLE VOTING CONVERTIBLE PREFERRED STOCK AND CONVERTIBLE
PROMISSORY NOTE
On December 20, 1992, the Company entered into a Preferred Stock and
Note Purchase Agreement (the Agreement) with SBM Partners L.P. (of
which Head Insurance Investors L.P. and Jupiter Industries, Inc. are
general partners) (SBM Partners) and Integon Life Insurance Corporation
(Integon) (SBM Partners and Integon are referred to herein as the
Purchasers) regarding a sale to the Purchasers of an aggregate of
19,000 shares of the Company's Series A Mandatory Redeemable Voting
Convertible Preferred Stock (the Preferred Stock) at a purchase price
of $19,000,000.
The closing of the transaction occurred in two stages. At the first
closing, which occurred on December 23, 1992, the Company issued 4,000
shares of its Preferred Stock to SBM Partners at a purchase price of
$4,000,000. In addition, the Company issued to Integon a $4,000,000
Convertible Promissory Note (the Note). At the second closing, which
occurred on September 21, 1993, the Note was converted into 4,000
shares of Preferred Stock, and the Company sold an additional 11,000
shares of Preferred Stock to the Purchasers for $11,000,000.
The Preferred Stock will initially pay a cumulative preferred dividend
of 8%; however, if the National Association of Insurance Commissioners
(NAIC) rating assigned to the Preferred Stock is increased to a two,
the dividend rate will be lowered to 6%. Each share of Preferred Stock
is convertible at the option of the holder into 62.5 shares of the
Company's common stock, which represents a conversion price of $16.00
per common share.
The terms of the Preferred Stock prohibit the payment of common stock
dividends or redemptions of common stock by the Company at any time
when a dividend on the Preferred Stock is in arrears. As of December
31, 1994, the Company was $760,000 in arrears on its Preferred Stock
dividends. In addition, common stock dividends and redemptions of
common stock are restricted to a maximum amount equal to the sum of $3
million plus 50% of the Company's consolidated net income subsequent to
January 1, 1993. As of December 31, 1994, the aggregate amount
available for common stock dividends and redemptions was $219,257.
The Preferred Stock provides that the shares will be redeemed by the
Company on January 1, 2004, unless the shares are converted earlier
into shares of the Company's common stock. Starting in 1998, the
Company has the option to redeem the Preferred Stock at a price of 105%
decreasing to 100% in 2003. The Preferred Stock also gives the holders
of the Preferred Stock the right to have such shares redeemed prior to
such date upon the occurrence of certain events of default at a price
of 105% until 1998 decreasing to 100% in 2003.
The Purchasers own shares representing approximately 34% (assuming
conversion to common stock) of the voting power of all outstanding
shares of the Company's voting stock and are entitled as a class to
elect at least 34% of the Company's directors or four of the ten member
Board of Directors. The holders of Preferred Stock have voting rights
on matters other than election of directors that are based upon the
number of shares of the Company's common stock into which the Preferred
Stock is convertible. In addition, upon the occurrence of certain
significant defaults by the Company, the Preferred Stockholders would
be permitted to elect a majority of the Board Directors of the Company.
The Company and the Purchasers also have entered into a Registration
Rights Agreement and an Exchange Right Agreement. Under the terms of
the Registration Rights Agreement, the Purchasers have been given the
right to require the Company to publicly register the Preferred Stock
and any shares of the Registrant's common stock issued upon conversion
of such Preferred Stock. The Exchange Right Agreement gives the
Purchasers the right to exchange shares of common stock of the Company
held or acquired by them for shares of the Company's Series B Voting
Convertible Participating Preferred Stock (the "Series B Preferred
Stock"). Unless and until any shares of the Preferred Stock are
redeemed, repurchased, or converted, the Series B Preferred Stock will
vote as a class with the Preferred Stock for purposes of election of
directors, and together with the Preferred Stock, will elect a number
of directors of the Company proportionate to the aggregate ownership
interest of the holders of the Preferred Stock and Series B Preferred
Stock in the Company.
COMMON STOCK HELD BY EMPLOYEE BENEFIT PLANS
The Company's two employee benefit plans own 304,693 and 305,693 shares
of Company common stock at December 31, 1994 and 1993, respectively
(see Note 12). The Company has entered into a written trustee agreement
whereby the Company has agreed to purchase common shares tendered to it
by the trustee from either benefit plan at a price equal to the higher
of adjusted book value or fair market value. Adjusted book value is
defined as the consolidated net assets of the Company plus unrealized
losses on marketable equity securities plus the deferred income tax
liability (if any) of the Company's life insurance subsidiary.
Historically, adjusted book value of Company common stock in the two
plans has been computed based upon amortized cost value of debt
securities. However, effective January 1, 1994, SFAS No. 115 requires
that debt securities classified as available-for-sale be valued on a
mark to market basis rather than at amortized cost. Accordingly, with
the required adoption of SFAS No. 115, common stockholders' equity is
in a deficit position. The Company has determined that in connection
with the adoption of SFAS No. 115, the adjusted book value of Company
common stock held by employee benefit plans for purposes of the trustee
agreement must be computed based upon market value of
available-for-sale debt securities. As such, the adjusted book value
for the common stock held by the plans is currently negative.
However, as is discussed above, under the terms of the trustee
agreement the Company is required to repurchase Company common stock
from the plans at a price equal to the higher of adjusted book value or
fair market value. In the past, for purposes of the trustee agreement,
the Company has regarded adjusted book value of Company stock as being
equivalent to the fair market value of such stock. With the adoption of
SFAS No. 115, adjusted book value of Company stock frequently will be
greater or less than the fair market value of such stock. Accordingly,
the Company has obtained an independent determination of the fair
market value of its common stock as of June 30, 1994, for purposes of
valuing the Company's stock pursuant to the trustee agreement. The fair
market value of the Company stock held by the plans was determined by
the valuation to be $6.29 per common share. As this amount exceeds the
adjusted book value of Company stock, it has been used by management to
determine the value of the stock in the plans as of December 31, 1994.
Because the valuation was performed as of June 30, 1994, it may not
precisely reflect the value of SBM common stock held by the plans as of
December 31, 1994. Further, the value determined by the independent
valuation does not reflect the value of the Company's common stock held
by the Company's other shareholders. In as much as interest rates have
continued to rise in the third and fourth quarters of 1994, it is
possible that the value of the Company stock held by the plans has
decreased.
Subsequent to year-end, the trustee of the plans notified the Company
that it was tendering all shares held by the plans to the Company under
the trustee agreement. The tender indicated that the value of the stock
should be based on amortized cost adjusted book value in that it was
the trustee's interpretation that this was the appropriate method of
valuing the stock under the trustee agreement. The Company believes the
trustee's tender of all shares is not consistent with the trustee
agreement, and the valuation of the common stock held by the Plans
should not be based upon amortized cost but rather based on the
methodology described above. The Company has subsequently commenced a
lawsuit against the trustee to obtain a declamatory judgment as to the
appropriate interpretation of the trustee agreement.
While the Company believes its interpretation of the trustee agreement
is appropriate, if it were determined that, for the limited purpose of
establishing the adjusted book value of the Company common stock in the
two plans under the trustee agreement, the plans should use amortized
cost value of portfolio securities rather than market value, this would
have the effect at December 31, 1994 of increasing the value of the
stock held by the plans by approximately $2.5 million or $1.33 per
share and reducing stockholders' equity by an equal amount.
As the common stock held by employee benefit plans is subject to the
trustee agreement as described above, the Company has classified those
shares of common stock held by the Company's employee benefit plans
outside of Stockholders' Equity on the consolidated balance sheet.
COMMON STOCK AND STOCK OPTIONS
The Company has a stock option plan which allows for incentive stock
options, nonstatutory options and stock appreciation rights. The
Company has reserved 350,000 shares for issuance under the plan. No
options have been granted under the plan.
TENDER OFFER
During January 1994, the Company purchased 98,296 shares of its common
stock for approximately $1.5 million, $15.26 per share, pursuant to a
cash tender offer initiated by the Company during December 1993.
DIVIDENDS
The ability of the Company to pay cash dividends to shareholders may be
dependent upon the amount of dividends received from subsidiaries. The
following is a summary of dividend restrictions and capital
requirements for each subsidiary.
As of December 31, 1994, the life insurance subsidiary is required to
obtain written approval prior to payment of all dividends in accordance
with an administrative order issued by the Minnesota Department of
Commerce (MDC) - see "Regulatory Matters" below. Exclusive of the
administrative order, pursuant to Minnesota legal requirements,
dividend payments must be paid solely from the adjusted earned surplus
of the life insurance subsidiary. Adjusted earned surplus means the
earned surplus as determined in accordance with statutory accounting
practices (unassigned funds), less 25% of the amount of such earned
surplus which is attributable to unrealized capital gains. Further, the
life insurance subsidiary may not pay in any calendar year any dividend
which, when combined with other dividends paid within the preceding 12
months, exceeds the greater of (i) 10% of the life insurance
subsidiary's statutory surplus at the prior year-end or (ii) 100% of
the life insurance subsidiary's statutory net gain from operations (not
including realized capital gains) for the prior calendar year. The
limitation for 1995 would be $3,262,671. Furthermore, distributions to
the Parent by the life insurance subsidiary in excess of $26,896,170 as
of December 31, 1994, would result in an additional income tax
liability to the subsidiary.
The Company's life insurance subsidiary prepares its statutory basis
financial statements in accordance with accounting practices prescribed
or permitted by the MDC. Prescribed statutory accounting practices
include a variety of publications of the NAIC, as well as state laws,
regulations, and general administrative rules. The Company's life
insurance subsidiary has strengthened its reserves on five policy forms
in accordance with Proposed Actuarial Guideline GGG. The Minnesota
Department of Commerce and the California Insurance Department, the
Company's domiciliary and commercially domiciliary states,
respectively, have approved the reserve strengthening over a three-year
period beginning in 1994. The strengthening totals $12.3 million and
according to the three year phase-in provision, one-third of this
total, or $4.1 million, is included in reserves in the 1994 statutory
basis financial statements of the subsidiary with the remaining
two-thirds to be reflected equally in 1995 and 1996. The life insurance
subsidiary's statutory capital and surplus as of December 31, 1994 and
1993 was $32,626,711 and $41,863,603, respectively. Statutory operating
income was $3,102,341 and $1,460,216 for 1994 and 1993, respectively.
The Company's sales subsidiary is subject to the Securities and
Exchange Commission's uniform net capital rule (Rule 15c3-1) which
requires that the ratio of aggregate indebtedness to net capital, both
as defined, shall not exceed 15 to 1. In addition, restrictions may be
imposed to prohibit the Company from expanding its business or
declaring dividends if its ratio of aggregate indebtedness to net
capital is greater than 10 to 1. Net capital and the related net
capital ratio fluctuate on a daily basis; however at December 31, 1994,
the net capital ratio was .78 to 1 and net capital was $562,500, which
exceeded the minimum capital requirement by $533,053.
The Company's face amount certificate subsidiary is subject to two
principal restrictions relating to its regulatory capital requirements.
First, under the Investment Company Act of 1940, the subsidiary is
required to establish and maintain minimum capital in an amount of
certificate reserves plus $250,000. Second, the MDC has historically
recommended to the Company that face amount certificate companies
should maintain a ratio of stockholder's equity to total assets at a
minimum of 5% based upon a valuation of available-for-sale securities
reflected at amortized cost. Under this formula, the subsidiary's
capital level was 6.9% at December 31, 1994. In November 1994, the MDC
notified the subsidiary that, based on the decline in the value of the
subsidiary's investment portfolio resulting from increasing interest
rates in 1994 and the subsidiary's decreasing liquidity resulting from
reduced principal prepayments on the subsidiary's CMO portfolio, the
MDC recommended that the subsidiary increase its capital level. The
MDC's concern was influenced by the subsidiary's capital ratio,
calculated including the effects of SFAS No. 115 (see Note 4), which
would have been 0.31% at December 31, 1994. On March 29, 1995, the life
insurance subsidiary, parent of the face amount certificate subsidiary,
contributed $1.5 million to the capital of the certificate subsidiary.
The certificate subsidiary is now in compliance with the MDC's
recommendation. The certificate subsidiary's shareholder's equity on a
proforma basis at December 31, 1994, adjusted to reflect the $1.5
million capital contribution and the change in unrealized losses
through February 28, 1995, would have been approximately $3 million.
SBM Company is guarantor of approximately 65% of the certificates
issued by the certificate company. The subsidiary has not paid
dividends in the past and has no present intention to pay dividends in
the near future, in order to increase capital resources.
REGULATORY MATTERS
On November 16, 1994, the Commissioner of the MDC issued an
administrative order to the Company's life insurance subsidiary (SBM
Life). The order restricts the following types of material transactions
without approval of the Commissioner: merging or consolidating with
another company; paying dividends; entering into new reinsurance
agreements; making material changes in management; increasing salaries
and benefits of officers or directors or making payment of bonuses;
entering into any transactions with officers and directors, including
employment agreements, or making other payments determined preferential
by the commissioner; disposing of, conveying, or encumbering its assets
or its business in force; or amending or entering into new contracts
with the holding company or other affiliated companies.
The issuance of the order was influenced by the SBM Life's A.M. Best
rating reduction and the significant unrealized depreciation in its
investment portfolio (Note 4). An additional capital infusion to SBM
Life will be necessary to address the issues of the MDC and for
possible re- evaluation of its rating.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the requirements
of SFAS No. 107, Disclosures about Fair Value of Financial Instruments
and SFAS No. 119, Disclosures about Derivative Financial Instruments
and Fair Value of Financial Instruments. SFAS No. 107 requires
disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present
value or other valuation techniques. These techniques are significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of
the instrument.
SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the
underlying value of the Company.
SFAS No. 119 requires fair value disclosures to be presented together
with the related carrying amount in a summary table. The fair value
disclosures presented herein are based on pertinent information
available to the Company as of December 31, 1994. Although the Company
is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of those financial statements
since that date; therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
DEBT SECURITIES - The estimated market value disclosures for debt
securities satisfy the fair value disclosure requirements of SFAS No.
107. (See Note 4 - Investments)
MARKETABLE EQUITY SECURITIES - Fair value equals carrying value as
these securities are carried at quoted market value.
MORTGAGE LOANS - The fair values for mortgage loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered in the marketplace for similar loans to borrowers with similar
credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations.
POLICY LOANS, OTHER INVESTED ASSETS, CASH AND SHORT-TERM INVESTMENTS -
The carrying amounts for these assets approximate the assets' fair
values.
OTHER FINANCIAL INSTRUMENTS REPORTED AS ASSETS - The carrying amount
for these financial instruments (receivable from reinsurer and accrued
investment income) approximately those assets' fair values.
FUTURE POLICY BENEFITS - The fair value of future policy benefits,
principally deferred annuities, was determined to be the customers'
account balance as management has the ability to reprice the deferred
annuities on an annual basis.
FACE AMOUNT CERTIFICATE RESERVES - The fair value for face amount
certificate reserves was determined from discounted cash flow analyses
of the certificates included in the reserve. The interest rates used in
the analyses were based on interest rates currently being offered on
the Company's certificates.
OTHER FINANCIAL INSTRUMENTS REPORTED AS LIABILITIES - The carrying
amounts for other financial instruments (normal payables of a
short-term nature, notes payable, and deferred compensation and
retirement benefits) approximate those liabilities' fair value.
MANDATORY REDEEMABLE VOTING CONVERTIBLE PREFERRED STOCK - The fair
value for mandatory redeemable voting convertible preferred stock
equals the liquidation value plus any dividends in arrears.
COMMON STOCK HELD BY EMPLOYEE BENEFIT PLAN - The fair value equals the
most recent appraised value for 1994.
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1994
---------------------------
Carrying Fair
Value Value
<S> <C> <C>
Financial Instruments Recorded as Assets:
Debt securities available-for-sale $653,207,076 $653,207,076
Debt securities held-to-maturity 13,944,234 11,913,328
Equity securities 683,089 683,089
Mortgage loans 36,257,214 27,373,864
Policy loans 22,153,936 22,153,936
Other invested assets 1,694,506 1,694,506
Cash and short-term investments 41,168,183 41,168,183
Other financial instruments reported as assets 114,246,196 114,276,196
Financial Instruments Recorded as Liabilities:
Future policy benefits 899,709,020 899,709,020
Face amount certificate reserves 60,355,015 60,050,268
Other financial instruments reported as liabilities 10,479,331 10,479,331
Mandatory Redeemable Voting Convertible
Preferred Stock 18,485,868 19,760,000
Common Stock Held by Employee Benefit Plans 1,916,519 1,916,519
</TABLE>
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's holdings
of a particular financial instrument. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing financial instruments
without attempting to estimate the value of anticipated future business
and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to
the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered
in the estimates.
15. INDUSTRY SEGMENT DATA
The Company's principal business activities consist of four distinct
business segments. SBM Company (the Parent) manages six mutual fund
companies. SBM Certificate Company currently issues single payment face
amount certificates. SBM Financial Services, Inc. is registered as a
broker and dealer in securities under the Securities and Exchange Act
of 1934 and performs sales functions for SBM Certificate Company,
affiliated mutual funds and State Bond and Mortgage Life Insurance
Company.
State Bond and Mortgage Life Insurance Company is licensed as a life
insurer and issues a variety of ordinary life insurance policies and
flexible premium and single premium deferred annuities. SBM Company
segment data is as follows:
<TABLE>
<CAPTION>
SBM Company State Bond
(Dollar amounts Mutual SBM SBM and Mortgage Adjustments
in thousands) Fund General Certificate Financial Life Insurance and
Operations Corporate Company Services, Inc. Company Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
1994:
Total revenues 1,399 (258) 5,336 9,191 55,598 (11,334) 59,932
Pretax income (loss) 240 (1,260) 555 (4,406) (4,871)
Income (loss) 158 (1,208) 383 (2,937) (3,604)
Identifiable assets (8,085) 60,563 1,004 906,449 9,433 969,364
Liabilities 3,235 60,376 441 917,486 (599) 980,939
1993:
Total revenues 1,401 337 5,413 11,797 60,642 (7,543) 72,407
Pretax income (loss) 302 (642) 56 5,832 5,548
Income (loss) 199 (415) 101 3,863 3,748
Identifiable assets 60,198 70,939 992 949,800 (57,019) 1,024,910
Liabilities 5,675 67,058 495 897,852 (527) 970,553
</TABLE>
The Company's capital expenditures and related depreciation expenses
are incurred by the Parent and SBM Certificate Company. For the two
years ended December 31, 1994, total capital expenditures for the
Parent were $161,330 and $226,284, respectively, and depreciation
expense for the Parent and SBM Certificate Company was $248,474 and
$54,017 and $259,347 and $58,678, respectively.
Income (loss) of each industry segment includes a provision for income
taxes calculated on a separate return basis, (except for the Parent's
segments, which are allocated taxes (credits) based on the segments'
percentage of pretax income (loss) to the Parent's total) modified to
the extent that benefits from operating losses are recognizable for SBM
Company on a consolidated basis.
The adjustments and eliminations required to determine consolidated
amounts shown above consist principally of elimination of intersegment
financial income, investments in consolidated subsidiaries and
intersegment receivables or payables. Intersegment income is related
primarily to commissions earned by SBM Financial Services, Inc. on the
sale of the other subsidiaries' products to outside customers.
The Parent received dividends from its life insurance subsidiary of
$650,000 in 1994 and $1,855,000 in 1993.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosure and
no change of accountants during the two most recent fiscal years.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons were the directors and executive officers of the
Company at March 31, 1996.
<TABLE>
<CAPTION>
Name and
Year First Became
Director or Officer Position Business
(Age) with Company Experience
- --------------------------- --------------------------- --------------------------------------
<S> <C> <C>
Richard M. Evjen Director President, The Evjen Associates,
1993 Inc., architects/ engineers/ planners
(63)
Kennon V. Rothchild Director Chairman and Chief Executive
1992 Officer, RCN Associates, Inc.,
(67) mortgage banking consultants
Robert M. Winslow Director Professor of Medicine, University of
1992 California at San Diego
(54)
Charles A. Geer Chief Executive Officer Owner, Charles Geer Associates, a
1993 private merchant banking firm, and
(55) consulting attorney
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation paid by the Company in
1995 and 1994 to its Chief Executive Officer. No other person who served as an
executive officer of the Company during 1995 received, prior to the Sale
Transaction, salary and bonus in excess of $100,000.
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
Name and Securities All Other
Principal Position Year Salary Bonus Underlying Options Compensation
------------------ ---- ------ ----- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Charles A. Geer(1) 1995 $159,238(2) 386,000(3) --- $770,000(4)
Chief Executive Officer 1994 $225,000(5)(6) --- 168,361(7) shares ---
</TABLE>
- ----------------
(1) Mr. Geer entered into the Initial Agreement (as hereinafter defined)
with the Company in July 1994. He acted as an independent contractor
for the Company through December 31, 1994. From January 1, 1995 to the
closing of the Sale Transaction, he was an employee of the Company.
Since the Sale Transaction he has acted as a consultant to the Company
and has received an hourly fee for services rendered to the Company.
(2) Does not include $101,875 accrued by the Company in 1995 for fees
payable to Mr. Geer for services rendered during 1995.
(3) This represents an incentive bonus paid to Mr. Geer upon consummation
of the Sale Transaction. The bonus represents 1% of capital financing
arranged in connection with the Sale Transaction. See "Certain
Relationships and Related Transactions -- Employment Agreement with
Charles A. Geer".
(4) Includes $270,000 received as severance payment upon consummation of
the Sale Transaction and $500,000 received when the Warrant (as
hereinafter defined) was repurchased by the Company. See Note 5 below
and "Certain Relationships and Related Transactions -- Employment
Agreement with Charles A. Geer".
(5) This represents $195,000 paid to Mr. Geer pursuant to the terms of the
Initial Agreement and the Letter Agreement (as hereinafter defined),
plus fees in the amount of $30,000 paid to Mr. Geer for acting as a
director and as a member of the Special Committee of Independent
Directors from January 1, 1994 through July of 1994. Mr. Geer was a
director of the Company through July 1994.
(6) Excludes $90,000 which was advanced to Mr. Geer as a deposit under the
Letter Agreement with the Company and was repaid by Mr. Geer in
connection with the consummation of the Sale Transaction.
(7) In 1994, Mr. Geer was issued the Warrant to acquire Common Stock equal
to 5% of the outstanding shares of Common Stock on a fully-diluted
basis, which in 1994 equaled 168,361 shares, at a price of $6.29 per
share. See "Certain Relationships and Related Transactions --
Employment Agreement with Charles A. Geer".
Aggregated Option/SAR Exercises in 1995 and Year-End Option/SAR Values
Value
Name Realized
---- --------
Charles A. Geer $500,000(1)
- ----------------
(1) Represents the amount received by Mr. Geer upon the repurchase of the
Warrant by the Company. See "Certain Relationships and Related
Transactions -- Employment Agreement with Charles A. Geer".
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The members of the Company's Compensation Committee in 1995 were Kennon
V. Rothchild and Robert M. Winslow. The Committee members have no interlocking
relationships as defined by the Securities and Exchange Commission.
Director Compensation
Members of the Board of Directors of the Company who are also employees
of the Company are not compensated by the Company for their services as
directors. Non-employee directors currently receive a quarterly fee of $5,000.
Prior to consummation of the Sale Transaction, each non-employee director
received an annual fee of $3,600 plus (i) an additional sum equal to $2,700 if
such director attended 75% or more of the Board's regular quarterly meetings
during the year, or (ii) an additional sum equal to $675 multiplied by the total
number of regular quarterly meetings attended during the year if such director
attended less than 75% of such meetings, and (iii) $675 for each special meeting
attended. Directors are also paid a per-meeting fee for each committee meeting
attended. The aggregate amount of fees paid to or accrued for the benefit of
directors during 1995 by the Company and the Subsidiaries was $48,225. Directors
are also reimbursed for reasonable travel expenses incurred in attending Board
of Director meetings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the
ownership of the issued and outstanding shares of Common Stock as of March 31,
1996 by all persons who owned 5% or more of the Common Stock of the Company, by
directors, by the sole executive officer and by such executive officer and
directors of the Company as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME AND ADDRESS OF OWNERSHIP OF CLASS
<S> <C> <C>
Clara K. Schonlau 354,400 (1) 16.26%
300 South State Street Beneficial
New Ulm, MN 56073
Henry Somsen 120,000 5.51%
211 2nd Street Record and
New Ulm, MN 55901 Beneficial
Firstar Trust Company of Minnesota 304,693 (2) 13.98%
601 Marquette Avenue Record
Minneapolis, MN 55402
State Bank & Trust Co. of New Ulm 249,835 (3) 11.46%
100 North Minnesota Street Record
New Ulm, MN 56073
SBM Company 257,413 (4) 11.81%
Profit Sharing Stock Plan Beneficial
Charles A. Geer -0- --
4440 IDS Center
Minneapolis, MN 55402
Richard M. Evjen -0- --
P.O. Box 225
Hudson, WI 54016
Kennon V. Rothchild 2,200 (5)
2300 American National Bank Building Beneficial
St. Paul, MN 55101
Robert M. Winslow 1,000 (5)
Department of Medicine Record and
University of California-Veterans Affairs Medical Center Beneficial
3350 LaJolla Village Drive (111-E)
San Diego, CA 92161
Executive officer and directors as a group 3,200 (5)
(4 persons) Record and
Beneficial
</TABLE>
- --------
(1) Of these shares, 352,800 are held of record by Robert Struyk and First
Bank National Association of Minneapolis as Trustees of the Trust under
the will of T.H. Schonlau, and 1,600 are held of record by State Bank &
Trust Company of New Ulm as Trustee of the Clara Schonlau Revocable
Trust, of which trust Mrs. Schonlau is the life beneficiary.
(2) These shares are held by the record holder as trustee of the Plans.
Pursuant to the terms of the Plans, the trustee votes the shares held
by the Plans unless, pursuant action of the Plan Administrative
Committee, voting rights have been passed through to Plan participants.
The Plan Administrative Committee has passed through the right to vote
shares held by the Plans.
(3) The Bank holds these shares as trustee of a number of trusts.
(4) These shares are held of record by Firstar Trust Company of
Minnesota. See Note 2.
(5) Less than 1%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EMPLOYMENT AGREEMENT WITH CHARLES A. GEER. The Company and Charles A.
Geer entered into an initial agreement as of July 15, 1994 (the "Initial
Agreement") which was superseded by a letter agreement executed in November 1994
(the "Letter Agreement). The Letter Agreement, except for provisions relating to
indemnification of Mr. Geer for certain claims, was terminated in accordance
with its terms upon consummation of the Sale Transaction.
Pursuant to the Letter Agreement, Mr. Geer was entitled to receive
$135,000 upon termination of his employment, in lieu of severance pay, provided
that if the termination was a constructive termination or was in connection with
a change of control of the Company (as defined), he would be entitled to
$270,000. Since Mr. Geer's employment was terminated as a part of the Sale
Transaction, he received $270,000 as severance pay upon the closing of the Sale
Transaction.
The Initial Agreement and the Letter Agreement provided for the payment
to Mr. Geer of an incentive bonus of 1% of the net value of any new capital
financing for the Company or any Subsidiary, any substantial sale of assets by
the Company or any Subsidiary, and certain other transactions arranged during
the term of Mr. Geer's employment. Although up to $20 million of capital
financing was arranged for one of the Subsidiaries as a part of the Sale
Transaction, Mr. Geer's incentive bonus was calculated only on the basis of the
value of the sale of the assets of the Company. Accordingly, Mr. Geer received
$386,000 as an incentive bonus upon the consummation of the Sale Transaction.
Under the Letter Agreement, Mr. Geer was granted a warrant to purchase
five percent of the Common Stock of the Company outstanding on a fully-diluted
basis at a price of $6.29 per share (the "Warrant") in order to offer him a
participation in the value of the Company. The Warrant contained standard
anti-dilution protections and was subject to repurchase by the Company at the
option of either the Company or Mr. Geer under different circumstances which
involved termination of Mr. Geer's employment before December 31, 1996 at a
price of $300,000 (before a change of control of the Company, as defined) or
$500,000 (after a change of control of the Company). The Warrant was repurchased
by the Company for $500,000 upon consummation of the Sale Transaction.
RELEASE IN FAVOR OF OFFICERS AND DIRECTORS AND CERTAIN SHAREHOLDERS.
One of the conditions to the Company's obligation to consummate the Sale
Transaction was the execution and delivery, to the extent permitted by
regulatory authorities, of a release by each of the Subsidiaries in favor of the
Company and each person who, prior to consummation of the Sale Transaction, was
an officer or director of the Company or any of the Subsidiaries (a "Released
Person"). The releases executed in connection with the Sale Transaction released
and discharged any and all claims which could be made against the Company or a
Released Person (other than, in the case of a Released Person, a claim based on
fraud) by a Subsidiary arising out of, based on or in connection with, any act,
omission, event, transaction or occurrence that happened or failed to happen, or
any fact or circumstance in existence, prior to or contemporaneously with the
execution of the release.
INDEMNIFICATION OF OFFICERS AND DIRECTORS. In connection with the Sale
Transaction, ARM Financial agreed to cause each of the Subsidiaries to continue
to indemnify or to directly indemnify the persons who were officers and
directors of each of the Subsidiaries prior to the consummation of the Sale
Transaction for any action or inaction by such person prior to the consummation
of the Sale Transaction. ARM Financial also agreed to cause the Subsidiaries to
maintain the provisions in their articles of incorporation and bylaws which
limit the liability of persons who were officers and directors of the
Subsidiaries prior to the consummation of the Sale Transaction for actions or
inactions by such persons prior to the consummation of the Sale Transaction.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements of the Company for year ended December 31,
1995 and for the two-year period ended December 31, 1994 included in Item 8.
Independent Auditors' Report
Statement of Net Assets in Liquidation as of December 31, 1995
Statement of Changes in Net Assets in Liquidation -
Year Ended December 31, 1995
Consolidated Balance Sheet as of December 31, 1994
Consolidated Statements of Income - Two years ended
December 31, 1994
Consolidated Statements of Stockholders' Equity
(Deficit) - Two years ended December 31, 1994
Consolidated Statements of Cash Flows - Two years ended
December 31, 1994
Notes to Financial Statements - Year ended December 31, 1995
2. Financial Schedules
Schedule II - Condensed Financial Information of Registrant -
Three Years Ended December 31, 1994*.
Schedule III - Supplementary Insurance Information -
Three Years Ended December 31, 1994*.
Schedule IV - Reinsurance - Three Years Ended
December 31, 1994*.
Schedule IX - Short-Term Borrowings - Three Years Ended
December 31, 1993**.
- ---------------------
* Filed with Form 10-K filed April 12, 1995 (File No. 811-407), and
incorporated herein by reference.
** Filed with Form 10-K filed March 31, 1994 (File No. 811-407), and
incorporated herein by reference.
3. List of required exhibits:
(2) Plan of Complete Liquidation and Dissolution of registrant filed as
Exhibit 2 hereto.
(3) Amended and Restated Articles of Incorporation filed as Exhibit 3B to
Form 10-K filed April 1, 1991 (File No. 811-407).*
Amendment to Amended and Restated Articles of Incorporation filed as
Exhibit 3A to Form 10-K filed April 12, 1995 (File No. 811-407).*
Amendment to Amended and Restated Articles of Incorporation filed as
Exhibit 3 hereto.
Restated By-laws, as amended, filed as Exhibit 3 to Form 10-K filed
March 31, 1993 (File No. 811-407).*
(4) Instruments defining the rights of security holders - filed as exhibits
4A through 4K to Registration Statement No. 2-61993 dated June 27,
1978; Exhibit 4 to Registration Statement No. 2-76706 dated March 26,
1982; and Exhibit 4 to Registration Statement No. 33-6131 dated May 28,
1986.*
(10) Material Contracts.
The following documents were filed as the designated exhibits to Form
10-K or registration statements filed as indicated.
Assumption, Assignment Agreement and Bill of Sale between registrant
and SBM Certificate Company dated December 31, 1990 filed as Exhibit
18(b) to Form N-8B-4 No. 811-6268 of SBM Certificate Company filed
April 1, 1991.*
SBM Company Thrift Plan Trust Agreement dated November 1, 1993, filed
as Exhibit 10B to Form 10-K dated December 31, 1993 (File No.
811-407).* First Amendment to Thrift Plan dated December 22, 1994 filed
as Exhibit 10A to Form 10-K filed April 12, 1995 (File No. 811-407).*
SBM Company Profit Sharing Stock Plan Trust Agreement dated November 1,
1993, filed as Exhibit 10C to Form 10-K dated December 31, 1993 (File
No. 811-407).* First Amendment to Stock Plan dated December 22, 1994
filed as Exhibit 10B to Form 10-K filed April 12, 1995 (File No.
811-407).*
Engagement Agreement between registrant and Charles A. Geer dated
November 22, 1994 and Warrant issued to Charles A. Geer filed as
Exhibit 10C to Form 10-K filed April 12, 1995 (File No. 811-407).*
Amended and Restated Stock and Asset Purchase Agreement between the
registrant and ARM Financial Group, Inc., dated as of February 16,
1995, filed as an Exhibit to a Form 8-K of the registrant dated
February 16, 1995.*
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
SBM Company Thrift Plan Trust Agreement dated November 1, 1993, filed
as Exhibit 10B to Form 10-K dated December 31, 1993 (File No.
811-407).* First Amendment to SBM Company Thrift Plan Trust Agreement
filed as Exhibit 10A to Form 10-K filed April 12, 1995 (File No.
811-407).*
SBM Company Profit Sharing Stock Plan Trust Agreement dated November 1,
1993, filed as Exhibit 10C to Form 10-K dated December 31, 1993 (File
No. 811-407).* First Amendment to SBM Company Profit Sharing Stock Plan
Trust Agreement filed as Exhibit 10B to Form 10-K filed April 12, 1995
(File No. 811-407).*
Engagement Agreement between registrant and Charles A. Geer dated
November 22, 1994 and Warrant issued to Charles A. Geer filed as
Exhibit 10C to Form 10-K filed April 12, 1995 (File No. 811-407).*
(11) Statement regarding computation of per share earnings. See Statements
of Income - Two years ended December 31, 1994, in Item 8 hereof.
(27) Financial Data Schedule, filed as Exhibit 27 hereto.
(b) Reports on Form 8-K.
None.
- ---------------------
* Previously filed as indicated and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SBM COMPANY
Registrant
Date: April 11, 1996 By /s/ Charles A. Geer
Charles A. Geer,
Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Date: April 11, 1996 By /s/ Richard M. Evjen
Richard M. Evjen Director
Date: April 11, 1996 By /s/ Kennon V. Rothchild
Kennon V. Rothchild Director
Date: April 11, 1996 By /s/ Robert M. Winslow
Robert M. Winslow Director
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Document Form of Filing
- ------------- -------------------------------------------- -----------------------
<S> <C> <C>
2 Plan of Complete Liquidation and Dissolution Electronic Transmission
3 Amendment to Amended and Restated Articles Electronic Transmission
of Incorporation
27 Financial Data Schedule Electronic Transmission
</TABLE>
Exhibit 2
PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION
OF SBM COMPANY
This Plan of Complete Liquidation and Dissolution is for the purposes
of effecting the complete liquidation of SBM Company, a Minnesota corporation
(the "Company"), and the dissolution of the Company under the Minnesota Business
Corporation Act (the "MBCA").
1. Effectiveness
This Plan shall become effective at such time as (i) the shareholders
of the Company approve the sale (the "Sale") by the Company of all or
substantially all of its assets to ARM Financial Group, Inc., a Delaware
corporation ("ARM"), pursuant to the Amended and Restated Stock and Asset
Purchase Agreement dated as of February 16, 1995 between the Company and ARM
(the "Purchase Agreement") and (ii) a closing with respect to the Sale has
occurred under the Purchase Agreement. The vote of the shareholders on the Sale
shall be held and conducted as required by the MBCA and the Articles of
Incorporation of the Company. In the event the Sale is not approved by the
shareholders pursuant to the above-referenced vote, or the Purchase Agreement
terminates without a closing thereunder having occurred, then this Plan shall
not become effective and the Company shall continue without interruption.
2. Winding Up of the Company's Affairs
As soon as practicable after the effectiveness of this Plan, the
directors and officers of the Company shall take all steps necessary to wind up
the Company's business and affairs, including the actions described herein.
3. Period of Liquidation
As soon as practicable after the effectiveness of this Plan, the
Company shall commence its complete liquidation by initiating the distribution
described in paragraph 4 of this Plan. The period of liquidation shall be deemed
to have commenced upon effectiveness of this Plan. During the period of
liquidation, no action shall be taken by or on behalf of the Company that is
inconsistent with the Company's liquidation status, and that status shall be
deemed to continue until the date the Company's liquidation and dissolution is
completed.
4. Distribution of Property
During the period of liquidation, the Company shall collect or make
provision for the collection of all known debts due or owing to the Company, pay
or make provision for the payment of all known debts, obligations and
liabilities of the Company according to their priorities and distribute all of
its remaining property (other than cash set aside as a reserve to pay
liabilities in accordance with the provisions of paragraph 5 of this Plan) to
its shareholders in accordance with Section 302A.551 of the MBCA.
5. Reserve for Liabilities
The Company shall set aside as a reserve to pay contingent and
unascertained liabilities (including without limitation federal, state, and
local tax liabilities) that amount of cash that the Company, in its discretion,
deems reasonable. The amount in that reserve may be transferred during the
period of liquidation to a liquidating trust for the benefit of shareholders of
the Company. Pursuant to the requirements of the MBCA, the Company or the
trustee of the liquidating trust, if a liquidating trust is established, will
(i) set aside that percentage of proceeds from the Sale which it believes is
sufficient to satisfy (a) all outstanding contingent, conditional, or unmatured
liabilities of the Company which have not been otherwise assumed, if any, and
(b) unknown and unassumed liabilities of the Company which the Company or the
trustee, as the case may be, based on facts known to it or him, believes are
likely to arise prior to the expiration of applicable statutes of limitations,
if any, and (ii) as soon as practicable and in any event within one year of the
commencement of the period of liquidation, distribute the balance of the
proceeds from the Sale to the shareholders of the Company based on the
liquidation rights and preferences of the shares of capital stock of the Company
owned by each holder.
6. Dissolution
As soon as practicable after all of the Company's property is
distributed to its shareholders in accordance with paragraphs 4 and 5 of this
Plan, the Company's officers and directors shall take all steps necessary and
appropriate to complete the dissolution of the Company under the provisions of
the MBCA, including filing Articles of Dissolution in accordance with the MBCA.
7. Form 966
Within 30 days after effectiveness of this Plan, the Company shall file
a properly completed and executed Form 966 with all information and attachments
required by treasury regulations promulgated under the Internal Revenue Code of
1986, as amended, with the IRS Service Center where the Company will file its
final federal income tax return.
8. Authority of Officers and Directors
The directors and officers of the Company shall have authority to carry
out and consummate this Plan, including authority:
(a) to establish a liquidating trust and appoint a trustee
therefor; and
(b) to convert the liquidation and dissolution herein
contemplated to a supervised voluntary dissolution under the provisions
of the MBCA; and
(c) to do, on behalf of the Company, all acts required or
advisable to be done by the Company under this Plan; and
(d) to adopt all resolutions, execute all documents, file all
papers, and take all other action deemed necessary or appropriate to
effect the dissolution of the Company and the complete liquidation of
its business, assets and affairs.
Exhibit 3
State of Minnesota
Office of the Secretary of State
AMENDMENT OF ARTICLES OF INCORPORATION
* READ INSTRUCTIONS AT BOTTOM OF PAGE BEFORE COMPLETING THIS FORM
CORPORATE NAME
SBM Company
This amendment is effective on the day it is filed with the Secretary of State,
unless you indicate another date, no later than 30 days after filing with the
Secretary of State, in this box:
------------------------------------------
| |
| |
------------------------------------------
The following amendments of articles or modifications to the statutory
requirements regulating the above corporation were adopted: (Insert full text of
newly amended or modified article(s), indicating which article(s) is(are) being
amended or added. If the full text of the amendment will not fit in the space
provided, please do not use this form. Instead, retype the amendment on a
separate sheet or sheets using this format.)
ARTICLE I
The name of the corporation is "1150 Liquidating Corporation".
ARTICLE V
The business and affairs of the Corporation shall be managed by or under the
direction of a Board of Directors consisting of not less than one person.
Whenever the holders of any one or more classes of preferred or preference stock
issued by the Corporation pursuant to Article III of these Articles of
Incorporation have the right by the terms of their class of stock, voting
separately by class or series, to elect directors at a regular or special
meeting of shareholders, the elections, term of office, filling of vacancies or
other features of such directorships shall be governed by or pursuant to the
applicable terms of those classes or series of shares.
This amendment has been approved pursuant to chapter 302A, Minnesota Statutes.
I certify that I am authorized to execute this amendment and I further certify
that I understand that by signing this amendment, I am subject to the penalties
of perjury as set forth in section 609.48 as if I had signed this amendment
under oath.
/s/ Stewart D. Gregg
(Signature of Authorized Person)
Vice President, General Counsel
and Secretary
- -------------------------------------------- ----------------------------------
INSTRUCTIONS: FOR USE BY THE SECRETARY OF STATE
1. Type or print with dark black ink.
2. Filing fee: $35.00.
3. Make check payable to Secretary of State.
4. Mail or bring completed forms to:
Secretary of State
Business Services Division
180 State Office Building
Saint Paul, MN 55155
(612) 296-2803
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 0
<CASH> 6,048,325
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 7,026,763
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 4,692,196
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
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> 0
<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
</TABLE>
