Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to___________________
For Quarter Ended September 30, 1997 Commission File Number 811-407
1150 LIQUIDATING CORPORATION
(formerly SBM Company)
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0557530
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4440 IDS Center
Minneapolis, Minnesota 55402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 338-5254
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No___
2,179,714 Common Shares were outstanding as of September 30, 1997
<PAGE>
1150 LIQUIDATING CORPORATION
I N D E X
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Net Assets in Liquidation 1
Statement of Changes in Net Assets in Liquidation 2
Notes to Condensed Financial Statements 3-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Changes in Net Assets in Liquidation 8
PART II. OTHER INFORMATION 9-10
<PAGE>
Part I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
1150 LIQUIDATING CORPORATION
(formerly SBM COMPANY AND SUBSIDIARIES)
STATEMENT OF NET ASSETS IN LIQUIDATION
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
-------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents $ 5,705,947 $ 5,861,428
Federal income tax refund 134,961 15,541
Escrowed funds 922,002 888,634
Other assets 387,354 60,893
-------------- --------------
Total assets 7,150,264 6,826,496
LIABILITIES
Reserve for taxes 100,000 -
Accounts payable 37,545 125,308
Reserve for estimated costs during the period of liquidation 229,177 438,611
Reserve for legal expenses payable under settlement agreement 250,000 250,000
-------------- --------------
Total liabilities 616,722 813,919
Common stock held by employee benefit plans - 304,693 shares (see Note 2) 2,741,363 2,639,835
-------------- --------------
Net assets $ 3,792,179 $ 3,372,742
============== ==============
Common shares outstanding - 2,179,714 less 304,693 shares
held by employee benefit plans 1,875,021 1,875,021
============== ==============
Net assets per common share outstanding $ 2.02 $ 1.80
============== ==============
</TABLE>
See Notes to Financial Statements.
<PAGE>
1150 LIQUIDATING CORPORATION
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
For the Period from December 31, 1994 to September 30, 1997
<TABLE>
<CAPTION>
<S> <C>
NET ASSETS (DEFICIT) AT DECEMBER 31, 1994 $ (31,976,759)
Income from liquidating activities 42,662,596
Preferred stock liquidation amount in excess
of carrying value (1,279,805)
Common stock dividend distribution - $2.75 per share (5,994,214)
Allocation of common stock dividend distribution to
common stock held by employee benefit plans 837,906
Allocation of net loss and carrying value to common
stock held by employee benefit plans 442,472
--------------
NET ASSETS AT DECEMBER 31, 1995 4,692,196
Income (loss) from liquidating activities (330,740)
Special allocation of carrying value to common stock held by
employee benefit plans under settlement agreement (Note 2) (1,000,000)
Allocation of net loss and carrying value to
common stock held by employee benefit plans 11,286
--------------
NET ASSETS AT DECEMBER 31, 1996 3,372,742
Income from liquidating activities (January 1, 1997 through September 30, 1997) 487,596
Allocation of net income and carrying value to common stock
held by employee benefit plans (68,159)
--------------
NET ASSETS AT SEPTEMBER 30, 1997 (unaudited) $ 3,792,179
==============
</TABLE>
See Notes to Financial Statements.
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Sale and Liquidation of the Company:
Effective May 31, 1995, SBM Company (the "Company") sold
substantially all of the business operations and assets of the
Company to ARM Financial Group, Inc. (ARM) (the Transaction) for a
purchase price of $34.5 million, net of $4.1 million of
liabilities assumed, pursuant to an Amended and Restated Stock and
Asset Purchase Agreement dated February 16, 1995 between the
Company and ARM. As part of the Transaction, ARM acquired all of
the outstanding stock of the Company's wholly owned subsidiaries
(State Bond and Mortgage Life Insurance Company ("SBM Life"), SBM
Certificate Company ("SBMC") and SBM Financial Services, Inc.) and
certain assets of the Company, including the investment adviser
function of six mutual funds, and assumed certain liabilities of
the Company. The following summarizes the proceeds from and net
assets sold of the Transaction:
Proceeds from the sale $ 34,445,877
Assets sold:
Investments 808,543,939
Receivable from reinsurer 85,202,588
Deferred acquisition costs 61,683,713
Other assets 14,863,970
--------------
970,294,210
Liabilities assumed:
Future policy benefits 861,067,924
Face amount certificate reserves 56,439,745
Accounts payable and other liabilities 12,508,983
--------------
930,016,652
--------------
Net assets sold 40,277,558
--------------
Less costs of the Transaction, including
income taxes of $408,000 710,927
--------------
Net loss on sale of Company operations $ (6,542,608)
==============
The Company intends to wind up and liquidate the Company as soon
as practicable. The Company has adopted a Plan of Dissolution
effective May 31, 1995. At closing, the Series A Preferred Stock
was redeemed for $20.5 million (including $1.5 million of
dividends in arrears) as a result of its senior rights over the
common stock.
The Company's shareholders approved the Transaction and the Plan
of Dissolution (the "Plan") at their regular shareholder meeting
on May 18, 1995. The Company also changed its name to "1150
Liquidating Corporation" effective June 14, 1995.
As a result, the Company has adopted the liquidation basis of
accounting effective January 1, 1995. Assets have been valued at
estimated net realizable value and liabilities provide for all
expenses to be incurred during the period of liquidation. The
reserve for estimated costs during the period of liquidation
includes what management anticipates are reasonable estimates of
costs required to liquidate the Company's remaining assets and to
defend known legal claims, as well as the estimated costs of
directors and officers and legal, audit and other professional
fees and expenses expected to be incurred during the period of
liquidation. The net assets ultimately available for distribution
to shareholders will depend almost entirely upon the remaining
time involved in winding up the affairs of the Company,
particularly the litigation involving the Employee Benefit Plans
and any now unknown liabilities or additional litigation
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 1. Sale and Liquidation of the Company (Continued):
(including any litigation resulting from the Schonlau
investigation described in Note 3) and the expenses and
liabilities incurred in connection therewith. The statement of net
assets in liquidation at September 30, 1997 includes accruals for
general and administrative expenses anticipated by management with
respect to resolving such known matters in a reasonably timely
fashion, as expected at that date. Net assets ultimately available
for distribution will be reduced by the amount of any other
unknown liabilities as may arise in the future, and to any extent
general and administrative expenses incurred exceed the estimates
included in the statement of net assets in liquidation at
September 30, 1997. In addition, the financial statements do not
reflect any investment income that is anticipated to be earned
subsequent to September 30, 1997.
The financial statements included in this Form 10-Q have been
prepared by the Company without audit. In the opinion of
management, all adjustments necessary to present fairly the
statement of net assets in liquidation and changes therein for all
periods presented have been made.
Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It
is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto
included in the SBM Company and Subsidiaries' Annual Report on
Form 10-K for the year ended December 31, 1996.
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting
period. For example, estimates and assumptions are used in
determining the Reserve for Estimated Costs During the Period of
Liquidation and Common Stock Held by Employee Benefit Plans. While
these estimates are based on the best judgment of management,
actual results and revised estimates could differ from current
estimates and are reflected in the period of change.
Note 2. Common Stock Held by Employee Benefit Plans:
The Company's two employee benefit plans ("Plans") own 304,693
shares of Company common stock. The value of such shares has been
classified as a separate line outside of net assets in liquidation
on the Company's statement of net assets in liquidation as of
September 30, 1997 and outside of stockholders' equity on the
Company's consolidated balance sheet as of December 31, 1996
because of the Company's obligation to repurchase such shares,
under certain circumstances, under a stock agreement ("Stock
Agreement"), between the Company and the Plans' trustee dated
September 30, 1993.
On the December 31, 1996 and September 30, 1997 statement of net
assets in liquidation, the liability to the Plans has been shown
as the estimated liquidation value of the Plans' shares of common
stock under the settlement agreement discussed below, plus the
$2.75 dividend escrowed in September, 1995, pursuant to the Plan
of Dissolution described above in Note 1, plus interest earned on
such escrowed amounts. Interest earned from January 1, 1997
through September 30, 1997 is $33,369.
Escrowed funds represent distributions and related interest
thereon allocated to the Plans which is currently being retained
in a court ordered trust account pending settlement of the amounts
owed them.
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Common Stock Held by Employee Benefit Plans (Continued):
In January 1995, the trustee of the Plans notified the Company
that it was tendering all shares held by the Plans to the Company
for purchase by the Company under the Stock Agreement. Under the
Stock Agreement, in certain circumstances, the Company has agreed
to purchase common shares tendered to it by the Plans at a price
equal to the higher of adjusted book value (as defined in the
Stock Agreement) or fair market value. The Plans' trustee asserted
in its tender that the correct basis under the Stock Agreement to
determine the price of the shares for purposes of the Company's
repurchase obligation is to determine their adjusted book value at
December 31, 1994 based on the books of the Company but using the
amortized cost of the Company's investment portfolios, rather than
their fair market value. The Company maintains that such price
under the Stock Agreement must be based on the books of the
Company which, after the effectiveness of the SFAS 115 on January
1, 1994, must use the market value, rather than the amortized
cost, of the substantial portion of the Company's investment
portfolios which must be classified as "available-for-sale" under
applicable accounting principles. In the alternative, the Company
maintains that the tender was invalid in the circumstances under
which it was made and, even if valid, that the correct price under
such circumstances is the pro-rata estimated liquidation value of
all of the Company's common shares pursuant to the Plan of
Dissolution, rather than any value based upon the books of the
Company as prepared on the going concern historical cost basis.
The Company declined to repurchase such shares at the price
demanded by the Trustee for various reasons, including those
stated above, and commenced a declaratory judgment action in
Minnesota District Court in March 1995 to determine its repurchase
obligation and the applicable price under the Stock Agreement
("Plan Litigation"). If the views of the Company or those of the
largest non-plan shareholder (the Schonlau Trust) which is a party
to such litigation prevail, either the Company will have no
obligation to purchase the shares held by the Plans under the
Stock Agreement or the price at which any such repurchase
obligation exists will be based either on the December 31, 1994
appraised value of the shares ($5.38 per share) less the 1995
escrowed dividend distribution ($2.75 per share) or the pro-rata
estimated liquidation value of all of the Company's common shares
pursuant to the Plan of Dissolution (estimated for purposes of the
September 30, 1997 statement of net assets in liquidation to be
$2.52 per share). If the view of the Plans' trustee prevails, the
Company will have the obligation to repurchase all of the shares
held by the Plans at the December 31, 1994 adjusted book value of
such shares on the books of the Company using the amortized cost
of the Company's investment portfolios net of the dividend
distribution already received in 1995 (estimated to be
approximately $10-$12 per share).
While the Company believes its interpretation of the Stock
agreement is correct, the determination that the views of the
Trustee are correct would have the effect at September 30, 1997 of
increasing the value of the shares held by the Plans by
approximately $2.76 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 $1.47 per share.
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. A draft of a final and more
formal settlement agreement (the Settlement Agreement) was
subsequently prepared and circulated. In general, the Settlement
Agreement 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 $150,000 in
partial payment of attorneys' fees incurred by the Trustee. The
Settlement Agreement also provides for the payment by the Company
of up to $100,000 of the litigation costs incurred by the Schonlau
Trust. The amounts payable as part of the settlement would be in
addition to the pro rata amounts payable to Plan shareholders
(determined without regard to the settlement amounts) and would be
payable out of the amount otherwise available for pro rata
distribution in liquidation to non-Plan shareholders.
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Common Stock Held by Employee Benefit Plans (Continued):
By April 1996, both the Trustee and the Schonlau Trust had
indicated that they had no significant issues with respect to the
economic terms of the Settlement Agreement. The Schonlau Trust
did, however, indicate that it was unwilling to proceed to
settlement unless a class consisting of all non-Plan shareholders
was certified and unless it was named as representative of the
class. The Company and the Trustee have agreed to these terms as
part of the Settlement Agreement.
During the year the Department of Labor (DOL) advised the Company
of certain alleged violations of ERISA (of breach of fiduciary
duty under Sections 404(a)(1)(A), (B), and (D) of ERISA and
prohibited transactions based upon Section 406(b)(2) of ERISA) in
connection with the Company's handling of the repurchase of shares
owned by the Plans under the Put Agreement and the Internal
Revenue Service (IRS) opened an audit alleging that the Company
could be liable for certain excise taxes in connection with such
matters. The Company objected to such allegations and, on February
27, 1997, received a letter from the DOL which advised it would
take no further action in connection with the allegations if the
litigation with the Plans is resolved pursuant to the Settlement
Agreement and the Company subsequently was advised that the IRS
would close its audit and not assess excise tax liabilities on the
Company. These matters delayed implementation of the Settlement
Agreement.
In October 1996, the Company, the Schonlau Trust and the Trustee
agreed to sign the Settlement Agreement and proceed with its
implementation at such time as the allegations of the DOL and IRS
were resolved in a manner satisfactory to all parties to the Plan
litigation. In June 1997, these allegations of the DOL and IRS
having been resolved, the Settlement Agreement was signed by all
parties and was submitted to the court for approval. A hearing was
held on August 21, 1997 and Judge William R. Howard approved the
settlement and entered the Order Approving Settlement. The
Settlement will become effective on November 21, 1997 as long as
no appeal is taken from Judge Howard's Order.
Once the settlement becomes effective, the Company will pay the
$1.0 million special allocation of carrying value to common stock
held by employee benefit plans, as well as the $250,000 accrued
payment for legal expenses payable under the Settlement Agreement.
Furthermore, upon the settlement becoming effective, the initial
liquidating distribution allocable to the Plans in the amount of
$2.75 per share, which is currently being held in an interest
bearing escrow account pursuant to court order, will be released
to Firstar for the benefit of Plan participants.
Note 3. Other Matters:
The Company was notified several months ago that The Trust Under
the Will of T.H. Schonlau ("Schonlau Trust"), its largest
shareholder, has retained legal counsel for the purpose of
investigating whether the Schonlau Trust has claims or rights
against current or former officers, directors, employees,
shareholders, representatives, agents, auditors, accountants,
attorneys or anyone acting on its behalf (i) arising out of or
relating to its ownership of SBM common shares and (ii) arising
out of or relating to the management of SBM, or otherwise. The
Trust has requested the Company to produce certain corporate
records and documents in connection with its investigation.
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 3. Other Matters (Continued):
At this time, it is impossible to anticipate whether the Schonlau
Trust, or other shareholders, will commence suit with respect to
the above, or other matters, and, if so, who would be named as
defendants. Presumably, the Schonlau Trust would not commence any
such action unless it believed that a substantial likelihood
existed that the liquidation value of the Company, net to
shareholders, would be materially enhanced by its efforts. Such a
determination would have to factor in the following, and other
considerations: (i) likely expenses to be incurred by the Company
in supporting any such litigation; (ii) the expenses to be
incurred by the Company in connection with its obligations to
defend and indemnify present and past officers and directors in
the event they were to become involved in any such litigation;
(iii) expenses to be incurred by the Company in defending against
probable third party claims, including claims for indemnity and
contribution.
Any such shareholder action, even if successful in the long-term,
would have the effect of delaying the liquidation and dissolution
of the Company and of increasing its administrative and
professional expenses in the short-term. No provision has been
made to support any actual litigation by the Schonlau Trust,
claims for indemnity by present or former officers or directors,
or related litigation which may result, because the Schonlau Trust
has not decided at this time to bring any such action.
The Company is also undergoing audits 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 both audits and subsequently
approved by the Joint Committee of Congress.
<PAGE>
1150 LIQUIDATING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1150 LIQUIDATING CORPORATION
Date By: /s/ Charles A. Geer
----------------------- -------------------------------------
Charles A. Geer
Its: President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997<F1>
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 0
<CASH> 5,705,947
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 7,150,264
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 3,792,179<F2>
<TOTAL-LIABILITY-AND-EQUITY> 7,150,264
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> 00
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 487,596
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>THE COMPANY IS CURRENTLY USING LIQUIDATION ACCCOUNTING.
<F2>NET ASSETS IN LIQUIDATION.
</FN>
</TABLE>
