SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996 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 1, 1997 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. To date the Company has made liquidating distributions equal to
an aggregate of $5,994,214 million or $2.75 per share with respect to the Common
Stock of the Company (the "Common Stock"). Such distributions made with respect
to the Common Stock held by the Plans (as defined below) have been deposited
into an interest-bearing escrow account pursuant to a court order. The remaining
proceeds of the Sale Transaction of approximately $5.9 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 audits 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 argued 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
"Plan litigation"). 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 non-Plan holders of Common Stock. The Company
in its complaint asserted 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 its counterclaim and
crossclaim. 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. 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. Therefore, assuming that the estimate of future liquidation
expenses is accurate and no liabilities in addition to those liabilities known
as of the date hereof are incurred by the Company (such as liabilities incurred
in connection with the investigations by the DOL and IRS referred to below) Plan
shareholders would receive an additional $6.24 per share in liquidating
distributions, including the $150,000 payment made to the Plan for litigation
expenses (for a total of $8.99 per share in liquidating distributions) and
non-Plan shareholders would receive an additional $1.80 per share in liquidating
distributions (for a total of $4.55 per share in liquidating distributions). The
Settlement Agreement also contains a provision barring Plan and non-Plan
shareholders from asserting any claims against the Company, the Trustee and the
Schonlau Trust (and affiliated persons) and the Plans, the administrative
committees for the Plans and members of such committees which arise out of,
relate to, or exist by reason of, the subject matter of the Plan litigation or
the settlement of the Plan litigation. Among the claims not released by the Plan
and non-Plan shareholders and specifically preserved in the Settlement Agreement
are claims (i) relating to transactions between ARM Financial and the holders of
Preferred Stock in which Preferred Stock was sold to ARM Financial, (ii)
relating to the purchase or sale by the Company or its affiliates of mortgage
backed securities and stripped mortgage backed securities, (iii) against the
Company's auditors or accountants which may arise from the purchase or sale by
the Company or its affiliates of mortgage backed securities, and (iv) relating
to the sale in 1994 by Roman Schmid of certain shares of Common Stock to the
holders of the Preferred Stock. The specific preservation of such claims in the
Settlement Agreement was made at the request of the Schonlau Trust. To the
extent that any claims are brought against parties other than the Company, the
Company could be required to provide defense and/or indemnity or contribution to
one or more such parties.
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.
On June 10, 1996, the Company received a letter from the Department of
Labor (the "DOL") which alleged certain violations of ERISA (the "DOL Letter").
The DOL Letter alleged that the Company and its officers and directors and the
Administrative Committee, as Plan Administrator, were fiduciaries of the Plan
and that therefore the Company and such individuals, in taking positions adverse
to the Trustee in the Plan litigation, breached their fiduciary duties under
Sections 404(a)(1)(A), (B) and (D) of ERISA and engaged in prohibited
transactions that violated Sections 406 (a)(1)(A), 406(b)(1) and 406(b)(2) of
ERISA.
The Company responded to the DOL's allegations on a number of levels.
The Company asserted that, in the context of redeeming stock held by the Plans
and in the Plan litigation, the Company was not acting as a fiduciary of the
Plans and therefore was not subject to the fiduciary duty or prohibited
transactions provisions of ERISA. Since the Company acts only in a corporate or
"settlor" capacity when it redeems its stock, the subject matter of the Plan
litigation, the positions taken by the Company and its officers and directors in
the Plan litigation did not violate any provisions of ERISA. The Company also
argued that, assuming the existence of a fiduciary duty, it did not breach such
duty or engage in prohibited transactions for a number of reasons. First, it did
not violate Sections 406 (a)(1)(A) and 406(b)(1) of ERISA because the Company
did not use assets of the Plans for its own benefit or for its own account.
Second, it did not violate Section 406(b)(2) of ERISA because the Company took
appropriate steps to relieve itself of any conflict of interest when it named
the Trustee as a defendant in the Plan litigation. The Trustee has acted as an
independent fiduciary in the Plan litigation representing the interests of the
Plan and the Plan shareholders. Third, the Company has attempted to represent
the interests of all shareholders of the Company in the Plan litigation,
including the Plan shareholders, in that the Company has at times taken
positions in the Plan litigation favorable to Plan shareholders. On February 27,
1997, the Company received a letter from the DOL which stated that, upon further
consideration of the facts of the case and the arguments raised by the Company,
the DOL no longer believed that the Company violated Sections 406(a)(1)(A) and
406(b)(1) of ERISA. In addition, the DOL indicated that it would take no further
action with respect to its allegations of breach of fiduciary duty under
Sections 404(a)(1)(A), (B), and (D) of ERISA and of prohibited transactions in
violation of Section 406(b)(2) of ERISA if the Plan litigation is resolved in
accordance with the Settlement Agreement. Therefore, there can be no assurance
that the DOL will not pursue its allegations 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 if the Plan litigation is not resolved in
accordance with the Settlement Agreement.
On or about the date of the DOL Letter, the DOL referred the
above-referenced matter to the Internal Revenue Service ("IRS"). On October 10,
1996, the Company received a letter from the IRS (the "IRS Letter") alleging
that the Company had engaged in prohibited transactions and that as a result the
Company could be liable for the payment of certain excise taxes. Subsequent to
receipt of the IRS Letter, the IRS orally indicated to the Company that the IRS
would likely close its audit and not assess any excise taxes if the DOL withdrew
the allegations of prohibited transactions based upon Sections 406(a)(1)(A) and
406(b)(1) of ERISA, which are the only prohibited transactions allegations made
by the DOL which could give rise to the assessment of excise taxes under the
Code. Upon receipt of the DOL's February 27, 1997 letter, the Company informed
the IRS of DOL's withdrawal of the prohibited transactions allegations based
upon Sections 406(a)(1)(A) and 406(b)(1) of ERISA. Based upon the DOL's decision
to withdraw such allegations, in a letter dated March 25, 1997 the IRS informed
the Company that the IRS has accepted as filed the return for the SBM Company
Profit Sharing Stock Plan.
In October 1996, the Company circulated a letter agreement which set
forth the agreement of the parties to the Plan litigation to execute the
Settlement Agreement at such time as the allegations of the DOL and IRS are
resolved in a manner satisfactory to all parties to the Plan litigation. The
Schonlau Trust has executed such letter agreement. The Trustee has indicated
that it will sign the Settlement Agreement when it has been signed by the
Company and the Schonlau Trust. If and when the Settlement Agreement is executed
by all parties, it will be submitted to the court for approval after notice is
given to all shareholders and Plan participants and such persons have been given
an opportunity to be heard by the court. Any notice sent to shareholders and
Plan participants must be approved by the court and will indicate that the
settlement class will consist of all non-Plan shareholders. Even if the DOL and
IRS allegations are resolved in a manner satisfactory to the Company and the
Settlement Agreement is executed by all the parties, there can be no assurance
that the Settlement Agreement will be approved by the court. In addition to
re-opening the DOL's allegations 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, failure of the court to approve the Settlement
Agreement would result in continued litigation or would require the parties to
attempt to reach an alternative settlement arrangement, either of which would
lead to further delays in making liquidating distributions.
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 the years 1986-1990 and will be
effective if and when approved by the Joint Committee of Congress. A report is
expected in the next few months 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 1, 1997, 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.
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
two-year period ended December 31, 1996 on a liquidation basis.
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS IN LIQUIDATION AS OF DECEMBER 31, 1995 AND 1996
1995 1996
---------- ----------
ASSETS
<S> <C> <C>
Cash and short term investments $6,048,325 $5,861,428
Federal income tax refund 118,831 15,541
Escrowed funds 846,419 888,634
Other assets 13,188 60,893
---------- ----------
7,026,763 6,826,496
LIABILITIES
Accounts payable 55,166 125,308
Reserve for estimated costs during the period of liquidation 577,527 438,611
Reserve for legal expenses payable under Settlement Agreement 250,000
Deferred compensation for former directors 92,968
---------- ----------
Total Liabilities 725,661 813,919
Common stock held by Employee Benefit Plans -
304,693 shares(1) 1,608,906 2,639,835
---------- ----------
Net asset available to common shareholders $4,692,196 $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 Asset per common share outstanding $ 2.50 $ 1.80
========== ==========
</TABLE>
- -------------------
(1) Should the Settlement Agreement not be executed and approved, 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 would be
reversed, and the Company would likely incur additional legal costs in
defending its positions. These potential costs, which include
litigation costs and potential settlement costs, could have a material
adverse effect on the Company and could substantially reduce the amount
of liquidating distributions available to shareholders and Plan
participants.
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
YEARS ENDED DECEMBER 31, 1996 AND 1995
<S> <C> <C>
NET ASSETS (DEFICIT) AT BEGINNING OF YEAR $ (31,976,759) $ 4,692,196
Income (loss) from liquidating activities 42,662,596 (330,740)
Special allocation of carrying value to common stock held by
Employee Benefit Plans under Settlement Agreement (1,000,000)
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 11,286
------------- -----------
NET ASSETS AT END OF YEAR $ 4,692,196 $ 3,372,742
</TABLE>
The following selected financial data of the Company is presented
for the three years ended December 31, 1994 on a going concern basis.
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------
1994 1993 1992
(in thousands, except for per share data)
<S> <C> <C> <C>
Total Revenues $ 59,932 $ 72,047 $ 69,027
Income (Loss) From Continuing
Operations(1) (3,604) 3,748 3,039
Net Income (Loss) (3,604) 3,748 2,778
Per Common Share:
Primary:
Continuing Operations (2.40) 1.35 1.32
Net Income (Loss) (2.40) 1.35 1.21
Fully diluted:
Continuing Operations (2.40) 1.32 1.32
Net Income (Loss) (2.40) 1.32 1.21
Dividends declared per share:
Common Stock .10 .40 .10
Mandatory Redeemable Voting
Convertible Preferred Stock 40.00 80.00
As of December 31,
----------------------------------------
1994 1993 1992
(in thousands)
Total Assets(1) 969,364 1,024,910 933,367
Face Amount Certificate Reserves 60,355 67,029 66,550
Future Policy Benefits 910,104 891,923 810,963
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
Stockholders' Equity (Deficit)(2) (31,977) 31,959 29,919
Total Assets of Affiliated Mutual Fund
Companies 203,691 209,461 200,088
</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.
TWO YEARS ENDED DECEMBER 31, 1996
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 periods June 1, 1995 to December 31, 1995 and January 1, 1996 to December
31, 1996 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
incurred in connection with litigation with the Trustee of the Plans and
resolving the allegations of the DOL, and 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. 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, 1996 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 also
reflects the premium contemplated in the Settlement Agreement above a pro-rata
distribution to all shareholders which the Company will be obligated to pay the
Plans for distribution to Plan participants upon resolution of the litigation
with the Trustee of the Plans in accordance with the Settlement Agreement. See
"Litigation" and Note 2 to the Company's Financial Statements in Item 8 hereof.
Net assets ultimately available for distribution will be adjusted for any
modifications to the Settlement Agreement during resolution of the litigation,
unanticipated liabilities that may arise in the future, and to the extent
general and administrative expenses incurred exceeds the reserve for estimated
costs during the period of liquidation included in the Statement of Net Assets
in Liquidation as of December 31, 1996. Should the Settlement Agreement not be
executed and approved, 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 would be
reversed, and the Company would likely incur additional legal costs in defending
its positions. These potential costs, which include litigation costs and
potential settlement costs, could have a material adverse effect on the Company
and could substantially reduce the amount of liquidating distributions available
to shareholders and Plan participants.
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. In the several years prior to the Sale
Transaction, 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;
and 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:
Type of CMO 1994 1993
- --------------------------------- --------------------- ---------------------
(Dollars in Millions) (Dollars in Millions)
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%
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)
---- ------- ----------- ----------- ------------------
<C> <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 7 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 7 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 principles. 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 7 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 statements of net assets in liquidation of 1150
Liquidation Corporation, formerly SBM Company (the Company) as of December 31,
1996 and 1995 and the related statements of changes in net assets for the years
then ended. In addition, we have audited the related consolidated statements of
income, stockholders' equity, and cash flows of the Company for the year 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
the Company 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, 1996 and 1995 and the changes in its net assets in liquidation for
the years then ended, in conformity with generally accepted accounting
principles on the bases described in the preceding paragraph. Also, in our
opinion, the consolidated statements of income, stockholders' equity, and cash
flows of the Company present fairly, in all material respects, the results of
its operations and its cash flows for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company is a defendant
in a lawsuit relating to the valuation of shares of common stock held by the
Company's two employee benefit plans.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 31, 1997
1150 LIQUIDATION CORPORATION
(FORMERLY SBM COMPANY)
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS IN LIQUIDATION
AS OF DECEMBER 31, 1996 AND 1995
- ---------------------------------------------------------------------------------------------------------
1996 1995
ASSETS
<S> <C> <C>
Cash and short-term investments $ 5,861,428 $ 6,048,325
Federal income tax refund 15,541 118,831
Escrowed funds (Note 2) 888,634 846,419
Other assets 60,893 13,188
------------ ------------
6,826,496 7,026,763
LIABILITIES
Accounts payable 125,308 55,166
Reserve for estimated costs during the period of liquidation (Note 2) 438,611 577,527
Reserve for legal expenses payable under Settlement Agreement (Note 2) 250,000
Deferred compensation for former directors 92,968
------------ ------------
Total liabilities 813,919 725,661
Common stock held by Employee Benefit Plans - 304,693 shares (Note 2) 2,639,835 1,608,906
------------ ------------
Net asset available to common shareholders $ 3,372,742 $ 4,692,196
============ ============
Common shares outstanding - 2,179,714 less 304,693 shares
held by Employee Benefit Plans 1,875,021 1,875,021
============ ============
Net assets per common share outstanding (Note 2) $ 1.80 $ 2.50
============ ============
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
YEARS ENDED DECEMBER 31, 1996 AND 1995
- ---------------------------------------------------------------------------------------------------------
NET ASSETS (DEFICIT) AT BEGINNING OF YEAR $ 4,692,196 $(31,976,759)
Income (loss) from liquidating activities (Note 1) (330,740) 42,662,596
Special allocation of carrying value to common stock held by Employee
Benefit Plans under Settlement Agreement (Note 2) (1,000,000)
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 11,286 442,472
------------ ------------
NET ASSETS AT END OF YEAR $ 3,372,742 $ 4,692,196
============ ============
See notes to financial statements.
</TABLE>
1150 LIQUIDATION CORPORATION
(FORMERLY SBM COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME (GOING CONCERN BASIS)
YEAR ENDED DECEMBER 31, 1994
REVENUES:
<S> <C>
Net investment income $ 62,887,722
Underwriting, sales service, and distribution fees 3,124,299
Life insurance premiums 392,801
Advisory and other fees from affiliated mutual funds 1,481,074
Realized investment losses, net (9,799,377)
Other income 1,845,231
------------
Total revenues 59,931,750
BENEFITS AND EXPENSES:
Provisions for benefits:
Annuities and life insurance 42,466,335
Face amount certificate reserves (interest) 3,575,075
Loan and real estate losses 320,000
Death and other benefits 471,419
Commissions, wages, and benefits 7,148,918
Interest expense 124,363
Amortization of deferred policy acquisition costs 4,275,361
Occupancy and equipment 1,370,685
State guaranty association assessments 1,791,617
Other expenses 3,259,408
------------
Total benefits and expenses 64,803,181
Loss before income taxes (4,871,431)
Income taxes benefits (1,267,000)
------------
Net loss $ (3,604,431)
============
Discount accretion on preferred stock $ 136,188
============
Mandatory redeemable voting convertible preferred stock dividends $ 1,520,000
============
Net loss applicable to common stock $ (5,260,619)
============
EARNINGS PER COMMON SHARE:
Primary:
Net loss $ (2.40)
============
Fully diluted:
Net loss $ (2.40)
============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (PRIMARY) 2,187,481
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(FULLY DILUTED) 2,187,481
See notes to financial statements.
</TABLE>
1150 LIQUIDATION CORPORATION
(FORMERLY SBM COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIT) (GOING CONCERN BASIS)
YEARS ENDED DECEMBER 31, 1994 AND 1993
UNREALIZED
LOSSES ON UNREALIZED TOTAL
MARKETABLE LOSSES STOCKHOLDERS'
COMMON EQUITY ON DEBT RETAINED EQUITY
STOCK SECURITIES SECURITIES EARNINGS (DEFICIT)
<S> <C> <C> <C> <C>
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)
=========== =========== ============ ============ ============
See notes to financial statements.
</TABLE>
1150 LIQUIDATION CORPORATION
(FORMERLY SBM COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(GOING CONCERN BASIS)
YEAR ENDED DECEMBER 31, 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss $ (3,604,431)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provisions for losses and benefits:
Annuities and life insurance 42,466,335
Face amount certificate reserves (interest) 3,575,075
Loan and real estate losses 320,000
Depreciation 302,491
Amortization of deferred policy acquisition costs 4,275,361
Deferred income taxes (786,000)
Premium amortization, net (4,537,537)
Realized investment losses, net 9,799,377
Decrease (increase) in operating assets:
Accrued investment income (2,764,904)
Receivable from reinsurer (300,934)
Deferred policy acquisition costs capitalized (5,205,762)
Refundable income taxes (2,648,568)
Other assets (160,953)
Increase (decrease) in operating liabilities:
Accounts payable and other liabilities 899,236
Deferred compensation and retirement benefits for officers (8,764)
Net cash provided by operating activities 41,620,022
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
Proceeds from other investments sold 314,979
Proceeds from sales of debt securities:
Available-for-sale 176,422,655
Held-to-maturity 11,983
Cost of debt securities acquired:
Available-for-sale (242,280,515)
Held-to-maturity (16,678,534)
Cost of other investments purchased (2,880)
Purchase of short-term investments, net (28,729,158)
Loan principal repayments 17,472,582
Loans funded (11,142,529)
Proceeds from land, building, and equipment, net 2,170,973
-------------
Net cash used in investing activities (11,814,089)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to face amount certificate holders (15,615,986)
Reserve payments from face amount certificate holders 5,332,840
Deposits received from annuitants, net 73,987,946
Payments to annuitants (86,284,317)
Purchase of common stock (1,569,268)
Dividends on common stock (217,971)
Dividends on preferred stock (760,000)
Principal payments on notes payable (2,012,210)
-------------
Net cash used in financing activities (27,138,966)
-------------
NET INCREASE IN CASH 2,666,967
CASH AT BEGINNING OF YEAR 898,726
CASH AT END OF YEAR $ 3,565,693
=============
See notes to financial statements
</TABLE>
1150 LIQUIDATION CORPORATION
(FORMERLY SBM COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(LIQUIDATION BASIS)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
BASIS OF PRESENTATION
The financial statements at December 31, 1996 and the two years 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 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:
<TABLE>
<CAPTION>
<S> <C>
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
is 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
================
A summary of significant activities from January 1 to December 31, 1996
is as follows:
Income on cash and short-term investments $ 299,331
Revised provision for estimated costs during the period of liquidation (572,171)
Reserve for legal expenses payable under Settlement Agreement (250,000)
Income tax benefits 192,100
----------------
$ (330,740)
================
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LIQUIDATION BASIS OF ACCOUNTING
Assets have been valued at estimated net realizable value and liabilities
provide for all anticipated 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 Statements of Net Assets in Liquidation
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 provided for in
financial statements. In addition, the financial statements do not
reflect any investment income that is anticipated to be earned subsequent
to December 31, 1996.
USE OF ESTIMATES
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.
INCOME TAXES
The federal income tax refund is based on the amounts currently due from
the Internal Revenue Service (IRS) as reflected on the Company's federal
tax return. Deferred income taxes were not significant at December 31,
1996 and 1995. Cash paid (refunds) for income taxes for the years ended
December 31, 1996 and 1995 was $(295,390) and $637,000, respectively.
The Company also is undergoing an audit by the IRS of the years 1986-1990
and 1991-1994. An adjustment agreement has been executed by the Company
and the IRS with respect to the former years and has been approved by the
Joint Committee of Congress. A report is expected in mid-1996 with
respect to the audit of the later years was executed in 1996 by the
Company and the IRS and will be effective when approved by the Joint
Committee of Congress. The effect of this agreement has been reflected in
the financial statements of the Company.
COMMON STOCK HELD BY EMPLOYEE BENEFIT PLANS AND RELATED LITIGATION
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, 1996 and 1995 because of the Company's obligation to repurchase such
shares, under certain circumstances, under a stock agreement, or stock
repurchase agreement or put agreement (Put Agreement), between the
Company and the Plans' Trustee dated September 30, 1993.
The value of the shares owned by the Plans on the Statement of Net Assets
in Liquidation at December 31, 1996 and 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 Statement of Financial Accounting Standards (SFAS) No. 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, 1996 statement of net assets in
liquidation to be $5.38 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, 1996 of increasing the value of the
shares held by the Plans by approximately $1.8 million before
consideration of additional legal costs 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 approximately $1.48 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.
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 that 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 have been resolved in a
manner satisfactory to all parties to the Plan litigation. The Company
believes that the recent actions by the DOL and IRS satisfactorily
resolve their previous allegations and expects the Settlement Agreement
to be executed within the next few weeks for submission to the court for
approval pursuant to a process which will involve a court-approved notice
being sent to all Plan and non-Plan shareholders and will include an
opportunity for those affected to be heard by the court at a hearing.
While the Company believes the Settlement Agreement will be executed,
there can be no assurance that the Settlement Agreement ultimately will
be approved by the court.
The failure of the court to approve the Settlement Agreement would result
in continued litigation between the Company, the Trustee, and Schonlau
Trust or would require the parties to attempt to reach an alternative
settlement arrangement, either of which would lead to further delays in
making liquidating distributions. As well, such failure would result in
the re-opening of the DOL's allegations under ERISA.
Should the Settlement Agreement not be executed and approved, 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 would be reversed, and
the Company would likely incur additional legal costs in defending its
positions. The ultimate impact on the Company of these potential costs,
which include litigation costs and potential settlement costs, are
reasonably not estimable at this time and could have a material adverse
effect on the Company and could substantially reduce the amount of
liquidating distributions available to shareholders and Plan
participants.
ESCROWED FUNDS
Escrowed funds represent 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.
YEAR ENDED DECEMBER 31, 1994
(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 year ended December 31, 1994 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 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 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 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.
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.
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 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.
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 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. For 1994, the warrant and the
assumed conversion of the mandatory redeemable voting convertible
preferred stock would have been antidilutive 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
year ended December 31, 1994 was $4,062,114. Cash paid for income taxes,
net of refunds received, for the year ended December 31, 1994 was
$2,062,899, respectively.
4. INVESTMENTS
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.
Net investment income summarized by investment category for the year
ended December 31, 1994 is as follows:
1994
Debt securities available-for-sale $ 54,509,734
Debt securities held-to-maturity 953,519
Marketable equity securities 60,154
Mortgage loans 4,586,675
Policy loans 851,780
Short-term investments 2,412,970
---------------
Total investment income 63,374,832
Less investment expenses 487,110
---------------
$ 62,887,722
===============
5. INCOME TAXES
The provision for income taxes (benefit) for the year ended December 31,
1994 was as follows:
1994
Current:
Federal $ (675,000)
State 86,000
Deferred federal and state (678,000)
--------------
$ (1,267,000)
==============
Federal income tax 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 for the year
ended December 31, 1994:
Federal income tax benefit at statutory rate $ (1,705,000)
Change in estimate of valuation allowance 400,000
Tax-exempt interest (10,000)
State income taxes, net of federal benefit 22,000
Benefit of graduated income tax rates 37,000
Other, net (11,000)
---------------
$ (1,267,000)
===============
6. 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, the Company purchased 1,000 shares 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.
Directors' fee was $200,367 in 1994, and aggregate salaries of executive
officers for the year was $1,187,087, 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 Company has been accruing the
liability for such deferred retirement benefits over remaining active
employment periods by annual charges to expense. 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.
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.
7. 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 shares of Company
common stock at December 31, 1994. 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.
Inasmuch 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.
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.
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. 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.
8. 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
</TABLE>
The Company's capital expenditures and related depreciation expenses are
incurred by the Parent and SBM Certificate Company. For the year ended
December 31, 1994, total capital expenditures for the Parent were
$161,330 and depreciation expense for the Parent and SBM Certificate
Company was $248,474 and $54,017, 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.
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 1, 1997.
<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
(64)
Kennon V. Rothchild Director Chairman and Chief Executive
1992 Officer, RCN Associates, Inc.,
(68) mortgage banking consultants
Robert M. Winslow Director Professor of Medicine, University of
1992 California at San Diego
(55)
Charles A. Geer Chief Executive Officer Owner, Charles Geer Associates, a
1993 private merchant banking firm, and
(57) consulting attorney
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation paid by the Company in
1996, 1995 and 1994 to its Chief Executive Officer. No other person who served
as an executive officer of the Company during 1996 received salary and bonus in
excess of $100,000.
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------
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) 1996 $174,602(2) --- --- ---
Chief Executive Officer 1995 $159,238(3) 386,000(4) --- $770,000(5)
1994 $225,000(6)(7) --- 168,361(8) 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 $81,563 accrued by the Company in 1996 for fees
payable to Mr. Geer for services rendered during 1996, but includes
$105,705 paid to Mr. Geer in 1996 for services renedered in 1995.
(3) Does not include $105,705 accrued by the Company in 1995 for fees
payable to Mr. Geer for services rendered during 1995.
(4) This represents an incentive bonus paid to Mr. Geer upon consummation
of the Sale Transaction. The bonus represents 1% of the capital
financing arranged in connection with the Sale Transaction. See
"Certain Relationships and Related Transactions -- Employment Agreement
with Charles A. Geer".
(5) 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".
(6) 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.
(7) 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.
(8) 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".
Compensation Committee Interlocks and Insider Participation
in Compensation Decisions
The members of the Company's Compensation Committee in 1996 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, none of whom are
employees of the Company, 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 1996 by the Company was $92,791. 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 1,
1997 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 as of December 31, 1996 and
1995 and for the years then ended included in Item 8.
Independent Auditors' Report
Statement of Net Assets in Liquidation as of December 31, 1996 and 1995
Statement of Changes in Net Assets in Liquidation - Years Ended
December 31, 1996 and 1995
Consolidated Statement of Income - Year ended December 31, 1994
Consolidated Statements of Stockholders' Equity (Deficit) - Year ended
December 31, 1994
Consolidated Statements of Cash Flows - Year ended December 31, 1994
Notes to Financial Statements - Year ended December 31, 1995
2. Financial Schedules for the Year Ended December 31, 1994*
Schedule II - Condensed Financial Information of Registrant - Year
Ended December 31, 1994.
Schedule III - Supplementary Insurance Information - Year Ended
December 31, 1994.
Schedule IV - Reinsurance - Year Ended December 31, 1994.
Schedule IX - Short-Term Borrowings - Year Ended December 31, 1994.
- -----------------------
* Filed with Form 10-K filed April 12, 1995 (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 to Form 10-K filed April 15, 1996 (File No. 811-407).*
(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 to Form 10-K filed April 15, 1996 (File No. 811-407).*
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).*
- -------------------------
* Previously filed as indicated and incorporated herein by reference.
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.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT
No annual report, proxy statement or other proxy soliciting material
was sent to the security holders of the Registrant during the last fiscal year.
- -----------------------
* 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.
1150 LIQUIDATING CORPORATION
Registrant
Date: March 28, 1997 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: March 28, 1997 By /s/ Charles A. Geer
--------------------
Charles A. Geer Chief Executive Officer
Date: March 5, 1997 By /s/ Richard M. Evjen
-----------------------------------------
Richard M. Evjen Director
Date: March 28, 1997 By /s/ Kennon V. Rothchild
-----------------------------------------
Kennon V. Rothchild Director
Date: March 28, 1997 By /s/ Robert M. Winslow
-----------------------------------------
Robert M. Winslow Director
Exhibit Index
Exhibit No. Document Form of Filing
- ---------------- --------------------------- -----------------------
27 Financial Data Schedule Electronic Transmission
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,861,428
<SECURITIES> 0
<RECEIVABLES> 15,541
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,876,969
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,826,496
<CURRENT-LIABILITIES> 813,919
<BONDS> 0
2,639,835
0
<COMMON> 0
<OTHER-SE> 3,372,742
<TOTAL-LIABILITY-AND-EQUITY> 6,826,496
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (330,740)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (330,740)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (330,740)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
