Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
For Quarter Ended September 30, 1998 Commission File Number 811-407
------------------ -------
1150 LIQUIDATING CORPORATION
(formerly SBM Company)
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0557530
- ---------------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4440 IDS Center
Minneapolis, Minnesota 55402
- ---------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 338-5254
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
2,179,714 Common Shares were outstanding as of September 30, 1998
<PAGE>
1150 LIQUIDATING CORPORATION
I N D E X
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Net Assets in Liquidation 1
Statement of Changes in Net Assets in Liquidation 2
Notes to Condensed Financial Statements 3-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Changes in Net Assets in Liquidation 7
PART II. OTHER INFORMATION 8-9
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
1150 LIQUIDATING CORPORATION
(formerly SBM COMPANY AND SUBSIDIARIES)
STATEMENT OF NET ASSETS IN LIQUIDATION
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents $ 871,000 $ 5,015,698
Other assets 77,525 36,971
------------ ------------
Total assets 948,525 5,052,669
LIABILITIES
Reserve for taxes -- 70,000
Accounts payable 72,830 83,888
Reserve for estimated costs during the period of liquidation 161,070 245,239
------------ ------------
Total liabilities 233,900 399,127
Common stock held by employee benefit plans
or plan participants - 304,693 shares (see Note 2) 125,770 825,231
------------ ------------
Net assets $ 588,855 $ 3,828,311
============ ============
Common shares outstanding - 2,179,714 less 304,693 shares
held by employee benefit plans or plan participants 1,875,021 1,875,021
============ ============
Net assets per common share outstanding $ .31 $ 2.04
============ ============
</TABLE>
See Notes to Financial Statements.
1
<PAGE>
1150 LIQUIDATING CORPORATION
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
For the Period from December 31, 1994 to September 30, 1998
<TABLE>
<S> <C>
NET ASSETS (DEFICIT) AT DECEMBER 31, 1994 $(31,976,759)
Income from liquidating activities 42,662,596
Preferred stock liquidation amount in excess
of carrying value (1,279,805)
Common stock dividend distribution - $2.75 per share (5,994,214)
Allocation of common stock dividend distribution to
common stock held by employee benefit plans 837,906
Allocation of net loss and carrying value to common
stock held by employee benefit plans 442,472
------------
NET ASSETS AT DECEMBER 31, 1995 4,692,196
Income (loss) from liquidating activities (330,740)
Special allocation of carrying value to common stock held by
employee benefit plans under settlement agreement (Note 2) (1,000,000)
Allocation of net loss and carrying value to
common stock held by employee benefit plans 11,286
------------
NET ASSETS AT DECEMBER 31, 1996 3,372,742
Income from liquidating activities 529,599
Allocation of net income and carrying value to common stock
held by employee benefit plans (74,030)
------------
NET ASSETS AT DECEMBER 31, 1997 3,828,311
Income (loss) from liquidating activities (January 1, 1998 through September 30, 1998) 61,082
Common stock dividend distribution - $2.32 per share (708,000)
Common stock dividend distribution - $1.76 per share (3,292,000)
Allocation of net income and carrying value to common stock
previously held by employee benefit plans 699,462
------------
NET ASSETS AT SEPTEMBER 30, 1998 (unaudited) $ 588,855
============
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Sale and Liquidation of the Company:
Effective May 31, 1995, SBM Company (the "Company") sold substantially
all of the business operations and assets of the Company to ARM
Financial Group, Inc. (ARM) (the Transaction) for a purchase price of
$34.5 million, net of $4.1 million of liabilities assumed, pursuant to
an Amended and Restated Stock and Asset Purchase Agreement dated
February 16, 1995 between the Company and ARM. As part of the
Transaction, ARM acquired all of the outstanding stock of the Company's
wholly owned subsidiaries (State Bond and Mortgage Life Insurance
Company ("SBM Life"), SBM Certificate Company ("SBMC") and SBM
Financial Services, Inc.) and certain assets of the Company, including
the investment adviser function of six mutual funds, and assumed
certain liabilities of the Company. The following summarizes the
proceeds from and net assets sold of the Transaction:
Proceeds from the sale $ 34,445,877
Assets sold:
Investments 808,543,939
Receivable from reinsurer 85,202,588
Deferred acquisition costs 61,683,713
Other assets 14,863,970
--------------
970,294,210
Liabilities assumed:
Future policy benefits 861,067,924
Face amount certificate reserves 56,439,745
Accounts payable and other liabilities 12,508,983
--------------
930,016,652
--------------
Net assets sold 40,277,558
--------------
Less costs of the Transaction, including income
taxes of $408,000 710,927
--------------
Net loss on sale of Company operations $ (6,542,608)
==============
The Company intends to wind up and liquidate the Company as soon as
practicable. The Company has adopted a Plan of Dissolution effective
May 31, 1995. At closing, the Series A Preferred Stock was redeemed for
$20.5 million (including $1.5 million of dividends in arrears) as a
result of its senior rights over the common stock.
The Company's shareholders approved the Transaction and the Plan of
Dissolution (the "Plan") at their regular shareholder meeting on May
18, 1995. The Company also changed its name to "1150 Liquidating
Corporation" effective June 14, 1995.
As a result, the Company adopted the liquidation basis of accounting
effective January 1, 1995. Assets have been valued at estimated net
realizable value and liabilities provide for all expenses to be
incurred during the period of liquidation. The reserve for estimated
costs during the period of liquidation includes what management
anticipates are reasonable estimates of costs required to liquidate the
Company's remaining assets and to defend known legal claims, as well as
the estimated costs of directors and officers and legal, audit and
other professional fees and expenses expected to be incurred during the
period of liquidation. The net assets ultimately available for
distribution to shareholders will depend almost entirely upon the
remaining time involved in winding up the affairs of the Company, and
any now unknown liabilities or additional litigation and the expenses
and liabilities incurred in connection therewith.
3
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 1. Sale and Liquidation of the Company (Continued):
The statement of net assets in liquidation at September 30, 1998
includes accruals for general and administrative expenses anticipated
by management with respect to resolving such known matters in a
reasonably timely fashion, as expected at that date. Net assets
ultimately available for distribution will be reduced by the amount of
any other unknown liabilities as may arise in the future, and to any
extent general and administrative expenses incurred exceed the
estimates included in the statement of net assets in liquidation at
September 30, 1998. In addition, the financial statements do not
reflect any investment income that is anticipated to be earned
subsequent to September 30, 1998.
The financial statements included in this Form 10-Q have been prepared
by the Company without audit. In the opinion of management, all
adjustments necessary to present fairly the statement of net assets in
liquidation and changes therein for all periods presented have been
made.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these financial statements be read in conjunction with the
financial statements and notes thereto included in the 1150 Liquidating
Corporation's Annual Report on Form 10-K for the year ended December
31, 1997.
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 the Employee
Benefit Plans or plan participants. While these estimates are based on
the best judgment of management, actual results and revised estimates
could differ from current estimates and are reflected in the period of
change.
Note 2. Common Stock Held by Employee Benefit Plans or Plan Participants:
The Company's two employee benefit plans ("Plans") owned 304,693 shares
of Company common stock. The value of such shares has been classified
as a separate line outside of net assets in liquidation on the
Company's statement of net assets in liquidation as of September 30,
1998 and as of December 31, 1997 because of the Company's obligation to
repurchase such shares, under certain circumstances, under a stock
agreement ("Stock Agreement"), between the Company and the Plans'
trustee dated September 30, 1993.
On the December 31, 1997 and September 30, 1998 statement of net assets
in liquidation, the liability to the Plans' participants has been shown
as the estimated liquidation value of their shares of common stock
under the settlement agreement discussed below.
In January 1995, the trustee of the Plans notified the Company that it
was tendering all shares held by the Plans to the Company for purchase
by the Company under the Stock Agreement. Under the Stock Agreement, in
certain circumstances, the Company has agreed to purchase common shares
tendered to it by the Plans at a price equal to the higher of adjusted
book value (as defined in the Stock Agreement) or fair market value.
The Plans' trustee asserted in its tender that the correct basis under
the Stock Agreement to determine the price of the shares for purposes
of the Company's repurchase obligation is to
4
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Common Stock Held by Employee Benefit Plans or Plan Participants
(Continued):
determine their adjusted book value at December 31, 1994 based on the
books of the Company but using the amortized cost of the Company's
investment portfolios, rather than their fair market value. The Company
maintains that such price under the Stock Agreement must be based on
the books of the Company which, after the effectiveness of the SFAS 115
on January 1, 1994, must use the market value, rather than the
amortized cost, of the substantial portion of the Company's investment
portfolios which must be classified as "available-for-sale" under
applicable accounting principles. In the alternative, the Company
maintains that the tender was invalid in the circumstances under which
it was made and, even if valid, that the correct price under such
circumstances is the pro-rata estimated liquidation value of all of the
Company's common shares pursuant to the Plan of Dissolution, rather
than any value based upon the books of the Company as prepared on the
going concern historical cost basis.
The Company declined to repurchase such shares at the price demanded by
the Trustee for various reasons, including those stated above, and
commenced a declaratory judgment action in Minnesota District Court in
March 1995 to determine its repurchase obligation and the applicable
price under the Stock Agreement ("Plan Litigation").
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 1996, the Department of Labor (DOL) advised the Company of
certain alleged violations of ERISA (of breach of fiduciary duty under
Sections 404(a)(1)(A), (B), and (D) of ERISA and prohibited
transactions based upon Section 406(b)(2) of ERISA) in connection with
the Company's handling of the repurchase of shares owned by the Plans
under the Put Agreement and the Internal Revenue Service (IRS) opened
an audit alleging that the Company could be liable for certain excise
taxes in connection with such matters. The Company objected to such
allegations and, on February 27, 1997, received a letter from the DOL
which advised it would take no further action in connection with the
allegations if the litigation with the Plans is resolved pursuant to
the Settlement Agreement and the Company subsequently was advised that
the IRS would close its audit and not assess excise tax liabilities on
the Company. These matters delayed implementation of the Settlement
Agreement.
5
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Common Stock Previously Held by Employee Benefit Plans (Continued):
In October 1996, the Company, the Schonlau Trust and the Trustee agreed
to sign the Settlement Agreement and proceed with its implementation at
such time as the allegations of the DOL and IRS were resolved in a
manner satisfactory to all parties to the Plan litigation. In June
1997, these allegations of the DOL and IRS having been resolved, the
Settlement Agreement was signed by all parties and was submitted to the
court for approval. A hearing was held on August 21, 1997 and Judge
William R. Howard approved the settlement and entered the Order
Approving Settlement. The Settlement became effective on November 21,
1997.
Pursuant to the terms of the Settlement Agreement, on or about December
1, 1997, the Company made settlement payments totaling $1.15 million to
the Plan's Trustee and a settlement payment of $100,000 to the Schonlau
Trust. Also, on or about December 1, 1997, the Company's initial
liquidating distribution to the Trustee, which had been held in escrow
pending resolution of the Plan litigation, was released to the Trustee.
On February 16, 1998, the 304,693 shares of common stock held by the
Employee Benefit Plans were distributed to plan participants.
Note 3. Other Matters:
The Company was notified that The Trust Under the Will of T.H. Schonlau
("Schonlau Trust"), its largest shareholder, had retained legal counsel
for the purpose of investigating whether the Schonlau Trust had claims
or rights against current or former officers, directors, employees,
shareholders, representatives, agents, auditors, accountants, attorneys
or anyone acting on its behalf (i) arising out of or relating to its
ownership of SBM common shares and (ii) arising out of or relating to
the management of SBM, or otherwise. The Trust had requested the
Company to produce certain corporate records and documents in
connection with its investigation.
Any such shareholder action, even if successful in the long-term, would
have the effect of delaying the liquidation and dissolution of the
Company and of increasing its administrative and professional expenses
in the short-term. No provision has been made to support any actual
litigation by the Schonlau Trust, any possible liability of the
Company, claims for indemnity by present or former officers or
directors, or related litigation which may result, because the Schonlau
Trust has not decided at this time to bring any such action.
Company counsel has now been advised by counsel to the Schonlau Trust
that its investigation of potential claims has been terminated and that
the Trustees have no present intention of "commencing litigation on
behalf of the Schonlau Trust against any person or entity arising from
or related to the conduct and events that resulted in the sale of SBM's
assets in 1995." Representatives of other significant shareholders have
made similar statements to management.
6
<PAGE>
1150 LIQUIDATING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
7
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 6. Exhibits and Reports on Form 8-K
None
8
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1150 LIQUIDATING CORPORATION
Date November 13, 1998 By: /s/ Charles A. Geer
------------------------ -------------------------------------
Charles A. Geer
Its: President and Chief Financial Officer
9
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998<F1>
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 0
<CASH> 871,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 948,525
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 588,855<F2>
<TOTAL-LIABILITY-AND-EQUITY> 948,525
0
<INVESTMENT-INCOME> 0
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,082
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>THE COMPANY IS CURRENTLY USING LIQUIDATION ACCOUNTING.
<F2>NET ASSETS IN LIQUIDATION.
</FN>
</TABLE>
