SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 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, 1998 2,179,714
Documents Incorporated By Reference
None
<PAGE>
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 Company's Thrift Plan and Profit Sharing Stock Plan
(collectively, the "Plans") had been held until December 1, 1997 in an
interest-bearing escrow account pursuant to a court order. On December 1, 1997
as a result of the terms of a settlement agreement, the distributions were
released to the trustee for the Plans. The remaining proceeds of the Sale
Transaction of approximately $5 million are being invested in a short-term
government money market fund pending the resolution of liabilities of the
Company. See "Litigation" below. The Company does not expect to distribute all
of the remaining cash proceeds of the Sale Transaction until all known debts,
obligations and liabilities of the Company, including contingent liabilities,
have been paid or adequate provision has been made therefor, and there are no
pending legal, administrative or arbitration proceedings by or against the
Company or adequate provision has been made therefor.
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
<PAGE>
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"), was 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. Prior to the liquidating distributions on
February 16, 1998, the Plans held 304,693 shares of Common Stock. The Company
historically has 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.
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 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.
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 named as defendants the Trustee and the Schonlau
Trust, which holder alleged that it fairly and adequately represented 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
<PAGE>
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 sought 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
were 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 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 final and more formal settlement agreement (the "Settlement
Agreement") was executed on June 6, 1997. As explained below, this delay of
approximately sixteen months was caused in large part by the investigations of
the Department of Labor and the Internal Revenue Service into this matter.
In general, the Settlement Agreement provided for 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 included $150,000 in partial payment
of attorneys' fees incurred by the Trustee. The Settlement Agreement also
provided for the payment by the Company of $100,000 of the litigation costs
incurred by the Schonlau Trust. The amounts paid as part of the settlement are
in addition to the pro rata amounts payable to Plan shareholders (determined
without regard to the settlement amounts) and are paid out of the amount
otherwise available for pro rata distribution in liquidation to non-Plan
shareholders. Therefore, based on December 31, 1997 financial statements and
assuming that no liabilities in addition to those liabilities incurred as of
December 31, 1997 are incurred by the Company and that general and
administrative expenses incurred by the Company during liquidation do not exceed
the reserve therefor. Plan shareholders may expect to receive additional
liquidating distributions of $5.96 per share (which takes into account $.34 per
share liquidating expenses paid largely to the Trustee) in addition to the $2.75
previously distributed (for a total of $8.71 per share in liquidating
distributions) and non-Plan shareholders may expect to receive additional
liquidating distributions of $2.04 per share (for a total of $4.79 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
<PAGE>
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. The Company has been advised that the
Schonlau Trust has been investigating some or all of these potential claims and
has not yet decided whether to pursue any of them. To the extent that any claims
are brought against officers or directors of the Company or other third parties,
the Company could be required to provide defense and/or indemnity or
contribution to one or more such parties. The Company could also be named as a
party in a shareholder's derivative action and may incur costs in connection
therewith.
The Settlement Agreement further provided that it would not become
effective until the following occurred: 1) a mandatory settlement class of
non-Plan shareholders was certified by the Court; 2) the parties provided notice
of the settlement to all Plan and non-Plan shareholders; 3) the Court held a
hearing at which the parties would present evidence concerning the fairness of
the settlement and the Plan and non-Plan shareholders had the opportunity to
object to the settlement; and 4) following the hearing the Court approved the
settlement and entered a bar order consistent with the Settlement Agreement as
described above.
On June 10, 1996 (after the settlement agreement in principle was
signed, but before the execution of the Settlement Agreement), 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
<PAGE>
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 were 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.
On August 21, 1997, the Court held a hearing as required under the
terms of the Settlement Agreement. No objections were made to the settlement by
any shareholder, Plan or non-Plan, at the hearing. At the conclusion of the
hearing, the Court entered an Order approving the settlement, certifying a
mandatory settlement class of non-Plan shareholders, and 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. Accordingly, the Settlement
Agreement became effective on November 19, 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 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.
In a related matter, the Company entered into a Settlement Agreement
and Release of Claims ("Release") with Nutmeg Insurance Company and Pacific
Insurance Company, the
<PAGE>
Company's fiduciary liability insurers (the "Insurers"), on October 3, 1997.
Under the terms of that Release, the Company agreed to release its claims for
coverage under the Insurers' fiduciary liability policies with respect to claims
arising out of, or related to, the Trustee's Counterclaims in the Plan
litigation and the DOL and IRS investigations described above, in return for a
payment of $340,000. The settlement between the Company and the Insurers was
concluded on December 3, 1997, when the Company received the Insurers'
settlement payment.
The Internal Revenue Service has audited the Company for the years
1986-1990 and 1991-1993. The Company and the IRS have entered into adjustment
agreements with respect to each period. The Company has made all necessary
payments. However, certain interest adjustments are being negotiated and the
Company expects to receive payments from the IRS, which payments, if received,
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, 1998, there were approximately 356 holders of
record 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.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following financial data of the Company is presented for the
three-year period ended December 31, 1997 on a liquidation basis.
STATEMENT OF NET ASSETS IN LIQUIDATION AS OF DECEMBER 31, 1997, 1996 AND 1995.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Cash and short term investments $5,015,688 $5,861,428 $6,048,325
Federal income tax refund 15,541 118,831
Escrowed funds 888,634 846,419
Other assets 36,971 60,893 13,188
---------- ---------- ----------
5,052,669 6,826,496 7,026,763
LIABILITIES
Accounts payable 83,888 125,308 55,166
Reserve for estimated costs during
the period of liquidation 245,239 438,611 577,527
Reserve for legal expenses payable
under Settlement Agreement 250,000
Reserve for taxes 70,000 92,968
---------- ---------- ----------
Total Liabilities 399,127 813,919 725,661
Common stock held by Employee Benefit Plans -
304,693 shares(1) 825,231 2,639,835 1,608,906
---------- ---------- ----------
Net asset available to common shareholders $3,828,311 $3,372,742 $4,692,196
========== ========== ==========
Common shares outstanding - 2,179,714 less 304,693
shares held by Employee Benefit Plans(1) 1,875,021 1,875,021 1,875,021
========== ========== ==========
Net Assets per common share outstanding $ 2.04 $ 1.80 $ 2.50
========== ========== ==========
- -----------------------
</TABLE>
(1) On February 16, 1998 the shares were distributed to the participants of
the Plans. See "Legal Proceedings".
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET ASSETS (DEFICIT) AT BEGINNING OF YEAR $ 3,372,742 $ 4,692,196 $(31,976,759)
Income (loss) from liquidating activities 529,599 (330,740) 42,662,596
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 (income) loss and carrying value to
common stock held by Employee Benefit Plans (74,030) 11,286 442,472
------------ ------------ ------------
NET ASSETS AT END OF YEAR $ 3,828,311 $ 3,372,742 $ 4,692,196
============ ============ ============
</TABLE>
<PAGE>
The following selected financial data of the Company is presented for
the two years ended December 31, 1994 on a going concern basis.
For the Year Ended December 31,
-----------------------------------------
1994 1993
---- ----
(in thousands, except for per share data)
Total Revenues $ 59,932 $ 72,047
Income (Loss) From Continuing
Operations(1) (3,604) 3,748
Net Income (Loss) (3,604) 3,748
Per Common Share:
Primary:
Continuing Operations (2.40) 1.35
Net Income (Loss) (2.40) 1.35
Fully diluted:
Continuing Operations (2.40) 1.32
Net Income (Loss) (2.40) 1.32
Dividends declared per share:
Common Stock .10 .40
Mandatory Redeemable Voting
Convertible Preferred Stock 40.00 80.00
As of December 31,
------------------
1994 1993
---- ----
(in thousands)
Total Assets 969,364 1,024,910
Face Amount Certificate Reserves 60,355 67,029
Future Policy Benefits 910,104 891,923
Mandatory Redeemable Voting
Convertible Preferred Stock 18,486 17,590
Common Stock Held by Employee
Benefit Plans 1,917 4,809
Stockholders' Equity (Deficit)(1) (31,977) 31,959
Total Assets of Affiliated Mutual Fund
Companies 203,691 209,461
- ------------------
(1) Effective January 1, 1994, the Company adopted SFAS 115 which had a
significant effect on stockholders' equity.
<PAGE>
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, 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+ 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, and
making provision for, its remaining liabilities and has made an initial
distribution to holders of the Common Stock. The remaining proceeds will be
distributed once all other liabilities have been satisfied. See Note 2 to the
Company's Financial Statements in Item 8 hereof.
TWO YEARS ENDED DECEMBER 31, 1997
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, January 1, 1996 to December 31,
1996 and January 1, 1997 to December 31, 1997 consisted
<PAGE>
almost entirely of earnings on invested assets and certain insurance proceeds.
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 the settlement of the litigation with the
Trustee of the Plans and resolving the allegations of the DOL and the IRS, 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 depend upon the amount needed to satisfy, or make adequate
provision for, all known debts, obligations and liabilities of the Company and
any legal, administrative or arbitration proceeding by or against the Company,
and the expenses and liabilities incurred in connection therewith. The Statement
of Net Assets in Liquidation as of December 31, 1997 and 1996 includes accruals
for general and administrative expenses anticipated by the Company to be
incurred with respect to resolving certain known liabilities in a reasonably
timely fashion, as expected at that date. Net assets ultimately available for
distribution will be adjusted for additional liabilities that must be satisfied,
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. These potential
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. See "Legal Proceedings".
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 all other liabilities are
satisfied.
ITEM 8. FINANCIAL STATEMENTS
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
1150 Liquidating Corporation
Minneapolis, Minnesota
We have audited the accompanying statements of net assets in liquidation of 1150
Liquidating Corporation (the Company) as of December 31, 1997 and 1996 and the
related statements of changes in net assets for the three years then ended.
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 Liquidating Corporation at
December 31, 1997 and 1996 and the changes in its net assets in liquidation for
the three years then ended, in conformity with generally accepted accounting
principles on the bases described in the preceding paragraph.
Minneapolis, Minnesota
March 20, 1998
<PAGE>
1150 LIQUIDATING CORPORATION
STATEMENTS OF NET ASSETS IN LIQUIDATION
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1997 1996
ASSETS
<S> <C> <C>
Cash and short-term investments $5,015,698 $5,861,428
Federal income tax refund 15,541
Escrowed funds 888,634
Other assets 36,971 60,893
---------- ----------
5,052,669 6,826,496
LIABILITIES
Accounts payable 83,888 125,308
Reserve for estimated costs during the period of liquidation (Note 2) 245,239 438,611
Reserve for legal expenses payable under Settlement Agreement (Note 2) 250,000
Reserve for taxes 70,000
---------- ----------
Total liabilities 399,127 813,919
Common stock held by Employee Benefit Plans - 304,693
shares (Notes 2 and 3) 825,231 2,639,835
---------- ----------
Net asset available to common shareholders $3,828,311 $3,372,742
========== ==========
Common shares outstanding - 2,179,714 less 304,693 shares
held by Employee Benefit Plans 1,875,021 1,875,021
========== ==========
Net assets per common share outstanding (Note 2) $ 2.04 $ 1.80
========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
1150 LIQUIDATING CORPORATION
STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
NET ASSETS (DEFICIT) AT BEGINNING OF YEAR $ 3,372,742 $ 4,692,196 $ (31,976,759)
Income (loss) from liquidating activities (Note 1) 529,599 (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 (income) loss and carrying value to common stock
held by Employee Benefit Plans (74,030) 11,286 442,472
------------- ------------ ---------------
NET ASSETS AT END OF YEAR $ 3,828,311 $ 3,372,742 $ 4,692,196
============= ============ ===============
</TABLE>
See notes to financial statements.
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
BASIS OF PRESENTATION
The financial statements at December 31, 1997 and the three years then
ended include the accounts of 1150 Liquidating 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.
<PAGE>
<TABLE>
<CAPTION>
The following summarizes certain amounts related to the Transaction:
<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)
=============
<PAGE>
A summary of significant activities from January 1 to December 31, 1997
is as follows:
Income on cash and short-term investments $ 360,190
Revised provision for estimated costs during the period of liquidation (196,213)
Insurance settlement 340,000
Income tax benefits 25,622
-------------
$ 529,599
=============
</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 known and asserted 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, including resolution of any now
unknown and unasserted liabilities or additional litigation related to
such matters. 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 and
unasserted liabilities and additional litigation costs related to such
matters 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, 1997.
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 IRS as reflected on the Company's federal tax return. Deferred income
taxes were not significant at December 31, 1997 and 1996. Cash paid
(refunds) for income taxes for the years ended December 31, 1997, 1996,
and 1995 was $(111,163), $(295,390), and $637,000, respectively.
The Internal Revenue Service has audited the Company for the years
1986-1990 and 1991-1993. The Company and the IRS have entered into
adjustment agreements with respect to each period. The Company has made
all necessary payments. However, certain interest adjustments are being
<PAGE>
negotiated and the Company expects to receive payments from the IRS,
which payments, if received, will not be material to the Company's
financial condition.
COMMON STOCK HELD BY EMPLOYEE BENEFIT PLANS AND RELATED LITIGATION
The Company's two employee benefit plans (Plans) owned 304,693 shares of
Company common stock at December 31, 1997 and 1996. The value of such
shares has been classified as a separate line on the Statement of Net
Assets in Liquidation at December 31, 1997 and 1996 because of the
Company's obligation to repurchase such shares, under certain
circumstances, under a stock agreement, or stock repurchase agreement or
put agreement (the "Stock Agreement"), between the Company and the Plans'
Trustee dated September 30,1993.
Pursuant to the terms of 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. Prior to the liquidating
distributions on February 16, 1998, the Plans held 304,693 shares of
Common Stock.
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"). 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 final and more formal
settlement agreement (the "Settlement Agreement") was executed on June 6,
1997. In general, the Settlement Agreement provided for 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 included $150,000 in
partial payment of attorneys' fees incurred by the Trustee. The
Settlement Agreement also provided for the payment by the Company of
$100,000 of the litigation costs incurred by the Schonlau Trust. The
amounts paid as part of the settlement are in addition to the pro rata
amounts payable to Plan shareholders (determined without regard to the
settlement amounts) and are paid out of the amount otherwise available
for pro rata distribution in liquidation to non-Plan shareholders.
On August 21, 1997, the Court held a hearing as required under the terms
of the Settlement Agreement. At the conclusion of the hearing, the Court
entered an Order approving the settlement, certifying a mandatory
settlement class of non-Plan shareholders, and 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.
Accordingly, the Settlement Agreement became effective on November 19,
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 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.
Related administrative matters which involved assertions by the
Department of Labor ("DOL") and Internal Revenue Service ("IRS") have
been resolved, effective upon the entering of the Order approving the
settlement of the Plan Litigation.
<PAGE>
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. The Company has been advised that
the Schonlau Trust has been investigating some or all of these potential
claims and has been advised that it has not yet decided whether to pursue
any of them. To the extent that any claims are brought, directly or by
cross-claim or third-party claim against officers or directors of the
Company or other third parties, the Company could be required to provide
defense and/or indemnity or contribution to one or more such parties. No
provision for any such liabilities has been made in the financial
statements.
In a related matter, the Company entered into a Settlement Agreement and
Release of Claims ("Release") with Nutmeg Insurance Company and Pacific
Insurance Company, the Company's fiduciary liability insurers (the
"Insurers"), on October 3, 1997. Under the terms of that Release, the
Company agreed to release its claims for coverage under the Insurers'
fiduciary liability policies with respect to claims arising out of, or
related to, the Trustee's Counterclaims in the Plan litigation and the
DOL and IRS investigations described above, in return for a payment of
$340,000. The settlement between the Company and the Insurers was
concluded on December 3, 1997, when the Company received the Insurers'
settlement payment.
3. SUBSEQUENT EVENT
On February 16, 1998, the 304,693 shares of common stock held by Employee
Benefit Plans were distributed to the plan participants.
<PAGE>
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, 1998.
<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
(65)
Kennon V. Rothchild Director Chairman and Chief Executive
1992 Officer, RCN Associates, Inc.,
(69) mortgage banking consultants
Robert M. Winslow Director Professor of Medicine, University of
1992 California at San Diego
(56)
Charles A. Geer Chief Executive Officer Owner, Charles Geer & Associates, a
1993 private management and merchant
(57) banking firm, and consulting attorney
</TABLE>
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation paid by the Company in
1997, 1996 and 1995 to its Chief Executive Officer. No other person who served
as an executive officer of the Company during 1997 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>
1997 $113,063(2) --- --- ---
Charles A. Geer(1) 1996 $174,602(2) --- --- ---
Chief Executive Officer 1995 $159,238(2) 386,000(3) --- $770,000(4)
- ----------------
</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 $103,863 accrued by the Company in 1997 for fees
payable to Mr. Geer for services rendered during 1997, but does include
$81,563 paid to Mr. Geer in 1997 for services rendered in 1996. 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 rendered in 1995. Does not include
$105,705 accrued by the Company in 1995 for fees payable to Mr. Geer
for services rendered during 1995.
(3) This represents an incentive bonus paid to Mr. Geer upon consummation
of the Sale Transaction. The bonus represents 1% of the capital
financing arranged in connection with the Sale Transaction. See
"Certain Relationships and Related Transactions -- Employment Agreement
with Charles A. Geer".
(4) Includes $270,000 received as severance payment upon consummation of
the Sale Transaction and $500,000 received when the Warrant (as
hereinafter defined) was repurchased by the Company. See Note 5 below
and "Certain Relationships and Related Transactions -- Employment
Agreement with Charles A. Geer".
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The members of the Company's Compensation Committee in 1997 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
<PAGE>
per-meeting fee for each committee meeting attended. The aggregate amount of
fees paid to or accrued for the benefit of directors during 1997 by the Company
was $50,000. Directors are also reimbursed for reasonable travel expenses
incurred in attending Board of Director meetings.
<PAGE>
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,
1998 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
State Bank & Trust Co. of New Ulm 249,835(2) 11.46%
100 North Minnesota Street Record
New Ulm, MN 56073
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 *
2300 American National Bank Building Beneficial
St. Paul, MN 55101
Robert M. Winslow 1,000 *
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 *
(4 persons) Record and
Beneficial
- ----------------------
</TABLE>
*Less than 1%.
(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) The Bank holds these shares as trustee of a number of trusts.
<PAGE>
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.
<PAGE>
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, 1997
AND 1996 FOR THE THREE YEARS THEN ENDED INCLUDED IN ITEM 8.
Independent Auditors' Report
Statements of Net Assets in Liquidation as of December 31, 1997 and
1996
Statements of Changes in Net Assets in Liquidation - Three Years Ended
December 31, 1997
Notes to Financial Statements - Three Years ended December 31, 1997
2. FINANCIAL STATEMENT SCHEDULES.
None.
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).*
- -----------------------
* Previously filed as indicated and incorporated herein by reference.
<PAGE>
(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.
10.1 Settlement Agreement and Release of Claims dated June 6, 1997 among the
registrant, Firstar Bank of Minnesota, National Association and the
Trusts under the Will of T.H. Schonlau.
10.2 Settlement Agreement and Claim Release dated October 3, 1997 among the
registrant, Firstar Bank of Minnesota, National Association and the
Trusts under the Will of T.H. Schonlau.
The following documents were filed as the designated exhibits to Form
10-K or registration statements filed as indicated.
Assumption, Assignment Agreement and Bill of Sale between registrant
and SBM Certificate Company dated December 31, 1990 filed as Exhibit
18(b) to Form N-8B-4 No. 811-6268 of SBM Certificate Company filed
April 1, 1991.*
SBM Company Thrift Plan Trust Agreement dated November 1, 1993, filed
as Exhibit 10B to Form 10-K dated December 31, 1993 (File No.
811-407).* First Amendment to Thrift Plan dated December 22, 1994 filed
as Exhibit 10A to Form 10-K filed April 12, 1995 (File No. 811-407).*
SBM Company Profit Sharing Stock Plan Trust Agreement dated November 1,
1993, filed as Exhibit 10C to Form 10-K dated December 31, 1993 (File
No. 811-407).* First Amendment to Stock Plan dated December 22, 1994
filed as Exhibit 10B to Form 10-K filed April 12, 1995 (File No.
811-407).*
Engagement Agreement between registrant and Charles A. Geer dated
November 22, 1994 and Warrant issued to Charles A. Geer filed as
Exhibit 10C to Form 10-K filed April 12, 1995 (File No. 811-407).*
Amended and Restated Stock and Asset Purchase Agreement between the
registrant and ARM Financial Group, Inc., dated as of February 16,
1995, filed as an Exhibit to a Form 8-K of the registrant dated
February 16, 1995.*
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
- -----------------------
* Previously filed as indicated and incorporated herein by reference.
<PAGE>
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). *
(27) Financial Data Schedule, filed as Exhibit 27.1 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.
<PAGE>
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 30, 1998 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 30, 1998 By /s/ Charles A. Geer
-------------------------
Charles A. Geer Chief Executive Officer
Date: March 30, 1998 By /s/ Richard M. Evjen
--------------------------
Richard M. Evjen Director
Date: March 30, 1998 By /s/ Kennon V. Rothchild
-----------------------------
Kennon V. Rothchild Director
Date: March 30, 1998 By /s/ Robert M. Winslow
---------------------------
Robert M. Winslow Director
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Document Form of Filing
----------- -------- --------------
<S> <C> <C>
10.1 Settlement Agreement and Release of Claims dated June 6, 1997 Electronic
among the registrant, Firstar Bank of Minnesota, National Transmission
Association and the Trusts under the Will of T.H. Schonlau
10.2 Settlement Agreement and Claim Release dated October 3, 1997 Electronic
among the registrant, Nutmeg Insurance Company and Pacific Transmission
Insurance Company
27.1 Financial Data Schedule Electronic
Transmission
</TABLE>
Exhibit 10.1
STATE OF MINNESOTA DISTRICT COURT
COUNTY OF HENNEPIN FOURTH JUDICIAL DISTRICT
CASE TYPE: OTHER CIVIL
- --------------------------------------------------------------------------------
SBM Company, a Minnesota
corporation, File No. CT 95-003703
Plaintiff,
SETTLEMENT AGREEMENT
v. AND RELEASE OF CLAIMS
- -- ---------------------
Firstar Trust Company of
Minnesota, a Minnesota trust
company, as Trustee of the
SBM Company Profit Sharing
Stock Plan and the SBM Company
Thrift Plan; The Trust under the
Will of T. H. Schonlau, a
Minnesota trust,
Defendants.
- --------------------------------------------------------------------------------
THIS SETTLEMENT AGREEMENT AND RELEASE OF CLAIMS (the "SETTLEMENT
AGREEMENT") is made this 6th day of June, 1997, by and among SBM Company, now
known as 1150 Liquidating Corporation ("SBM"), Firstar Trust Company of
Minnesota, now known as Firstar Bank of Minnesota, National Association
("FIRSTAR"), as Trustee of the SBM Company Profit Sharing Stock Plan and SBM
Company Thrift Plan (collectively referred to as the "PLANS"), and the Trust
created under Paragraph II of the Last Will and Testament of Theodore H.
Schonlau, deceased, and the Trust created under Paragraph VI of the Last Will
and Testament of Theodore H. Schonlau, deceased, acting individually,
derivatively, and as putative
<PAGE>
Co-Class Representatives on behalf of all non-Plan shareholders of SBM Company
common stock (the "SCHONLAU TRUSTS"). (The parties to this Agreement are
collectively referred to herein as the "PARTIES.")
RECITALS
WHEREAS, SBM is a corporation organized under the laws of the State of
Minnesota that, on June 14, 1995, sold substantially all its assets to ARM
Financial Group, Inc. and is currently in the process of dissolving and paying
distributions to its shareholders; and
WHEREAS, there are 2,179,714 shares of SBM Company common stock ("SBM
STOCK") issued and outstanding; and
WHEREAS, SBM sponsors the Plans, which collectively hold 304,693 shares
of SBM Stock, which is 13.97858% of all issued and outstanding shares; and
WHEREAS, Firstar is a national banking association that, as the trustee
of the Plans, is the record owner of the shares of SBM Stock held by the Plans;
and
WHEREAS, the Schonlau Trusts are trusts existing under the laws of the
State of Minnesota that together own 352,800 shares of SBM Stock, which is
16.1856% of all issued and outstanding shares, making the Schonlau Trusts
collectively the largest single holder of SBM Stock; and
WHEREAS, SBM and Firstar are parties to a Stock Agreement dated
September 1, 1993 (the "STOCK AGREEMENT") which allows Firstar to "put" shares
of SBM Stock held by the Plans back to SBM at the greater of fair market value
or Book Value, all as is more fully set out in the terms of the Stock Agreement;
and
<PAGE>
WHEREAS, by letter dated January 30, 1995, Firstar attempted to put all
of the SBM Stock held by the Plans back to SBM at a claimed Book Value of
approximately $14.50 per share; and
WHEREAS, by letter dated February 7, 1995, SBM replied that Firstar's
attempted put was invalid and that Firstar's methodology for computing Book
Value under the Stock Agreement was incorrect; and
WHEREAS, by letter dated February 17, 1995, the Schonlau Trusts
objected to Firstar's attempted put and alleged that SBM would violate Minnesota
law if it honored the put; and
WHEREAS, on March 8, 1995, SBM filed its Amended Complaint for
Declaratory Judgment and Related Relief in the above-captioned action (the
"ACTION") seeking declaratory judgment that: (1) Book Value as defined in
paragraph 3 of the Stock Agreement must take into account unrealized losses on
debt securities held by SBM and its subsidiaries; (2) the Stock Agreement only
allowed Firstar to make "liquidity puts" as necessary to pay benefits to
retiring Plan participants and did not allow Firstar to put all of the SBM Stock
held by the Plans back to SBM at one time; (3) Firstar's attempted put was void
and unenforceable pursuant to paragraph 6 of the Stock Agreement because SBM was
in the process of selling substantially all its assets and dissolving at the
time of Firstar's attempted put; (4) if SBM was required to honor the attempted
put, it would not violate Minnesota law in doing so; and (5) Firstar waived
and/or was estopped from asserting its purported interpretation of Book Value;
and
WHEREAS, on March 27, 1995, Firstar filed its Separate Answer and
Counterclaim generally denying that SBM was entitled to the declaratory relief
it sought in its Complaint, and asserting counterclaims against SBM alleging
that: (1) SBM breached the terms of the Stock Agreement by refusing to honor
Firstar's put of all the SBM Stock held by the Plans at the Book
<PAGE>
Value price claimed by Firstar; (2) SBM was estopped from asserting the various
interpretations of the Stock Agreement alleged in SBM's Complaint; (3) SBM was a
fiduciary of the Plans and was in breach of its fiduciary duty under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"); and (4)
SBM was also in breach of other fiduciary duties it owed outside of ERISA; and
WHEREAS, on March 22, 1995, the Schonlau Trusts filed their Separate
Answer, Counterclaim and Crossclaim in which they generally agreed that
Firstar's attempted put was invalid and, furthermore, acting individually and
purporting to act derivatively on behalf of all persons or entities that hold
SBM Stock outside the Plans (the "NON-PLAN SHAREHOLDERS"), the Schonlau Trusts
asserted counterclaims against SBM and crossclaims against Firstar alleging
that: (1) Firstar's attempted put was void and unenforceable because SBM could
not honor the put and still pay its debts in the ordinary course of business as
required by Minn. Stat. ss. 302A.551, Subd. 1(a); (2) the Stock Agreement was
void and unenforceable because it illegally altered the common stock investment
contract between SBM and the Non-Plan Shareholders by giving a preferential
right of redemption to Firstar acting on behalf of the persons who have a
beneficial interest in the shares of SBM Stock held under the Plans (the "PLAN
SHAREHOLDERS"); and (3) the Non-Plan Shareholders were entitled to the
dissenters' rights appraisal remedy under Minn. Stat. ss. 302A.471; and
WHEREAS, on June 16, 1995, the Court heard SBM's and Firstar's
cross-motions for summary judgment and on July 5, 1995 entered an Order: (1)
dismissing Firstar's counterclaim alleging breach of fiduciary duty under ERISA
for lack of subject matter jurisdiction; (2) ruling that Firstar could put all
of the shares of common stock owned by it at one time; (3) ruling that the
provisions in the Stock Agreement dealing with dissolution were ambiguous as to
when
<PAGE>
dissolution occurs; and (4) ruling that the Stock Agreement was ambiguous as to
the meaning of "Book Value" and as to whether "unrealized losses on debt
securities" should be included in calculating "Book Value;" and
WHEREAS, on October 16, 1995, the Court heard the Schonlau Trusts'
motion for summary judgment on their state law claims, as well as SBM's second
motion for summary judgment; after that hearing, the Parties asked the Court to
defer ruling on those motions pending settlement negotiations among the Parties,
and the Court has never issued a ruling on those motions; and
WHEREAS, on November 13, 1995, the Parties agreed upon a settlement of
the Action and executed a "Settlement Agreement in Principle;" the Settlement
Agreement in Principle contemplated a final and more formal settlement
agreement, including agreement as to a procedure for ensuring that the
settlement will fully and finally resolve all claims and liability relating to
the Action and the settlement of the Action; various drafts of the final and
more formal settlement papers were prepared and circulated among the Parties;
and
WHEREAS, on June 5, 1996, before the settlement papers were finalized,
the Department of Labor ("DOL") sent SBM a letter setting forth its preliminary
view that, subject to the possibility that additional information might lead the
DOL to revise its views, the DOL believed that SBM's refusal to honor Firstar's
attempted put and SBM's filing of this declaratory judgment action may have
violated several of the fiduciary duty and prohibited transaction provisions of
ERISA; shortly thereafter, on June 28, 1996, SBM sent the DOL a detailed letter
explaining why SBM strongly disagreed with the preliminary views expressed in
the DOL's letter, and explaining that if the DOL continued to pursue its
allegations it would, at the very least, substantially delay the settlement that
had been reached by the Parties and, at worst, might
<PAGE>
potentially upset that settlement completely; SBM sent the DOL copies of the
Settlement Agreement in Principle and the draft settlement papers that had been
prepared and circulated among the Parties; the DOL subsequently indicated that,
if the terms of the final settlement were in all material respects similar to
those in the draft settlement papers, the DOL would issue a "no enforcement
closing letter" closing its file without taking any enforcement action with
respect to the alleged violations; and
WHEREAS, before receiving SBM's response, however, the DOL referred a
copy of its June 5 letter to the Internal Revenue Service ("IRS"); the IRS
reviewed the letter, noted the prohibited transaction allegations, and on
September 23, 1996, sent a letter to SBM stating that it was opening a
prohibited transaction excise tax audit of SBM; and
WHEREAS, the IRS subsequently informed SBM that it viewed the DOL as
having primary responsibility for determining whether any prohibited
transactions had in fact occurred, and that the IRS's role was primarily to
determine the amount of any excise taxes that should be assessed; the IRS stated
that if the DOL withdrew the prohibited transaction allegations it had made in
its letter of June 5, 1996, the IRS would close its excise tax audit; and
WHEREAS, after extensive discussions between SBM and the DOL, on
February 27, 1997, the DOL issued its no enforcement closing letter. In that
letter, the DOL formally withdrew the allegations in its June 5, 1996 letter
that could have led to the imposition of prohibited transaction excise taxes.
Accordingly, on March 25, 1997, the IRS issued a letter closing its excise tax
audit without assessing any taxes; and
WHEREAS, the Parties have been involved in lengthy and expensive
litigation over the numerous issues raised in the pleadings in the Action; and
<PAGE>
WHEREAS, the Parties have engaged in vigorous and arm's-length debate
concerning the facts, legal theories, likelihood of success for each Party and
potential relief that might be granted by the Court in the Action; and
WHEREAS, the Parties have on two separate occasions engaged in
mediation in an attempt to resolve their dispute; and
WHEREAS, as discussed above, after extensive negotiations the Parties
have finally reached an agreement and desire to settle and completely resolve
the Action and any and all claims arising out of the subject matter of the
Action on the terms set out below; and
WHEREAS, the Parties agree that class certification as a mandatory non
opt-out class under Minn. R. Civ. P. Rules 23.02(a)(2) and (b) for settlement
purposes only of the claims asserted by the Schonlau Trusts on behalf of the
Non-Plan Shareholders (the "SETTLEMENT CLASS"), is substantively and
procedurally appropriate as an element of the proposed settlement of the Action;
and
WHEREAS, the Parties agree that this Settlement Agreement is contingent
upon the Settlement Agreement being submitted to the Court for a hearing on the
fairness of the settlement, and the proposed entry of an order in the form of
Exhibit A hereto (the "ORDER APPROVING SETTLEMENT"), certifying for settlement
purposes only under Minn. R. Civ. P. Rules 23.02(a)(2) and (b) the claims
asserted by the Schonlau Trusts on behalf of the Non-Plan Shareholders and
barring all claims against the Parties by the Non-Plan Shareholders and the Plan
Shareholders relating to the subject matter of the Action or the settlement of
the Action as more fully described below;
NOW, THEREFORE, for the consideration described below, the receipt and
sufficiency of which is expressly acknowledged, the Parties agree as
follows: SETTLEMENT
<PAGE>
AGREEMENT
AND RELEASE OF CLAIMS
1. Settlement Agreement Is Not Effective Until Completion Of Fairness
Hearing Procedure. This Settlement Agreement shall be unenforceable and of no
force and effect until the completion of the fairness hearing procedure
described in numbered paragraph 6 below (the "FAIRNESS HEARING PROCEDURE").
2. Special Payments. SBM will make special payments to Firstar and to
the Schonlau Trusts as follows:
(a) Payment to Plans. SBM will pay $1,000,000 to Firstar for the
benefit of Plan Shareholders in settlement of the Action.
(b) Payment of attorneys' fees and costs of Firstar and the
Schonlau Trusts. SBM will pay $150,000 to Firstar as partial
payment of the actual attorneys' fees and costs incurred by
Firstar in the Action and the settlement of the Action. SBM
will also pay $100,000 to the Schonlau Trusts as partial
payment of the actual attorneys' fees and costs incurred by
the Schonlau Trusts in the Action and the settlement of the
Action. These payments shall represent the full extent of
SBM's obligation to pay the attorneys' fees and costs of the
Plans, Firstar, or the Schonlau Trusts in connection with the
Action or the settlement of the Action.
(c) Time of payment. The special payments described in
subparagraphs (a) and (b) above shall be made by SBM within
fifteen (15) days after the Settlement Agreement becomes
effective as set forth in numbered paragraph 6 below.
(d) Special payments shall be charged solely against the amounts
otherwise distributable to Non-Plan Shareholders. The special
payments described in subparagraphs (a) and (b) above shall be
charged solely against the amounts
<PAGE>
otherwise distributable to Non-Plan Shareholders. No part of
the special payments shall be charged against the amounts
otherwise distributable to Plan Shareholders.
(e) Balance of Firstar's attorneys' fees and costs. To the extent
Firstar has incurred attorneys' fees and costs in the Action
and the Settlement of the Action that exceed the $150,000
described in subparagraph (b), then notwithstanding any
language in the Plans to the contrary, Firstar shall have sole
discretionary authority as trustee to determine whether to pay
those fees and costs out of the assets of the Plans.
3. Release of Claims. Each Party, including Firstar on its own behalf
and on behalf of the Plans and the Plan Shareholders (solely to the extent of
their interest as Plan Shareholders), and the Schonlau Trusts on their own
behalf and on behalf of the Non-Plan Shareholders (solely to the extent of their
interest as Non-Plan Shareholders), for good and valuable consideration, the
receipt and sufficiency of which is expressly acknowledged, hereby releases and
forever discharges the other Parties, and each of them, and each and every one
of their respective past or present parents, subsidiaries, affiliates, related
corporations, predecessors, successors, heirs, assigns, partners, associates,
directors, officers, employees, agents, representatives, attorneys, insurers,
trustees and indemnitors, and the Plans, the Administrative Committees for the
Plans and the individual members of the Administrative Committees, past and
present, of and from any and all rights, claims, demands, causes of action,
liabilities, damages, costs of litigation, attorneys' fees, and judgments,
whether in law or equity, legally binding or not, known or unknown, written or
unwritten, asserted or unasserted, liquidated or unliquidated, absolute or
contingent, of any kind whatsoever that each Party may ever have had,
<PAGE>
presently has, or may in the future claim to have against any other Party which
arise out of, relate to, or exist by reason of the subject matter of the Action,
including, but not limited to, all claims relating to:
(a) Firstar's attempted put on January 30, 1995 and SBM's refusal
to honor that put;
(b) the Stock Agreement or any prior version of the Stock
Agreement, including the proper method for calculating the
value of SBM Stock under the Stock Agreement or any prior
version of the Stock Agreement;
(c) the decision by SBM or its Board of Directors to enter into
the Stock Agreement or any prior version of the Stock
Agreement;
(d) the alleged acts, omissions, or negligence of any Party in
violation of contract, the Minnesota Business Corporation Act,
ERISA, state or federal securities laws, any other state or
federal statute, and any other state or federal common law, in
connection with the facts and events described in
subparagraphs (a), (b), and (c) immediately above;
(e) the alleged facts, circumstances, transactions, events,
occurrences, acts or omissions, or failures to act, of
whatever kind or character whatsoever, which were asserted,
referred to, alluded to, or reflected in the Action; and
(f) the conduct and settlement of the Action (except for actions
to implement or enforce this Settlement Agreement or the
Exhibits hereto).
4. Certain Claims Expressly Preserved. Nothing herein shall release,
waive or otherwise affect any claims not released in paragraph number 3 which
any Party hereto, or any person or entity on whose behalf any such Party is
purporting to act or may act or purport to act, may ever have had, presently has
or may in the future claim to have against any person or entity
<PAGE>
(including without limiting the generality of the foregoing, any of SBM's
current or former officers, directors, employees, shareholders, representatives,
agents, auditors, accountants, attorneys or anyone acting or purporting to act
on SBM's behalf, but specifically excluding Firstar, the Schonlau Trusts, the
Plans, the Administrative Committees for the Plans, and the individual members
of the Administrative Committees for the Plans acting in their capacity as such)
as follows:
(a) any claims which may arise from or relate to any agreements,
understandings or transactions of any nature between or among
ARM Financial, Inc. and/or the holders, controllers or owners
of SBM's Series A preferred stock relating to or arising from
the sale by the holders, controllers or owners of SBM's Series
A preferred stock of such Series A preferred stock to ARM
Financial, Inc.;
(b) any claims which may arise from or relate to the purchase or
sale by SBM and/or any of its affiliated companies of mortgage
backed securities (including but not limited to collateralized
mortgage obligations ("CMOS") and stripped mortgage backed
securities ("DERIVATIVES")), including but not limited to any
claims against the issuers, sellers or purchasers of such
securities;
(c) any claims against SBM's auditors or accountants which may
arise from or relate to the purchase, sale or holding by SBM
and/or any of its affiliated companies of mortgage backed
securities (including but not limited to CMOs and
derivatives); and
(d) any claims which may arise from or relate to the sale in 1994
by Roman Schmid of certain shares of SBM common stock then
owned, held or controlled by him to
<PAGE>
certain persons or entities which then owned, held or
controlled SBM's Series A preferred stock.
5. Release Of Initial Distribution On Deposit With The Court. After the
execution of this Settlement Agreement but prior to the completion of the
Fairness Hearing Procedure, Firstar may if it so desires prepare a petition for
submission to the Court seeking release of the funds currently on deposit with
the Court; provided, however, that those funds shall not be released until the
Court issues an order satisfactory to all Parties barring all of the claims that
could be asserted against the Parties relating to the escrow or the release of
those funds.
6. Fairness Hearing Procedure. Immediately upon the execution of this
Settlement Agreement, the Parties shall institute the following procedure
intended to establish the fairness of the settlement and to result in the entry
of the Order Approving Settlement.
(a) Motion to approve form of Notice of Settlement Hearing. A
proposed Notice of Settlement Hearing (the "NOTICE") is
attached hereto as Exhibit B. The Parties agree to cooperate
in seeking the Court's approval of the proposed Notice and the
Court's execution of the proposed Order Approving Notice of
Settlement Hearing (the "ORDER APPROVING NOTICE") attached
hereto as Exhibit C.
(b) Mailing of Notice of Settlement Hearing. After the Court
enters the Order Approving Notice, SBM shall mail the Notice
to all Plan and Non-Plan Shareholders and to the attorneys for
the Parties. SBM shall bear all costs and expenses attendant
with the preparation, reproduction, mailing, and service of
the Notice.
(c) Memorandum in support of Order Approving Settlement. Prior to
the date of the hearing on the proposed settlement (the
"SETTLEMENT HEARING"), the Parties shall
<PAGE>
prepare and submit to the Court a joint memorandum of law
describing the need for the Order Approving Settlement and the
legal basis therefor. SBM shall prepare and bear the cost of
preparing a draft of such memorandum for approval by the
Parties.
(d) Settlement Hearing and Order Approving Settlement. Either
prior to or as part of the Settlement Hearing, the Parties
shall use their best efforts to present such evidence as may
be necessary to prove to the Court that the proposed
settlement is fair, reasonable and adequate, and in the best
interests of both Plan Shareholders and Non-Plan Shareholders.
The Parties shall also use their best efforts to explain to
the Court the need for the Order Approving Settlement and the
legal basis therefor.
(e) Settlement Agreement becomes effective when Order Approving
Settlement becomes final. Except as provided below, this
Settlement Agreement shall be unenforceable and of no force or
effect until such time as:
(1) the Court executes the Order Approving Settlement
attached hereto as Exhibit A, without modification,
within 180 days of the date appearing on the first
page of this Settlement Agreement or such reasonable
time thereafter as may be agreed to by the Parties;
(2) the Order Approving Settlement becomes a final
judgment of the Court within 60 days of its
execution; and
(3) one of the following alternatives occurs:
(i) the time for filing an appeal from the
judgment has lapsed and no appeal has been
filed in the Action within that time; or
<PAGE>
(ii) the judgment appealed from has been affirmed
on appeal, without modification, and one of
the following alternatives occurs:
(1) the time for filing a petition for
review to the Minnesota Supreme
Court has lapsed and no petition
for review has been filed within
that time; or
(2) the petition for review to the
Minnesota Supreme Court is denied
or the Minnesota Supreme Court
affirms the judgment without
modification, and:
a) the time for filing a
petition for certiorari to
the United States Supreme
Court has lapsed; or
b) the petition for certiorari
to the United States
Supreme Court is denied or
the United States Supreme
Court affirms the judgment
without modification.
In the event the Order Approving Settlement is modified by the
Court or any appellate court, the Parties hereto may, in their
individual discretion, agree to accept such modification and
further agree that the Settlement Agreement may become fully
enforceable despite the modification by expressing such
agreement in a writing duly executed on behalf of each Party
hereto.
(f) Probate Court Approval of Schonlau Trusts' execution of
Settlement Agreement. Notwithstanding the terms of paragraph
6(e) above, this Settlement Agreement shall be unenforceable
and of no force or effect until such time as the Brown County
District Court, State of Minnesota, Fifth Judicial District
("PROBATE
<PAGE>
COURT") shall enter Orders approving the Schonlau Trusts'
participation in, and execution of, this Settlement Agreement
in In the Matter of the Trust Created under Paragraph II of
the Last Will and Testament of Theodore H. Schonlau, Deceased,
Court file no. 15743 and In the Matter of the Trust Created
under Paragraph VI of the Last Will and Testament of Theodore
H. Schonlau, Deceased, Court file no. 15744. The Schonlau
Trusts shall seek such approval immediately upon the execution
of this Settlement Agreement. The Schonlau Trusts shall
promptly notify SBM and Firstar upon either obtaining such
approval or failing to obtain such approval.
7. Compromise of Disputed Claims. This Settlement Agreement constitutes
the settlement of doubtful and disputed claims; no Party admits liability to any
other Party or any other person or entity; and every Party released herein
specifically denies any such liability. This Settlement Agreement constitutes an
offer to compromise within the meaning of Rule 408 of the Rules of Evidence and
is not admissible in evidence or as impeachment in any proceeding; provided,
however, that this Settlement Agreement may be used for purposes of the
Settlement Hearing, any appeals which may result from the entry of the proposed
Order Approving Settlement, and any proceeding to implement or enforce this
Settlement Agreement.
8. Consultation with Counsel. Each Party acknowledges and agrees that
it has carefully read this Settlement Agreement and the Exhibits attached
hereto, has discussed them with its counsel, and understands all of their terms.
9. Entire Agreement. This Settlement Agreement, including the Exhibits
hereto, constitutes the entire agreement of the Parties. In agreeing to sign
this Settlement Agreement, each Party acknowledges and agrees that it has not
relied on any statements or explanations made
<PAGE>
by another Party or their attorneys other than those set forth in this
Settlement Agreement and the Exhibits hereto.
10. Modification or Amendment. Except as otherwise specifically
provided herein, this Settlement Agreement and the Exhibits hereto may be
modified or amended only by a written agreement signed by all the Parties.
11. Settlement Agreement Binding on Successors. This Settlement
Agreement shall bind, and the rights hereunder shall inure to, the respective
heirs, successors and assigns of the Parties.
12. Drafting. The Parties agree that the drafting of this Settlement
Agreement and the Exhibits hereto was a collaborative effort of all the Parties
and the normal rules of construction providing that ambiguities are construed
against the drafter are suspended. In the event there is a dispute concerning
the proper interpretation of this Settlement Agreement or any of the Exhibits
hereto, the doctrine of contra proferentum shall not apply.
13. Cooperation. The Parties shall cooperate in presenting all papers,
affidavits, and/or testimony to the Court as may be necessary to effectuate the
purposes and intent of this Settlement Agreement.
14. Fair and Reasonable. This Settlement Agreement is fair, reasonable
and adequate, and the Parties have arrived at this settlement as a result of
arms-length negotiations.
15. Governing Law. This Settlement Agreement shall be construed in
accordance with, and governed by, the laws of the State of Minnesota.
16. Retention of Jurisdiction. The Court shall retain continuing
jurisdiction over the Action and the Parties until all transactions contemplated
herein are completed, and thereafter for purposes of interpreting, implementing
and enforcing the terms of this Settlement Agreement.
<PAGE>
17. Counterparts. This Settlement Agreement may be executed in two or
more counterparts, each of which when so executed and delivered shall be deemed
an original, but all of which together shall constitute one and the same
document.
1150 LIQUIDATING CORPORATION, FORMERLY
KNOWN AS SBM COMPANY
By /s/ Charles A. Geer
----------------------------------------------
Its President
----------------------------------------------
<PAGE>
FIRSTAR BANK OF MINNESOTA, NATIONAL ASSOCIATION,
FORMERLY KNOWN AS FIRSTAR TRUST COMPANY OF MINNESOTA,
AS TRUSTEE OF THE SBM COMPANY PROFIT SHARING STOCK
PLAN AND THE SBM COMPANY THRIFT PLAN AND ON BEHALF OF
ALL PLAN SHAREHOLDERS
By /s/ Karen B. Lewis
----------------------------------------------
Its Senior Vice President
----------------------------------------------
<PAGE>
THE TRUST CREATED UNDER PARAGRAPH II OF THE LAST WILL
AND TESTAMENT OF THEODORE H. SCHONLAU, DECEASED,
INDIVIDUALLY, DERIVATIVELY, AND AS PUTATIVE CO-CLASS
REPRESENTATIVE ON BEHALF OF ALL NON-PLAN SHAREHOLDERS
BY ITS CO-TRUSTEES:
FIRST BANK, NATIONAL ASSOCIATION, AS CO-TRUSTEE
By /s/ Duane M. Feragan
-------------------------------------------------
Duane M. Feragan
Its Vice President
/s/ Robert J. Struyk
-------------------------------------------------
Mr. Robert J. Struyk, as Co-Trustee
INDEX TO EXHIBITS
Exhibit A -- Order Approving Settlement
Exhibit B -- Notice of Settlement Hearing
Exhibit C -- Order Approving Notice
Exhibit 10.2
SETTLEMENT AGREEMENT AND CLAIM RELEASE
THIS SETTLEMENT AGREEMENT AND CLAIM RELEASE is made as of this 3rd day
of October, 1997, by and between SBM Company (now known as 1150 Liquidating
Corporation) (hereinafter referred to as "SBM"), Nutmeg Insurance Company
(hereinafter referred to as "Nutmeg"), and Pacific Insurance Company
(hereinafter referred to as "Pacific"), as follows:
WITNESSETH
WHEREAS, Nutmeg issued Corporate Fiduciary Liability Insurance Policy
No. QV0000011 to SBM for the period from July 26, 1994 to July 26, 1995,
specifying limits of liability of $3,000,000 per claim and in the aggregate for
all claims first made against the insureds during the policy period, subject to
a $5,000 deductible per claim (hereinafter referred to as the "Nutmeg Policy");
and
WHEREAS, SBM sponsored two employee retirement plans, being the SBM
Company Thrift Plan and the SBM Company Profit Sharing Stock Plan (hereinafter
referred to collectively as the "Plans"), with Firstar Trust Company of
Minnesota (hereinafter referred to as "Firstar") acting as trustee of the two
Plans; and
WHEREAS, SBM and Firstar were parties to a Stock Agreement dated
September 1, 1993, which allowed Firstar to "put" shares of SBM stock held by
the Plans back to SBM at a price established by a formula in the Stock
Agreement; and
<PAGE>
WHEREAS, on January 30, 1995, Firstar attempted to "put" all of the SBM
stock held by the Plans back to SBM at a specified price, which put and price
SBM disputed; and
WHEREAS, on or about February 28, 1995, SBM commenced a civil action
for declaratory judgment with respect to the issue of the "put" of the SBM stock
held by the Plans entitled SBM COMPANY V. FIRSTAR TRUST COMPANY OF MINNESOTA, ET
AL., venued in Hennepin County District Court for the State of Minnesota as File
No. CT-95-003703 (hereinafter referred to as the "Firstar Litigation"); and
WHEREAS, on March 27, 1995, Firstar filed an Answer and Counterclaim
against SBM in the Firstar Litigation; the Counterclaim alleged breach of the
terms of the Stock Agreement, estoppel, breach of fiduciary duty under the
Employee Retirement Income Security Act of 1974 (hereinafter referred to as
"ERISA") and "other breach of fiduciary duty" (hereinafter referred to as the
"Counterclaim"); and
WHEREAS, the Counterclaim was reported to Nutmeg with a request for
coverage as to same under the Nutmeg Policy; and
WHEREAS, Nutmeg denied coverage under the Nutmeg Policy with respect to
the Counterclaim; and
WHEREAS, Pacific issued Corporate Fiduciary Liability Insurance Policy
No. TV0000170 to SBM (hereinafter referred to as "Pacific Policy") which
replaced the Nutmeg Policy at the end of its policy period; and
<PAGE>
WHEREAS, by letter dated June 5, 1996, the United States Department of
Labor (hereinafter referred to as "DOL") notified SBM of an investigation
relating to the Plans (EIN/PN: 41-0557530; Case No. 60-95129); and by letter
dated September 23, 1996, the United States Internal Revenue Service
(hereinafter referred to as "IRS") notified SBM of an investigation relating to
the Plans (EP 7105) (collectively referred to herein as the "DOL and IRS
Investigations"); and
WHEREAS, in 1996 SBM made claims for coverage upon Nutmeg and Pacific
with respect to claims arising out of the DOL and IRS Investigations; claims
which were denied by Nutmeg and Pacific; and
WHEREAS, SBM has negotiated a settlement of the Firstar Litigation
including the Counterclaim, which settlement will become effective on November
21, 1997 in the event no appeal is taken from the Court's judgment approving the
settlement in the Firstar Litigation by that date (hereinafter referred to as
the "Judgment"); and
WHEREAS, in conjunction with the settlement of the Firstar Litigation,
both the DOL and the IRS concluded their respective investigations and issued
letters of case closing stating that no further enforcement action would be
taken; and
WHEREAS, SBM, Nutmeg and Pacific have, by virtue of discussions and
negotiations, agreed to resolve their differences, without waiving their
relative positions, but in the interests of avoiding time-consuming and
expensive litigation;
<PAGE>
NOW THEREFORE, it is mutually understood and agreed by and between the
parties to this Settlement Agreement and Claim Release as follows:
1. This Settlement Agreement and Claim Release shall be unenforceable
and of no force and effect until such time as the time for filing an appeal from
the Judgment in the Firstar Litigation has expired (namely, November 21, 1997)
and no appeal has been filed within that time. Upon the expiration of that time
period with no appeal having been filed, this Settlement Agreement and Claim
Release shall become legally binding upon and enforceable against the parties
hereto.
2. Nutmeg and Pacific agree jointly, without waiving, modifying,
altering, or changing in any way their rights under the terms, covenants,
conditions, exclusions, provisions, additions and endorsements to the Nutmeg
Policy and the Pacific Policy to pay to SBM the total sum of Three Hundred Forty
Thousand Dollars ($340,000.00), in full and complete satisfaction of any and all
obligations Nutmeg and Pacific shall or may have under or pursuant to the Nutmeg
Policy and the Pacific Policy with respect to the Counterclaim or any claims
arising out of or related to the Counterclaim, including but not limited to any
direct claims, cross-claims or third-party claims, and the DOL and IRS
Investigations. The $340,000.00 payment shall be made at the time the settlement
payments in the Firstar Litigation are due; that is, assuming the Judgment is
not appealed by November 21, 1997, payment of the $340,000.00 shall be made no
later than December 5, 1997.
3. In consideration of the payment described in numbered Paragraph 2
above, and for other good and valuable consideration, SBM, for itself, its
partners, shareholders,
<PAGE>
principals, attorneys and their heirs, executors, administrators, successors and
assigns, hereby releases, acquits and discharges Nutmeg and Pacific and their
partners, principals, shareholders, directors, officers, attorneys, employees
and other insurers, agents, representatives, parents, subsidiaries, affiliates,
divisions, predecessors or successors, partnerships or corporations, heirs,
executors, administrators and assigns, from any and all liability, actions,
causes of action, suits, debts, dues, sums of money, accounts, reckonings,
bonds, bills, specialties, covenants, contracts, controversies, agreements,
promises, variances, trespasses, damages, judgments, extents, executions, claims
and demands whatsoever, in law, admiralty, or equity arising out of, or in any
way connected with or related to coverage under the Nutmeg Policy and/or the
Pacific Policy with respect to the Counterclaim, including, but not limited to,
all legal fees and costs that the parties may have incurred through the
conclusion of all proceedings in, relating to, or arising from the Counterclaim,
and the DOL and IRS Investigations.
4. For good and valuable consideration, Nutmeg and Pacific, and each of
them, their respective insurers, agents, representatives, parents, subsidiaries,
affiliates, divisions, predecessors or successors, partnerships or corporations,
heirs, executors, administrators and assigns, attorneys and their heirs,
executors, administrators, successors and assigns, hereby release, acquit and
discharge SBM and its partners, principals, shareholders, directors, officers,
attorneys, employees and other insurers, agents, representatives, parents,
subsidiaries, affiliates, divisions, predecessors or successors, partnerships or
corporations, heirs, executors, administrators and assigns, from any and all
liability, actions, causes of
<PAGE>
action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills,
specialties, covenants, contracts, controversies, agreements, promises,
variances, trespasses, damages, judgments, extents, executions, claims and
demands whatsoever, in law, admiralty, or equity arising out of, or in any way
connected with or related to coverage under the Nutmeg Policy and/or the Pacific
Policy with respect to the Counterclaim, including, but not limited to, all
legal fees and costs that the parties may have incurred through the conclusion
of all proceedings in, relating to, or arising from the Counterclaim, and the
DOL and IRS Investigations.
5. This Settlement Agreement and Claim Release is intended to and does
finally and fully terminate and dispose of all claims and causes of action which
have or may be asserted by SBM, Nutmeg and Pacific, and each of them, and anyone
acting through, for, or on behalf of any one of them, as against the others with
respect to the Counterclaim, including all legal fees and costs that the party
may have incurred therein, or in any proceeding for, based upon, or arising out
of the Counterclaim. No rights or claims or interest asserted or which may have
been asserted by the parties against the others with respect to the Counterclaim
shall survive the execution of this Settlement Agreement and Claim Release. All
such rights, claims, causes of action and interest are merged into this
Settlement Agreement and Claim Release.
6. It is expressly understood and agreed to among the parties that
nothing in this Settlement Agreement and Claim Release shall preclude or limit
SBM or any other insured under the Nutmeg Policy and/or Pacific Policy from
seeking further coverage from Nutmeg
<PAGE>
and/or Pacific in the event the DOL and/or the IRS reverse their position and
make claims against SBM or any other insured upon or relating to the allegations
they have previously made against SBM. But any coverage for such claims shall
only relate to any sums incurred after the reversal of position by the DOL
and/or IRS. Similarly, Nutmeg and Pacific shall retain the right to assert all
appropriate and applicable coverage defenses, insofar as this Settlement
Agreement and Claim Release will not waive such rights.
7. This Settlement Agreement and Claim Release represents the entire
understanding between the parties with respect to the Counterclaim. This
Settlement Agreement and Claim Release can only be modified by a writing signed
by all parties hereto and the provisions contained herein cannot be orally
waived or modified.
8. This Settlement Agreement and Claim Release shall be governed by,
and construed in accordance with, the laws of the State of Minnesota.
9. This Settlement Agreement and Claim Release shall inure to the
benefit of, and shall be binding upon, each of the parties and their respective
directors, officers, parents, subsidiaries, affiliates, attorneys, agents,
employees, representatives, successors, heirs and assigns.
10. The parties hereto represent, warrant and covenant that they have
read this Settlement Agreement and Claim Release, that they have consulted with
their respective attorneys concerning its contents and consequences and that the
Settlement Agreement and Claim Release has been executed voluntarily by them.
<PAGE>
11. This Settlement Agreement and Claim Release may be executed in two
or more counterparts and in both original form and one or more copies, each of
which shall be deemed an original but all of which shall constitute one and the
same written instrument.
12. The parties who hereunto affix their signatures expressly state
that they are authorized to enter into this Settlement Agreement and Claim
Release on behalf of their respective parties to the Agreement.
IN WITNESS WHEREOF, the parties have hereunto set their signatures.
SBM COMPANY, NOW KNOWN AS
1150 LIQUIDATING CORPORATION
By: /s/ Charles A. Geer
-----------------------------
An Authorized Representative
NUTMEG INSURANCE COMPANY
By: /s/ Steven J. Lovell
-----------------------------
An Authorized Representative
PACIFIC INSURANCE COMPANY
By: /s/ Steven J. Lovell
-----------------------------
An Authorized Representative
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,015,698
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,015,698
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,052,669
<CURRENT-LIABILITIES> 399,127
<BONDS> 0
825,231
0
<COMMON> 0
<OTHER-SE> 3,828,311
<TOTAL-LIABILITY-AND-EQUITY> 5,052,669
<SALES> 0
<TOTAL-REVENUES> 529,599
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
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<INCOME-CONTINUING> 529,599
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