Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________ to __________________________
--------------------
For Quarter Ended March 31, 1998 Commission File Number 811-407
1150 LIQUIDATING CORPORATION
(formerly SBM Company)
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0557530
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4440 IDS Center
Minneapolis, Minnesota 55402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 338-5254
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
2,179,714 Common Shares were outstanding as of March 31, 1998
<PAGE>
1150 LIQUIDATING CORPORATION
I N D E X
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Net Assets in Liquidation 1
Statement of Changes in Net Assets in Liquidation 2
Notes to Condensed Financial Statements 3-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Changes in Net Assets in Liquidation 7
PART II. OTHER INFORMATION 8-9
<PAGE>
Part I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
1150 LIQUIDATING CORPORATION
(formerly SBM COMPANY AND SUBSIDIARIES)
STATEMENT OF NET ASSETS IN LIQUIDATION
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
----------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents $4,873,277 $5,015,698
Other assets 32,091 36,971
---------- ----------
Total assets 4,905,368 5,052,669
LIABILITIES
Reserve for taxes 41,000 70,000
Accounts payable 87,054 83,888
Reserve for estimated costs during the period of liquidation 150,933 245,239
---------- ----------
Total liabilities 278,987 399,127
Common stock held by employee benefit plans
or plan participants - 304,693 shares (see Note 2) 821,434 825,231
---------- ----------
Net assets $3,804,947 $3,828,311
========== ==========
Common shares outstanding - 2,179,714 less 304,693 shares
held by employee benefit plans or plan participants 1,875,021 1,875,021
========== ==========
Net assets per common share outstanding $ 2.03 $ 2.04
========== ==========
See Notes to Financial Statements.
</TABLE>
<PAGE>
1150 LIQUIDATING CORPORATION
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
For the Period from December 31, 1994 to March 31, 1998
<TABLE>
<CAPTION>
<S> <C>
NET ASSETS (DEFICIT) AT DECEMBER 31, 1994 $(31,976,759)
Income from liquidating activities 42,662,596
Preferred stock liquidation amount in excess
of carrying value (1,279,805)
Common stock dividend distribution - $2.75 per share (5,994,214)
Allocation of common stock dividend distribution to
common stock held by employee benefit plans 837,906
Allocation of net loss and carrying value to common
stock held by employee benefit plans 442,472
------------
NET ASSETS AT DECEMBER 31, 1995 4,692,196
Income (loss) from liquidating activities (330,740)
Special allocation of carrying value to common stock held by
employee benefit plans under settlement agreement (Note 2) (1,000,000)
Allocation of net loss and carrying value to
common stock held by employee benefit plans 11,286
------------
NET ASSETS AT DECEMBER 31, 1996 3,372,742
Income from liquidating activities 529,599
Allocation of net income and carrying value to common stock
held by employee benefit plans (74,030)
------------
NET ASSETS AT DECEMBER 31, 1997 3,828,311
Income (loss) from liquidating activities (January 1, 1998 through March 31, 1998) (27,161)
Allocation of net income and carrying value to common stock
held by employee benefit plans for plan participants 3,797
------------
NET ASSETS AT MARCH 31, 1998 (unaudited) $ 3,804,947
============
</TABLE>
See Notes to Financial Statements.
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Sale and Liquidation of the Company:
Effective May 31, 1995, SBM Company (the "Company") sold
substantially all of the business operations and assets of the
Company to ARM Financial Group, Inc. (ARM) (the Transaction)
for a purchase price of $34.5 million, net of $4.1 million of
liabilities assumed, pursuant to an Amended and Restated Stock
and Asset Purchase Agreement dated February 16, 1995 between
the Company and ARM. As part of the Transaction, ARM acquired
all of the outstanding stock of the Company's wholly owned
subsidiaries (State Bond and Mortgage Life Insurance Company
("SBM Life"), SBM Certificate Company ("SBMC") and SBM
Financial Services, Inc.) and certain assets of the Company,
including the investment adviser function of six mutual funds,
and assumed certain liabilities of the Company. The following
summarizes the proceeds from and net assets sold of the
Transaction:
Proceeds from the sale $ 34,445,877
Assets sold:
Investments 808,543,939
Receivable from reinsurer 85,202,588
Deferred acquisition costs 61,683,713
Other assets 14,863,970
-------------
970,294,210
Liabilities assumed:
Future policy benefits 861,067,924
Face amount certificate reserves 56,439,745
Accounts payable and other liabilities 12,508,983
-------------
930,016,652
Net assets sold 40,277,558
Less costs of the Transaction, including income
taxes of $408,000 710,927
-------------
Net loss on sale of Company operations $ (6,542,608)
=============
The Company intends to wind up and liquidate the Company as
soon as practicable. The Company has adopted a Plan of
Dissolution effective May 31, 1995. At closing, the Series A
Preferred Stock was redeemed for $20.5 million (including $1.5
million of dividends in arrears) as a result of its senior
rights over the common stock.
The Company's shareholders approved the Transaction and the
Plan of Dissolution (the "Plan") at their regular shareholder
meeting on May 18, 1995. The Company also changed its name to
"1150 Liquidating Corporation" effective June 14, 1995.
As a result, the Company has adopted the liquidation basis of
accounting effective January 1, 1995. Assets have been valued
at estimated net realizable value and liabilities provide for
all expenses to be incurred during the period of liquidation.
The reserve for estimated costs during the period of
liquidation includes what management anticipates are
reasonable estimates of costs required to liquidate the
Company's remaining assets and to defend known legal claims,
as well as the estimated costs of directors and officers and
legal, audit and other professional fees and expenses expected
to be incurred during the period of liquidation. The net
assets ultimately available for distribution to shareholders
will depend almost entirely upon the remaining time involved
in winding up the affairs of the Company, and any now unknown
liabilities or additional litigation (including any litigation
resulting from the Schonlau
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 1. Sale and Liquidation of the Company (Continued):
investigation described in Note 3) and the expenses and
liabilities incurred in connection therewith. The statement of
net assets in liquidation at March 31, 1998 includes accruals
for general and administrative expenses anticipated by
management with respect to resolving such known matters in a
reasonably timely fashion, as expected at that date. Net
assets ultimately available for distribution will be reduced
by the amount of any other unknown liabilities as may arise in
the future, and to any extent general and administrative
expenses incurred exceed the estimates included in the
statement of net assets in liquidation at March 31, 1998. In
addition, the financial statements do not reflect any
investment income that is anticipated to be earned subsequent
to March 31, 1998.
The financial statements included in this Form 10-Q have been
prepared by the Company without audit. In the opinion of
management, all adjustments necessary to present fairly the
statement of net assets in liquidation and changes therein for
all periods presented have been made.
Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes
thereto included in the SBM Company and Subsidiaries' Annual
Report on Form 10-K for the year ended December 31, 1997.
The preparation of financial statements in accordance with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses during the
reporting period. For example, estimates and assumptions are
used in determining the Reserve for Estimated Costs During the
Period of Liquidation and Common Stock held by the Employee
Benefit Plans or plan participants. While these estimates are
based on the best judgment of management, actual results and
revised estimates could differ from current estimates and are
reflected in the period of change.
Note 2. Common Stock Held by Employee Benefit Plans or Plan
Participants:
The Company's two employee benefit plans ("Plans") owned
304,693 shares of Company common stock. The value of such
shares has been classified as a separate line outside of net
assets in liquidation on the Company's statement of net assets
in liquidation as of March 31, 1998 and as of December 31,
1997 because of the Company's obligation to repurchase such
shares, under certain circumstances, under a stock agreement
("Stock Agreement"), between the Company and the Plans'
trustee dated September 30, 1993.
On the December 31, 1997 and March 31, 1998 statement of net
assets in liquidation, the liability to the Plans'
participants has been shown as the estimated liquidation value
of their shares of common stock under the settlement agreement
discussed below.
In January 1995, the trustee of the Plans notified the Company
that it was tendering all shares held by the Plans to the
Company for purchase by the Company under the Stock Agreement.
Under the Stock Agreement, in certain circumstances, the
Company has agreed to purchase common shares tendered to it by
the Plans at a price equal to the higher of adjusted book
value (as defined in the Stock Agreement) or fair market
value. The Plans' trustee asserted in its tender that the
correct basis under the Stock Agreement to determine the price
of the shares for purposes of the Company's repurchase
obligation is to
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Common Stock Held by Employee Benefit Plans or Plan
Participants (Continued):
determine their adjusted book value at December 31, 1994 based
on the books of the Company but using the amortized cost of
the Company's investment portfolios, rather than their fair
market value. The Company maintains that such price under the
Stock Agreement must be based on the books of the Company
which, after the effectiveness of the SFAS 115 on January 1,
1994, must use the market value, rather than the amortized
cost, of the substantial portion of the Company's investment
portfolios which must be classified as "available-for-sale"
under applicable accounting principles. In the alternative,
the Company maintains that the tender was invalid in the
circumstances under which it was made and, even if valid, that
the correct price under such circumstances is the pro-rata
estimated liquidation value of all of the Company's common
shares pursuant to the Plan of Dissolution, rather than any
value based upon the books of the Company as prepared on the
going concern historical cost basis.
The Company declined to repurchase such shares at the price
demanded by the Trustee for various reasons, including those
stated above, and commenced a declaratory judgment action in
Minnesota District Court in March 1995 to determine its
repurchase obligation and the applicable price under the Stock
Agreement ("Plan Litigation").
On November 13, 1995, the Company, the Trustee, and the
Schonlau Trust agreed upon a settlement of the litigation and
executed a settlement agreement in principle. A draft of a
final and more formal settlement agreement (the Settlement
Agreement) was subsequently prepared and circulated. In
general, the Settlement Agreement contemplates payment by the
Company of $1.15 million to the Plans in addition to the pro
rata amounts otherwise distributable in liquidation with
respect to the 304,693 shares of Common Stock held by the
Plans. This amount includes $150,000 in partial payment of
attorneys' fees incurred by the Trustee. The Settlement
Agreement also provides for the payment by the Company of up
to $100,000 of the litigation costs incurred by the Schonlau
Trust. The amounts payable as part of the settlement would be
in addition to the pro rata amounts payable to Plan
shareholders (determined without regard to the settlement
amounts) and would be payable out of the amount otherwise
available for pro rata distribution in liquidation to non-Plan
shareholders.
By April 1996, both the Trustee and the Schonlau Trust had
indicated that they had no significant issues with respect to
the economic terms of the Settlement Agreement. The Schonlau
Trust did, however, indicate that it was unwilling to proceed
to settlement unless a class consisting of all non-Plan
shareholders was certified and unless it was named as
representative of the class. The Company and the Trustee have
agreed to these terms as part of the Settlement Agreement.
During the year the Department of Labor (DOL) advised the
Company of certain alleged violations of ERISA (of breach of
fiduciary duty under Sections 404(a)(1)(A), (B), and (D) of
ERISA and prohibited transactions based upon Section 406(b)(2)
of ERISA) in connection with the Company's hanlding of the
repurchase of shares owned by the Plans under the Put
Agreement and the Internal Revenue Service (IRS) opened an
audit alleging that the Company could be liable for certain
excise taxes in connection with such matters. The Company
objected to such allegations and, on February 27, 1997,
received a letter fromt he DOL which advised it would take no
further action in connection with the allegations if the
litigation with the Plans is resolved pursuant to the
Settlement Agreement and the Company subsequently was advised
that the IRS would close its audit and not assess excise tax
liabilities on the Company. These matters delayed
implementation of the Settlement Agreement.
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Common Stock Previously Held by Employee Benefit Plans
(Continued):
In October 1996, the Company, the Schonlau Trust and the
Trustee agreed to sign the Settlement Agreement and proceed
with its implementation at such time as the allegations of the
DOL and IRS were resolved in a manner satisfactory to all
parties to the Plan litigation. In June 1997, these
allegations of the DOL and IRS having been resolved, the
Settlement Agreement was signed by all parties and was
submitted to the court for approval. A hearing was held on
August 21, 1997 and Judge William R. Howard approved the
settlement and entered the Order Approving Settlement. The
Settlement became effective on November 21, 1997.
Pursuant to the terms of the Settlement Agreement, on or about
December 1, 1997, the Company made settlement payments
totaling $1.15 million to the Plan's Trustee and a settlement
payment of $100,000 to the Schonlau Trust. Also, on or about
December 1, 1997, the Company's initial liquidating
distribution to the Trustee, which had been held in escrow
pending resolution of the Plan litigation, was released to the
Trustee.
On February 16, 1998, the 304,693 shares of common stock held
by the Employee Benefit Plans were distributed to plan
participants.
Note 3. Other Matters:
The Company was notified several months ago that The Trust
Under the Will of T.H. Schonlau ("Schonlau Trust"), its
largest shareholder, has retained legal counsel for the
purpose of investigating whether the Schonlau Trust has claims
or rights against current or former officers, directors,
employees, shareholders, representatives, agents, auditors,
accountants, attorneys or anyone acting on its behalf (i)
arising out of or relating to its ownership of SBM common
shares and (ii) arising out of or relating to the management
of SBM, or otherwise. The Trust has requested the Company to
produce certain corporate records and documents in connection
with its investigation.
At this time, it is impossible to anticipate whether the
Schonlau Trust, or other shareholders, will commence suit with
respect to the above, or other matters, and, if so, who would
be named as defendants. Presumably, the Schonlau Trust would
not commence any such action unless it believed that a
substantial likelihood existed that the liquidation value of
the Company, net to shareholders, would be materially enhanced
by its efforts. Such a determination would have to factor in
the following, and other considerations: (i) likely expenses
to be incurred by the Company in supporting any such
litigation; (ii) the expenses to be incurred by the Company in
connection with its obligations to defend and indemnify
present and past officers and directors in the event they were
to become involved in any such litigation; (iii) expenses to
be incurred by the Company in defending against probable third
part claims, including claims for indemnity and contribution.
Any such shareholder action, even if successful in the
long-term, would have the effect of delaying the liquidation
and dissolution of the Company and of increasing its
administrative and professional expenses in the short-term. No
provision has been made to support any actual litigation by
the Schonlau Trust, claims for indemnity by present or former
officers or directors, or related litigation which may result,
because the Schonlau Trust has not decided at this time to
bring any such action.
The Company is also undergoing audits by the Internal Revenue
Service of the years 1986-1990 and 1991-1993. An adjustment
agreement, which is not material to the Company's financial
condition, has been executed by the Company and the Internal
Revenue Service with respect to both audits and subsequently
approved by the Joint Committee of Congress.
<PAGE>
1150 LIQUIDATING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
-----------------------------------------------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1150 LIQUIDATING CORPORATION
Date May 15, 1998 By: /s/ Charles A. Geer
Charles A. Geer
Its: President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998<F1>
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 0
<CASH> 4,873,277
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 4,903,368
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 3,804,947<F2>
<TOTAL-LIABILITY-AND-EQUITY> 4,905,368
0
<INVESTMENT-INCOME> 0
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,161)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>THE COMPANY IS CURRENTLY USING LIQUIDATION ACCOUNTING
<F2>NET ASSETS IN LIQUIDATION
</FN>
</TABLE>
