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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
_________________________________
For Quarter Ended June 30, 1998 Commission File Number 811-407
1150 LIQUIDATING CORPORATION
(formerly SBM Company)
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0557530
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4440 IDS Center
Minneapolis, Minnesota 55402
- ------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 338-5254
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
2,179,714 Common Shares were outstanding as of June 30, 1998
<PAGE>
1150 LIQUIDATING CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Net Assets in Liquidation 1
Statement of Changes in Net Assets in Liquidation 2
Notes to Condensed Financial Statements 3-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Changes in Net Assets in Liquidation 8
PART II. OTHER INFORMATION 9-10
<PAGE>
Part I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
1150 LIQUIDATING CORPORATION
(formerly SBM COMPANY AND SUBSIDIARIES)
STATEMENT OF NET ASSETS IN LIQUIDATION
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
---------- ----------
(Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents $4,892,220 $5,015,698
Other assets 74,773 36,971
---------- ----------
Total assets 4,966,993 5,052,669
LIABILITIES
Reserve for taxes 41,000 70,000
Accounts payable 90,461 83,888
Reserve for estimated costs during the period of liquidation 167,975 245,239
---------- ----------
Total liabilities 299,436 399,127
Common stock held by employee benefit plans
or plan participants - 304,693 shares (see Note 2) 827,192 825,231
---------- ----------
Net assets $3,840,365 $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 $ 2.05 $ 2.04
========== ==========
</TABLE>
See Notes to Financial Statements.
<PAGE>
1150 LIQUIDATING CORPORATION
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
For the Period from December 31, 1994 to June 30, 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 June 30, 1998) 14,013
Allocation of net income and carrying value to common stock
previously held by employee benefit plans (1,959)
------------
NET ASSETS AT JUNE 30, 1998 (unaudited) $ 3,840,365
============
</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 June 30, 1998 includes accruals for
general and administrative expenses anticipated by management with
respect to resolving such known matters in a reasonably timely
fashion, as expected at that date. Net assets ultimately available
for distribution will be reduced by the amount of any other
unknown liabilities as may arise in the future, and to any extent
general and administrative expenses incurred exceed the estimates
included in the statement of net assets in liquidation at June 30,
1998. In addition, the financial statements do not reflect any
investment income that is anticipated to be earned subsequent to
June 30, 1998.
The financial statements included in this Form 10-Q have been
prepared by the Company without audit. In the opinion of
management, all adjustments necessary to present fairly the
statement of net assets in liquidation and changes therein for all
periods presented have been made.
Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It
is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto
included in the 1150 Liquidating Corporation's Annual Report on
Form 10-K for the year ended December 31, 1997.
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting
period. For example, estimates and assumptions are used in
determining the Reserve for Estimated Costs During the Period of
Liquidation and Common Stock held by the Employee Benefit Plans or
plan participants. While these estimates are based on the best
judgment of management, actual results and revised estimates could
differ from current estimates and are reflected in the period of
change.
Note 2. Common Stock Held by Employee Benefit Plans or Plan Participants:
The Company's two employee benefit plans ("Plans") owned 304,693
shares of Company common stock. The value of such shares has been
classified as a separate line outside of net assets in liquidation
on the Company's statement of net assets in liquidation as of June
30, 1998 and as of December 31, 1997 because of the Company's
obligation to repurchase such shares, under certain circumstances,
under a stock agreement ("Stock Agreement"), between the Company
and the Plans' trustee dated September 30, 1993.
On the December 31, 1997 and June 30, 1998 statement of net assets
in liquidation, the liability to the Plans' participants has been
shown as the estimated liquidation value of their shares of common
stock under the settlement agreement discussed below.
In January 1995, the trustee of the Plans notified the Company
that it was tendering all shares held by the Plans to the Company
for purchase by the Company under the Stock Agreement. Under the
Stock Agreement, in certain circumstances, the Company has agreed
to purchase common shares tendered to it by the Plans at a price
equal to the higher of adjusted book value (as defined in the
Stock Agreement) or fair market value. The Plans' trustee asserted
in its tender that the correct basis under the Stock Agreement to
determine the price of the shares for purposes of the Company's
repurchase obligation is to
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 2. Common Stock Held by Employee Benefit Plans or Plan Participants
(Continued):
determine their adjusted book value at December 31, 1994 based on
the books of the Company but using the amortized cost of the
Company's investment portfolios, rather than their fair market
value. The Company maintains that such price under the Stock
Agreement must be based on the books of the Company which, after
the effectiveness of the SFAS 115 on January 1, 1994, must use the
market value, rather than the amortized cost, of the substantial
portion of the Company's investment portfolios which must be
classified as "available-for-sale" under applicable accounting
principles. In the alternative, the Company maintains that the
tender was invalid in the circumstances under which it was made
and, even if valid, that the correct price under such
circumstances is the pro-rata estimated liquidation value of all
of the Company's common shares pursuant to the Plan of
Dissolution, rather than any value based upon the books of the
Company as prepared on the going concern historical cost basis.
The Company declined to repurchase such shares at the price
demanded by the Trustee for various reasons, including those
stated above, and commenced a declaratory judgment action in
Minnesota District Court in March 1995 to determine its repurchase
obligation and the applicable price under the Stock Agreement
("Plan Litigation").
On November 13, 1995, the Company, the Trustee, and the Schonlau
Trust agreed upon a settlement of the litigation and executed a
settlement agreement in principle. A draft of a final and more
formal settlement agreement (the Settlement Agreement) was
subsequently prepared and circulated. In general, the Settlement
Agreement contemplates payment by the Company of $1.15 million to
the Plans in addition to the pro rata amounts otherwise
distributable in liquidation with respect to the 304,693 shares of
Common Stock held by the Plans. This amount includes $150,000 in
partial payment of attorneys' fees incurred by the Trustee. The
Settlement Agreement also provides for the payment by the Company
of up to $100,000 of the litigation costs incurred by the Schonlau
Trust. The amounts payable as part of the settlement would be in
addition to the pro rata amounts payable to Plan shareholders
(determined without regard to the settlement amounts) and would be
payable out of the amount otherwise available for pro rata
distribution in liquidation to non-Plan shareholders.
By April 1996, both the Trustee and the Schonlau Trust had
indicated that they had no significant issues with respect to the
economic terms of the Settlement Agreement. The Schonlau Trust
did, however, indicate that it was unwilling to proceed to
settlement unless a class consisting of all non-Plan shareholders
was certified and unless it was named as representative of the
class. The Company and the Trustee have agreed to these terms as
part of the Settlement Agreement.
During 1996, the Department of Labor (DOL) advised the Company of
certain alleged violations of ERISA (of breach of fiduciary duty
under Sections 404(a)(1)(A), (B), and (D) of ERISA and prohibited
transactions based upon Section 406(b)(2) of ERISA) in connection
with the Company's handling of the repurchase of shares owned by
the Plans under the Put Agreement and the Internal Revenue Service
(IRS) opened an audit alleging that the Company could be liable
for certain excise taxes in connection with such matters. The
Company objected to such allegations and, on February 27, 1997,
received a letter from the DOL which advised it would take no
further action in connection with the allegations if the
litigation with the Plans is resolved pursuant to the Settlement
Agreement and the Company subsequently was advised that the IRS
would close its audit and not assess excise tax liabilities on the
Company. These matters delayed implementation of the Settlement
Agreement.
<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.
Over the last several weeks, counsel to the Schonlau Trust and
counsel to the Company have had discussions concerning the
possibility that a shareholder and/or derivative action will be
commenced by the trust and/or other shareholders. Company counsel
understands that no final decision has been made as to whether
such an action will be commenced. However, a few weeks ago Company
counsel was advised that such claims "probably" would be commenced
and was advised that the investigation of possible claims and
defendants had been narrowed and more specifically identified by
counsel to the Schonlau Trust. More recently, counsel was advised
that "no final decision" has been made as to commencement of suit.
Were suit to be commenced pursuant to the information which was
disclosed to Company counsel, it is believed that claims against
the Company would be asserted which would require the
establishment of substantial reserves for costs of defense,
possible liability and possible indemnity obligations.
Presumably, the Schonlau Trust would not commence any such action
unless it believed that a substantial likelihood existed that the
liquidation value of the Company, net to shareholders, would be
materially enhanced by its efforts. Such a determination would
have to factor in the following, and other considerations: (i)
likely expenses to be incurred by the Company in supporting any
such litigation; (ii) the expenses to be incurred by the Company
in connection with its obligations to defend and indemnify present
and past officers and directors in the event they were to become
involved in any such litigation; (iii) expenses to be incurred by
the Company in defending against probable third party claims,
including claims for indemnity and contribution.
<PAGE>
1150 LIQUIDATING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 3. Other Matters (Continued):
Any such shareholder action, even if successful in the long-term,
would have the effect of delaying the liquidation and dissolution
of the Company and of increasing its administrative and
professional expenses in the short-term. No provision has been
made to support any actual litigation by the Schonlau Trust, any
possible liability of the Company, claims for indemnity by present
or former officers or directors, or related litigation which may
result, because the Schonlau Trust has not decided at this time to
bring any such action.
<PAGE>
1150 LIQUIDATING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1150 LIQUIDATING CORPORATION
Date By: /s/ Charles A. Geer
----------------------- --------------------------------------
Charles A. Geer
Its: President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998<F1>
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 0
<CASH> 4,892,220
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 4,966,993
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 3,804,365<F2>
<TOTAL-LIABILITY-AND-EQUITY> 4,966,993
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> 14,013
<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>
