UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-21911
SLH CORPORATION
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(Exact name of registrant as specified in its charter)
Missouri 43-1764632
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 410949
2600 Grand Ave., Suite 500
Kansas City, Missouri 64141
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(Address of principal (Zipcode)
executive offices)
Registrant's telephone number, including area code (816) 842-7000
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- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Number of shares outstanding of only class of Registrant's common stock as of
May 8, 1997: $1 par value common - 1,622,276
SLH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
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(unaudited)
March 31, December 31,
1997 1996
- ---------------------------------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 9,822 3,925
Short-term investments 10,133 --
Accounts and notes receivable 117 33
Real estate under contract 2,198 1,223
Other current assets 313 348
------------------------
Total current assets 22,583 5,529
Real estate held for sale 19,399 24,202
Investment securities 4,815 4,718
Investment in affiliates:
Oil and gas partnerships 3,463 3,526
Other (247) (116)
Property, plant and equipment 116 425
Notes receivable 1,525 --
Intangible assets 68 113
Deferred income taxes 97 73
Other assets 4 4
------------------------
$ 51,823 38,474
========================
LIABILITIES AND COMBINED EQUITY
Current liabilities:
Accounts payable $ 206 289
State income tax payable 794 --
Notes payable 1,194 1,194
Other current liabilities 1,406 682
------------------------
Total current liabilities 3,600 2,165
Notes payable 41 --
Deferred income taxes -- 183
Other liabilities 246 313
------------------------
Total liabilities 3,887 2,661
------------------------
Stockholders' Equity:
Perferred stock of $.01 par value
with $100 liquidation preference.
Authorized 1,000,000 shares;
none issued. --
Common stock of $.01 par value.
Authorized 30,000,000 shares;
issued 1,622,276 shares 16
Paid-in capital 47,947
Net unrealized gains on marketable
equity securities 1,375
Accumulated deficit (1,402)
------------------------
Total stockholders' equity 47,936
Combined equity 35,813
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$ 51,823 38,474
========================
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and
results of operations.
SLH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
- ----------------------------------------------------------------------
Three Months Ended
March 31,
1997 1996
- ----------------------------------------------------------------------
(In thousands except
share amounts)
(unaudited)
REVENUES
Real estate sales $ 4,040 4,787
Real estate rentals and other 174 182
----------------------
Total revenues 4,214 4,969
COSTS AND EXPENSES
Real Estate:
Cost of sales 4,038 4,787
Operating expenses 745 619
Provision for loss on real
estate held for sale, net 179 (364)
General and administrative 333 397
----------------------
Loss from operations (1,081) (470)
Investment income - net 3,206 2
Interest expense (44) (28)
Equity in net loss of affiliates (232) (231)
Equity in net earnings of
venture capital investment funds 58 177
Other income 266 --
----------------------
Earnings (loss) before income taxes
and cumulative effect 2,173 (550)
Income taxes (benefit) (3) (10)
----------------------
Earnings (loss) before cumulative effect
of change in accounting principle 2,176 (540)
Cumulative effect of change in
accounting principle -- (1,400)
----------------------
NET EARNINGS (LOSS) $ 2,176 (1,940)
======================
Per share of common stock:
Net earnings (loss) $ 1.28 (1.13)
Average shares outstanding 1,703,504 1,703,504
Shares outstanding end of period 1,622,276 1,622,276
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and
results of operations.
SLH CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
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(unaudited)
Three Months Ended
March 31, 1997
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(in thousands)
Common stock:
Balance, beginning of year $ 1
Capitalization by Seafield Capital Corporation 15
---------
Balance, end of period 16
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Paid-in capital:
Balance, beginning of year 99
Capitalization by Seafield Capital Corporation 47,848
---------
Balance, end of period 47,947
---------
Net unrealized gains on marketable equity securities:
Balance, beginning of year --
Net change during period 1,375
---------
Balance, end of period 1,375
---------
Accumulated deficit:
Balance, beginning of year --
Net loss for the period from the date of
distribution (March 3, 1997) to March 31, 1997 (1,402)
---------
Balance, end of period (1,402)
---------
Stockholders' Equity $ 47,936
=========
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and
results of operations.
SLH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three months ended
March 31,
1997 1996
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(in thousands)
OPERATING ACTIVITIES
Net earnings (loss) $ 2,176 (1,930)
Adjustments to reconcile net earnings (loss)
to net cash provided by operations
Cumulative effect of change in accounting
principle -- 1,400
Depreciation and amortization 96 96
Equity in net loss of affiliates 193 224
Equity in net earnings of venture capital
investment funds (58) (111)
Provision for loss of real estate held for sale 179 (364)
Sales of real estate 3,765 3,696
Increase of notes receivable from sales
of real estate (1,525) --
Collections of notes receivable from sales
of real estate -- 14
Additions to real estate held for sale (115) (765)
Change in accounts receivable (84) (784)
Change in accounts payable (83) 68
Increase in deposits (225) (1)
Income taxes and other 343 187
-------------------------
Net cash provided by operations 4,662 1,730
-------------------------
INVESTING ACTIVITIES
Investments in affiliates -- (44)
Purchase of investments available for sale (10,119) --
Sale of investments available for sale 1,350 --
Additions to property, plant and equipment, net (37) --
Collections of other notes receivable -- 13
-------------------------
Net cash used by investing activities (8,806) (31)
-------------------------
FINANCING ACTIVITIES
Proceeds from long-term debt 41 --
Capitalization by Seafield Capital Corporation 10,000 --
Net transactions with Seafield Capital
Corporation -- (1,699)
-------------------------
Net cash provided (used) by financing activities 10,041 (1,699)
-------------------------
Net change in cash and cash equivalents 5,897 --
Cash and cash equivalents - beginning of year 3,925 --
-------------------------
Cash and cash equivalents - end of year $ 9,822 --
=========================
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $ -- --
=========================
Income taxes, net $ 5 6
=========================
See accompanying notes to combined financial statements.
SLH CORPORATION
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
(1) The financial information furnished herein is unaudited; however, in
the opinion of management, the financial information reflects all
adjustments which are necessary to fairly state SLH's financial position at
March 31, 1997 and December 31, 1996 and the results of its operations and
cash flows for the periods ended March 31, 1997 and 1996. All adjustments
made in the interim period were of a normal recurring nature except for
costs associated with the move of SLH to a new location in June 1997. The
financial statements have been prepared in conformity with generally
accepted accounting principles appropriate in the circumstances, and
therefore included in the financial statements are certain amounts based on
management's informed estimates and judgments. The financial information
herein is not necessarily representative of a full year's operations
because levels of sales, interest rates and other factors fluctuate
throughout the fiscal year. These same considerations apply to all year to
year comparisons. Certain 1996 amounts have been reclassified for
comparative purposes with no effect on net earnings (loss). See SLH's
Annual Report pursuant to Section 13 to the Securities Exchange Act of 1934
(Form 10-K) for additional information not required by this Quarter's
Report (Form 10-Q).
(2) Pursuant to a Distribution Agreement between SLH and Seafield Capital
Corporation (Seafield), the former parent company of SLH, Seafield
transferred certain assets (the Transfer Assets) and liabilities (the
Transfer Liabilities), including two wholly-owned subsidiaries, Scout
Development Corporation (Scout) and BMA Resources, Inc. (Resources), to SLH
on February 28, 1997. The Transfer Assets and Transfer Liabilities are
reflected in SLH's financial statements at Seafield's historical cost. All
stock of SLH was then distributed to the shareholders of Seafield (the
Distribution) on March 3, 1997.
The accompanying consolidated statement of operations and statement of cash
flows for the period ending March 31, 1997 includes the results of
operations and cash flows for January and February 1997 when the Transfer
Assets and Transfer Liabilities were owned and operated by Seafield.
The accompanying combined balance sheet as of December 31, 1996 and the
combined statement of operations and combined statement of cash flows for
the three months ended March 31, 1996 present the financial position,
results of operations and cash flows of the business, assets and
liabilities comprising the Transfer Assets and Transfer Liabilities which
relate directly to the businesses transferred.
(3) Cash and cash equivalents include all highly liquid investments with
an original maturity of three months for less when purchased.
(4) The components of "Other Liabilities" are as follows:
March 31, 1997 December 31, 1996
Current Noncurrent Current Noncurrent
---------------------- ----------------------
(in thousands)
Accrued property tax $ 61 -- 150 --
Interest payable 1,035 -- -- --
Accrued rent expense 300 246 250 250
Deposits 10 -- 235 --
Deferred income -- -- 47 59
Other -- -- -- 4
---------------------- ----------------------
$ 1,406 246 682 313
====================== ======================
(5) Earnings per share of common stock are based on the weighted average
number of shares of common stock outstanding and the common share
equivalents of dilutive stock options, where applicable.
(6) Under the Distribution Agreement and Assignment the Company has
assumed the rights and obligations of Seafield with respect to the legal
matters described below.
(a) Claim Against Skidmore, Owings & Merrill, et al. In 1986, a
lawsuit was initiated in the Circuit Court of Jackson County, Missouri by
Seafield's former insurance subsidiary (i.e., Business Men's Assurance
Company of America) against Skidmore, Owings & Merrill (SOM) which is an
architectural and engineering firm, and a construction firm to recover
costs incurred to remove and replace the facade on the former home office
building. Because the removal and replacement costs had been incurred
prior to the sale of the insurance subsidiary, Seafield negotiated with the
buyer for an assignment of the cause of action from the insurance
subsidiary. Under the Distribution Agreement Seafield has assigned to the
Company all of its rights to any recoveries and the Company has assumed any
costs relating to the prosecution of any of the above described claims.
Thus any recovery will be for the benefit of the Company and all costs
incurred in connection with the litigation will be paid by the Company.
Any ultimate recovery will be recognized as income when received and would
be subject to income taxes. In September 1993, the Missouri Court of
Appeals reversed a $5.7 million judgment granted in 1992 in favor of
Seafield; the Court of Appeals remanded the case to the trial court for a
jury trial limited to the question of whether or not the applicable statute
of limitations barred the claim. The Appeals Court also set aside $1.7
million of the judgment originally granted in 1992. Subsequently, the
parties waived a jury trial and in July 1996, the case was retried to a
judge. On January 21, 1997, the judge entered a judgment in favor of
Seafield for the benefit of the Company. The amount of that judgment,
together with interest is approximately $5.8 million. While the judgment
has been appealed, counsel for the Company expects that it will be
difficult for the defendants to cause the judgment to be reversed. The
final outcome is not expected until at least 1998. Settlement arrangements
with other defendants have resulted in payments to plaintiff which have
substantially offset legal fees and costs to date of approximately
$481,000. Future legal fees and costs can not reliably be estimated.
(b) Claim Against Scout. On January 30, 1997, Scout Development
Corporation was served with a complaint filed in the District Court of
Tarrant County, Texas by the parents of a 36 week old fetus who did not
survive an automobile accident at an intersection in Fort Worth, Texas,
the view of which is alleged to have been obstructed by weeds growing on
property that is alleged to have been owned by Scout. The Company has
denied liability, has turned the matter over to its insurance carrier and
believes that if it has any liability, it is adequately covered by an
existing policy of insurance.
(c) Internal Revenue Service Audits. Seafield has received notices
of proposed adjustments (Revenue Agent's Reports) from the Internal
Revenue Service (IRS) with respect to 1986-1990 federal income taxes.
These notices claim total federal income taxes due for the entire five year
period in the approximate net amount of $13,867,000, exclusive of interest
thereon. Seafield has filed protests regarding the 1986-1990 notices of
proposed adjustments.
On May 9, 1997, Seafield received a formal agreement to the issues and the
final tax computation from the IRS. The agreement provides for a tax
refund of approximately $5.8 million, before interest. The Company expects
to owe interest of approximately $700,000. The agreement is subject to
approval by the Congressional Joint Committee on Taxation. Consideration
by the Joint Committee is expected before the end of 1997.
The Company assumed from Seafield all contingent tax liabilities and
is acquiring all rights to refunds as well as any interest thereon related
to these tax years (the Tax Claims) and liabilities and refunds related to
any issues raised by the IRS for the years 1986-1990 whose resolution may
extend to tax years beyond the 1990 tax year. The Company believes that
adequate accruals for these income tax liabilities have been made.
(d) California Tax Issues. In December 1996, the California state
auditor sent Seafield an audit report covering the 1987-1989 taxable years.
The State of California has determined to include, as a "unitary
taxpayer," all majority owned non-life insurance subsidiaries and joint
ventures of Seafield. The auditor's report has been forwarded to the
California Franchise Tax Board for action. A billing is expected to be
made within six months from the submission of the report by the auditor.
The total amount of California state income taxes due for the 1987-1989
years is expected to be approximately $750,000 plus interest of
approximately $1 million. The Company is assuming all potential tax
liabilities and interest thereon regarding the California audit for the
1987-1989 taxable years. The Company believes that it has established
appropriate accruals for the California state income tax liability.
(7) In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share", which revised the calculation and
presentation provisions of Accounting Principles Board Opinion 15 and
related interpretations. Statement No. 128 is effective for Seafield's
fiscal year ending December 31, 1997. Retroactive application will be
required. Seafield believes the adoption of Statement No. 128 will not
have a significant effect on its reported earnings per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Selected financial data:
Three months ended March 31,
----------------------------
1997 1996
----------- ----------
Revenues $ 4,040,000 4,787,000
Loss from operations $ (1,081,000) (470,000)
Investment income - net $ 3,206,000 2,000
Net earnings (loss) $ 2,176,000 (1,940,000)
Per share:
Net earnings (loss) $ 1.28 (1.13)
Average shares outstanding 1,703,504 1,703,504
Shares outstanding end of period 1,622,276 1,622,276
Introductory remarks about results of operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations covers periods when the Company's assets were owned
by Seafield Capital Corporation (Seafield) and operated as part of
Seafield. It should be read in conjunction with the Notes to the Company's
Financial Statements.
On March 3, 1997, Seafield distributed to its shareholders all of the
outstanding shares of common stock of its wholly-owned subsidiary, SLH
Corporation, on the basis of one share of common stock of SLH for each four
shares of Seafield common stock held. In connection with this distribution
and pursuant to a Distribution Agreement between Seafield and SLH, Seafield
transferred its real estate and energy businesses and miscellaneous assets
and liabilities, including two wholly-owned subsidiaries, Scout Development
Corporation and BMA Resources, Inc., to SLH. The net assets distributed to
SLH totaled approximately $48 million.
1997 Compared to 1996.
Real estate revenues in 1997's first quarter were $4.2 million compared
with $5 million in 1996. The real estate sales revenues in 1997 include
the sale of 10 residential units or lots in Florida, New Mexico and Texas
($1.8 million) and 547 acres of land in Texas ($2.3 million). In 1996, the
real estate sales revenue included the sale of 11 residential units in New
Mexico ($4.8 million). Real estate rental and other revenues were
approximately the same in both the first quarters of 1997 and 1996.
At March 31, 1997, real estate holdings include residential land,
undeveloped land, single-family housing and commercial structures located
in the following states: Florida, Kansas, Nevada, New Mexico, Texas and
Wyoming. The total acreage consisted of approximately 600 acres and 56
lots or units for sale. Real estate operations are influenced from period
to period by several factors including seasonal sales cycles for projects
in Florida and New Mexico.
Cost of the real estate sales in 1997's first quarter totaled $4 million,
compared with a cost of approximately $4.8 million in the first quarter of
1996, reflecting the mix of real estate sold during each period as
discussed above in the revenue analysis. Real estate operating expenses
totaled $745,000 in 1997, compared with $619,000 in 1996. The increase is
attributable to increased expenses associated with the completion of the
residential projects.
Real estate available for sale is not depreciated under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which was implemented effective January 1, 1996.
Adoption of SFAS No. 121 resulted in an impairment loss on real estate held
for sale of $1.4 million which is included in the accompanying statement of
operations for 1996 as the cumulative effect of a change in accounting
principle. This impairment loss resulted primarily from discounting
expected future cash flows in estimating fair values less cost to sell of
certain real estate properties.
An additional $179,000 net impairment loss on real estate held for sale was
recorded in 1997's first quarter. The 1997 impairment loss resulted from
changes in estimated expected future cash flows based primarily on lower
expected sales prices on certain properties based on current market
conditions. The first quarter 1996 operations included a net recovery of
the discounted expected future cash flows under SFAS No. 121.
General and administrative expenses include estimates for overhead
operating costs totaling $250,000 for the months of January and February
1997 and $375,000 for the first three months of 1996. Actual SLH post-
distribution expenses on a stand alone basis of $77,000 were recorded in
March 1997.
The above factors produced a loss from operations of $1.1 million in the
first quarter of 1997, compared with a loss of $470,000 in the first
quarter of 1996.
Investment income totaled $3.2 million in 1997's first quarter compared
with $2,000 in 1996's first quarter. The 1997 income consists primarily of
the sale of 100,000 shares of Watson Pharmaceuticals, Inc. common stock.
This sale resulted in a gain of approximately $3 million.
Equity in affiliates' operating losses were approximately $232,000 in both
1997 and 1996's first quarters. During 1997's first three months, the oil
and gas operations recorded affiliated losses of $248,000, compared to a
$98,000 loss in the first three months of 1996, reflecting increased costs
recorded by Syntroleum Corporation and variances in operating results of
the oil and gas general partnership interests. Syntroleum is a
developmental venture which is expected to incur losses throughout its
development stage.
Interest expense increased to $44,000 in 1997 from $28,000 in 1996's
comparable quarter reflecting interest accrual on the expected state tax
liability.
Equity in earnings of venture capital investment funds totaled $58,000 in
1997's first quarter while 1996's comparable quarter produced earnings of
$177,000. These funds invest in development stage companies which cause
earnings to be subject to significant variations.
The $266,000 of other income in 1997 primarily reflects $508,000 in
receipts on Tenenbaum receivables accounted for on the cost recovery method
and $300,000 for costs associated with the move of SLH to a new location in
June 1997.
Tax benefits of $3,000 were recorded in 1997 compared with tax benefits of
$10,000 in 1996. Valuation allowances were provided on the federal tax
benefits because utilization within the group is not expected.
The combined effect of the above factors resulted in net earnings of $2.2
million in the first quarter of 1997 and a net loss of $1.9 million in the
first quarter of 1996.
Liquidity and Capital Resources
Prior to September 30, 1996, the Company's liquidity was provided by
Seafield. However, as provided in the Distribution Agreement, Seafield
transferred to the Company on March 3, 1997, cash of $6.9 million and
approximately $3.1 million of short-term investments (consisting of a U.S.
Treasury Note which is pledged to a bank for a real estate letter of
credit). Additionally, cash generated from operations of or the sale of
the Company's assets from October 1, 1996 to March 3, 1997 totaling $9.6
million was transferred to the Company as provided in the Distribution
Agreement. The $3.9 million of cash and cash equivalents in the December
31, 1996 balance sheet represents the net cash generated by the Company
during 1996's fourth quarter and was included in the transferred cash.
Cash provided by operations in the first quarter of 1997 totaled $4.7
million compared to $1.7 million in the first quarter of 1996. The
increase in funds provided is primarily the result of earnings reported in
1997's first quarter of $2.2 million compared to a loss of $1.9 million in
the first quarter of 1996. Cash provided by real estate sales was
approximately the same in both quarters ($3.8 million and $3.7 million,
respectively). Cash used by investing activities was $8.8 million in
1997's first quarter reflecting the $10 million increase in investments
available for sale as a result of the capitalization of SLH by Seafield.
The funds used were partially offset by a $1.4 million sale of marketable
common stock. Cash used by investing activities in the first quarter of
1996 was $31,000. The $10 million cash provided by financing activities in
the first quarter of 1997 represents the capitalization by Seafield. The
first quarter of 1996 had net cash used by financing activities of $1.7
million which represents the net cash transactions with Seafield on SLH
assets. The timing of receipts from real estate sales and/or collections
of notes thereon, as well as distributions from venture capital
investments, may vary significantly.
Debt associated with real estate totaled $1.2 million at both March 31,
1997 and December 31, 1996 and is due in December 1997. This consolidated
debt is non-recourse and comprises the current notes payable on the balance
sheets. The Company is obligated under recourse debt (with an unpaid
balance of $6.2 million) of an affiliate accounted for on the equity
method. The Company's obligation on this recourse debt is secured by a
$3.1 million U.S. Treasury Note transferred to the Company at the
Distribution Date.
The Company may seek its own credit facilities but management expects cash
flow from operations, cash from the capitalization at the Distribution Date
and the sale of assets will be sufficient to fund cash needs.
On January 21, 1997, the Circuit Court of Jackson County, Missouri entered
a judgment favorable to the Company in the claim against Skidmore, Owings &
Merrill (see Notes to Consolidated Financial Statements). The amount of
the judgment, together with accrued interest at December 31, 1996, is
approximately $5.8 million. While the judgment has been appealed, the
Company has been advised by its Counsel that it will be difficult for the
defendants to cause the judgment to be reversed. The final outcome is not
expected until at least 1998.
Subsequent Events.
The Company is entering into a joint development agreement for its 370
acres in Houston, Texas. The Company will contribute the land to a
partnership in exchange for a note receivable with a 10% preferential
return on both the land contribution and future development cash
requirements. The estimated future development cash requirements is
approximately $2.5 million. The Company's ownership position will be
approximately 75%.
The Company has committed to make a $1.5 million equity investment in a
Syntroleum chemical plant. The Company's equity investment will allow for
the commencement of certain engineering and permitting efforts on the
plant. Syntroleum is presently negotiating with other potential capital
providers and the development of the plant is contingent upon financing.
Syntroleum has executed two additional master license agreements since
March 3, 1997 (Texaco previously completed an agreement) with Marathon Oil
Company (Marathon) and Atlantic Richfield Company (ARCO).
A $2.6 million contract was signed on May 6, 1997 for the sale of one home
in Florida. The closing is scheduled for early July 1997. Additionally,
on May 8, 1997 a $820,000 contract was signed for the sale of 205 acres in
Ft. Worth, Texas. This closing is scheduled for June 1997 with the Company
providing $255,000 purchase money financing at 12% interest per annum with
principal due in three years.
On May 9, 1997, Seafield received a formal agreement to the issues and the
final tax computation from the IRS. The agreement provides for a tax
refund of approximately $5.8 million, before interest. The Company expects
to owe interest of approximately $700,000. The agreement is subject to
approval by the Congressional Joint Committee on Taxation. Consideration
by the Joint Committee is expected before the end of 1997. The Company
assumed the liability and rights to any refund as part of the Distribution
Agreement. Accordingly, the Company will record a significant gain when
the agreement is formally approved.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which revised the calculation and
presentation provisions of Accounting Principles Board Opinion 15 and
related interpretations. Statement No. 128 is effective for Seafield's
fiscal year ending December 31, 1997. Retroactive application will be
required. Seafield believes the adoption of Statement No. 128 will not
have a significant effect on its reported earnings per share.
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" is required to be implemented for
periods ending after December 15, 1997. The adoption of this standard is
not expected to have any significant impact on the Company's financial
position or results of operations.
No other recently issued accounting standards presently exist which will
require adoption in future periods.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Under the Distribution Agreement and Assignment the Company has
assumed the rights and obligations of Seafield with respect to the legal
matters described below.
(a) Claim Against Skidmore, Owings & Merrill, et al. In 1986, a
lawsuit was initiated in the Circuit Court of Jackson County, Missouri by
Seafield's former insurance subsidiary (i.e., Business Men's Assurance
Company of America) against Skidmore, Owings & Merrill (SOM) which is an
architectural and engineering firm, and a construction firm to recover
costs incurred to remove and replace the facade on the former home office
building. Because the removal and replacement costs had been incurred
prior to the sale of the insurance subsidiary, Seafield negotiated with the
buyer for an assignment of the cause of action from the insurance
subsidiary. Under the Distribution Agreement Seafield has assigned to the
Company all of its rights to any recoveries and the Company has assumed any
costs relating to the prosecution of any of the above described claims.
Thus any recovery will be for the benefit of the Company and all costs
incurred in connection with the litigation will be paid by the Company.
Any ultimate recovery will be recognized as income when received and would
be subject to income taxes. In September 1993, the Missouri Court of
Appeals reversed a $5.7 million judgment granted in 1992 in favor of
Seafield; the Court of Appeals remanded the case to the trial court for a
jury trial limited to the question of whether or not the applicable statute
of limitations barred the claim. The Appeals Court also set aside $1.7
million of the judgment originally granted in 1992. Subsequently, the
parties waived a jury trial and in July 1996, the case was retried to a
judge. On January 21, 1997, the judge entered a judgment in favor of
Seafield for the benefit of the Company. The amount of that judgment,
together with interest is approximately $5.8 million. While the judgment
has been appealed, counsel for the Company expects that it will be
difficult for the defendants to cause the judgment to be reversed. The
final outcome is not expected until at least 1998. Settlement arrangements
with other defendants have resulted in payments to plaintiff which have
substantially offset legal fees and costs to date of approximately
$481,000. Future legal fees and costs can not reliably be estimated.
(b) Claim Against Scout. On January 30, 1997, Scout Development
Corporation was served with a complaint filed in the District Court of
Tarrant County, Texas by the parents of a 36 week old fetus who did not
survive an automobile accident at an intersection in Fort Worth, Texas,
the view of which is alleged to have been obstructed by weeds growing on
property that is alleged to have been owned by Scout. The Company has
denied liability, has turned the matter over to its insurance carrier and
believes that if it has any liability, it is adequately covered by an
existing policy of insurance.
(c) Internal Revenue Service Audits. Seafield has received notices
of proposed adjustments (Revenue Agent's Reports) from the Internal
Revenue Service (IRS) with respect to 1986-1990 federal income taxes.
These notices claim total federal income taxes due for the entire five year
period in the approximate net amount of $13,867,000, exclusive of interest
thereon. Seafield has filed protests regarding the 1986-1990 notices of
proposed adjustments.
On May 9, 1997, Seafield received a formal agreement to the issues and the
final tax computation from the IRS. The agreement provides for a tax
refund of approximately $5.8 million, before interest. The Company expects
to owe interest of approximately $700,000. The agreement is subject to
approval by the Congressional Joint Committee on Taxation. Consideration
by the Joint Committee is expected before the end of 1997.
The Company assumed from Seafield all contingent tax liabilities and
is acquiring all rights to refunds as well as any interest thereon related
to these tax years (the Tax Claims) and liabilities and refunds related to
any issues raised by the IRS for the years 1986-1990 whose resolution may
extend to tax years beyond the 1990 tax year. The Company believes that
adequate accruals for these income tax liabilities have been made.
(d) California Tax Issues. In December 1996, the California state
auditor sent Seafield an audit report covering the 1987-1989 taxable years.
The State of California has determined to include, as a "unitary
taxpayer," all majority owned non-life insurance subsidiaries and joint
ventures of Seafield. The auditor's report has been forwarded to the
California Franchise Tax Board for action. A billing is expected to be
made within six months from the submission of the report by the auditor.
The total amount of California state income taxes due for the 1987-1989
years is expected to be approximately $750,000 plus interest of
approximately $1 million. The Company is assuming all potential tax
liabilities and interest thereon regarding the California audit for the
1987-1989 taxable years. The Company believes that it has established
appropriate accruals for the California state income tax liability.
Item 2. Changes in Securities
(a) Changes in Securities: None
(b) Under the Kansas General Corporation Code, dividends may be
paid out of the Corporation's surplus, or if there is no surplus, out of
the Corporation's net profits for the fiscal year in which the dividend is
declared or the preceding fiscal year. At March 31, 1997, the
Corporation's surplus (as defined under the Kansas General Corporation
Code) was approximately $47,920,000. However, in connection with the
distribution by Seafield Capital Corporation (Seafield) of all shares of
SLH Corporation common stock to Seafield shareholders, effected March 3,
1997, the Corporation agreed that it will not, for a period of two years
following the distribution, pay any dividends in cash or property or redeem
any of its shares of capital stock, without the consent of Seafield.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule - as filed electronically by
the Registrant in conjunction with this Form 10-Q.
(b) Reports on Form 8-K:
None.
SIGNATURES
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.
SLH Corporation
Date May 9, 1997 By /s/ James R. Seward
----------------------------
James R. Seward
President and Chief
Executive Officer
Date May 9, 1997 By /s/ Steven K. Fitzwater
----------------------------
Steven K. Fitzwater
Vice President, Chief Financial and
Accounting Officer, Treasurer and
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the period ending March 31, 1997 and is qualified in its
entirety by reference to such 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 9,822
<SECURITIES> 10,133
<RECEIVABLES> 117
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,583
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 51,823
<CURRENT-LIABILITIES> 3,600
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 47,920
<TOTAL-LIABILITY-AND-EQUITY> 51,823
<SALES> 4,040
<TOTAL-REVENUES> 4,214
<CGS> 4,038
<TOTAL-COSTS> 924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> 2,173
<INCOME-TAX> (3)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,176
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 0<F2>
<FN>
<F1>Disclosure not required on interim financial statements.
<F2>Computation not applicable.
</FN>
</TABLE>
