SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
SLH CORPORATION
(name of registrant as specified in its charter)
Commission File No. 0-21911
Kansas 43-1764632
(State of incorporation or organization) (IRS Employer Identification No.)
2600 Grand Boulevard
Suite 500
Kansas City, Missouri 64108
(Address, including zip code, of principal executive offices)
816-842-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value and Preferred Share Purchase Rights
Number of shares outstanding of the only class of Registrant's common
stock as of February 24, 1997: Common Stock, $0.01 par value - 1,622,276.
The aggregate market value of the Common Stock of the Company
held by non-affiliates, based upon the last sales price of such stock
at $29.25 per share on March 27, 1996, was $35,862,000.
Indicate by check mark whether the Registrant (1) has filed all
reports required 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 __ No X
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]
CONTENTS
PART I PAGE
Item 1. Business..............................................
Overview..............................................
Strategy..............................................
Management and Disposition of Real Estate Assets......
Business and Management of Energy Assets..............
Miscellaneous Assets and Liabilities..................
Company Employees.....................................
Regulation-Possible Application of the Investment
Company Act of 1940..................................
Item 2. Properties............................................
Item 3. Legal Proceedings.....................................
Item 4. Submission of Matters to a Vote of Security Holders...
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters................................
Item 6. Selected Financial Data...............................
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................
Item 8. Financial Statements and Supplementary Data...........
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............
PART III
Item 10. Directors and Executive Officers of the Registrant....
Item 11. Executive Compensation................................
Item 12. Security Ownership of Certain Beneficial
Owners and Management..............................
Item 13. Certain Relationships and Related Transactions........
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K..........................................
SIGNATURES..........................................................
INDEPENDENT AUDITORS' REPORT........................................
FINANCIAL STATEMENT SCHEDULE
Schedule III. Real Estate and Accumulated Depreciation............
The calculation of the aggregate market value of the Common
Stock of the Company held by non-affiliates is based on the
assumption that non-affiliates do not include directors. Such assumption
does not constitute an admission by the Company or any director that any
director is an affiliate of the Company.
PART I
ITEM 1. BUSINESS.
Overview
SLH Corporation (the "Company") was incorporated in Kansas
on December 5, 1996. The Company is primarily engaged in the business of
managing, developing and disposing of Real Estate and Energy businesses
and Miscellaneous assets (the "Transfer Assets") acquired from
Seafield Capital Corporation ("Seafield") on February 28, 1997 in
connection with a Distribution of all of the outstanding shares of the
Company's Common Stock and certain Preferred Share Purchase Rights to
Seafield Shareholders on March 3, 1997 (the "Distribution"). The
Distribution was effected pursuant to a Distribution Agreement (the
"Distribution Agreement"), a Blanket Bill of Sale and Assumption
Agreement (" the Assignment Agreement"), a Facilities Management and
Interim Services Agreement ("Interim Services Agreement") and a Tax
Sharing Agreement ("Tax Sharing Agreement"), copies of which are
appended to this report as exhibits. The Distribution is more
particularly described in the Information Statement that was furnished
to all stockholders on February 13, 1997 (the "Information Statement"),
and the Company's related Registration Statement on Form 10 ("Form 10").
See also Item 13 for a description of the Agreements.
The following list shows the Company and each subsidiary
corporation of which Registrant owned a majority interest at March 3,
1997, together with the ownership percentage and state or country of
incorporation. See Item 7 and Notes to Consolidated Financial Statements
for additional information.
SLH CORPORATION (Kansas)
BMA Resources, Inc. (Missouri) 100%
Scout Development Corporation (Missouri) 100%
Scout Development Corporation of New Mexico (Missouri) 100%
Carousel Apartment Homes, Inc. (Georgia) (inactive) 100%
The Company's real estate assets reflect the remaining assets
of a discontinued real estate development business that was conducted by
Seafield in association with a previously owned life insurance company
that was sold in 1990. The energy and miscellaneous assets also reflect
a variety of insurance company assets that were retained by Seafield
following the sale of that insurance business. The Company is engaged in
the sale of all of its assets in an orderly manner other than its interest
in Syntroleum Corporation.
Real estate assets, as of December 31, 1996, consist of
(a) the remaining inventory from three high end condominium
developments located in Santa Fe, New Mexico (comprising 25 completed
homes that have been priced for sale between $225,000 and $750,000;
"Quail Run") and Juno Beach, Florida (primarily comprising three
homes that have been priced for sale between $800,000 and $3.0
million, the "Juno Beach Homes"); (b) a seven story parking garage in
Reno, Nevada (the "Reno Parking Garage"); (c) a 49.9% interest in a
community shopping center in Gillette, Wyoming (the "Shopping Center
Interest"); and (d) approximately 1,147 acres of undeveloped land,
with 370 acres in Houston, Texas, approximately 547 acres in the
vicinity of the Alliance Airport in Ft. Worth, Texas, 205 acres in West
Ft. Worth, Texas, 9 other acres in Corinth, Texas and 16 acres at
the intersection of 119th Street and Interstate 35 in the southern
portion of the Kansas City metropolitan area (the "Undeveloped Land").
The Total Real Estate Inventory had an aggregate carrying value at December
31, 1996, of approximately $ 25.2 million.
Energy assets consist of a 32.5% interest in Syntroleum
Corporation ("Syntroleum") and minority interests in four oil and gas
general partnerships which have working interests in producing wells in
the Gulf of Mexico (the "Oil & Gas Properties").
Syntroleum is the developer and owner of a patented process
and several related proprietary technologies ("Syntroleum(R) Process")
for the conversion of natural gas into synthetic liquid hydrocarbons
which can be further processed into fuels such as diesel, kerosene (used by
jet aircraft) and naphtha and related non fuel chemical feedstocks and
lubricants. Syntroleum is currently engaged in negotiations for the
licensing of the Syntroleum Process with major oil companies.
Because Syntroleum continues to be in the developmental phase of
its operations, no assurances can be given that it will be able to
successfully conclude any license or agreement on a favorable basis or
that a commercially viable Syntroleum Process plant will be
constructed and successfully operated.
The Company also owned other assets consisting primarily of (a)
three investments in privately held venture capital limited partnerships
having an aggregate book value at December 31, 1996, of $1.2 million, (b)
184,878 shares (of which 100,000 were sold on February 28, 1997) of
common stock of Watson Pharmaceuticals, a publicly traded company which
closed on March 27, 1997, at $38.38 per share and (c) a preferred
stock interest in Norian Corporation, a privately owned developer of
proprietary bone substitute technology which had a carrying value of
approximately $1.0 million at December 31, 1996, ("Miscellaneous Assets").
The Company assumed liabilities relating to the Transfer
Assets as well as certain contingent Seafield liabilities ("Transfer
Liabilities"), including Seafield's liability for disputed income
taxes which the Internal Revenue Service claims to be owed by Seafield for
its 1986, 1987, 1988, 1989 and 1990 tax years and which the State of
California claims to be owed for the 1987, 1988 and 1989 years (the "Tax
Claims"). The Tax Claims amount to approximately $14.6 million, plus
interest. Although the Company believes that a combination of defenses
against the claims and contested offsetting tax losses generated by a
real estate project sold at a loss in 1990, could result in a positive
outcome, the Company can not provide any assurance that its defense of
such claims will be successful. See "Item 3 - Legal Proceedings."
The Company is engaged in the sale of all of its assets in an
orderly manner other than Syntroleum. Following the liquidation of
non Syntroleum assets, the Company plans to continue to promote the
management, growth and development of Syntroleum or it may engage in a
merger or some other transaction that would effectively dispose of all of
its assets.
As a result of the Distribution, Seafield owns no shares of
Company Common Stock and the Company is now operating as an independent
publicly traded company. The Company's principal executive offices are
located at 2600 Grand Boulevard, Suite 500, PO Box 410949, Kansas City,
Missouri 64141, and its telephone number is (816) 842-7000.
Strategy
The Company plans to sell all of its assets, other than
Syntroleum, in an orderly manner and under circumstances that would
enable the Company to take advantage of opportunities to maximize the net
amounts to be derived from each asset. Although the Company does not
expect to engage in further Real Estate development activities, it may
utilize available cash to further improve undeveloped real estate on
hand if the improvement would be expected to enhance its ultimate
marketability on a profitable basis. Concurrent with these
activities the Company will continue to assist Syntroleum with its
efforts to license the Syntroleum Process, market its catalyst and to
ultimately construct and operate plants for the conversion of natural
gas into synthetic liquid hydrocarbons. These activities will include
assistance with strategic planning and the acquisition of debt and or
equity financing for the construction of one or more Syntroleum plants.
That assistance may also include further investment by the Company in
Syntroleum or directly in one or more Syntroleum plants. Following the
liquidation of non Syntroleum assets, the Company expects to continue
to promote the management, growth and development of Syntroleum or it may
engage in a merger or some other transaction that would effectively
dispose of all of its assets.
The Company's primary source of revenue to support operations
will be derived from the operation and sale of non Syntroleum assets and
available cash. In addition to the support of current operations, those
proceeds are expected to be used to prepare assets for ultimate sale, as
is possible with respect to the Company's undeveloped real estate.
Depending on the progress made by Syntroleum it is expected that such
proceeds may also be used for possible further investment in
Syntroleum or in one or more Syntroleum plants, none of which are
presently under development. Pending any such use, the proceeds of
sale and available cash will be invested in government securities or
possibly in other marketable debt or equity securities or money market
instruments to the extent that any such investments would not cause the
Company to become an investment company under the Investment Company Act
of 1940.
Management and Disposition of Real Estate Assets
Real Estate assets are owned and operated by the Company's wholly
owned subsidiary Scout Development Corporation and its wholly-owned
subsidiary Scout Development Corporation of New Mexico (collectively,
"Scout"). Scout was initially formed in 1990 to acquire, develop and
manage improved and unimproved real estate as a means of investing assets
of Seafield's insurance business, which was then Seafield's primary
business. However, in 1992 following the 1990 disposition by Seafield of
the insurance business, the real estate development operations were
discontinued. Since then Scout has concentrated on bringing to completion
all of its development projects and on the disposition of all of its real
estate assets in an orderly manner that would maximize the value of each
asset. By the end of 1995 substantially all real estate development
activities had been concluded and Scout was engaged primarily in the
disposition of its assets.
The following table shows the carrying value of the inventory
of the
Company's Real Estate Assets as of December 31, 1996:
REAL ESTATE INVENTORY
Carrying value as of
Asset Location December 31, 1996
----- -------- -----------------
The 28 Residential Condominiums Santa Fe New Mexico
and Juno Beach, Fla. $ 14,536,000
The Reno Parking Garage Reno, Nevada 3,056,000
The Houston Tract Houston, Texas 2,218,000
The Fort Worth Tracts Ft Worth, Texas 2,956,000
The Kansas City Tract Olathe, Kansas 2,659,000
----------
25,425,000
The Shopping Center Interest Gillette, Wyoming (263,000)
----------
Total $ 25,162,000
==========
The Quail Run and Juno Beach residential condominium developments
consist of inventory remaining from real estate development projects
commenced by Scout. The Juno Beach homes consist of two exclusive ocean
front homes, each of which are listed for sale at $3.0 million, a third
home within another project in the same area listed for sale at $800,000
and three marina boat slips. The Quail Run properties consist of 25 homes
ranging in listing prices from $225,000 to $750,000. The Company is
actively involved in the marketing of these properties and anticipates
that approximately two years will be required to complete all home sales.
Following the disposition of these newly constructed homes, the Company
will continue to have warranty obligations. None of the home properties
are subject to any mortgage or material encumbrance.
The Reno Parking Garage is a seven story 850-space parking garage
located in downtown Reno, Nevada. Scout owns the building unencumbered
except for a ground lease which expires on February 28, 2023 and which
calls for annual lease payments in the amount of $294,000. The building
contains a total of 144,500 square feet of leasable parking space.
Parking revenue totaled approximately $595,000 or $700 per space or $4.12
per square foot in 1996. In addition, 8,258 square feet located on the
ground floor of the garage is leased to a retail tenant under a 15-year
lease. Revenue from the retail lease during 1996 was $133,800 or $16.20
per square foot. In addition to basic rent, the retail tenant is
responsible for its pro rata share of real estate taxes and insurance.
During 1996, $5,400 was collected from the retail tenant for taxes and
insurance. Scout is presently actively marketing the property for sale.
The Shopping Center Interest consists of a 49.9% joint venture
interest in a retail shopping center containing approximately 163,000
square feet of net leasable area and 14 acres of undeveloped land in
Gillette, Wyoming. At the end of 1996, the center was 88% occupied.
Rental revenue totaled $733,000 for 1996. The average annual gross rental
per occupied square foot was $5.62. In addition to rental revenue,
tenants are responsible for their share of common area maintenance
(CAM). During 1996, CAM collections from tenants totaled $83,000. The
property is subject to industrial revenue refunding bonds pursuant to
a refinancing in 1996 in the amount of $6.17 million that are secured by
a bank letter of credit and guaranteed by Scout. The letter of credit is
secured by a $3.15 million Treasury Note that is pledged by the Company to
the issuer of the letter of credit.
The Undeveloped Land consists of an aggregate of approximately 1,147
acres of undeveloped land, with 370 acres in Houston, Texas,
approximately 547 acres in the vicinity of the Alliance Airport in Ft.
Worth, Texas, 205 acres in West Ft. Worth, Texas, 9 other acres in
Corinth, Texas, and 16 acres at the intersection of 119th Street and
Interstate 35 in the southern portion of the Kansas City metropolitan
area. The zoning for the tracts other than the Kansas City Tract varies
from residential to light commercial, with the Kansas City Tract being
zoned for commercial use. None of the property is developed, none is
encumbered with any mortgages, except for a $1.2 million non recourse
mortgage on the Kansas City Tract, and all is being actively marketed as
is.
The Company does not plan to engage in further development of any
of the Real Estate Assets except to the extent necessary to maximize the
value of the properties on hand. Following the disposition of all
properties it intends to terminate its real estate operations.
The Company also owns an interest in certain contingent accounts
receivable of Tenenbaum & Associates, Inc. ("TAI"), a real estate tax
consulting firm, the business of which was sold in 1995. The Company
also has and is actively marketing a leasehold interest in
approximately 14,985 square feet of space located on the second floor
of an office building in Kansas City, Missouri, that was formerly occupied
by TAI and that was vacant as of December 31, 1996. The lease, which
expires on May 31, 2000, calls for rents of approximately $19,318 per
month, subject to yearly increases of approximately $850.
Environmental. Scout is subject to the following United
States environmental laws: Clean Air Act, Comprehensive
Environmental Response, Compensation, and Liability Act, Emergency
Planning and Community Right-to-Know Act, Federal Water Pollution Control
Act, Oil Pollution Act of 1990, Resource Conservation and Recovery Act,
Safe Drinking Water Act and Toxic Substances Control Act, all as
amended. Scout is also subject to the United States environmental
regulations promulgated under these acts, and also is subject to state and
local environmental regulations which have their foundation in the
foregoing United States environmental laws.
As is the case with many companies, Scout faces exposure to
actual or potential claims and lawsuits involving environmental matters.
However, no such claims are presently pending and Scout has not suffered,
and does not anticipate that it will suffer, a material adverse effect as a
result of any past action by any governmental agency or other party, or
as a result of compliance with such environmental laws and regulations.
Business and Management of Energy Assets
General
The Company's Energy Assets consist of Syntroleum and interests in
four oil and gas partnerships that have working interests in producing
wells in the Gulf of Mexico. These assets are owned by BMA
Resources, Inc., a wholly-owned subsidiary of the Company ("BMA
Resources"). BMA Resources was formed by Seafield to acquire, hold
and develop properties in connection with its insurance business
that was sold in 1990. Since that sale, BMA Resources has disposed of
all of its assets other than Syntroleum and the Oil and Gas
Interests. The Company intends to promote the continued
development of Syntroleum. The Company does not intend to acquire
additional oil and gas interests with the exception of additional
capital expenditures in existing partnerships for the purpose of further
developing proven reserves.
Syntroleum
Syntroleum Background. The Company owns 5,950,000 shares of
Syntroleum Common Stock, which constitutes approximately 32.5% of all
outstanding shares. The shares were acquired by the Company over a number
of years for an aggregate of approximately $2.1 million. Syntroleum is
the developer and owner of a patented process and several related
proprietary technologies ("Syntroleum Process") for the conversion of
natural gas into synthetic liquid hydrocarbons which can be further
processed into fuels such as diesel, kerosene (used by jet aircraft) and
naphtha and related non fuel chemical feedstocks and lubricants.
Syntroleum is a privately owned corporation that was founded in
1984 by Kenneth Agee. Mr. Agee is a chemical engineer who is the
inventor of most of Syntroleum's proprietary technology, the Chairman
and Chief Executive Officer and a principal stockholder of Syntroleum.
Syntroleum built an initial two barrel per day pilot plant in 1990-1991
with the proceeds of the Company's first significant investment in 1988.
In 1995 Syntroleum substantially up graded the pilot plant to conduct
additional tests. In 1996, Syntroleum entered into a joint development
agreement and master license agreement with Texaco. Under the joint
development agreement with Texaco, Syntroleum and Texaco have agreed to
pool resources for the refinement of certain aspects of the Syntroleum
Process. Under the master license agreement, Syntroleum has granted Texaco
a nonexclusive license to use the Syntroleum Process outside North
America (United States, Canada and Mexico), China and India for the
construction of processing plants and the production of liquid fuels. In
early 1997, Syntroleum also entered into a nonexclusive master license
agreement with Marathon Oil Company.
Syntroleum's strategy is to license the Syntroleum Process on a
non-exclusive basis to producers of natural gas and oil and gas
processors in exchange for license fees and royalties, to market the
principal catalyst used in the Syntroleum Process to plant operators
(the " Catalyst") and to construct and operate its own plants in the
United States and other parts of the world for the production of chemical
feedstocks and lubricants.
The Syntroleum Process. Syntroleum's Syntroleum Process
essentially involves two catalytic reactions - the first reaction converts
natural gas into synthesis gas ("syngas"). In the syngas reaction,
natural gas consisting primarily of methane, is combined at high
temperature with air, consisting primarily of oxygen and nitrogen,
in a proprietary reactor utilizing a commercially available catalyst
to form syngas. The resulting syngas consists primarily of carbon monoxide
and hydrogen that is "diluted" with nitrogen. The second reaction
converts the syngas into hydrocarbons which are primarily liquid at room
temperature through a catalytic reaction commonly referred to as the
Fischer-Tropsch reaction. In the Fischer-Tropsch reaction, the syngas
flows into a reactor containing a proprietary catalyst developed by
Syntroleum. As the syngas passes over the catalyst, it is converted
into hydrocarbons of various molecular weights, with by-product water and
carbon dioxide also being produced. The hydrocarbons and water drain
from the reactor vessel and are subsequently separated. Both
reactions generate considerable amounts of heat. The nitrogen helps to
remove a portion of the heat from the reactor and is ultimately vented
into the atmosphere. The Syntroleum Process contemplates that a portion of
the excess heat energy will be used in the compression energy necessary
for the syngas and Fischer-Tropsch reactions, with any remaining
surplus heat energy being converted for commercial sale if
circumstances permit. Energy integration is a key component of the
capital efficiency of the Syntroleum Process and is the subject of
several patent applications that Syntroleum has in process.
The Syntroleum Process involves a number of unique characteristics
that differentiate it from competing processes developed or under
development by a number of large companies. The Syntroleum Process
utilizes oxygen directly from the atmosphere for the syngas reaction
while others utilize pure oxygen to create a syngas that is free of
nitrogen. This difference significantly reduces costs and equipment to
produce syngas in the Syntroleum Process. The Syntroleum Process
also utilizes a unique catalyst under development by Syntroleum for
use in the Fischer-Tropsch conversion reaction. The Catalyst produces
hydrocarbon molecules that are primarily in the liquid fuels range. This
reduces subsequent processing where the desired product is a liquid fuel.
Syntroleum has also developed a catalyst which produces a very waxy
synthetic crude oil which requires further processing in order to
produce a liquid fuel. A third major difference relates to the use of
nitrogen in the Syntroleum Process rather than eliminating it prior to
the initial syngas reaction as with competing processes. The
combination of these and other features have led Syntroleum to
believe that plants using its proprietary Syntroleum Process may be
constructed at a capital cost significantly less than those based on
competing processes of comparable size. In addition, Syntroleum
believes that the Syntroleum Process will permit the construction of
relatively small cost effective processing plants that may be used on
ships, barges and offshore platforms for the conversion of gas production
from small fields in remote locations.
Patents and Properties. Syntroleum holds the following patents
relating to the Syntroleum Process: United States Patent No.
4,833,170 issued May 23, 1989 and No. 4,973,453 issued November 27, 1990.
These patents were granted for a term of seventeen years from the date of
issuance. Patent applications were subsequently filed in Argentina,
Australia, Canada, China, India, Malaysia, Mexico, Netherlands,
Nigeria, Norway, Pakistan, United Kingdom and Venezuela. Subsequent
patents have been granted in Australia, Canada, China, India,
Malaysia, Mexico, Nigeria, Norway, Pakistan and the United Kingdom.
The applications in Argentina, Netherlands and Venezuela are still
pending. Syntroleum also has several additional patent applications filed
and others in progress.
Syntroleum owns a prototype two barrel per day pilot plant located
on 2 acres in Tulsa, Oklahoma and leases 2,500 square feet of laboratory
and office pace and 4,500 square feet of executive office space in Tulsa.
Available Natural Gas and Demand for the Syntroleum Process.
Syntroleum believes that a significant demand exists for cost
effective gas to liquids plants due to the availability of large
quantities of natural gas in remote regions of the world that are not
currently marketable because the distance to a market makes them
uneconomical to transport as natural gas. When crude oil is associated
with unmarketable natural gas, it is frequently flared or re-injected in
order to produce the associated oil. However, in many countries flaring
is not allowed by law and re-injection is frequently not an economical
option. Natural gas may also be unmarketable due to the nature or quantity
of impurities in the gas, such as excessive quantities of carbon dioxide,
nitrogen or hydrogen sulfide. A cost effective Syntroleum plant may be
a viable option in many of these cases.
In the Syntroleum Process certain impurities such as nitrogen and
carbon dioxide do not have to be removed in order for the gas to be used
as a viable feedstock. The liquid hydrocarbon or "Syncrude" that
results from the Syntroleum Process is free from sulfur, metals,
aromatics, nitrogen, salt and other impurities that may be found in crude
oil. These and other characteristics make the Syncrude a valuable blending
stock for upgrading natural crude oil products.
Products. Depending on the catalyst used and the design of the
plant the Syntroleum Process will produce short chain liquid
hydrocarbons that can be upgraded into liquid fuels such as diesel,
kerosene (for jet fuel) and naphtha (for use in gasoline production).
These may be differentiated from existing commodity fuels because
they are free of sulfur, metals, particulates and aromatics and may
therefore be marketed at premium prices as a blending agent in US and
European markets and as a substitute for LNG (liquefied natural gas).
Other proprietary catalysts may be used to produce longer chain
hydrocarbons that can be further processed to produce synthetic
lubricants, waxes and petrochemical feedstocks.
Competition-Early Stage Development. The Syntroleum Process is in
direct competition with processes developed by or under development by
a number of major oil companies which have substantially greater
financial and technical resources relative to those available to
Syntroleum. Furthermore, the Syntroleum Process has not been
tested in a plant designed to produce commercial quantities and
such testing can not occur until a plant has been developed, which
could take up to two years from the commencement of construction.
Although, Syntroleum has entered into a joint development agreement
with Texaco, that agreement does not assure that the development
process will be completed or that Texaco will use its license rights to
build a plant using the Syntroleum Process. Accordingly, until a plant
is constructed and placed in profitable operation, Syntroleum will not
have assurance of the commercial feasibility of its process or whether it
will be able to successfully compete with processes developed by
companies having much greater financial resources.
No Market for Syntroleum Common Stock. Syntroleum's capital stock
consists of a single class of Common Stock, 18,311,057 shares of which
were outstanding at December 31, 1996. There is no public market for the
Syntroleum Common Stock. It is privately held by approximately 114
stockholders under agreements which restrict the transfer of the stock.
Transfers are not permitted except to certain affiliates and in
connection with sales to other third parties after the stock has first
been offered to Syntroleum and then to the other Syntroleum
stockholders. During 1996, Syntroleum sold shares in two private
transactions at $7.42 per share, the largest of which transactions
involved a catalyst supplier who purchased a portion of the shares for $1
million in cash and agreed to purchase the balance at $7.42 per share
through the delivery of $7 million of catalyst and other non cash
consideration.
Syntroleum Financial Condition and Results of Operations. As of
December 31, 1996, Syntroleum had an unaudited accumulated deficit of $5
million (1996 losses from operations were $1.8 million) and net
shareholders' equity of $450,000.
Syntroleum Management and Employees. Syntroleum's officers consist
of :
Mr. Kenneth Agee, age 39, who has been Chairman and Chief
Executive Officer since inception and who is a licensed
professional engineer and the inventor of most of Syntroleum's
proprietary technology.
Mr. Mark A. Agee, age 43, who has been the President and
Chief Operating Officer of Syntroleum since January 1996, Vice
President and Chief Financial Officer from January 1994 until
December 1996, and who is the brother of Kenneth Agee. From
1989 to 1993, Mr. Agee was the President and Chief Executive
Officer of Convergent Communications, Inc., a private
telecommunications company that was sold in 1993.
Mr. Peter Snyder, age 51, has been Vice President of Marketing
since January 1996. From 1990 to 1995 he was the President of C&
C Petroleum and Chemicals Group, a wax and lubricants marketing
company.
Mr. Larry J. Weick, age 48, has been employed as Vice
President of Project Development since January 1996. From
1993 to 1996 he was a consultant for natural gas and electric
utilities. Previously he was employed for twelve years in
finance, planning and business development for ARCO.
Mr. Randall M. Thompson, age 38, has been the Vice President and
Chief Financial Officer since December 1996. From 1994 to
December 1996 he was a Vice President of Tenneco Energy and
from 1983 to 1994 was Planning and Evaluation Manager for
Atlantic Richfield Company.
The Syntroleum Board consists of eight directors, two of which are
officers of the Company, being Mr. Seward and Mr. Jacobs, Mr. Frank M.
Bumstead, a Director of a Seafield Subsidiary, Mr. Kenneth Agee and Mr.
Mark Agee, who are Syntroleum officers, and three other non employee
directors, consisting of Mr. Alvin Albe, Mr. Robert Rosene, Jr., and Mr.
Ted Sheridan.
At December 31, 1996, Syntroleum had 8 full time and 8 part time
employees.
Oil and Gas Properties
BMA Resources owns minority general partnership interests in four
oil and gas general partnerships, which were formed from 1987 to 1989,
with the purpose of engaging in the business of acquiring, exploring and
developing oil and gas prospects. The partnerships have working
interests in producing wells in the Gulf of Mexico and have a combined
carrying value of $3.5 million as of December 31, 1996.
Miscellaneous Assets and Liabilities
The Company also owned other assets consisting primarily of (a)
three investments in privately held venture capital limited partnerships
having an aggregate book value at December 31, 1996, of $1,203,000, (b)
184,878 shares (of which 100,000 shares were sold on February 28, 1997),
of common stock of Watson Pharmaceuticals, a publicly traded company
which closed on March 27, 1997, at $38.38 per share, and (c) a preferred
stock interest in Norian Corporation, a privately owned developer of
proprietary bone substitute technology, which had a carrying
value of approximately $1.0 million at December 31, 1996. These assets
were acquired by Seafield in connection with its Insurance Business that
was sold in 1990. The Company plans to liquidate all of these investments
in an orderly manner with the view to maximizing their value to
stockholders.
Under the Distribution Agreement and the Assignment the Company
assumed certain contingent Seafield liabilities, including Seafield's
liability for disputed income taxes which the Internal Revenue
Service and the State of California claims to be owed by Seafield for its
1986, 1987, 1988, 1989 and 1990 tax years (the "Tax Claims"). The Tax
Claims amount to approximately $14.6 million, plus interest. Although
the Company believes that a combination of defenses against the claims
and contested offsetting tax losses generated by a real estate project
sold at a loss in 1990, could result in a positive outcome, the Company
can not provide any assurance that its defense of such claims will be
successful. The Company has accrued for the estimated settlement with the
IRS in the accompanying combined financial statements.
Company Employees
The Company and Scout, but not including Syntroleum employed 9
individuals as of March 3, 1997, none of whom are covered by
collective bargaining agreements. All of the Company's employees, other
than 6 property management employees of Scout, provide management,
financial, accounting, tax, administrative and other services with
respect to its assets. The Company believes that relations with its
employees are good.
Regulation - Possible Application of the Investment Company Act of 1940
Generally, and subject to certain exceptions, an issuer of securities
is an "investment company" under the Investment Company Act of 1940 (the
"1940 Act") if, among other criteria, it is engaged in or proposes to
engage in the business of investing, owning, holding or trading of
securities and it owns or proposes to acquire investment securities
having a value exceeding 40% of the value of such issuer's total assets
(exclusive of government securities and cash items) on an unconsolidated
basis. "Investment securities" for purposes of this definition,
includes stock of non-majority owned companies, so the Company's holding
of Syntroleum would be part of its investment securities. Although the
value of the Company's investment securities as of December 31, 1996,
based in part on appraisals, do not exceed 40% of the value of its
total assets (exclusive of government securities and cash), the
Company could meet this definition of an investment company in the future
as its real estate assets are sold and if the value of Syntroleum
increases.
However, under a rule adopted under the 1940 Act by the Securities
and Exchange Commission (the "SEC"), an issuer generally will not be deemed
to be an investment company under the 1940 Act if (a) no more than 45%
of the value of the issuer's total assets (exclusive of government
securities and cash items) consists of, and no more than 45% of the
issuer's net income after taxes (for the last four fiscal quarters
combined) is derived from, securities other than (a) government
securities, (b) securities issued by certain employees' securities
companies, (c) securities issued by majority owned subsidiaries of the
issuer and (d) securities issued by companies other than investment
companies which are controlled primarily by the issuer and through
which the issuer engages in a business other than that of investing,
reinvesting, owning, holding or trading in securities (the "45% Rule").
Under the 1940 Act an issuer is presumed to be in control of another
company if it holds more than 25% of the voting stock of the company. The
Company believes that Syntroleum is "primarily controlled" by the Company
based on the amount of actual control exercised by the Company over
Syntroleum's business and the amount of its ownership of voting stock in
Syntroleum. Accordingly, the Company believes that its only assets that
are securities for purposes of the 45% test are its Miscellaneous Assets.
Based in part on appraisals, the Company's Board believes that the
value of those assets as of December 31, 1996, would be less than 15% of
the Company's total assets as of that date, exclusive of government
securities and cash items, that the income from such assets in the
future will be less than 45% of the Company's anticipated net income
in the future and that the Company should therefore be well within the
parameters of the 45% test and not subject to regulation under the 1940
Act.
Nevertheless, if the Company's percentage ownership interest in
Syntroleum should drop below 25% or if the amount of the Company's
Miscellaneous Assets and other securities that do not fall within the
exclusion should become greater than 45% of the Company's total assets
(other than government securities and cash) or if the income derived
from such securities exceeds 45% of the Company's net income after taxes,
and if the Company can not meet the 40% test, then the Company could
become subject to regulation by the SEC under the 1940 Act, which
regulation could significantly and adversely affect the Company's
activities. In order to minimize the likelihood of such event and
to stay within the requirements of the 45% Rule, the Company intends to
take such action as may be reasonable and appropriate in order to
maintain its primary control over Syntroleum and to reinvest the
proceeds of sales of its Real Estate, Miscellaneous Assets and Oil
and Gas properties in government securities and other operating assets
pending any merger or other disposition of the Company's assets and
businesses.
If the Company does fail to meet the requirements of the 40% or 45%
Rules, it may nevertheless avoid regulation under the 1940 Act if it
meets the requirements of another SEC rule applicable to "transient"
investment companies. Under this rule, a company will not, for a period
of one year, be deemed an investment company, even though it fails the
test under the 45% Rule, if it has a bona fide intent to be engaged
primarily, and as soon as reasonably possible (and in any event by the
end of the one-year period), in a non-investment company business or,
under an SEC statement respecting the rule, a bona fide intent to
liquidate within such period of time. The transient investment company rule
is frequently relied on by companies which have received a substantial
amount of cash through a sale of significant assets or through a
securities offering; they typically need time to expand their business
or to start up or acquire a new operating business.
Under the transient investment company rule, a company's intent to
engage primarily in a non-investment company business must be evidenced by
appropriate resolutions of its board of directors and by its business
activities. The Company's board of directors has adopted a resolution
evidencing its intent to engage primarily in a non-investment company
business, and the Company presently believes that its business activities
will demonstrate the intent required for it to fall within the rule.
ITEM 2. PROPERTIES.
The Company's headquarters occupy approximately 13,700 square
feet of leased space in a building at 2600 Grand Boulevard, Suite 500, PO
Box 410949, Kansas City, Missouri 64141. The term of this lease expires
on April 1, 2002, subject to an option to cancel the lease on April 1,
1999.
The Company's real estate subsidiary owns diversified types of
properties for sale or investment purposes in various geographical
locations. In certain cases, projects were developed on a joint venture
basis with one or more joint venture partners. Title to property in such
cases may be held jointly with such partners or in the name of the venture.
Rights and obligations with respect to such properties are governed by the
terms of the joint venture agreement. Real estate is described in greater
detail in Items 1 and 7 and Schedule III. The Company and subsidiaries
lease office space, equipment, land and buildings under various
noncancelable leases that expire over the next several years. See Note 9
of the Notes to Consolidated Financial Statements for additional lease
information
ITEM 3. 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.
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. 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 for at least another year. Settlement
arrangements with other defendants have resulted in payments to
plaintiff which have offset legal fees and costs to date of
approximately $478,000. Future legal fees and costs can not reliably be
estimated.
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.
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.
The substantive issues raised in these notices for the years 1986-
1990 are primarily composed of the former television subsidiaries'
amortization of film rights, the sale of the stock of a former television
station, certain insurance company tax issues and a $27 million loss
on the sale of a real estate partnership interest.
The IRS' denial of film right amortization equates to approximately
$10.5 million of the $13.9 million in additional taxes; provided that if
the IRS were to prevail on the amortization issues, the tax basis in the
television stations would be increased. This would have the effect of
reducing income taxes in connection with the sale of the television
stations.
With respect to the loss on the sale of the real estate
partnership interest, the IRS has claimed that the sale did not occur
during 1990, but rather occurred after 1991. If the sale did not occur
in 1990, then 1990 losses could not be carried back to 1987, to reduce
Seafield's significant taxable income in 1987.
Seafield has filed protests regarding the 1986-1990 notices of
proposed adjustments. Seafield is currently pursuing a compromise
with the Appeals Division of the IRS for the 1986-1989 years. The 1990
issues have not yet been formally addressed at the Appeals Division
but Seafield is advised by IRS representatives that tax issues in all
years under audit will be addressed together. Resolution of these tax
disputes may reasonably be expected, but is not certain, during 1997.
The Company is assuming 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 years 1986-1990 whose
resolution may extend to tax years beyond the 1990 tax year. Based upon the
advice of counsel, the Company believes that it will prevail on the 1990
loss carryback issue. In addition, there are meritorious defenses or
pending favorable compromises for many of the other substantive issues.
The Company believes that adequate accruals for these income tax
liabilities have been made.
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 to Seafield 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,
exclusive of interest. 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
on the pro forma balance sheet appropriate accruals for the California
state income tax liability. See Note 11 to Combined Financial
Statements.
The Company believes that final resolution of the above Tax Claims
after taking into account offsetting claims for refunds and amounts
accrued, should not have a material adverse effect on the Company's
financial position.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters have been submitted to a vote of stockholders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS.
The Common Stock of the Company has been traded on the OTC Bulletin
Board under the symbol SLHO since February 24, 1997. Since that date the
high and low closing prices of the Common Stock were $31.00 and $16.62
respectively. At February 24, 1997, there were approximately 1,800
holders of record of the Company's Common Stock. It is believed that the
Common Stock is held by more than 1,000 beneficial owners.
DIVIDEND POLICY
The Company has paid no cash dividends since inception. Under the
Distribution Agreement with Seafield, the Company will be restricted from
paying dividends, in cash or property, or redeeming its capital stock, for
a period of two years following the Distribution Date of March 3, 1997,
without the consent of Seafield.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth a summary of selected historical financial
data for the Company. The historical financial information presented
reflects periods during which the Company did not exist but rather reflects
the financial information of Seafield's businesses and assets transferred
to the Company in connection with the Distribution as well as related
liabilities assumed by the Company. The historical financial information
presented may not necessarily be indicative of the results of operations or
financial condition that would have been obtained if the Company had been a
separate, independent company during the periods shown. Neither should the
information be deemed to be indicative of the Company's future performances
as an independent company. The financial information should be read in
conjunction with the Combined Financial Statements and the notes thereto.
See Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS".
Years ended December 31,
1996 1995 1994 1993 1992
------------------------------------------
(in thousands)
Statement of Operations Data
- ----------------------------
Real estate sales $ 15,606 10,485 10,932 16,297 33,067
Real estate rentals
and other 759 1,001 1,059 1,173 1,701
------------------------------------------
Total Revenues $ 16,365 11,486 11,991 17,470 34,768
==========================================
Cumulative effect of change
in accounting principle (1) $ (1,400) -- -- -- --
Net loss (5,598) (11,232) (6,545) (4,166) (5,904)
Balance Sheet Data
- ------------------
Current assets $ 5,529 4,432 3,707 6,006 1,538
Real estate held for sale 24,202 35,073 40,998 39,047 50,703
Investment securities 4,718 5,136 6,161 6,624 6,990
Investment in oil and gas
partnerships and interests 3,526 5,255 6,703 8,543 11,427
Total assets 38,474 51,638 64,627 70,155 84,471
Current liabilities 2,165 365 239 2,150 1,186
Long-term debt -- 1,289 2,689 1,153 1,153
Combined equity 35,813 49,686 61,147 66,438 81,271
(1) Adoption of statement of Financial Accounting Standard No. 121,
"Acounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed Of"
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Introductory remarks about results of operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations covers periods when Company's assets were owned by
Seafield and operated as part of Seafield. It should be read in
conjunction with Items 1 and 6 and the Notes to Company's Historical
Combined Financial Statements included elsewhere herein. It covers the
years ended December 31, 1996, 1995 and 1994.
1996 Compared to 1995.
Real estate revenues in 1996 were $16.4 million compared with $11.5 million
in 1995. The real estate sales revenues in 1996 include the sale of 40
residential units in Florida and New Mexico ($14.8 million); 20 acres of
land in Oklahoma ($275,000) and 1.5 acres of land in Kansas ($580,000). In
1995, the real estate sales revenue included the sale of 29 residential
units or lots in Florida, Missouri, New Mexico and Texas ($7.9 million) and
302 acres of land in Kansas and Texas ($2.6 million). Real estate rental
and other revenues decreased from $1 million in 1995 to $759,000 in 1996,
reflecting sales of rental property and an approximate 15% decrease in
rentals at the Reno parking garage.
At the end of 1996, 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, all of which are listed for sale. The total acreage consisted of
approximately 1,147acres and approximately 71 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 1996 totaled $15.3 million, compared with
a cost of approximately $10.9 million in 1995, reflecting the mix of real
estate sold during each period as discussed above in the revenue analysis.
Real estate operating expenses totaled $2.7 million in 1996, compared with
$3.2 million in 1995. The decrease is attributable to a reduction in
expenses associated with the substantial completion of the residential
projects and a reduction of depreciation in 1996 as 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 on January 1, 1996 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 $1.1 million net impairment loss on real estate held for sale
was recorded in 1996. This impairment loss resulted from changes in
estimated expected future cash flows based primarily on lower expected
sales prices on certain properties based on appraisals and other current
market conditions.
General and administrative expenses in the statements of operations include
a $1.5 million estimate in both 1996 and 1995 of Seafield's actual costs.
Management estimates that the Company will incur approximately $1.5 million
of expenses annually when the Company operates on a stand alone basis.
The above factors produced a loss from operations of $4.3 million in 1996,
compared with $12.2 million in 1995.
Investment income in 1996 increased to $401,000 from $278,000 in 1995.
The 1996 income primarily reflects cash received in excess of basis from
two venture capital funds while 1995's income consists of interest on notes
receivable from the sale of real estate.
Equity in affiliates' operations produced a loss of $1.2 million in 1996,
compared with a loss of $267,000 in 1995. During 1996, the oil and gas
operations recorded affiliated losses of $1.1 million, compared to a
$209,000 loss in 1995, reflecting increased costs recorded by Syntroleum
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. See Item 1 and Notes to
Combined Financial Statements for additional information regarding
Syntroleum."
Interest expense decreased to $107,000 in 1996 from $189,000 in 1995
reflecting retirement of a real estate note payable in 1995.
Equity in earnings of venture capital investment funds totaled $890,000 in
1996 while 1995 produced a loss of $249,000. These funds invested in
development stage companies which cause earnings to be subject to
significant variations.
The $159,000 of other income in 1996 consists of cash received during the
fourth quarter in excess of the $800,000 of Tenenbaum assets at September
30, 1996. See Item 1 for additional information. All future Tenenbaum
receipts will be recorded since all costs have been recovered on this asset
that has been accounted for on the costs recovery method. The 1995 income
on sale of affiliates reflects the Company's net gain of $111,000 on the
sale of a partnership interest in a commercial property in Colorado.
Tax expense of $56,000 was recorded in 1996 compared with tax benefits of
$1.3 million in 1995. Because the Company is a party to a tax sharing
agreement with other Seafield entities, some tax benefits were recorded in
1995 for utilization of the Company's losses by Seafield. Valuation
allowances of $2.6 million in 1996 and $3.7 million in 1995 were provided
on the tax benefits because utilization within the Seafield group was not
expected. See Note 8 to Combined Financial Statements for additional
information.
The net loss in 1996 of $5.6 million and $11.2 million in 1995 reflect the
above results of operations.
1995 Compared to 1994.
Real estate revenues in 1995 were $11.5 million compared with $12 million
in 1994. The real estate sales revenues in 1995 include the sale of 29
residential units or lots in Florida, Missouri, New Mexico and Texas ($7.9
million) and 302 acres of land in Kansas and Texas ($2.6 million). The
1994 real estate sales revenue included the sale of 47 residential units or
lots in Florida, New Mexico and Texas ($10.4 million) and land in
California ($500,000). Real estate rental and other revenues decreased
$58,000 to $1 million in 1995 reflecting the sale of a rental property in
1994.
At the end of 1995, real estate holdings include residential land,
undeveloped land, single family housing and commercial structures. The
total acreage consisted of approximately 1,165 acres and 99 lots or units
for sale.
Cost of the real estate sales totaled approximately $10.9 million in both
1995 and 1994. Real estate operating expenses totaled $3.2 million in
1995, compared with $4 million in 1994. The decrease primarily reflects
termination costs in 1994 associated with a real estate project.
During 1995, a $7.9 million net realizable value provision on real estate
was recorded. The loss reflected decreases in sales prices during 1995.
Management believed the decline was other than temporary and therefore
recorded a loss provision on the affected sales inventory. Likewise, in
1994, a $4.4 million loss was recorded on Texas land held for sale when
conditions indicated that a decline was occurring in the market for this
type of sale inventory. Management regularly analyzes market trends and
adjusts the carrying values when an impairment condition is indicated.
General and administrative expenses include a $1.5 million estimate in both
1995 and 1994 of Seafield's actual costs. Management estimates that the
Company will incur approximately $1.5 million of expenses annually when
the Company operates on a stand alone basis.
The above factors produced a loss from operations of $12.2 million in 1995,
compared with $8.9 million in 1994.
Investment income in 1995 was $278,000 compared to $1,127,000 in 1994. The
1994 increase included the recognition of deferred interest income on a
real estate note receivable.
Equity in affiliates' operation produced a loss of $267,000 in 1995,
compared with earnings of $254,000 in 1994. During 1995, the oil and gas
operations recorded affiliated losses of $209,000, compared to earnings of
$373,000 in 1994, reflecting variances in operating results of the oil and
gas general partnership interests and increased costs recorded by
Syntroleum. See Notes to Combined Financial Statements for additional
information regarding operations accounted for on the equity method.
Interest expense, all associated with real estate, decreased slightly to
$189,000 in 1995 from $222,000 in 1994 reflecting decreases in notes
payable.
Equity in losses of venture capital investments were approximately the same
in 1995 and 1994. Variance in results are expected as these funds have
investment in development stage companies.
Gain on sale of affiliates income in 1995 reflects the Company's net gain
of $111,000 on the sale of a partnership interest in a commercial property
in Colorado.
Tax benefits of approximately $1.3 million were recorded in 1995 and $1.4
million in 1994. Because the Company is a party to a tax sharing agreement
with other Seafield entities, benefits were recorded for utilization of the
Company's losses by Seafield. In 1995, valuation allowances were provided
on some tax benefits because it was not expected Seafield could realize
utilization of the Company's losses.
The net loss in 1995 of $11.2 million and $6.5 million in 1994 reflect the
above results of operations.
Liquidity and Capital Resources
Prior to September 30, 1996, the Company's liquidity was provided by
Seafield. However, as discussed in Item 1, Seafield transferred to the
Company 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) on March 3, 1997, (Distribution Date).
Additionally, any cash generated from operations of or the sale of the
Company's assets from October 1, 1996 to March 3, 1997 will be for the
benefit of the Company. The $3.9 million of cash and cash equivalents in
the December 31, 1996 combined balance sheet represents the net cash
generated by the Company during 1996's fourth quarter.
The residential condominiums projects were substantially complete by the
end of 1995. Cash provided from operations in 1996 totaled $8.9 million
compared to $33,000 of cash used in 1995, reflecting decreased expenditures
to complete real estate projects. Additionally, cash provided by real
estate sales increased approximately $3 million to $13 million in 1996,
including a $225,000 deposit on a sale that closed in 1997. 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 December 31, 1996
and is due in December 1997. This consolidated debt is non-recourse and
comprises the increase in current notes payable and decrease in long-term
notes payable on the Combined 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. See Notes to Combined
Financial Statements for additional information.
Management anticipates that future additions to property, plant and
equipment will be minimal. During 1997, management estimates that
construction and disposal costs to complete real estate projects in
development will be approximately $2 million. The Company may seek its own
credit facilities but management expects cash flow from operations, cash
from the capitalization at Distribution Date and the sale of assets will be
sufficient to fund cash needs. The capitalization and operations cash will
increase the Company's December 31, 1996 combined historical equity of
$35.8 million. See Note 11 of Combined Financial Statements
Subsequent Events.
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 that is described under Item 3 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 for
at least another year.
During January and February of 1997, approximately $600,000 of net cash was
generated from the Company's real estate assets, including sales and
operations. Additionally, the sale of a 547 acre Fort Worth, Texas tract
of undeveloped real estate generated a $1.5 million three year secured note
which the Company financed. Approximately $650,000 was also received with
respect to Tenenbaum receivables that are described under Item 1.
On February 28, 1997, Seafield sold 100,000 shares of Watson Pharmaceutical
stock for approximately $4.3 million, producing a gain for the Company of
approximately $3 million. The cash generated by the sale was transferred
to the Company when received by Seafield in March 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128 "Earnings per Share" is
required to be implemented for both interim and annual 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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(Not Applicable)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company are as follows:
Name Age Position
James R. Seward, CFA 44 President, Chief Executive Officer
and Class A Director
P. Anthony Jacobs, CFA 55 Chairman of the Board and Class A
Director.
Steven K. Fitzwater 50 Vice President, Chief Accounting and
Financial Officer, Treasurer and
Secretary and Class C Director
Lan C. Bentsen 49 Class C Director
W. D. Grant 80 Class B Director
W.T. Grant II 46 Class B Director
Michael E. Herman 55 Class A Director
David W. Kemper 46 Class B Director
Mr. Seward has been a director of Seafield since 1990, the Executive
Vice President of Seafield since May 1993; Senior Vice President of
Seafield from August 1990 to May 1993 and Chief Financial Officer of
Seafield since 1990. Mr. Seward also is a director of Syntroleum, LabOne,
Inc. (LabOne) and Response Oncology, Inc. (Response). Seafield owns 82% of
LabOne and 67% of Response.
Mr. Jacobs has been a director of Seafield since 1987, the
President of Seafield since May 1993 and Chief Operating Officer of
Seafield since 1990. He is also a director of Syntroleum, LabOne, Response
and Trenwick Group, Inc..
Mr. Fitzwater has been the Vice President, Chief Accounting
Officer and Secretary of Seafield since 1990.
Mr. Bentsen has been a Seafield director since 1986 and has been
Managing Partner of Remington Partners (Investments) since 1995; prior
to its sale in 1994, Mr. Bentsen was Chairman and Chief Executive Officer
of Sovereign National Management, Inc. (property management).
Mr. W. D. Grant has been a consultant to Seafield since August 1990;
he was Chairman of the Board of Seafield until May 1993. Mr. Grant also
is a director of LabOne and Boatmen's First National Bank of Kansas City.
Mr. W. T. Grant II has been a director of Seafield since 1980, the
Chairman and Chief Executive Officer of Seafield since May 1993; and
President of Seafield prior to May 1993. Since November 1995, Mr. Grant
has also served as President, Chairman of the Board and Chief Executive
Officer of LabOne Mr. Grant also is a director of AMC Entertainment, Inc.,
Commerce Bancshares, Inc., Kansas City Power & Light Company, and Response.
Michael E. Herman has been a Seafield director since 1991 and has
been engaged in private investments since 1990 (partner Herman
Family Trading Company); he has been President of Kansas City Royals
Baseball Team (major league baseball) since 1993; and Chairman of the
Finance Committee of Ewing Marion Kauffman Foundation since 1990. Mr.
Herman also is a director of Boatmen's First National Bank of Kansas
City, Cerner Corporation, Janus Capital Corporation and Agouron
Pharmaceuticals, Inc.
Mr. Kemper has been Chairman of the Board, President and Chief
Executive Officer of Commerce Bancshares, Inc. (bank holding company)
and Chairman and Chief Executive Officer and a director of Commerce Bank,
N.A. (St. Louis) for more than the past five years. Mr. Kemper also
is a director of Ralcorp Holdings, Inc., Wave Technologies
International, Inc. and Tower Properties Company.
The Articles of Incorporation and Bylaws provide that the Company
Board will be divided into three classes of directors, with the
classes to be as nearly equal in number as possible, and that, of the
initial directors of the Company following the Distribution as
identified above, the Class A directors will continue to serve until the
2000 Annual Meeting of Stockholders, the Class B Directors will continue
to serve until the 1998 Annual Meeting of Stockholders and the Class C
Directors will continue to serve until the 1999 Annual Meeting of
Stockholders. Starting with the 1997 Annual Meeting of Stockholders,
which was held in January 1997, one class of directors is elected each
year for a three-year term. The Bylaws provide that beginning in 1998
annual meetings of stockholders shall be held on the second Wednesday in
May or such other date as may be fixed by resolution of the Company Board.
The first annual meeting for which proxies will be solicited from
stockholders is expected to be held on May 13, 1998.
Certain Board Committees
The Company Board has established an Executive Committee
consisting of Messrs. Seward, Jacobs, Fitzwater and Grant II, an Audit
Committee consisting of Messrs. Kemper, Bentsen and W.D. Grant, and
a Nominating Committee and Compensation Committee consisting of
Messrs. Bentsen, Kemper and Herman. The specific duties of such
committees will be established at a meeting of the Company Board prior
to the next annual meeting of the stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
Compensation of Directors
Nonemployee directors of the Company receive compensation
consisting of annual cash retainers, meeting fees and stock option awards.
Cash Compensation. Directors who are not employees of the
Company are paid an annual retainer for Company Board service of $1,000
per quarter and a fee of $500 for each Company Board meeting attended.
Directors who are employees of the Company, Messrs. Seward, Jacobs and
Fitzwater, are not paid any fee or additional remuneration for services
as members of the Company Board or any committee thereof.
Directors' Stock Options. Pursuant to the SLH Corporation 1997
Stock Incentive Plan (the " SLH Stock Option Plan"), all of the above
named directors of the Company other than Messrs. Seward, Jacobs and
Fitzwater have received options to purchase 16,200 shares of the
Company's Common Stock at the fair market value of such stock as of the
close of business on March 3, 1997, which the Company has determined to be
$19.15 per share.
Compensation of Executive Officers
The following table summarizes compensation paid to all
of the Company's Executive Officers for services rendered to Seafield
during 1996 . Under the Interim Services Agreement, all of the Company's
Executive Officers will remain full time employees of Seafield after the
Distribution Date, until the earlier of the termination of that agreement
or the cessation of their full time employment with Seafield. Pursuant to
that agreement, Seafield will make their services and the services of
certain other Seafield employees available to the Company on an as
needed basis in exchange for Seafield's use of the Company's offices,
equipment and other facilities. See "Item 13. Certain Relationships
and Related Transactions." Upon any termination of the arrangement during
1997 it is expected that each of Messrs. Seward, Jacobs and Fitzwater
will receive a base salary from the Company in the amount of $75,000,
$75,000 and $60,000, respectively , auto allowances and usual health
insurance, vacation and other benefits customarily provided to all salaried
employees. Each of Messrs. Jacobs, Seward and Fitzwater have also received
stock options under the 1997 SLH Stock Incentive Plan to the extent
indicated in Note 2 to the table. The principal positions listed in the
footnotes to the table are those held by the Named Executive Officers
with the Company as of the Distribution Date.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Name and Annual Securities
Principal Compensation Underlying All Other
Position Year Salary Bonus Options Compens.
($) (1) ($) (#) (2) ($) (3)
James R. Seward, CFA 1996 $147,290 -- -- 20,810
President and Chief
Executive Officer
P. Anthony Jacobs, CFA 1996 249,590 -- -- 95,110
Chairman of the Board
Steven K. Fitzwater 1996 94,266 -- -- 9,937
Vice President - Chief
Financial and Accounting
Officer, Treasurer and
Secretary
(1) Consists of cash compensation paid by Seafield for all
services rendered to Seafield during 1996. At the Distribution Date, it
is anticipated that each Executive Officer's annual rate of salary will be
the same as the 1996 amount shown in the Summary Compensation Table;
however, under the Interim Services agreement, that part of it which is
attributable to services rendered to Seafield will be allocated to Seafield
and the remaining part for services to the Company. Following termination
of the Interim Services Agreement, the Executive Officers will be
compensated by the Company at the following annual rates: James R. Seward:
$75,000; P. Anthony Jacobs: $75,000 and Steven K. Fitzwater: $60,000.
(2) On March 3, 1997, Messrs. Seward, Jacobs and Fitzwater received
options to purchase 65,000, 65,000 and 40,500 shares, respectively,
of the Company Common Stock. All such options are nonqualified stock
options with exercise prices equal to the fair market value of the
Company Common Stock on the Distribution Date, which was determined by
the Company to be $19.15 per share; all options have ten year terms and
become exercisable in equal installments as follows: one fourth on March
3, 1997, and one-fourth on each of the first, second and third
anniversary dates of such date. See "SLH Stock Incentive Plan."
(3) The amounts include contributions paid or accrued to the
named executive officers' accounts in Seafield's 401(k) Plan ("401(k)")
and Money Purchase Pension Plan ("MPP"), pursuant to a Supplemental
Retirement Agreement ("SERP") with the executive and for term life
insurance for the executive.
Employment Agreements
Each of the Executive Officers named in the Summary Compensation
Table is a party to an Employment Agreement with the Company. Each
Employment Agreement provides for employment of the Executive Officer for
an initial term commencing on the date the Executive Officer ceases to be
employed by Seafield under the Interim Services Agreement on behalf of the
Company and ending on the third anniversary of the Distribution Date.
The term of the Employment Agreements is automatically extended for
successive one year periods unless a notice of non-extension is given by
either party at least twelve months prior to the end of the then current
term.
Compensation does not commence under the Employment Agreement
until the date the Executive Officer ceases to be employed by Seafield
under the Interim Services Agreement. Base compensation, which is initially
at the rates per annum set forth above under "Compensation of
Executive Officers," is subject to adjustment annually by the Company
Board, provided that base salary may not be decreased by more than five
percent year to year. The Employment Agreements provide that an
Executive Officer's full time is not required and such Executive Officer
is entitled to pursue other employment or business opportunities
simultaneously with his duties to the Company.
The employment of each of the Company's Executive Officers is
subject to termination for cause, which is defined as including willful
misconduct with respect to an Executive Officer's duties, or the
perpetration of a fraud, embezzlement, or other act of dishonesty, or a
breach of trust or fiduciary duty which materially adversely affects the
Company or its stockholders or the other employment or business activities
of such Executive Officer conflicting with the Company's business. The
Employment Agreements provide that the Executive Officers will not
compete with the Company during the term of the Employment Agreements
and, if an Executive Officer is terminated with cause or voluntarily
terminates his employment, for a period of one year thereafter.
SLH Stock Incentive Plan
The Company has adopted a stock incentive plan, which provides
for the granting of stock options respecting Company Common Stock to
officers, employees and non-employee directors of the Company. Pursuant
to the stock option plan, the initial non-employee directors of the
Company have been granted options respecting 16,200 shares of Company
common stock, effective on the Distribution Date. Non-employee directors
who first become directors of the Company after the distribution date
would be granted stock options respecting 16,200 shares of Company
common stock effective on the date such a non-employee director first
assumes office as a director of the Company. Each option granted
to a non-employee director pursuant to the terms of the stock incentive
plan will have a term of ten years, will provide for an exercise price
equal to 100% of the fair market value of the Company Common Stock on the
Distribution Date and will become exercisable in four installments as
follows: one-fourth on the date of grant and one fourth on each of the
first, second and third anniversaries of the date of grant. Non-employee
directors are entitled to receive additional grants of stock options
under the stock option plan, but only subject to approval of such
subsequent grants by Company stockholders. The Company does not presently
expect that non-employee directors will be granted options other than
those described above.
Except for grants of stock options to non-employee
directors as discussed above (which grants are provided for in the stock
option plan itself), stock option grants will be administered by the
Nominating and Compensation Committee of the Company Board ("Committee").
The Committee shall consist of two or more non-employee directors. The
Committee has authority to issue stock options to officers and
employees, with such terms and provisions as the Committee shall
determine. The stock incentive plan limits the number of shares of Company
Common Stock with respect to which stock options may be granted to
260,000 in the aggregate and further limits the number of shares of
Company Common Stock which may be subject to stock options granted to any
one individual to 65,000. Stock options granted to officers or
employees may be either incentive stock options (ISO's) or non-qualified
stock options (NQSO's), at the discretion of the Committee. Except in the
case of officers or employees who are beneficial owners of more than ten
percent of the voting power of Company Common Stock (which is not expected
to be the case with any of the Company's officers or employees),
options, including both NQSO's and ISO's, may be granted with an exercise
price not less than 100% of the fair market value of the underlying
shares on the date of grant. Options granted to officers and employees
may not expire later than the tenth anniversary of the date of grant and
no options may be granted after December 31, 2001. Options granted to
officers and employees may contain such vesting schedule as is deemed
appropriate by the Committee. The options initially granted to officers
and employees and referred to in the Summary Compensation Table above
all provide for vesting in four equal installments as follows: one-
fourth on the date of grant and one-fourth on each of the first, second and
third anniversaries of the date of grant.
All options held by officers and employees expire six months
after an option holder's employment with the Company terminates; provided,
however, that except in the case of an ISO, the period is extended to
twelve months in the case of a holder's death or disability and is
extended to three years in the case of a holder's retirement. A non-
employee director's options terminate ninety days after his term as a
director terminates, except that said period is extended to twelve months
if the non-employee director dies while in office or during the ninety
days thereafter. Generally, options which are exercisable following
termination of an option holder's employment or the expiration of a non-
employee director's term as a director may be exercised only to the
extent exercisable on the date employment terminates or the term as a
non-employee director expires. However, vesting shall be accelerated
in the event of an option holder's death, or in the case of options
granted other than to non-employee directors, disability or retirement.
All unvested options shall become immediately exercisable in the
event of one or more of the following: (i) acquisition of beneficial
ownership of 25% or more of the voting power of Company common stock by
any person other than descendants of W. D. Grant's father; (ii) a
change in the composition of the Company Board such that a majority of
the Board is comprised of persons other than the initial directors and
future directors nominated by the initial directors or persons who
have been nominated by the initial directors; (iii) consummation of a
merger or consolidation involving the Company; or (iv) adoption of a
plan of complete liquidation and dissolution by the Company Board and the
Company's stockholders.
Except in the case of ISOs, payment of the exercise price for
options may, at the holder's election, be made either in cash, in the form
of shares of Company Common Stock previously owned by the option holder,
or by way of the Company withholding shares otherwise issuable upon the
exercise of an option with a fair market value at the time of exercise
equal to the exercise price.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENTS.
By Management
The following table sets forth the number of shares of Company
Common Stock beneficially owned as of March 3, 1997, directly or
indirectly, by each director, each Named Executive Officer and all
directors and executive officers as a group, based on their holdings of
record of Seafield Common Stock on February 24, 1997. Except as
otherwise indicated, each individual named has sole investment and voting
power with respect to the securities shown.
Amount and Nature of
Name Beneficial Ownership (1)(2)(11) Percentage(12)
James R. Seward (9) 25,444 1.6%
P. Anthony Jacobs (8) 28,785 1.8%
Steven K. Fitzwater 13,837 --
Lan C. Bentsen (3) 6,012 --
W. D. Grant (4) 271,846 17.0%
W.T. Grant II (5) 40,770 2.5%
Michael E. Herman (6) 5,860 --
David W. Kemper (7) 4,702 --
All Directors and Officers
as a group of eight (10) 396,227 23.5%
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(1) A beneficial owner of a security includes a person who, directly or
indirectly, has or shares voting or investment power with respect to
such security. Voting power is the power to vote or direct the voting of
the security and investment power is the power to dispose or direct the
disposition of the security. Each person listed has stated that he,
either alone or with his spouse, has sole voting power and sole
investment power with respect to the shares shown as beneficially owned,
except as otherwise indicated.
(2) Shares of Company Common Stock shown as beneficially owned
include shares issuable upon the exercise of stock options that were
exercisable on the Distribution Date or that become exercisable within
60 days thereafter, as follows: Lan C. Bentsen, 4,050 shares, W. D.
Grant, 4,050 shares; W. T. Grant II, 4,050 shares; Michael E. Herman,
4,050 shares; David W. Kemper, 4,050 shares; P. Anthony Jacobs, 16,250
shares, James R. Seward, 16,250 shares; Steven K. Fitzwater, 10,125
shares, and all directors and executive officers as a group, 62,875
shares.
(3) Includes 355 shares held by a family trust for the benefit
of Mr. Bentsen's children, as to which he disclaims beneficial
ownership. An unaffiliated person is trustee with sole voting and
investment powers.
(4) Includes 59,490 shares held by a family trust for which W. D.
Grant serves as a co-trustee and in that capacity shares voting and
investment powers with UMB Bank, Kansas City, N.A.; and 1,350 shares held
by a family foundation of which W.D. Grant shares voting and investment
power with UMB Bank, N.A.; also including 6,712 shares owned by W. D.
Grant's wife, as to which he disclaims beneficial ownership.
(5) Includes 7,814 shares held by W. T. Grant II as custodian
for his children; includes 11,250 shares held in a family trust for which
W. T. Grant II serves as a co-trustee with Laura Gamble and in that
capacity shares voting and investment powers; also includes 2,967 shares
owned by the wife of W. T. Grant II, as to which he disclaims beneficial
ownership.
(6) Includes 50 shares owned by the Herman Family Trading Company of
which Mr. Herman is a general partner and approximately 73% owner.
(7) Includes 489 shares held in a family trust for which Mr. Kemper
serves as a trustee, and in that capacity shares voting power and has
sole investment power.
(8) Includes 250 shares owned by the wife and 50 shares owned by the
son of P. Anthony Jacobs as to which he disclaims beneficial ownership.
(9) Includes 375 shares held in a family trust for which Mr. Seward
serves as a co-trustee with his mother, and in that capacity shares
voting and investment powers.
(10) Includes (i) 62,875 shares of Company Common Stock issuable
upon the exercise of stock options granted under the SLH 1997 Stock
Incentive Plan that became exercisable on March 3, 1997 or that become
exercisable within 60 days thereafter.
(11) Includes as to each of the following individuals, the
following numbers of shares held in their respective accounts under the
Seafield Capital Corporation 401(k) Plan and Trust, as to which shares
the individual shares investment power, but does not have voting power:
James R. Seward, 166 shares; P. Anthony Jacobs, 565 shares; Steven K.
Fitzwater, 160 shares; and W.T. Grant II, 297 shares (plus, in the case
of both Messrs. Fitzwater and Seward, the balance of the shares in the
Seafield 401(K) Plan as to which each shares voting power as a member of
the Seafield 401(K) Plan Administrative Committee; the Seafield 401(K)
Plan own an aggregate of 1,712 shares).
(12) The percentages represent the total number of shares of Common
Stock shown in the adjacent column divided by 1,622,276 the number of
issued and outstanding shares of the Company's Common Stock on March 3,
1997, plus, in each instance, all shares of Common Stock issuable to the
person or group named upon the exercise of stock options granted under
the SLH Corporation Stock Option Plan for 1997 that were exercisable on
March 3, 1997, or that become exercisable within 60 days thereafter.
Percentages of less than one percent are omitted.
By Others
The table below sets forth each person or entity (other than
persons set forth in the preceding table) that has reported to the
Company beneficial ownership of more than 5% of the Company's Common
Stock as of March 17, 1997. The percentage of ownership is based on
1,622,276 shares outstanding as of March 3, 1997.
Amount and Nature of
Name Beneficial Ownership Percentage(1)
Gotham Partners, L.P (2) 83,215 5.1%
110 East 42nd Street, 18th
Floor, New York, New York 10017.
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(2) As reported in a Schedule 13D filed on March 17, 1997. Gotham
Partners II, L.P. reports ownership of an additional 760 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company and Seafield have entered into certain agreements
for the purpose of effecting the Distribution and defining the ongoing
relationship between them. These agreements consist of the
Distribution Agreement, Assignment, Interim Services Agreement and Tax
Sharing Agreement.
Distribution Agreement and Assignment
The Distribution Agreement and Assignment provide for, among
other things, the principal corporate transactions required to effect the
Distribution and certain other matters governing the relationship
between Seafield and the Company with respect to or in consequence of the
Distribution.
Transfer Assets and Liabilities. Under the Distribution Agreement
and Assignment Seafield placed with the Company (1) the Transfer
Assets and the personnel currently involved in the management of those
assets and (2) and the Transfer Liabilities, which include Seafield's
financial responsibility for known and contingent or unknown liabilities
which relate directly to the Real Estate, Energy and Miscellaneous
businesses and assets as conducted on the Distribution Date and certain
other liabilities of Seafield described in the Distribution Agreement,
including Seafield's obligations under the Tax Claims described under
"Item 3. Legal Proceedings."
As security for the Company's obligations in connection
with the Distribution, the Company has agreed in the Distribution
Agreement that it will not pay any dividends in cash or property or redeem
any of its capital stock for a period of two years following the
Distribution Date, without the consent of the Seafield Board. That
covenant will also limit the extent to which the Company may pay
dividends or otherwise effect a complete liquidation prior to such date.
Contingent Claims and Insurance. Under the Distribution
Agreement, the Company will be entitled to the benefit of insurance
coverage under Seafield policies, to the extent such insurance coverage
existed and is available, for claims relating to the ownership or
operation of the Transfer Assets by Seafield prior to the Distribution Date
subject to, among other things, the obligation to reimburse Seafield for
increases in insurance premiums as a result of payments for such claims.
Employee Benefits. The Distribution Agreement and Assignment
contain a number of provisions relating to current and former employees.
Generally, under those provisions the Company assumed no obligations or
liabilities with respect to employee plans or benefits prior to the
Distribution Date but did assume responsibility for providing employee
benefits for certain Seafield personnel, primarily consisting of employees
of Scout Development Corporation, that became employees of the Company
through its acquisition of Scout. Pursuant to these agreements the
Company also contracted with Seafield for executive and
administrative services as described under the Interim Services
Agreement described below.
No Representations or Warranties. The Distribution Agreement
and Assignment provide that Seafield transferred the Transfer Assets and
Transfer Liabilities to the Company without representation or warranty "as
is, where is," except as otherwise expressly provided.
Interim Services Agreement
At the date of the transfer of the Transfer Assets and
Liabilities to the Company under the Distribution Agreement and
Assignment (the "Transfer Date"), all of Seafield's operations were
conducted by 17 employees from 13,674 square feet of leased offices at
2600 Grand Boulevard, Kansas City, Missouri (the "Lease"). Under the
Assignment Seafield transferred the Lease to the Company and all
Seafield employees continued to remain employees of Seafield (the
"Seafield Personnel") except for 9 employees of Scout Development
Corporation and its subsidiaries (the "Company Personnel"). In
particular, Messrs. Jacobs, Seward, and Fitzwater and other
administrative personnel remained officers and employees of Seafield while
also serving the Company under the Interim Services Agreement.
On the Transfer Date Seafield and the Company entered into the
Interim Services Agreement for the purpose of permitting Seafield and
the Company to continue to jointly use their respective personnel and
facilities until either party elects to terminate the arrangement. Under
the arrangement, Seafield has agreed to provide to the Company during the
term of the arrangement all services required by the Company for the
operation of the offices of the Company's Chairman, Chief Executive
Officer, Chief Financial Officer and Chief Accounting Officer together with
clerical and administrative services, but not including services
required exclusively by Scout Development Corporation and its
subsidiaries. In exchange for those services, the Company agrees to
provide the retained Seafield Personnel with office facilities and
equipment sufficient for the conduct of Seafield's activities. Seafield
and the Company are required to review the amount of personnel and
facilities used under the arrangement and each will reimburse the other
to the extent that the exchange of facilities for services is not
equivalent.
Tax Sharing Agreement
Generally. In connection with the Distribution the Company and
Seafield have entered into a Tax Sharing Agreement which provides, among
other things, for the allocation among the parties thereto of Federal,
state, local, and foreign tax liabilities for all periods through the
Distribution Date. Though valid as between the parties thereto, the Tax
Sharing Agreement is not binding on the IRS and does not affect the joint
and several liability of Seafield and its subsidiaries to the IRS for
all Federal taxes owed to the IRS by such corporations.
Prior Tax Agreement. Seafield and all of its subsidiaries,
including subsidiaries of the Company, were members of a
consolidated group of corporations that filed consolidated Federal
income tax returns, and all of these corporations are parties to a tax
sharing agreement dated August 1, 1990 that governs their relationship
as members of this consolidated group (the "Prior Tax Agreement"). The
Tax Sharing Agreement modifies and amplifies the Prior Tax Agreement in
certain respects and expressly provides that the Prior Tax Agreement,
as so modified and amplified, will continue in full force and effect
with respect to all tax returns for periods beginning prior to the
Distribution Date that are otherwise covered by such Prior Tax Agreement.
Under the Prior Tax Agreement each member of the Seafield
consolidated group is essentially liable for the amount of Federal income
tax that it would pay if it filed a separate Federal income tax
return. As a result of the continuation of the Prior Tax Agreement,
among other things, Seafield will be responsible and liable for all
Federal income tax liability attributable to it as the payor of the
Distribution. Also under the Prior Tax Agreement as continued in
effect by the Tax Sharing Agreement, each subsidiary of the Company will be
liable to Seafield and will pay to Seafield after the Distribution Date an
amount equal to any Federal income tax liability attributable to
income generated by the subsidiary prior to such date and Seafield will
be liable to the Company and will pay to the Company after the
Distribution Date an amount equal to any Federal income tax savings
attributable to losses generated by the subsidiary prior to such date..
Other Matters. The Tax Sharing Agreement generally provides
that the parties will cooperate with each other in the preparation and
filing of tax returns and with regard to handling post-filing audits and
similar proceedings. The Tax Sharing Agreement expressly provides that
it does not deal with the liability of the parties with respect to the Tax
Claims or any tax liabilities that arise out of or are related to the Tax
Claims, since such liability is the subject of the Distribution Agreement
and the Assignment.
Conflicts of Interest
The above agreements were developed by Seafield in connection
with its strategy to create the Company and to cause the Company's
stock to be distributed to Seafield shareholders in the Distribution.
Accordingly, none of the agreements are the result of arm's-length
negotiation between independent parties.
P. Anthony Jacobs, CFA, James R. Seward, CFA, and Steven K.
Fitzwater, who are the President and Chief Operating Officer, Executive
Vice President and Chief Financial Officer, and Vice President and Chief
Accounting Officer of Seafield, respectively, are the Chairman, President
and Chief Executive Officer, and Vice President and Chief Financial and
Accounting Officer of the Company, respectively. All but one of the
directors of the Company are also directors of Seafield. These officers and
directors of the Company will continue in such dual capacities with
Seafield and the Company for an indefinite period of time. Because the
management of both Seafield and the Company are essentially
identical, conflicts may arise with respect to the operation and effect
of the agreements and arrangements described above and also with
respect to the negotiation of any additional agreements which may well
arise between Seafield and the Company. Although Seafield and the Company
plan to utilize independent directors who have no affiliation with the
Company to resolve any material issue that may arise between Seafield and
the Company following the Distribution, such resolutions may not reflect
the results of actual arms-length negotiations. Accordingly, conflicts
arising out of the management of both Seafield and the Company by the same
persons could have an adverse affect on the Company and its stockholders
if not properly resolved.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as part of this report:
(a)(1) Financial Statements:
Independent Auditors Report on SLH Combined Financial Statements and
Schedule
SLH Operations Combined Balance Sheets as of December 31, 1996 and
1995
SLH Operations Combined Statements of Operations for the years
ended December 31, 1996, 1995 and 1994
SLH Operations Statements of Combined Equity
SLH Operations Combined Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994
Notes to SLH Operations Combined Financial Statements
(2) Financial Statement Schedule:
III. Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable
or the information is contained in the Combined
Financial Statements or notes thereto.
(3) Exhibits required by Item 601 of Regulation S-K(see Index to
Exhibits in paragraph (c) infra,)
(b)Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
December 31, 1996.
(c)Index to Exhibits (Exhibits follow the Schedules);
Number Description
2(a) Copy of Distribution Agreement [incorporated by reference
to Exhibit 2(a) to Form 10/A of the Company dated February 3,
1997].
2(b) * Copy of Blanket Assignment, Bill of Sale, Deed and
Assumption Agreement.
3(a) Articles of Incorporation of SLH Corporation
[incorporated by reference to Exhibit 3(a) to the Form 10 of
the Company filed December 24, 1996].
3(b) Bylaws of SLH Corporation [incorporated by reference to Exhibit
3(b) to the Form 10 of the Company filed December 24, 1996].
4 Copy of Rights Agreement dated as of January 31, 1997
[incorporated by reference to Exhibit 4 to the Form 10/A of
the Company filed February 12, 1997].
10(a) * Copy of Facilities Management and Interim Services Agreement.
10(b) * Copy of Tax Sharing Agreement .
10(c) Copy of SLH Corporation 1997 Stock Incentive Plan
[incorporated by reference to Exhibit 10(c) to the Form 10/A
of the Company filed February 12, 1997]. ** ***
10(d) Form of Employment Agreements with certain executive officers
of SLH [(incorporated by reference to Exhibit B to Exhibit
2(a)]. **
21 Subsidiaries of SLH Corporation (reference is made to Item 1
hereof)
23 * Consent of KPMG Peat Marwick LLP with respect to Form 10-K
27 Financial Data Schedule - as filed electronically by the
Registrant in conjunction with this 1996 Form 10-K
* These documents may be obtained by stockholders of the Company upon
written request to: SLH Corporation, P.0. Box 410949, Kansas City,
Missouri 64141.
** Management Compensatory Plan
*** Non-Management Director Compensatory Plan
(d) Not Applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SLH CORPORATION
By: /s/ P. Anthony Jacobs
-----------------------------
P. Anthony Jacobs
Title: Chairman of the Board
Officer and Director
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons who serve Registrant
in the capacities and on the dates indicated.
By: /s/ James R. Seward By: /s/ Steven K. Fitzwater
----------------------------- -----------------------------
James R. Seward Steven K. Fitzwater
Title: President and Chief Title: Vice President, Chief
Executive Officer Financial Officer, Chief
and Director Accounting Officer, and
Secretary and Director
Date: March 31, 1997 Date: March 31, 1997
By: /s/ David W. Kemper By: /s/ Michael E. Herman
----------------------------- -----------------------------
David W. Kemper Michael E. Herman
Title: Director Title: Director
Date: March 31,1997 Date: March 31, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SLH Corporation:
We have audited the combined balance sheets of SLH Operations as of
December 31, 1996 and 1995 and the related combined statements of
operations, equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
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.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of SLH Operations
at December 31, 1996 and 1995 and the results of its operations and its
cash flows for each of the years in the three-year period ended December
31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic combined financial statements taken as
a whole, present fairly, in all material respects, the information set
forth therein.
/s/ KPMG Peat Marwick LLP
Kansas City, Missouri
March 31, 1997
SLH OPERATIONS
Combined Balance Sheets
- ---------------------------------------------------------------------
December 31, 1996 1995
- ---------------------------------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 3,925 --
Accounts and notes receivable 33 69
Real estate under contract 1,223 3,868
Other current assets 348 495
---------------------
Total current assets 5,529 4,432
Real estate held for sale 24,202 35,073
Investment securities 4,718 5,136
Investment in affiliates:
Oil and gas partnerships and interests 3,526 5,255
Other (116) 123
Property, plant and equipment 425 630
Notes receivable -- 22
Intangible assets 113 839
Deferred income taxes 73 118
Other assets 4 10
---------------------
$ 38,474 51,638
=====================
LIABILITIES AND COMBINED EQUITY
Current liabilities:
Accounts payable $ 289 115
Notes payable 1,194 --
Other current liabilities 682 250
---------------------
Total current liabilities 2,165 365
Notes payable -- 1,289
Deferred income taxes 183 183
Other liabilities 313 115
---------------------
Total liabilities 2,661 1,952
---------------------
Total combined equity 35,813 49,686
---------------------
$ 38,474 51,638
=====================
See accompanying notes to combined financial statements.
SLH OPERATIONS
Combined Statements of Operations
- ----------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------
(In thousands except
per share amounts)
REVENUES
Real estate sales $ 15,606 10,485 10,932
Real estate rentals and other 759 1,001 1,059
----------------------------
Total revenues 16,365 11,486 11,991
COSTS AND EXPENSES
Real Estate:
Cost of sales 15,250 10,984 10,897
Operating expense 2,733 3,217 4,048
Provision for loss on real
estate held for sale, net 1,069 7,901 4,400
General and administrative 1,581 1,564 1,554
----------------------------
Loss from operations (4,268) (12,180) (8,908)
Investment income - net 401 278 1,127
Equity in net earnings (loss)
of affiliates (1,217) (267) 254
Interest expense (107) (189) (222)
Equity in net earnings (loss) of
venture capital investment funds 890 (249) (233)
Other income 159 -- --
Gain on sale of affiliates -- 111 --
----------------------------
Loss before income taxes
and cumulative effect (4,142) (12,496) (7,982)
----------------------------
Taxes on income (benefits):
Current 11 (1,225) (1,638)
Deferred 45 (39) 201
----------------------------
Total 56 (1,264) (1,437)
----------------------------
Loss before cumulative effect of
change in accounting principle (4,198) (11,232) (6,545)
Cumulative effect of change in
accounting principle (1,400) -- --
----------------------------
NET LOSS $ (5,598) (11,232) (6,545)
============================
See accompanying notes to consolidated financial statements.
SLH OPERATIONS
STATEMENT OF COMBINED EQUITY
- --------------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------------
Balance, December 31, 1993 $ 66,438
Net loss (6,545)
Capital contributions from Seafield Capital Corporation 1,254
-------
Balance, December 31, 1994 61,147
Net loss (11,232)
Distributions to Seafield Capital Corporation (229)
-------
Balance, December 31, 1995 49,686
Net loss (5,598)
Distributions to Seafield Capital Corporation (8,275)
-------
Balance, December 31, 1996 $ 35,813
=======
See accompanying notes to combined financial statements.
SLH OPERATIONS
COMBINED STATEMENTS OF CASH FLOWS
Years Ended December 31,
- ---------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES
Net loss $ (5,598) (11,232) (6,545)
Adjustments to reconcile net loss to net cash
provided (used) by operations
Cumulative effect of change in accounting
principle 1,400 -- --
Depreciation and amortization 374 582 641
Equity in net (earnings)loss of affiliates 1,217 267 (254)
Equity in net (earnings) loss of venture capital
investment funds (890) 249 233
(Gain) loss on sale of affiliates -- (111) --
Provision for loss of real estate held for sale 1,069 7,901 4,400
Sales of real estate 12,773 9,890 9,400
Collections of notes receivable from sales
of real estate 14 4,132 658
Increase of notes receivable from sales of
real estate -- -- (138)
Additions to real estate held for sale (1,726) (12,637)(10,991)
Change in accounts receivable 22 352 (122)
Change in accounts payable 174 8 (419)
Increase in deposits 225 -- --
Income taxes and other (201) 566 (1,032)
-------------------------
Net cash provided (used) by operations 8,853 (33) (4,169)
-------------------------
INVESTING ACTIVITIES
Investments in affiliates (44) (1,000) (114)
Distributions from affiliates 1,383 1,447 2,314
Additions to property, plant and equipment, net (27) (21) (112)
Collections of other notes receivable 22 35 159
Proceeds from sale of affiliates -- 425 --
Proceeds from sales of leased land -- -- 438
Net cash received on Tenenbaum assets 800 -- --
Investments in venture capital investment funds -- -- (120)
Distributions from venture capital
investment funds 1,308 776 350
-------------------------
Net cash provided by investing activities 3,442 1,662 2,915
-------------------------
FINANCING ACTIVITIES
Payments of principal on long-term debt (95) (1,400) --
Net transactions with Seafield Capital
Corporation (8,275) (229) 1,254
-------------------------
Net cash provided (used) by financing activities (8,370) (1,629) 1,254
-------------------------
Net change in cash and cash equivalents 3,925 -- --
Cash and cash equivalents - beginning of year -- -- --
-------------------------
Cash and cash equivalents - end of year $ 3,925 -- --
=========================
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $ 107 189 222
=========================
Income taxes, net $ 12 (1,224) (1,638)
=========================
See accompanying notes to combined financial statements.
SLH OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION AND BASIS OF PRESENTATION
Pursuant to a Distribution Agreement between SLH Corporation (SLH) and
Seafield Capital Corporation (Seafield), the 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. See Note 11 for additional information
about the Distribution.
The accompanying combined financial statements 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 (SLH Operations or the
Company). Other Transfer Assets and Transfer Liabilities are discussed in
Note 11. The Company is primarily engaged in the business of managing,
developing and disposing of real estate and energy businesses and other
assets consisting of stock investments of privately-held corporations and
limited partnership interests in privately-held venture capital funds.
Scout's assets consist of partially developed and undeveloped land,
residential development projects and commercial property. Resources has
investments in oil and gas partnerships and Syntroleum Corporation
(Syntroleum), a development-stage company with a process for the conversion
of natural gas into synthetic liquid hydrocarbons which can be further
processed into fuels, such as diesel, kerosene and naphtha. All
significant intercompany transactions have been eliminated in combination.
The financial information included herein may not necessarily reflect the
financial position and results of operations of the Company in the future
or what these amounts would have been if it had been a separate, stand-
alone entity during the periods presented.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity 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 amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Significant assumptions include estimates of fair value less cost to sell
assets to be disposed of, principally real estate properties. Management
utilizes a variety of sources in estimating fair values including recent
sales of comparable assets, internal appraisals based on current market
conditions, discounted cash flows, and, to a lesser extent, independent
appraisals. Significant assumptions used in discounting cash flows include
the amount and timing of expected cash flows and the discount rate.
Management estimates the amount and timing of cash flows as described
above. Discount rates estimated to be commensurate with the risk involved
for individual properties are selected based on current economic conditions
and industry practices. The amounts the Company will ultimately realize
could materially differ from the carrying amounts in the accompanying
combined balance sheets.
General and administrative expenses have been included in the statements of
operations based on management's estimate of what expenses would have been
incurred had the Company operated on a stand alone basis for all periods
presented. Such amounts are not materially different than what are
expected for future periods. The estimated expense is approximately $1.5
million for each of the years ended December 31, 1996, 1995 and 1994.
CASH AND CASH EQUIVALENTS
All highly liquid investments with an original maturity of three months or
less when purchased are considered to be cash equivalents.
REAL ESTATE AND OTHER LONG-LIVED ASSETS
Real estate sales are recognized when consummated. Profit is recognized
using the full accrual method when the down payment, continuing investment,
and transfer of risk criteria have been satisfied. Payments received from
buyers prior to recording of a sale are recorded as deposits. Real estate
rentals and other revenues are accrued in the period when earned.
Prior to January 1, 1996, real estate held for sale was valued at the lower
of cost, including development costs less allowances for depreciation, or
market. Development costs which are incurred during the period of
development or construction are capitalized. Capitalized costs are charged
to operations as properties or units are sold or, in the case of income
producing properties, are amortized as part of the depreciation charges.
During 1994 and 1995, the Company made provisions for loss on real estate
held for sale of $4.4 million and $7.9 million, respectively. The
provisions resulted from changes in net realizable value based upon
management's analysis of recent sales transactions and other current market
conditions.
With the adoption of SFAS 121, long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less costs to sell.
Any impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds the fair value of the asset less cost to sell.
The best evidence of fair value is quoted market prices. When quoted
market prices are not available, the estimate of fair value is based on the
best information available including prices for similar assets or
discounted cash flows of estimated expected future cash flows. Assets to
be held and used in operations are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset
may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) of the asset is less than the
carrying amount of the asset, an impairment would be recognized as the
difference between the carrying amount and estimated fair value.
Adoption of SFAS 121 on January 1, 1996 resulted in an impairment loss on
real estate held for sale of $1.4 million which is included in the
accompanying 1996 statement of operations 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 net impairment loss on real estate held for sale of $1.1
million was recorded in 1996. This impairment loss resulted from changes
in estimated expected future cash flows based primarily on lower expected
sales prices on certain properties based on appraisals and other current
market conditions.
INVESTMENT SECURITIES
Investment securities consisting of stock investments of two privately-held
corporations (representing 4.8% and 1.9% ownership) are accounted for at
cost. Investment in limited partnership interests in privately-held
venture capital funds (representing 3.7%, 7.6% and 9.3% ownership) are
accounted for using the equity method. Fair values are not readily
determinable; however, management believes the estimated fair value of each
investment exceeds its carrying value. See Note 10 for additional
information about fair values of financial instruments.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost with depreciation
provided over the useful lives. Upon sale or retirement, the costs and
related accumulated depreciation are eliminated from the accounts. Any
resulting gains or losses are included in the results of operations.
OIL AND GAS INVESTMENTS
Investments in oil and gas partnerships are accounted for using the equity
method as they are less than 50% owned and the Company is a noncontrolling
investor. The Company uses the full cost method of accounting for oil and
gas properties. Under this method, all costs incurred in acquisition and
development are capitalized. Depletion is computed on the units of
production method based on all proven reserves. All general operating
costs are expensed as incurred.
INTANGIBLE ASSETS
Goodwill is recorded at acquisition as the excess of cost over fair value
of net assets acquired and is being amortized on a straight-line basis over
periods up to twenty years. Goodwill is presented net of accumulated
amortization of $277,000, $195,000 and $135,000 at December 31, 1996, 1995
and 1994, respectively. On a periodic basis, the Company estimates the
fair value of the business to which goodwill relates in order to ensure
that the carrying value of goodwill has not been impaired.
INCOME TAXES
Income taxes are accounted for as if the Company filed separate tax returns
pursuant to tax sharing agreements among Seafield and its subsidiaries.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation,"
(FAS 123) which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternately, FAS 123 allows entities to continue to apply the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB 25) and provide pro forma net earnings and pro forma
earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in FAS 123
had been applied. SLH has elected to continue to apply the provisions of
APB 25 and provide the pro forma disclosure provisions of FAS 123. SLH had
no stock options granted in 1995 or 1996.
Statement of Financial Accounting Standards No. 128 "Earnings per Share" is
required to be implemented for both interim and annual 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.
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.
Note 2 - Real Estate Held for Sale
A summary of real estate held for sale follows:
December 31,
1996 1995
--------------------
(in thousands)
Land investments/developments $ 26,658 27,831
Commercial building
Gross amount 5,296 5,296
Less accumulated depreciation 1,293 1,293
-------------------
4,003 4,003
Residential developments
Gross amount: Land 1,940 2,697
Buildings/improvements 24,259 34,074
-------------------
26,199 36,771
-------------------
56,860 68,605
Less valuation allowance for write-downs 28,966 29,664
Less valuation allowance for impairments 2,469 --
-------------------
25,425 38,941
Less real estate under contract 1,223 3,868
-------------------
Net real estate $ 24,202 35,073
===================
A summary of real estate revenues follows (dollars in thousands):
Years Ended December 31,
1996 1995 1994
---------------- --------------- ---------------
Units/ Units/ Units/
----- ----- ------
Amounts Acres Amounts Acres Amounts Acres
------- ----- ------- ----- ------- -----
Real estate sales:
Condominiums and homes $ 14,751 40 7,348 24 9,165 29
Improved lots -- -- 546 5 1,267 18
Undeveloped land 855 21.5 2,591 302
Leased land investments -- -- -- -- 500 1
------- -------- -------
Total real estate
sales 15,606 10,485 10,932
------- -------- -------
Real estate rentals
and other
Lease revenue 134 134 169
Commercial Parking
operations 595 744 793
Other 30 123 97
------- -------- -------
Total real estate
rentals and other 759 1,001 1,059
------- -------- --------
Total real estate
revenues $ 16,365 11,486 11,991
======= ======= =======
Note 3 - Investment in Oil and Gas Partnerships and Interests
The Company's investment in oil and gas consists principally of four oil
and gas general partnership interests and prior to 1996, oil and gas
working interests. The oil and gas partnerships represent 36% and 40%
interests in general partnerships. These partnerships are accounted for on
the equity method as they are less than 50% owned and the Company is a
noncontrolling investor.
Equity in operations of oil and gas partnerships are generally recorded
based on periods ended within one month of the Company's accounting period.
Shown below is unaudited combined financial information for the oil and gas
investments:
Years Ended December 31,
----------------------------
Results of Operations 1996 1995 1994
- --------------------- ------ ------ ------
(in thousands)
Oil and gas revenue $ 7,731 6,344 8,989
Net income (loss) (797) (647) 1,386
The Company's equity in net earnings (loss) (291) (70) 464
Cash distributions received from the partnerships were $1,382,000,
$1,348,000 and $2,264,000 in 1996, 1995 and 1994, respectively.
December 31
-----------------
Financial Position 1996 1995
- ------------------ -----------------
(in thousands)
Current Assets $ 7,410 5,146
Oil and gas 3,620 10,359
------- -------
Total assets 11,030 15,505
------- -------
Current liabilities 25 27
Other liabilities 1,301 1,297
------- -------
Total liabilities 1,326 1,324
------- -------
The Company's investment in oil and
gas partnerships and interests 3,526 5,255
The Company's proportional interest in oil and gas reserves of partnerships
accounted for by the equity method (in equivalent barrels) was 440,000 as
of December 31, 1995. The Company's proportional share of standardized
measure of discounted future net cash flows from these reserves was
$3,593,000 at December 31, 1995. Such information is not currently
available for any periods subsequent to 1995.
The Company's proportional share of net capitalized costs relating to oil
and gas producing activities of partnerships accounted for by the equity
method is $1,400,000 and $4,028,000 at December 31, 1996 and 1995,
respectively. The Company's proportional share of costs capitalized was
$454,000, $368,000 and $417,000 in 1996, 1995 and 1994, respectively.
Note 4 - Investment in Other Affiliates
The Company's 32.5% investment in Syntroleum Corporation (a development
stage enterprise) is accounted for on the equity method. Equity in
operations of Syntroleum is generally recorded based on periods with a one
to two month delay of the Company's accounting period, depending upon the
availability of financial information.
Syntroleum is the developer and owner of a patented process and several
related proprietary technologies ("Syntroleum(R) Process") for the
conversion of natural gas into synthetic liquid hydrocarbons which can be
further processed into fuels such as diesel, kerosene (used by jet
aircraft) and naptha and related non-fuel chemical feedstocks and
lubricants. Sale of the Company's common shares of Syntroleum is subject
to certain restrictions pursuant to shareholder agreements which require
that a selling shareholder first offer the shares to be sold to Syntroleum
and if Syntroleum does not accept the offer, then to the other Syntroleum
shareholders.
Summarized unaudited financial information for Syntroleum is shown below.
Years Ended
Cumulative December 31,
Amounts From --------------------------
Results of Operations Inception * 1996 1995 1994
- ------------------------- ------------ --------------------------
(in thousands)
Revenue $ 721 612 41 68
Net loss (5,008) (1,752) (426) (307)
The Company's equity in
net loss (1,465) (811) (139) (91)
- ----------------
* November 15, 1984 to December 31, 1996
December 31
-----------------
Financial Position 1996 1995
- ------------------ -----------------
(in thousands)
Current assets $ 888 500
Other assets 658 431
------ ------
Total assets 1,546 931
------ ------
Current liabilities 96 4
Long-term borrowing 1,000 --
------ ------
Total liabilities 1,096 4
------ ------
The Company's investment in Syntroleum 147 313
Total investment in Syntroleum is presented on the combined balance sheet
as follows:
December 31,
-----------------
1996 1995
-----------------
(in thousands)
Investment in affiliate $ 147 313
Intangible asset - goodwill, net 113 839
------ ------
Total $ 260 1,152
====== ======
The Company is a 49.9% partner in a general partnership which owns a
shopping center. Prior to September 1995, the Company was also a 49.9%
partner in a general partnership which owned a commercial building. Prior
to September 1994, the Company was a 50% partner in a general partnership
which owned land. All of these partnerships are accounted for on the
equity method. Summarized unaudited financial information for these
partnerships is shown below.
Years Ended
December 31,
--------------------------
1996 1995 1994
--------------------------
(in thousands)
Results of Operations
- ---------------------
Revenue $ 816 764 956
Net loss (207) (160) (255)
The Company's equity in net
loss of affiliates (115) (58) (119)
December 31,
-----------------
1996 1995
-----------------
(in thousands)
Financial Position
- ------------------
Current assets $ 367 514
Real estate 5,190 5,466
Other assets 205 229
------ -----
Total assets 5,762 6,209
------ -----
Short-term borrowings -- 130
Other current liabilities 121 292
Long-term borrowings 6,170 6,170
------ ------
Total liabilities 6,291 6,592
------ ------
The Company's investment in
real estate affiliates (263) (190)
Note 5 - Property, Plant and Equipment and Accounts and Notes
Receivable
A summary of property, plant and equipment follows:
December 31
Rate of -----------------
Depreciation 1996 1995
------------ -----------------
(in thousands)
Property, plant and equipment 5%-33% $2,580 2,554
Less accumulated depreciation 2,155 1,924
------- -------
$ 425 630
======= =======
A summary of accounts and notes receivable follows:
December 31,
-----------------
1996 1995
-----------------
(in thousands)
Accounts receivable $ 33 55
Notes receivable -- 36
------ ------
33 91
Less current portion 33 69
------ ------
$ -- 22
====== ======
Interest rate on notes receivable was 8%.
Note 6 - Notes Payable
Notes payable are as follows:
December 31,
-----------------
1996 1995
-----------------
(in thousands)
8.625% loan, secured by real estate
final maturity in December 1997 $ 1,194 1,289
===== =====
The 8.625% loan requires semiannual payments of interest only and
a lump sum payment of any outstanding principal on December 31,
1997. If portions of the secured property are sold prior to
December 31, 1997, the Company is required to pay certain minimum
release prices to the lender for the partial release of the
property from the mortgage lien.
The Company is obligated under recourse debt (with an unpaid
balance of $6,170,000 at December 31, 1996) of an affiliate
accounted for on the equity method (see Note 4). The Company's
obligation on this recourse debt is secured by a $3,150,000 U.S.
Treasury note transferred to the Company as part of the
Distribution and is not reflected in the accompanying combined
balance sheets.
Note 7 - Other Assets and Liabilities
The components of other current assets, other current liabilities
and other liabilities follow:
December 31
-----------------
1996 1995
-----------------
(in thousands)
Other Current Assets
- --------------------
Prepaid expenses $ 238 386
Restricted cash 110 109
-----------------
Total $ 348 495
=================
Other Current Liabilities
- -------------------------
Accrued property tax $ 150 191
Deposits 235 12
Accrued rent expense 250 --
Deferred income 47 47
-----------------
Total $ 682 250
=================
Other Liabilities
- -----------------
Deferred income $ 59 106
Accrued rent expense 250 --
Other 4 9
------------------
Total $ 313 115
==================
Note 8 - Income Taxes
The real estate assets, energy assets, and other miscellaneous assets of
the Company were acquired from Seafield, and were included in Seafield's
consolidated U.S. federal income tax returns. The income tax provisions
and tax liabilities have been calculated as if the Company had filed
separate returns, utilizing a tax sharing agreement with Seafield.
During 1995, the Company generated approximately $1 million in current
capital losses that exceeded capital gains. These losses are carried
forward through the year 2000. Future realization of these tax assets or
any existing deductible temporary differences or carryforwards ultimately
depend on sufficient taxable income of the appropriate character occurring
within the carryover period. When it becomes more likely than not that a
deferred tax asset will not be realized, a valuation allowance is accrued
against that deferred tax asset.
The components of the provision (benefit) for income taxes on income from
the Company are as follows:
Years ended
December 31,
--------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Current:
Federal $ -- (1,234) (1,480)
State 11 9 (158)
----- ----- -----
11 (1,225) (1,638)
----- ----- -----
Deferred:
Federal -- -- --
State 45 (39) 201
----- ----- -----
45 (39) 201
----- ----- -----
$ 56 (1,264) (1,437)
======= ====== ======
The reconciliation of income tax computed at federal statutory tax rates to
income tax expense is as follows:
Years ended
December 31,
----------------------
1996 1995 1994
---- ---- ----
(in thousands)
Computed expected tax expense (benefit) $(1,408) (4,249) (2,714)
State income taxes, net of federal benefit
and changes in state valuation allowances 37 (20) 28
Goodwill amortization 28 20 16
Tax benefits not available for subsidiary
losses 276 47 31
Increase in federal taxes due to
valuation allowances 1,333 2,845 1,518
Other, net (210) 93 (316)
----- ----- -----
Actual income tax expense (benefit) $ 56 (1,264) (1,437)
======= ====== ======
Effective tax rates 1% (10%) (18%)
The significant components of deferred income tax assets and liabilities
are as follows:
Years ended
December 31,
----------------
1996 1995
---- ----
(in thousands)
Current deferred income tax assets(liabilities):
Excess book expense accruals $ 782 229
State income tax deficiency and interest 661
Other, net 19 12
------ ------
Gross current deferred income tax assets 1,462 241
Current valuation allowance (1,462) (241)
------ ------
Net current deferred income tax assets -- --
------ ------
Non-current deferred income tax assets (liabilities):
Excess book expense accruals 176 267
Excess book partnership expenses 273 200
Excess book oil and gas expenses 519 225
Real estate valuation allowances and other basis
differences 7,618 7,282
Excess book depreciation and amortization 82 238
Alternative minimum tax credit -- 157
Other, net 92 42
Capital loss carryforwards 337 337
Federal net operating loss carryforwards 1,100 --
Federal audit adjustment carryback 535 535
State net operating loss carryforwards 2,954 3,026
------ ------
Gross non-current deferred income tax assets 13,686 12,309
Valuation allowance for non-current deferred
income tax assets (13,796) (12,374)
------- ------
Net non-current deferred income tax assets
(liabilities) (110) (65)
------- ------
Net deferred income tax assets (liabilities) $ (110) (65)
======= ======
Presented on the balance sheet as:
Deferred income tax asset $ 73 118
Deferred income tax liability (183) (183)
------ ------
$ (110) (65)
======= ======
Included in SLH Operations, on a historical basis, are deferred income tax
liabilities that have been accrued for potential Internal Revenue Service
(IRS) audit adjustments to Seafield's 1986-1990 federal income tax years.
Please refer to footnote 11 for additional information regarding this
matter. Also, included in SLH Operations, on a historical basis, are
deferred income tax assets resulting from refund claims filed by Seafield
for the 1990 taxable year. This refund claim results primarily from
taxable losses generated by the sale of a real estate partnership in 1990.
These deferred income tax liabilities and assets are both classified as
non-current. The IRS audit issues for all five years will be settled
contemporaneously. Therefore, the assets and liabilities for these years
have been netted for balance sheet presentation purposes.
The gross accruals are as follows for each of the balance sheet dates
presented:
In thousands
------------
Deferred income tax liability for IRS adjustments $(7,782)
Deferred income tax asset for 1990 loss carryback 7,599
------
Net deferred tax liability for IRS adjustments $ (183)
======
The federal and state valuation allowances increased during 1996 by
$2,643,000, increased during 1995 by approximately $3,660,000 and
increased by $706,000 during 1994. The federal and state valuation
allowances as of December 31, 1993 were $8,249,000.
Note 9 - Lease Commitments
Office space, equipment, land and buildings are leased under various,
noncancelable leases that expire over the next several years. Rental
expense, including an allocation of Seafield's total lease expense, was
$371,000, $372,000 and $352,000 for 1996, 1995 and 1994, respectively.
Total future minimum lease payments under these agreements as of December
31, 1996 are as follows:
Year Amount
---- ------
(in thousands)
1997 $ 543
1998 538
1999 355
2000 294
2001 294
Thereafter 6,218
Included above is annual rent for the ground lease on a parking garage in
Reno, Nevada of $294,000. The lease agreement provides for increases every
five years based on the Consumer Price Index and expires in 2023.
Note 10 - Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are
summarized as follows:
December 31, 1996 December 31, 1995
-------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(in thousands)
Cash equivalents $ 3,925 3,925 -- --
Accounts and notes receivable 33 33 69 69
Investment securities-not
practical to estimate
fair value 4,718 -- 5,136 --
Note payable 1,194 1,012 1,289 1,092
The fair value of accounts and notes receivable approximate cost because of
the short-term maturity of these financial instruments. The estimated fair
value of the note payable was calculated by discounting scheduled cash
flows using estimated market discount rates.
At December 31, 1996 the Company owned (a) three equity investments in
privately held venture capital limited partnerships having an aggregate
carrying value of $1.2 million, (b) a common stock interest in Oclassen
Pharmaceuticals, Inc., a privately owned pharmaceutical manufacturer, which
had a carrying value of $2.5 million and (c) a preferred stock interest in
Norian Corporation, a privately owned developer of proprietary bone
substitute technology, which had a carrying value of approximately $1
million. Investment in these closely-held enterprises was made on a
principal-to-principal basis at negotiated values. Therefore, it is not
practical to estimate fair value for these investments at December 31, 1996
and 1995.
On February 27, 1997, Watson Pharmaceuticals, a publicly traded company,
merged with Oclassen Pharmaceuticals which converted the Company's Oclassen
stock into 184,878 shares of Watson. On February 28, 1997, the Company
sold 100,000 shares of Watson for proceeds of $4.4 million and a gain of
approximately $3 million.
Note 11- Subsequent Events, Contingencies and
Pro Forma Financial Information
Transfer of Certain Assets and Liabilities from Seafield
On February 28, 1997, Seafield transferred to the Company the Transfer
Assets and Transfer Liabilities pursuant to a Distribution Agreement and a
Blanket Assignment, Bill of Sale, Deed and Assumption Agreement (the
Agreements). These Agreements also provide for the Company to receive cash
and a U.S. Treasury note, rights with respect to claims in pending
litigation and to incur obligations described below.
Employee Benefits
The Agreements contain a number of provisions relating to employees. The
provisions generally contemplate that the Company will assume no
obligations or liabilities with respect to Seafield employee plans or
benefits prior to the Distribution Date and that after the Distribution
Date, the Company will be responsible for providing employee benefits for
Seafield personnel that become employees of the Company.
The Agreements provide that the Company will provide each executive
officer of the Company employment agreements and participation in a new
stock incentive plan. SLH has adopted a stock incentive plan which
provides for the granting of stock options of SLH Common Stock to officers,
employees and non-employee directors of SLH. Except for grants of stock
options to non-employee directors, stock option grants will be administered
by the Nominating and Compensation Committee of the Board of Directors.
The Committee has authority to issue stock options to officers and
employees with such terms and provisions as the Committee shall determine.
The stock incentive plan limits the number of shares of SLH Common Stock
with respect to which stock options may be granted to 260,000 in the
aggregate. Pursuant to the stock option plan, the initial non-employee
directors of SLH were granted options in 1997 totaling 81,000 shares of SLH
common stock effective on the Distribution Date. The officers and
employees were granted options totaling 179,000 shares effective on the
Distribution Date. Each option initially granted to non-employee directors
and officers and employees has a term of ten years, provides for an
exercise price equal to the fair market value ($19.15) of SLH Common Stock
on the Distribution Date and become exercisable in four installments as
follows: one-fourth on the date of grant and one-fourth on each of the
first, second and third anniversaries of the date of grant.
Tax Agreements
Through the Distribution Date, the results of the operations of the Company
will be included in Seafield's consolidated federal income tax returns. As
part of the Distribution, the Company and Seafield entered into a Tax
Sharing Agreement which provides, among other things, for the allocation
among the parties of federal, state, local and foreign tax liabilities for
all periods through the Distribution Date. In general, the Tax Sharing
Agreement provides that the Company will be liable for all federal, state,
local and foreign tax liabilities, including any such liabilities resulting
from the audit or other adjustment to previously filed tax returns, which
are attributable to the Company, and that Seafield will be responsible for
all other such taxes, except for the tax liabilities arising out of or that
are related to the tax claims as described below.
Interim Services Agreement
Seafield and the Company entered into the Interim Services Agreement for
the purpose of permitting Seafield and the Company to continue to jointly
use their respective personnel and facilities. Under the arrangement,
Seafield agrees to provide to the Company services required by the Company
for its executive and administrative operations. In exchange for those
services, the Company agrees to provide the retained Seafield personnel
with office facilities and equipment sufficient for the conduct of
Seafield's activities. Following the Distribution, Seafield and the
Company will review the amount of personnel and facilities used under the
arrangement and each will reimburse the other to the extent that the
exchange of facilities for services is not equivalent.
Claims in Pending Litigation
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. Pursuant to the Distribution Agreement this lawsuit has been
assigned to the Company. Thus, any recovery will be for the benefit of the
Company and all future 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. In July 1996, this case was retried to a judge. On January 21,
1997, the judge entered a judgment in favor of Seafield. The amount of
that judgment, together with interest is approximately $5.8 million.
Although 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 for at least another year.
Tax Issues
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.
The substantive issues raised in these notices for the years 1986-1990 are
primarily composed of the former television subsidiaries' amortization of
film rights, the sale of the stock of a former television station, certain
insurance company tax issues and a $27 million loss on the sale of a real
estate partnership interest.
The IRS' denial of film right amortization equates to approximately $10.5
million of the $13.9 million in additional taxes; provided that if the IRS
were to prevail on the amortization issues, the tax basis in the television
stations would be increased. This would have the effect of reducing income
taxes in connection with the stations' sales; all have been sold.
With respect to the loss on the sale of the real estate partnership
interest, the IRS has claimed that the sale did not occur during 1990, but
rather occurred after 1991. If the sale did not occur in 1990, then 1990
losses could not be carried back to 1987, to reduce Seafield's significant
taxable income in 1987.
Seafield has filed protests regarding the 1986-1990 notices of proposed
adjustments. Seafield is currently pursuing a compromise with the Appeals
Division of the IRS for the 1986-1989 years. The 1990 issues have not yet
been formally addressed at the Appeals Division but Seafield is advised by
IRS representatives that tax issues in all years under audit will be
addressed together. Resolution of these tax disputes may reasonably be
expected, but is not certain, during 1997.
The Company assumed from Seafield all of the contingent tax liabilities
described above and acquired all rights to refunds plus any interest
related to these tax years. SLH also assumed all contingent 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. Based
upon the advice of counsel, the Company believes that it will prevail on
the 1990 loss carryback issue. In addition, there are meritorious defenses
or pending favorable compromises for many of the other substantive issues.
The Company believes that adequate accruals for these income tax
liabilities have been made in the accompanying Combined Financial
Statements.
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. The total amount of California state
income taxes due for the 1987-1989 years is expected to be approximately
$750,000, exclusive of interest. The Company is assuming all potential tax
liabilities and interest thereon regarding the California audit for the
1987-1989 tax years.
The Company believes that final resolution of the above Tax Claims after
taking into account offsetting claims for refunds and amounts reserved,
should not have a material adverse effect on the Company's financial
position, results of operations or liquidity.
Other
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 expects to deny
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.
Unaudited Pro Forma Combined Financial Information
The following unaudited Pro Forma Combined Balance Sheet of the Company as
of December 31, 1996 has been prepared pursuant to the Distribution
Agreement to reflect the transfer to the Company of the Transfer Assets and
Transfer Liabilities including the assumption by the Company of certain
federal and state tax and related interest claims of Seafield and the
distribution of the shares to Seafield's stockholders. The accounting for
this transfer of assets and liabilities represents a reorganization of
companies under common control and, accordingly, all assets and liabilities
will be reflected at their historical carrying value. The unaudited Pro
Forma Combined Balance Sheet has been prepared as if the transactions had
occurred on December 31, 1996. Pro forma statements of operations are not
included because there are no material adjustments to be made.
Pro forma per share loss before cumulative effect of a change in accounting
principle was $(2.58), $(6.92) and $(4.03) for the years ended December 31,
1996, 1995 and 1994, respectively, based on 1,622,276 shares outstanding on
the date of distribution.
The SLH Board of Directors declared a dividend of one preferred share
purchase right, effective and paid as of the Distribution Date, on each
share of SLH Common Stock. Each Right entitles the registered holder to
purchase from SLH one one-hundredth of a share of junior participating
preferred stock, par value $0.01 per share with a $100 liquidation
preference, at a price of $125.00 per one one-hundredth of a share, subject
to adjustment.
Under the Distribution Agreement with Seafield, SLH will be restricted from
paying dividends, in cash or property, or redeeming its capital stock for a
period of two years following the Distribution Date of March 3, 1997,
without the consent of the Seafield Board of Directors.
SLH OPERATIONS
Unaudited Pro Forma Combined Balance Sheets
- ----------------------------------------------------------------------
December 31, 1996
----------------------------------------
Historical Adjustments Pro Forma
- ---------------------------------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 3,925 6,850 (a) 10,775
Short-term investments -- 3,150 (a) 3,150
Accounts and notes receivable 33 33
Real estate under contract 1,223 1,223
Other current assets 348 348
----------------------------------
Total current assets 5,529 10,000 15,529
Real estate held for sale 24,202 24,202
Investment securities 4,718 4,718
Investment in affiliates:
Oil and gas partnerships
and interests 3,526 3,526
Other (116) (116)
Property, plant and equipment 425 425
Intangible assets 113 113
Deferred income taxes 73 73
Other assets 4 4
----------------------------------
$ 38,474 10,000 48,474
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 289 289
Notes payable 1,194 1,194
Income tax payable -- 750 (b) 750
Other current liabilities 682 1,350 (b)(c) 2,032
----------------------------------
Total current liabilities 2,165 2,100 4,265
Deferred income taxes 183 183
Other liabilities 313 350 (c) 663
----------------------------------
Total liabilities 2,661 2,450 5,111
----------------------------------
Stockholders' equity:
Preferred stock of $0.01 par
value with $100 liquidation
preference. Authorized
1,000,000 shares; none issued -- -- --
Common stock of $0.01 par value.
Authorized 30,000,000 shares;
issued 1,622,276 shares -- 16 (d) 16
Paid-in capital -- 35,797 (d) 43,347
10,000 (a)
(1,750)(b)
(700)(c)
Total combined equity 35,813 (35,813)(d) --
----------------------------------
Total stockholders' equity 35,813 7,550 43,363
----------------------------------
$ 38,474 10,000 48,474
==================================
Notes to Pro Forma Combined Financial Information:
(a) Represents the cash and short-term investments, consisting of
U.S. Treasury obligations, transferred to the Company on the date of
distribution.
(b) Represents the estimated state tax liability ($750,000) and accrued
interest ($1,000,000) assumed by the Company.
(c) Represents contractual lease obligation for the Seafield office
space (approximately $700,000 through April 1999). The lease to
be assumed from Seafield expires in April 2002 with a right to
cancel in April 1999. The lease has been accounted for as an
operating lease.
(d) Represents the issuance of 1,622,276 shares of $.01 par value
stock to Seafield's stockholders and the reclassification of the
combined equity in excess of par value to the paid-in capital
account.
SLH OPERATIONS
Schedule III
Real Estate and Accumulated Depreciation
December 31, 1996
(Page 1 of 2)
Costs Capitalized Gross Amount
Initial Cost Subsequent At Which Carried
to Company to Acquisition at December 31, 1996
----------------- ----------------- ----------------------
Buildings & Buildings &
Improve- Improve- Carrying Improve-
Description Land ments ments Costs Land ments Total
- ------------------------------- ----------------- ----------------------
(In thousands)
Land Investments/
Developments:
Houston, TX $ 6,158 49 977 1,553 4,283 -- 4,283
Ft Worth, TX 11,501 -- 91 -- 7,720 -- 7,720
Ft Worth, TX 11,289 -- -- 42 11,331 -- 11,331
Ft Worth, TX 1,000 -- -- -- 665 -- 665
Olathe, KS 3,292 -- 49 -- 2,659 -- 2,659
Parking:
Reno, NV -- 5,277 19 -- -- 5,296 5,296
Residential:
Juno Beach, FL 13,740 -- 33,233 2,723 1,313 6,601 7,914
Santa Fe, NM 4,576 -- 66,236 17,423 627 17,658 18,285
--------------------------------------------------------------
$ 51,556 5,326 100,605 21,741 28,598 29,555 58,153
==================================================
Reserves (31,435)
-------
Net real estate before depreciation 26,718
Accumulated depreciation (1,293)
-------
Net real estate 25,425
Less current portion (1,223)
-------
Real estate, net of current portion $ 24,202
=======
(1) Reserves have been established to reflect lower net realizable values
based on periodic evaluation of changes in market conditions, recent
sales prices, and appraisals.
SLH OPERATIONS
Schedule III
Real Estate and Accumulated Depreciation
December 31, 1996
(Page 2 of 2)
Date
Accum. Tax Constr. Date Depr.
Description Reserves Depr. Basis Began Acquired Life
- ---------------------------------------------------------------------------
(In thousands)
Land Investments/
Developments
Houston, TX $ 2,065 -- 4,580 -- 1974 --
Ft Worth, TX 5,569 -- 7,495 -- 1986 --
Ft Worth, TX 10,559 -- 8,021 -- 1986 --
Ft Worth, TX 632 -- 665 -- 1986 --
Olathe, KS -- -- 2,438 -- 1991 --
Parking:
Reno, NV 947 1,293 4,385 -- 1989 20 yrs
Residential:
Juno Beach, FL 2,393 -- 5,557 1985 1983 --
Santa Fe, NM 9,270 -- 12,078 1987 1985 --
-------------------------
$ 31,435 1,293 45,219
=========================
SLH OPERATIONS
Schedule III
Real Estate and Accumulated Depreciation
Reconciliation Between Years
A) Reconciliations of total real estate carrying value for the three years
ended December 31, 1996 are as follows:
1996 1995 1994
- ---------------------------------------------------------------------------
(In thousands)
Balance at beginning of year $ 40,234 44,595 44,550
Additions during year:
Improvements 1,726 12,637 10,991
Consolidate joint venture -- -- 3,292
----------------------------------
41,960 57,232 58,833
Deductions during year:
Value of real estate sold 12,773 9,890 9,838
Provision for loss on sale of
real estate 1,069 7,108 4,400
Cumulative effect of change in
accounting principle 1,400 -- --
----------------------------------
15,242 16,998 14,238
----------------------------------
Balance at end of year $ 26,718 40,234 44,595
==================================
B) Reconciliations of accumulated depreciation for the three years ended
December 31, 1996 are as follows:
1996 1995 1994
- ---------------------------------------------------------------------------
(In thousands)
Balance at beginning of year $ 1,293 1,081 868
Additions during year - depreciation -- 212 213
----------------------------------
1,293 1,293 1,081
Deductions during year - accumulated
depreciation of real estate sold -- -- --
----------------------------------
Balance at end of year $ 1,293 1,293 1,081
==================================
Exhibit 2(b)
BLANKET ASSIGNMENT, BILL OF SALE, DEED AND
ASSUMPTION AGREEMENT
This BLANKET ASSIGNMENT, BILL OF SALE, DEED AND ASSUMPTION AGREEMENT,
dated as of February 28, 1997, ("Assignment and Assumption Agreement") by and
among Seafield Capital Corporation, a Missouri corporation ("Seafield") and SLH
Corporation, a newly formed Kansas corporation which is a wholly owned
subsidiary of Seafield ("SLH").
RECITALS
A. The Boards of Directors of Seafield and SLH have determined that it
is in the best interests of the shareholders of Seafield: (1) to transfer to SLH
substantially all of Seafield's assets (the "Transfer Assets") other than its
holdings (including any capital stock and debt) of LabOne, Inc. ("Lab") and
Response Oncology, Inc. ("Response") and certain other assets (the "Retained
Assets" as more particularly defined below) and certain liabilities (the
"Transfer Liabilities") and (2) to distribute to the holders of the issued and
outstanding shares of common stock, par value $1 per share, of Seafield all of
the issued and outstanding shares of common stock, par value $0.01 per share, of
SLH (the "Distribution") in accordance with Article II of a DISTRIBUTION
AGREEMENT dated as of December 20, 1996 ("Distribution Agreement").
B. Pursuant to Section 1.02 of the Distribution Agreement Seafield and
SLH are required to take all action necessary to transfer to SLH, and to cause
SLH to assume, as the case may be, effective as of the Distribution Date, (1)
all of the Transfer Assets and (2) all of the Transfer Liabilities. This
agreement is intended to effect such transfers and assumptions, subject to the
terms of the Distribution Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained and intending to be legally bound thereby, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1. Definitions and Terms. Except as otherwise provided herein, the
capitalized terms in this agreement shall have the same meaning as those terms
are defined to have in the Distribution Agreement.
1
<PAGE>
ARTICLE II
TRANSFER OF TRANSFER ASSETS
2.1 Contribution and Transfer. KNOW ALL MEN BY THESE PRESENTS: for good
and valuable consideration, the receipt of which is hereby acknowledged,
Seafield, subject to the terms hereof, has contributed, granted, conveyed,
transferred, assigned, and set over, and does by these presents grant, convey,
transfer, assign and set over to SLH all of its right, title and interest in
those assets held by Seafield in the name of or for the exclusive benefit of the
SLH Business (the "SLH Assets") other than the assets listed in Section 2.2
hereof (the "Retained Assets," with the SLH Assets other than the Retained
Assets being hereinafter referred to as the "Transfer Assets"), TO HAVE AND TO
HOLD the same unto SLH, its successors and assigns, forever. Without limiting
the foregoing, the Transfer Assets expressly include all Transfer Assets
reflected on Seafield's books and records as being allocated for the exclusive
use or consumption by the SLH Business, including, without limitation, the
Transfer Assets reflected on the September 30, 1996, unaudited Pro Forma
Combined Balance Sheet included in the SLH Form 10 under the Securities and
Exchange Commission dated December 21, 1996, as amended (the "Balance Sheet" and
the "Form 10") as well as those acquired by the SLH Business since September 30,
1996, less those disposed of since September 30, 1996. Without limiting the
foregoing, the Transfer Assets include the following:
2.11 SLH Subsidiaries. All of the issued and outstanding shares of the
capital stock of the following Seafield subsidiaries, which together with the
indirectly owned subsidiaries of such Seafield subsidiaries constitute the SLH
Subsidiaries as defined in the Distribution Agreement:
a. BMA Resources, Inc. ("Resources"), which owns, among other
things (i) 5,950,000 shares of the issued and outstanding
shares of common stock of Syntroleum Corporation and (ii)
interests in the following oil and gas general partnerships:
Bundy, Bentel, Westgate and Chenault.
b. Scout Development Corporation ("Scout"), which owns, among
other things (i) Scout Development Corporation of New Mexico
("Scout NM"), and (ii) Carousel Apartment Homes, Inc.
("Carousel"); and
c. Tenenbaum Associates, Inc. ("Tenenbaum"),together with any
accounts receivable and other assets that may have been
retained by Seafield in connection with the sale of
Tenenbaum's business and assets.
2.12 SLH Investments. The following Securities held by Seafield which are
hereinafter referred to as the SLH Investments:
2
<PAGE>
a. Securities issued by Norian Corporation, a California
corporation consisting of 181,250 shares of convertible
preferred stock, no par value;
b. Securities issued by: (i) First Century Partnership III, a
limited partnership consisting of a 3.7% capital interest;
(ii) First Century Partnership II, a limited partnership;
(iii) New Enterprise Associates II, L.P. a limited
partnership;
c. Securities issued by Oclassen Pharmaceuticals, Inc. a
Delaware corporation consisting of 500,000 shares of common
stock;
d. Cash and short term investments in the face amount of
$6,850,000;
e. Contract rights formerly relating to or arising out of
Tenenbaum Associates, Inc. and its stockholders, including
all rights of Seafield in and to payments and other
consideration required to be made by Ernst & Young U.S. LLP
("E&Y") pursuant to that certain Asset Purchase Agreement
dated May 31, 1995 (the "E&Y Agreement) and any rights
arising out of that certain Agreement of Purchase and Sale
of Assets dated as of July 10, 1995 between Seafield and
Wayne A. Tenenbaum (the "WAT Agreement") and all accounts
and notes receivable by Seafield with respect to the sale of
Tenenbaum Associates, Inc. assets and the liquidation of
Tenenbaum; and
f. Treasury notes or similar instruments pledged by Seafield in
the approximate amount of $3.0 million to secure payment of
a certain Gillette letter of credit.
2.13 Information and Records. All books, records and information recorded
on any form of media, including paper, magnetic disks, computer drives,
microfiche or other form of information storage equipment or materials owned by
Seafield and used exclusively by the SLH Business.
2.14 Accounts and Notes Receivable. All payments of currency receivable by
Seafield upon accounts generated with respect to the SLH Business and upon
notes, leases, refunds and other evidences of indebtedness or reimbursements
arising out of transactions between the SLH Business and persons or entities
other than Seafield (hereinafter "Third Parties"), including any receivables
reflected on the Balance Sheet and now owned by Seafield.
3
<PAGE>
2.15 Contracts and Agreements. All of Seafield's right, title and interest
in all contracts and agreements between Seafield and any Third Party made by or
for the exclusive benefit of the SLH Business, other than such rights and
interests in contracts and agreements included among the Retained Assets (the
"Contract Rights," and "Contracts," respectively with the excluded rights and
interests hereinafter referred to as the "Retained Contract Rights" and
"Retained Contracts," respectively) including, without limitation the following:
2.151Real estate leases consisting of (i) the lease for the
space occupied by Seafield at 2600 Grand Boulevard , Suite
500, Kansas City, Missouri (the "Seafield Offices") and (ii)
the Tenenbaum leases;
2.152Equipment leases with respect to any items of equipment
located at the Seafield Offices on the Distribution Date;
2.153Insurance and indemnity contracts and policies to the
extent set forth under Article VIII of the Distribution
Agreement;
2.154SLH Business orders for the purchase of goods and or
services from Third Parties;
2.155Employee benefit plans and arrangements for the benefit of
employees who on the Distribution Date are employed by and
are on the payroll of the SLH or any SLH Subsidiary (the
"SLH Employees");
2.156Any SLH Support Agreement as defined in the Distribution
Agreement including the pledge by Seafield of the Gillette
cash and short term securities; and
2.157 The E&Y Agreement and the WAT Agreement.
2.16 Claims, Suits and Choses in Action. All asserted and unasserted
claims, suits, and choses in action now owned by Seafield and arising out of the
business and operations of the SLH Business or relating to any of the Transfer
Assets (the "Claims") including without limitation, the following:
a. Any Seafield claim for tax refunds or off sets arising out
of losses recognized or recognizable by Seafield with
respect to the disposition prior to the Distribution Date of
any assets of the SLH Business, or which is usable by
Seafield as an off set against or a reduction of any tax
liability which is included in the Transfer Liabilities; and
4
<PAGE>
b. The action described in the second paragraph of Item 3 of
the Seafield report on Form 10-K for the fiscal year ended
December 31, 1995 (the "Seafield 10-K") (BMA v. Skidmore,
Owings & Merrill).
2.17 Permits and Licenses. All permits and licenses held by Seafield for
the exclusive benefit of the SLH Business to the extent that such permits and
licenses may be legally transferrable (The "Permits").
2.2 Retained Assets. Notwithstanding the foregoing, the following Retained
Assets shall not be deemed to be within the Transfer Assets and shall not be
contributed or otherwise transferred to SLH hereunder:
2.21 Retained Information and Records. All books, records and information
recorded on any form of media, including paper, magnetic disks, computer drives,
microfiche or other form of information storage equipment or materials owned by
Seafield and including information or data relating to or for the benefit of the
SLH Business as well as businesses other than the SLH Business (the "Joint
Records"). SLH shall be permitted access to the Joint Records at Seafield's
discretion and on an otherwise mutually agreeable basis.
2.22 Retained Accounts and Notes Receivable. All of the following Retained
Accounts Receivable: All intracompany accounts receivable by the SLH Business
from Seafield other than the following accounts: O' Byrne Note receivable.
2.23 Retained Contracts and Contract Rights. All of the following
Retained Contracts and Retained Contract Rights:
2.231All contract rights to be retained by Seafield or any
member of the Seafield Group under Article VI and VIII
of the Distribution Agreement.
2.24 Assets Subject to Restrictions on Transfer. The Retained
Assets shall include, subject to the terms hereof, any asset
otherwise included in the above description of the Transfer
Assets which is subject to a restriction on transfer or
otherwise requires the consent of a third party prior to
transfer and with respect to which the restriction has not
been removed or a consent has not been obtained as of the
Distribution Date. Subsequent to the Distribution Date
Seafield and SLH shall use reasonable efforts to remove any
such restriction or to obtain such consent and upon the
removal of such restriction or the receipt of such consent
such asset shall become a Contributed Asset, deemed by the
parties to have been contributed at and as of the
Distribution Date. Upon such occurrence Seafield and SLH
shall execute such further instruments of transfer necessary
to complete the legal transfer of such Contributed Asset,
dated as of the Distribution Date if permissible. Pending
removal of such restriction and receipt of any such required
consent, Seafield shall arrange for SLH
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to enjoy the benefits of such Asset to the extent legally
permissible and SLH shall provide Seafield with the
resources necessary for Seafield to continue to satisfy
SLH's obligations with respect to such asset.
2.25 Other Retained Assets. All of the following other assets held by
Seafield in the name of or for the exclusive benefit of the SLH Business: None
other than an Accra Legend automobile used by W.T. Grant II, a whale sculpture
in the Seafield Board Room and a fish tank in the offices of W.T. Grant II.
ARTICLE III
ASSUMPTION OF TRANSFER LIABILITIES
3.1 Liabilities Assumed by SLH. SLH hereby unconditionally assumes and
agrees to discharge and perform in accordance with their terms all of the
obligations, liabilities and duties of Seafield arising out of its operation of
the SLH Business and its ownership, use or operation of the Transfer Assets
other than such Retained liabilities and obligations that are enumerated in
Section 3.2 (the "Transfer Liabilities," with such Retained liabilities and
obligations hereinafter referred to as the "Retained Liabilities"), including
without limitation the following Transfer Liabilities:
3.11 Balance Sheet Liabilities. All of Seafield's liabilities relating to
the SLH Business which are referred to or which are reflected on the Balance
Sheet as well as such liabilities which have been incurred by the SLH Business
since September 30, 1996, other than such liabilities included in the Retained
Liabilities (the "Balance Sheet Liabilities" with the such Retained balance
sheet liabilities hereinafter referred to as the "Retained Balance Sheet
Liabilities").
3.12 Liabilities to SLH Employees. All of Seafield's liabilities to SLH
Employees, including, without limitation, all Seafield's obligations under and
pursuant to any SLH collective bargaining, union benefit, salary, bonus,
employee welfare, pension, retirement, vacation pay, disability, accident and
health insurance, life insurance, profit sharing, severance pay or other benefit
plan other than such liabilities and obligations included in the Retained
Liabilities (the "Employee Liabilities" with the such other employee liabilities
hereinafter referred to as the "Retained Employee Liabilities").
3.121 Employment of SLH Employees. At the Distribution Date,
(a) all of the following individuals who were prior to the
Distribution Date employees of Seafield shall become the
employees of SLH, with their employment continuing on the same
terms and conditions as in effect immediately prior to the
Distribution Date, subject to the rights of each such employee to
decline such employment with SLH: All persons full time employed
by an SLH Subsidiary, but not including P. Anthony Jacobs, James
R. Seward, Steven K. Fitzwater, Linda McCoy, D. Rick Linhardt,
Lisa Wall, Sandy Crain, Brian Elvin, Kim Schaefer, Paula
Sheridan, Julie Tushaus, Patti Campbell or Linda Stilley; and (b)
all
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SLH Employees who were immediately prior to the Distribution
Date employees of SLH or of any SLH Subsidiary shall
continue as employees of SLH or such subsidiary of SLH, as
the case may be, with their employment continuing on the
same terms and conditions as in effect immediately prior to
the Distribution Date. In no event shall there be deemed to
be any separation from service or termination of employment
with respect to any of the SLH Employees for any purpose on
account of the transfer of assets and liabilities relating
to the SLH Business contemplated hereby.
3.13 Contract Liabilities. All of Seafield's liabilities and obligations
under the contracts and agreements included in the Transfer Assets, including
those specified in Section 2.15.
3.14 Liabilities Relating to Certain Tax Claims. Without limiting the
foregoing, the Transfer Liabilities shall include any and all liability of
Seafield to the IRS or any state or local taxing authority with respect to any
matter relating to or arising out of any proposed adjustments by the IRS as
described under "Legal Matters" in the Information Statement that is a part of
the Form 10 (the "Information Statement") as well as any other matters to be
assumed by SLH as set forth in the Tax Sharing Agreement.
3.15 Transfer and Distribution Tax Liabilities. Without limiting the
foregoing, the Transfer Liabilities shall include Tax liabilities only to the
extent provided in Section 3.14 and as provided in the Tax Sharing Agreement.
3.16 Other Liabilities. All other liabilities and obligations of Seafield
arising out of or relating to any of the Transfer Assets other than such
liabilities and obligations included in the Retained Liabilities (the "Other
Liabilities" with the such other Retained liabilities hereinafter referred to as
the "Other Retained Liabilities").
3.2 Retained Liabilities. Notwithstanding the foregoing, the following
Retained Liabilities shall not be deemed to be within the Transfer Liabilities
and shall not be assumed by SLH hereunder:
3.21 Retained Employee Liabilities. Retained Employee
Liabilities consisting of all of Seafield's obligations (a) with respect to the
following Seafield employees: P. Anthony Jacobs, James R. Seward, Steven K.
Fitzwater, Linda McCoy, D. Rick Linhardt, Lisa Wall, Sandy Crain, Brian Elvin,
Kim Schaefer, Paula Sheridan, Julie Tushaus, Patti Campbell or Linda Stilley;
(b) under Retained Liabilities identified in Article VI of the Distribution
Agreement, and (c ) arising under employee benefit plans that are not for the
exclusive benefit of the SLH Employees but that cover the employees of Seafield
and/or of its subsidiaries in addition to the SLH Employees such as stock option
or award plans relating to securities issued or issuable by Seafield, umbrella
employee benefit or welfare plans such as the 401-K Plan, to the extent such
obligations relate to employees other than the SLH Employees and to the extent
that such obligations are excluded from the Transfer Liabilities under the
Distribution Agreement.
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3.22 Transfer and Distribution Tax Costs and Expenses. Without
limiting the foregoing, the Transfer Liabilities shall not include any expense
or liability (other than Tax Liabilities under Section 3.14) incurred by
Seafield with respect to (a) the transfer of the Transfer Assets and the
assumption of the Transfer Liabilities hereunder and (b) the distribution of the
SLH Common Stock to the Seafield shareholders under the Distribution Agreement.
3.24 Retained Other Liabilities. All of the following Retained Other
Liabilities: None.
3.3 No Other Liabilities Assumed. Anything in this Agreement to the
contrary notwithstanding, SLH shall not assume, or shall be deemed to have
assumed, any debt, claim, obligation or other liability of Seafield or any of
Seafield's subsidiaries or other affiliates whatsoever other than as
specifically set forth in this Article III.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES, INDEMNIFICATION AND
ACCESS TO INFORMATION
4.1 Representations and Warranties. Except as otherwise provided
herein, Seafield makes no representations or warranties with respect to the
Transfer Assets, the Transfer Liabilities or the accuracy or completeness of the
Balance Sheet and SLH understands that it is accepting the Transfer Assets "AS
IS AND WITH ALL FAULTS" and assuming the Transfer Liabilities without any
limitation.
4.2 Indemnification. Obligations of the parties with respect to
indemnification are provided for under Article III of the Distribution
Agreement.
4.3 Access to Information. Obligations of the parties with respect to
access to Information are provided for under Article V of the Distribution
Agreement.
4.4 Restriction On Payment of Dividends and Redemption of Stock. As further
assurance for its obligations hereunder, SLH agrees that until the second
anniversary of this agreement SLH shall not distribute property to its
stockholders with respect to its outstanding stock as a dividend or redeem any
of its capital stock without the prior written consent of the Seafield Board.
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ARTICLE V
MISCELLANEOUS AND
CERTAIN ADDITIONAL COVENANTS OF SEAFIELD AND SLH
5.1 Taxes. Subject to the specific terms of the Tax Sharing Agreement,
Seafield shall pay all sales, use, stamp, transfer, service, recording, real
estate and like taxes or fees, if any, imposed by the United States or any state
or political subdivision thereof on Seafield and or SLH, required to be paid in
connection with the transfer and assignment of the Transfer Assets, if any and
in connection with the Distribution; provided, however, neither SLH nor Seafield
shall be responsible for or obligated with respect to any taxes required to be
recognized by any Seafield shareholder or SLH stockholder arising out of or in
connection with the distribution of the SLH Common Stock in the Distribution.
5.2 Amendment. This Agreement may be amended, modified or supplemented in a
writing signed by Seafield and SLH.
5.3 Counterparts. This Agreement may be executed simultaneously in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.4 Applicable Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of Missouri.
5.5 Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
5.6 No Third Party Beneficiaries. Except as otherwise indicated herein,
this Agreement is solely for the benefit of the parties hereto and no provision
of this Agreement shall be deemed to confer upon third parties any remedy,
claim, liability, reimbursement, claim of action or other right in excess of the
specific rights granted hereunder.
5.7 Conveyances and Further Assurances. The transfer of the Transfer Assets
hereunder shall be further evidenced by the delivery by Seafield to SLH of stock
certificates together with duly executed instruments of assignment separate from
certificates, deeds, bills of sale, properly endorsed certificates of title and
other specific conveyances requested by SLH. The assumption by SLH of the
Transfer Liabilities shall be further evidenced by the delivery by SLH to
Seafield of such other instruments as Seafield may reasonably request and as may
otherwise be required by this Agreement, the Distribution Agreement and the
Other Agreements. In addition, upon the reasonable request of any of party to
this Agreement, the other party will on and after the Distribution Date execute
and deliver to the requesting party such other documents, releases, assignments
and other instruments as may be required to effectuate completely the
transactions contemplated by this Agreement.
5.8. Notices. All notices, requests, claims, demands and other
communications
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hereunder (collectively, "Notices") shall be in writing and shall be given (and
shall be deemed to have been duly given upon receipt) by delivery in person, by
cable, telegram, telex or other standard form of telecommunications, or by
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows:
If to Seafield:
Seafield Capital Corporation
2600 Grand Boulevard, Suite 500
Kansas City, Missouri 64108
Attention: President
If to SLH:
SLH Corporation
2600 Grand Boulevard, Suite 500
Kansas City, Missouri 64108
Attention: President
or to such other address as any party hereto may have furnished to the other
parties by a notice in writing in accordance with this Section 9.05. Copies of
all notices, requests, claims, demands and other communications hereunder shall
also be given to:
Lathrop & Gage L.C.
2345 Grand Boulevard
Suite 2800
Kansas City, Missouri 64108-2684
Attention: Lathrop M. Gates, Esq.
5.9 Entire Understanding. This Agreement sets forth the entire
agreement and understanding of the parties hereto in respect to the transactions
contemplated hereby and supersedes all prior agreements, arrangements and
understandings relating to the subject matter hereof.
5.10 Written Consent of Sole Stockholder. Seafield owns all of the
issued and outstanding capital stock of SLH, consisting of 100 shares of $0.001
par value Common Stock. The officer of Seafield executing this Agreement has
been duly authorized by the Board of Directors of Seafield, consistent with its
Articles of Incorporation and Bylaws, to vote such stock and execute written
consents of the holders of such stock, and his execution of this Agreement shall
constitute the written consent of the Sole Stockholder of SLH to this
transaction.
5.11 Approval of Seafield's and SLH's Boards of Directors. Consistent with
and in accordance with the Certificates of Incorporation and Bylaws of Seafield
and SLH, the
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Boards of Directors of Seafield and SLH have authorized and approved of this
agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered on the date first above written.
SEAFIELD CAPITAL CORPORATION
Attest:
s/Steven K. Fitzwater s/P. Anthony Jacobs
_______________________ By: ________________________________
Steven K. Fitzwater P. Anthony Jacobs, CFA
Secretary President
SLH CORPORATION
Attest:
s/Steven K. Fitzwater s/James R. Seward
_______________________ By: ________________________________
Steven K. Fitzwater James R. Seward, CFA
Secretary President
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ACKNOWLEDGMENTS
STATE OF MISSOURI )
) ss.
COUNTY OF JACKSON )
BE IT REMEMBERED, that on this 28th day of february, 1997, before me,
the undersigned, a notary public in and for said state, came P. Anthony Jacobs,
CFA, President and Steven K. Fitzwater, Secretary, respectively of Seafield
Capital Corporation, a Missouri corporation, to me personally known to be such
officers and the same persons who executed as such officers the foregoing
instrument on behalf of said corporation, and such persons duly acknowledged the
execution of the same to be the act and deed of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year last above mentioned.
s/Sally Jo Blake
-------------------------
Notary Public in and for said
County and State
My commission expires:
Jan.12, 1999
STATE OF MISSOURI )
) ss.
COUNTY OF JACKSON )
BE IT REMEMBERED, that on this 28th day of February, 1997, before me,
the undersigned, a notary public in and for said state, came James R. Seward,
CFA, President and Steven K. Fitzwater, Secretary, respectively of SLH
Corporation, a Kansas corporation, to me personally known to be such officers
and the same persons who executed as such officers the foregoing instrument on
behalf of said corporation, and such persons duly acknowledged the execution of
the same to be the act and deed of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year last above mentioned.
s/Sally Jo. Blake
-------------------------
Notary Public in and for said
County and State
My commission expires:
Jan. 12, 1999
Exhibit 10(a)
FACILITIES SHARING AND INTERIM SERVICES AGREEMENT
This FACILITIES SHARING AND INTERIM SERVICES AGREEMENT is made as of the
28th day of February , 1996, between Seafield Capital Corporation, a Missouri
corporation ("Seafield") and SLH CORPORATION., a newly formed Kansas corporation
which is a wholly owned subsidiary of Seafield ("SLH").
RECITALS
A. The Boards of Directors of Seafield and SLH have determined that it
is in the best interests of the shareholders of Seafield: (1) to transfer to SLH
substantially all of Seafield's assets (the "Transfer Assets") other than its
holdings of LabOne, Inc. ("Lab") and its holdings of Response Oncology, Inc.
("Response") and certain other assets (the "Retained Assets" as more
particularly defined below) and certain liabilities (the "Transfer Liabilities")
and (2) to distribute to the holders of the issued and outstanding shares of
common stock, par value $1 per share, of Seafield all of the issued and
outstanding shares of common stock, par value $0.01 per share, of SLH (the
"Distribution") in accordance with Article II of a DISTRIBUTION AGREEMENT to
which this agreement is appended as Exhibit A ("Distribution Agreement").
B. Pursuant to Section 6.15 of the Distribution Agreement Seafield has
agreed to provide SLH with certain services and SLH has agreed to provide
Seafield with certain facilities in accordance with the terms of this agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained and intending to be legally bound thereby, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1. Definitions and Terms. Except as otherwise provided herein, the
capitalized terms in this agreement shall have the same meaning as those terms
are defined to have in the Distribution Agreement.
ARTICLE II
FACILITIES AND SERVICES
2.01 AGREEMENT TO PROVIDE FACILITIES AND SERVICES. Subject to the terms
and conditions hereof Seafield agrees to provide to SLH and SLH agrees to accept
during the term specified in Section 2.03 (the "Term") all services required by
SLH for the operation of the offices of SLH's Chairman, Chief Executive Officer,
Chief Accounting
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Officer and Chief Financial Officer, together with clerical and administrative
services, but not including services provided exclusively by Scout Development
Corporation and its subsidiaries. Services to be provided hereunder shall be
provided on a reasonably timely basis. The Services provided hereunder shall be
provided in exchange for the facilities to be provided by SLH to Seafield as set
forth in Section 2.02 hereof.
2.02 AGREEMENT TO PROVIDE FACILITIES AND SERVICES. Subject to the terms
and conditions hereof SLH agrees to provide Seafield and Seafield agrees to
accept during the term specified in Section 2.02 (the "Term") the use of SLH
facilities at 2600 Grand Boulevard, Suite 500, Kansas City, Missouri (the
"Offices") for up to 16 Seafield officers and employees, including the Seafield
employees performing services for SLH under Section 2.01. The facilities shall
include appropriate office space, furniture, equipment and supplies to support
the day to day activities of such personnel during the term of this agreement.
The facilities provided hereunder shall be provided in exchange for the services
to be provided by SLH to Seafield as set forth in Section 2.02 hereof; provided,
however, following the Distribution, Seafield and the Company will review the
amount of personnel and facilities used under the arrangement and each will
reimburse the other to the extent that the exchange of facilities for services
is not reasonably equivalent.
2.03 TERM. This Agreement shall be effective on the date first written
above and shall continue until terminated by either party by giving written
notice to the other party of termination to become effective as of the end of
the month following the month in which notice of termination is given.
ARTICLE III
MISCELLANEOUS
3.01 SEAFIELD INDEMNIFICATION. SLH further agrees to indemnify and hold
harmless Seafield, its officers, agents, employees, directors, representatives
and successors from any claims, liabilities, damages, losses, costs, attorneys
fees, damages and/or liability, worker's compensation and discrimination actions
and/or any other type of civil, administrative or criminal action(s) whether
such action(s) be brought by Seafield's personnel and/or any other third
party(ies), that they, or any one of them, may suffer or sustain as a result of
any claims, demands or causes of action arising out of, or in any way related to
the action or inaction of SLH relating to SLH's use of Services provided to SLH
by Seafield hereunder.
3.02 SLH INDEMNIFICATION. Seafield further agrees to indemnify and hold
harmless SLH, its officers, agents, employees, directors, representatives and
successors from any claims, liabilities, damages, losses, costs, attorneys fees,
damages and/or liability, worker's compensation and discrimination actions
and/or any other type of civil, administrative or criminal action(s) whether
such action(s) be brought by SLH's personnel and/or any other third party(ies),
that they, or any one of them, may suffer or sustain as a
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result of any claims, demands or causes of action arising out of, or in any way
related to the action or inaction of Seafield relating to Seafield's use of
facilities provided to Seafield by SLH hereunder.
3.03 MUTUAL COVENANT. Except to the extent otherwise provided herein,
SLH and Seafield covenant and warrant that in the event that it appears that the
exchange of services for facilities as herein provided is not a fair exchange,
then a fair charge for the services or facilities provided hereunder shall be
determined in a fair and equitable manner and thereafter paid to the party
providing such service or facility..
3.04 FORCE MAJEURE. If either party is unable to perform any of its
duties or fulfill any of its covenants or obligations under this Agreement as a
result of causes beyond its control and without its fault or negligence,
including but not limited to acts of God or government, fire, flood, war,
governmental controls, and labor strife, then such party shall not be deemed to
be in default of this Agreement during the continuance of such events which
rendered it unable to perform; such party shall have such additional time
thereafter as is reasonably necessary to enable it to resume performance of its
duties and obligations under this Agreement; and the party entitled to such
performance shall not be required to pay the other party for such performance to
the extent that such other party is unable to perform. Notwithstanding the
foregoing, if the suspension of a party's obligation to perform under this
Agreement is of such a nature or duration as to substantially frustrate the
purpose of this Agreement, then SLH or Seafield, as the case may be, shall have
the right to terminate this Agreement by giving to the other 30 days' prior
written notice of termination, in which case termination shall be effective upon
the expiration of such 30-day period unless performance is resumed prior to such
expiration.
3.05 SEVERABILITY. The invalidity of any provision of this Agreement as
determined by a court of competent jurisdiction in no way shall affect the
validity of any other provision hereof. If a provision is determined to be
invalid, the parties shall negotiate in good faith in an effort to agree upon a
suitable and equitable alternative provision to effect the original intent of
the parties.
3.06 TIME OF THE ESSENCE. The parties hereto agree that with respect to the
performance of all terms, conditions and covenants of this Agreement, time is of
the essence.
3.07 CAPTIONS. Section captions are not a part hereof and are merely for
the convenience of the parties.
3.08 BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof, this
Agreement shall bind the parties, their successors and assigns. This Agreement
shall be governed by the laws of the State of Missouri without reference to the
conflict or choice of law provisions thereof.
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3.09 ASSIGNMENT. Neither party shall assign or sublease this Agreement
or any Services to be provided hereunder without the prior written consent of
the other, which consent shall not be withheld unreasonably. Notwithstanding the
foregoing, consent shall not be required for an assignment or sublease of this
Agreement or any Service provided hereunder by either party to a corporate
affiliate of such party or to any third party vendor or third party record
keeper who had been providing all or a material portion of the Services to or on
behalf of SLH or Seafield, as the case may be, prior to the date first written
above.
3.09 AMENDMENT. This Agreement may not be amended without the express
written agreement of all parties hereto.
3.10 NOTICES. All notices under this Agreement must be in writing and
delivered personally or sent by United States mail, postage prepaid, addressed
as follows, except that any party by written notice given as aforesaid, may
change its address for subsequent notices to be given hereunder.
If to Seafield:
Seafield Capital Corporation
2600 Grand Boulevard, Suite 500
Kansas City, Missouri 64108
Attention: President
If to SLH:
SLH CORPORATION.
2600 Grand Boulevard, Suite 500
Kansas City, Missouri 64108
Attention: President
Notice sent by U.S. mail will be deemed given when deposited with the U.S.
postal service.
3.11 LIABILITY FOR NONPERFORMANCE. None of the parties hereto nor any
subsidiaries of such parties shall have any liability to each other for failure
to perform its obligations hereunder unless such failure arises out of, directly
or indirectly, the misconduct or gross negligence on the part of the
nonperforming party. Seafield shall not be required to perform any Service (or
any part of any Service) to the extent that performance of such Service (or such
part of such Service) would violate any law, rule or regulation.
3.12 INDEPENDENT ENTITIES. In carrying out the provisions of this
Agreement, Seafield and SLH are and shall be deemed to be for all purposes,
separate and independent entities. Seafield and SLH shall select their employees
and agents, and such employees and agents shall be under the exclusive and
complete supervision and control of
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<PAGE>
Seafield or SLH, as the case may be. Seafield and SLH hereby acknowledge
responsibility for full payment of wages and other compensation to all employees
and agents engaged by either in the performance of their respective Services
under this Agreement. It is the express intent of this Agreement that the
relationship of Seafield to SLH and SLH to Seafield shall be solely that of
separate and independent companies and not that of a joint venture, partnership
or any other joint relationship.
3.13 NONFIDUCIARY STATUS. In carrying out the provisions of this
Agreement, neither party shall be a fiduciary (as defined in Section 3(21) of
ERISA) with respect to any employee benefit plan, program or arrangement
maintained by or on behalf of the other party. Each party will provide Services
pursuant to the terms and conditions of this Agreement in accordance with the
directions, guidelines and/or procedures established by SLH or Seafield, as the
case may be, or the plan administrator (as defined in Section 3(16) of ERISA) of
each party's employee benefit plans or arrangements.
3.14 THIRD PARTY BENEFICIARIES. The provisions of this Agreement are
solely for the benefit of the parties and are not intended to confer upon any
person except the parties any rights or remedies hereunder. There are no third
party beneficiaries of this Agreement, and this Agreement shall not provide any
third person with any remedy, claim, liability, reimbursement, action or other
right in excess of those existing without reference to this Agreement.
3.14 CONSTRUCTION. For purposes of this Agreement, references to
Seafield, with respect to events or periods prior to the date first written
above, shall mean and include, where appropriate, SLH's operation of the
Transferred Businesses as they existed prior to such date.
IN WITNESS WHEREOF, this Agreement has been executed in multiple
counterparts on the date set forth above, each of which shall, for all purposes,
be deemed an original and all of which shall evidence but one agreement between
the parties hereto.
SLH CORPORATION, SEAFIELD CAPITAL CORPORATION,
a Kansas corporation a Missouri corporation
s/James R. Seward s/P. Anthony Jacobs
By: __________________________ By:__________________________
Name: James R. Seward, CFA Name: P. Anthony Jacobs, CFA
Title: President Title: President
5
Exhibit 10(b)
TAX SHARING AGREEMENT
Between
SEAFIELD CAPITAL CORPORATION
and
SLH CORPORATION
<PAGE>
TABLE OF CONTENTS
ARTICLE I PREPARATION AND FILING OF TAX RETURNS......................2
1.1 General Rules.....................................2
1.2 Pre-Distribution Period Tax Returns...............2
1.3 Post-Distribution Period Tax Returns..............4
ARTICLE II DEFICIENCIES AND REFUNDS OF TAXES.................4
2.1 Definition of Final Determination.................4
2.2 Payment of Deficiencies by SLH....................4
2.3 Payment of Refunds to SLH.........................5
ARTICLE III TAX AUDITS, TRANSACTIONS AND OTHER MATTERS........6
3.1 Tax Audits and Controversies......................6
3.2 Retention of Books and Records....................7
3.3 Cooperation Regarding Tax Matters.................7
3.4 Survival of Agreement.............................8
ARTICLE IV MISCELLANEOUS.....................................9
4.1 Severability......................................9
4.2 Modification of Agreement.........................9
4.3 Conflict with Other Agreements....................9
4.4 Notices...........................................9
4.5 Application to Present and Future Subsidiaries....10
4.6 Term..............................................10
4.7 Titles and Headings...............................10
4.8 Singular and Plural...............................10
4.9 Governing Law.....................................10
4.10 Counterparts......................................10
<PAGE>
TAX SHARING AGREEMENT
THIS TAX SHARING AGREEMENT (the "Agreement") is made as of February 28,
1997 by Seafield Capital Corporation, a Missouri corporation ("Seafield"), and
SLH Corporation, a Kansas corporation ("SLH").
WHEREAS, SLH is a newly-formed corporation to which Seafield has on the
date hereof transferred certain assets, subject to certain liabilities, in
exchange for 100 percent of the issued and outstanding common stock of SLH
(which common stock is the only issued and outstanding capital stock of SLH);
and
WHEREAS, the assets transferred by Seafield to SLH on the date hereof
include 100 percent of the outstanding capital stock of BMA Resources, Inc., a
Missouri corporation, and 100 percent of the outstanding capital stock of Scout
Development Corporation, a Missouri corporation which itself owns 100 percent of
the capital stock of Scout Development Corporation of New Mexico, a Missouri
corporation and 100 percent of the capital stock of Carousel Apartment Homes,
Inc. ("Carousel") (SLH, BMA Resources, Inc., Scout Development Corporation,
Scout Development Corporation of New Mexico and Carousel are hereinafter
collectively the "SLH Group"); and
WHEREAS, Seafield and SLH have contemporaneously herewith entered into
a Distribution Agreement (the "Distribution Agreement") pursuant to which all of
the issued and outstanding common stock of SLH is to be distributed effective as
of the close of business on the date hereof (the "Distribution Date") by
Seafield to the holders of its common stock on a pro rata basis (the
"Distribution"); and
WHEREAS, the parties hereto desire to provide for the payment of tax
liabilities and entitlement to tax refunds for the taxable periods ending
before, on, and after the Distribution Date, to allocate responsibility for and
provide for cooperation in the preparation and filing of tax returns with
respect to such taxable periods, and to provide for certain other related
matters;
NOW, THEREFORE, Seafield, on behalf of itself and its present, former,
and future subsidiaries, other than members of the SLH Group as hereinafter
defined (the "Seafield Group"), and SLH, on behalf of itself and the SLH Group,
in consideration of the premises and the mutual covenants contained herein,
acknowledge and agree as follows:
<PAGE>
ARTICLE I
PREPARATION AND FILING OF TAX RETURNS
1.1 General Rules.
(a) Certain Definitions. For purposes of this Agreement: the
term "Taxes" shall mean all forms of taxation and shall include without
limitation income, alternative minimum, superfund, sales, use, ad valorem, gross
receipts, franchise, transfer, recording, withholding, employment, excise, and
occupation taxes, together with any related interest, penalties, and additions
to tax, or additional amounts, imposed by any governmental authority upon the
Seafield Group, the SLH Group, or any of their respective members or any
combination thereof; the term "Tax" shall mean any of the Taxes; and the term
"Tax Return" shall mean any return, filing, questionnaire, or other document
required by law to be filed, including any amendment and refund claim that
constitutes an amendment to any of the foregoing that is required or permitted
to be filed, for any period with any governmental authority or other person in
connection with any Taxes (whether or not a payment is required to be made with
respect to such filing).
(b) Preservation of Accounting Methods and Tax Elections. All
Tax Returns filed by any member of the Seafield Group or by any member of the
SLH Group after the Distribution Date shall be prepared on a basis which does
not have an adverse effect on the elections, accounting methods, conventions,
closing agreements, and principles of taxation used in any Tax Return filed by
any such person for any taxable period ending on or before the Distribution
Date, and shall be filed on a timely basis by the party responsible for such
filing under this Agreement.
(c) Decisions Regarding Tax Returns. Subject to the provisions
of this Agreement, all decisions relating to the preparation and filing of Tax
Returns and relating to the handling of any audit or other review of such Tax
Returns by any governmental authority shall be made in the sole discretion of
the party responsible under this Agreement for such filing.
1.2 Pre-Distribution Period Tax Returns.
(a) Continued Effectiveness of Prior Seafield Tax Sharing
Agreement. The parties acknowledge that Seafield, its subsidiaries, and members
of the SLH Group are parties to a Tax Sharing Agreement dated as of August 1,
1990 (the "Prior Tax Agreement"). Notwithstanding the change in the federal
income tax consolidated group of which Seafield is the common parent corporation
that results from the Distribution (and similar changes that may result under
state or local law), the Prior Tax Agreement shall continue in full force and
effect after the Distribution Date with respect to all Tax Returns otherwise
subject to the provisions of such Prior Tax Agreement that relate to fiscal
periods beginning before the Distribution Date. The Prior Tax Agreement, as
modified, amplified, and supplemented by this Agreement, shall be interpreted in
accordance with
2
<PAGE>
the past practices under such agreement of the parties thereto. The parties
acknowledge that, in accordance with the preceding provisions of this Section
1.2(a), Seafield shall be responsible for and shall pay all Federal income Taxes
arising as a result of the Distribution.
(b) Performance of Parties Under Prior Tax Agreement. SLH
shall cause each member of the SLH Group to perform on a timely basis all of
such member's obligations, if any, under the Prior Tax Agreement and, in
addition, shall promptly provide to Seafield upon request all information that
Seafield may reasonably request from time to time (including tax computations,
reconciliations of book and taxable incomes, and other similar information that
SLH or a member of the SLH Group must affirmatively prepare) that may be needed
by Seafield to file Tax Returns or otherwise perform under the Prior Tax
Agreement or to monitor the performance of any other party under such contract.
Seafield shall itself and shall cause each other member of the Seafield Group to
perform on a timely basis all of its or such member's obligations, respectively,
under the Prior Tax Agreement and shall promptly provide to SLH upon request all
information that SLH may reasonably request from time to time relating to the
Tax liability of any member of the Seafield Group or the SLH Group with respect
to a Tax Return that is subject to the provisions of the Prior Tax Agreement or
to the performance under such contract of any of the parties thereto.
(c) Tax Returns Not Governed by Prior Tax Agreement. For
purposes of the preceding Sections 1.2(a) and (b) (i.e., for purposes of filing
Tax Returns and paying Taxes pursuant to the Prior Tax Agreement for fiscal
periods beginning prior to the Distribution Date), paragraph 7 of the Prior Tax
Agreement is hereby modified to refer to and include all municipal and state
Taxes with respect to which combined, consolidated, or unitary reporting is
permissible, rather than merely referring to and including state income Taxes.
All Tax Returns other than the Tax Returns described in Section 1.2(a) and the
preceding sentence which include or are filed with respect to a member of the
Seafield Group or the SLH Group for periods beginning before the Distribution
Date shall be filed by the member of the Seafield Group or the SLH Group, as the
case may be, that is required to file such return by law.
(d) Carryback of Tax Attributes. For purposes of this
Agreement: the term "Tax Attribute" shall mean any net operating loss, capital
loss, or tax credit allowed by the Internal Revenue Code of 1986 or any
successor thereto and the regulations promulgated thereunder (the "Code") or
equivalent state statute or local ordinance; and the term "Tax Benefit" shall
mean the amount of the decrease in Taxes resulting from any increase or decrease
in any item including, but not limited to, any item of income or deduction, gain
or loss, or tax credit. If any member of the SLH Group shall have a Tax
Attribute that can only be utilized on a consolidated, combined, or unitary Tax
Return filed by Seafield for a fiscal year beginning before the Distribution
Date, then Seafield shall promptly upon SLH's request (and upon SLH furnishing
to Seafield all information relevant to such Tax Attribute) file an amended Tax
Return for such fiscal year reporting
3
<PAGE>
such Tax Attribute and shall pay to such member of the SLH Group the Tax Benefit
attributable to such Tax Attribute, all in accordance with the provisions of the
Prior Tax Agreement; provided, Seafield may withhold from such payment and
retain for itself a reasonable fee to compensate it for the effort and expense
incurred by it in filing such amended Tax Return. If any member of the SLH Group
shall have a Tax Attribute that can be utilized either on a consolidated,
combined, or unitary Tax Return filed by Seafield for a fiscal year beginning
before the Distribution Date or on a Tax Return for a fiscal year beginning on
or after the Distribution Date, then such Tax Attribute may be carried back to
the earlier fiscal period's Tax Return (in accordance with the procedures
described in the preceding sentence) if Seafield and SLH mutually so agree, and
if not then the SLH Group member may utilize the Tax Attribute only on the later
fiscal period's Tax Return.
(e) Apportionment of Tax Attributes. If all or a portion of
any Tax Attribute arising in any taxable period beginning before the
Distribution Date is apportioned to a tax year of any member of the SLH Group
beginning on or after the Distribution Date pursuant to any provisions of the
Code (or equivalent state or local law or regulation), then SLH shall retain the
Tax Benefit related to the Tax Attribute so apportioned.
1.3 Post-Distribution Period Tax Returns. All Tax Returns and Taxes for
periods beginning on or after the Distribution Date shall be the responsibility
of the Seafield Group if such Tax Returns or Taxes are legally due from the
Seafield Group and shall be the responsibility of the SLH Group if such Tax
Returns or Taxes are legally due from the SLH Group.
ARTICLE II
DEFICIENCIES AND REFUNDS OF TAXES
2.1 Definition of Final Determination. For purposes of this Agreement
the term "Final Determination" shall mean the final resolution of liability for
any Tax for a taxable period: (i) by Internal Revenue Service ("IRS") Form
870-AD (or any successor forms thereto) on the date of acceptance by or on
behalf of the IRS, or by a comparable form under the laws of other
jurisdictions; (ii) by a decision, judgment, decree, or other order by a court
of competent jurisdiction which has become final and unappealable; (iii) by
closing agreement or accepted offer in compromise under Section 7121 or 7122 of
the Code, or comparable agreement under the laws of other jurisdictions; (iv) by
any allowance of a refund or credit in respect of an overpayment of Tax, but
only after the expiration of all periods during which such refund may be
recovered (including by way of offset) by the Tax-imposing jurisdiction; or (v)
by any other final disposition, including by reason of the expiration of the
applicable statute of limitations or by mutual agreement of the parties.
2.2 Payment of Deficiencies by SLH. The provisions of this Section 2.2 are
intended to amplify the provisions of paragraph 6 of the Prior Tax Agreement. If
a Final
4
<PAGE>
Determination is made that results in any adjustments to any Tax Return of
Seafield in which any member of the SLH Group is included for taxable periods
beginning before the Distribution Date, then to the extent that such adjustments
result in a greater Tax for such SLH Group member or any Seafield Group member
(in either case without regard to any offsetting adjustments to other members of
the Seafield Group), such member of the SLH Group shall be liable for such
increase in Taxes. If any member of the SLH Group shall have
any liability as a result of this Section 2.2, SLH shall pay to Seafield, hold
Seafield harmless, and indemnify Seafield for any such Tax liability, costs, and
attorneys fees, and the amount thereof shall be paid by SLH to Seafield within
15 days of the receipt by SLH of written notice of such liability, together with
a computation of the amount due and supporting documentation in such detail as
SLH may reasonably request to verify the computation of the amount due. Any such
required payment not made within such 15-day period shall thereafter bear
interest until paid at the then most recently published rate of interest charged
by the IRS on income tax deficiencies pursuant to Code section 6621(a)(2).
2.3 Payment of Refunds to SLH. The provisions of this Section 2.3 are
intended to amplify further the provisions of paragraph 6 of the Prior Tax
Agreement. If a Final Determination is made that results in any adjustments to
any Tax Return of Seafield in which any member of the SLH Group is included for
taxable periods beginning before the Distribution Date, then to the extent that
such adjustments decrease the Tax liability attributable to any member of the
SLH Group and result in a Tax Benefit to Seafield or any member of the Seafield
Group (without regard to any offsetting adjustments to other members of the
Seafield Group), then Seafield shall remit to SLH any refunds of Taxes received
by or credited to it as a result of the adjustments attributable to a member of
the SLH Group. Seafield shall pay any amounts due from it to SLH as a result of
this Section 2.3 within 15 days of its receipt of the relevant refund or credit
from the IRS or any state or other governmental unit, as the case may be. Any
such required payment not made within such 15-day period shall thereafter bear
interest until paid at the then most recently published rate at which the IRS
pays interest on tax refunds pursuant to Code section 6621(a)(1). Such payments
shall be accompanied by a computation of the amount due and supporting
documentation in such detail as SLH may reasonably request to verify the
computation of the amount due. Anything herein to the contrary notwithstanding,
except as provided in this Section 2.3, no member of the SLH Group shall be
entitled to any payment or benefit as a result of the receipt of any Tax refund
received by any member of the Seafield Group except to the extent such refund is
attributable to the overpayment of estimated Taxes by the SLH Group or any
member thereof.
5
<PAGE>
ARTICLE III
TAX AUDITS, TRANSACTIONS AND OTHER MATTERS
3.1 Tax Audits and Controversies.
(a) Federal, State, or Local Income or Franchise Taxes. Except
as otherwise provided in this Section 3.1, Seafield shall have the exclusive
authority and obligation to represent each member of the SLH Group before the
IRS or any other governmental agency or authority or before any court with
respect to any matter affecting the federal, state, or local income or franchise
Tax liability of any member of either the Seafield Group or the SLH Group for
any Tax period beginning before the Distribution Date, in each such case: (i)
allowing representatives of the SLH Group, including without limitation outside
counsel and consultants, to participate in good faith in all respects in all
such Tax proceedings affecting any member of the SLH Group; and (ii) acting in
the best interests of both the Seafield Group and the SLH Group.
Such representation shall include but shall not be limited to
exclusive control over: (i) any response to any examination of federal, state,
or local income or franchise Tax Returns; and (ii) any contest or litigation
through a Final Determination of any issue included in any Tax Return that
includes a member of the Seafield Group, including but not limited to: (A)
whether and in what forum to conduct such contest; and (B) whether and on what
basis to settle such contest, except that Seafield shall not without SLH's
consent settle any claim, suit, action, or proceeding in respect of which any
member of the SLH Group may incur any then known (by Seafield) future Tax
liability, or in respect of which indemnity for federal, state, or local income
or franchise Taxes may be sought hereunder against SLH or any member of the SLH
Group, which consent shall not be unreasonably withheld. Seafield shall give
timely notice to SLH of any inquiry, the assertion of any claim, or the
commencement of any suit, action, or proceeding in respect of which any member
of the SLH Group may incur any then known (by Seafield) future Tax liability or
in respect of which indemnity for federal, state, or local income or franchise
Taxes may be sought under this Agreement against SLH or any member of the SLH
Group and shall give SLH such information with respect thereto as SLH may
reasonably request.
Anything in this Section 3.1 or elsewhere in this Agreement to
the contrary notwithstanding, if SLH contests or litigates any federal, state,
or local income or franchise tax issue in any forum, SLH shall pay and shall
indemnify and hold harmless each member of the Seafield Group from any and all
costs, expenses, and/or liabilities of any type or nature including without
limitation, any federal income tax liability (including interest and penalties
thereon), that are incurred by or imposed upon Seafield or any member of the
Seafield Group which Seafield or such Seafield Group member would not otherwise
have incurred.
(b) Other Taxes. Except as otherwise provided in this Section 3.1, the
6
<PAGE>
party responsible for filing any Tax Return (other than federal, state, or local
income or franchise Tax Returns) pursuant to Section 1.2(c) hereof shall, at its
own expense, have the exclusive authority to represent each member of the
Seafield Group and the SLH Group before any governmental agency or authority or
before any court with respect to any matter affecting the Tax liability of any
member of either the Seafield Group or the SLH Group for any Tax period
beginning before the Distribution Date in each case: (i) allowing
representatives of the other group to participate in good faith in all respects
in all such Tax proceedings affecting any member of the other group; and (ii)
acting in the best interests of both the Seafield Group and the SLH Group.
Such representation shall include but shall not be limited to
exclusive control over: (i) any response to any examination by the governmental
authority of such Tax Returns; and (ii) any contest through a Final
Determination of any issue included in any Tax Return that includes a member of
the SLH Group or the Seafield Group, including but not limited to: (A) whether
and in what forum to conduct such contest; and (B) whether and on what basis to
settle such contest, except that Seafield or any member of the Seafield Group
shall not settle any claim, suit, action, or proceeding in respect of which
indemnity for such Taxes may be sought hereunder against SLH or any member of
the SLH Group without SLH's consent, which consent shall not be unreasonably
withheld, and except that SLH or any member of the SLH Group shall not settle
any claim, suit, action, or proceeding in respect of which indemnity for such
Taxes may be sought hereunder against Seafield or any member of the Seafield
Group without Seafield's consent, which consent shall not be unreasonably
withheld.
3.2 Retention of Books and Records. SLH and Seafield each agrees to
retain and preserve in accessible and reproducible form all Tax Returns, related
schedules, and workpapers, and all accounting and computer records (in whatever
media) and other documents relating thereto (collectively, the "Tax Documents"),
existing on the date hereof or created through or with respect to taxable
periods ending on or before the Distribution Date until the later of: (a) the
expiration of the statute of limitations (including extensions) of the taxable
years to which such Tax Returns and Tax Documents relate; or (b) December 31,
2006. No Tax Documents shall be destroyed or otherwise disposed of by either
Seafield or SLH (or any member of their respective groups) until the party
intending to make such disposition has given the other party at least 30 days
advance notice thereof, whereupon the party receiving such notice shall have the
right, at its own expense, to take possession of such Tax Documents.
3.3 Cooperation Regarding Tax Matters.
(a) SLH's Obligations. In addition to any obligations imposed
pursuant to the Distribution Agreement, SLH and each other member of the SLH
Group shall fully cooperate with Seafield and its representatives, in a prompt
and timely manner, in connection with the preparation and filing of, and any
inquiry, audit, examination, investigation, dispute, or litigation involving,
any Tax Return filed or required to be filed
7
<PAGE>
by or for any member of the Seafield Group for any taxable period beginning
before the Distribution Date. Such cooperation shall include but not be limited
to making available to Seafield during normal business hours, and within 30 days
of any request therefor, all Tax Documents, books, records, and information, and
the assistance of all officers and employees, necessary or useful in connection
with any Tax inquiry, audit, examination, investigation, dispute, litigation, or
other matter.
SLH agrees on behalf of itself and each other member of the
SLH Group to execute and deliver to Seafield, when so requested by Seafield, any
power of attorney that may be necessary or appropriate to allow Seafield and its
counsel to represent SLH or such SLH Group member in any controversy which
Seafield shall have the right to control pursuant to the terms of Section 3.1 of
this Agreement.
(b) Seafield's Obligation. Except as otherwise provided in
this Article III, Seafield shall fully cooperate with SLH and its
representatives, in a prompt and timely manner, in connection with the
preparation and filing of, and any inquiry, audit, examination, investigation,
dispute, or litigation involving, any Tax Return filed or required to be filed
pursuant to Section 1.2(c) by or for any member of the SLH Group. Such
cooperation shall include but not be limited to making available to SLH during
normal business hours, and within 30 days of any request therefor, all books,
records, and information, and the assistance of all officers and employees,
necessary or useful in connection with any tax inquiry, audit, examination,
investigation, dispute, litigation, or other matter.
Seafield agrees on behalf of itself and each other member of
the Seafield Group to execute and deliver to SLH, when so requested by SLH, any
power of attorney that may be necessary or appropriate to allow SLH and its
counsel to represent Seafield or such other Seafield Group member in any
controversy which SLH shall have the right to control pursuant to the terms of
Section 3.1(b) of this Agreement.
(c) Remedy for Failure to Comply. If Seafield reasonably
determines that SLH is not for any reason fulfilling its obligations under
Section 3.3(a), or if SLH reasonably determines that Seafield is not for any
reason fulfilling its obligations under Section 3.3(b), then Seafield or SLH, as
the case may be, shall have the right to appoint, at the expense of the other,
an independent entity such as a nationally recognized public accounting firm to
assist the other in meeting its obligations under this Section 3.3. Such entity
shall have complete access to all books, records, and information, and the
complete cooperation of all officers and employees, of SLH or Seafield, as the
case may be.
3.4 Survival of Agreement. This Agreement and all covenants contained
herein shall survive the expiration of all statutes of limitations prescribed by
the Code and other tax laws and any extensions thereof that apply to any Tax
Returns and any Taxes and any Final Determination relating to any Taxes.
8
<PAGE>
ARTICLE IV
MISCELLANEOUS
4.1 Severability. In case any one or more of the provisions contained
in this Agreement should be invalid, illegal, or unenforceable, the
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.
4.2 Modification of Agreement. No modification, amendment, or waiver of
any provision of this Agreement shall be effective unless the same shall be in
writing and signed by each of the parties hereto and then such modification,
amendment, or waiver shall be effective only in the specific instance and for
the purpose for which given.
4.3 Conflict with Other Agreements. Anything in this Agreement or the
Distribution Agreement to the contrary notwithstanding, in the event and to the
extent that there shall be a conflict between the provisions of this Agreement
and the Distribution Agreement, the provisions of this Agreement shall control.
In the event and to the extent that there shall be a conflict between the
provisions of this Agreement and the Prior Tax Agreement as modified, amplified,
and supplemented by this Agreement, the provisions of this Agreement shall
control. Notwithstanding any other provision of this Agree ment, however, this
Agreement shall not amend, modify, or affect in any way the provisions of the
Distribution Agreement and the Blanket Assignment, Bill of Sale, Deed and
Assumption Agreement between Seafield and SLH dated the date hereof (the
"Assignment") that relate to the rights or obligations of either party with
respect to certain federal income tax or other tax-related claims and certain
federal income tax or other tax-related liabilities that are described therein;
the parties expressly intend for all matters relating to such claims or
liabilities to be governed by the Distribution Agreement and the Assignment.
4.4 Notices. All notices or other communications required or permitted
under this Agreement shall be delivered by hand, mailed by certified or
registered mail, postage prepaid and return receipt requested, or sent by cable,
telegram, telex, or telecopy (confirmed by regular, first-class mail), to the
parties at the following addresses (or at such other addresses for a party as
shall be specified by like notice) and shall be deemed given on the date on
which such notice is received:
(a) In the case of Seafield, to
Seafield Capital Corporation
2600 Grand Boulevard, Suite 500
Kansas City, Missouri 64108
Attention: President
9
<PAGE>
(b) In the case of SLH, to
SLH Corporation
2600 Grand Boulevard, Suite 500
Kansas City, Missouri 64108
Attention: President
4.5 Application to Present and Future Subsidiaries. This Agreement is
being entered into by Seafield and SLH on behalf of themselves and each member
of the Seafield Group and the SLH Group, respectively. This Agreement shall
constitute a direct obligation of each such member and shall be deemed to have
been readopted and affirmed on behalf of any corporation which becomes a member
of the Seafield Group or the SLH Group in the future. Seafield and SLH hereby
guarantee the performance of all actions, agreements, and obligations provided
for under this Agreement of each member of the Seafield Group and the SLH Group,
respectively. Seafield and SLH shall, upon the written request of the other,
cause any of their respective group members formally to execute this Agreement.
This Agreement shall be binding upon, and shall inure to the benefit of, the
successors, assigns, and persons controlling any of the corporations bound
hereby.
4.6 Term. This Agreement shall commence on the date of execution
indicated above and shall continue in effect until otherwise agreed to in
writing by Seafield and SLH, or their successors.
4.7 Titles and Headings. Titles and headings to sections herein are
inserted for the convenience of reference only and are not intended to be a part
or to affect the meaning or interpretation of this Agreement.
4.8 Singular and Plural. As used herein, the singular shall include the
plural and vice versa.
4.9 Governing Law. This Agreement shall be governed by the laws of the
State of Missouri.
4.10 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become a binding agreement when one or more counterparts have been signed
by each party and delivered to the other parties.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers, all on the day and year first
above written.
SEAFIELD CAPITAL CORPORATION,
a Missouri corporation
s/P. Anthony Jacobs
By:___________________________
P. Anthony Jacobs, CFA
President
SLH CORPORATION,
a Kansas corporation
s/James R. Seward
By:_________________________
James R. Seward, CFA
President
11
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors of SLH Corporation
We consent to incorporation by reference in the 1996 annual report on Form
10-K of SLH Corporation of our report dated March 31, 1997 relating to the
combined balance sheets of SLH Operations as of December 31, 1996 and 1995,
and the related combined statements of operations, equity and cash flows
and the related schedule for each of the years in the three-year period
ended December 31, 1996, which report appears in the December 31, 1996
annual report on Form 10-K of SLH Corporation.
/s/ KPMG Peat Marwick LLP
Kansas City, Missouri
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-K for the period ending December 31, 1996 and is qualified in its
entirety by reference to such 10-K.
</LEGEND>
<CIK> 0001029023
<NAME> SLH CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,925
<SECURITIES> 0
<RECEIVABLES> 33
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,529
<PP&E> 2,580
<DEPRECIATION> 2,155
<TOTAL-ASSETS> 38,474
<CURRENT-LIABILITIES> 2,165
<BONDS> 0
0
0
<COMMON> 0<F1>
<OTHER-SE> 35,813<F1>
<TOTAL-LIABILITY-AND-EQUITY> 38,474
<SALES> 15,606
<TOTAL-REVENUES> 16,365
<CGS> 15,250
<TOTAL-COSTS> 3,802
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> (4,142)
<INCOME-TAX> 56
<INCOME-CONTINUING> (4,198)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,400)
<NET-INCOME> (5,598)
<EPS-PRIMARY> (3.45)<F1>
<EPS-DILUTED> 0<F2>
<FN>
<F1>The historical financial information presented reflects periods during
which SLH Corporation did not exist but rather reflects the financial
information of the Transfer Assets and Transfer Liabilities which relate
directly to the businesses transferred to SLH Corporation from Seafield
Capital Corporation.
<F2>Computation not applicable
</FN>
</TABLE>
