UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-21911
SLH CORPORATION
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(Exact name of registrant as specified in its charter)
Kansas 43-1764632
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 7568
5000 W. 95th St., Suite 260
Shawnee Mission, KS 66207
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(Address of principal (Zipcode)
executive offices)
Registrant's telephone number, including area code (913) 652-1000
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P. O. Box 410949 2600 Grand Blvd. Suite 500 Kansas City, MO 64141
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Number of shares outstanding of only class of Registrant's common stock as of
August 4, 1997: $1 par value common - 4,866,828 (after three for one stock
split on July 21, 1997)
SLH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
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June 30, December 31,
1997 1996
(unaudited)
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(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 12,797 3,925
Short-term investments 12,468 --
Accounts and notes receivable 1,212 33
Real estate under contract 3,469 1,223
Other current assets 270 348
------------------------
Total current assets 30,216 5,529
Real estate held for sale 9,852 24,202
Real estate under development 2,071 --
Investment securities 1,855 4,718
Investment in affiliates:
Oil and gas partnerships 3,383 3,526
Other 1,262 (116)
Property, plant and equipment 113 425
Notes receivable 1,680 --
Intangible assets -- 113
Deferred income taxes -- 73
Other assets 8 4
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$ 50,440 38,474
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 262 289
State income tax payable 96 --
Notes payable 1,194 1,194
Other current liabilities 1,404 682
------------------------
Total current liabilities 2,956 2,165
Notes payable 21 --
Deferred income taxes (199) 183
Other liabilities 133 313
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Total liabilities 2,911 2,661
------------------------
Stockholders' Equity:
Perferred stock of $.01 par value
with $100 liquidation preference.
Authorized 1,000,000 shares;
none issued. --
Common stock of $.01 par value.
Authorized 30,000,000 shares;
issued 1,622,276 shares 16
Paid-in capital 47,947
Net unrealized gains on marketable
equity securities 42
Accumulated deficit (476)
------------------------
Total stockholders' equity 47,529
Combined equity 35,813
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$ 50,440 38,474
========================
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and
results of operations.
SLH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
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(in thousands except share amounts)
REVENUES
Real estate sales $ 6,975 3,426 11,015 8,213
Real estate rentals and other 211 189 385 371
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Total revenues 7,186 3,615 11,400 8,584
COSTS AND EXPENSES
Real Estate:
Cost of sales 6,981 3,426 11,019 8,213
Operating expenses 818 684 1,563 1,303
Provision for loss on real
estate held for sale, net 41 549 220 185
General and administrative 354 400 687 797
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Loss from operations (1,008) (1,444) (2,089) (1,914)
Investment income 1,942 4 5,124 6
Interest expense (45) (27) (89) (55)
Equity in net loss of affiliates (137) (205) (369) (436)
Equity in net earnings of
venture capital investment -- 380 82 557
funds
Other income 169 -- 435 --
--------------------- --------------------
Earnings (loss) before
income taxes and
cumulative effect 921 (1,292) 3,094 (1,842)
Income taxes (benefit) (5) 135 (8) 125
--------------------- --------------------
Earnings (loss) before cumulative
effect of change in accounting
principle 926 (1,427) 3,102 (1,967)
Cumulative effect of change
in accounting principle -- -- -- (1,400)
--------------------- --------------------
Net earnings (loss) $ 926 (1,427) 3,102 (3,367)
===================== ====================
Per share of common stock:
Net earnings (loss) $ .48 (.78) 1.76 (1.91)
Book value $ 29.30 29.30
Average shares outstanding 1,830,276 1,830,276 1,766,890 1,766,890
Shares outstanding
end of period 1,622,276 1,622,276 1,622,276 1,622,276
See accompanying notes to consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.
SLH CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
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(unaudited)
Six Months Ended
June 30, 1997
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(in thousands)
Common stock:
Balance, beginning of year $ 1
Capitalization by Seafield Capital Corporation 15
---------
Balance, end of period 16
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Paid-in capital:
Balance, beginning of year 99
Capitalization by Seafield Capital Corporation 47,848
---------
Balance, end of period 47,947
---------
Net unrealized gains on marketable equity securities:
Balance, beginning of year --
Net change during period 42
---------
Balance, end of period 42
---------
Accumulated deficit:
Balance, beginning of year --
Net loss for the period from the date of
distribution (March 3, 1997) to June 30, 1997 (476)
---------
Balance, end of period (476)
---------
Stockholders' Equity $ 47,529
=========
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and
results of operations.
SLH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(unaudited)
Six months ended
June 30,
1997 1996
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(in thousands)
OPERATING ACTIVITIES
Net earnings (loss) $ 3,102 (3,367)
Adjustments to reconcile net earnings (loss)
to net cash provided by operations
Cumulative effect of change in accounting
principle -- 1,400
Depreciation and amortization 78 220
Equity in losses of affiliates 369 436
Equity in earnings of venture capital
investment funds (82) (557)
Provision for loss on real estate held for sale 220 185
Sales of real estate 10,045 6,706
Increase in notes receivable from sales
of real estate (1,780) --
Collections of notes receivable from sales
of real estate 100 14
Additions to real estate held for sale (233) (1,193)
Change in short-term trading portfolio, net (2,279) --
Change in accounts receivable (1,178) (15)
Change in accounts payable (27) 39
Increase in deposits (225) (2)
Income taxes and other (534) 36
---------------------
Net cash provided by operations 7,576 3,902
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INVESTING ACTIVITIES
Investments in affiliates (1,500) (44)
Distribution from afiliates -- 272
Distribution from venture capital
investment funds 445 916
Purchase of investments available for sale (10,119) --
Sale of investments available for sale 2,500 --
Additions to property, plant and equipment, net (51) --
Collections of other notes receivable -- 22
---------------------
Net cash provided (used) by investing
activities (8,725) 1,166
---------------------
FINANCING ACTIVITIES
Proceeds from long-term debt 41 --
Payment of principal on long-term debt (20) (95)
Capitalization by Seafield Capital Corporation 10,000 --
Net transactions with Seafield Capital
Corporation -- (4,973)
---------------------
Net cash provided (used) by financing
activities 10,021 (5,068)
---------------------
Net change in cash and cash equivalents 8,872 --
Cash and cash equivalents - beginning of year 3,925 --
---------------------
Cash and cash equivalents - end of year $ 12,797 --
=====================
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $ 54 --
=====================
Income taxes, net $ 33 5
=====================
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and
results of operations.
SLH CORPORATION
Notes to Consolidated Financial Statements
June 30, 1997
(1) The financial information furnished herein is unaudited; however, in
the opinion of management, the financial information reflects all
adjustments which are necessary to fairly state SLH's financial position at
June 30, 1997 and December 31, 1996 and the results of its operations and
cash flows for the six month periods ended June 30, 1997 and 1996. All
adjustments made in the interim period were of a normal recurring nature
except for costs associated with the move of SLH to a new location in June
1997. The financial statements have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances,
and therefore included in the financial statements are certain amounts
based on management's informed estimates and judgments. The financial
information herein is not necessarily representative of a full year's
operations because levels of sales, interest rates and other factors
fluctuate throughout the fiscal year. These same considerations apply to
all year to year comparisons. Certain 1996 amounts have been reclassified
for comparative purposes with no effect on net earnings (loss). See SLH's
Annual Report pursuant to Section 13 to the Securities Exchange Act of 1934
(Form 10-K) for additional information not required by this Quarter's
Report (Form 10-Q).
(2) Pursuant to a Distribution Agreement between SLH and Seafield Capital
Corporation (Seafield), the former parent company of SLH, Seafield
transferred certain assets (the Transfer Assets) and liabilities (the
Transfer Liabilities), including two wholly-owned subsidiaries, Scout
Development Corporation (Scout) and BMA Resources, Inc. (Resources), to SLH
on February 28, 1997. The Transfer Assets and Transfer Liabilities are
reflected in SLH's financial statements at Seafield's historical cost. All
stock of SLH was then distributed to the shareholders of Seafield (the
Distribution) on March 3, 1997.
The accompanying consolidated statement of operations and statement of cash
flows for the six month period ending June 30, 1997 includes the results of
operations and cash flows for January and February 1997 when the Transfer
Assets and Transfer Liabilities were owned and operated by Seafield.
The accompanying combined balance sheet as of December 31, 1996 and the
combined statement of operations and combined statement of cash flows for
the six months ended June 30, 1996 present the financial position, results
of operations and cash flows of the business, assets and liabilities
comprising the Transfer Assets and Transfer Liabilities which relate
directly to the businesses transferred.
(3) Cash and cash equivalents include all highly liquid investments with
an original maturity of three months or less when purchased.
(4) The components of "Other Liabilities" are as follows:
June 30, 1997 December 31, 1996
Current Noncurrent Current Noncurrent
---------------------- ----------------------
(in thousands)
Accrued property tax $ 91 -- 150 --
Interest payable 1,053 -- -- --
Accrued rent expense 250 133 250 250
Deposits 10 -- 235 --
Deferred income -- -- 47 59
Other -- -- -- 4
---------------------- ----------------------
$ 1,404 133 682 313
====================== ======================
(5) Earnings per share of common stock are based on the weighted average
number of shares of common stock outstanding and the common share
equivalents of dilutive stock options, where applicable.
(6) On July 3, 1997, the Registrant's board of directors declared a three
for one split of the Registrant's shares of common stock. As a result of
the split, which was effected as a stock dividend, each stockholder of
record on July 14, 1997 received two additional shares of common stock for
each share of common stock held. Certificates for the additional shares
were mailed to stockholders on July 21, 1997. Shares outstanding after the
stock split total 4,866,828.
(7) Under the Distribution Agreement and Related Assignment, the Company
has assumed the rights and obligations of Seafield with respect to the
legal matters described below.
(a) Claim Against Skidmore, Owings & Merrill, et al. In 1986, a
lawsuit was initiated in the Circuit Court of Jackson County, Missouri by
Seafield's former insurance subsidiary (i.e., Business Men's Assurance
Company of America) against Skidmore, Owings & Merrill (SOM) which is an
architectural and engineering firm, and a construction firm to recover
costs incurred to remove and replace the facade on the former home office
building. Because the removal and replacement costs had been incurred
prior to the sale of the insurance subsidiary, Seafield negotiated with the
buyer for an assignment of the cause of action from the insurance
subsidiary. Under the Distribution Agreement Seafield has assigned to the
Company all of its rights to any recoveries and the Company has assumed any
costs relating to the prosecution of any of the above described claims.
Thus any recovery will be for the benefit of the Company and all costs
incurred in connection with the litigation will be paid by the Company.
Any ultimate recovery will be recognized as income when received and would
be subject to income taxes. In September 1993, the Missouri Court of
Appeals reversed a $5.7 million judgment granted in 1992 in favor of
Seafield; the Court of Appeals remanded the case to the trial court for a
jury trial limited to the question of whether or not the applicable statute
of limitations barred the claim. The Appeals Court also set aside $1.7
million of the judgment originally granted in 1992. Subsequently, the
parties waived a jury trial and in July 1996, the case was retried to a
judge. On January 21, 1997, the judge entered a judgment in favor of
Seafield for the benefit of the Company. The amount of that judgment,
together with interest is approximately $5.8 million. While the judgment
has been appealed, counsel for the Company expects that it will be
difficult for the defendants to cause the judgment to be reversed. The
final outcome is not expected until at least 1998. Settlement arrangements
with other defendants have resulted in payments to plaintiff which have
substantially offset legal fees and costs to date of approximately
$487,000. Future legal fees and costs can not reliably be estimated.
(b) Claim Against Scout. On January 30, 1997, Scout Development
Corporation was served with a complaint filed in the District Court of
Tarrant County, Texas by the parents of a 36 week old fetus. The fetus was
aborted, allegedly as a result of an automobile accident at an intersection
in Fort Worth, Texas, the view of which is alleged to have been obstructed
by weeds growing on property that is alleged to have been owned by Scout.
The Company has denied liability, has turned the matter over to its
insurance carrier and believes that if it has any liability, it is
adequately covered by an existing policy of insurance.
(c) Internal Revenue Service Audits. Seafield has received notices
of proposed adjustments (Revenue Agent's Reports) from the Internal
Revenue Service (IRS) with respect to 1986-1990 federal income taxes.
These notices claim total federal income taxes due for the entire five year
period in the approximate net amount of $13,867,000, exclusive of interest
thereon. Seafield has filed protests regarding the 1986-1990 notices of
proposed adjustments.
On May 9, 1997, Seafield received a formal agreement to the issues and the
final tax computation from the IRS. The agreement provides for a tax
refund of approximately $5.8 million, before interest. The Company expects
to owe interest of approximately $700,000. The agreement is subject to
approval by the Congressional Joint Committee on Taxation. Consideration
by the Joint Committee is expected before the end of 1997.
The Company assumed from Seafield all contingent tax liabilities and
is acquiring all rights to refunds as well as any interest thereon related
to these tax years (the Tax Claims) and liabilities and refunds related to
any issues raised by the IRS for the years 1986-1990 whose resolution may
extend to tax years beyond the 1990 tax year. The Company believes that
adequate accruals for these income tax liabilities have been made.
(d) California Tax Issues. In December 1996, the California state
auditor sent Seafield an audit report covering the 1987-1989 taxable years.
The State of California has determined to include, as a "unitary
taxpayer," all majority owned non-life insurance subsidiaries and joint
ventures of Seafield. The auditor's report was forwarded to the California
Franchise Tax Board for action. In June 1997, the California Franchise Tax
Board sent a notice of taxes due for the 1987-1989 years of $769,213 which
was paid in the same month. A billing for the interest due should be
received in the third quarter and is expected to be approximately $1
million. The Company has assumed all potential tax liabilities and
interest thereon regarding the California audit for the 1987-1989 taxable
years. The Company believes that it has established appropriate accruals
for the California state income tax liability.
(8) In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share", which revised the calculation and
presentation provisions of Accounting Principles Board Opinion 15 and
related interpretations. Statement No. 128 is effective for SLH's fiscal
year ending December 31, 1997. Retroactive application will be required.
SLH believes the adoption of Statement No. 128 will not have a significant
effect on its reported earnings per share.
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" is required to be implemented for
periods ending after December 15, 1997. The adoption of this standard is
not expected to have any significant impact on Seafield's financial
position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." Statement No. 130 is effective for
fiscal years beginning after December 15, 1997. Retroactive application
will be required. The adoption of this standard is not expected to have
any significant impact on SLH's financial position or results of
operations.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information."
Statement No. 131 is effective for fiscal years beginning after December
15, 1997. Retroactive application will be required. The adoption of this
standard is not expected to have any significant impact on SLH's financial
position or results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Selected financial data:
Three months ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ---------
Revenues $ 7,186,000 3,615,000 11,400,000 8,584,000
Loss from operations $(1,008,000) (1,444,000) (2,089,000) (1,914,000)
Investment income - net $ 1,942,000 4,000 5,124,000 6,000
Earnings (loss) from
continuing operations $ 926,000 (1,427,000) 3,102,000 (1,967,000)
Net earnings (loss) $ 926,000 (1,427,000) 3,102,000 (3,367,000)
Per share:
Net earnings (loss) $ 0.48 (0.78) 1.76 (1.91)
Book value per share $ 29.30 17.36
Average shares
outstanding 1,830,276 1,830,276 1,766,890 1,766,890
Shares outstanding
end of period 1,622,276 1,622,276 1,622,276 1,622,276
The above per share and shares totals do not reflect a stock split in July
1997, when SLH declared a three for one split in the form of a stock
dividend. Each stockholder of record received two additional shares of
common stock for each share of common stock held on July 14, 1997. The
stock certificates were distributed on July 21, 1997 resulting in 4,866,828
shares outstanding.
Introductory remarks about results of operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations covers periods when the Company's assets were owned
by Seafield Capital Corporation (Seafield) and operated as part of
Seafield. It should be read in conjunction with the Notes to the Company's
Financial Statements.
On March 3, 1997, Seafield distributed to its shareholders all of the
outstanding shares of common stock of its wholly-owned subsidiary, SLH
Corporation, on the basis of one share of common stock of SLH for each four
shares of Seafield common stock held. In connection with this distribution
and pursuant to a Distribution Agreement between Seafield and SLH, Seafield
transferred its real estate and energy businesses and miscellaneous assets
and liabilities, including two wholly-owned subsidiaries, Scout Development
Corporation and BMA Resources, Inc., to SLH. The net assets distributed to
SLH totaled approximately $48 million.
Second Quarter Analysis
Real estate revenues in 1997's second quarter were $7.2 million compared
with $3.6 million in 1996's second quarter. The real estate sales revenues
in 1997 include the closing on sales of 10 residential units or lots in
Florida, New Mexico and Texas ($6.2 million) and 205 acres of land in Texas
($820,000). The last Florida residential unit sale closed on July 1, 1997.
In 1996's second quarter, real estate sales revenue included the closing on
sales of 12 residential units in New Mexico and Florida ($2.8 million) and
1.5 acres of land in Kansas ($580,000). Real estate rental and other
revenues increased slightly to $211,000 in 1997's second quarter from
$189,000 in 1996's second quarter.
At June 30, 1997, real estate holdings include residential land,
undeveloped land, single-family housing and commercial structures located
in the following states: Kansas, Nevada, New Mexico, Texas and Wyoming.
The total acreage consisted of approximately 415 acres and 43 lots or units
for sale. Real estate operations are influenced from period to period by
several factors including seasonal sales cycles for projects in Florida and
New Mexico.
Cost of the real estate sales in 1997's second quarter totaled $6.9
million, compared with a cost of approximately $3.4 million in the second
quarter of 1996, reflecting the mix of real estate sale closings during
each period as discussed above in the revenue analysis. Real estate
operating expenses totaled $818,000 in 1997's second quarter, compared with
$684,000 in 1996's second quarter. The increase is attributable to
increased expenses associated with termination benefits resulting from
position eliminations associated with the decreasing real estate portfolio.
Real estate available for sale is not depreciated under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which was implemented effective January 1, 1996.
Adoption of SFAS No. 121 resulted in an impairment loss on real estate held
for sale of $1.4 million which is included in the accompanying statement of
operations for 1996 as the cumulative effect of a change in accounting
principle. This impairment loss resulted primarily from discounting
expected future cash flows in estimating fair values less cost to sell of
certain real estate properties.
A $41,000 net impairment loss on real estate held for sale was recorded in
1997's second quarter as compared with $549,000 in 1996's second quarter.
The impairment losses resulted from changes in estimated expected future
cash flows based primarily on lower expected sales prices on certain
properties based on current market conditions.
General and administrative expenses include estimates for overhead
operating costs totaling $375,000 for the second quarter of 1996. Actual
SLH post-distribution expenses on a stand alone basis, were approximately
$354,000 in 1997's second quarter.
The above factors produced a loss from operations of $1 million in the
second quarter of 1997, compared with a loss of $1.4 million in the second
quarter of 1996.
Investment income totaled $1.9 million in 1997's second quarter compared
with $4,000 in 1996's second quarter. The 1997 income consists primarily
of the sale of Watson Pharmaceuticals, Inc. common stock and other
marketable common stocks. The Watson sale resulted in a gain of
approximately $1.4 million. SLH received the Watson shares as a result of
an SLH venture investment in O'Classen Pharmaceuticals which was acquired
by Watson Pharmaceuticals.
Equity in affiliates' operating losses were $137,000 in 1997's second
quarter and $205,000 in 1996's second quarter. During 1997's second
quarter, the oil and gas operations recorded affiliated losses of $145,000,
as compared to a $70,000 loss in the second quarter of 1996, reflecting
variances in operating results of the oil and gas general partnership
interests and $65,000 for costs recorded by Syntroleum Corporation. As
Syntroleum is a developmental venture, it is expected to incur losses
during its development stage. However, the above $65,000 reduces SLH's
book value in Syntroleum to zero.
Interest expense increased to $45,000 in 1997's second quarter from $27,000
in 1996's comparable quarter reflecting an interest accrual on a state tax
liability.
Equity in earnings of venture capital investment funds totaled $24,000 in
1997's second quarter while 1996's comparable quarter produced earnings of
$380,000. These funds invest in development stage companies which cause
earnings to be subject to significant variations.
The $169,000 of other income in 1997's second quarter primarily reflects
receipts on Tenenbaum receivables accounted for on the cost recovery
method.
Tax benefits of $5,000 were recorded in 1997's second quarter, as compared
to a tax provision of $135,000 in 1996's second quarter. Valuation
allowances were provided in 1997 on the federal tax benefits generated
because utilization within the group is not expected.
The combined effect of the above factors resulted in net earnings of
$926,000 in the second quarter of 1997 and a net loss of $1.4 million in
the second quarter of 1996.
Year To Date Analysis
Real estate revenues in 1997's first six months were $11.4 million compared
with $8.6 million in 1996's first six months. The real estate sales
revenues in 1997 include the closing on sales of 20 residential units or
lots in Florida, New Mexico and Texas ($7.9 million) and 752 acres of land
in Texas ($3.1 million). In 1996's first six months, real estate sales
revenue included the closing on sales of 23 residential units in New Mexico
and Florida ($7.6 million) and 1.5 acres of land in Kansas ($580,000).
Real estate rental and other revenues increased slightly to $385,000 in
1997's first six months from $371,000 in 1996's first six months. Real
estate operations are influenced from period to period by several factors
including seasonal sales cycles for projects in Florida and New Mexico.
Cost of the real estate sales in 1997's first six months totaled $11
million, compared with a cost of $8.2 million in the first six months of
1996, reflecting the mix of real estate sale closings during each period as
discussed above in the revenue analysis. Real estate operating expenses
totaled $1.6 million in 1997's first six months, compared with $1.3 million
in 1996's first six months. The increase is attributable to increased
expenses associated with termination benefits resulting from position
eliminations associated with the decreasing real estate portfolio.
Real estate available for sale is not depreciated under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which was implemented effective January 1, 1996.
Adoption of SFAS No. 121 resulted in an impairment loss on real estate held
for sale of $1.4 million which is included in the accompanying statement of
operations for 1996 as the cumulative effect of a change in accounting
principle. This impairment loss resulted primarily from discounting
expected future cash flows in estimating fair values less cost to sell of
certain real estate properties.
A $220,000 net impairment loss on real estate held for sale was recorded in
1997's first six months, as compared with $185,000 in 1996's first six
months. The impairment losses resulted from changes in estimated expected
future cash flows based primarily on lower expected sales prices on certain
properties based on current market conditions.
General and administrative expenses include estimates for overhead
operating costs totaling $750,000 for the first six months of 1996. The
1997's first six months includes an estimate of $250,000 for overhead
operating costs in January and February. Actual SLH post-distribution
expenses for March through June 1997, on a stand alone basis, were
approximately $430,000.
The above factors produced a loss from operations of $2.1 million in the
first six months of 1997, as compared with a loss of $1.9 million in the
first six months of 1996.
Investment income totaled $5.1 million in 1997's first six months, as
compared with $6,000 in 1996's first six months. The 1997 income consists
primarily of the sales of Watson Pharmaceuticals, Inc. common stock and
other marketable common stocks. The Watson shares were received as a
result of an venture investment in O'Classen Pharmaceuticals which was
acquired by Watson Pharmaceuticals. The Watson sales resulted in a gain of
approximately $4.4 million during 1997's first six months.
Equity in affiliates' operating losses were $369,000 in 1997's first six
months and $436,000 in 1996's first six months. During 1997, the oil and
gas operations recorded affiliated losses of $394,000, as compared to a
$301,000 loss in the first six months of 1996, reflecting variances in
operating results of the oil and gas general partnership interests and
$251,000 for costs recorded by Syntroleum Corporation. As Syntroleum is a
developmental venture, it is expected to incur losses during its
development stage. However, the above expense reduces SLH's book value in
Syntroleum to zero.
Interest expense increased to $89,000 in 1997's first six months from
$55,000 in 1996's comparable period reflecting an interest accrual on a
state tax liability.
Equity in earnings of venture capital investment funds totaled $82,000 in
1997's first six months while 1996's comparable period produced earnings of
$557,000. These funds invest in development stage companies which cause
earnings to be subject to significant variations.
The $435,000 of other income in 1997 primarily reflects receipts on
Tenenbaum receivables accounted for on the cost recovery method and net of
costs of approximately $300,000 associated with the move of SLH to a new
location in June 1997.
Tax benefits of $8,000 were recorded in 1997's first six months, as
compared to a tax provision of $125,000 in 1996's first six months.
Valuation allowances were provided in 1997 on the federal tax benefits
generated because utilization within the group is not expected.
The combined effect of the above factors resulted in net earnings of $3.1
million in the first six months of 1997 and a net loss of $3.4 million in
the first six months of 1996.
Liquidity and Capital Resources
Prior to September 30, 1996, the Company's liquidity was provided by
Seafield. However, as provided in the Distribution Agreement, Seafield
transferred to the Company on March 3, 1997, cash of $6.9 million and
approximately $3.1 million of short-term investments (consisting of a U.S.
Treasury Note which is pledged to a bank for a real estate letter of
credit). Additionally, cash generated from operations of or the sale of
the Company's assets from October 1, 1996 to March 3, 1997 totaling $9.6
million was transferred to the Company as provided in the Distribution
Agreement. The $3.9 million of cash and cash equivalents in the December
31, 1996 balance sheet represents the net cash generated by the Company
during 1996's fourth quarter and was included in the transferred cash.
At June 30, 1997, SLH had available approximately $25.3 million in cash and
short-term investments. An additional $3.5 million of cash was collected
in early July from real estate sale closings. Current assets totaled
approximately $30 million while current liabilities totaled $3 million.
Changes in assets and liabilities on the balance sheet resulted primarily
from reductions in the real estate portfolio and the initial capitalization
of SLH.
Cash provided by operations in the first six months of 1997 totaled $7.6
million, as compared to $3.9 million in the first six months of 1996. The
increase in funds provided is primarily the result of earnings reported in
1997 of $3.1 million compared to a loss of $3.4 million in 1996, net of
cash additions invested in the short-term trading portfolio. Cash provided
by real estate operations (sales less notes received, net of additions) was
approximately $8 million in the 1997, as compared with $5.5 million in
1996.
Cash used by investing activities was $8.7 million in 1997's first six
months reflecting a $7.6 million net increase in investments available for
sale and a $1.5 million equity investment in a Syntroleum chemical plant.
The $1.2 million of cash provided by investing activities in 1996 reflects
distributions from venture capital investment funds and from affiliates.
SLH's equity investment in the Syntroleum chemical plant will allow for the
commencement of certain engineering and permitting efforts on the plant.
Syntroleum is presently negotiating with other potential capital providers;
the development of the plant is contingent upon financing.
The $10 million cash provided by financing activities in the first six
months of 1997 represents SLH's capitalization by Seafield. In the first
six months of 1996, SLH had net cash used by financing activities of $5.1
million which primarily represented the net cash transactions with Seafield
on SLH assets. The timing of receipts from real estate sales and/or
collections of notes thereon, as well as distributions from venture capital
investments, may vary significantly.
Debt associated with real estate totaled $1.2 million at both June 30, 1997
and December 31, 1996 and is due in December 1997. This consolidated debt
is non-recourse and comprises the current notes payable on the balance
sheets. SLH is obligated under recourse debt (with an unpaid balance of
$6.2 million) of an affiliate accounted for on the equity method. SLH's
obligation on this recourse debt is secured by a $3.1 million U.S. Treasury
Note transferred to SLH at the Distribution Date.
SLH may seek its own credit facilities but management expects cash flow
from operations, cash from the capitalization at the Distribution Date and
the sale of assets to be sufficient to fund cash needs.
During 1997's second quarter, SLH entered into a joint development
agreement for its 370 acres in Houston, Texas. The land was contributed to
a partnership in exchange for a note receivable with a 10% preferential
return on both the land contribution and future development cash
requirements. The estimated future development cash requirements is
approximately $2.5 million. SLH's ownership position is approximately 75%.
During the second quarter, a major oil company licensee of Syntroleum,
converted a previously issued Syntroleum $1 million debenture into
Syntroleum common stock at a previously negotiated conversion price of $12
per share, thereby decreasing SLH's ownership position in Syntroleum
slightly to 32.3%. SLH owns 5,950,000 shares of Syntroleum common stock.
On May 9, 1997, Seafield received a formal agreement to the issues
discussed in Note 7(c) to the financial statements and the final tax
computation from the IRS. The agreement provides for a tax refund of
approximately $5.8 million, before interest. The Company expects to owe
interest of approximately $700,000. The agreement is subject to approval
by the Congressional Joint Committee on Taxation. Consideration by the
Joint Committee is expected before the end of 1997. The Company assumed
the liability and rights to any refund as part of the Distribution
Agreement. Accordingly, the Company would record a significant gain if the
agreement is formally approved.
On January 21, 1997, the Circuit Court of Jackson County, Missouri entered
a judgment favorable to the Company in the claim against Skidmore, Owings &
Merrill (see Notes to Consolidated Financial Statements). The amount of
the judgment, together with accrued interest at December 31, 1996, is
approximately $5.8 million. While the judgment has been appealed, the
Company has been advised by its Counsel that it will be difficult for the
defendants to cause the judgment to be reversed. The final outcome is not
expected until at least 1998.
As further assurance for SLH's obligations in connection with the
Distribution Agreement, SLH has agreed that it will not pay cash dividends
or redeem any of its capital stock for a period of two years after the
Distribution Date (March 3, 1997), without the consent of the Seafield
Board.
Subsequent Events
In July 1997, SLH declared a three for one split in the form of a stock
dividend. Each stockholder of record received two additional shares of
common stock for each share of common stock held on July 14, 1997. The
stock certificates were distributed on July 21, 1997 resulting in 4,866,828
shares outstanding.
The stock of SLH was accepted for listing on the National Market System of
NASDAQ and began trading on July 29, 1997, under the symbol - SLHO. The
symbol is the same as before when SLH's stock traded on the OTC electronic
bulletin board.
On August 4, 1997, Syntroleum announced the execution of a non-exclusive
license agreement with YPF International. In addition to YPF, Syntroleum
has license agreements with Texaco, ARCO and Marathon. Syntroleum is the
developer and owner of a patented process and several related proprietary
technologies for the conversion of natural gas into synthetic liquid fuels.
Syntroleum has retained the rights to build lube and specialty chemical
plants for the production of synthetic lubricants, solvents and chemical
feedstocks from natural gas. The Syntroleum Process (registered trademark)
has not been tested in a plant designed to produce commercially viable
quantities and such testing cannot occur until a plant has been developed
and constructed, which could take up to two years from the commencement of
construction.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which revised the calculation and
presentation provisions of Accounting Principles Board Opinion 15 and
related interpretations. Statement No. 128 is effective for SLH's fiscal
year ending December 31, 1997. Retroactive application will be required.
SLH believes the adoption of Statement No. 128 will not have a significant
effect on its reported earnings per share.
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" is required to be implemented for
periods ending after December 15, 1997. The adoption of this standard is
not expected to have any significant impact on SLH's financial position or
results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." Statement No. 130 is effective for
fiscal years beginning after December 15, 1997. Retroactive application
will be required. The adoption of this standard is not expected to have
any significant impact on SLH's financial position or results of
operations.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information."
Statement No. 131 is effective for fiscal years beginning after December
15, 1997. Retroactive application will be required. The adoption of this
standard is not expected to have any significant impact on SLH's financial
position or results of operations.
No other recently issued accounting standards presently exist which will
require adoption in future periods.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Under the Distribution Agreement and Related Assignment, the
Company has assumed the rights and obligations of Seafield with respect to
the legal matters described below.
(a) Claim Against Skidmore, Owings & Merrill, et al. In 1986, a
lawsuit was initiated in the Circuit Court of Jackson County, Missouri by
Seafield's former insurance subsidiary (i.e., Business Men's Assurance
Company of America) against Skidmore, Owings & Merrill (SOM) which is an
architectural and engineering firm, and a construction firm to recover
costs incurred to remove and replace the facade on the former home office
building. Because the removal and replacement costs had been incurred
prior to the sale of the insurance subsidiary, Seafield negotiated with the
buyer for an assignment of the cause of action from the insurance
subsidiary. Under the Distribution Agreement Seafield has assigned to the
Company all of its rights to any recoveries and the Company has assumed any
costs relating to the prosecution of any of the above described claims.
Thus any recovery will be for the benefit of the Company and all costs
incurred in connection with the litigation will be paid by the Company.
Any ultimate recovery will be recognized as income when received and would
be subject to income taxes. In September 1993, the Missouri Court of
Appeals reversed a $5.7 million judgment granted in 1992 in favor of
Seafield; the Court of Appeals remanded the case to the trial court for a
jury trial limited to the question of whether or not the applicable statute
of limitations barred the claim. The Appeals Court also set aside $1.7
million of the judgment originally granted in 1992. Subsequently, the
parties waived a jury trial and in July 1996, the case was retried to a
judge. On January 21, 1997, the judge entered a judgment in favor of
Seafield for the benefit of the Company. The amount of that judgment,
together with interest is approximately $5.8 million. While the judgment
has been appealed, counsel for the Company expects that it will be
difficult for the defendants to cause the judgment to be reversed. The
final outcome is not expected until at least 1998. Settlement arrangements
with other defendants have resulted in payments to plaintiff which have
substantially offset legal fees and costs to date of approximately
$487,000. Future legal fees and costs can not reliably be estimated.
(b) Claim Against Scout. On January 30, 1997, Scout Development
Corporation was served with a complaint filed in the District Court of
Tarrant County, Texas by the parents of a 36 week old fetus. The fetus was
aborted, allegedly as a result of an automobile accident at an intersection
in Fort Worth, Texas, the view of which is alleged to have been obstructed
by weeds growing on property that is alleged to have been owned by Scout.
The Company has denied liability, has turned the matter over to its
insurance carrier and believes that if it has any liability, it is
adequately covered by an existing policy of insurance.
(c) Internal Revenue Service Audits. Seafield has received notices
of proposed adjustments (Revenue Agent's Reports) from the Internal
Revenue Service (IRS) with respect to 1986-1990 federal income taxes.
These notices claim total federal income taxes due for the entire five year
period in the approximate net amount of $13,867,000, exclusive of interest
thereon. Seafield has filed protests regarding the 1986-1990 notices of
proposed adjustments.
On May 9, 1997, Seafield received a formal agreement to the issues and the
final tax computation from the IRS. The agreement provides for a tax
refund of approximately $5.8 million, before interest. The Company expects
to owe interest of approximately $700,000. The agreement is subject to
approval by the Congressional Joint Committee on Taxation. Consideration
by the Joint Committee is expected before the end of 1997.
The Company assumed from Seafield all contingent tax liabilities and
is acquiring all rights to refunds as well as any interest thereon related
to these tax years (the Tax Claims) and liabilities and refunds related to
any issues raised by the IRS for the years 1986-1990 whose resolution may
extend to tax years beyond the 1990 tax year. The Company believes that
adequate accruals for these income tax liabilities have been made.
(d) California Tax Issues. In December 1996, the California state
auditor sent Seafield an audit report covering the 1987-1989 taxable years.
The State of California has determined to include, as a "unitary
taxpayer," all majority owned non-life insurance subsidiaries and joint
ventures of Seafield. The auditor's report was forwarded to the California
Franchise Tax Board for action. In June 1997, the California Franchise Tax
Board sent a notice of taxes due for the 1987-1989 years of $769,213 which
was paid in the same month. A billing for the interest due should be
received in the third quarter and is expected to be approximately $1
million. The Company has assumed all potential tax liabilities and
interest thereon regarding the California audit for the 1987-1989 taxable
years. The Company believes that it has established appropriate accruals
for the California state income tax liability.
Item 2. Changes in Securities
(a) Changes in Securities: None
(b) Under the Kansas General Corporation Code, dividends may be
paid out of the Corporation's surplus, or if there is no surplus, out of
the Corporation's net profits for the fiscal year in which the dividend is
declared or the preceding fiscal year. At June 30, 1997, the Corporation's
surplus (as defined under the Kansas General Corporation Code) was
approximately $47,513,000. However, in connection with the distribution by
Seafield Capital Corporation (Seafield) of all shares of SLH Corporation
common stock to Seafield shareholders, effected March 3, 1997, the
Corporation agreed that it will not, for a period of two years following
the distribution, pay any dividends in cash or property or redeem any of
its shares of capital stock, without the consent of Seafield.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
On July 3, 1997, the Registrant's board of directors declared a
three for one split of the Registrant's shares of common stock. As a
result of the split, which was effected as a stock dividend, each
stockholder of record on July 14, 1997 received two additional shares of
common stock for each share of common stock held. Certificates for the
additional shares were mailed to stockholders on July 21, 1997.
The stock of SLH was accepted for listing on the National Market
System of NASDAQ and began trading on July 29, 1997, under the symbol -
SLHO. The symbol is the same as before when SLH's stock traded on the OTC
electronic bulletin board.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule - as filed electronically by
the Registrant in conjunction with this Form 10-Q.
(b) Reports on Form 8-K:
A current report on Form 8-K dated July 3, 1997 was filed to
report that the Registrant's board of directors had declared a three for
one split of the Registrant's shares of common stock.
A current report on Form 8-K dated July 28, 1997 was filed to
report that the Registrant's common stock had been accepted for listing on
the National Market System of NASDAQ. Trading commenced on NASDAQ on July
29, 1997 under the symbol "SLHO".
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SLH Corporation
Date August 8, 1997 By /s/ James R. Seward
----------------------------
James R. Seward
President and Chief
Executive Officer
Date August 8, 1997 By /s/ Steven K. Fitzwater
----------------------------
Steven K. Fitzwater
Vice President, Chief Financial and
Accounting Officer, Treasurer and
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the period ending June 30, 1997 and is qualified in its
entirety by reference to such 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,797
<SECURITIES> 12,468
<RECEIVABLES> 1,212
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,216
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 50,440
<CURRENT-LIABILITIES> 2,956
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 47,513
<TOTAL-LIABILITY-AND-EQUITY> 50,440
<SALES> 11,015
<TOTAL-REVENUES> 11,400
<CGS> 11,019
<TOTAL-COSTS> 1,783
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 89
<INCOME-PRETAX> 3,094
<INCOME-TAX> (8)
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<EPS-PRIMARY> 1.76
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<FN>
<F1>Disclosure not required on interim financial statements.
<F2>Computation not applicable.
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