<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________
Commission file number 000-21911
SYNTROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Kansas 43-1764632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1350 South Boulder, Suite 1100 74119-3295
Tulsa, Oklahoma (Zip Code)
(Address of principal executive offices)
(918)592-7900
(Registrant's telephone number, including area code)
SLH CORPORATION
5000 W. 95th St., Suite 260
Shawnee Mission, Kansas 66207
(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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
------- ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
OUTSTANDING AT
Class NOVEMBER 1, 1998
----- ----------------
Common 26,900,052
1
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SYNTROLEUM CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
ITEM 1. Financial Statements.
<S> <C>
Unaudited Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997............................................. 3
Unaudited Condensed Consolidated Statements of Operations for
the Three and Nine Month Periods ended September 30, 1998 and 1997................... 4
Unaudited Condensed Consolidated Statements of Stockholders'
Equity for the Nine Month Period ended September 30, 1998............................ 5
Unaudited Condensed Consolidated Statements of Cash Flows for
the Nine Month Periods ended September 30, 1998 and 1997............................. 6
Notes to Unaudited Condensed Consolidated Financial Statements............................ 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........................ 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................. 19
ITEM 2. Changes in Securities and Use of Proceeds......................................... 20
ITEM 3. Defaults Upon Senior Securities................................................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders............................... 20
ITEM 5. Other Information................................................................. 21
ITEM 6. Exhibits and Reports on Form 8-K.................................................. 22
SIGNATURES................................................................................. 24
INDEX TO EXHIBITS.......................................................................... 25
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------- -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 27,829 $ 10,158
Short-term investments 13,777 --
Accounts and notes receivable 1,041 448
Income taxes receivable 180 --
Other current assets 548 16
--------------------- -----------------
Total current assets 43,375 10,622
REAL ESTATE HELD FOR SALE 3,969 --
REAL ESTATE UNDER DEVELOPMENT 2,142 --
INVESTMENT SECURITIES 1,451 --
PROPERTY, PLANT AND EQUIPMENT, net 3,092 1,245
OTHER ASSETS 542 224
--------------------- -----------------
$ 54,571 $ 12,091
===================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,571 $ 677
Other liabilities 627 99
--------------------- -----------------
Total current liabilities 2,198 776
OTHER NONCURRENT LIABILITIES 129 60
DEFERRED REVENUE 11,000 11,000
--------------------- -----------------
Total liabilities 13,327 11,836
MINORITY INTERESTS 1,335 1,497
--------------------- -----------------
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 346 245
Paid-in capital 63,810 14,028
Notes receivable from sale of common stock (699) (699)
Accumulated deficit (23,471) (14,805)
--------------------- -----------------
39,986 (1,231)
Less-treasury stock (77) (11)
--------------------- -----------------
Total stockholders' equity 39,909 (1,242)
--------------------- -----------------
$ 54,571 $ 12,091
===================== =================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Real estate sales $ 1,560 $ -- $ 1,560 $ --
Joint development revenue 635 747 1,486 1,579
Other 119 -- 119 1
------------- ------------ -------------- --------------
Total revenues 2,314 747 3,165 1,580
COSTS AND EXPENSES:
Cost of real estate sold 1,538 -- 1,538 --
Real estate operating expense 145 -- 145 --
Pilot plant and research and development 687 771 2,243 2,265
General and administrative and other 3,387 1,326 8,535 2,754
------------- ------------ -------------- --------------
Income (loss) from operations (3,443) (1,350) (9,296) (3,439)
INVESTMENT AND INTEREST INCOME 412 110 603 214
EQUITY IN LOSS OF AFFILIATES (16) -- (16) --
INTEREST EXPENSE -- -- -- (22)
OTHER INCOME 11 -- 11 --
------------- ------------ -------------- --------------
Income (loss) before income taxes (3,036) (1,240) (8,698) (3,247)
PROVISION (BENEFIT) FOR INCOME TAXES -- -- -- --
INCOME (LOSS) BEFORE MINORITY INTERESTS (3,036) (1,240) (8,698) (3,247)
MINORITY INTERESTS 18 1 32 2
------------- ------------ -------------- --------------
NET INCOME (LOSS) $ (3,018) $ (1,239) $ (8,666) $ (3,245)
============= ============ ============== ==============
NET INCOME (LOSS) PER SHARE
BASIC AND DILUTED $ (0.12) $ (0.05) $ (0.35) $ (0.14)
============= ============ ============== ==============
COMMON SHARES OUTSTANDING 26,900,052 24,500,236 26,900,052 24,500,236
============= ============ ============== ==============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 25,934,909 23,888,052 24,983,715 23,769,047
============= ============ ============== ==============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
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SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLES
---------------------- ADDITIONAL FROM SALE TOTAL
NUMBER PAID IN OF COMMON ACCUMULATED TREASURY STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL STOCK DEFICIT STOCK EQUITY
----------- --------- ---------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 24,502 $ 245 $ 14,028 $ (699) $ (14,805) $ (11) $ (1,242)
RETIREMENT OF TREASURY STOCK (2) -- (11) -- -- 11 --
MERGER WITH SLH CORPORATION 10,075 101 49,793 -- -- (77) 49,817
NET INCOME (LOSS) -- -- -- -- (8,666) -- (8,666)
----------- --------- ---------- ---------- ----------- -------- ------------
BALANCE, September 30, 1998 34,575 $ 346 $ 63,810 $ (699) $ (23,471) $ (77) $ 39,909
=========== ========= ========== ========== =========== ======== ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
SYNTROLEUM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------------------
1998 1997
----------------------- -----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ (8,666) $ (3,245)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations, net of acquisition of
SLH Corporation:
Stock issued for services -- 34
Interest on conversion of debenture -- 22
Minority interest in loss of subsidiary (32) (2)
Depreciation and amortization 199 39
Writedown of property and equipment -- 414
Equity in (earnings) losses of affiliates 16 --
Sales of real estate 1,322 --
Additions to real estate under development (47) --
Changes in assets and liabilities-
Accounts receivable 285 (532)
Other assets (542) (32)
Accounts payable 554 243
Other liabilities (1,998) 125
Deferred revenue -- 11,000
----------------------- -----------------------
Net cash provided by (used in) operating activities (8,909) 8,066
----------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,967) (457)
Distribution from venture capital investment funds 71 --
Maturity of investments acquired from SLH Corporation 26,774 --
----------------------- -----------------------
Net cash provided by (used in) investing activities 24,878 (457)
----------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash acquired in merger with SLH Corporation 713 --
Payments under capital lease (11) --
Minority interest investment in subsidiary 1,000 1,500
Proceeds from sale of common stock -- 160
Treasury stock purchased -- (11)
----------------------- -----------------------
Net cash provided by financing activities 1,702 1,649
----------------------- -----------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,671 9,258
CASH AND CASH EQUIVALENTS, beginning of period 10,158 882
----------------------- -----------------------
CASH AND CASH EQUIVALENTS, end of period $ 27,829 $ 10,140
======================= =======================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<PAGE>
SYNTROLEUM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BASIS OF REPORTING
The condensed consolidated financial statements included in this report
have been prepared by Syntroleum Corporation ("Syntroleum" or the "Company")
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, these statements reflect all
adjustments (consisting of normal recurring entries) which are, in the opinion
of management, necessary for a fair statement of the financial results for the
interim periods presented. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Joint Proxy Statement/Prospectus filed with the SEC pursuant to Rule
424 under the Securities Act of 1933, as amended, on July 6, 1998 (the "Joint
Proxy Statement/Prospectus").
The condensed consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. These subsidiaries include BMA
Resources, Inc., Scout Development Corporation, Scout Development Corporation of
New Mexico, Lot Development, Inc., Carousel Apartment Homes, Inc., 529 Partners,
Ltd. and Syntroleum/Sweetwater Company, LLC. All subsidiaries except
Syntroleum/Sweetwater Company, LLC were acquired through the merger with SLH
Corporation ("SLH"). All significant inter-company accounts and transactions
have been eliminated.
On August 7, 1998 Syntroleum Corporation ("Old Syntroleum") merged (the
"Merger") with SLH. In the Merger, each outstanding share of Old Syntroleum
common stock was converted into 1.2899 shares of SLH common stock. Accordingly,
24,500,236 shares of common stock of SLH were issued, net of fractional shares,
which were paid in cash, for 18,993,950 shares of common stock of Old
Syntroleum. After the Merger, SLH's name was changed to Syntroleum, and SLH
management and six of the eight SLH directors were replaced with Syntroleum
management and directors.
The Merger was accounted for as a reverse acquisition using the purchase
method of accounting in accordance with the Accounting Principles Board Opinion
No. 16. Although SLH is the surviving corporation in the Merger for legal
purposes, Old Syntroleum is the acquirer for accounting purposes. Under
reverse acquisition accounting, the value of the transaction is determined based
on the value of the accounting acquirer's shares issued, which in this situation
was impracticable due to Old Syntroleum's status as a private company and the
absence of a trading market for its shares. Accordingly, the fair value of SLH's
net tangible assets has been used to determine the value of the transaction. For
this purpose, the value of SLH's investment in Old Syntroleum was determined by
calculating the implied value of the Old Syntroleum common stock held by SLH,
which was determined based upon the market capitalization of the outstanding
shares of SLH common stock minus the fair value of SLH's non-Syntroleum assets
divided by the 5,950,000 shares of Old Syntroleum common stock held by SLH. This
method of calculating the implied value of the Old Syntroleum common stock is
consistent with the method used in determining the Merger exchange ratio of
1.2899 discussed above.
For purposes of preparing its condensed consolidated financial statements,
the Company established a new accounting basis for SLH's assets and liabilities
using their fair market values, based upon the consideration paid in the Merger
and Old Syntroleum's costs of the Merger. Although Old Syntroleum's equity
accounts survive the Merger, SLH's common stock survives. Accordingly, Old
Syntroleum's common stock with a par value of $.001 has been restated to reflect
SLH's par value of $.01 and to reflect the effect of the exchange ratio of
1.2899.
7
<PAGE>
The results of operations of SLH have been included in the results of
Syntroleum since August 7, 1998. Unaudited pro forma results of operations for
the nine months ended September 30, 1998 and 1997, as though the Merger had
occurred at January 1, 1997, are as follows (in thousands except per share
amounts):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------------------
1998 1997
---------------------- ----------------------
<S> <C> <C>
Revenues $ 10,703 $ 17,635
Net income (loss) $ (4,727) $ 875
Basic earnings (loss) per share $ (.19) $ .04
Diluted earnings (loss) per share $ (.19) $ .04
</TABLE>
The preparation of financial statements in conformity with generally
accepted accounting principals 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.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Cash and cash equivalents consist of cash and highly liquid investments
with an original maturity of three months or less. The carrying value of cash
and cash equivalents approximates fair value. The Merger with SLH was accounted
for as a non-cash investing activity.
3. EARNINGS PER SHARE
Both basic and diluted earnings per share were computed using the weighted
average number of common shares outstanding. Options to purchase 2,714,206
shares of common stock at an average exercise price of $6.50 were outstanding
during the period ended September 30, 1998, but were not included in the
computation of diluted earnings per share because inclusion of such stock
options in such computation would be anti-dilutive as the Company incurred a net
loss for the period.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement. Companies must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999, however,
companies may implement the statement as of the beginning of any fiscal quarter
beginning June 16, 1998. SFAS No. 133 cannot be applied retroactively and must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998). As of September 30, 1998, the Company had no outstanding derivative
instruments.
5. CONTINGENCIES AND COMMITMENTS
On March 3, 1997, Lab Holdings, Inc. ("Lab Holdings") distributed to its
shareholders all of the outstanding shares of common stock of its wholly-owned
subsidiary, SLH. In connection with this distribution and pursuant to a
Distribution Agreement between Lab Holdings and SLH, Lab Holdings transferred
its real estate and energy businesses and miscellaneous assets and liabilities.
Under such Distribution Agreement and related agreements, SLH assumed (and as a
result of the Merger, Syntroleum has assumed) the rights and obligations of Lab
Holdings 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 Lab Holdings'
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 insurance company's former home office building.
Because the removal and replacement costs had been incurred prior to the sale of
the insurance subsidiary, Lab Holdings negotiated with the buyer for an
assignment of the cause of action from the insurance subsidiary. Under the
Distribution Agreement, Lab Holdings has assigned to the Company all of its
rights to any recoveries and the Company has assumed all costs relating to the
prosecution of the 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.
In September 1993, the Missouri Court of Appeals reversed a $5.7 million
judgment which was granted in 1992 in favor of Lab Holdings. The Court of
Appeals remanded the case to the trial court for a retrial limited to the
question of whether or not the applicable statute of limitations barred the
claim. The Missouri Court of Appeals also set aside $1.7 million of the
judgment originally granted in 1992. In July 1996, the case was retried to the
court. On January 21, 1997, the court entered a judgment in favor of Lab
Holdings for the benefit of the Company. The amount of that judgment, together
with interest, is approximately $5.8 million. The defendant appealed the
judgment to the Missouri Court of Appeals, Kansas City Division, and posted an
appeal bond to stay collection of the judgment pending the outcome of the
appeal. In August 1998, the Court of Appeals affirmed the judgment in favor of
the Company. On October 27, 1998, the Court overruled the defendant's motion
for reconsideration and denied defendant's request for transfer of the appeal to
the Missouri Supreme Court. The defendant may file, within 15 days, a request
directly with the Missouri Supreme Court asking it to accept transfer of the
appeal for reconsideration of the opinion issued by the Court of Appeals.
Internal Revenue Service Audits. Prior to the Distribution, Lab Holdings
had received notices of proposed adjustments (the "Revenue Agent's Reports")
from the Internal Revenue Service (the "IRS") with respect to its 1986-1990
federal income taxes. In connection with the Distribution, the Company assumed
from Lab Holdings all its contingent tax liabilities to the IRS and acquired all
of its related rights to refunds as well as any interest thereon related to the
Lab Holdings' 1986-1990 tax years. During 1997, the Company settled all of the
claims and disputes between Lab Holdings and the IRS for the 1986-1990 years. In
the second quarter 1998, the Company received federal tax refunds of
approximately $5.9 million for the 1986-1990 years. An additional amount for
interest on the 1990 tax refund is still pending.
California Tax Issues. In connection with the Distribution, the Company
also assumed Lab Holdings' rights and liabilities with respect to an audit being
conducted by the State of California for Lab Holdings' 1987-1989 taxable years
which the Company settled in the first quarter 1998.
Although the Company has settled potential liabilities to the IRS and
California for the tax years in question, the settlement made it necessary for
the Company to file amended tax returns in certain states to reflect the results
of the settlement. Approximately $20,000 was paid with the amended state
returns and a $170,000 state tax refund is now expected.
Claims Against Scout. The Company's wholly-owned subsidiary, Scout
Development Corporation ("Scout"), has pending against it a warranty claim by
the purchaser of a home in Florida which the Company does not believe is
material to the Company's financial condition. During 1997, Syntroleum entered
into a global settlement of claims by the homeowners association of the
Company's real estate development in Quail Run. Pursuant to that settlement, the
Company was released from future claims with respect to the common elements and
limited common elements of the development.
8
<PAGE>
6. REAL ESTATE UNDER DEVELOPMENT
Real estate under development is valued at lower of cost, including
development costs, or market. Development costs which are incurred during the
period of development or construction are capitalized. Capitalized costs are
charged to operations as properties are sold. There was no real estate under
development sold during the period.
7. FOOTNOTES INCORPORATED BY REFERENCE
Certain footnotes are applicable to the financial statements, but would be
substantially unchanged from those presented in the Company's December 31, 1997
financial statements included in the Company's Joint Proxy Statement/Prospectus
filed with the SEC and are incorporated herein by reference.
<TABLE>
<CAPTION>
NOTE DESCRIPTION
- ---------------- ----------------------------------------------------
<S> <C>
1 Summary of Significant Accounting Policies
2 Notes Receivable from Sale of Common Stock
3 Income Taxes
4 Supplemental Cash Flow Information
6 Commitments
7 Common Stock Options
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Pursuant to an Agreement and Plan of Merger dated as of March 30, 1998 (the
"Merger Agreement") by and between Syntroleum Corporation, an Oklahoma
corporation ("Old Syntroleum"), and SLH Corporation, a Kansas corporation
("SLH"), effective August 7, 1998 (i) Old Syntroleum merged (the "Merger") with
and into SLH, with SLH being the surviving corporation (the survivor of the
Merger, together with its subsidiaries and predecessors, is referred to herein
as "Syntroleum" or the "Company"), (ii) SLH changed its name to "Syntroleum
Corporation," (iii) the officers of SLH were replaced by the officers of Old
Syntroleum, (iv) six of the eight SLH directors were replaced by Old Syntroleum
directors, (v) each outstanding share of common stock, par value $0.001 per
share, of Old Syntroleum was converted into the right to receive 1.28990 shares
of common stock, par value $0.01 per share, of the Company (the "Common Stock"),
and (vi) the Company's Articles of Incorporation were amended to increase the
number of authorized shares of Common Stock from 30,000,000 shares to
150,000,000 shares and the number of authorized shares of the Company's
preferred stock, par value $0.01 per share, from 1,000,000 shares to 5,000,000
shares. The transactions relating to the Merger are more fully described in the
Joint Proxy Statement/Prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424 under the Securities Act of 1933, as amended, on
July 6, 1998 (the "Joint Proxy Statement/Prospectus").
The Merger has been accounted for as a reverse acquisition using the
purchase method of accounting in accordance with the Accounting Principles Board
Opinion No. 16. Although SLH is the surviving corporation in the merger for
legal purposes, Old Syntroleum is the acquirer for accounting purposes. For
purposes of preparing its consolidated financial statements, the Company
established a new accounting basis for SLH's assets and liabilities using the
fair values thereof, based upon the consideration paid in the Merger and Old
Syntroleum's costs of the Merger. For financial reporting purposes, the results
of operations of SLH have been included in the Company's consolidated statement
of operations following the effective date of the Merger. Management's
discussion and analysis of the results of operation for the three and nine month
periods ended September 30, 1998 compares the Company's results of operations to
Old Syntroleum's results of operations in the three and nine month periods ended
September 30, 1997.
The following information should be read in conjunction with the
information presented in the Joint Proxy Statement/Prospectus (including Old
Syntroleum's financial statements and notes thereto) and with the information
presented in SLH's Annual Report on Form 10-K for the year ended December 31,
1997 (including SLH's financial statements and notes thereto) and other filings
by the Company with the Securities and Exchange Commission.
OVERVIEW
Syntroleum is the developer and owner of a proprietary process (the
"Syntroleum Process") designed to catalytically convert natural gas into
synthetic liquid hydrocarbons ("gas to liquids" or "GTL"). The Syntroleum
Process is a simplification of traditional GTL technologies aimed at
substantially reducing both the capital cost and the minimum economical size of
a GTL plant, as well as plant operating costs. A unique characteristic and
primary advantage of the Syntroleum Process over competing processes is its use
of air, rather than pure oxygen, in the conversion process. Although no
commercial-scale GTL plant based on the Syntroleum Process has yet been built,
Syntroleum owns and operates a nominal two barrel per day pilot plant in Tulsa,
Oklahoma where it has successfully demonstrated certain elements and variations
of the Syntroleum Process. Syntroleum believes that a significant opportunity
exists for cost-effective GTL plants due to the large volumes of natural gas
reserves worldwide that are currently not marketable because distance to market
makes their utilization uneconomical.
Syntroleum's strategy for commercializing the Syntroleum Process involves
the following key elements: (i) entering into agreements with oil and gas
industry participants to license the Syntroleum Process for use in GTL plants
designed to produce synthetic crude oil and liquid fuels; (ii) establishing
joint ventures with oil and gas industry partners and/or financial partners to
design, construct and operate GTL plants designed to produce specialty products;
(iii) making available mobile GTL plants to customers on a contract basis
through efforts with industry partners and others; and (iv) continuing to reduce
costs and develop process improvements through research and development
activities and acquisitions. To date, Syntroleum has entered into master license
agreements with Texaco, Inc. ("Texaco"), Atlantic Richfield Company ("ARCO") and
Marathon Oil Company ("Marathon"), and has entered into volume license
agreements with YPF International, Ltd., an affiliate of Argentina-based
Yacimientos Petroliferos Fiscales, S.A. ("YPF"), Enron Capital & Trade Resources
Corp. ("Enron") and Kerr-McGee Corporation ("Kerr-McGee"). Syntroleum received
an aggregate of $11 million and rights to certain technologies in connection
with these license agreements. Syntroleum is currently in discussions with
several other oil and gas companies with respect to additional license
agreements and joint
10
<PAGE>
ventures to develop specialty product GTL plants. To date, Syntroleum has
entered into joint development arrangements with Texaco, ARCO, Marathon, Bateman
Engineering, Inc. ("Bateman"), AGC Manufacturing Services, Inc. ("AGC"),
Catalytica Combustion Systems, Inc. ("Catalytica Combustion Systems"),
Catalytica Advanced Technologies, Inc. ("Catalytica Advanced Technologies") and
AMEC Process and Energy Limited. Syntroleum has formed a joint venture
Syntroleum/Sweetwater Company, LLC ("Sweetwater LLC") with Enron with respect
to the development of a specialty products plant in Sweetwater County, Wyoming
(the "Sweetwater Plant"), which is scheduled to be operational in 2001, although
such schedule may be delayed as a result of a variety of factors. Syntroleum has
also entered into a joint development agreement with Texaco with respect to the
development of a small GTL plant that is scheduled to be operational by 2000,
although such schedule may be delayed as a result of a variety of factors.
Because Syntroleum is incurring costs with respect to developing and
commercializing the Syntroleum Process and does not anticipate recognizing any
revenues from licensing its technology in the near future, the Company expects
to operate at a loss unless and until sufficient revenues are recognized from
licensing activities, specialty product GTL plants, or real estate sales.
OPERATING REVENUES
General. During the periods discussed below, Syntroleum's revenues were
generated from (i) sales of real estate holdings owned by SLH prior to the
Merger, (ii) reimbursement for research and development activities associated
with the Syntroleum Process, and (iii) other sources, including rent generated
by real estate holdings owned by SLH prior to the Merger. Because SLH had
substantially reduced its real estate inventory prior to the Merger, Syntroleum
expects to receive lower levels of revenues from these sources in following
periods. In the future, Syntroleum expects to receive revenue relating to the
Syntroleum Process from five sources: licensing, catalyst sales; sales of
products from specialty product GTL plants in which Syntroleum owns an equity
interest; revenues from providing mobile GTL plants on a contract basis; and
revenues from research and development activities carried out with industry
partners. Until the commencement of commercial operation of GTL plants in which
Syntroleum owns an interest, Syntroleum expects that its cash flow relating to
the Syntroleum Process will consist primarily of license fee deposits, site
license fees, catalysts sales and revenues associated with joint development
activities. Syntroleum does not expect to receive any cash flow from GTL plants
in which it owns an equity interest until 2000 at the earliest, when the GTL
plant under development with Texaco is scheduled to be operational. Syntroleum's
future operating revenues will depend on the successful commercial construction
and operation of GTL plants based on the Syntroleum Process, the success of
competing GTL technologies and other competing uses for natural gas.
Syntroleum's results of operations and cash flows are expected to be affected by
changing crude oil, fuel and specialty product prices. If the price of these
products increases (decreases), there could be a corresponding increase
(decrease) in operating revenues.
License Revenues. The revenue earned from licensing the Syntroleum Process
is expected to be generated through four types of contracts: master license
agreements, volume license agreements, regional license agreements and site
license agreements. Master, volume and regional license agreements provide the
licensee with the right to enter into site license agreements for individual GTL
plants. A master license agreement grants broad geographic and volume rights,
while volume license agreements limit the total production capacity of all GTL
plants constructed under the agreement to specified amounts and regional license
agreements limit the geographical rights of the licensee. Master, volume and
regional license agreements require an up-front cash deposit that may offset or
partially offset license fees for future plants payable under site licenses.
Syntroleum has acquired technology, commitment of funds for joint development
activities, services or other consideration in lieu of the initial cash deposit
in cases where Syntroleum believed such technologies or commitments had a
greater value.
Syntroleum's site license agreements require fees to be paid in increments
when certain milestones during the plant design and construction process are
achieved. The amount of the license fee under Syntroleum's existing master and
volume license agreements is determined pursuant to a formula based on the
present value of the product of (i) the yearly maximum design capacity of the
plant, (ii) an assumed life of the plant and (iii) Syntroleum's per barrel rate,
which currently is approximately $.50 per barrel of daily capacity, regardless
of plant capacity. Syntroleum's licensee fees may change from time to time
based the size of the plant, improvements that reduce plant capital cost and
competitive market conditions. Syntroleum's accounting policy is to defer all
up-front deposits under master, volume and regional license agreements and
license fees under site license agreements and recognize 50% of such deposits
and fees as revenue in the period in which the engineering process design
package under the agreement is delivered and recognize 50% of the deposits and
fees when the plant has passed certain performance tests. The amount of license
revenue Syntroleum earns will be dependent on the construction of plants by
licensees, as well as the number of licenses it sells in the future.
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Catalyst Revenues. Syntroleum expects to earn revenue from the sale of its
proprietary catalysts to its licensees. Syntroleum's license agreements require
Syntroleum's catalyst to be used in the initial fill for the licensee to receive
Syntroleum's process guarantee. After the initial fill, the licensee may use
other catalyst vendors if appropriate catalysts are available. The price for
catalysts purchased from Syntroleum pursuant to license agreements is equal to
Syntroleum's cost plus a specified margin. Syntroleum will receive revenue from
catalyst sales if and when its licensees purchase catalysts. Syntroleum expects
that catalysts will need to be replaced every three to five years.
Specialty Product GTL Plant Revenues. Syntroleum intends to develop
several specialty product GTL plants in which it intends to retain significant
equity interests. These plants will enable Syntroleum to gain experience with
the commercial operation of the Syntroleum Process and, if successful, are
expected to provide ongoing revenues. The anticipated specialty products of
these plants (i.e., synthetic lube base oils, synthetic drilling fluid, waxes
and liquid normal paraffins) have historically been sold at premium prices and
are expected to result in relatively high margins for these plants. Syntroleum
anticipates forming several joint ventures with oil and gas industry and
financial partners in order to finance and operate these plants, of which the
Sweetwater Plant is the first. Syntroleum anticipates that its specialty
GTL plants will include partners who have low cost gas reserves in strategic
locations and/or have distribution networks in place for the specialty products
to be made in each plant.
Revenues from Providing GTL Plants on a Contract Basis. Through joint
efforts with industry partners and others, Syntroleum intends to make mobile GTL
plants available to customers on a contract basis. Syntroleum believes that
there is a significant market for users who need GTL plants for applications
that do not justify the capital investment of a dedicated GTL plant. Such
applications include: extended well testing in areas with stringent flaring
regulations, conversion of small associated gas fields that are not large enough
to justify the capital investment of a permanent GTL plant and short-term use of
a GTL plant on large fields to generate cash flow for the customer while a
permanent GTL plant is being built or while awaiting pipeline hookup.
Joint Development Revenue. Syntroleum continually conducts research and
development activities in order to reduce the capital and operating costs of GTL
plants based on the Syntroleum Process. Syntroleum conducts its research and
development activities primarily through two initiatives: (i) independent
development utilizing its own resources and (ii) formal joint development
arrangements with its licensee partners and others. Through these joint
development agreements, Syntroleum may receive revenue as reimbursement for
certain research and development expenses. Under certain agreements, the joint
development partner may receive credits against future license fees for monies
expended on joint research and development.
Real Estate Sales Revenues. As of September 30, 1998, Syntroleum's real
estate inventory, consisted of (i) a seven story parking garage in Reno, Nevada;
(ii) a 49.9% interest in a community shopping center in Gillette, Wyoming; (iii)
undeveloped land in Houston, Texas (341 acres comprising the "Houston Project"),
Corinth, Texas (nine acres) and the Kansas City metropolitan area (nine acres at
the intersection of I-35 and 119th Street) and (iv) an equity investment in a
hotel located in Tulsa, Oklahoma. This real estate inventory was owned by SLH
prior to the Merger and reflects the remaining assets of a real estate
development business that was conducted by SLH in association with a previously
owned life insurance company that was sold in 1990. The total real estate
inventory had an aggregate carrying value at September 30, 1998 of approximately
$6.1 million. All of the real estate inventory is held for sale except for the
investment in the hotel located in Tulsa, Oklahoma and the Houston Project which
is being developed for commercial and residential use. Real estate operations
have been influenced from period to period by several factors including seasonal
sales cycles. SLH had substantially reduced its real estate inventory prior to
the Merger. This reduced inventory will influence future period to period
comparisons, and real estate sales revenues should decrease with less inventory
available for sale. The timing of these sales will also create variances in
period to period earnings recognition. Syntroleum does not intend to acquire
additional real estate holdings for development and/or sale outside its core
business interests.
OPERATING EXPENSES
Syntroleum's operating expenses historically have consisted primarily of
pilot plant expenses, research and development expenses and general and
administrative expenses, which include costs associated with general corporate
overhead, compensation expenses, legal and accounting expenses and other related
administrative functions. Syntroleum's policy is to expense pilot plant and
research and development costs as incurred. All of these research and
development expenses are associated with Syntroleum's development of the
Syntroleum Process. Syntroleum has also recognized depreciation and amortization
expense primarily related to office and computer equipment. Following the
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Merger, Syntroleum's operating expenses have also included costs of real estate
sold and real estate operating expense. Syntroleum's general and administrative
expenses have increased substantially as it has expanded its research and
development, engineering and commercial operations, and these expenses are
expected to continue to increase. In this regard, Syntroleum entered into a
lease for office facilities in August 1997 that has resulted in increased rental
expense. Syntroleum also expects to continue to incur higher research and
development and pilot plant expenses as it continues to develop and improve its
GTL technology. In May 1998, Syntroleum acquired a 16,500-square-foot laboratory
located on approximately 100 acres at which it intends to increase its
laboratory and pilot plant operations.
Syntroleum expects to incur significant expenses in connection with the
start-up of its GTL plants. For example, Syntroleum expects that its expenses
will increase at the time of the currently planned start-up of the Sweetwater
Plant in 2001. Upon the commencement of commercial operation of GTL plants in
which Syntroleum owns an equity interest, Syntroleum will incur cost-of-sales
expense relating primarily to the cost of natural gas feedstocks for its
specialty plants and will incur operating expenses relating to such plants,
including labor, supplies and maintenance. Due to the substantial capital
expenditures associated with the construction of GTL plants, Syntroleum expects
to incur significant depreciation and amortization expense in the future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Real Estate Sales Revenue. Revenues from the sale of real estate were
$1,560,000 in the third quarter of 1998, up from $0 in the third quarter of
1997. This increase was the result of the sale of the final three condominium
units at SLH's Quail Run development in Santa Fe, New Mexico and the sale of a
boat slip in Florida.
Joint Development Revenue. Revenues from joint research and development
and pilot plant operations were $635,000 in the third quarter of 1998, down
$112,000 from the third quarter of 1997 when they were $747,000. The decrease
was primarily due to the completion of construction of the hybrid, multiphase
(HMX) reactor at the Company's pilot plant that was funded by Texaco under an
on-going joint development agreement.
Other Revenues. Other revenues were $119,000 in the third quarter of 1998,
up from $0 in the third quarter of 1997. The increase resulted primarily from
parking and retail rentals at the parking garage in Reno, Nevada.
Cost of Real Estate Sold. The cost of real estate sold was $1,538,000 in
the third quarter of 1998, up from $0 in 1997. The increase resulted from the
sale of the condominium units in New Mexico.
Pilot Plant and R&D. Expenses from pilot plant and research and development
activities were $687,000 in the third quarter of 1998, down $84,000 from the
third quarter of 1997 when these expenses were $771,000. The decrease occurred
as a result of lower activity associated with the development of the hybrid
multi phase reactor (HMX) under development with Texaco, partially offset by
higher research and development spending.
General and Administrative and Other Expense. General and administrative
expenses were $3,387,000 in the third quarter of 1998, up $2,061,000 from the
third quarter of 1997 when these expenses were $1,326,000. The increase is
attributable to higher wages and salaries resulting from higher staffing levels
and higher outside engineering expenses.
Investment, Interest and Other Income (Expense). Investment, interest and
other income increased to $407,000 in the third quarter of 1998, up $296,000
from the third quarter of 1997 when this income was $111,000. The increase was
primarily attributable to interest income from higher cash balances following
the Merger.
Provision for Income Taxes. Syntroleum incurred a loss in both the third
quarter of 1998 and the third quarter of 1997 and did not recognize an income
tax benefit for such loss.
Net Income. In the third quarter of 1998, the company experienced a loss
of $3,018,000. The loss was $1,779,000 higher than the third quarter of 1997
when the company experienced a loss of $1,239,000. The increase in the loss is
as a result of the factors described above.
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NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Real Estate Sales Revenue. Revenues from the sale of real estate were
$1,560,000 in the nine months ended September 30, 1998, up from $0 in the nine
months ended September 30, 1997. This increase was the result of the sale of the
final three condominium units at SLH's Quail Run development in Santa Fe, New
Mexico and the sale of a boat slip in Florida.
Joint Development Revenue. Revenues from joint research and development
and pilot plant operations were $1,486,000 in the nine months ended
September 30, 1998, down $93,000 from the nine months ended September 30, 1997
when they were $1,579,000. The decrease was primarily due to the completion of
construction of the hybrid, multiphase (HMX) reactor at the Company's pilot
plant that was funded by Texaco under an on-going joint development agreement.
Other Revenues. Other revenues were $119,000 in the nine months ended
September 30, 1998, up $118,000 from the nine months ended September 30, 1997
when they were $1,000. The increase resulted primarily from parking and retail
rentals at the parking garage in Reno, Nevada.
Cost of Real Estate Sold. The cost of real estate sold was $1,538,000 in
the nine months ended September 30, 1998, up from $0 in the nine months ended
September 30, 1997. The increase resulted from the sale of the condominium units
in New Mexico.
Pilot Plant and R&D. Expenses from pilot plant and research and
development activities were $2,243,000 in the nine months ended September 30,
1998, down $22,000 from the nine months ended September 30, 1997 when these
expenses were $2,265,000. The decrease occurred as a result of lower operating
costs associated with the development of the hybrid multiphase reactor (HMX)
under development with Texaco, partially offset by higher research and
development spending.
General and Administrative and Other Expense. General and administrative
expenses were $8,535,000 in the nine months ended September 30, 1998, up
$5,781,000 from the nine months ended September 30, 1997 when these expenses
were $2,754,000. The increase is attributable primarily to higher wages and
salaries resulting from higher staffing levels and higher outside engineering
expenses.
Investment, Interest and Other Income (Expense). Investment, interest and
other income increased to $598,000 in the nine months ended September 30, 1998,
up $406,000 from the nine months ended September 30, 1997 when this income was
$192,000. The increase was primarily attributable to interest income from higher
cash balances following the Merger.
Provision for Income Taxes. Syntroleum incurred a loss in both the first
nine months of 1998 and the nine months ended September 30, 1997, and did not
recognize an income tax benefit for such loss.
Net Income. In the nine months ended September 30, 1998, the company
experienced a loss of $8,666,000. The loss was $5,421,000 higher than the nine
months ended September 30, 1997 when the company experienced a loss of
$3,245,000. The increase in the loss is as a result of the factors described
above.
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LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As of September 30, 1998, Syntroleum had $41,606,000 in cash and short-term
investments and $2,198,000 in current liabilities. Syntroleum does not currently
have any material outstanding debt or lines of credit. Prior to the Merger, Old
Syntroleum's primary sources of liquidity had historically been equity capital
contributions and prepaid license fees and its principal liquidity needs were to
fund expenditures relating to research and development and pilot plant
activities and to fund working capital. At September 30, 1998, the Company had
$1,041,000 in accounts receivable outstanding with its joint development
partners relating to joint development activities. Such amount also includes
interest receivables from short-term investments and the Internal Revenue
Service.
Cash flows (used in) provided by operations were ($8,909,000) and
$8,067,000 in the first nine months of 1998 and 1997, respectively. The decrease
in cash flows in the first nine months of 1998 was primarily the result of the
absence during the 1998 period of prepaid licensing fees, which the Company
recognizes as deferred revenue, and higher salaries and wages related to higher
staffing levels. In addition, the comparison was impacted by a write down during
1997 of property and equipment that had been capitalized. This write down
related to an anticipated commercial GTL plant to be located near Odessa, Texas
which, in 1997, the Company determined not to pursue because an agreement was
not reached with the owner of the proposed plant site. Additionally, during the
1998 period the Company sold the final three condominium units in Santa Fe, NM
which were acquired from SLH.
During the first nine months of 1998 and the first nine months of 1997,
cash flows provided by (used in) investment activities were $24,878,000 and
($457,000), respectively. The increase resulted from investments held to
maturity that were acquired in the Merger, partially offset by higher spending
on property and equipment. Cash flows provided by financing activities were
$1,702,000 and $1,648,000 during the first nine months of 1998 and the first
nine months of 1997, respectively, and primarily reflected the investment by
Enron in Sweetwater LLC and the Merger with SLH.
The construction of Syntroleum's specialty product GTL plants will require
significant capital expenditures. Syntroleum's other efforts to commercialize
the Syntroleum Process will also involve significant expenditures. Syntroleum
intends to obtain additional funding through joint ventures, partnerships,
license agreements and other strategic alliances, as well as various other
financing arrangements. Syntroleum may also seek debt or equity financing in
the capital markets. In the event such capital resources are not available to
Syntroleum, its GTL plant development and other activities may be curtailed.
Syntroleum estimates that construction and disposal costs to complete real
estate projects in development will be approximately $3 million. In addition to
the foregoing, pursuant to a joint development agreement with Catalytica
Advanced Technologies, Petro-Canada and Technociso, Inc., Syntroleum is
obligated to contribute $400,000 per year for three years toward the cost of the
development of a single-step natural gas conversion process, subject to the
project's achieving certain milestones.
THE SWEETWATER GTL PLANT
The capital costs of the Sweetwater Plant are currently expected to be
funded by a combination of project debt and equity financing. The current
capital structure anticipates the project will require equity contributions of
approximately $45 million and subordinated and senior project debt for the
balance of the expected costs. Ownership percentages are currently anticipated
to be as follows: Syntroleum - 74%, Enron - 11%, an additional equity partner -
11% and a project development company four percent. However, actual ownership
percentages may vary from these estimates based on the terms of subsequent
financings.
Syntroleum has issued a site license and contributed a total of $2 million
to Sweetwater LLC, which Syntroleum formed to own and operate the Sweetwater
Plant. Syntroleum intends to contribute an additional $15 million at the closing
of the financing for the plant and, based on current plans, would retain an
approximately 74% interest in Sweetwater LLC. In January 1998, Enron contributed
$1 million in exchange for a four percent interest in Sweetwater LLC, and agreed
to contribute an additional approximately $14 million in exchange for an
additional seven percent interest in Sweetwater LLC upon the satisfaction of
certain conditions, including the execution of agreements which provide for the
remaining equity and debt financing for the plant, the execution of fixed price
engineering and construction contracts, and the execution of acceptable
agreements for the sale of products produced at the plant. Additionally, Enron
and Syntroleum entered into an option agreement which provides that in the event
of the completion of an underwritten public offering and the repayment of at
least 50% of the senior term loan financing for Sweetwater LLC, Enron may elect
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during a period of two years to exchange its interest in Sweetwater LLC for a
number of shares of the Company's Common Stock equal to the quotient of the
amount of Enron's contributions to Sweetwater LLC and 130% of the average market
price of the Common Stock during the first 30 trading days following an
underwritten public offering. The option agreement also provides that if such
repayment does not occur by the eighth year after plant start up, Enron may
elect to purchase during the 180 day period following such date such number of
shares in exchange for the amount of Enron's contributions to Sweetwater LLC. In
addition, the option agreement provides that, if an underwritten public offering
has not yet occurred following the later to occur of the fourth year after the
plant passes certain performance tests and the repayment of at least 50% of the
senior term loan financing for Sweetwater LLC, Enron may elect during a period
of up to 10 years to require Syntroleum to purchase its interest in Sweetwater
LLC for a price equal to three times the annual average cash distributions made
to Enron by Sweetwater LLC during the preceding three-year period.
Syntroleum plans to fund the remaining estimated capital cost of the
Sweetwater Plant through project equity and debt financing. Syntroleum has
entered into term sheets with respect to a portion of the debt financing, which
term sheets are subject to the execution of definitive documentation. During
the third quarter of 1998, Syntroleum continued to advance on the project
through negotiations of contracts relating to floor pricing of products produced
at the plant, the sale of electricity and the purchase of natural gas. If
financing is obtained, construction of the plant is scheduled to commence in
late 1999, and the plant is scheduled to be operational in 2001, although such
schedule may be delayed as a result of a variety of factors.
THE JOINT VENTURE GTL PLANT
In November 1997, Syntroleum, Texaco and Brown & Root entered into a
project development agreement for the development of a small GTL plant based on
the Syntroleum Process. In July 1998, the parties extended the term of the
agreement to July 15, 1999. During the third quarter of 1998, Brown & Root
informed Syntroleum of its decision not to participate in the project as an
equity holder while expressing an interest in continuing to provide engineering
and construction services to the project. The first phase of the project, which
involved preparation of a feasibility study, has been completed, and Syntroleum
and Texaco are currently reviewing the appropriate size and location on which
definitive design and construction plans for the plant will be pursued.
If Syntroleum and Texaco determine to continue the project, Syntroleum
expects that the GTL plant will be developed through a joint venture to be
formed with Texaco and that capital costs will be funded through equity
contributions by Syntroleum and Texaco, together with any additional joint
venture participants. It is anticipated that Syntroleum and Texaco would each
initially own an equal interest in the joint venture and that Texaco would be
the designated operator of the plant. However, if additional interests in the
joint venture are sold to third parties, the interests of Syntroleum and Texaco
would be diluted. The project development agreement provides that Syntroleum and
Texaco will initially contribute up to $1.5 million to the project in the form
of cash and that additional contributions may be made by the parties at or after
the formation of the joint venture.
The project development agreement provides for the joint venture to enter
into a site license with Syntroleum with respect to this plant. The plant is
scheduled to be operational by 2000, although such schedule may be delayed as a
result of a variety of factors. The project development agreement provides that,
in the event the joint venture determines to cease operation of the plant or
after three years following startup, Syntroleum would have the right to purchase
the plant at a price equal to the remaining undepreciated tax book value of the
plant. If Syntroleum subsequently sells the plant within one year from the date
of such purchase, the proceeds above undepreciated tax book value will be
distributed to the owners of the joint venture.
CURRENCY RISK
Syntroleum expects to conduct a portion of its business in currencies other
than the United States dollar. Syntroleum expects to attempt to minimize its
currency exchange risk by seeking international contracts payable in local
currency in amounts equal to Syntroleum's estimated operating costs payable in
local currency and in United States dollars for the balance of the contract and
by contractual purchase price adjustments based on an exchange rate formula
related to United States dollars. In the future, Syntroleum also may have
significant investments in countries other than the United States. The
functional currency of these foreign operations will be the local currency and,
accordingly, financial statement assets and liabilities will be translated at
current exchange rates.
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YEAR 2000 COMPLIANCE
Historically, certain computerized systems have used two digits rather than
four digits to define the applicable year, causing them to not properly
recognize a year that does not begin with "19." This could result in major
failures or miscalculations, and is generally referred to as the "Year 2000
issue." Syntroleum recognizes that the impact of the Year 2000 issue extends
beyond traditional computer hardware and software to automated systems and
instrumentation, as well as to third parties such as vendors, suppliers,
customers and banks.
Syntroleum's computer hardware and software and automated systems and
instrumentation were acquired during the past two years. Based on the recent
date of purchase and assertions made by the vendors of these systems,
Syntroleum believes these systems are Year 2000 compliant.
With respect to external parties, Syntroleum is in the process of
completing its assessment of the level of risk to Syntroleum of non-compliance
by the external parties and, to the extent it deems necessary, intends to
contact those external parties deemed to be significant to Syntroleum's
operations. Based on assertions made by these external parties, Syntroleum does
not believe that a material uncertainty exists of noncompliance by an external
party which would significantly affect Syntroleum's operations.
The total cost of Year 2000 activities to date has not been, and future
costs are not expected to be, material to Syntroleum's operations, liquidity or
capital resources.
Syntroleum's assessment of its Year 2000 issues involves many assumptions,
and there can be no assurance that Syntroelum's assumptions will prove accurate
and actual results could differ significantly from these assumptions. In
conducting its Year 2000 compliance efforts, Syntroelum has relied primarily on
seller representations with respect to its internal computerized systems and
representations from third parties with which Syntroleum has business
relationships and has not independently verified these representations. There
can be no assurance that these representations will prove to be accurate. A Year
2000 failure could result in a business disruption that adversely affects
Syntroleum's business, financial condition or results of operations. Although it
is not currently aware of any likely business disruption, Syntroleum is
developing contingency plans to address certain potential Year 2000 failures and
expects this work to continue through 2000. Syntroleum is also continuing to
monitor Year 2000 risks and compliance and expects this work to continue through
2000.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement. Companies must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999, however,
companies may implement the statement as of the beginning of any fiscal quarter
beginning June 16, 1998. SFAS No. 133 cannot be applied retroactively and must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998). As of September 30, 1998, the Company had no outstanding derivative
instruments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
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PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
On March 3, 1997, Lab Holdings, Inc. ("Lab Holdings") distributed to its
shareholders all of the outstanding shares of common stock of its wholly-owned
subsidiary, SLH. In connection with this distribution and pursuant to a
Distribution Agreement between Lab Holdings and SLH, Lab Holdings transferred
its real estate and energy businesses and miscellaneous assets and liabilities.
Under such Distribution Agreement and related agreements, SLH assumed (and as a
result of the Merger, Syntroleum has assumed) the rights and obligations of Lab
Holdings 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 Lab Holdings'
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 insurance company's former home office building.
Because the removal and replacement costs had been incurred prior to the sale of
the insurance subsidiary, Lab Holdings negotiated with the buyer for an
assignment of the cause of action from the insurance subsidiary. Under the
Distribution Agreement, Lab Holdings has assigned to the Company all of its
rights to any recoveries and the Company has assumed all costs relating to the
prosecution of the 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.
In September 1993, the Missouri Court of Appeals reversed a $5.7 million
judgment which was granted in 1992 in favor of Lab Holdings. The Court of
Appeals remanded the case to the trial court for a retrial limited to the
question of whether or not the applicable statute of limitations barred the
claim. The Missouri Court of Appeals also set aside $1.7 million of the
judgment originally granted in 1992. In July 1996, the case was retried to the
court. On January 21, 1997, the court entered a judgment in favor of Lab
Holdings for the benefit of the Company. The amount of that judgment, together
with interest, is approximately $5.8 million. The defendant appealed the
judgment to the Missouri Court of Appeals, Kansas City Division, and posted an
appeal bond to stay collection of the judgment pending the outcome of the
appeal. In August 1998, the Court of Appeals affirmed the judgment in favor of
the Company. On October 27, 1998, the Court overruled the defendant's motion
for reconsideration and denied defendant's request for transfer of the appeal to
the Missouri Supreme Court. The defendant may file, within 15 days, a request
directly with the Missouri Supreme Court asking it to accept transfer of the
appeal for reconsideration of the opinion issued by the Court of Appeals.
Internal Revenue Service Audits. Prior to the Distribution, Lab Holdings
had received notices of proposed adjustments (the "Revenue Agent's Reports")
from the Internal Revenue Service (the "IRS") with respect to its 1986-1990
federal income taxes. In connection with the Distribution, the Company assumed
from Lab Holdings all its contingent tax liabilities to the IRS and acquired all
of its related rights to refunds as well as any interest thereon related to the
Lab Holdings' 1986-1990 tax years. During 1997, the Company settled all of the
claims and disputes between Lab Holdings and the IRS for the 1986-1990 years. In
the second quarter 1998, the Company received federal tax refunds of
approximately $5.9 million for the 1986-1990 years. An additional amount for
interest on the 1990 tax refund is still pending.
California Tax Issues. In connection with the Distribution, the Company
also assumed Lab Holdings' rights and liabilities with respect to an audit being
conducted by the State of California for Lab Holdings' 1987-1989 taxable years
which the Company settled in the first quarter 1998.
Although the Company has settled potential liabilities to the IRS and
California for the tax years in question, the settlement made it necessary for
the Company to file amended tax returns in certain states to reflect the results
of the settlement. Approximately $20,000 was paid with the amended state
returns and a $170,000 state tax refund is now expected.
Claims Against Scout. The Company's wholly-owned subsidiary, Scout
Development Corporation ("Scout"), has pending against it a warranty claim by
the purchaser of a home in Florida which the Company does not believe is
material to the Company's financial condition. During 1997, Syntroleum entered
into a global settlement of claims by the homeowners association of the
Company's real estate development in Quail Run. Pursuant to that settlement, the
Company was released from future claims with respect to the common elements and
limited common elements of the development.
18
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Changes in Securities. Pursuant to the Merger Agreement, on August 7, 1998
the Company's Articles of Incorporation were amended to increase the number of
authorized shares of Common Stock from 30,000,000 shares to 150,000,000 shares
and the number of authorized shares of the Company's preferred stock, par value
$0.01 per share, from 1,000,000 shares to 5,000,000 shares.
Dividends. Under the Kansas General Corporation Code, dividends may be
paid out of the Company'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 September 30, 1998, the Company's surplus (as
defined under the Kansas General Corporation Code) was approximately
$39,563,000. In connection with the distribution by Lab Holdings of all shares
of SLH common stock to Lab Holdings shareholders, effected March 3, 1997, SLH
agreed that it would 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 Lab Holdings. On June 1, 1998, SLH and Lab
Holdings agreed that the restrictions would expire upon the effective date of
the Merger.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In connection with the Merger, a special meeting of the stockholders of the
Company was held on August 6, 1998. Set forth below are the results of the
voting with respect to each matter acted upon at the meeting.
<TABLE>
<CAPTION>
VOTES VOTES CAST VOTES BROKER
MATTER CAST FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
------ ------------ ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Approval and Adoption of the Merger Agreement and
the transactions contemplated thereby............. 5,623,816 16,186 --- 23,709 2,913,696
Election of Directors:
W. D. Grant.................................... 8,552,850 --- 24,557 --- ---
W. T. Grant II................................. 8,547,960 --- 29,447 --- ---
David W. Kempner............................... 8,553,460 --- 23,947 --- ---
Approval and Adoption of the Syntroleum 1993 Stock
Option and Incentive Plan, as amended, and the
Syntroleum Stock Option Plan for Outside Directors 5,267,157 326,486 --- 69,388 2,914,376
Ratification of the Appointment of KPMG Peat
Marwick LLP as Independent Public Accountants for 8,441,458 113,344 --- 21,925 680
the 1998 Fiscal Year..............................
</TABLE>
Pursuant to the Merger Agreement, Kenneth L. Agee, Mark A. Agee, Alvin R.
Albe, Jr., Frank M. Bumstead, Robert Rosene, Jr. and J. Edward Sheridan were
appointed as six of the eight directors of the Company. James R. Seward, SLH's
President and Chief Executive Officer, and P. Anthony Jacobs, SLH's Chairman of
the Board, who were directors of both companies prior to the Merger, have
remained as directors of the Company.
19
<PAGE>
ITEM 5. OTHER INFORMATION.
NOTICE OF SHAREHOLDER PROPOSAL DEADLINE DATE
Rule 14a-8 under the Securities and Exchange Act of 1934, as amended,
addresses when a company must include a stockholder's proposal in its proxy
statement and identify the proposal in its form of proxy when the company holds
an annual or special meeting of stockholders. Under Rule 14a-8, proposals that
stockholders intend to have included in Syntroleum's proxy statement for the
1999 Annual Meeting of Stockholders should be received by Syntroleum's Corporate
Secretary a reasonable time before Syntroleum begins to print and mail its proxy
materials. As set forth in the Joint Proxy Statement/Prospectus dated July 2,
1998 relating to Syntroleum's 1998 Meeting of Stockholders, based on
Syntroleum's anticipated meeting schedule, it considers such date to be February
1, 1999.
If a stockholder desires to bring a matter before an annual or special
meeting which is outside the process of Rule 14a-8, the stockholder must follow
the procedures set forth in Syntroleum's Bylaws. Syntroleum's Bylaws provide
generally that stockholder proposals for an annual meeting may be made by a
stockholder only if (i) the stockholder is a stockholder of record and is
entitled to vote at the meeting, and (ii) the stockholder gives timely written
notice of the proposal to the Corporate Secretary of Syntroleum. To be timely, a
stockholder's notice must be delivered to, or mailed and received at, the
principal executive offices of the Company not less than 70 days nor more than
90 days prior to the first anniversary of the prior year's annual meeting;
provided, however, that, in the event the date of the annual meeting is advanced
by more than 20 days or delayed by more than 70 days from such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
close of business on the 90th day prior to such annual meeting and not later
than the close of business on the later of the 70th day prior to such annual
meeting or the tenth day following the day on which public announcement of the
date of such meeting is first made by the Company.
FORWARD-LOOKING STATEMENTS
This document includes forward-looking statements as well as historical
facts. These forward-looking statements include but are not limited to,
statements relating to the Syntroleum Process and related technologies, gas-to-
liquids plants based on the Syntroleum Process, anticipated capital and
operating costs of such plants, the timing of commencement and completion of
construction of such plants, obtaining required financing for such plants, the
economic use of GTL plants, the continued development of the Syntroleum Process
(alone or with partners), anticipated capital expenditures, the sale of
Syntroleum's real estate inventory and any other statements regarding future
growth, cash needs, operations, business plans and financial results. When used
in this document or any document incorporated by reference herein, the words
"anticipate," "believe," "estimate," "expect," "intend," "may," "plans,"
"project," "should" and similar expressions are intended to be among the
statements that identify forward-looking statements. Although the Company
believes that the expectations reflected in these forward-looking statements are
reasonable, such statements involve risks and uncertainties and no assurance can
be given that actual results will be consistent with these forward-looking
statements. Important factors that could cause actual results to differ from
these forward-looking statements include the potential that commercial-scale GTL
plants will not achieve the same results as those demonstrated on a laboratory
or pilot basis or that such plants will experience technological and mechanical
problems, the potential that improvements to the Syntroleum Process currently
under development may not be successful, the impact on plant economics of
operating conditions (including energy prices), competition, intellectual
property risks, the Company's ability to obtain financing and other risks
described in the Company's filings with the Securities and Exchange Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports on Form 8-K. On August 12, 1998, the Company filed with the
Securities and Exchange Commission a Current Report on Form 8-K dated August 7,
1998 containing information with respect to Item 1 (Changes in Control of
Registrant), Item 2 (Acquisition on Disposition of Assets) and Item 7 (Financial
Statements and Exhibits). The financial statements filed with this Current
Report consisted of (i) the consolidated balance sheets of Syntroleum
Corporation, an Oklahoma corporation, and subsidiary as of December 31, 1997 and
as of March 31, 1998 and the related consolidated statements or operations,
stockholders' equity and cash flows for each of the three years in the
20
<PAGE>
period ended December 31, 1997 and for the three months ended March 31, 1998 and
1997, and (ii) the unaudited pro forma balance sheet at March 31, 1998, giving
effect to the Merger as if the Merger had been consummated on that date, and the
unaudited pro forma statements of operations for the three months ended March
31, 1998 and the three months ended March 31, 1997, giving effect to the Merger
as if the Merger had been consummated on January 1, 1997.
Exhibits. The following exhibits are filed as part of this quarterly
report:
<TABLE>
<CAPTION>
EXHIBIT
No. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <S>
*2.1 Distribution Agreement (incorporated by reference to Exhibit 2(a) to Form 10/A of SLH dated
February 3, 1997).
*2.2 Agreement and Plan of Merger dated as of March 30, 1998 by and between SLH and Syntroleum
(incorporated by reference to Appendix A to the Joint Proxy Statement/Prospectus filed with the
Securities and Exchange Commission on July 6, 1998).
*2.3 Blanket Assignment, Bill of Sale, Deed and Assumption Agreement (incorporated by reference to Exhibit
2(b) to SLH's Annual Report on Form 10-K for the year ended December 31, 1996).
*3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3(a) to the Form 10 of
SLH filed with the Securities and Exchange Commission on December 24, 1996).
*3.2 Certificate of Designations of Series A Junior Participating Preferred Stock of SLH Corporation, dated
February 19, 1997, together with Statement of Increase, dated June 1, 1998 (incorporated by reference
to Exhibit 4.3 to the Company's Registration Statement on Form S-4 (Registration No. 333-50253)).
*3.3 Certificate of Merger filed on August 7, 1998 (incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K dated August 7, 1998).
*3.4 Bylaws of the Company (incorporated by reference to Exhibit 3(b) to the Form 10 of the Company filed
with the Securities and Exchange Commission on December 24, 1996).
*4.1 Second Amendment to Rights Agreement dated as of August 7, 1998 (incorporated by reference to Exhibit
4.6 to the Company's Current Report on Form 8-K dated August 7, 1998).
*10.1 Form of Master License Agreement of Syntroleum (incorporated by referenced to Exhibit 10.9 to the
Company's Registration Statement on Form S-4 (Registration No. 333-50253)).
*10.2 Form of Indemnification Agreement between Syntroleum and each of its directors (incorporated by reference
to Exhibit 10.10 to the Company's Registration Statement on Form S-4 (Registration No. 333-50253)).
*10.3 1993 Stock Option and Incentive Plan of Syntroleum (incorporated by reference to Appendix E to the
Joint Proxy Statement/Prospectus filed by the Company with the Securities and Exchange Commission on
July 6, 1998).
*10.4 Stock Option Plan for Outside Directors of Syntroleum (incorporated by reference to Appendix F to the
Joint Proxy Statement/Prospectus filed by the Company with the Securities and Exchange Commission on
July 6, 1998).
*10.5 First Amended and Restated Operating Agreement of Syntroleum/Sweetwater Company, L.L.C. dated
January 12, 1998 by and among Syntroleum, SLH and such other persons who may be admitted as members of
Syntroleum/Sweetwater Company, L.L.C. as provided therein (incorporated by referenced to Exhibit 10.13 to the
Company's Registration Statement on Form S-4 (Registration No. 333-50253)).
*10.6 Purchase Agreement dated January 12, 1998 by and between Syntroleum and Enron Capital Trade Resources
Corp. (incorporated by referenced to Exhibit 10.14 to the Company's Registration Statement on Form S-4
(Registration No. 333-50253))
*10.7 Amended and Restated Employment Agreement between Syntroleum and Kenneth L. Agee (incorporated
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
by referenced to Exhibit 10.15 to the Company's Registration Statement on Form S-4 (Registration No. 333-50253)).
*10.8 Amended and Restated Employment Agreement between Syntroleum and Mark A. Agee (incorporated by
referenced to Exhibit 10.16 to the Company's Registration Statement on Form S-4 (Registration No.
333-50253)).
*10.9 Amended and Restated Employment Agreement between Syntroleum and Charles A. Bayens (incorporated by
referenced to Exhibit 10.17 to the Company's Registration Statement on Form S-4 (Registration No.
333-50253))
*10.10 Amended and Restated Employment Agreement between Syntroleum and Eric Grimshaw (incorporated by
referenced to Exhibit 10.18 to the Company's Registration Statement on Form S-4 (Registration No.
333-50253)).
*10.11 Amended and Restated Employment Agreement between Syntroleum and Peter Snyder (incorporated by
referenced to Exhibit 10.19 to the Company's Registration Statement on Form S-4 (Registration No.
333-50253)).
*10.12 Amended and Restated Employment Agreement between Syntroleum and Randall M. Thompson (incorporated by
referenced to Exhibit 10.20 to the Company's Registration Statement on Form S-4 (Registration No.
333-50253)).
*10.13 Amended and Restated Employment Agreement between Syntroleum and Larry Weick (incorporated by
referenced to Exhibit 10.21 to the Company's Registration Statement on Form S-4 (Registration No.
333-50253)).
*10.14 Master Preferred License Agreement dated September 25, 1996 between Syntroleum and Texaco Natural Gas,
Inc. (incorporated by referenced to Exhibit 10.22 to the Company's Registration Statement on Form S-4
(Registration No. 333-50253)).
*10.15 Master Preferred License Agreement dated March 7, 1997 between Syntroleum and Marathon Oil Company
(incorporated by referenced to Exhibit 10.23 to the Company's Registration Statement on Form S-4
(Registration No. 333-50253)).
*10.16 Master Preferred License Agreement dated April 10, 1997 between Syntroleum and Atlantic Richfield
Company (incorporated by referenced to Exhibit 10.24 to the Company's Registration Statement on Form
S-4 (Registration No. 333-50253)).
*10.17 Volume License Agreement dated August 1, 1997 between Syntroleum and YPF International, Ltd.
(incorporated by referenced to Exhibit 10.25 to the Company's Registration Statement on Form S-4
(Registration No. 333-50253)).
*10.18 Volume License Agreement dated February 4, 1998 between Syntroleum and Kerr-McGee Corporation
(incorporated by referenced to Exhibit 10.26 to the Company's Registration Statement on Form S-4
(Registration No. 333-50253)).
*10.19 Volume License Agreement dated January 12, 1998 between Syntroleum and Enron Capital & Trade Resources
Corp. (incorporated by referenced to Exhibit 10.27 to the Company's Registration Statement on Form S-4
(Registration No. 333-50253)).
*10.20 Site License Agreement dated January 12, 1998 between Syntroleum and Syntroleum/Sweetwater Company,
L.L.C. (incorporated by referenced to Exhibit 10.28 to the Company's Registration Statement on Form
S-4 (Registration No. 333-50253)).
27 Financial Data Schedule and Restated Financial Data Schedules.
</TABLE>
______________________
* Incorporated by reference as indicated.
22
<PAGE>
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.
SYNTROLEUM CORPORATION, a Kansas
corporation (Registrant)
Date: November 12, 1998 By:
-----------------------------------------------
Kenneth L. Agee
Chief Executive Officer and Chairman of the
Board (Principal Executive Officer)
Date: November 12, 1998 By:
-----------------------------------------------
Randall M. Thompson
Chief Financial Officer (Principal Financial
and Accounting Officer)
23
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
*2.1 Distribution Agreement (incorporated by reference to Exhibit 2(a) to Form 10/A of SLH dated
February 3, 1997).
*2.2 Agreement and Plan of Merger dated as of March 30, 1998 by and between SLH and Syntroleum
(incorporated by reference to Appendix A to the Joint Proxy Statement/Prospectus filed with the
Securities and Exchange Commission on July 6, 1998).
*2.3 Blanket Assignment, Bill of Sale, Deed and Assumption Agreement (incorporated by reference to Exhibit
2(b) to SLH's Annual Report on Form 10-K for the year ended December 31, 1996).
*3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3(a) to the Form 10 of
SLH filed with the Securities and Exchange Commission on December 24, 1996).
*3.2 Certificate of Designations of Series A Junior Participating Preferred Stock of SLH Corporation, dated
February 19, 1997, together with Statement of Increase, dated June 1, 1998 (incorporated by reference
to Exhibit 4.3 to the Company's Registration Statement on Form S-4 (Registration No. 333-50253)).
*3.3 Certificate of Merger filed on August 7, 1998 (incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K dated August 7, 1998).
*3.4 Bylaws of the Company (incorporated by reference to Exhibit 3(b) to the Form 10 of the Company filed
with the Securities and Exchange Commission on December 24, 1996).
*4.1 Second Amendment to Rights Agreement dated as of August 7, 1998 (incorporated by reference to Exhibit
4.6 to the Company's Current Report on Form 8-K dated August 7, 1998).
*10.1 Form of Master License Agreement of Syntroleum (incorporated by referenced to Exhibit 10.9 to the
Company's Registration Statement on Form S-4 (Registration No. 333-50253)).
*10.2 Form of Indemnification Agreement between Syntroleum and each of its directors (incorporated by
reference to Exhibit 10.10 to the Company's Registration Statement on Form S-4 (Registration No. 333-50253)).
*10.3 1993 Stock Option and Incentive Plan of Syntroleum (incorporated by reference to Appendix E to the
Joint Proxy Statement/Prospectus filed by the Company with the Securities and Exchange Commission on
July 6, 1998).
*10.4 Stock Option Plan for Outside Directors of Syntroleum (incorporated by reference to Appendix F to the
Joint Proxy Statement/Prospectus filed by the Company with the Securities and Exchange Commission on
July 6, 1998).
*10.5 First Amended and Restated Operating Agreement of Syntroleum/Sweetwater Company, L.L.C. dated
January 12, 1998 by and among Syntroleum, SLH and such other persons who may be admitted as members of
Syntroleum/Sweetwater Company, L.L.C. as provided therein (incorporated by referenced to Exhibit 10.13 to the
Company's Registration Statement on Form S-4 (Registration No. 333-50253)).
*10.6 Purchase Agreement dated January 12, 1998 by and between Syntroleum and Enron Capital Trade Resources
Corp. (incorporated by referenced to Exhibit 10.14 to the Company's Registration Statement on Form S-4
(Registration No. 333-50253))
*10.7 Amended and Restated Employment Agreement between Syntroleum and Kenneth L. Agee (incorporated by
referenced to Exhibit 10.15 to the Company's Registration Statement on Form S-4 (Registration No.
333-50253)).
*10.8 Amended and Restated Employment Agreement between Syntroleum and Mark A. Agee (incorporated by
referenced to Exhibit 10.16 to the Company's Registration Statement on Form S-4 (Registration No.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
333-50253)).
*10.9 Amended and Restated Employment Agreement between Syntroleum and Charles A. Bayens (incorporated by
referenced to Exhibit 10.17 to the Company's Registration Statement on Form S-4 (Registration No.
333-50253))
*10.10 Amended and Restated Employment Agreement between Syntroleum and Eric Grimshaw (incorporated by
referenced to Exhibit 10.18 to the Company's Registration Statement on Form S-4 (Registration No.
333-50253)).
*10.11 Amended and Restated Employment Agreement between Syntroleum and Peter Snyder (incorporated by
referenced to Exhibit 10.19 to the Company's Registration Statement on Form S-4 (Registration No.
333-50253)).
*10.12 Amended and Restated Employment Agreement between Syntroleum and Randall M. Thompson (incorporated by
referenced to Exhibit 10.20 to the Company's Registration Statement on Form S-4 (Registration No.
333-50253)).
*10.13 Amended and Restated Employment Agreement between Syntroleum and Larry Weick (incorporated by
referenced to Exhibit 10.21 to the Company's Registration Statement on Form S-4 (Registration No.
333-50253)).
*10.14 Master Preferred License Agreement dated September 25, 1996 between Syntroleum and Texaco Natural Gas,
Inc. (incorporated by referenced to Exhibit 10.22 to the Company's Registration Statement on Form S-4
(Registration No. 333-50253)).
*10.15 Master Preferred License Agreement dated March 7, 1997 between Syntroleum and Marathon Oil Company
(incorporated by referenced to Exhibit 10.23 to the Company's Registration Statement on Form S-4
(Registration No. 333-50253)).
*10.16 Master Preferred License Agreement dated April 10, 1997 between Syntroleum and Atlantic Richfield
Company (incorporated by referenced to Exhibit 10.24 to the Company's Registration Statement on Form
S-4 (Registration No. 333-50253)).
*10.17 Volume License Agreement dated August 1, 1997 between Syntroleum and YPF International, Ltd.
(incorporated by referenced to Exhibit 10.25 to the Company's Registration Statement on Form S-4
(Registration No. 333-50253)).
*10.18 Volume License Agreement dated February 4, 1998 between Syntroleum and Kerr-McGee Corporation
(incorporated by referenced to Exhibit 10.26 to the Company's Registration Statement on Form S-4
(Registration No. 333-50253)).
*10.19 Volume License Agreement dated January 12, 1998 between Syntroleum and Enron Capital & Trade Resources
Corp. (incorporated by referenced to Exhibit 10.27 to the Company's Registration Statement on Form S-4
(Registration No. 333-50253)).
*10.20 Site License Agreement dated January 12, 1998 between Syntroleum and Syntroleum/Sweetwater Company,
L.L.C. (incorporated by referenced to Exhibit 10.28 to the Company's Registration Statement on Form
S-4 (Registration No. 333-50253)).
27 Financial Data Schedule and Restated Financial Data Schedules.
</TABLE>
______________________
* Incorporated by reference as indicated.
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE PERIOD ENDING SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 27,829
<SECURITIES> 13,777
<RECEIVABLES> 1,041
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,375
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 54,571
<CURRENT-LIABILITIES> 2,198
<BONDS> 0
0
0
<COMMON> 346
<OTHER-SE> 39,563
<TOTAL-LIABILITY-AND-EQUITY> 54,571
<SALES> 1,560
<TOTAL-REVENUES> 3,165
<CGS> 1,538
<TOTAL-COSTS> 2,388
<OTHER-EXPENSES> 8,535
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,698)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,666)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
<FN>
<F1>Disclosure not required on interim financial statements.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE PERIOD ENDING SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 1,579
<CGS> 0
<TOTAL-COSTS> 2,265
<OTHER-EXPENSES> 2,754
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> (3,247)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,245)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE PERIOD ENDING SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,158
<SECURITIES> 0
<RECEIVABLES> 448
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,622
<PP&E> 1,392
<DEPRECIATION> 147
<TOTAL-ASSETS> 12,091
<CURRENT-LIABILITIES> 776
<BONDS> 0
0
0
<COMMON> 245
<OTHER-SE> (1,487)
<TOTAL-LIABILITY-AND-EQUITY> 12,091
<SALES> 0
<TOTAL-REVENUES> 2,007
<CGS> 0
<TOTAL-COSTS> 7,647
<OTHER-EXPENSES> 4,326
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> (9,615)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,612)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
