UNITED STATES
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 MARCH 31, 1999.
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 NO. 0-21911
SYNTROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
KANSAS 43-1764632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1350 SOUTH BOULDER, SUITE 1100
TULSA, OKLAHOMA 74119-3295
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 592-7900
NOT APPLICABLE
(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 __.
--
At May 13, 1999, the number of outstanding shares of the issuer's common stock
was 26,900,052.
<PAGE>
SYNTROLEUM CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
PAGE
----
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements.
<S> <C>
Unaudited Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Unaudited Consolidated Statements of Operations for the three month
periods ended March 31, 1999 and 1998 . . . . . . . . . . . . . . . . 2
Unaudited Consolidated Statements of Stockholders' Equity for the three
month period ended March 31, 1999 . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statements of Cash Flows for the three month
periods ended March 31, 1999 and 1998 . . . . . . . . . . . . . . . . 4
Notes to Unaudited Consolidated Financial Statements. . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 14
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 14
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements as
well as historical facts. These forward-looking statements include statements
relating to the Syntroleum Process and related technologies, gas-to-liquids
plants based on the Syntroleum Process, anticipated costs to design, construct
and operate such plants, the timing of commencement and completion of the design
and construction of such plants, obtaining required financing for such plants,
the economic construction and operation of GTL plants, including the value,
markets and prices for and other characteristics of products produced by such
plants, the continued development of the Syntroleum Process (alone or with
partners), anticipated capital expenditures, anticipated revenues, 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 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 Syntroleum believes that the expectations reflected in these forward-
looking statements are reasonable, such statements involve risks and
uncertainties and actual results may not 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 the
cost of designing and constructing commercial-scale GTL plants will exceed
current estimates, 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, Syntroleum's ability
to obtain financing and other risks described in this Quarterly Report on Form
10-Q and Syntroleum's Annual Report on Form 10-K for the year ended December 31,
1998.
<PAGE>
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 36,186 $ 34,981
Short-term investments . . . . . . . . . . . . . . . . 3,152 3,135
Accounts and notes receivable. . . . . . . . . . . . . 1,126 860
Other current assets . . . . . . . . . . . . . . . . . 464 498
----------- --------------
Total current assets. . . . . . . . . . . . . . . . 40,928 39,474
REAL ESTATE HELD FOR SALE. . . . . . . . . . . . . . . . 3,122 3,122
REAL ESTATE UNDER DEVELOPMENT. . . . . . . . . . . . . . 3,994 2,722
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . 1,200 1,180
PROPERTY AND EQUIPMENT, net. . . . . . . . . . . . . . . 3,408 3,210
OTHER ASSETS, net. . . . . . . . . . . . . . . . . . . . 664 692
----------- --------------
$ 53,316 $ 50,400
=========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 1,111 $ 1,365
Accrued liabilities. . . . . . . . . . . . . . . . . . 638 633
Total current liabilities . . . . . . . . . . . . . 1,749 1,998
----------- --------------
OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . . 80 103
MINORITY INTERESTS . . . . . . . . . . . . . . . . . . . 1,331 1,337
DEFERRED REVENUE . . . . . . . . . . . . . . . . . . . . 11,000 11,000
Total liabilities . . . . . . . . . . . . . . . . . 14,160 14,438
----------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued. . . . . . . . . . . . - -
Common stock, $0.01 par value, 150,000,000 shares
authorized, 34,574,957 shares issued in 1999 and
1998, respectively, including shares in treasury. . 346 346
Additional paid-in capital . . . . . . . . . . . . . . 68,905 62,908
Notes receivable from sale of common stock . . . . . . (699) (699)
Retained earnings. . . . . . . . . . . . . . . . . . . (29,319) (26,516)
----------- --------------
39,233 36,039
Less-treasury stock, 7,674,905 shares in 1999 and 1998 (77) (77)
----------- --------------
Total stockholders' equity. . . . . . . . . . . . . 39,156 35,962
----------- --------------
$ 53,316 $ 50,400
=========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
1
<PAGE>
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Joint development revenue. . . . . . . . . . . . . . . $ 603 $ 385
Other. . . . . . . . . . . . . . . . . . . . . . . . . 163 -
------------ ------------
Total revenues. . . . . . . . . . . . . . . . . . . 766 385
------------ ------------
COST AND EXPENSES:
Real estate operating expense. . . . . . . . . . . . . 156 -
Pilot plant, engineering and research and development. 988 1,066
General and administrative . . . . . . . . . . . . . . 2,818 2,367
------------ ------------
INCOME (LOSS) FROM OPERATIONS. . . . . . . . . . . . . . (3,196) (3,048)
INVESTMENT AND INTEREST INCOME . . . . . . . . . . . . . 386 101
OTHER INCOME . . . . . . . . . . . . . . . . . . . . . . 1 -
------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS. . . . . . . . . (2,809) (2,947)
MINORITY INTERESTS . . . . . . . . . . . . . . . . . . . 6 19
------------ ------------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . $ (2,803) $ (2,928)
============ ============
NET INCOME (LOSS) PER SHARE -
Basic and diluted. . . . . . . . . . . . . . . . . . . $ ( .10) $ ( .12)
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING. . . . . . . . . . . . . . . . . . . . . . 26,900,052 24,500,236
============ ============
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
statements.
2
<PAGE>
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK NOTES
------------ ADDITIONAL RECEIVABLE TOTAL
NUMBER PAID-IN FROM SALE OF ACCUMULATED TREASURY STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL COMMON STOCK DEFICIT STOCK EQUITY
------------ ----------- ----------- -------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998. 34,575 $ 346 $ 62,908 $ (699) $ (26,516) $ (77) $ 35,962
SETTLEMENT OF MERGER
CONTINGENCY. . . . . . - - 5,997 - - - 5,997
NET INCOME (LOSS) . . . . - - - - (2,803) - (2,803)
BALANCE, March 31, 1999 . . 34,575 $ 346 $ 68,905 $ (699) $ (29,319) $ (77) $ 39,156
============ =========== =========== ============== ============= ========== ===============
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
statements.
3
<PAGE>
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) . . . . . . . . . . . . . . . . $(2,803) $(2,928)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations:
Minority interest in loss of subsidiary. . . . (6) (19)
Depreciation and amortization. . . . . . . . . 118 55
Equity in earnings of affiliates . . . . . . . (20) -
Changes in real estate held for sale and
under development . . . . . . . . . . . . . (1,272) -
Changes in assets and liabilities--
Accounts receivable. . . . . . . . . . . . (266) 246
Prepaids and other . . . . . . . . . . . . 33 (42)
Other assets . . . . . . . . . . . . . . . 26 (69)
Accounts payable . . . . . . . . . . . . . (254) (200)
Accrued liabilities and other. . . . . . . (63) 73
-------- --------
Net cash provided by (used in)
operating activities . . . . . . . . . (4,507) (2,884)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment. . . . . . . . (253) (408)
Maturity of SLH investments held to maturity. . . (17) -
-------- --------
Net cash provided by (used in)
investing activities. . . . . . . . . (270) (408)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Settlement of merger contingency. . . . . . . . . 5,997 -
Payments under capital lease. . . . . . . . . . . (15) (4)
Minority interest in investment in subsidiary . . - 1,000
-------- --------
Net cash provided by (used in)
financing activities. . . . . . . . . 5,982 996
-------- --------
NET INCREASE IN CASH. . . . . . . . . . . . . . . . 1,205 (2,296)
CASH AND CASH EQUIVALENTS,
beginning of period . . . . . . . . . . . . . . . 34,981 10,158
-------- --------
CASH AND CASH EQUIVALENTS, end of period. . . . . . $36,186 $ 7,862
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
statements.
4
<PAGE>
SYNTROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. BASIS OF REPORTING
Syntroleum Corporation (the "Company" or "Syntroleum"), formerly named SLH
Corporation ("SLH"), was incorporated in Kansas in December 1996. The
Company's primary operations to date have consisted of the research and
development of a proprietary process (the "Syntroleum Process") designed to
convert natural gas into synthetic liquid hydrocarbons. Synthetic crude oil
produced by the Syntroleum Process can be further processed into liquid fuels
such as diesel, kerosene and naphtha, or specialty products such as synthetic
lubricants, synthetic drilling fluid, waxes, liquid normal paraffins and certain
chemical feedstocks.
The consolidated financial statements included in this report have been
prepared by Syntroleum 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 Annual Report on Form 10-K for the year ended December 31, 1998
filed with the SEC under the Securities Exchange Act of 1934, as amended, on
March 31, 1999.
On August 7, 1998 Syntroleum Corporation, an Oklahoma 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 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.
Syntroleum received $6.0 million in satisfaction of a judgment in its
favor. The litigation, originally brought by Business Men's Assurance Company
(BMA) in 1986, alleged negligence and breach of contract arising out of the
design and construction of the BMA office tower in Kansas City, as a result of
marble panels detaching and falling from the building. The Missouri Supreme
Court ruled in favor of BMA on February 9, 1999. Rights to the litigation were
owned by SLH and were acquired by Syntroleum when it merged with SLH. The
settlement was recorded as additional paid-in capital during the first quarter
of 1999. The purchase allocations related to the Merger were completed on March
31, 1999.
5
<PAGE>
The results of operations of SLH have been included in the results of
Syntroleum since completion of the Merger on August 7, 1998. Unaudited pro
forma results of operations for the three months ended March 31, 1999 and 1998,
as though the Merger had occurred at January 1, 1998, are presented below. The
proforma results of operations are not necessarily indicative of the actual
operating results had the transaction been consummated at the beginning of the
period presented below or in future operating results of the combined
operations:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------
1999 1998
-------- -------
<S> <C> <C>
Revenues. . . . . . . . . . . . . $ 766 $3,623
Net income (loss) . . . . . . . . (2,803) (397)
Basic and diluted earnings (loss)
per share. . . . . . . . . . . $ (.10) $ (.02)
</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. EARNINGS PER SHARE
The Company applies the provisions of SFAS No. 128, "Earnings Per Share."
Basic and diluted earnings (losses) per common share were computed by dividing
net income (loss) by the weighted average number of shares of common stock
outstanding during the reporting period. Options to purchase 2,676,667 shares
of common stock at an average exercise price of $7.30 were not included in the
computation of diluted earnings per share as inclusion of such options would be
anti-dilutive. All share and per share amounts presented in the financial
statements reflect the adjustment for the Merger exchange ratio of 1.2899.
3. 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, 1998 financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 as filed with the SEC, and are
incorporated herein by reference.
<TABLE>
<CAPTION>
NOTE DESCRIPTION
- ---- -------------------------------------------
<C> <S>
1. Summary of Significant Accounting Policies
2. Investments
3. Property and Equipment
4. Notes Receivable from Sale of Common Stock
5. Accrued Liabilities
6. Income Taxes
7. Supplemental Cash Flow Information
9. Commitments
10. Stock Options
11. Cash Equivalents and Short-Term Investments
12. Stock Options
13. Significant Customers
14. Stockholder Rights Plan
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
MERGER TRANSACTION
Pursuant to the Agreement and Plan of Merger dated as of March 30, 1998 by and
between Syntroleum Corporation, an Oklahoma corporation ("Old Syntroleum"), and
SLH Corporation, a Kansas corporation ("SLH"), effective August 7, 1998, (1) Old
Syntroleum merged (the "Merger") with and into SLH, with SLH being the surviving
corporation (the surviving corporation in the Merger, together with its
subsidiaries and predecessors, is referred to herein as "Syntroleum" or the
"Company"), (2) SLH changed its name to "Syntroleum Corporation," (3) the
officers of SLH were replaced by the officers of Old Syntroleum, (4) six of the
eight SLH directors were replaced by Old Syntroleum directors, (5) each
outstanding share of Old Syntroleum's common stock was converted into the right
to receive 1.28990 shares of the Company's common stock, and (6) the Company's
Articles of Incorporation were amended to increase the number of authorized
shares of its common stock from 30,000,000 shares to 150,000,000 shares and the
number of authorized shares of its preferred stock from 1,000,000 shares to
5,000,000 shares. The Merger and related transactions are more fully described
in the Joint Proxy Statement/Prospectus filed with the Securities and Exchange
Commission on July 6, 1998.
The Merger was accounted for as a reverse acquisition using the purchase
method of accounting. 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. The discussion under
"-Results of Operations" below includes a comparison of the Company's results of
operations for the three months ended March 31, 1999 to Old Syntroleum's results
of operations for the three months ended March 31, 1998.
The following information should be read in conjunction with the
information presented elsewhere in this Quarterly Report on Form 10-Q and with
the information presented in Syntroleum's Annual Report on Form 10-K for the
year ended December 31, 1998 (including Syntroleum's financial statements and
notes thereto).
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: (1) 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; (2) 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; (3)
making available mobile GTL plants to customers on a contract basis through
efforts with industry partners and others; and (4) 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 and others with respect to joint ventures to develop
7
<PAGE>
specialty product GTL plants. Syntroleum has formed a joint venture with Enron
with respect to the development of a specialty products plant, although the
schedule for construction of this proposed plant has not yet been finally
determined. Syntroleum has entered into joint development arrangements with
Texaco, ARCO, Marathon, Bateman Engineering, Inc. ("Bateman"), AGC Manufacturing
Services, Inc. ("AGC"), GE Power Systems ("GE Power Systems"), DaimlerChrysler
AG ("DaimlerChrysler"), Catalytica Combustion Systems, Inc. ("Catalytica
Combustion Systems"), and AMEC Process and Energy Limited ("AMEC").
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 (1) sales of real estate holdings owned by SLH prior to the
Merger, (2) reimbursement for research and development activities associated
with the Syntroleum Process and (3) 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 will not receive any cash flow from GTL plants in which
it owns an equity interest until the first such plant is constructed.
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 gas, 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 (1) the yearly maximum design capacity of the
plant, (2) an assumed life of the plant and (3) 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 on 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 for a plant licensed 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.
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
8
<PAGE>
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. 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: (1) independent
development utilizing its own resources and (2) 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 March 31, 1999, Syntroleum's real estate
inventory consisted of (1) a seven-story parking garage in Reno, Nevada; (2) a
49.9% interest in a community shopping center in Gillette, Wyoming; (3)
undeveloped land in Houston, Texas (341 acres comprising the "Houston Project"),
Corinth, Texas (nine acres) and the Kansas City metropolitan area ( two acres at
the intersection of I-35 and 119th Street) and (4) an equity investment in a
hotel being renovated 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 March 31, 1999 of approximately
$7.1 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. The timing of real
estate sales will 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, and real estate
sales revenues should decrease as the current real estate inventory is
liquidated.
OPERATING EXPENSES
Syntroleum's operating expenses historically have consisted primarily of
pilot plant, engineering and research and development expenses and general and
administrative expenses, which include costs associated with general corporate
overhead, compensation expense, legal and accounting expense and other related
administrative functions. Syntroleum's policy is to expense pilot plant,
engineering 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 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. Syntroleum also expects to continue to incur
higher pilot plant, engineering and research and development expenses as it
9
<PAGE>
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 commencement of construction of specialty products
plants in which it owns an interest. 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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
Joint Development Revenue. Revenues from joint research and development
and pilot plant operations were $603,000 in the first quarter of 1999, up
$218,000 from the first quarter of 1998 when they were $385,000. The increase
was primarily due to revenue from ARCO in connection with research and
development activities related to the construction and preparation for start-up
of a GTL pilot plant at ARCO's Cherry Point, Washington refinery under a joint
development agreement with ARCO, offset by the completion during 1998 of
construction of the hybrid, multiphase (HMX) reactor at the Company's pilot
plant that was funded by Texaco under the joint development agreement with
Texaco.
Other Revenues. Other revenues were $163,000 in the first quarter of 1999,
up from zero in the first quarter of 1998. The increase resulted primarily from
parking and retail rentals at Syntroleum's parking garage in Reno, Nevada.
Pilot Plant, Engineering and R&D. Expenses from pilot plant, engineering
and research and development activities were $988,000 in the first quarter of
1999, down $78,000 from the first quarter of 1998 when these expenses were
$1,066,000. The decrease occurred as a result of lower activity associated with
the development of the hybrid multiphase reactor (HMX) developed with Texaco,
partially offset by research and development spending in other areas.
General and Administrative Expenses. General and administrative expenses
were $2,818,000 in the first quarter of 1999, up $451,000 from the first quarter
of 1998 when these expenses were $2,367,000. The increase is attributable to
higher wages and salaries resulting from higher staffing levels and higher rent
expense.
Investment, Interest and Other Income (Expense). Investment, interest and
other income increased to $393,000 in the first quarter of 1999, up $273,000
from the first quarter of 1998 when this income was $120,000. 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
quarter of 1999 and the first quarter of 1998 and did not recognize an income
tax benefit for such loss.
Net Income (loss). In the first quarter of 1999, Syntroleum experienced a
loss of $2,803,000. The loss was $125,000 lower than the first quarter of 1998
when Syntroleum experienced a loss of $2,928,000. The decrease in the loss is
as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As of March 31, 1999, Syntroleum had $36,186,000 in cash and short-term
investments and $1,749,000 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 were 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 March 31, 1999, the Company had
$963,000 in accounts receivable outstanding with its joint development partners
relating to joint development activities.
10
<PAGE>
Cash flows (used in) provided by operations were $(4,507,000) in the first
three months of 1999 compared to $(2,884,000) during the first three months of
1998. The increase in cash flows used in operations during the first quarter of
1999 compared to the first quarter of 1998 was primarily the result of an
increase in expenditures on real estate under development in Houston, Texas.
Additionally, during the first quarter of 1999, the Company had no real estate
sales.
Cash flows provided by (used in) investment activities were $(270,000) in
the first three months of 1999 compared to $(408,000) in the first three months
of 1998. The decrease in cash flows used in investment activities in the first
quarter of 1999 compared to the first quarter of 1998 resulted from lower
spending on property and equipment. Cash flows provided by financing activities
were $5,982,000 in the first three months of 1999 compared to $996,000 in the
first three months of 1998. The increase was primarily due to the receipt of
approximately $6.0 million in satisfaction of a judgment in favor of Syntroleum
which was a Merger contingency and has been recorded as additional paid in
capital. Cash flows in 1998 primarily reflected the investment by Enron in
Syntroleum/Sweetwater Company, LLC.
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.
INITIAL SPECIALTY PRODUCT GTL PLANT
In May 1997, Syntroleum formed a joint venture through which Syntroleum
intends to develop an 8,000-barrel-per-day specialty product plant.
Syntroleum has issued a site license and contributed a total of $2 million
to the joint venture formed to own and operate this 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 a majority interest. In January
1998, Enron contributed $1 million in exchange for a four percent interest in
this joint venture and agreed to contribute an additional approximately $14
million in exchange for an additional seven percent interest 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. The
capital costs of this plant are currently expected to be funded by a combination
of project senior and subordinated debt and additional equity financing. Actual
ownership percentages may vary from current estimates depending on the terms of
subsequent financings. 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 this joint venture, Enron may elect during a period of
two years to exchange its interest in this joint venture for a number of shares
of Syntroleum's common stock equal to the quotient of the amount of Enron's
contributions to this joint venture 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 this joint venture. 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 this joint venture, Enron may elect during a period of up to
10 years to require Syntroleum to purchase its interest in this joint venture
for a price equal to three times the annual average cash distributions made to
Enron by this joint venture during the preceding three-year period.
Syntroleum plans to fund the remaining estimated capital cost of this plant
through project equity and debt financing. During the first quarter of 1999,
Syntroleum continued to pursue development of the project. Syntroleum is
currently reviewing preliminary design and cost estimates for the plant and
exploring sources of debt and equity capital to fund final design and
11
<PAGE>
construction. However, there can be no assurance that the necessary capital for
this project will be obtained. The schedule for construction of this plant has
not yet been finally determined.
PROPOSED REINCORPORATION
On May 7, 1999, the Company's board of directors approved an Agreement and
Plan of Merger (the "Merger Agreement") dated as of May 7, 1999 between the
Company and Syntroleum Corporation, a Delaware corporation and a wholly-owned
subsidiary of the Company ("Syntroleum-Delaware"). Pursuant to the Merger
Agreement, the Company will merge with and into Syntroleum-Delaware, with
Syntroleum-Delaware being the surviving corporation. This merger will result in
a change in the Company's state of incorporation from Kansas to Delaware. In
the merger, each share of the Company's common stock will automatically convert
into one share of common stock of Syntroleum-Delaware. The merger is subject to
certain conditions to closing, including the approval of the merger by the
Company's stockholders at their annual meeting scheduled for June 17, 1999.
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, banks and securities markets.
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, has contacted
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 Syntroleum's assumptions may prove to be inaccurate and actual results could
differ significantly from these assumptions. In conducting its Year 2000
compliance efforts, Syntroleum 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. These representations might not
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
12
<PAGE>
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 March 31, 1999, the Company had no outstanding derivative
instruments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Syntroleum had short-term investments in the form of U.S. Treasury
securities as of March 31, 1999. The majority of these securities mature in
less than 90 days. The Company's policy is to hold short-term securities to
maturity which minimizes interest rate risk. The average interest rate on these
investments at March 31, 1999 was approximately 4.8%.
Syntroleum does not currently conduct any material operations in foreign
markets. Accordingly, Syntroleum does not have market risk related to foreign
exchange rates.
Syntroleum does not purchase futures contracts nor does it purchase or hold
any derivative financial instruments.
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 February 1999,
Syntroleum received $6.0 million in satisfaction of a judgment in favor of the
Company against Skidmore, Owings & Merrill ("SOM"). The judgment was the result
of a lawsuit initiated in 1986 in the Circuit Court of Jackson County, Missouri
by Lab Holdings' former insurance subsidiary, Business Men's Assurance Company
of America against SOM, an architectural and engineering firm, and against 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 by Lab Holdings of the
insurance subsidiary, Lab Holdings negotiated with the buyer of the insurance
subsidiary for an assignment of the cause of action from the insurance
subsidiary. Under the Distribution Agreement, Lab Holdings 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. In 1992, a $5.7 million
judgment was granted against SOM in favor of Lab Holdings. In September 1993,
the Missouri Court of Appeals reversed the judgment and 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 and on January 21, 1997, the
court entered a judgment against SOM in favor of Lab Holdings for the benefit of
the Company for approximately $5.8 million. SOM 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 of Appeals overruled the defendant's motion for
reconsideration and denied SOM's request for transfer of the appeal to the
Missouri Supreme Court. The Missouri Supreme Court, upon direct request of SOM,
subsequently accepted transfer of the appeal for reconsideration of the opinion
issued by the Court of Appeals. Finally, on February 9, 1999, the Missouri
Supreme Court affirmed the judgment in favor of the Company and the Company
subsequently received the $6.0 million.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports on Form 8-K. On February 16, 1999, Syntroleum filed with the
Securities and Exchange Commission a Current Report on Form 8-K dated February
15, 1999 containing information with respect to Item 4, Changes in the
Registrant's Certifying Accountants. On February 25, 1999, Syntroleum filed
with the Securities and Exchange Commission Amendment No. 1 to such Current
Report on Form 8-K dated February 25, 1999 correcting certain information set
forth therein.
Exhibits. The following exhibits are filed as part of this quarterly
report:
<TABLE>
<CAPTION>
<C> <S>
*2.1 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).
*2.2 Blanket Assignment, Bill of Sale, Deed and Assumption Agreement dated February 28, 1997
between Seafield Capital Corporation and SLH (incorporated by reference to Exhibit 2(b) to
the Company's Annual Report on Form 10-K for the year ended December 31, 1996).
*2.3 Agreement and Plan of Merger dated as of May 7, 1999 between the Company and Syntroleum
Corporation, a Delaware corporation (incorporated by reference to Appendix A to the
Company's Proxy Statement filed with the Securities and Exchange Commission on May 12,
1999).
*3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3(a) to the
Form 10 of the Company 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).
*10.1 Employment Agreement between Syntroleum and Carla S. Covey dated March 22, 1999
(incorporated by reference to Exhibit 10.31 to Amendment No. 1 to the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1998).
*10.2 Employment Agreement between Syntroleum and Michael L. Stewart dated March 22, 1999
(incorporated by reference to Exhibit 10.32 to Amendment No. 1 to the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1998).
27 Financial Data Schedule and Restated Financial Data Schedules.
____________________
</TABLE>
* Incorporated by reference as indicated.
14
<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: May 13, 1999 By: /s/ Kenneth L. Agee
-------------------
Kenneth L. Agee
Chief Executive Officer and Chairman of
the Board (Principal Executive Officer)
Date: May 13, 1999 By: /s/ Randall M. Thompson
-----------------------
Randall M. Thompson
Chief Financial Officer (Principal
Financial Officer)
15
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- -------- ----------------------
<C> <S>
*2.1 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).
*2.2 Blanket Assignment, Bill of Sale, Deed and Assumption Agreement dated February 28, 1997
between Seafield Capital Corporation and SLH (incorporated by reference to Exhibit 2(b) to
the Company's Annual Report on Form 10-K for the year ended December 31, 1996).
*2.3 Agreement and Plan of Merger dated as of May 7, 1999 between the Company and Syntroleum
Corporation, a Delaware corporation (incorporated by reference to Appendix A to the
Company's Proxy Statement filed with the Securities and Exchange Commission on May 12,1999).
*3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3(a) to the
Form 10 of the Company 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).
*10.1 Employment Agreement between Syntroleum and Carla S. Covey dated March 22, 1999
(incorporated by reference to Exhibit 10.31 to Amendment No. 1 to the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1998).
*10.2 Employment Agreement between Syntroleum and Michael L. Stewart dated March 22, 1999
(incorporated by reference to Exhibit 10.32 to Amendment No. 1 to the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1998).
27 Financial Data Schedule and Restated Financial Data Schedules.
____________________
</TABLE>
* Incorporated by reference as indicated.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE PERIOD ENDING MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 36186
<SECURITIES> 3152
<RECEIVABLES> 1126
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40928
<PP&E> 0 <F1>
<DEPRECIATION> 0 <F1>
<TOTAL-ASSETS> 53316
<CURRENT-LIABILITIES> 1749
<BONDS> 0
<COMMON> 346
0
0
<OTHER-SE> 38810
<TOTAL-LIABILITY-AND-EQUITY> 53316
<SALES> 0
<TOTAL-REVENUES> 766
<CGS> 0
<TOTAL-COSTS> 1144
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2803)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2803)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2803)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
<FN>
<F1> Disclosure is not required on interim financial statements.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE PERIOD ENDING MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7862
<SECURITIES> 0
<RECEIVABLES> 183
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8123
<PP&E> 0 <F1>
<DEPRECIATION> 0 <F1>
<TOTAL-ASSETS> 10018
<CURRENT-LIABILITIES> 649
<BONDS> 0
<COMMON> 245
0
0
<OTHER-SE> 3925
<TOTAL-LIABILITY-AND-EQUITY> 10018
<SALES> 0
<TOTAL-REVENUES> 385
<CGS> 0
<TOTAL-COSTS> 1066
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2928)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2928)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2928)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
<FN>
<F1> Disclosure is not required on interim financial statements.
</FN>
</TABLE>
