UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-16946
SEAFIELD CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
Missouri 43-1039532
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 410949
2600 Grand Ave., Suite 500
Kansas City, Missouri 64141
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(Address of principal (Zipcode)
executive offices)
Registrant's telephone number, including area code (816) 842-7000
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Number of shares outstanding of only class of Registrant's common stock as of
August 8, 1994: $1 par value common - 6,361,021
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- - -------------------------------------------------------------------------------
June 30, December 31,
1994 1993
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(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 4,634 15,491
Short-term investments 74,571 80,069
Accounts and notes receivable 33,637 32,296
Current income tax receivable 1,162 1,325
Deferred income tax assets 1,812 1,621
Other current assets 9,168 8,924
Current assets of discontinued real estate
operations - net 114 336
------------------------
Total current assets 125,098 140,062
Property, plant and equipment 26,200 27,767
Investments:
Securities 9,173 8,274
Notes receivable 1,507 1,394
Oil and gas 7,353 8,381
Intangible assets 30,833 33,178
Other assets 3,237 2,977
Non-current assets of discontinued real estate
operations - net 52,455 52,260
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$ 255,856 274,293
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,947 6,746
Notes payable 2,649 4,571
Other current liabilities 8,526 9,552
------------------------
Total current liabilities 19,122 20,869
Notes payable 16 18
Deferred income tax liabilities (185) 723
Other liabilities 4,907 4,197
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Total liabilities 23,860 25,807
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Minority interests 22,321 22,816
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Stockholders' equity:
Preferred stock of $1 par value.
Authorized 3,000,000 shares; none issued -- --
Common stock of $1 par value.
Authorized 24,000,000 shares; issued
7,500,000 shares 7,500 7,500
Paid-in capital 1,003 1,007
Equity adjustment from foreign
currency translation (510) (350)
Retained earnings 232,462 235,583
------------------------
240,455 243,740
Less cost of 1,138,979 shares of treasury stock
(1993-766,755) 30,780 18,070
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Total stockholders' equity 209,675 225,670
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$ 255,856 274,293
========================
See accompanying notes and management's discussion and analysis of financial
statements.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
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Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
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(in thousands except per share amounts)
REVENUES
Insurance services $ 17,442 19,542 34,208 38,734
Healthcare services 10,783 9,807 20,553 18,569
Other 2,709 2,993 5,723 6,145
---------------------- ----------------------
Total revenues 30,934 32,342 60,484 63,448
COSTS AND EXPENSES
Insurance services 8,611 8,692 16,497 17,045
Healthcare services 10,038 9,364 19,681 16,723
Other 2,544 2,912 5,604 6,891
Selling, general
and administrative 9,864 8,674 19,171 18,295
--------------------- ----------------------
Earnings (loss) from operations (123) 2,700 (469) 4,494
Investment income - net 749 582 2,275 1,654
Other income (expense) 43 (25) 122 (43)
--------------------- ----------------------
Earnings before income taxes 669 3,257 1,928 6,105
Income taxes 464 1,649 1,151 3,039
---------------------- ----------------------
Earnings before
minority interests 205 1,608 777 3,066
Minority interests 158 699 82 1,285
---------------------- ----------------------
Net earnings $ 47 909 695 1,781
====================== ======================
Per share of common stock:
Net earnings $ .01 .13 .11 .26
Dividends $ .30 .30 .60 .60
Book value $ 32.96 33.68
Average shares outstanding 6,508,044 6,823,391 6,525,668 6,833,352
Shares outstanding end of period 6,361,021 6,708,542
See accompanying notes and management's discussion and analysis of financial
statements.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
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Six Months Ended
June 30, 1994
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(in thousands)
Common stock:
Balance, beginning of year $ 7,500
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Balance, end of period 7,500
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Paid-in capital:
Balance, beginning of year 1,007
Exercise of stock options (4)
---------
Balance, end of period 1,003
---------
Foreign currency translation:
Balance, beginning of year (350)
Net change during period (160)
---------
Balance, end of period (510)
---------
Retained earnings:
Balance, beginning of year 235,583
Net earnings 695
Dividends paid (3,816)
---------
Balance, end of period 232,462
---------
Less:
Treasury stock:
Balance, beginning of year 18,070
Exercise of stock options (242)
Shares purchased (382,350 shares) 12,952
---------
Balance, end of period 30,780
---------
Stockholders' Equity $ 209,675
=========
See accompanying notes and management's discussion and analysis of
financial statements.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
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Six months ended June 30,
1994 1993
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OPERATING ACTIVITIES
Earnings from operations $ 695 1,781
Adjustments to reconcile earnings from operations
to net cash provided (used) by operations:
Depreciation and amortization 7,494 9,192
Earnings applicable to minority interests 82 1,285
Change in short-term trading portfolio, net 762 --
Change in accounts receivable 939 (1,672)
Change in accounts payable 1,222 (1,468)
Income taxes and other (604) (5,256)
------------------------
Net cash provided by continuing operations 10,590 3,862
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INVESTING ACTIVITIES
Purchases of investments (2,207) (8,682)
Sales or maturities of investments 242 5,101
Secruitization of receivables 2,300 --
Additions to property, plant and equipment, net (2,683) (2,008)
Oil and gas investments (666) (318)
Short-term investments 957 4,292
Net cash used by discontinued real estate operations 27 6,701
Other, net (604) 231
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Net cash provided (used) by investing activities (2,634) 5,317
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FINANCING ACTIVITIES
Payments under line of credit ageements, net (1,870) (433)
Proceeds from long-term debt -- 500
Payment of principal on long-term debt (57) (904)
Payment of capital lease (210) --
Dividends paid (3,816) (4,025)
Purchase of treasury stock (12,952) --
Issuance of common stock 238 21
------------------------
Net cash used by financing activities (18,667) (4,841)
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Effect of foreign currency translation (146) 213
------------------------
Net increase (decrease) in cash
and cash equivalents (10,857) 4,551
Cash and cash equivalents - beginning of period 15,491 2,246
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Cash and cash equivalents - end of period $ 4,634 6,797
========================
Cash paid during the period for:
Interest (net of amount capitalized) $ 160 332
========================
Income taxes, net $ 583 3,899
========================
See accompanying notes and management's discussion and analysis of financial
statements.
SEAFIELD CAPITAL CORPORATION
Notes to Consolidated Financial Statements
June 30, 1994 and 1993
(1) The financial information furnished herein, in the opinion of management,
reflects all adjustments which are necessary to fairly state the Registrant's
financial position at June 30, 1994 and December 31, 1993 and the results of
its operations and cash flows for the periods ended June 30, 1994 and 1993.
The financial statements have been prepared in conformity with generally
accepted accounting principles appropriate in the circumstances, and therefore
included in the financial statements are certain amounts based on management's
informed estimates and judgments. The financial information herein is not
necessarily representative of a full year's operations because levels of
sales, interest rates and other factors fluctuate throughout the fiscal year.
These same considerations apply to all year to year comparisons. Certain 1993
amounts have been reclassified for comparative purposes with no effect on net
earnings. See the Registrant's Annual Report pursuant to Section 13 to the
Securities Exchange Act of 1934 (Form 10-K) for additional information not
required by this Quarter's Report (Form 10-Q).
(2) Cash and cash equivalents include demand deposits in banks and overnight
investments.
(3) A lawsuit was initiated in 1986 by the Registrant's former insurance
subsidiary against an architectural and engineering firm and a construction
firm to recover costs incurred to remove and replace the facade on the former
home office building. Because the costs had been incurred prior to any
discussions regarding a sale of the insurance company, Registrant negotiated
with the buyer for an assignment of the cause of action from the insurance
company. Thus, any recovery will be for the benefit of the Registrant and all
costs incurred in connection with the litigation will be paid by the
Registrant. Any ultimate recovery will be recognized as income when received
and would be subject to income taxes. In September 1993, the Missouri Court
of Appeals reversed a $5.7 million judgment granted in 1992 in favor of the
Registrant. Trial counsel was authorized to seek a rehearing by the Court of
Appeals, and failing that, a review by the Missouri Supreme Court. The Court
of Appeals notified counsel in November 1993 that it would rehear the case
without oral arguments or further briefs.
In 1990, the Registrant's former insurance subsidiary was joined in an
existing lawsuit by the Federal Deposit Insurance Corporation (FDIC) as
successor to Sunbelt Service Corporation. The FDIC alleged that the insurance
subsidiary was obligated under a repurchase agreement in the approximate
amount of $6 million. Following a mediation proceeding, all claims involving
Seafield were dismissed with prejudice by order of the court signed in
February 1994.
In February 1988, a lawsuit was initiated against the Registrant's former
insurance subsidiary by its former partners in the Quail Run real estate
project in Santa Fe, New Mexico. The plaintiffs alleged that the project
partnership agreement was improperly terminated, thus denying them an ongoing
interest in the project, and that their exclusive real estate brokerage
arrangement was improperly terminated, thus denying them commissions from
sales of project units and adversely affecting their brokerage business
generally. The plaintiffs were seeking approximately $11 million in actual
damages and unspecified punitive damages based upon alleged breaches of
contract and fiduciary duty and economic compulsion, all arising out of the
purchase of the plaintiffs' interest in the project partnership. After a
four-week trial in July 1994, the jury returned a verdict absolving Registrant
of any liability. The verdict is subject to appeal.
Because the Quail Run project was retained by Registrant in connection with
the sale of its former insurance subsidiary, Registrant defended the lawsuit
under an indemnification arrangement with the purchaser of the former
insurance subsidiary; all costs incurred have been paid by the Registrant. In
addition, in the event of an appeal of the recent verdict, all costs incurred
will be for the account of the Registrant.
In the opinion of management, after consultation with legal counsel and based
upon current available information, none of these lawsuits is expected to have
a significant impact on the consolidated financial position of the Registrant.
(4) Statement of Financial Accounting Standards No. 112 Employer's
Accounting for Postemployment Benefits was implemented in the first quarter
of 1994. The adoption of this standard had no significant impact on the
Registrant's financial position or results of operations.
(5) Earnings per share of common stock are based on the weighted average
number of shares of common stock outstanding and the common share equivalents
of dilutive stock options.
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Selected financial data
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
Revenues $ 30,934,000 32,342,000 60,484,000 63,448,000
Earnings (loss)
from operations $ (123,000) 2,700,000 (469,000) 4,494,000
Investment
Income - Net $ 749,000 582,000 2,275,000 1,654,000
Net earnings $ 47,000 909,000 695,000 1,781,000
Per share:
Net earnings $ .01 .13 .11 .26
Dividends per share $ .30 .30 .60 .60
Book value per share $ 32.96 33.68
Average shares
outstanding 6,508,044 6,823,391 6,525,668 6,833,352
Shares outstanding
end of period 6,361,021 6,708,542
Insurance Services Segment
The following businesses are considered to be in the insurance services
segment: laboratory testing for the life, disability and health insurance
industries, underwriting and policy administration services and insurance
premium finance services.
LabOne, Inc. (LabOne), an 82% owned subsidiary of Seafield Capital Corporation
(Seafield), is a publicly-traded company (NASDAQ-LABS). LabOne currently
generates revenue primarily from laboratory testing of insurance policy
applicants for insurance companies. The tests performed by LabOne are
specifically designed to assist an insurance company in objectively evaluating
the mortality and morbidity risks posed by policy applicants. The majority of
the testing is performed on individual and group life insurance policy
applicants. LabOne also provides testing services on individual and group
medical and disability policies.
LabOne offers a core group of urine tests, controlled substance tests,
insurance-oriented blood chemistry profiles and a series of AIDS-related
tests. The following table summarizes LabOne's sales from such tests, and
from other operations (primarily the sale of specimen kits):
Three months ended June 30, Six months ended June 30,
1994 1993 1994 1993
---------------------------- ---------------------------
Urinalyses $ 2,464,000 2,657,000 4,884,000 5,273,000
Controlled
substances 2,591,000 3,401,000 5,192,000 6,861,000
Blood chemistry
profile 4,357,000 5,182,000 8,779,000 10,348,000
AIDS-related
tests 3,157,000 3,901,000 6,300,000 7,826,000
Other 3,012,000 3,074,000 5,693,000 5,858,000
-------------------------- --------------------------
$ 15,581,000 18,215,000 30,848,000 36,166,000
========================== ==========================
LabOne's reported net earnings of $1.9 million for the second quarter of 1994
on revenues of $15.6 million, compared to the prior year's second quarter net
earnings of $3 million on revenues of $18.2 million. For the six months ended
June 30, 1994, LabOne's reported net earnings of $3.9 million on revenues of
$30.8 million, compared to the prior year's six months net earnings of $6
million on revenues of $36.2 million
LabOne's decrease in revenue of $2.6 million in the second quarter of 1994 can
be attributed to an 11% decrease in the total number of applicants tested and
a 7% decline in the average revenue per applicant. Insurance industry reports
indicate that the number of policies written in 1994 is significantly less
than during the same period in 1993. The decline in the total number of
applicants tested can be attributed primarily to the reduction in the number
of policy applications written. Average revenue per applicant declined due to
certain price decreases as a result of continued competitive pressures.
LabOne's revenue decrease in the first six months of $5.4 million or 15% can
be attributed primarily to a 10% decrease in the total number of applicants
tested and an 8% decrease in the average revenue per applicant. These
decreases were partially offset by increases in ancillary blood and urine test
revenue.
LabOne's cost of sales decreased in the second quarter of 1994 by $246,000 as
compared to the prior year's second quarter. This decrease is due primarily
to the decrease in testing volume and unit cost reductions for specimen kits
and net freight expenses. The second quarter expense reductions were
partially offset by an increase in expenses incurred due to the expansion into
clinical laboratory testing of approximately $400,000. Cost of sales declined
$794,000 in the six month period ended June 30, 1994 as compared to the prior
year's period. This decrease is due primarily to decreases in testing volume,
a decrease in depreciation and amortization expenses and unit cost reductions
for specimen kits and net freight expenses. These expense reductions were
partially offset by an increase in expenses related to the clinical
diversification.
LabOne's selling, general and administrative expenses increased $68,000 in the
second quarter 1994 from the same period last year, primarily due to increased
expenses related to the clinical diversification of approximately $500,000.
The second quarter increases were partially offset by an approximate $200,000
reduction in depreciation expense due to certain equipment being retired or
fully depreciated and by a decrease of approximately $200,000 in commissions
and bonus expense. LabOne's selling, general and administrative expenses
decreased $361,000 in the first six months of 1994 due primarily to lower
depreciation expense, commissions and bonus expense which were partially
offset by an increase in expenses related to the clinical diversification.
In August 1993, LabOne announced a plan to diversify into the clinical testing
market. Clinical testing became operational on April 15, 1994. In May 1994,
LabOne announced the signing of an agreement with PCS Health Systems to market
an integrated and fully managed system of laboratory testing and
administration services for payers and health plans throughout the United
States.
In June 1994, LabOne announced that it had received SAMHSA (formerly NIDA)
certification by the United States Department of Health and Human Services.
This certification allows LabOne to perform laboratory testing to detect drugs
of abuse in Federal employees and in workers governed by federal regulations,
such as the Department of Transportation. Many major companies with drug
testing programs also require their laboratories to be SAMHSA certified.
In July 1994, LabOne announced that it and PCS Health Systems have signed an
agreement with Principal Mutual Life Insurance Company to provide a managed
clinical laboratory testing program to Principal Mutual. Principal Mutual
provides health coverage to over 3 million people in the United States.
Initially, services will be offered in three metropolitan areas, involving
200,000 covered lives. It is expected that patient service centers will be
opened later in 1994 to provide phlebotomy services and laboratory testing for
Principal Mutual.
The insurance premium finance services operations were profitable during the
second quarters and first six months of 1994 and 1993. In the second quarter
of 1994, this subsidiary originated $20 million of new premium finance
contracts, compared to $16.9 million for the same quarter in 1993. The number
of contracts processed also continues to increase with 3,709 contracts
processed during the second quarter of 1994, compared to 2,891 contracts in
1993's second quarter.
The underwriting and policy administration services revenue increased 108% in
1994's second quarter and 72% in the first six months as compared to the prior
year's periods. While new business development is positive, this subsidiary
incurred losses during the second quarter and first six months. A couple of
quarters are required before production from new clients has a positive impact
on earnings and cash flow.
Healthcare Services Segment
The following businesses are considered to be in the healthcare services
segment: advanced cancer treatment services and radiopharmaceuticals and
related services for nuclear medicine.
Response Technologies, Inc. (Response), a 59% owned subsidiary of Seafield, is
a publicly-traded company (AMEX-RTK). Response is a leading provider of
advanced cancer treatments and related services, principally on an outpatient
basis, through treatment centers operated by Response. The Centers, known as
IMPACT(registered trademark) (IMPlementing Advanced Cancer Treatments)
Centers, are staffed by experienced oncology nurses, laboratory technologists,
pharmacists and other support personnel to deliver outpatient services under
the direction of private practicing oncologists. The primary treatments
provided by the Centers involve high-dose chemotherapy coupled with support of
the patient's immune system through the use of autologous peripheral blood
stem cell reinfusion. The Centers also provide home pharmacy and outpatient
infusional services for its patients.
As of June 30, 1994, Response had 29 IMPACT(registered trademark) Centers or
hospital affiliates located in California, Colorado, Florida, Georgia,
Indiana, Massachusetts, Michigan, Minnesota, Missouri, New Mexico, North
Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas and Virginia.
Response anticipates continued expansion through a combination of corporate-
owned and hospital-based centers over the next few years.
Response is devoting significant marketing effort to the development of
additional centers based within client hospitals. Response will provide
turnkey assistance to the hospital including protocols, data collection and
analysis, employee training, reimbursement support and a nurse coordinator to
manage the program. This arrangement will allow a hospital to gain greater
utilization of its existing staff and facilities by offering high-dose
chemotherapy treatments without incurring additional overhead. These
hospital-based centers may entail a joint venture relationship or a management
agreement.
Response continues to undertake significant efforts to establish provider
relationships to redirect patients to its Centers and to establish contractual
pricing arrangements. During the second quarter, national provider contracts
were consummated with U.S. Healthcare of Blue Bell, Pennsylvania, Hines &
Associates, Inc. of Elgin, Illinois and several other insurance or managed
care companies. U.S. Healthcare is an HMO with over 1.6 million members in
eight states and Washington, D.C. Hines & Associates is a managed care
company providing precertification, utilization review and case management
services throughout the United States. The agreements allow all
IMPACT(registered trademark) Centers to deliver high-dose chemotherapy with
peripheral blood stem cell (PBSC) support and other advanced cancer treatments
at a reduced rate.
Subsequent to the quarter ended June 30, 1994, Response opened an advanced
cancer treatment center in a cooperative arrangement with DeKalb Medical
Center in Atlanta, Georgia (the Hospital). Through an agreement with the
Hospital, Response will provide technical and administrative services,
including treatment protocols and data management, employee training and
reimbursement support. Patient care and laboratory services will be provided
and billed to third parties by the Hospital, with a management fee paid to
Response. The center represents a transition of Response's wholly-owned and
operated IMPACT(registered trademark) Center which was established in Atlanta
in December 1991 to a cooperative center with the Hospital.
Response reported a net loss of $546,000 for the second quarter of 1994 on
revenues of $9.3 million, compared to the prior year's second quarter net
earnings of $50,000 on revenues of $9 million. For the six months ended June
30, 1994, Response incurred a net loss of $l.5 million on revenues of $17.8
million, compared to the prior year's six months net earnings of $270,000 on
revenues of $17 million. A new treatment regimen has been introduced into
Response's IMPACT(registered trademark) Center network based upon its
promising results in advanced breast cancer. This regimen is more intensive
by design and may help achieve durable remission for a greater proportion of
breast cancer patients. Close attention to patient safety has required some
slowing of patient accrual as physician directors have been appropriately
selective and deliberate in deploying this new regimen. Improved results over
the prior quarter reflect a gradual recovery of patient volume during this
transition period.
Response's 1994 second quarter operating expenses increased $241,000 or 3%
when compared to the quarter ended June 30, 1993. Operating expenses for the
six months ended June 30, 1994 increased $1.3 million or 10% when compared to
the six months ended June 30, 1993. These expenses consist of payroll costs,
pharmaceutical and laboratory expenses, rent expense and other operational
expenses. Operating expenses display a high degree of variability in
proportion to IMPACT(registered trademark) Center revenue. The increase in
operating expenses is primarily attributable to the opening of five additional
Centers from the comparable prior year period and the maturation of the
existing Centers. Operating expenses as a percent of net revenue were 81% for
the quarters and 83% and 79% for the six month periods ended June 30, 1994 and
1993, respectively. This is primarily attributable to lower than expected
revenues for the quarter and six months ended June 30, 1994.
Response's general and administrative costs for the quarter ended June 30,
1994 increased $409,000 or 57% when compared to the quarter ended June 30,
1993. These expenses increased $828,000 or 62% for the six months ended June
30, 1994 when compared to the six months ended June 30, 1993. The increase is
primarily attributable to payroll and relocation costs related to Response's
actions to bolster its medical and scientific management to support future
growth, including the addition of an oncologist to serve as scientific
director. In addition, professional fees were paid during the quarter and six
months ended June 30, 1994 for quality review of Response's clinical data and
for public relations. Increased legal expenses were incurred during the
quarter and six months ended June 30, 1994 related to treatment
preauthorization appeals and Response's appeal of state regulatory issues in
Ohio. As a percentage of net revenue, general and administrative costs were
12% for the quarter and six months ended June 30, 1994 compared to 8% for the
quarter and six months ended June 30, 1993.
Response's provision for doubtful accounts increased $141,000 or 28% and
$218,000 or 21% between the quarters and for the six months periods ended June
30, 1994 and 1993, respectively. The provision as a percentage of net revenue
was 7% and 6% for the quarters and for the six months periods ending June 30,
1994 and 1993. The provision for the second quarter and six months ended June
30, 1993 benefited from significant bad debt recoveries.
Seafield's second healthcare operating subsidiary, Pyramid Diagnostic
Services, Inc. (Pyramid), reported a small loss in the second quarter and
first six months of 1994 compared to a small profit in last year's periods.
While start-up costs associated with two new pharmacies, which opened in late
1993, negatively impacted operating results during 1994's first six months,
these two pharmacies have both achieved profitability. Pyramid has also added
staffing at the corporate level to offer clinical trials and healthcare
physics services to its customers. Currently, four pharmacies distribute
radiopharmaceuticals and related services to nuclear medicine departments in
hospitals and clinics. Pyramid anticipates opening two new pharmacies in each
of the third and fourth quarters of 1994.
Other Operating Results
Seafield's oil and gas subsidiary produced a small profit in the first six
months of 1994, compared to a loss during 1993's first six months. Seafield's
pre-tax cash flow from oil and gas investments in the first six months of 1994
totaled approximately $1.5 million. On January 1, 1993, Seafield increased
its ownership position from 50% to 79% in a real estate, personal property,
sales and use taxes consulting firm. Other revenues in 1994's second quarter
included $2.8 million from the tax consulting firm, compared to $3.1 million
in 1993's second quarter.
Other investments contributing earnings include venture capital and liquidity
investments. The return on short-term investments is included in the
investment income line in the consolidated statements of earnings. Investment
income totaled $2.3 million in 1994's first six months compared to $1.7
million in last year's first six months. The increase during 1994 in
investment income resulted from gains on marketable securities exceeding
decreases in values of marketable securities held. In 1994, the consolidated
effective tax rate increased primarily due to a change in the percentage
relationship of non-deductible goodwill to pre-tax earnings.
Seafield has investments in two majority-owned entities that are publicly
traded. At June 30, 1994, based on the market prices of publicly-traded shares
of these two subsidiaries, pretax unrealized gains of approximately $168
million on these investments were not reflected in either Seafield's book
value or stockholders' equity.
Real Estate-discontinued operations
In 1992, Seafield's board of directors approved a plan for the discontinuance
of real estate operations. After reviewing sales activity and appraisals in
1992, Seafield believed it was an appropriate time to discontinue real estate
operations and sell the remaining real estate assets as soon as practicable.
Seafield holds real estate through a wholly-owned subsidiary, Scout
Development Corporation. The real estate holdings are diverse in location and
include residential land, undeveloped land, single-family housing, and
commercial structures.
As a result of the decision to discontinue real estate, a $6 million after-tax
provision for estimated write-downs and costs through final disposition was
included in 1992's financial statements. Real estate revenues were $4.4
million during 1994's first six months compared to $10.7 million in last
year's first six months. The 1994 sales include 2 residential lots in Texas
and 15 residential lots and units in Florida and New Mexico. Real estate
sales in 1993's first six months consisted of 7 residential lots in Texas and
42 residential units in Florida and New Mexico.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1994 at the holding company level, Seafield had available for
operations approximately $35.5 million in cash, cash equivalents and
marketable common stocks with an additional $6.6 million in long-term
securities. On a consolidated basis, Seafield and its subsidiaries had $79.2
million (primarily LabOne with $40.7 million) in cash and short-term
investments and $9.2 million in long-term securities. Current assets totaled
approximately $125.1 million while current liabilities totaled $19.1 million.
Net cash provided by consolidated operations in 1994's first six months was
$10.6 million compared to net cash provided of $3.9 million in last year's
first six months which resulted primarily from changes in accounts receivable,
accounts payable and income taxes.
In August 1990, Seafield's board of directors authorized $70 million for the
acquisition of Seafield and LabOne common stock. Up to $20 million of this
authorization could be utilized to purchase LabOne stock. At December 31,
1993, Seafield had $4.6 million remaining of the $50 million authorization for
Seafield common stock. In January 1994, Seafield's board of directors
approved an additional $8.4 million authorization necessary to complete an
acquisition of 382,350 Seafield shares for approximately $13 million. This
completed Seafield's treasury share repurchase program. During 1994's first
six months, 10,126 Seafield shares were issued for exercised options.
Additionally, Seafield has acquired a total of 1,418,000 shares of LabOne's
stock under the board authorization at a cost of $16.6 million. In 1993,
Seafield's board of directors approved an additional $5 million for the
purchase of LabOne's stock resulting in a remaining aggregate authorization of
$8.4 million at June 30, 1994. During the first six months of 1994, Seafield
did not purchase any LabOne stock.
Seafield is primarily a holding company. Sources of cash are investment
income and sales (including real estate), borrowings and dividends from
subsidiaries. The dividend-paying capabilities of subsidiaries may be
restricted. The primary uses of cash for Seafield are investments, stock
purchases and dividends to shareholders.
Seafield received a notice during 1992 of proposed adjustments from the
Internal Revenue Service (IRS) with respect to 1986-87 federal income taxes.
The amount of additional taxes proposed by the IRS was approximately $17
million. Seafield filed a protest of the adjustments in 1992. The IRS has
not yet responded to this protest. Seafield has also informally received
proposed adjustments for 1988-1989 from the IRS. The amount of additional
taxes proposed for these years is approximately $6 million. Seafield filed a
carryback claim for 1990 taxable losses with the IRS. These losses were
carried back to 1987, and the tax refund generated by this carryback is
approximately $7.6 million. The refund, however, will not be acted on by the
IRS until the IRS completes its review of the 1990 federal income taxes. This
review began in late 1993, and will likely not be completed until 1995.
Seafield believes it has meritorious defenses to many of the issues raised by
the IRS and adequate accruals for income tax liabilities.
In 1988, LabOne's board of directors authorized up to $25 million to enter the
market from time to time for the purpose of acquiring shares of LabOne's
common stock. As of June 30, 1994, LabOne had acquired 2,099,235 shares at a
total cost of $22.7 million. There were no shares purchased during 1994.
LabOne began paying quarterly dividends in December 1991. As an 82% owner,
Seafield received $3.8 million as a cash dividend from LabOne during the six
months of 1994. LabOne's working capital position decreased slightly to $47.9
million at June 30, 1994 from $48.6 million at December 31, 1993. This
decrease is the result of capital additions, dividends paid and increases in
long-term investments exceeding cash provided by operations after changes in
working capital. LabOne expects to fund working capital needs, capital
additions, dividend payments and further treasury stock purchases, if any,
from a combination of cash reserves, cash flow from operations and short-term
borrowings. LabOne has had no short-term borrowings during 1994 and did not
utilize an unsecured $1 million line of credit that is available for general
corporate purposes. During 1994's second quarter, LabOne invested $1.1
million in additional property, plant, and equipment while 1993's second
quarter investment totaled $500,000.
Response's working capital at June 30, 1994 was $12.5 million with current
assets of $18.2 million and current liabilities of $5.7 million. Cash and
cash equivalents and short-term investments represent $2.5 million of
Response's current assets. Response has a $5 million revolving bank line of
credit secured by accounts receivable with $731,000 borrowed under this line
of credit at June 30, 1994.
Response's management believes that their cash and capital resources, together
with available credit facilities, will be sufficient to finance current
operations and anticipated expansion.
Trends
Historically, the number of insurance applications in the third quarter are
less than the second quarter. The seasonal fluctuation will likely result in
the total unit volume of tests performed by LabOne in the third quarter 1994
being less than the second quarter 1994. Accordingly, LabOne's revenues and
net earnings in the third quarter 1994 will likely decrease from the level
achieved in the second quarter 1994.
The diversification into the clinical testing market has resulted in
approximately $900,000 of incremental expenses incurred during the second
quarter 1994. LabOne's management expects that the incremental expenses
associated with clinical diversification for the third quarter 1994 will
likely exceed the amount spent during the second quarter 1994.
Clinical testing revenue incurred during the second quarter was insignificant.
LabOne's management expects clinical testing revenue to increase during the
third and fourth quarters of 1994, but does not expect the increases to offset
the clinical expenses incurred during the same time period.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A lawsuit was initiated in 1986 by the Registrant's former insurance
subsidiary against an architectural and engineering firm and a construction
firm to recover costs incurred to remove and replace the facade on the former
home office building. Because the costs had been incurred prior to any
discussions regarding a sale of the insurance company, Registrant negotiated
with the buyer for an assignment of the cause of action from the insurance
company. Thus, any recovery will be for the benefit of the Registrant and all
costs incurred in connection with the litigation will be paid by the
Registrant. Any ultimate recovery will be recognized as income when received
and would be subject to income taxes. In September 1993, the Missouri Court
of Appeals reversed a $5.7 million judgment granted in 1992 in favor of the
Registrant. Trial counsel was authorized to seek a rehearing by the Court of
Appeals, and failing that, a review by the Missouri Supreme Court. The Court
of Appeals notified counsel in November 1993 that it would rehear the case
without oral arguments or further briefs.
In 1990, the Registrant's former insurance subsidiary was joined in an
existing lawsuit by the Federal Deposit Insurance Corporation (FDIC) as
successor to Sunbelt Service Corporation. The FDIC alleged that the insurance
subsidiary was obligated under a repurchase agreement in the approximate
amount of $6 million. Following a mediation proceeding, all claims involving
Seafield were dismissed with prejudice by order of the court signed in
February 1994.
In February 1988, a lawsuit was initiated against the Registrant's former
insurance subsidiary by its former partners in the Quail Run real estate
project in Santa Fe, New Mexico. The plaintiffs alleged that the project
partnership agreement was improperly terminated, thus denying them an ongoing
interest in the project, and that their exclusive real estate brokerage
arrangement was improperly terminated, thus denying them commissions from
sales of project units and adversely affecting their brokerage business
generally. The plaintiffs were seeking approximately $11 million in actual
damages and unspecified punitive damages based upon alleged breaches of
contract and fiduciary duty and economic compulsion, all arising out of the
purchase of the plaintiffs' interest in the project partnership. The case was
heard in the United States District Court for the District of New Mexico.
After a four-week trial in July 1994, the jury returned a verdict absolving
Registrant of any liability. The verdict is subject to appeal.
Because the Quail Run project was retained by Registrant in connection with
the sale of its former insurance subsidiary, Registrant defended the lawsuit
under an indemnification arrangement with the purchaser of the former
insurance subsidiary; all costs incurred have been paid by the Registrant. In
addition, in the event of an appeal of the recent verdict, all costs incurred
will be for the account of the Registrant.
In the opinion of management, after consultation with legal counsel and based
upon current available information, none of these lawsuits is expected to have
a significant impact on the consolidated financial position of the Registrant.
Item 2. Changes in Securities
(a) Changes in Securities: None
(b) Under the Missouri General Corporation Law, no dividends to
stockholders may be declared or paid at a time when the net assets of the
corporation are less than its stated capital or when the payment thereof would
reduce the net assets of the corporation below its stated capital. At June
30, 1994 the net assets of Seafield Capital Corporation exceeded its stated
capital by $202,175,000.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
(a) The annual meeting of shareholders was held on May 11, 1994.
Holders of 6,360,371 shares were eligible to vote and 4,745,282 shares were
represented at the meeting either in person or by proxy.
(c) Each of the following persons was elected as a director of the
Company to serve until the 1997 annual meeting of shareholders and until his
successor is duly elected and qualified (the number of votes in favor are
indicated after the names): W. T. Grant II - 4,736,420; P. Anthony Jacobs -
4,736,449; David W. Kemper - 4,736,449; Dennis R. Stephen - 4,735,249.
The shareholders approved the appointment of KPMG Peat Marwick
as independent auditors for the year ending December 31, 1994 with 4,730,904
shares voted for, 3,206 shares voted against and 11,172 shares abstained.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Seafield Capital Corporation
Date August 10, 1994 By /s/ James R. Seward
----------------------------
James R. Seward
Executive Vice President
and Chief Financial Officer
Date August 10, 1994 By /s/ Steven K. Fitzwater
----------------------------
Steven K. Fitzwater
Vice President, Chief Accounting
Officer and Secretary
