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 September 30, 1995
----- 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
November 4, 1995: $1 par value common - 6,460,565
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
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September 30, December 31,
1995 1994
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(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 1,984 8,626
Short-term investments 76,019 67,631
Accounts and notes receivable 25,400 32,871
Current income tax receivable 6,089 2,311
Deferred income tax assets 5,233 1,766
Other current assets 7,761 10,813
Current assets of discontinued
real estate operations 663 747
--------------------
Total current assets 123,149 124,765
Property, plant and equipment 21,769 24,981
Investments:
Securities 6,171 6,725
Notes receivable 350 1,298
Oil and gas 4,819 5,998
Intangible assets 20,595 29,318
Deferred income tax assets 1,784 1,715
Other assets 1,229 1,323
Non-current assets of discontinued
real estate operations 53,580 49,264
--------------------
$ 233,446 245,387
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,468 7,475
Notes payable -- 2,823
Other current liabilities 6,561 9,513
--------------------
Total current liabilities 14,029 19,811
Notes payable -- 8
Other liabilities 2,844 3,439
--------------------
Total liabilities 16,873 23,258
--------------------
Minority interests 20,863 21,196
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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 1,611 1,002
Equity adjustment from foreign
currency translation (375) (561)
Retained earnings 216,870 223,169
--------------------
225,606 231,110
Less:
Cost of 1,039,483 shares of treasury stock
(1994 - 1,121,739) 29,896 30,177
--------------------
Total stockholders' equity 195,710 200,933
--------------------
$ 233,446 245,387
====================
See accompanying notes and management's discussion and analysis of financial
statements.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
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(in thousands except per share amounts)
REVENUES
Insurance services $ 12,338 16,039 43,219 50,247
Healthcare services 15,212 12,547 44,488 33,100
Other 676 2,971 6,711 8,694
---------------------- ----------------------
Total revenues 28,226 31,557 94,418 92,041
COSTS AND EXPENSES
Insurance services 5,203 8,090 18,220 24,587
Healthcare services 14,239 11,544 41,784 31,225
Other 774 3,319 5,677 8,923
Selling, general
and administrative 9,546 11,593 32,865 30,764
--------------------- ----------------------
Loss from operations (1,536) (2,989) (4,128) (3,458)
Investment income/(loss) - net (238) 828 3,293 3,103
Other income (loss) (3,056) (133) (4,539) (11)
--------------------- ----------------------
Loss before income taxes (4,830) (2,294) (5,374) (366)
Income taxes (benefits) (3,489) (392) (6,264) 759
---------------------- ----------------------
Earnings/(loss) before
minority interests (1,341) (1,902) 890 (1,125)
Minority interests 250 (157) 1,405 (75)
---------------------- ----------------------
Net loss $ (1,591) (1,745) (515) (1,050)
====================== ======================
Per share of common stock:
Net loss $ (.25) (.27) (.08) (.16)
Dividends $ .30 .30 .90 .90
Book value $ 30.29 32.41 30.29 32.41
Average shares outstanding 6,443,818 6,361,021 6,451,660 6,374,920
Shares outstanding
end of period 6,460,517 6,361,021 6,460,517 6,361,021
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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Nine Months Ended
September 30, 1995
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(in thousands)
Common stock:
Balance, beginning of year $ 7,500
---------
Balance, end of period 7,500
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Paid-in capital:
Balance, beginning of year 1,002
Exercise of stock options 609
---------
Balance, end of period 1,611
---------
Foreign currency translation:
Balance, beginning of year (561)
Net change during period 186
---------
Balance, end of period (375)
---------
Retained earnings:
Balance, beginning of year 223,169
Net loss (515)
Dividends paid (5,784)
---------
Balance, end of period 216,870
---------
Less:
Treasury stock:
Balance, beginning of year 30,177
Exercise of stock options (281)
---------
Balance, end of period 29,896
---------
Stockholders' Equity $ 195,710
=========
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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Nine months ended September 30,
1995 1994
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OPERATING ACTIVITIES
Earnings from operations $ (515) (1,050)
Adjustments to reconcile earnings from operations
to net cash provided by operations:
Depreciation and amortization 9,804 12,528
Earnings applicable to minority interests 1,405 (75)
Change in short-term trading portfolio, net (10,150) 3,946
Change in accounts receivable (2,218) 1,944
Change in accounts payable 2,673 251
Income taxes and other (1,455) (2,143)
------------------------
Net cash provided (used) by operations (456) 15,401
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INVESTING ACTIVITIES
Purchases of investments available for sale -- (120)
Sales of investments available for sale 263 242
Purchases of investments held to maturity (47,410) (73,736)
Maturities of investments held to maturity 49,151 77,054
Securitization of receivables 1,500 4,800
Additions to property, plant and equipment, net (3,140) (3,942)
Oil and gas investments (402) (773)
Increase in notes receivable, net (2,507) (6,932)
Proceeds from dispositions of subsidiaries, net 11,148 --
Net cash used by discontinued real estate operations (4,232) (1,107)
Other, net (2,728) (901)
------------------------
Net cash provided (used) by investing activities 1,643 (5,415)
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FINANCING ACTIVITIES
Payments under line of credit agreements, net (2,818) (2,097)
Payment of principal on long-term debt -- (42)
Payment of capital lease (150) (297)
Dividends paid (5,784) (5,724)
Purchase of treasury stock -- (12,952)
Issuance of common stock 890 238
------------------------
Net cash used by financing activities (7,862) (20,874)
------------------------
Effect of foreign currency translation 33 (17)
------------------------
Net decrease in cash and cash equivalents (6,642) (10,905)
Cash and cash equivalents - beginning of period 8,626 15,491
------------------------
Cash and cash equivalents - end of period $ 1,984 4,586
========================
Cash paid during the period for:
Interest (net of amount capitalized) $ 142 248
========================
Income taxes, net $ 79 2,291
========================
See accompanying notes and management's discussion and analysis of financial
statements.
SEAFIELD CAPITAL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1995 and 1994
(1) The financial information furnished herein is unaudited; however, in
the opinion of management, the financial information reflects all
adjustments which are necessary to fairly state the Registrant's financial
position at September 30, 1995 and December 31, 1994 and the results of its
operations and cash flows for the periods ended September 30, 1995 and 1994.
All adjustments made in the interim period were of a normal recurring
nature, except for sales and write-offs of subsidiaries as discussed below.
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 1994 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) The components of "Other Liabilities" are as follows:
September 30, 1995 December 31, 1994
Current Noncurrent Current Noncurrent
---------------------- ----------------------
Accrued payroll
and benefits $ 2,115 1,547 2,191 1,622
Accrued commissions
and consulting fees 1,407 154 2,552 184
Other accrued expenses 1,139 -- 3,454 --
Other liabilities 1,900 1,143 1,316 1,633
---------------------- ----------------------
$ 6,561 2,844 9,513 3,439
====================== ======================
(4) The components of "Other Income/(Loss)" on the Statements of Operations
are as follows:
Three months ended Nine months ended
September 30, September 30,
1995 1994 1995 1994
------------------- -------------------
Gain/(loss) on sale of
subsidiaries $ 477 -- (1,068) --
Reserve on subsidiary
in bankruptcy (3,382) -- (3,382) --
Other (151) (133) (89) (11)
------------------- -------------------
$ (3,056) (133) (4,539) (11)
=================== ===================
(5) Earnings per share of common stock are based on the weighted average
number of shares of common stock outstanding and the common share
equivalents of dilutive stock options, where applicable.
(6) Registrant sold its 80.1% owned subsidiary, Agency Premium Resource,
Inc., during the second quarter. The sale generated a pre-tax gain of $1.9
million on proceeds of approximately $10 million.
The Registrant also completed a second quarter asset sale by Tenenbaum &
Associates, Inc., a 79% owned subsidiary. This subsidiary then distributed
its assets to shareholders and filed for dissolution. The earnings effect
of the sale, distribution and dissolution was a pre-tax loss of $3.4
million.
The Registrant sold its 80% owned subsidiary, International Underwriting
Services, Inc., during the third quarter. The sale generated a pre-tax gain
of $477,000 on proceeds of approximately $2.1 million.
The Registrant's 74% owned subsidiary, Pyramid Diagnostic Services, Inc.,
entered voluntary bankruptcy in early October 1995 as a result of an adverse
judgment in a lawsuit settlement. The Registrant fully reserved its
investment in this subsidiary at September 30, 1995 and recorded a pre-tax
charge to earnings of approximately $3.4 million.
(7) A lawsuit was initiated in 1986 by the Registrant's former insurance
subsidiary, Business Men's Assurance Company of America (BMA), against
Skidmore, Owings & Merrill (SOM), an architectural and engineering firm, and
a construction firm (with which a settlement has previously been reached) to
recover costs incurred to remove and replace the facade on the former home
office building. The lawsuit was filed in and is pending before the Circuit
Court (i.e. state trial court) of Jackson County, Missouri. Because the
costs had been incurred prior to any discussions regarding a sale of the
insurance subsidiary, Registrant negotiated with the buyer for an assignment
of the cause of action from the insurance subsidiary. 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; the Court
of Appeals set aside $1.7 million of the judgment and remanded the balance
of the case to the trial court for a jury trial limited to the question of
whether or not the applicable statute of limitations barred the claim. A
date for the retrial has not been set. Legal costs to date have aggregated
approximately $427,000. Any ultimate recovery will be reduced by amounts
received previously on settlements with other defendants (which settlement
amounts aggregated approximately $450,000).
In 1988, a lawsuit was initiated against the Registrant's former insurance
subsidiary, BMA, by its former partners in the Quail Run real estate project
in Santa Fe, New Mexico. The lawsuit was filed in the United States
District Court for the District of New Mexico by Lyon Development Company
and Jeanne Lyon, DBA Lyon and Associates Realty. The plaintiffs alleged
that the project partnership agreement was improperly terminated, thus
denying them an ongoing interest in the project, and the loss of their
exclusive real estate brokerage arrangement. 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. After a trial in July 1994, the jury returned a verdict
absolving Registrant of any liability. Subsequent to the trial, the judge
awarded Registrant approximately $250,000 in connection with marketing
expenses which the plaintiffs were to have repaid. In April 1995, the court
awarded Registrant approximately $64,000 in legal costs with interest until
paid. Plaintiffs have appealed all judgments against them; the appeal is
pending before the United States Court of Appeals for the Tenth Circuit.
The plaintiffs' request for oral arguments in their appeal was denied. The
Court will decide the appeal on the briefs alone and a decision is expected
by the end of 1995. 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 legal fees and costs
incurred (approximately $3.5 million from inception through September 30,
1995) and any judgments rendered in favor of the plaintiff 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 material adverse impact on the consolidated financial position or
results of operations of the Registrant.
During 1992, Seafield received proposed adjustments from the Internal
Revenue Service (IRS) with respect to 1986-87 federal income taxes.
Seafield protested these adjustments during 1992. Later, the IRS determined
to include the 1988-90 tax periods as part of its review. The original
amount of additional taxes proposed by the IRS was approximately $17 million
for the 1986-87 period. In May 1995, the IRS issued a revised 1986-87
adjustment report reducing the original amount of proposed taxes to $13.5
million. Two-thirds of the proposed adjustments relate to formerly owned
television subsidiaries. In September 1995, this new 1986-87 report was
protested.
In June 1995, the IRS issued its 1988-89 report which includes reversals of
some additional taxes in the 1986-87 report. The amount of additional
proposed taxes for 1988-89 is now $182,000 (having originally been
approximately $6 million). In September 1995, the 1988-89 report was also
protested.
The IRS may issue its proposed tax adjustments for 1990 by the end of 1995.
Three preliminary proposed adjustments for 1990 totaling $7.4 million in
additional taxes have been received. Two of the adjustments reflect
reversals of prior years' adjustments. The third constitutes an attempt by
the IRS to tax the gain on an intercompany transfer of LabOne stock. The
IRS has used this proposed adjustment to deny Seafield's uncontested 1990
net operating and net capital loss carryback claim for refund of $7.6
million. The effect is to propose a reduction in net taxes for 1990 of
approximately $196,000, including the refund.
Seafield believes that it has meritorious defenses to many of the issues
raised by the IRS, has or will timely file protests and that the financial
statements contain adequate accruals for income tax liabilities.
(8) In February 1995, Registrant retained Alex. Brown and Sons Incorporated
as financial advisor to assist the Registrant in considering strategic
alternatives to maximize shareholder value. One alternative that the
Registrant expects to pursue is a cash-option merger of the Registrant into
LabOne. The board of directors will consider other business combination
proposals that are presented to it. There can be no assurances that either
a merger with LabOne or any other business combination will occur.
(9) Statements of Financial Accounting Standards No. 114 "Accounting by
Creditors for Impairment of a Loan" and No. 118 "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" have been
implemented for the year ending December 31, 1995. The adoption of this
standard has had no significant impact on the Registrant's financial
position or results of operations.
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
is required to be implemented for fiscal years beginning after December 15,
1995. The Registrant has not ascertained the impact, if any, on its
financial position or results of operations.
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation" is required to be implemented for fiscal years beginning
after December 31, 1995. The adoption of this standard is not expected to
have any significant impact on the Registrant's financial position or
results of operations.
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Selected financial data
Three months ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
Revenues $ 28,226,000 31,557,000 94,418 000 92,041,000
Loss from operations $ (1,536,000) (2,989,000) (4,128,000) (3,458,000)
Investment income - net $ (238,000) 828,000 3,293,000 3,103,000
Net loss $ (1,591,000) (1,745,000) (515,000) (1,050,000)
Per share:
Net loss $ (.25) (.27) (.08) (.16)
Dividends per share $ .30 .30 .90 .90
Book value per share $ 30.29 32.41 30.29 32.41
Average shares
outstanding 6,443,818 6,361,021 6,451,660 6,374,920
Shares outstanding
end of period 6,460,517 6,361,021 6,460,517 6,361,021
Insurance Services Segment
The following businesses are considered to be in the insurance services
segment: laboratory testing for insurance industries, insurance premium
finance services and underwriting and policy administration services.
On May 31, 1995, the insurance premium finance services subsidiary was sold.
On July 17 1995, the underwriting and policy administration services
subsidiary was sold.
LabOne, Inc. (LabOne), an 82% owned subsidiary of Seafield Capital
Corporation (Seafield), is a publicly-traded company (NASDAQ-LABS). LabOne
provides risk appraisal, clinical and substance-abuse laboratory services to
insurance companies, physicians and employers. The results of operations for
LabOne's laboratory testing for insurance industries is presented below in
Seafield's "Insurance Services Segment." LabOne's clinical and substance-
abuse laboratory services results are presented in the "Healthcare Services
Segment."
LabOne provides risk appraisal laboratory services to the insurance
industries in the United States and Canada. The tests performed 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 life insurance policy
applicants. LabOne also provides testing services on individual and group
medical and disability policy applicants. LabOne currently serves over half
this market, with Osborn Laboratories, Inc., Clinical Reference Laboratory
and GIB Laboratories maintaining a majority of the remaining market.
LabOne continues to work with client companies to develop the OraSure
(registered trademark) saliva testing product to accommodate the needs of the
insurance industry. As insurers work through the regulatory requirements for
saliva-based testing, the potential for expansion in this area exists.
LabOne's revenue in the third quarter 1995 was $13.7 million as compared to
$14.5 million in the same period last year. The decrease of $800,000 (6%)
can be attributed primarily to decreases in insurance laboratory revenue of
$1.8 million and insurance kit revenue of $200,000, partially offset by a
$1.2 million increase in clinical and substance-abuse laboratory testing
revenues. The total number of insurance applicants tested in the third
quarter 1995 decreased by 10% as compared to the same quarter last year,
primarily due to a national decline in the number of life insurance policies
written and a slight decline in LabOne's market share. LabOne's average
revenue per insurance applicant declined 6% during the third quarter 1995 as
compared to the same quarter last year.
At the end of 1994, LabOne initiated a price stabilization plan. The purpose
of this plan was to increase prices based on the emphasis of LabOne's quick
turn-around time and quality of testing. The initial result of this action
was a slight increase in the average revenue per applicant, however prices
have subsequently declined due to continued competitive pressures.
In September 1995, LabOne reduced staff by seven percent. This work force
reduction was considered a necessary element in LabOne's efforts to improve
the cost structure of its insurance testing operations and meet clients'
requirements for lower cost, high quality laboratory services. Additionally,
several LabOne Service Center locations were closed to improve the
flexibility of the specimen collection operations. The total cost of these
actions was a $500,000 charge to LabOne's third quarter earnings from
operations.
LabOne's revenues in the first nine months of 1995 were $43.0 million as
compared to $45.3 million in the same period last year. The decrease of $2.3
million or 5% can be attributed primarily to an 8% decrease in the total
number of insurance applicants tested in the nine month period and a 5%
decrease in the average revenue per applicant. These decreases were
partially offset by a $2.9 million increase in clinical and substance-abuse
testing revenues.
LabOne's cost of sales increased $500,000 (7%) in the third quarter 1995 as
compared to the third quarter 1994. This increase includes the LabOne
Service Center lease write-offs for closed locations. Payroll and outside
lab services also increased; however, these increases were partially offset
by a reduction in depreciation expense and royalty fees. Cost of sales
increased $1.2 million (6%) in 1995's first nine months as compared to 1994's
first nine months. This increase is due primarily to increases in payroll,
rent expense and outside lab services, all related to the clinical expansion.
These were partially offset by decreases in Canadian expenses, depreciation
expense and net postage.
LabOne's gross profit declined 18% from $7.5 million in the third quarter
1994 to $6.2 million in 1995. This decline of $1.3 million is primarily
attributable to the reduction in total revenue of $800,000 and the increased
expenses associated with the clinical expansion. Gross profit declined 15%
from $24.1 million in 1994's first nine months to $20.5 million in 1995's
first nine months. This decline of $3.6 million is primarily attributable to
the reduction in total revenue of $2.3 million and the additional expenses
associated with the clinical expansion.
LabOne's selling, general and administrative expenses decreased $1.3 million
(17%) in the third quarter 1995 as compared to the prior year, due primarily
to prior year expenses related to closing the Canadian laboratory and a
decrease in depreciation expense. LabOne consolidated its Canadian
laboratory testing with the Kansas operations during the third quarter 1994
which resulted in a restructuring charge of $1.6 million. Other variances
include increases in third party billing expenses and bad debt accruals due
to the increase in clinical and substance-abuse testing revenue.
LabOne's selling, general and administrative expenses decreased $400,000 (2%)
in the nine month period ended September 30, 1995, as compared to the prior
year primarily due to the closure of the Canadian laboratory in 1994.
Additional declines included depreciation and maintenance expense. These
were partially offset by increases in commission expense, payroll, bad debt
accruals and travel and entertainment expenses.
LabOne's effective income tax rate for the third quarter 1995 was 33.0%,
which was reduced as a result of certain tax adjustments. During 1994, the
tax rate was impacted by certain tax adjustments resulting in a tax benefit
of $119,000 for the third quarter. LabOne's effective income tax rate
increased from 32.2% during the first nine months of 1994 to 36.5% during the
same period in 1995. The prior year was impacted by tax adjustments related
to the closure and liquidation of the HORL (UK) operations and certain U.S.
tax adjustments.
The insurance premium finance services subsidiary, Agency Premium Resource,
Inc., (APR) was sold on May 31, 1995. Seafield received approximately
$800,000 in cash and $9.2 million of US Treasury Bills that matured in June
1995. The impact on Seafield's results of operations was an after-tax gain
of $1.4 million recorded on the sale. Additionally, the sale eliminated
APR's revenues from the insurance services revenues line for 1995's third
quarter compared to revenues of $974,000 included in 1994's third quarter.
The sale reduced the nine months revenues consolidated for APR from $2.8
million in 1994 to $1.6 million in 1995. Correspondingly, APR expenses were
eliminated in 1995's third quarter results. The 1994 third quarter results
included $321,000 of APR expenses. The nine month expenses were reduced to
$517,000 from $1 million in 1994. APR's contribution to consolidated
earnings from operations was zero in 1995's third quarter, $267,000 in 1994's
third quarter, $300,000 in 1995's first nine months and $624,000 in 1994's
first nine months.
The underwriting and policy administration services subsidiary, International
Underwriting Services, Inc., (IUS) was sold on July 17, 1995. Seafield
received $2.1 million in cash as sales proceeds. The impact on Seafield's
results of operations was an after-tax gain of $1.1 million recorded on the
sale. Additionally, the sale eliminated IUS's revenues from the insurance
services revenues line for 1995's third quarter compared to revenues of
$599,000 included in 1994's third quarter. The sale reduced the nine months
revenues consolidated for IUS from $2.1 million in 1994 to $1.8 million in
1995. Correspondingly, IUS expenses were eliminated in 1995's third quarter
results. The 1994 third quarter results included $846,000 of IUS expenses.
The nine month expenses were reduced to $1.6 million from $2.3 million in
1994. IUS's contribution to consolidated earnings from operations was zero
in 1995's third quarter, whereas for 1994's third quarter IUS contributed a
$535,000 loss. IUS contributed a $338,000 operating loss in 1995's first
nine months which compares with a $1 million loss in 1994's first nine
months. As a result of the IUS sale, $736,000 of goodwill that was recorded
on Seafield's balance sheet under the caption "Intangible Assets" was
eliminated.
Healthcare Services Segment
The following businesses are considered to be in the healthcare services
segment: advanced cancer treatment services, clinical laboratory testing for
physicians and employers, substance abuse laboratory testing, and
radiopharmaceuticals and related services for nuclear medicine.
Response Oncology, Inc. (Response), a 59% owned subsidiary of Seafield, is a
publicly-traded company (NASDAQ-ROIX). Response, formerly known as Response
Technologies, Inc., changed it name effective November 2, 1995.
Response is a leading provider of advanced cancer treatments and related
services, principally on an out-patient basis, through treatment centers
owned or managed by Response. The centers, known as IMPACT (registered
trademark) (IMPlementing Advanced Cancer Treatments) Centers, are staffed by
experienced oncology nurses, pharmacists, laboratory technologists, and other
support personnel to deliver out-patient 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 out-patient
infusional services for its patients.
Beginning in 1994, Response began expanding its network of centers to include
hospital-affiliated centers. These centers entail a management agreement
(managed centers) or a jointly owned entity (jointly owned centers). For
managed centers, Response provides technical and administrative services,
including treatment protocols and data management, employee training and
reimbursement support. Patient care and laboratory services are provided and
billed to third parties by the host hospital, with a management fee paid to
Response.
For jointly-owned centers, Response and the host hospital contribute cash and
other forms of capital to establish an entity to provide outpatient and
inpatient services to its patients. These entities will purchase services
from the hospital to deliver and manage complex cancer treatments. Response
contemplates that it will maintain management control of these jointly owned
programs, and accordingly plans to include the results of operations on a
consolidated basis.
Response plans to expand its operations to include the acquisition and
management of oncology physician practices as discussed more fully
hereinafter.
As of September 30, 1995, Response had twenty-seven IMPACT Centers, seven
managed centers, and five jointly-owned centers located in twenty-one states.
The five jointly-owned centers were not operational as of September 30, 1995.
Response anticipates continued nationwide expansion over the next few years,
primarily through the establishment of jointly-owned centers.
Response recorded net earnings of $605,000 and $2.2 million for the quarter
and nine months ended September 30, 1995 compared to net losses of $138,000
and $1.7 million for the same periods last year. Revenues for the quarter
ended September 30, 1995 of $11.2 million increased $384,000 or 4% when
compared to the quarter ended September 30, 1994. Revenues for the nine
months ended September 30, 1995 of $33.8 million increased $5.2 million or
18% compared to the nine months ended September 30, 1994. The increase is
primarily attributable to increased patient referrals. Revenues for the
quarter and nine months ended September 30, 1995 also included approximately
$181,000 and $578,000 respectively, related to Response's efforts to conduct
pharmaceutical contract research in parallel with its clinical trials data
management activities.
Response's operating expenses for the quarter ended September 30, 1995
decreased $420,000 or 5% when compared to the quarter ended September 30,
1994. Operating expenses for the nine months ended September 30, 1995
increased $1.3 million or 5% when compared to the nine months ended September
30, 1994. 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 patient
services revenue. Operating expenses as a percentage of revenues were 74%
and 81% for the quarters and 73% and 82% for the nine month periods ended
September 30, 1995 and September 30, 1994, respectively. This decrease is
primarily attributable to operating efficiencies at higher levels of center
activity and certain fixed operating expenses being spread over a larger
revenue base.
Response's general and administrative costs for the quarter ended September
30, 1995 increased $386,000 or 37% when compared to the quarter ended
September 30, 1994. These expenses increased $839,000 or 26% for the nine
months ended September 30, 1995 when compared to the nine months ended
September 30, 1994. The increase is primarily attributable to increases in
administrative payroll and related costs. General and administrative costs
as a percentage of revenues were 13% and 10% for the quarters and 12% and 11%
for the nine months ended September 30, 1995 and 1994, respectively.
Response's depreciation and amortization expense for the quarter ended
September 30, 1995 decreased $137,000 or 26% when compared to the quarter
ended September 30, 1994. The expense decreased $350,000 or 22% between the
nine months ended September 30, 1994 and 1995. The decrease is primarily
attributable to the startup costs of many Centers being fully amortized after
a two-year operational period.
Response's provision for doubtful accounts decreased $72,000 or 11% and
$188,000 or 10% between the quarters and nine months ended September 30, 1995
and 1994, respectively. The provision as a percentage of revenue was 5% for
the quarter and nine months ended September 30, 1995 and 6% and 7% for the
quarter and nine months ended September 30, 1994. The decrease is
attributable to a higher proportion of contracted patient accounts, improved
collections performance and an increase in revenues from physician sales,
hospital management fees, and contract research for which collection is more
certain.
Response's tax net operating loss carryforwards were utilized to fully offset
current year taxable income. Response's increased 1995 net earnings created
the changes in Seafield's minority interests allocations in the consolidated
statements of operations.
LabOne has offered clinical laboratory services to the healthcare industry
since May 1994 to aid in the diagnosis and treatment of patients. LabOne has
entered into contracts with several professional organizations nationwide to
serve as approved service centers for the collection of specimens for
testing. In June 1994, LabOne became accredited by the Substance Abuse and
Mental Health Services Administration (SAMHSA) to perform substance-abuse
testing services for federally regulated employers. The substance-abuse
testing services are marketed throughout the country to both regulated and
nonregulated employers.
Through its laboratory benefit management (LBM) program, LabOne has developed
Lab Card (registered trademark) to reduce the total cost of out patient
laboratory testing by as much as 50 percent. By using Lab Card, patients
incur no out-of-pocket expenses for outpatient lab work, and their employers
save substantially against their current lab expenditures. The Lab Card
Program is being marketed to insurance carriers, as well as to self-insured
and partially-insured companies and other organizations.
LabOne's clinical and substance-abuse testing revenues increased to $1.3
million in third quarter 1995 from $146,000 in the third quarter of 1994.
Clinical and substance-abuse testing revenues in the first nine months of
1995 were $3.1 million, an increase of $2.9 million from 1994's first nine
months. LabOne's cost of sales for clinical and substance-abuse testing
during the third quarter 1995 were $2.2 million, as compared to approximately
$600,000 in the same quarter 1994. Cost of sales for clinical and substance
abuse testing during 1995's first nine months were $6.3 million compared with
$1.8 million in 1994's first nine months.
LabOne's selling, general and administrative expenses on clinical and
substance-abuse testing during the third quarter of 1995 were $1.2 million,
as compared to $800,000 in the third quarter 1994. The selling, general and
administrative expenses on clinical and substance abuse testing during the
first nine months of 1995 were $3.2 million, as compared to $2.3 million in
1994's first nine months.
Another healthcare subsidiary, Pyramid Diagnostic Services, Inc. (Pyramid),
reported a third quarter 1995 loss of $291,000 compared to $119,000 in 1994's
third quarter. For the first nine months, Pyramid reported a $768,000 loss
in 1995 and a $227,000 loss in 1994.
Pyramid entered bankruptcy proceedings in early October 1995 as a result of
an adverse $6 million judgment entered in a lawsuit against Pyramid. The
impact on Seafield's results of operations was the September 30, 1995, write-
off of Seafield's investment in Pyramid by recording a pre-tax expense of
approximately $3.3 million and a corresponding tax benefit of $2.1 million
resulting in an after-tax $1.2 million third quarter charge to earnings.
Included with the Pyramid write-off was $2.3 million of goodwill.
Other Operating Results
The "other revenue" includes oil and gas operations revenues and the revenues
by a real estate, personal property, sales and use tax consulting subsidiary,
Tenenbaum and Associates, Inc. (TAI).
On May 31, 1995, TAI entered into a sale of certain assets to Ernst & Young
U. S. LLP. The agreement provides for Ernst & Young to continue the work-in-
process on current accounts (where formal or informal protests have been
filed but not yet resolved). Ernst & Young will earn a fee for collecting
the current accounts and will participate in net cash collected on certain
accounts after third party costs and Ernst & Young's fees. TAI retained its
accounts receivable as of May 31, 1995. During June, TAI distributed its
assets to shareholders and filed for dissolution.
The TAI impact on "other income" in Seafield's results of operations was a
$3.4 million pre-tax loss in 1995's second quarter which included a $3.1
million goodwill write-off. Approximately $4 million of tax benefits were
recorded as goodwill was deducted for tax purposes upon TAI's dissolution.
The accounts received upon dissolution approximated Seafield's $3 million
carrying value of TAI. Thus far, Seafield has collected a net $1.4 million
in cash from the TAI receivables.
Additionally, the dissolution eliminated TAI's revenues from the "other
revenues" line during 1995's third quarter compared to revenues of $1.7
million included in 1994's third quarter. The dissolution reduced the nine
months revenues consolidated for TAI from $6.5 million in 1994 to $5.3
million in 1995. Correspondingly, TAI expenses were eliminated in 1995's
third quarter results. The 1994 third quarter results included $2.3 million
of TAI expenses. The nine month expenses were reduced to $4.1 million from $7
million in 1994. TAI's contribution to consolidated earnings from operations
was zero in 1995's third quarter, a loss of $556,000 in 1994's third quarter,
earnings of $1.2 million in 1995's first nine months and a loss of $529,000
in 1994's first nine months. As the work-in-process accounts progress to a
billable state (protests are resolved), additional revenues and corresponding
costs will then be recorded on Seafield's financial statements.
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 operations.
Investments produced a $238,000 loss in 1995's third quarter compared to
earnings of $828,000 in last year's third quarter. Seafield's quarterly
earnings can be significantly affected by fluctuations in security prices. A
$1.5 million fluctuation loss created the third quarter 1995 loss. Whereas,
the 1995 nine months investment income approximated 1994's nine months
earnings amount of $3.1 million.
Seafield has investments in two majority-owned entities that are publicly
traded, LabOne and Response. At September 30, 1995, based on the market
prices of publicly-traded shares of these two subsidiaries, pretax unrealized
gains of approximately $127 million on these investments were not reflected
in either Seafield's book value or stockholders' equity.
Provision for Income Taxes
During the first nine months of 1995, Seafield's effective tax rate was
impacted by tax losses created on the dispositions of three consolidated
companies previously discussed. The dispositions generated current and
deferred tax benefits of approximately $4.1 million. Additionally, the third
quarter write-off of Seafield's investment in Pyramid generated a deferred
tax benefit of $2.1 million. Deferred taxes are not ordinarily recorded for
the book amortization of goodwill, and therefore, tax benefits were generated
in the year of disposition.
Also impacting the effective rate was the usage by Response of tax net
operating loss carryforwards offsetting current year's taxable income.
Third quarter activities generated a $3.5 million tax benefit. Of this
amount, $2.1 million was the deferred tax benefit on Pyramid and
approximately $600,000 on the sale of IUS.
Real Estate-discontinued 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. 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. An additional $2.9 million after-tax loss
provision was recorded in the fourth quarter of 1994. 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.
Real estate generated revenues of $2.9 million during 1995's third quarter
compared to $3 million in last year's third quarter. Revenues during 1995's
first nine months were $8.5 compared to $7.8 million in 1994's first nine
months. The real estate is presented in the financial statements as a
discontinued operation. Therefore, the real estate revenues and expenses are
not included in the results of operations.
Sales during the first nine months of 1995 include 2 commercial parcels in
Kansas, a partnership interest in commercial property in Colorado, 1
commercial parcel, 1 residential lot and 120 acres in Texas, 1 commercial
parcel in Missouri, and 15 residential lots and units in Florida and New
Mexico. The nine month 1994 sales included 2 residential lots in Texas, 1
commercial property in California and 35 residential lots and units in
Florida and New Mexico.
Listed below is the status of the discontinued real estate operations as of
November 1, 1995:
Land:
North Ft. Worth, TX 120 acres sold, 585 contract pending, 149 listed
West Ft. Worth, TX 212 acres listed for sale
Houston, TX 1 acre sold, 30 lots sold, 370 acres and 37 lots
listed for sale
Olathe, Ks 4 acres sold, 17.5 acres listed for sale
Tulsa, OK 12 acres listed for sale
Land Lease:
Honolulu, HI sold
San Diego, CA sold
Nashville, TN sold
Commercial:
Reno, NV contract pending
Denver, Co sold
Gillette, WY listed
Residential:
Juno, FL last 2 units to be completed within 60 days,
listed for sale
Juno, FL last unit completed and 10 marina slips, listed
Santa Fe, NM last 23 units to be completed within 90 days,
listed with 11 of 63 units under contract
Mazatlan, Mexico final sales remittance received in October
The net real estate asset amounts are influenced from period to period by
several factors. In addition to seasonal sales cycles for projects in
Florida and New Mexico, a decision at the end of 1993 to accelerate the
build-out of the New Mexico project, and to a lesser degree the timing of the
construction on the final three houses in Florida, resulted in a net increase
in real estate assets during 1995's first nine months. The accelerated
build-out will substantially be completed soon after year's end. While
Seafield is currently holding preliminary talks with several potential
purchasers for the New Mexico project, it is more likely that the final 63
units will be sold individually.
The net real estate asset amount did not vary greatly during 1995's third
quarter. However, October activities have decreased the net asset amount to
approximately $50 million, the balance at December 31, 1994.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1995, at the holding company level, Seafield had available
for operations approximately $34 million in cash and short-term investments
with an additional $5.7 million in long-term securities. On a consolidated
basis, Seafield and its subsidiaries (primarily LabOne with $39 million) had
$78 million in cash and short-term investments. Current assets totaled
$123.1 million while current liabilities totaled approximately $14 million.
Net cash used by operations during 1995's first nine months totaled $456,000
compared with $15.4 million provided in 1994's first nine months. The
decrease primarily reflects Seafield's cash received on liquidation of a $13
million partnership investment portfolio during 1994. These decreases are
reported as funds provided by operations beginning in 1994. Other less
material items impacting the change in funds used/provided include changes in
accounts receivable, accounts payable, income taxes, deprecation,
amortization and earnings applicable to minority interests.
In 1994, Seafield acquired 382,350 Seafield shares for $13 million. At June
30, 1995, the company had no remaining authorization for the purchase of
Seafield shares. During 1995's first nine months, treasury stock issued for
exercised options and awards totaled 82,256 shares.
In 1990, Seafield's board of directors authorized up to $20 million for the
acquisition of LabOne common stock. In 1993, Seafield's board of directors
approved an additional $5 million for the purchase of LabOne stock. In 1995,
Seafield did not acquire any shares of LabOne stock. At September 30, 1995,
the remaining aggregate authorization totals $7.7 million.
Seafield is primarily a holding company. Sources of cash have been
investment income, sales, borrowings and dividends from subsidiaries. The
dividend paying capabilities of subsidiaries may be restricted as to their
transfer to the parent company. The primary uses of cash for Seafield have
been investments, subsidiary stock purchases and dividends to shareholders.
In addition to producing $11.1 million in net proceeds, the sales of APR and
IUS, the dissolution of TAI and the write-off of the Pyramid investment
impacted several line item amounts in Seafield's consolidated balance sheet.
Approximately $9.8 million of APR, IUS and Pyramid accounts and notes
receivable (primarily APR with $8.l million) reflected in the December 31,
1994 balance sheet were not consolidated at September 30, 1995. The actual
change from December 1994 to September 1995 reflects the above mentioned $9.8
million offset by $2.2 million increase in Response's accounts and notes
receivable.
The decrease in other current assets on the balance sheets principally
reflects TAI's decreases and reclassifications. The $3.2 million reduction
in property, plant and equipment is attributable to $1.9 million on APR, IUS,
Pyramid and TAI with the remaining decrease associated with normal
depreciation by LabOne, Response and Seafield.
The $8.7 million decrease in intangible assets on the balance sheets reflects
$7.6 million of goodwill associated with IUS, Pyramid and TAI at December 31,
1994. Approximately $1.5 million of goodwill was amortized during 1995 prior
to sales or dissolution with the $6.1 million remaining charged to expense or
basis at the time that APR, IUS, Pyramid and TAI left the consolidated group.
Consolidated notes payable, both current and long-term, decreased to zero at
September 30, 1995 from $2.8 million at December 31, 1994, primarily as a
result of TAI's 1995 note payments on liabilities that Seafield consolidated
at year's end. The decreases during 1995 in the other current and long-term
liabilities result from the sales or dissolution of APR, IUS Pyramid and TAI.
The 1995 decrease in the securitization of receivables in the investing
activities resulted from the APR sale.
During 1992, Seafield received proposed adjustments from the Internal Revenue
Service (IRS) with respect to 1986-87 federal income taxes. Seafield
protested these adjustments during 1992. Later, the IRS determined to
include the 1988-90 tax periods as part of its review. The original amount
of additional taxes proposed by the IRS was approximately $17 million for the
1986-87 period. In May 1995, the IRS issued a revised 1986-87 adjustment
report reducing the original amount of proposed taxes to $13.5 million. Two-
thirds of the proposed adjustments relate to formerly owned television
subsidiaries. In September 1995, this new 1986-87 report was protested.
In June 1995, the IRS issued its 1988-89 report which includes reversals of
some additional taxes in the 1986-87 report. The amount of additional
proposed taxes for 1988-89 is now $182,000 (having originally been
approximately $6 million). In September 1995, the 1988-89 report was also
protested.
The IRS may issue its proposed tax adjustments for 1990 by the end of 1995.
Three preliminary proposed adjustments for 1990 totaling $7.4 million in
additional taxes have been received. Two of the adjustments reflect
reversals of prior years' adjustments. The third constitutes an attempt by
the IRS to tax the gain on an intercompany transfer of LabOne stock. The IRS
has used this proposed adjustment to deny Seafield's uncontested 1990 net
operating and net capital loss carryback claim for refund of $7.6 million.
The effect is to propose a reduction in net taxes for 1990 of approximately
$196,000, including the refund.
Seafield believes that it has meritorious defenses to many of the issues
raised by the IRS, has or will timely file protests and that the financial
statements contain 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 September 30, 1995, LabOne had acquired 2,099,235 shares
at a total cost of $22.7 million. There were no treasury stock purchased
during 1995.
LabOne paid quarterly dividends during 1994 and the first, second and third
quarters of 1995. As an 82% owner, Seafield received $5.8 million of cash as
dividends from LabOne in 1995. LabOne's working capital position decreased
by $2.6 million to $46 million at September 30, 1995, from $48.6 million at
December 31, 1994. This decrease was primarily due to dividends paid and
capital additions exceeding LabOne's cash provided by operations. LabOne
expects to fund operations, capital additions and future dividend payments
from a combination of cash reserves and cash flow from operations.
LabOne had no borrowings during 1995 and an unsecured $1 million line of
credit at prime rate of approximately 8.75%, that may be used for general
corporate purposes. During 1995's third quarter, LabOne invested $700,000 in
additional property, plant, and equipment.
Response's working capital at September 30, 1995 was $14.4 million with
current assets of $20.3 million and current liabilities of $5.8 million.
Cash and cash equivalents and short-term investments represent $3.6 million
of Response's current assets. Response has a $2.5 million revolving bank
line of credit, secured by eligible accounts receivable, bearing interest at
the bank's prime rate plus one percent, or 9.75% at September 30, 1995. The
line, which expires April 1, 1996, is expected to be renewed for additional
one-year terms. Response had no borrowings under its line of credit at
September 30,, 1995.
Response had no material commitments for capital expenditures at September
30, 1995. Response believes that its cash and capital resources, together
with available credit facilities, will be sufficient to finance current
operations and anticipated expansion of its network of IMPACT Centers.
Subsequent to September 30, 1995, Response engaged Smith Barney, Inc. to
assist in the development of a physician practice acquisition and management
strategy, including the development of financing alternatives for such
contemplated acquisitions. Response has entered into a letter of intent to
purchase and manage the assets of a leading oncology-hematology practice, and
expects that further acquisitions will be forthcoming. However, there are no
assurances that Response will successfully consummate the acquisition of this
or any additional practices. Response is currently evaluating means of
optimally financing these acquisitions, and it is contemplated that such
acquisitions will be financed through combinations of cash, debt, and equity.
Accordingly, Response will evaluate possible offerings of its common stock in
public or private markets as means of raising additional equity capital.
On November 1, 1995, an amendment to Response's charter was approved at a
Special Meeting of Shareholders decreasing the number of authorized shares
from 60,000,000 shares, $.002 par value, to 30,000,000 shares, $.01 par
value, with a corresponding reclassification to which each issued and
outstanding share will be reclassified, converted and changed into one-fifth
(1/5) of an issued and outstanding share. The amendment became effective
November 2, 1995. The number of shares of Common Stock outstanding prior to
the one-for-five reverse split was 34,934,615.
In February 1995, Seafield retained Alex. Brown and Sons Incorporated as
financial advisor to assist Seafield in considering strategic alternatives to
maximize shareholder value. One alternative that Seafield expects to pursue
is a cash-option merger of Seafield into LabOne. The board of directors will
consider other business combination proposals that are presented to it.
There can be no assurances that either a merger with LabOne or any other
business combination will occur.
NEW ACCOUNTING STANDARDS
Statements of Financial Accounting Standards No. 114 "Accounting by Creditors
for Impairment of a Loan" and No. 118 "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures" have been implemented for the
year ending December 31, 1995. The adoption of this standard has had no
significant impact on the Registrant's financial position or results of
operations.
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
is required to be implemented for fiscal years beginning after December 15,
1995. The Registrant has not ascertained the impact, if any, on its
financial position or results of operations.
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation" is required to be implemented for fiscal years beginning
after December 31, 1995. The adoption of this standard is not expected to
have any significant impact on the Registrant's financial position or results
of operations.
No other recently issued accounting standards presently exist which will
require adoption in future periods.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A lawsuit was initiated in 1986 by the Registrant's former insurance
subsidiary, Business Men's Assurance Company of America (BMA), against
Skidmore, Owings & Merrill (SOM), an architectural and engineering firm, and
a construction firm (with which a settlement has previously been reached) to
recover costs incurred to remove and replace the facade on the former home
office building. The lawsuit was filed in and is pending before the Circuit
Court (i.e. state trial court) of Jackson County, Missouri. Because the
costs had been incurred prior to any discussions regarding a sale of the
insurance subsidiary, Registrant negotiated with the buyer for an assignment
of the cause of action from the insurance subsidiary. 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; the Court
of Appeals set aside $1.7 million of the judgment and remanded the balance
of the case to the trial court for a jury trial limited to the question of
whether or not the applicable statute of limitations barred the claim. A
date for the retrial has not been set. Legal costs to date have aggregated
approximately $427,000. Any ultimate recovery will be reduced by amounts
received previously on settlements with other defendants (which settlement
amounts aggregated approximately $450,000).
In 1988, a lawsuit was initiated against the Registrant's former insurance
subsidiary, BMA, by its former partners in the Quail Run real estate project
in Santa Fe, New Mexico. The lawsuit was filed in the United States
District Court for the District of New Mexico by Lyon Development Company
and Jeanne Lyon, DBA Lyon and Associates Realty. The plaintiffs alleged
that the project partnership agreement was improperly terminated, thus
denying them an ongoing interest in the project, and the loss of their
exclusive real estate brokerage arrangement. 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. After a trial in July 1994, the jury returned a verdict
absolving Registrant of any liability. Subsequent to the trial, the judge
awarded Registrant approximately $250,000 in connection with marketing
expenses which the plaintiffs were to have repaid. In April 1995, the Court
awarded Registrant approximately $64,000 in legal costs with interest until
paid. Plaintiffs have appealed all judgments against them; the appeal is
pending before the United States Court of Appeals for the Tenth Circuit.
The plaintiffs' request for oral arguments in their appeal was denied. The
Court will decide the appeal on the briefs alone and a decision is expected
by the end of 1995. 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 legal fees and costs
incurred (approximately $3.5 million from inception through September 30,
1995) and any judgments rendered in favor of the plaintiff 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 material adverse impact on the consolidated financial position or
results of operations of the Registrant.
During 1992, Seafield received proposed adjustments from the Internal
Revenue Service (IRS) with respect to 1986-87 federal income taxes.
Seafield protested these adjustments during 1992. Later, the IRS determined
to include the 1988-90 tax periods as part of its review. The original
amount of additional taxes proposed by the IRS was approximately $17 million
for the 1986-87 period. In May 1995, the IRS issued a revised 1986-87
adjustment report reducing the original amount of proposed taxes to $13.5
million. Two-thirds of the proposed adjustments relate to formerly owned
television subsidiaries. In September 1995, this new 1986-87 report was
protested.
In June 1995, the IRS issued its 1988-89 report which includes reversals of
some additional taxes in the 1986-87 report. The amount of additional
proposed taxes for 1988-89 is now $182,000 (having originally been
approximately $6 million). In September 1995, the 1988-89 report was also
protested.
The IRS may issue its proposed tax adjustments for 1990 by the end of 1995.
Three preliminary proposed adjustments for 1990 totaling $7.4 million in
additional taxes have been received. Two of the adjustments reflect
reversals of prior years' adjustments. The third constitutes an attempt by
the IRS to tax the gain on an intercompany transfer of LabOne stock. The
IRS has used this proposed adjustment to deny Seafield's uncontested 1990
net operating and net capital loss carryback claim for refund of $7.6
million. The effect is to propose a reduction in net taxes for 1990 of
approximately $196,000, including the refund.
Seafield believes that it has meritorious defenses to many of the issues
raised by the IRS, has or will timely file protests and that the financial
statements contain adequate accruals for income tax liabilities.
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
September 30, 1995 the net assets of Seafield Capital Corporation exceeded
its stated capital by $188,210,000.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule - as filed electronically by
the Registrant in conjunction with this Form 10-Q.
(b) Reports on Form 8-K:
A current report on Form 8-K was filed with the Commission on
October 30, 1995. This Form 8-K reported that the Registrant issued a news
release on October 23, 1995 and on October 24, 1995.
The text of the October 23, 1995 news release is as follows: "Seafield
Capital Corporation's 59% owned subsidiary, Response Technologies, Inc.,
today announced plans to effect a one-for-five reverse stock split of its
common stock; delist its common stock from the American Stock Exchange
(Amex: RTK) and begin trading on the Nasdaq National Market under the symbol
ROIX beginning November 3, 1995; and change its name from "Response
Technologies, Inc." to "Response Oncology, Inc." The aforementioned reverse
stock split and name change are contingent upon approval by a majority of
shareholders at a Special Meeting of Shareholders to be held on November 1,
1995. In addition, Response announced that it has retained Smith Barney
Inc. to assist in the development of a physician practice acquisition and
management strategy, including the development of financing alternatives for
such contemplated acquisitions.
Response's reverse stock split and the move to the Nasdaq National Market
helps to better position the company with respect to the capital markets.
The name change to Response Oncology reflects the focus of the company.
More importantly, Response is very excited by the prospects of expanding
relationships with some of its oncologists in the high dose chemotherapy
programs to include acquisition and management of their practices.
Response's data collection, analysis and outcomes reporting relative to
advanced cancer therapies provides a natural segue into information
management of the full spectrum of cancer care. These disease management
capabilities will provide a significant competitive advantage to its groups
in winning managed care contracts. Response currently has entered into a
letter of intent to purchase and manage the assets of Oncology Hematology
Group of South Florida, a leading oncology-hematology practice, and expects
that further acquisitions will be forthcoming. Response is currently
evaluating means of optimally financing these acquisitions, and it is
contemplated that such acquisitions will be financed through combinations of
cash, debt and equity. However, there are no assurances that Response will
successfully consummate the acquisitions of this one or any additional
practices. Response has relationships with over 300 oncologists in 21
states through its stem cell program, presenting an entre to several
potential acquisition relationships.
The common stock of Response Technologies, Inc. is currently traded on the
American Stock Exchange (AMEX) under the symbol RTK. On October 26, 1995,
the common stock will begin trading on the Nasdaq National Market under the
symbol ROIX. Effective November 2, 1995 (subject to shareholder approval),
the common stock will trade under the symbol ROIXD for an interim period to
denote occurrence of the one-for-five reverse stock split."
The text of the October 23, 1995 news release is as follows: "Seafield
Capital Corporation's 82% owned subsidiary, LabOne, Inc., today announced
that Bert Hood has resigned his position as chairman, president and chief
executive officer of LabOne. Hood plans to pursue other business interests.
W. Thomas Grant II, chairman of the board and chief executive officer of
Seafield, will fill the vacancies left by Hood.
Thomas J. Hespe, who recently joined LabOne as Executive Vice President of
Sales, will head the company's Lab Card (trademark) sales efforts.
The Lab Card Program provides outpatient laboratory services to self-funded
employers and insurance companies nationwide. LabOne's Lab Card Program,
representing over a quarter million lives, is gaining widespread recognition
as an innovative new carve-out benefit for the health care industry.
LabOne will release third quarter 1995 results in about a week. LabOne
estimates that net earnings per share for the third quarter 1995 will be
approximately $0.02. Net earnings for the third quarter 1994 were also
$0.02. During the third quarter 1995, operating income was reduced by a
previously announced, one-time expense of $0.5 million, or $0.03 per share.
During the third quarter 1994, LabOne incurred a restructuring charge of
$1.6 million, or $0.08 per share.
LabOne operates a centralized laboratory in the Kansas City area which
markets clinical, substance-abuse and insurance laboratory services
nationwide.
Seafield also will release consolidated third quarter 1995 results in about
a week."
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 November 13, 1995 By /s/ James R. Seward
----------------------------
James R. Seward
Executive Vice President
and Chief Financial Officer
Date November 13, 1995 By /s/ Steven K. Fitzwater
----------------------------
Steven K. Fitzwater
Vice President, Chief Accounting
Officer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10Q for the period ending September 30, 1995 and is qualified in its
entirety by reference to such 10Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,984
<SECURITIES> 76,019
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 123,149
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 233,446
<CURRENT-LIABILITIES> 14,029
<BONDS> 0
<COMMON> 7,500
0
0
<OTHER-SE> 188,210
<TOTAL-LIABILITY-AND-EQUITY> 233,446
<SALES> 0
<TOTAL-REVENUES> 94,418
<CGS> 0
<TOTAL-COSTS> 98,546
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,374)
<INCOME-TAX> (6,264)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (515)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> 0<F2>
<FN>
<F1>Disclosure not required on interim financial statements.
<F2>Computation not applicable.
</FN>
</TABLE>
