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, 1996
----- 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 1, 1996: $1 par value common - 6,483,448
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
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September 30, December 31,
1996 1995
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(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 3,484 7,581
Short-term investments 71,077 75,632
Accounts and notes receivable 30,565 23,565
Current income tax receivable 4,614 4,457
Deferred income tax assets 1,295 1,540
Other current assets 13,459 8,850
--------------------
Total current assets 124,494 121,625
Property, plant and equipment 21,158 21,604
Investments:
Securities 7,388 5,647
Oil and gas 1,786 4,247
Intangible assets 89,799 19,477
Other assets 953 1,158
Net assets of discontinued real estate operations 34,305 42,215
--------------------
$ 279,883 215,973
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,721 6,370
Notes payable 5,555 --
Other current liabilities 9,014 5,859
--------------------
Total current liabilities 21,290 12,229
Notes payable 35,050 --
Deferred income taxes 12,861 (6,999)
Other liabilities 2,362 2,653
--------------------
Total liabilities 71,563 7,883
--------------------
Minority interests 26,587 21,006
--------------------
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 7,500 7,500
Paid-in capital 1,758 1,747
Equity adjustment from foreign
currency translation (447) (447)
Retained earnings 203,038 208,098
--------------------
211,849 216,898
Less: Cost of 1,016,552 shares of
treasury stock (1995 - 1,038,939 shares) 30,116 29,814
--------------------
Total stockholders' equity 181,733 187,084
--------------------
$ 279,883 215,973
====================
See accompanying notes and management's discussion and analysis of
financial statements.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
- ------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
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(in thousands except share amounts)
REVENUES
Healthcare services $ 20,233 15,212 52,214 44,488
Insurance services 12,449 12,338 36,954 43,219
Other 636 676 1,722 6,711
--------------------- ---------------------
Total revenues 33,318 28,226 90,890 94,418
COSTS AND EXPENSES
Healthcare services 17,665 14,239 46,084 41,784
Insurance services 5,625 5,203 16,489 18,220
Other 723 774 1,964 5,677
Selling, general
and administrative 8,579 9,546 26,010 32,865
--------------------- ---------------------
Earnings (loss) from operations 726 (1,536) 343 (4,128)
Investment income - net 1,654 (238) 4,069 3,293
Interest expense (599) (22) (1,070) (123)
Other income (loss) (12) (3,034) 235 (4,416)
--------------------- ---------------------
Earnings (loss) before
income taxes 1,769 (4,830) 3,577 (5,374)
Income taxes (benefits) 513 (3,489) 1,404 (6,264)
--------------------- ---------------------
Earnings (loss) before
minority interests 1,256 (1,341) 2,173 890
Minority interests 560 250 1,405 1,405
--------------------- ---------------------
Net earnings (loss) $ 696 (1,591) 768 (515)
===================== =====================
Per share of common stock:
Net earnings (loss) $ .11 (.25) .12 (.08)
Dividends $ .30 .30 .90 .90
Book value $ 28.03 30.29 28.03 30.29
Average shares outstanding 6,488,841 6,443,818 6,481,437 6,451,660
Shares outstanding
end of period 6,483,448 6,460,517 6,483,448 6,460,517
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, 1996
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(in thousands)
Common stock:
Balance, beginning of year $ 7,500
---------
Balance, end of period 7,500
---------
Paid-in capital:
Balance, beginning of year 1,747
Exercise of stock options 11
---------
Balance, end of period 1,758
---------
Foreign currency translation:
Balance, beginning of year (447)
Net change during period --
---------
Balance, end of period (447)
---------
Retained earnings:
Balance, beginning of year 208,098
Net earnings 768
Dividends paid (5,828)
---------
Balance, end of period 203,038
---------
Less:
Treasury stock:
Balance, beginning of year 29,814
Exercise of stock options 302
---------
Balance, end of period 30,116
---------
Stockholders' Equity $ 181,733
=========
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,
1996 1995
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OPERATING ACTIVITIES
Earnings from operations $ 768 (515)
Adjustments to reconcile earnings from operations
to net cash provided (used) by operations:
Depreciation and amortization 9,129 9,804
Earnings applicable to minority interests 1,405 1,405
Change in short-term trading portfolio, net (2,606) (10,150)
Change in accounts receivable (3,606) (2,218)
Change in accounts payable (1,875) 2,673
Income taxes and other 3,569 (1,454)
------------------------
Net cash provided (used) by operations 6,784 (455)
------------------------
INVESTING ACTIVITIES
Sales of investments available for sale 4 263
Purchases of investments held to maturity (15,753) (53,417)
Proceeds of investments held to maturity 20,995 55,158
Secruitization of receivables -- 1,500
Additions to property, plant and equipment, net (2,204) (3,140)
Oil and gas investments 124 (402)
Proceeds from sale of subsidiaries -- 11,148
Net increase (decrease) in note receivable 183 (2,507)
Subsidiary acquisition of assets (37,916) --
Subsidiary advances to physician group (3,547) --
Net cash provided (used) by discontinued
real estate operations 6,915 (4,232)
Other, net 29 (2,729)
------------------------
Net cash provided (used) by investing activities (31,170) 1,642
------------------------
FINANCING ACTIVITIES
Borrowing (payments) under line of credit
ageements, net 680 (2,818)
Proceeds from long-term debt 26,236 --
Payment of principal on long-term debt (502) --
Payment of capital lease (31) (150)
Dividends paid (5,828) (5,784)
Net issuance of treasury stock pursuant
to stock options plans (265) 890
------------------------
Net cash provided (used) by financing activities 20,290 (7,862)
------------------------
Effect of foreign currency translation (1) 33
------------------------
Net decrease in cash and cash equivalents (4,097) (6,642)
Cash and cash equivalents - beginning of period 7,581 8,626
------------------------
Cash and cash equivalents - end of period $ 3,484 1,984
========================
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest (net of amount capitalized) $ 1,041 142
========================
Income taxes, net $ 420 79
========================
See accompanying notes and management's discussion and analysis of financial
statements.
SEAFIELD CAPITAL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1996 and 1995
(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 Seafield's financial
position at September 30, 1996 and December 31, 1995 and the results of its
operations and cash flows for the periods ended September 30, 1996 and
1995. All adjustments made in the interim period were of a normal
recurring nature. 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 1995 amounts have been reclassified
for comparative purposes with no effect on net earnings (loss). See
Seafield'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 "Intangible Assets" are as follows:
September 30, 1996 December 31, 1995
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(in thousands)
Subsidiary management
service agreements $ 70,631 --
Goodwill 17,882 18,030
Other 1,286 1,447
-------------- --------------
$ 89,799 19,477
============== ==============
Subsidiary management service agreements consist of Response's costs of
purchasing management service agreements with physician practices. These
costs are amortized over the initial noncancelable 40-year terms of the
related management service agreements. The agreements are noncancelable
except for performance defaults. In the event a practice breaches the
agreement, or if Response terminates with cause, the practice is required
to purchase all tangible assets at fair market value and pay substantial
liquidating damages. The carrying value of the management service
agreements is reviewed for impairment at the end of each reporting period.
(4) The components of "Other Current Assets" are as follows:
September 30, 1996 December 31, 1995
------------------ -----------------
(in thousands)
Inventories $ 3,209 2,653
Prepaid expense 3,699 3,071
Unbilled revenue, net 1,558 1,942
Subsidiary's receivable from
affiliated physicians 3,547 --
Other current assets 1,446 1,184
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$ 13,459 8,850
============== ==============
The components of "Other Liabilities" are as follows:
September 30, 1996 December 31, 1995
Current Noncurrent Current Noncurrent
---------------------- ----------------------
(in thousands)
Accrued payroll
and benefits $ 2,188 1,419 2,230 1,514
Accrued commissions
and consulting fees 1,118 -- 1,135 41
Other accrued expenses 5,369 -- 1,982 --
Other liabilities 339 943 512 1,098
---------------------- ----------------------
$ 9,014 2,362 5,859 2,653
====================== ======================
(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) Seafield's 55% owned subsidiary, Response Oncology, Inc. (Response),
has executed purchase agreements with, and entered into long-term
management services agreements with five medical practices which have a
total of 24 practicing physicians. The total consideration was
approximately $54.8 million, approximately $37.1 million of which was paid
in cash, approximately $13.1 million by delivery of Response's long-term
unsecured interest-bearing amortizing promissory notes, approximately $3.8
million in the form of Response's common stock and the balance being paid
over 16 calendar quarters at the rate of $50,000 per quarter. Under the
Service Agreements, Response receives a fee to manage the non-medical
aspects of the practices and to coordinate practice enhancement
opportunities with the physicians. These transactions have mainly impacted
cash, accounts and notes receivable, intangible assets, deferred taxes and
notes payable on the consolidated balance sheet.
Upon the consummation of the acquisitions discussed above, Response
recognized deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of purchased assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Seafield loaned $10 million to Response in April 1996 evidenced by a
promissory note (the Note). At the election of Seafield, the Note was
exchanged for 909,090 shares of Response common stock in August 1996.
The unaudited consolidated pro forma results of all current, continuing
operations assuming the above-referenced acquisitions had been consummated
and the exchange of the Note for Response stock had taken place on January
1, 1995 are as follows:
Nine Months Ended September 30,
1996 1995
------------ ------------
(in thousands)
Revenues $ 100,561 110,497
Net earnings 1,280 (868)
Earnings per share .20 (.13)
(7) In May 1996, Response entered into a $27.5 million bank credit
facility to fund Response's acquisitions and working capital needs. The
acquisition facility (up to $20 million) matures May 31, 1998. The working
capital facility ($7.5 million) matures May 30, 1997. The interest rate
varies from LIBOR plus 1.5% to LIBOR plus 2.625%. At September 30, 1996,
$26.9 million was outstanding under this credit facility with an interest
rate of approximately 7.7%.
Additionally, notes payable includes Response's long-term unsecured
amortizing promissory notes bearing interest at rates from 4% to 9% issued
as partial consideration for the practice management affiliations. At
September 30, 1996, the unpaid principal amount was $13.7 million.
In October 1996, Seafield agreed to provide a $23.5 million credit facility
to Response to be used to finance acquisitions and working capital. The
loan is payable upon the earlier of the closing of a Response equity
offering or August 1998. The credit facility bears interest at a rate of
8% escalating at certain points during the term of the loan, is unsecured
and is convertible at the election of Seafield into shares of Response
common stock at a conversion price equal to the market price of the common
stock at the date of conversion. Provided, however, that after December
31, 1996, the conversion price will be the lower of market or $11.00 per
share.
(8) In 1986, a lawsuit was initiated in the Circuit Court of Jackson
County, Missouri by Seafield's former insurance subsidiary (i.e., Business
Men's Assurance Company of America) against Skidmore, Owings & Merrill
(SOM) which is an architectural and engineering firm, and a construction
firm to recover costs incurred to remove and replace the facade on the
former home office building. Because the removal and replacement costs had
been incurred prior to the sale of the insurance subsidiary, Seafield
negotiated with the buyer for an assignment of the cause of action from the
insurance subsidiary. Thus, any recovery will be for the benefit of
Seafield and all costs incurred in connection with the litigation will be
paid by Seafield. Any ultimate recovery will be recognized as income when
received and would be subject to income taxes. In September 1993, the
Missouri Court of Appeals reversed a $5.7 million judgment granted in 1992
in favor of Seafield; the Court of Appeals remanded the case to the trial
court for a jury trial limited to the question of whether or not the
applicable statute of limitations barred the claim. The Appeals Court also
set aside $1.7 million of the judgment originally granted in 1992. In July
1996, this case was retried to a judge. A ruling is expected from the
judge in late 1996. The only remaining defendant is SOM; settlement
arrangements with other defendants have resulted in payments to plaintiff
which have offset legal fees and costs to date of approximately $450,000.
None of the prior or future legal fees or costs are recoverable from the
remaining defendant, even if the judgment in plaintiff's favor is
ultimately upheld. Future legal fees and costs can not reliably be
estimated.
In 1988, a lawsuit was initiated in the United States District Court for
the District of New Mexico against Seafield's former insurance subsidiary
by Lyon Development Company and Jeanne Lyon, d/b/a Lyon and Associates
Realty, 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 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 Seafield of any liability.
Subsequent to the trial, the judge awarded Seafield approximately $250,000
in connection with marketing expenses which the plaintiffs were to have
repaid, and approximately $64,000 in legal costs, with interest until paid.
Total legal fees and costs incurred by Seafield and its former insurance
subsidiary have aggregated approximately $3.6 million. In February 1996,
the United States Court of Appeals for the Tenth Circuit affirmed the
jury's verdict in Seafield's favor, reversed the trial judge's award for
marketing expenses, and affirmed the trial judge's award of legal costs.
The plaintiffs did not seek a rehearing or review of the Appeals Court
affirmation of the verdict. In April 1996, plaintiffs paid the legal costs
awarded by the trial judge and affirmed by the Court of Appeals
(approximately $68,000, including interest). Because the Quail Run project
was retained by Seafield in connection with the sale of its former
insurance subsidiary, Seafield defended the lawsuit under an
indemnification arrangement with the purchaser of the former insurance
subsidiary; all costs incurred and judgments rendered in favor of the
plaintiff have been for the account of Seafield.
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 Seafield.
Seafield received a notice during 1992 of proposed adjustments from the
Internal Revenue Service (IRS) with respect to 1986-87 federal income
taxes. Later, the IRS determined to include 1988-90 as a part of its
review. In May 1995, the IRS issued a revised notice of proposed
adjustments to 1986-87 taxes in response to Seafield's protest filed in
1992. This revised notice reduced the previously proposed tax of
approximately $17 million to $13.5 million. In June 1995, the IRS issued
proposed adjustments to 1988-1989 federal income taxes. Additional
proposed taxes for these years are $182,000. Also, during 1995 the IRS
issued tentative proposed federal income tax adjustments for the 1990 year
totaling approximately $16 million. In April 1996, Seafield received the
final proposed adjustments for 1990; the original proposed adjustment of
$16 million has been reduced to approximately $7 million. The IRS has used
these proposed increases in federal income taxes to deny Seafield's refund
claim for 1990 of $7.6 million. In August 1996, Seafield filed its protest
of the 1990 proposed adjustments. This protest has not yet been assigned
for an appeals conference. Seafield is currently pursuing a compromise
with the Appeals Division of the IRS regarding settlement of the 1986-1989
tax years. Resolution of these matters is not expected during 1996.
Seafield believes that it has meritorious defenses to many of the
substantive issues raised by the IRS, and adequate accruals for income tax
liabilities.
(9) Seafield sold its 80.1% owned subsidiary, Agency Premium Resource,
Inc., during the second quarter of 1995. The sale generated a pre-tax gain
of $1.9 million on proceeds of approximately $10 million.
Seafield also completed a second quarter 1995 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.
Seafield sold its 80% owned subsidiary, International Underwriting
Services, Inc., during the third quarter of 1995. The sale generated a
pre-tax gain of $477,000 on proceeds of approximately $2.1 million.
Seafield'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. Seafield fully reserved its investment
in this subsidiary at September 30, 1995 and recorded a pre-tax charge to
earnings of approximately $3.3 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Three months ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ---------
Revenues $ 33,318,000 28,226,000 90,890,000 94,418,000
Earnings (loss)
from operations $ 726,000 (1,536,000) 343,000 (4,128,000)
Investment income - net $ 1,654,000 (238,000) 4,069,000 3,293,000
Net earnings (loss) $ 696,000 (1,591,000) 768,000 (515,000)
Per share:
Net earnings (loss) $ .11 (.25) .12 (.08)
Dividends per share $ .30 .30 .90 .90
Book value per share $ 28.03 30.29 28.03 30.29
THIRD QUARTER ANALYSIS
Healthcare Services Segment:
The following businesses are included in 1996's healthcare services
segment: an integrated cancer management company and the clinical and
substance abuse laboratory testing services. During 1995's first three
quarters, the radiopharmaceuticals and related nuclear medicine services
were also included in the healthcare services segment.
Response Oncology, Inc. (Response), a 55%-owned subsidiary of Seafield, is
a publicly-traded company (NASDAQ-ROIX). Response is a comprehensive
cancer management company which owns and/or operates a network of
outpatient treatment centers, or IMPACT (registered trademark) Centers,
which provide stem cell supported high dose chemotherapy and other advanced
cancer treatment services under the direction of practicing oncologists;
owns the assets of and manages the business aspects of oncology practices;
and conducts clinical cancer research on behalf of pharmaceutical
manufacturers. Over 300 medical oncologists are associated with Response
through these programs.
As of September 30, 1996 Response owned or operated in joint ventures with
hospitals 41 Centers in 20 states. In January 1996, Response began a
strategy of expanding its comprehensive cancer management services through
practice management affiliations with premier oncology groups. Pursuant to
service agreements, Response provides management services that extend to
all non-medical aspects of the operations of the affiliated practices.
Response is responsible for providing facilities, equipment, supplies,
support personnel and management and financial advisory services.
Response's resulting revenue from service agreements includes practice
operating expenses (other than amounts retained by physicians) and a
management fee either fixed in amount or equal to a percentage of each
affiliated oncology group's adjusted net revenue or net operating income.
In certain affiliations, Response may also be entitled to a performance fee
if certain financial criteria are satisfied. See Notes to Consolidated
Financial Statements for additional information.
Response reported net earnings for the third quarter of 1996 of $674,000
compared with net earnings of $605,000 in 1995's third quarter. Response's
revenues for the third quarter of 1996 were $17.9 million, an increase of
$6.7 million, or 60%, when compared to the third quarter of 1995. The
increase is primarily attributable to revenue from practice management
affiliations and an increase in pharmaceutical sales to physicians, which
carries a lower operating margin than Response's traditional patient
services revenue.
Response records patient services revenue net of contractual allowances and
discounts. The following table is a summary of Response's revenues by
source for the quarters ended September 30:
Three months ended September 30,
1996 1995
----------- -----------
Patient services revenue $ 8,647,000 8,595,000
Pharmaceutical sales to physicians 3,509,000 2,446,000
Practice management services fees 5,484,000 ---
Physician investigator studies 274,000 181,000
----------- -----------
Total revenues $17,914,000 11,222,000
=========== ===========
Response's operating expenses increased $5.1 million, or 61%, to $13.4
million for the quarter ended September 30, 1996. These expenses consist
of payroll costs, pharmaceutical and laboratory expenses, medical director
fees, rent expense and other operational expenses. Operating expenses as a
percent of revenues were 75% compared to 74% for the comparable period of
1995. This increase is primarily attributable to the increase in
affiliated physician practices under management. Pursuant to the service
agreements with the practice affiliates, Response is responsible for the
operating expenses of the practices (net of amounts retained by
physicians). In addition, pharmaceutical costs increased relative to
increased sales of pharmaceuticals to physicians.
Response's general and administrative costs increased $200,000, or 14%, for
the quarter ended September 30, 1996. The increase is primarily
attributable to increases in administrative payroll and other related
costs.
Response's depreciation and amortization expense was $1.1 million and
$388,000 for the quarters ended September 30, 1996 and 1995, an increase of
$649,000 or 167%. The increase is primarily attributable to the
amortization of service agreements purchased in recently completed
affiliations.
Response's provision for doubtful accounts decreased $157,000 or 28%
between the quarters ended September 30, 1996 and 1995. The provision as a
percentage of revenue was 5% in 1996's third quarter and 6% in 1995's third
quarter. The decrease is attributable to a higher proportion of contract
patient accounts, improved collections performance and an increase in
revenues from hospital managed centers for which collection is more
certain.
Response's interest expense totaled $742,000 in 1996's third quarter
compared with $5,000 in 1995's third quarter. The increase was related to
borrowings under the credit facility and notes issued in conjunction with
practice management affiliations.
Response recorded minority interest of $120,000 during 1996's third quarter
related to the operations of Response's majority-owned or controlled
IMPACTr Centers in joint ventures with hospitals. These IMPACTr Centers
were not operational during the comparable periods in 1995.
LabOne, Inc. (LabOne), an 82%-owned subsidiary of Seafield, is a publicly-
traded company (NASDAQ-LABS). LabOne provides high-quality laboratory
service to insurance companies, physicians and self-insured groups.
LabOne's clinical testing services are provided to the healthcare industry
to aid in the diagnosis and treatment of patients. LabOne operates only
one highly automated and centralized laboratory, which has economic
advantages over other conventional laboratory competitors. LabOne markets
its clinical testing services to the payers of healthcare--insurance
companies and self-insured groups. LabOne does this through Lab
Card(trademark), a Laboratory Benefits Management (LBM) program.
The Lab Card Program provides laboratory testing at a reduced rate as
compared to traditional laboratories. It uses a unique benefit design that
shares the cost savings with the patient, creating an incentive for the
patient to help direct laboratory work to LabOne. Under the Program, the
patient incurs no out-of-pocket expense when the Lab Card is used, and the
insurance company or self-insured group receives substantial savings on its
laboratory charges.
LabOne is certified by the Substance Abuse and Mental Health Services
Administration (SAMHSA) to perform substance abuse testing services for
federally regulated employers and is currently marketing these services
throughout the country to both regulated and nonregulated employers.
LabOne's rapid turnaround and multiple testing options help clients reduce
downtime for affected employees and meet mandated drug screening
guidelines.
LabOne's total revenues increased 8% in the third quarter 1996 to $14.8
million from $13.7 million in the third quarter 1995 primarily due to an
increase in healthcare (clinical and substance abuse testing) laboratory
revenues. Healthcare revenues increased from $1.3 million in the third
quarter 1995 to $2.3 million in 1996 due to increases in clinical and
substance abuse testing volumes.
LabOne's total cost of sales increased $900,000 in the third quarter 1996
as compared to the prior year, due primarily to increased insurance kit
sales volumes and the variable costs associated with increased healthcare
testing volumes.
LabOne's healthcare cost of sales expenses in 1996's third quarter were
$2.7 million as compared to $2.3 million in the third quarter 1995.
LabOne's healthcare segment's operating loss improved $200,000 from a $2.6
million loss in 1995's third quarter to a loss of $2.4 million in the third
quarter 1996.
Another healthcare subsidiary, Pyramid Diagnostic Services, Inc. (Pyramid),
entered bankruptcy proceedings in October 1995 as a result of an adverse $6
million judgment entered in a lawsuit against Pyramid. A December 1996
court date has been established for Pyramid's bankruptcy confirmation
hearing. In 1995, Seafield consolidated Pyramid's third quarter revenues
of $2.7 million while expenses consolidated in 1995's third quarter were
also $2.7 million.
Insurance Services Segment:
The risk-appraisal laboratory testing for the life and health insurance
industries constituted the insurance services segment in 1996's third
quarter. Additionally, during 1995's first and second quarters, the
underwriting and policy administration services and insurance premium
finance services businesses were also included in the insurance services
segment.
LabOne provides risk-appraisal laboratory services to the insurance
industries in the United States and Canada. 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 specimens of individual life
insurance policy applicants. Testing services are also provided on
specimens of individuals applying for individual and group medical and
disability policies.
In June 1996, Epitope, Inc. notified LabOne that the United States Food and
Drug Administration (FDA) had approved the OraSure(registered trademark)
HIV-1 Western Blot test as a confirmation for oral fluid HIV testing. Due
to the lower collection expense associated with oral fluid specimens, the
potential exists for an expansion of the life insurance testing market.
The noninvasive nature of oral fluid specimen collection allows for low-
cost agent collection, making testing much more affordable on smaller face
value insurance policies. Conversely, the availability of these tests also
has the potential to cannibalize part of the existing blood testing market.
The FDA also recently approved two home-based collection kits for HIV-1
testing. These kits are available for sale to the general public to
provide a confidential alternative in determining whether an individual has
HIV. The availability of these products may influence insurance companies
to lower testing thresholds for life insurance applicants.
Several clients have indicated that they plan to test a higher percentage
of their applicants in 1997 because of these new HIV testing products. The
net impact of these potential changes can not be determined at this time.
LabOne's insurance revenues increased to $12.4 million during the third
quarter 1996 as compared to $12.3 million in the same quarter last year.
Average revenue per applicant declined 5% during the third quarter 1996 as
compared to 1995. The total number of insurance applicants tested in the
third quarter 1996 increased by 2% as compared to the same quarter last
year. Insurance kit and container revenue increased due primarily to a
increase in the number of oral fluid and blood kits sold.
LabOne's total selling, general and administrative expenses decreased
$700,000 (11%) in the third quarter 1996 as compared to the prior year due
primarily to cost reduction projects. LabOne's insurance segment's
operating income improved $700,000 to $3.2 million in the third quarter
1996.
Other Segment:
Seafield's oil and gas subsidiary contributed revenues of $636,000 in
1996's third quarter as compared to $676,000 in 1995's third quarter.
Variances in the oil and gas prices nationally impact operating results.
Cash flow from oil and gas operations in 1996's third quarter totaled
$600,000 as compared to $323,000 in 1995's third quarter.
Seafield's subsidiary has an ownership position in Syntroleum Corporation,
a development-stage company with a process for converting natural gas to
synthetic oil and fuels. Seafield owns approximately 30% of Syntroleum.
This position was attained through various financings totaling $2 million.
Seafield records its share of Syntroleum's earnings and losses with the
equity method of accounting.
Recent developments at Syntroleum include a strategic alliance with a
catalyst supplier. The catalyst supplier, in return for providing
financing of $1 million in cash and $7 million of catalyst product,
received a 5% ownership position in Syntroleum. Additionally, a master
licensing agreement and a joint development agreement were signed with a
major oil company; however, no commercial plants have been constructed or
committed to at this time. Moreover, significant risks remain regarding
completion of development work to achieve commercialization of the process.
Investment Income - Net:
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.
Investment income totaled $1.6 million in 1996's third quarter and a loss
of $238,000 in 1995's third quarter. A $1.5 million loss was created in
the third quarter of 1995 as a result of market fluctuations. Seafield's
quarterly results can be affected by fluctuations in security prices.
Other Income/(Loss):
Consolidated interest expense increased to $599,000 in 1996's third quarter
from $22,000 in 1995's third quarter. The increase reflects interest costs
associated with Response's practice management affiliations.
The change in other income primarily reflects a pretax loss recorded in
1995's third quarter as Pyramid entered bankruptcy proceedings in early
October 1995. Seafield wrote-off its investment in Pyramid by recording a
pre-tax expense of approximately $3.3 million.
Taxes:
The consolidated effective tax rate in 1996's third quarter was impacted by
non-deductibility of goodwill, foreign withholding taxes, taxes on
unremitted earnings of foreign subsidiaries and the usage of net operating
losses. The 1995 third quarter rate was affected by the tax benefits on
the sale of subsidiaries, net operating loss usage and non-deductible
goodwill.
Consolidated Third Quarter Results:
The combined effect of the above factors resulted in 1996 third quarter net
earnings of $696,000 on revenues of $33.3 million compared with a net loss
of $1.6 million on revenues of $28.2 million in 1995's third quarter. The
increase in consolidated revenues primarily reflects Response's practice
management affiliations in 1996.
YEAR TO DATE ANALYSIS
Healthcare Services Segment:
Response's revenues were $46.4 million, an increase of $12.6 million, or
37%, when compared to the first nine months of 1995. The revenue increase
is primarily attributable to revenue from practice management affiliations,
and an increase in pharmaceutical sales to physicians.
Response's net revenue from patient services decreased $631,000 between the
nine month periods ending September 30, 1996 and 1995. Response's net
earnings for 1996's first nine months were $1.7 million compared with net
earnings of $2.2 million in 1995's first nine months. Both declines (in
net revenue and net earnings on a year-to-date basis) are primarily due to
the closure of three Centers pursuant to affiliations by referring
physicians with physician practice management companies prior to Response
establishing its own practice management alternative for medical
oncologists.
The following table is a summary of Response's revenues by source for the
first nine months:
Nine months ended September 30,
1996 1995
----------- -----------
Patient services revenue $25,439,000 26,070,000
Pharmaceutical sales to physicians 9,947,000 7,148,000
Practice management services fees 10,110,000 ---
Physician investigator studies 857,000 577,000
----------- -----------
Total revenues $46,353,000 33,795,000
=========== ===========
Response's operating expenses for the first nine months were $35.2 million
as compared to $24.8 million for the first nine months of 1995. These
expenses consist of payroll costs, pharmaceutical and laboratory expenses,
medical director fees, rent expense and other operational expenses.
Operating expenses as a percent of revenues were 76% compared to 73% for
the comparable period of 1995. This increase is primarily attributable to
the increase in affiliated physician practices under management. Pursuant
to the service agreements with the practice affiliates, Response is
responsible for the operating expenses of the practices (net of amounts
retained by physicians). In addition, pharmaceutical costs increased
relative to increased sales of pharmaceuticals to physicians.
Response's general and administrative costs increased $200,000, or 6%, for
the nine months ended September 30, 1996. The increase is primarily
attributable to increases in administrative payroll and related costs.
Response's depreciation and amortization expense was $2.4 million and $1.3
million for the nine months ended September 30, 1996 and 1995, an increase
of 87%. The increase is primarily attributable to the amortization of
service agreements purchased in recently completed affiliations.
Response's provision for doubtful accounts decreased $473,000 or 28%
between the first nine month periods ended September 30, 1996 and 1995.
The provision as a percentage of net patient revenue was 5% in 1996's first
nine months and 6% in 1995's first nine months. The decrease is
attributable to a higher proportion of contract patient accounts, improved
collections performance and an increase in revenues from hospital managed
centers for which collection is more certain.
Response's interest expense totaled $1.4 million in 1996's first nine
months compared with $16,000 in 1995's first nine months. The increase was
related to borrowings under a credit facility and notes issued in
conjunction with practice management affiliations.
Response recorded minority interest of $275,000 during 1996's first nine
months related to the operations of Response's majority-owned or controlled
IMPACT Centers in joint ventures with hospitals. These IMPACT Centers were
not operational during the comparable period in 1995.
LabOne's total revenues in the first nine months of 1996 were $42.8 million
as compared to $43 million in the same period last year. The decrease of
$200,000 can be attributed primarily to a decrease in insurance laboratory
revenue of $3 million, primarily offset by an increase in healthcare
revenue of $2.8 million. Insurance laboratory revenues declined primarily
due to a 4% decrease in the number of applicants tested and a 6% decrease
in the average revenue per applicant. Healthcare revenue increased 91% due
to substantial increases in the volume of specimens tested.
LabOne's total cost of sales increased $1.2 million, or 5%, in the first
nine months of 1996 as compared to the prior year. Healthcare cost of
sales expenses were $7.3 million as compared to $6.4 million in the first
nine months of 1995, due to increased testing volume.
LabOne's total selling, general and administrative expenses decreased $1.2
million (7%) in the first nine months 1996 as compared to the prior year
due to cost reduction efforts. These efforts resulted in a decrease in
payroll, travel, insurance and other overhead expenditures. Depreciation
expense declined due to certain assets becoming fully depreciated.
LabOne's healthcare segment improved $600,000 in the first nine months of
1996 to an operating loss of $6.8 million. LabOne's insurance segment's
operating income declined $700,000 in the first nine months of 1996 to $8.6
million due primarily to lower testing revenues, partially offset by a
decrease in insurance operating expenses.
Another healthcare subsidiary, Pyramid provided Seafield with revenues of
$5 million in 1995's first nine months while consolidated expenses were
also $5 million.
Insurance Services Segment:
LabOne's $3 million decline in insurance laboratory revenues during the
first nine months is due primarily to a 4% decrease in the number of
applicants tested and a 6% decrease in the average revenue per applicant.
LabOne's total selling, general and administrative expenses decreased $1.2
million, or 7%, in the first nine months of 1996 as compared to the prior
year.
LabOne's insurance segment's operating income declined $700,000 million in
the first nine months primarily due to lower testing revenues, partially
offset by a decrease in insurance operating expenses.
Agency Premium Resource, Inc. (APR) is an insurance premium finance
company. APR provides premium financing for the commercial customers of
independent insurance agents. On May 31, 1995, Seafield sold APR. In
1995's first nine months, Seafield consolidated APR's revenues of $1.6
million. Correspondingly, consolidated APR costs and expenses in 1995's
nine months were $517,000.
International Underwriting Services, Inc. (IUS), offers turnkey
policyholder and underwriting services. This subsidiary operated only
within the life and health insurance industry. On July 17, 1995, Seafield
sold IUS. In 1995's first nine months, consolidated IUS revenues were $1.8
million while consolidated IUS costs and expenses totaled $1.6 million.
Other Segment:
Seafield's oil and gas subsidiary contributed revenues of $1.7 million in
1996's first nine months as compared to $1.4 million in 1995's first nine
months. Variances in the oil and gas prices nationally impact operating
results.
The other segment's revenues and expenses in 1995 included the operating
results of a real estate, personal property, sales and use taxes consulting
subsidiary--Tenenbaum and Associates, Inc. (TAI). On May 31, 1995, TAI
sold certain assets to Ernst & Young U.S. LP. TAI retained its accounts
receivable as of May 31, 1995. 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. During June 1995, TAI distributed its remaining assets to
shareholders and filed for dissolution.
TAI's revenues consolidated in 1995's first nine months were $5.3 million
and the TAI expenses consolidated were $4.1 million.
Investment Income - Net:
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.
Investment income totaled $4.1 million in 1996's first nine months and $3.3
million in 1995's first nine months The increase primarily reflects
investment gains in 1996.
Taxes:
The consolidated effective tax rate in 1996's first nine months was
impacted by non-deductibility of goodwill, foreign withholding taxes and
the usage of net operating losses. The 1995 nine months rate was affected
by the tax benefits on the sale of subsidiaries, net operating loss usage
and non-deductible goodwill.
Other Income/(Loss):
Consolidated interest expense increased $947,000 in 1996's first nine
months. The increase reflects interest costs associated with Response's
practice management affiliations partially offset by a decrease in
consolidated interest costs incurred by subsidiaries that were disposed of
during 1995.
The change in other income primarily reflects the net pretax loss recorded
on the dispositions of APR and TAI in 1995's second quarter.
Consolidated Results:
The combined effect of the above factors resulted in 1996 first nine months
net earnings of $768,000 on revenues of $90.9 million compared with a net
loss of $515 on revenues of $94.4 million in 1995's first nine months.
The increase in consolidated revenues reflects Response practice management
affiliations in 1996. Additionally, revenues in 1995 included $16.3
million by four subsidiaries (APR, IUS, TAI and Pyramid) which were
disposed of in 1995. Operating costs, including selling, general and
administrative expenses, for these entities totaled $13.9 million in 1995's
first nine months. Consolidated net losses from APR, IUS, TAI and Pyramid
were $104,000 in 1995's first nine months.
Real Estate - discontinued operations
In June 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.
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 the 1992 financial statements as a loss from discontinued
real estate operations. An additional $2.9 million after-tax loss
provision was recorded in 1994 for a sales contract signed in January 1995.
During 1995's fourth quarter, an additional $6.6 million valuation
allowance was recorded. The increased allowance reflected values based on
recent sales transactions of undeveloped land parcels in Texas and sales
activities at a residential project in New Mexico. Real estate's net
assets have decreased from approximately $80 million at discontinuance to
$34 million at September 30, 1996. Net cash proceeds of approximately $32
million have been generated from real estate since its discontinuance in
1992.
Real estate revenues were $13.6 million during 1996's first nine months
compared with $8.5 million in last year's first nine months. The first
nine months 1996 sales consisted of 34 residential units in New Mexico and
Florida ($11.9 million), 20 acres of land in Oklahoma ($275,000) and 1.5
acres of land in Kansas ($580,000), while 1995's first nine month sales
were comprised of: 17 residential units or lots in Florida, Missouri, and
New Mexico ($5.5 million), 25 acres of land in Kansas and Texas ($1.8
million) and a partnership interest in a commercial property in Colorado.
Remaining real estate holdings include residential land, undeveloped land,
single-family housing, and commercial structures located in the following
states: Florida, Kansas, Nevada, New Mexico, Texas and Wyoming, all of
which are listed for sale.
Listed below is the status of the discontinued real estate operations as of
September 30, 1996:
Land:
North Ft. Worth, TX 297 acres sold, 545 acres under contract, 9
acres listed for sale
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 5.5 acres sold, 16 acres listed for sale
Tulsa, OK sold
Land Lease:
Honolulu, HI sold
San Diego, CA sold
Nashville, TN sold
Commercial:
Reno, NV option contract being negotiated
Denver, CO sold
Gillette, WY listed for sale
Residential:
Juno Beach, FL last 2 units listed for sale
Juno Beach, FL last unit and 3 marina slips,
listed for sale
Santa Fe, NM last 30 units listed for sale with 4 units
under contract
Mazatlan, Mexico final sales remittance received in 1995
The net real estate asset amounts are influenced from period to period by
several factors including 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 construction on the final three houses in
Florida. The accelerated build-out is substantially completed.
Publicly-Traded Subsidiaries
Seafield has investments in two majority-owned entities that are publicly-
traded, LabOne and Response. At September 30, 1996, based on the market
prices of publicly-traded shares of these two subsidiaries, pretax
unrealized gains of approximately $165 million on these investments were
not reflected in either Seafield's book value or stockholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1996 at the holding company level, Seafield had available
for operations approximately $40.8 million in cash and short-term
investments with an additional $4.9 million in long-term securities.
Seafield's working capital increased $1 million during 1996 to $47 million
at September 30, 1996.
On a consolidated basis, Seafield and its subsidiaries (primarily LabOne
with $31 million) had $74.6 million in cash and short-term investments at
September 30, 1996. Current assets totaled approximately $124.5 million
while current liabilities totaled $21.3 million.
Net cash provided by operations totaled $6.8 million in 1996's first nine
months compared with $455,000 used in 1995's first nine months. The
increase primarily reflects a $2.6 million net increase during the first
nine months of 1996 (funds used) in trading portfolios while 1995's first
nine months reflects a $10.1 million increase (funds used) in these trading
portfolios. Net cash used by investing activities totaled $31.2 million in
1996's first nine months compared with $1.6 million provided in 1995's
first nine months primarily reflecting funds invested by Response in
association with its practice management affiliations. The affiliations
were funded with $26 million of bank loan proceeds and reductions in the
consolidated cash position.
In August 1990, Seafield's board of directors rescinded a previous
authorization and passed a new authorization of up to $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.
In 1993, Seafield's board of directors approved an additional $5 million
for the purchase of LabOne's stock. No acquisitions of LabOne stock were
made during 1996. At September 30, 1996, the remaining aggregate
authorization for LabOne stock totals $7.7 million and all the authorized
amount for Seafield stock has been utilized. During 1996, treasury stock
issued for exercised options totaled 22,387 shares.
Seafield is primarily a holding company. Sources of cash are investment
income and 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 are
investments, subsidiary 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. Later, the IRS determined to include 1988-90 as a part of its
review. In May 1995, the IRS issued a revised notice of proposed
adjustments to 1986-87 taxes in response to Seafield's protest filed in
1992. This revised notice reduced the previously proposed tax of
approximately $17 million to $13.5 million. In June 1995, the IRS issued
proposed adjustments to 1988-1989 federal income taxes. Additional
proposed taxes for these years are $182,000. Also, during 1995 the IRS
issued tentative proposed federal income tax adjustments for the 1990 year
totaling approximately $16 million. In April 1996, Seafield received the
final proposed adjustments for 1990; the original proposed adjustment of
$16 million has been reduced to approximately $7 million. The IRS has used
these proposed increases in federal income taxes to deny Seafield's refund
claim for 1990 of $7.6 million. In August 1996, Seafield filed its protest
of the 1990 proposed adjustments. This protest has not yet been assigned
for an appeals conference. Seafield is currently pursuing a compromise
with the Appeals Division of the IRS regarding settlement of the 1986-1989
tax years. Resolution of these matters is not expected during 1996.
Seafield believes that it has meritorious defenses to many of the
substantive issues raised by the IRS, and adequate accruals for income tax
liabilities.
In 1988, LabOne's board of directors authorized LabOne to enter the market
from time to time for the purpose of acquiring shares of LabOne's common
stock in an amount not to exceed $25 million. As of September 30, 1996,
LabOne had acquired 2,099,235 shares of LabOne as treasury stock at a total
cost of $22.7 million, leaving $2.3 million for potential future stock
purchases. No shares have been purchased since 1990.
LabOne pays a quarterly dividend. As an 82% owner, Seafield has received
$5.8 million of cash as dividends from LabOne in 1996. LabOne's working
capital position declined from $44.2 million at December 31, 1995, to $38.7
million at September 30, 1996. This decrease is primarily due to LabOne's
dividends paid exceeding net cash provided by operations. LabOne has total
cash and short-term investments of $30.6 million at September 30, 1996,
compared to $37.1 million at December 31, 1995. 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
short-term borrowings in 1996 and an unsecured $5 million line of credit
available for general corporate purposes. LabOne's line of credit has a
stated rate equivalent to the prime rate which was 8.25% at September 30,
1996.
Response's working capital increased $2.9 million during the first nine
months, totaling $18.7 million at September 30, 1996, with current assets
of $29 million and current liabilities of $10.3 million. Cash and cash
equivalents and short-term investments represent $220,000 of Response's
current assets, a decrease of $3.9 million as compared to December 31,
1995. The decrease is due to cash consideration paid in the practice
management affiliation in January 1996. Response's increases in other
current assets are related to receivables acquired through practice
management affiliations and amounts due from affiliated physicians for
practice management service fees. Current liabilities increased for
amounts payable for operating expenses of practices under management and
liabilities assumed as consideration in the practice management
affiliations.
Seafield loaned Response $10 million in April 1996 to finance an
acquisition. The loan was unsecured and, after August 1, 1996, was
convertible at the option of Seafield into shares of Response common stock
at a conversion price equal to the market price of Response's common stock
at the time of conversion. Seafield exchanged the note for 909,090 shares
of Response stock in August 1996.
In May 1996, Response entered into a $27.5 million bank credit facility
with a bank to fund Response's transaction and working capital needs and to
repay an existing bank credit facility. The credit facility is comprised
of a $22 million acquisition facility and a $5.5 million working capital
facility. The acquisition facility matures May 31, 1998 and bears interest
at a variable rate equal to LIBOR plus a spread of between 1.5% and 2.625%,
depending upon borrowing levels. The working capital facility matures May
30, 1997, subject to a one year extension, and bears interest at a variable
rate equal to LIBOR plus a spread of between 1.875% and 2.375%. The credit
facility is secured by a pledge of common stock in all of Response's
subsidiaries. In addition, the loan agreement contains a covenant
precluding the encumbrance of Response's assets without the consent of the
bank and certain other affirmative, negative and financial covenants. At
September 30, 1996, $26.9 million aggregate principal amount was
outstanding under the credit facility with a current interest rate of
approximately 7.7%. Response's available credit at September 30, 1996, was
$600,000 under the acquisition facility.
Additionally, long-term unsecured amortizing promissory notes bearing
interest at rates from 4% to 9% were issued as partial consideration for
the practice management affiliations. Principal and interest under the
long-term notes may, at the election of the holders, be paid in shares of
common stock of Response based on conversion prices ranging from $13.75 to
$17.50. The unpaid principal amount of the long-term notes was $13.7
million at September 30, 1996.
In October 1996, Seafield extended a $23.5 million credit facility to
Response to be used to finance acquisitions and for working capital. The
loan is payable upon the earlier of the closing of a Response equity
offering or August 1998. This credit facility bears interest at a rate of
8% escalating at certain points during the term of the loan, is unsecured
and is convertible at the election of Seafield into shares of Response
common stock at a conversion price equal to the market price of the common
stock at the date of conversion. Provided, however, that after December
31, 1996, the conversion price will be the lower of market or $11 per
share.
Response's primary capital requirement is to fund affiliations with medical
oncology practices. Subsequent to September 30, 1996, Response has
completed practice management affiliations in Boca Raton, Tamarac, Port St.
Lucie, and Miami, Florida; and Knoxville Tennessee. The total
consideration was approximately $31.5 million, of which $14.5 million was
paid in cash, $6.4 million in Response's long-term unsecured interest-
bearing amortizing promissory notes, $4.2 million in Response's common
stock and $6.4 million of irrevocable standby letters of credit expiring on
January 2, 1997.
Response also executed an affiliation agreement with West Clinic, P.C., an
eight physician medical practice in Memphis, Tennessee. This agreement is
subject to certain conditions which, if not met by December 31, 1996, will
cause its termination. The cash required to consummate the affiliation with
the West Clinic, P.C. is approximately $27.5 million.
Response has received a commitment to increase its bank credit facility a
minimum of $5 million. Response anticipates that working capital generated
from operations, amounts available under the Seafield credit facility and
amounts to be available under the bank credit facility will be adequate to
expand the IMPACT Center network and to manage the practices with which
Response has affiliated for the next 12 months. Response's acquisition
strategy is dependent upon capital resources in excess of working capital
generated from operations and currently available credit facilities.
On July 17, 1996, Response filed a registration statement with the
Securities and Exchange Commission with respect to the public offering of
5,300,000 shares of its common stock, $.01 par value per share. Because of
current market conditions, Response is continuing to evaluate a number of
financing options both private and public.
RECENTLY ISSUED ACCOUNTING STANDARDS
No recently issued accounting standards presently exist which will require
adoption in future periods.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In 1986, a lawsuit was initiated in the Circuit Court of Jackson County,
Missouri by Registrant's former insurance subsidiary (i.e., Business Men's
Assurance Company of America) against Skidmore, Owings & Merrill (SOM)
which is an architectural and engineering firm, and a construction firm to
recover costs incurred to remove and replace the facade on the former home
office building. Because the removal and replacement costs had been
incurred prior to the sale of the insurance subsidiary, 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
Registrant and all costs incurred in connection with the litigation will be
paid by 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 Registrant; the Court of Appeals remanded the case to the trial
court for a jury trial limited to the question of whether or not the
applicable statute of limitations barred the claim. The Appeals Court also
set aside $1.7 million of the judgment originally granted in 1992. In July
1996, this case was retried to a judge. A ruling is expected from the
judge in late 1996. The only remaining defendant is SOM; settlement
arrangements with other defendants have resulted in payments to plaintiff
which have offset legal fees and costs to date of approximately $450,000.
None of the prior or future legal fees or costs are recoverable from the
remaining defendant, even if the judgment in plaintiff's favor is
ultimately upheld. Future legal fees and costs can not reliably be
estimated.
In 1988, a lawsuit was initiated in the United States District Court for
the District of New Mexico against Registrant's former insurance subsidiary
by Lyon Development Company and Jeanne Lyon, d/b/a Lyon and Associates
Realty, 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 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, and approximately $64,000 in legal costs,
with interest until paid. Total legal fees and costs incurred by
Registrant and its former insurance subsidiary have aggregated
approximately $3.6 million. In February 1996, the United States Court of
Appeals for the Tenth Circuit affirmed the jury's verdict in Registrant's
favor, reversed the trial judge's award for marketing expenses, and
affirmed the trial judge's award of legal costs. The plaintiffs did not
seek a rehearing or review of the Appeals Court affirmation of the verdict.
In April 1996, plaintiffs paid the legal costs awarded by the trial judge
and affirmed by the Court of Appeals (approximately $68,000, including
interest). 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 and
judgments rendered in favor of the plaintiff have been for the account of
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.
Registrant received a notice during 1992 of proposed adjustments from the
Internal Revenue Service (IRS) with respect to 1986-87 federal income
taxes. Later, the IRS determined to include 1988-90 as a part of its
review. In May 1995, the IRS issued a revised notice of proposed
adjustments to 1986-87 taxes in response to Registrant's protest filed in
1992. This revised notice reduced the previously proposed tax of
approximately $17 million to $13.5 million. In June 1995, the IRS issued
proposed adjustments to 1988-1989 federal income taxes. Additional
proposed taxes for these years are $182,000. Also, during 1995 the IRS
issued tentative proposed federal income tax adjustments for the 1990 year
totaling approximately $16 million. In April 1996, Registrant received the
final proposed adjustments for 1990; the original proposed adjustment of
$16 million has been reduced to approximately $7 million. The IRS has used
these proposed increases in federal income taxes to deny Registrant's
refund claim for 1990 of $7.6 million. In August 1996, Registrant filed
its protest of the 1990 proposed adjustments. This protest has not yet
been assigned for an appeals conference. Registrant is currently pursuing
a compromise with the Appeals Division of the IRS regarding settlement of
the 1986-1989 tax years. Resolution of these matters is not expected
during 1996. Registrant believes that it has meritorious defenses to many
of the substantive issues raised by the IRS, and 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, 1996 the net assets of Seafield Capital Corporation
exceeded its stated capital by $174,233,000.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
(a) 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:
(1) A current report on Form 8-K was filed with the Commission on
July 30, 1996. This Form 8-K reported that the Registrant's 55% owned
subsidiary, Response Oncology, Inc. (Response), had filed a registration
statement with the Securities and Exchange Commission with respect to the
public offering of 5,300,000 shares of Response's common stock.
(2) The following reports all relate to practice acquisitions by
Response and were filed on the dates indicated:
(a) Form 8-K dated June 20, 1996, filed July 10, 1996
(b) Form 8-K dated July 8, 1996, filed July 19, 1996
(c) Form 8-K/A (Amendment #1) dated June 20, 1996, filed
July 25, 1996
(d) Form 8-K/A (Amendment #2) dated June 20, 1996, filed
September 6, 1996
(e) Form 8-K/A (Amendment #1) dated July 8, 1996, filed
September 6, 1996
(f) Form 8-K dated September 3, 1996, filed September 18,
1996
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, 1996 By /s/ James R. Seward
----------------------------
James R. Seward
Executive Vice President
and Chief Financial Officer
Date November 13, 1996 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, 1996 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,484
<SECURITIES> 71,077
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 124,494
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 279,883
<CURRENT-LIABILITIES> 21,290
<BONDS> 0
0
0
<COMMON> 7,500
<OTHER-SE> 174,233
<TOTAL-LIABILITY-AND-EQUITY> 279,883
<SALES> 0
<TOTAL-REVENUES> 90,890
<CGS> 0
<TOTAL-COSTS> 90,547
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 1,070
<INCOME-PRETAX> 3,577
<INCOME-TAX> 1,404
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 768
<EPS-PRIMARY> .12
<EPS-DILUTED> 0<F2>
<FN>
<F1>Disclosure not required on interim financial statements.
<F2>Computation not applicable.
</FN>
</TABLE>
