UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment #1)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Missouri 43-1039532
------------------------------- ------------------
(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
-------------------------------- ----------------
(Address of principal (Zipcode)
executive offices)
Registrant's telephone number, including area code (816) 842-7000
--------------
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Number of shares outstanding of only class of Registrant's common stock as of
August 1, 1996: $1 par value common - 6,482,076
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
- ---------------------------------------------------------------------------
June 30, December 31,
1996 1995
- ---------------------------------------------------------------------------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 6,274 7,581
Short-term investments 65,752 75,632
Accounts and notes receivable 28,911 23,565
Current income tax receivable 5,407 4,457
Deferred income tax assets 1,130 1,540
Other current assets 11,040 8,850
--------------------
Total current assets 118,514 121,625
Property, plant and equipment 22,256 21,604
Investments:
Securities 7,220 5,647
Oil and gas 2,453 4,247
Intangible assets 61,429 19,477
Other assets 975 1,158
Net assets of discontinued real estate operations 37,648 42,215
--------------------
$ 250,495 215,973
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,277 6,370
Notes payable 636 --
Other current liabilities 7,899 5,859
--------------------
Total current liabilities 15,812 12,229
Notes payable 23,378 --
Deferred income taxes 2,851 (6,999)
Other liabilities 2,440 2,653
--------------------
Total liabilities 44,481 7,883
--------------------
Minority interests 23,033 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 1,763 1,747
Equity adjustment from foreign
currency translation (466) (447)
Retained earnings 204,287 208,098
--------------------
213,084 216,898
Less:
Cost of 1,017,924 shares of treasury stock
(1995 - 1,038,939 shares) 30,103 29,814
--------------------
Total stockholders' equity 182,981 187,084
--------------------
$ 250,495 215,973
====================
See accompanying notes and management's discussion and analysis of
financial statements.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
- ------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
- ------------------------------------------------------------------------------
(in thousands except share amounts)
REVENUES
Healthcare services $ 17,031 14,913 31,981 29,276
Insurance services 12,836 15,011 24,505 30,881
Other 1,070 2,840 1,086 6,035
--------------------- ---------------------
Total revenues 30,937 32,764 57,572 66,192
COSTS AND EXPENSES
Healthcare services 14,962 13,924 28,419 27,545
Insurance services 5,556 6,391 10,864 13,017
Other 1,196 2,761 1,241 4,903
Selling, general
and administrative 9,016 11,391 17,431 23,319
--------------------- ---------------------
Earnings (loss) from operations 207 (1,703) (383) (2,592)
Investment income - net 1,245 2,267 2,415 3,531
Interest expense (279) (100) (471) (171)
Other income (loss) 220 (1,334) 247 (1,312)
--------------------- ---------------------
Earnings (loss) before
income taxes 1,393 (870) 1,808 (544)
Income taxes (benefits) 736 (2,973) 891 (2,775)
--------------------- ---------------------
Earnings before
minority interests 657 2,103 917 2,231
Minority interests 471 460 845 1,155
--------------------- ---------------------
Net earnings $ 186 1,643 72 1,076
===================== =====================
Per share of common stock:
Net earnings $ .03 .26 .01 .17
Dividends $ .30 .30 .60 .60
Book value $ 28.23 31.09 28.23 31.09
Average shares outstanding 6,461,045 6,501,596 6,477,736 6,455,581
Shares outstanding
end of period 6,482,076 6,421,326 6,482,076 6,421,326
See accompanying notes and management's discussion and analysis of financial
statements.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
- ---------------------------------------------------------------------------
Six Months Ended
June 30, 1996
- ---------------------------------------------------------------------------
(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 16
---------
Balance, end of period 1,763
---------
Foreign currency translation:
Balance, beginning of year (447)
Net change during period (19)
---------
Balance, end of period (466)
---------
Retained earnings:
Balance, beginning of year 208,098
Net earnings 72
Dividends paid (3,883)
---------
Balance, end of period 204,287
---------
Less:
Treasury stock:
Balance, beginning of year 29,814
Exercise of stock options 289
---------
Balance, end of period 30,103
---------
Stockholders' Equity $ 182,981
=========
See accompanying notes and management's discussion and analysis of
financial statements.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
Six months ended June 30,
1996 1995
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES
Earnings from operations $ 72 1,076
Adjustments to reconcile earnings from operations
to net cash provided by operations:
Depreciation and amortization 5,990 7,071
Earnings applicable to minority interests 845 1,155
Change in short-term trading portfolio, net 2,703 (9,419)
Change in accounts receivable (3,720) (2,709)
Change in accounts payable (633) 1,231
Income taxes and other 2,453 1,942
------------------------
Net cash provided by operations 7,710 347
------------------------
INVESTING ACTIVITIES
Sales of investments available for sale 4 150
Purchases of investments held to maturity (13,355) (35,667)
Proceeds of investments held to maturity 18,595 34,284
Secruitization of receivables -- 1,500
Additions to property, plant and equipment, net (1,570) (2,150)
Oil and gas investments 87 (323)
Proceeds from sale of subsidiaries -- 9,849
Net increase (decrease) in note receivable 183 (2,810)
Subsidiary acquisition of assets (23,119) --
Subsidiary advances to physician group (2,269) --
Net cash provided (used) by discontinued
real estate operations 4,567 (4,502)
Other, net 320 (897)
------------------------
Net cash used by investing activities (16,557) (566)
------------------------
FINANCING ACTIVITIES
Borrowing (payments) under line of credit
ageements, net 81 (2,469)
Proceeds from long-term debt 12,046 --
Payment of principal on long-term debt (402) (72)
Payment of capital lease (28) (112)
Dividends paid (3,884) (3,852)
Net issuance of treasury stock pursuant
to stock options plans (273) 1,376
------------------------
Net cash provided (used) by financing activities 7,540 (5,129)
------------------------
Effect of foreign currency translation -- 18
------------------------
Net decrease in cash and cash equivalents (1,307) (5,330)
Cash and cash equivalents - beginning of period 7,581 8,626
------------------------
Cash and cash equivalents - end of period $ 6,274 3,296
========================
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest (net of amount capitalized) $ 648 100
========================
Income taxes, net $ 419 (545)
========================
See accompanying notes and management's discussion and analysis of financial
statements.
SEAFIELD CAPITAL CORPORATION
Notes to Consolidated Financial Statements
June 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 the Registrant's financial
position at June 30, 1996 and December 31, 1995 and the results of its
operations and cash flows for the periods ended June 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 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 "Intangible Assets" are as follows:
June 30, 1996 December 31, 1995
-------------- -----------------
(in thousands)
Subsidiary management
service agreements $ 43,839 --
Goodwill 15,982 18,030
Other 1,608 1,447
-------------- -----------------
$ 61,429 19,477
============== =================
The components of "Other Current Assets" are as follows:
June 30, 1996 December 31, 1995
-------------- -----------------
(in thousands)
Inventories $ 3,312 2,653
Prepaid expense 2,313 3,071
Unbilled revenue, net 1,897 1,942
Subsidiary's receivable from
affiliated physicians 2,269 --
Other current assets 1,249 1,184
-------------- -----------------
$ 11,040 8,850
============== =================
The components of "Other Liabilities" are as follows:
June 30, 1996 December 31, 1995
Current Noncurrent Current Noncurrent
---------------------- ----------------------
(in thousands)
Accrued payroll
and benefits $ 2,518 1,450 2,230 1,514
Accrued commissions
and consulting fees 1,145 -- 1,135 41
Other accrued expenses 3,892 -- 1,982 --
Other liabilities 344 990 512 1,098
---------------------- ----------------------
$ 7,899 2,440 5,859 2,653
====================== ======================
(4) 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.
(5) The Registrant's 54% owned subsidiary, Response Oncology, Inc.
(Response), has executed purchase agreements with, and entered into long-
term management services agreements with three medical practices. These
transactions have mainly impacted cash, accounts and notes receivable,
intangible assets, deferred taxes and notes payable on the consolidated
balance sheet. Refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for further information regarding
these agreements.
The unaudited consolidated pro forma results of all current, continuing
operations assuming the above-referenced acquisitions had been consummated
on January 1, 1995 are as follows:
Six Months Ended June 30,
1996 1995
------------ ----------
(in thousands)
Revenues $ 66,262 73,866
Net earnings 657 1,018
Earnings per share .10 .16
(6) 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 June 30, 1996, $12.1
million was outstanding under this credit facility with an interest rate of
approximately 8.2%.
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 June
30, 1996, the unpaid principal amount was $11.1 million.
(7) 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 the fall of 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 $400,000. 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. Registrant is currently engaged in
discussions 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.
(8) Registrant 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.
The Registrant 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.
The Registrant 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.
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 $3.3 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Three months ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ---------
Revenues $ 30,937,000 32,764,000 57,572,000 66,192,000
Earnings (loss)
from operations $ 207,000) (1,703,000) (383,000) (2,592,000)
Investment income - net $ 1,186,000 833,000 2,191,000 2,048,000
Net earnings $ 186,000 1,643,000 72,000 1,076,000
Per share:
Net earnings $ .03 .26 .01 .17
Dividends per share $ .30 .30 .60 .60
Book value per share $ 28.23 31.09 28.23 31.09
SECOND 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 and
second quarters, the radiopharmaceuticals and related nuclear medicine
services were also included in the healthcare services segment.
Response Oncology, Inc. (Response), a 54%-owned subsidiary of Seafield, is
a publicly-traded company (NASDAQ-ROIX). Response is a comprehensive
cancer management company. Response provides advanced cancer treatment
services through outpatient facilities known as IMPACT(registered
trademark) Centers under the direction of approximately 350 medical
oncologists; manages the business aspects of the practices of oncologists
with whom Response has affiliated; and conducts clinical cancer research on
behalf of pharmaceutical manufacturers.
As of June 30, 1996 Response owned or operated in joint ventures with
hospitals 41 Centers in 21 states. Commencing with the affiliations with
Oncology Hematology Group of South Florida, P.A. in January, 1996 (OHGSF),
Knoxville Hematology Oncology Associates in April, 1996, (KHOA), Jeffrey L.
Paonessa, M.D., P.A. in June, 1996 (Paonessa), Response executed its
strategy of expanding its comprehensive cancer management services through
affiliations with premier oncology groups. The total consideration for the
purchases of the business aspects of the three practices was approximately
$37.7 million, approximately $23.1 million of which was paid in cash,
approximately $11.2 million by delivery of Response's long-term unsecured
interest-bearing amortizing promissory notes, approximately $2.6 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.
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. The service agreement 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.
Upon the consummation of the acquisitions, 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.
Response has completed an additional practice management affiliation with
Southeast Florida Hematology Oncology Group (Fort Lauderdale) in July 1996
and has executed two additional definitive agreements and five non-binding
letters of intent for practice management affiliations, furthering
Response's expansion into the business of managing oncology practices.
Response reported net earnings for the second quarter of 1996 of $544,000
compared with net earnings of $729,000 in 1995's second quarter.
Response's revenues for the second quarter of 1996 were $15.1 million, an
increase of $3.7 million, or 33%, when compared to the second quarter of
1995. The increase is primarily attributable to revenue from practice
management affiliations, and an increase in pharmaceutical sales to
physicians, which both carry 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 revenues by source for the
quarters ended June 30:
Three months ended June 30,
1996 1995
----------- -----------
Patient services revenue $ 8,677,000 8,910,000
Pharmaceutical sales to physicians 3,215,000 2,335,000
Practice management services fees 2,996,000 ---
Physician investigator studies 211,000 128,000
----------- -----------
Total revenues $15,099,000 11,373,000
=========== ===========
Response's operating expenses increased $3.1 million, or 38%, to $11.4
million for the quarter ended June 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 73% for the comparable period of
1995. This increase is primarily attributable to operating expenses
incurred in connection with Response's diversification into physician
practice management. Pursuant to the management 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 in connection with increased sales of
pharmaceuticals to physicians.
Response's general and administrative costs increased $75,000, or 5%, for
the quarter ended June 30, 1996. The increase is primarily attributable to
additional administrative payroll and other costs related to Response's
diversification into physician practice management.
Response's depreciation and amortization expense was $754,000 and $463,000
for the quarters ended June 10, 1996 and 1995. Depreciation and
amortization expense increased by $291,000 or 63% when compared to the
second quarter of 1995. The increase is primarily attributable to the
amortization of service agreements purchased in recently completed
affiliations.
Response's provision for doubtful accounts decreased $143,000 or 24%
between the quarters ended June 30, 1996 and 1995. The provision as a
percentage of revenue was 3% in 1996's second quarter and 5% in 1995's
second quarter. The decrease is attributable to a higher proportion of
contract 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 interest expense totaled $465,000 in 1996's second quarter
compared with $7,000 in 1995's second quarter. The increase was related to
notes issued in conjunction with practice management affiliations.
Response recorded minority interest of $61,000 during 1996's second quarter
related to the operations of Response's majority-owned or controlled
IMPACTr Centers in joint ventures with hospitals. The 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 significant
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 1% in the second quarter 1996 to $14.8
million from $14.6 million in the second quarter 1995 due to an increase in
healthcare (clinical and substance abuse testing) laboratory revenues,
partially offset by a decrease in insurance laboratory revenue. Healthcare
revenues increased from $1.1 million in the second quarter 1995 to $1.9
million in 1996 due to increases in clinical and substance abuse testing
volumes.
LabOne's total cost of sales increased $400,000 in the second quarter 1996
as compared to the prior year, primarily due to variable costs associated
with increased healthcare testing volumes. LabOne's healthcare cost of
sales expenses in 1996's second quarter were $2.4 million as compared to $2
million in the second quarter 1995 while healthcare overhead expenditures
during the second quarter 1996 were $1.7 million as compared to $1.3
million in 1995.
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. Pyramid's
bankruptcy proceedings are expected to be finalized in 1996. In 1995,
Seafield consolidated Pyramid's second quarter revenues of $2.5 million
while expenses consolidated in 1995's second quarter were $2.6 million.
Insurance Services Segment:
The following business is considered to be in the insurance services
segment in 1996: risk-appraisal laboratory testing for the life and health
insurance industries. Additionally, during 1995's second quarter, 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.
Currently there are approximately 13.5 million individual life insurance
policies sold in the United States annually. However, laboratory services
are provided on only approximately four to five million of these policy
applicants. 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 net impact of OraSure HIV-1 testing cannot be
determined at this time.
Recently, the FDA 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.
LabOne's insurance revenues declined to $12.8 million during the second
quarter 1996 as compared to $13.5 million in the same quarter last year due
primarily to competitive pressures. Average revenue per applicant declined
5% during the second quarter 1996 as compared to 1995. The total number of
insurance applicants tested in the second quarter 1996 decreased by 1% as
compared to the same quarter last year. Insurance kit and container
revenue decreased due primarily to a decrease in the number of blood and
urine kits sold.
LabOne's total selling, general and administrative expenses decreased
$100,000 (2%) in the second quarter 1996 as compared to the prior year.
LabOne's insurance overhead expenses declined by $600,000 due to ongoing
cost reductions.
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 second quarter, Seafield consolidated APR's revenues of $671,000.
Correspondingly, consolidated APR costs and expenses in 1995's second
quarter were $207,000.
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 second quarter, consolidated IUS revenues were
$799,000 while consolidated IUS costs and expenses totaled $721,000.
Other Segment:
Seafield's oil and gas subsidiary contributed revenues of $1.1 million in
1996's second as compared to $711,000 in 1995's second quarter. Variances
in the oil and gas prices nationally impact operating results. Cash flow
from oil land gas operations in 1996's second quarter totaled $271,000 as
compared to $415,000 in 1995's second quarter.
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.
Consolidated revenues in 1995's second quarter for TAI were $2.1 million
and the TAI expenses consolidated were $1.9 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 $1.2 million in 1996's second quarter and $2.3
million in 1995's second quarter. The decrease primarily reflects a
reduction in unrealized investment gains in 1996. Seafield's quarterly
results can be affected by fluctuations in security prices.
Other Income/(Loss):
Consolidated interest expense increased to $279,000 in 1996's second
quarter from $100,000 in 1995's second quarter. The increase reflects
interest costs associated with Response's practice management affiliations.
The change in other income primarily reflects the net pretax loss recorded
on the dispositions of APR and TAI in 1995's second quarter.
Taxes:
The consolidated effective tax rate in 1996's second quarter was impacted
by non-deductibility of goodwill, foreign income and withholding taxes in
excess of the federal rate and the usage of net operating losses. The 1995
second quarter rate was affected by the tax benefits on the sale of
subsidiaries, net operating loss usage and non-deductible goodwill.
Consolidated Second Quarter Results:
The combined effect of the above factors resulted in 1996 second quarter
net earnings of $186,000 on revenues of $30.9 million compared with net
earnings of $1.6 million on revenues of $32.7 million in 1995's second
quarter.
The revenue decrease reflects second quarter 1995 revenues of $6.1 million
by four subsidiaries which were disposed of in 1995, APR, IUS, TAI and
Pyramid. Operating costs, including selling, general and administrative
expenses, for these entities totaled $5.3 million in 1995's second quarter.
Consolidated net earnings from APR, IUS, TAI and Pyramid were $46,000 in
1995's second quarter.
YEAR TO DATE ANALYSIS
Healthcare Services Segment:
Response reported net earnings for 1996's first six months of $1.1 million
compared with net earnings of $1.6 million in 1995's first six months.
Response's revenues were $28.4 million, an increase of $5.8 million, or
26%, when compared to the first six months of 1995. The increase is
primarily attributable to revenue from practice management affiliations,
and an increase in pharmaceutical sales to physicians.
The following table is a summary of revenues by source for the first six
months:
Six months ended June 30,
1996 1995
----------- -----------
Patient services revenue $16,792,000 17,475,000
Pharmaceutical sales to physicians 6,437,000 4,702,000
Practice management services fees 4,626,000 ---
Physician investigator studies 584,000 396,000
----------- -----------
Total revenues $28,439,000 22,573,000
=========== ===========
Response's operating expenses for the first six months were $21.8 million
as compared to $16.5 million for the first six 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 77% compared to 73% for
the comparable period of 1995. This increase is primarily attributable to
operating expenses incurred in connection with Response's diversification
into physician practice management. Pursuant to the management 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 in connection
with increased sales of pharmaceuticals to physicians.
Response's general and administrative costs increased $97,000, or 4%, for
the first six months ended June 30, 1996. The increase is primarily
attributable to increases in administrative payroll and related costs.
Depreciation and amortization expense increased by $451,000 or 52% when
compared to the first six months of 1995. The increase is primarily
attributable to the amortization of service agreements purchased in
recently completed affiliations.
Response's provision for doubtful accounts decreased $316,000 or 28%
between the first six month periods ended June 30, 1996 and 1995. The
provision as a percentage of revenue was 3% in 1996's six months and 5% in
1995's first six months. The decrease is attributable to a higher
proportion of contract patient accounts, improved collections performance
and an increase in revenues from physicians sales, hospital management
fees, and contract research for which collection is more certain.
Response interest expense totaled $657,000 in 1996's first six months
compared with $11,000 in 1995's first six months. The increase was related
to notes issued in conjunction with practice management affiliations.
Response recorded minority interest of $155,000 during 1996's first six
months related to the operations of Response's majority-owned or controlled
IMPACTr Centers in joint ventures with hospitals. The IMPACTr Centers were
not operational during the comparable period in 1995.
LabOne's total revenues in the first six months of 1996 were $28 million as
compared to $29.3 million in the same period last year. The decrease of
$1.3 million or 4% can be attributed primarily to a decrease in insurance
laboratory revenue of $3.1 million, partially offset by an increase in
healthcare revenue of $1.8 million. Healthcare revenue increased 103% due
to substantial increases in the volume of specimens tested.
LabOne's total cost of sales increased $400,000, or 2%, in the first six
months of 1996 as compared to the prior year. Healthcare cost of sales
expenses were $4.5 million as compared to $4.1 million in the first six
months of 1995. LabOne's total selling, general and administrative
expenses decreased $600,000 (5%) in the first six months 1996 as compared
to the prior year.
LabOne's healthcare overhead expenditures during the first six months of
1996 were $3.4 million as compared to $2.4 million in 1995. LabOne's
healthcare segment improved from an operating loss of $4.8 million in the
first six months of 1995 to a $4.4 million loss in 1996's first six months.
Another healthcare subsidiary, Pyramid provided Seafield with revenues of
$5 million in 1995's first six months while consolidated expenses were also
$5 million.
Insurance Services Segment:
LabOne's $3.1 million decline in insurance laboratory revenues during the
first six months is due primarily to a 6% 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
$600,000, or 5%, in the first six months of 1996 as compared to the prior
year. Insurance overhead expenses declined by $1.6 million due to cost
reduction efforts.
LabOne's insurance segment's operating income declined $1.4 million in the
first six months primarily due to lower testing revenues, partially offset
by a decrease in operating expenses.
Agency Premium Resource, Inc. (APR) was sold on May 31, 1995. In 1995's
first six months, Seafield consolidated APR's revenues of $1.6 million.
Correspondingly, consolidated APR costs and expenses in 1995's six months
were $517,000.
International Underwriting Services, Inc. (IUS) was sold July 17, 1995. In
1995's first six 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 $1.1 million in
1996's first six months as compared to $726,000 in 1995's first six 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) which was sold on May 31,
1995. TAI's revenues consolidated in 1995's first six 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 $2.4 million in 1996's first six months and $3.5
million in 1995's first six months The decrease primarily reflects a
reduction in unrealized investment gains in 1996.
Taxes:
The consolidated effective tax rate in 1996's first six months was impacted
by non-deductibility of goodwill, foreign income and withholding taxes in
excess of the federal rate and the usage of net operating losses. The 1995
six 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 $300,000 in 1996's first six
months. The increase reflects interest costs associated with Response's
practice management affiliations 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 six months
net earnings of $72,000 on revenues of $57.6 million compared with net
earnings of $1.1 million on revenues of $66.2 million in 1995's first six
months.
The revenue decrease reflects 1995 revenues of $13.6 million by four
subsidiaries which were disposed of in 1995, APR, IUS, TAI and Pyramid.
Operating costs, including selling, general and administrative expenses,
for these entities totaled $11.2 million in 1995's first six months.
Consolidated net earnings from APR, IUS, TAI and Pyramid were $123,000 in
1995's first six months.
The reduction in earnings applicable to minority interests results
primarily from the above discussed reduction in LabOne's earnings and the
disposition of TAI during 1995.
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
$38 million at June 30, 1996. Net cash proceeds of approximately $32
million have been generated from real estate since its discontinuance in
1992.
Real estate revenues were $8.6 million during 1996's first six months
compared with $5.7 million in last year's first six months. The first six
months 1996 sales consisted of 23 residential units in New Mexico and
Florida ($7.6 million) and 1.5 acres of land in Kansas ($580,000), while
1995's first six month sales were comprised of: 13 residential units or
lots in Florida, Missouri, and New Mexico ($3.9 million) and 5 acres of
land in Kansas and Texas ($1.3 million).
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, Oklahoma, Texas and Wyoming,
all of which are listed for sale.
Listed below is the status of the discontinued real estate operations as of
June 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 12 acres under contract
Land Lease:
Honolulu, HI sold
San Diego, CA sold
Nashville, TN sold
Commercial:
Reno, NV contract expired, relisted for sale
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 all units listed for sale with 5 of 37 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 June 30, 1996, based on the market prices
of publicly-traded shares of these two subsidiaries, pretax unrealized
gains of approximately $159 million on these investments were not reflected
in either Seafield's book value or stockholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1996 at the holding company level, Seafield had available for
operations approximately $35.9 million in cash and short-term investments
with an additional $4.7 million in long-term securities. Seafield's
working capital decreased $3.3 million during 1996 to $42.7 million at June
30, 1996, primarily as a result of a loan to Response.
On a consolidated basis, Seafield and its subsidiaries (primarily LabOne
with $33 million) had $72 million in cash and short-term investments at
June 30, 1996. Current assets totaled approximately $118.5 million while
current liabilities totaled $15.8 million.
Net cash provided by operations totaled $7.7 million in 1996's first six
months compared with $347,000 in 1995's first six months. The increase
primarily reflects a $2.7 million net decrease during the first six months
of 1996 (funds provided) in trading portfolios while 1995's first six
months reflects a $9.4 million increase (funds used) in these trading
portfolios. Net cash used by investing activities totaled $16.6 million in
1996's first six months compared with $566,000 in 1995's first six months
primarily reflecting $25.4 million invested by Response associated with
practice management affiliations. The affiliations were funded with $12
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 June 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 21,015 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. Seafield is currently engaged in
discussions 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 June 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
$3.9 million of cash as dividends from LabOne in 1996. LabOne's working
capital position declined from $44.2 million at December 31, 1995 to $39.6
million at June 30, 1996. This decrease is primarily due to LabOne's
dividends paid and increases in long term investments exceeding net cash
provided by operations. LabOne has total cash and investments of $35.5
million at June 30, 1996 compared to $37.6 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
June 30, 1996.
Response's working capital increased $1.1 million during the first six
months, totaling $17 million at June 30, 1996, with current assets of $25.4
million and current liabilities of $8.4 million. Cash and cash equivalents
and short-term investments represent $256,000 of Response's current assets,
a decrease of $4.3 million as compared to December 31, 1996. The decrease
is due to cash consideration paid in the OHGSF 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 to finance the KHOA acquisition. The
loan is unsecured and, after August 1, 1996, is 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. The note bears interest at the rate of prime plus 1%.
In May 1996, Response entered into a $27.5 million credit facility with a
bank to fund Response's acquisitions and working capital needs and to repay
its existing facility. The credit facility is comprised of up to a $20
million acquisition facility and a $7.5 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 at Response's election, 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 June 30, 1996, $12,127,000 aggregate principal amount was
outstanding under the credit facility with a current interest rate of
approximately 8.2%. Response's available credit at June 30, 1996, was $6.5
million 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 $15.50 to
$17.50. The unpaid principal amount of the long-term notes was $11,114,000
at June 30, 1996.
Response's primary capital requirement is to fund affiliations with medical
oncology practices. Subsequent to June 30, 1996, Response completed its
fourth practice management affiliation with Southeast Florida Hematology
Oncology Group, a four physician medical oncology and hematology practice
in Fort Lauderdale, Florida. Response also executed definitive agreements
with West Clinic, P.C., an eight physician medical practice in Memphis,
Tennessee and The Center for Hematology Oncology, P.A., a three physician
medical practice in Boca Ratan, Florida. Non-binding letters of intent
have also been executed with an additional 16 physicians in Southeast
Florida and East Tennessee. The unused portion of the credit facility
discussed above, cash flow from Response's operations and potential net
proceeds from any new debt or equity offerings will be utilized to fund
practice management affiliations.
In order to consummate all of the above-referenced affiliations and to fund
the associated working capital requirements, additional cash of
approximately $51 million will be required. Response anticipates
generating these funds through the proceeds of the public offering
described below or through expansion of the existing credit facilities. In
the event that the public offering of additional stock is not successfully
completed within a certain time frame, Response will explore other possible
means of equity and debt financing.
Response is committed under a definitive agreement with a certain physician
practice to fund liquidated damages in the amount of $250,000 in the event
that the practice affiliation is not consummated on or before December 1,
1996.
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. Of the
5,300,000 shares expected to be offered, 4,700,000 shares are being offered
by Response and 600,000 shares by selling shareholders, principally
Seafield. The registration statement has not yet become effective.
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 the fall of 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 $400,000.
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. Registrant is currently engaged in
discussions 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 June 30, 1996 the net assets of Seafield Capital Corporation exceeded
its stated capital by $175,481,000.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
(a) The annual meeting of shareholders was held on May 8, 1996 for the
purpose of electing a board of directors and approving the appointment of
auditors. Proxies for the meeting were solicited and there was no
solicitation in opposition to management's solicitations. Holders of
6,466,217 shares were eligible to vote and 5,228,454 shares were
represented at the meeting either in person or by proxy.
(c) All of management's nominees for directors as listed in the proxy
statement were elected with the following vote:
Director Shares Voted Shares Shares Not
For Withheld Voted
-------- ------------ -------- ----------
L.C. Bentsen 5,192,146 36,308 0
W.D. Grant 5,189,656 38,798 0
J.H. Robinson, Jr. 5,192,146 36,308 0
The shareholders approved the appointment of KPMG Peat
Marwick LLP as independent auditors for the year ending December 31, 1996
by the following vote:
Shares Voted Shares Voted Shares Shares Not
For Against Abstaining Voted
------------ ------------ ---------- ----------
5,220,207 1,699 6,547 1
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
June 11 1996. This Form 8-K reported that:
(a) the Registrant's 54% owned subsidiary, Response
Oncology, Inc. (Response), had executed a loan agreement with NationsBank
of Tennessee, N.A. as lead bank providing Response with a $27.5 million
unsecured credit facility for acquisitions and working capital
(b) Response had executed two additional letters of intent
to enter into practice affiliation transactions and practice management
relationships with two medical oncology practices
(c) the Registrant's 82% owned subsidiary, LabOne, Inc.
(LabOne), was notified by Epitope, Inc. that the Food and Drug
Administration had approved the OraSure(registered trademark) HIV-1 Western
Blot Test.
(2) The following reports all relate to practice acquisitions by
Response and were filed on the dates indicated:
(a) Form 8-K dated Jan. 17, 1996, filed Jan. 17, 1996
(b) Form 8-K/A (Amendment #1) dated Jan. 17, 1996, filed
Jan. 20, 1996
(c) Form 8-K/A (Amendment #2) dated Jan. 17, 1996, filed
March 20, 1996
(d) Form 8-K dated May 1, 1996, filed May 1, 1996
(e) Form 8-K/A (Amendment #1) dated May 1, 1996, filed
July 1, 1996
(f) Form 8-K/A (Amendment #2) dated May, 1, 1996, filed
July 3, 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 September 6, 1996 By /s/ James R. Seward
----------------------------
James R. Seward
Executive Vice President
and Chief Financial Officer
Date September 6, 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 10-Q for the period ending June 30, 1996 and is qualified in its
entirety by reference to such 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 6,274
<SECURITIES> 65,752
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 118,514
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 250,495
<CURRENT-LIABILITIES> 15,812
<BONDS> 0
0
0
<COMMON> 7,500
<OTHER-SE> 175,481
<TOTAL-LIABILITY-AND-EQUITY> 250,495
<SALES> 0
<TOTAL-REVENUES> 57,572
<CGS> 0
<TOTAL-COSTS> 57,955
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 471
<INCOME-PRETAX> 1,808
<INCOME-TAX> 891
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72
<EPS-PRIMARY> .01
<EPS-DILUTED> 0<F2>
<FN>
<F1>Disclosure not required on interim financial statements
<F2>Computation not applicable
</FN>
</TABLE>
