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 March 31, 1997
----- 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
May 8, 1997: $1 par value common - 6,489,103
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
- --------------------------------------------------------------------------
(unaudited)
March 31, December 31,
1997 1996
- --------------------------------------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 3,520 5,372
Short-term investments 27,559 55,208
Accounts and notes receivable 29,011 24,882
Current income tax receivable 2,331 (724)
Deferred income taxes 1,009 3,058
Other current assets 22,964 20,604
----------------------
Total current assets 86,394 108,400
Property, plant and equipment 22,287 22,777
Investments:
Securities 504 4,019
Oil and gas -- 1,543
Intangible assets 123,063 118,917
Other assets 123 1,830
Net assets of discontinued real estate operations -- 30,466
----------------------
$ 232,371 287,952
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,500 8,599
Notes payable 1,313 7,847
Other current liabilities 9,618 10,768
----------------------
Total current liabilities 18,431 27,214
Notes payable 45,586 39,611
Deferred income taxes 14,320 17,237
Other liabilities 108 1,528
----------------------
Total liabilities 78,445 85,590
----------------------
Minority interests 32,063 28,338
----------------------
Stockholders' equity:
Preferred stock of $1 par value.
Authorized 3,000,000 shares; none issued -- --
Common stock of $1 par value.
Authorized 24,000,000 shares;
issued 7,500,000 shares 7,500 7,500
Paid-in capital 1,772 1,748
Equity adjustment from foreign
currency translation (466) (439)
Retained earnings 143,201 195,329
----------------------
152,007 204,138
Less cost of 1,010,897 shares of treasury stock
(1996-1,016,066 shares) 30,144 30,114
----------------------
Total stockholders' equity 121,863 174,024
----------------------
$ 232,371 287,952
======================
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and results of
operations.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Operations
- ----------------------------------------------------------------------------
Three months ended
March 31,
1997 1996
- ----------------------------------------------------------------------------
(in thousands except share amounts)
(unaudited)
REVENUES
Healthcare services $ 27,676 14,950
Insurance services 14,429 11,669
Other -- 16
---------------------
Total revenues 42,105 26,635
COSTS AND EXPENSES
Healthcare services 23,324 13,457
Insurance services 6,175 5,308
Other -- 45
Selling, general and administrative 10,350 8,415
---------------------
Earnings (loss) from operations 2,256 (590)
Investment income - net 3,805 1,170
Interest expense (837) (192)
Other income 295 27
---------------------
Earnings before income taxes 5,519 415
Income taxes 6,942 155
---------------------
Earnings (loss) before minority interests (1,423) 260
Minority interests 794 374
---------------------
NET LOSS $ (2,217) (114)
=====================
Per share of common stock:
Net loss $ (.34) (.02)
Dividends $ .30 .30
Book value $ 18.78 28.57
Average shares outstanding 6,487,238 6,463,421
Shares outstanding end of period 6,489,103 6,470,801
See accompanying notes to consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
- ---------------------------------------------------------------------------
(unaudited)
Three Months Ended
March 31, 1997
- ---------------------------------------------------------------------------
(in thousands)
Common stock:
Balance, beginning and end of period $ 7,500
---------
Paid-in capital:
Balance, beginning of year 1,748
Exercise of stock options 24
---------
Balance, end of period 1,772
---------
Foreign currency translation:
Balance, beginning of year (439)
Net change during period (27)
---------
Balance, end of period (466)
---------
Retained earnings:
Balance, beginning of year 195,329
Net earnings (2,217)
Dividend of SLH Corporation (47,963)
Cash dividends paid (1,948)
---------
Balance, end of period 143,201
---------
Less:
Treasury stock:
Balance, beginning of year 30,114
Exercise of stock options 30
---------
Balance, end of period 30,144
---------
Stockholders' Equity $ 121,863
=========
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and results of
operations.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
Three months ended March 31,
1997 1996
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES (unaudited)
Net loss $ (2,217) (114)
Adjustments to reconcile loss from operations
to net cash provided (used) by operations:
Depreciation and amortization 2,927 2,697
Earnings applicable to minority interests 794 374
Change in trading portfolio, net 32,377 (2,438)
Change in accounts receivable (5,497) (798)
Change in accounts payable 1,057 626
Net advances to physician practices (1,959) (3,113)
Income taxes and other 3,909 254
------------------------
Net cash provided (used) by operations 31,391 (2,512)
------------------------
INVESTING ACTIVITIES
Sales of investments available for sale 1,350 --
Purchases of investments held to maturity (7,714) (4,386)
Maturities of investments held to maturity 732 11,883
Additions to property, plant and equipment, net (1,414) (536)
Oil and gas investments -- (73)
Net decrease in note receivable -- 183
Acquisition of physician practices -- (5,344)
Cost in excess of fair value of assets acquired (4,121) --
Net cash provided by discontinued
real estate operations 581 1,528
Other, net (444) (318)
------------------------
Net cash provided (used) by investing activities (11,030) 2,937
------------------------
FINANCING ACTIVITIES
Borrowing under line of credit ageements, net -- 3,528
Proceeds from long-term debt 7,150 --
Payment of principal on long-term debt (7,784) (299)
Payment of capital lease (22) (16)
Cash portion of SLH dividend (19,590) --
Regular quarterly dividend paid (1,947) (1,939)
Net issuance of treasury stock pursuant
to stock options plans (7) (137)
------------------------
Net cash provided (used) by financing activities (22,200) 1,137
------------------------
Effect of foreign currency translation (13) (4)
------------------------
Net increase (decrease) in cash and cash equivalents (1,852) 1,558
Cash and cash equivalents - beginning of period 5,372 7,581
------------------------
Cash and cash equivalents - end of period $ 3,520 9,139
========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 1,043 171
========================
Income taxes, net $ 1,718 89
========================
Supplemental disclosures of non-cash information:
Non-cash portion of SLH Dividend $ 28,373 --
========================
See accompanying notes and management's discussion and analysis of financial
statements.
SEAFIELD CAPITAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
(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 March 31, 1997 and December 31, 1996 and the results of its
operations and cash flows for the periods ended March 31, 1997 and 1996.
All adjustments made in the interim period were of a normal recurring
nature except the accrual of termination benefits due to the elimination of
certain Seafield positions after the SLH distribution. 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 1996 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) On March 3, 1997, Seafield distributed to its shareholders all of the
outstanding shares of common stock of its wholly-owned subsidiary, SLH
Corporation, on the basis of one share of common stock of SLH for each four
shares of Seafield common stock held. In connection with this distribution
and pursuant to a Distribution Agreement between Seafield and SLH, Seafield
transferred its real estate and energy businesses and miscellaneous assets
and liabilities, including two wholly-owned subsidiaries, Scout Development
Corporation and BMA Resources, Inc., to SLH. The net assets distributed to
SLH totaled approximately $48 million. The spinoff was accounted for as a
dividend. As a result of the distribution, Seafield's principal assets
consist of its stock holdings in LabOne, Inc. and Response Oncology, Inc.
The following unaudited consolidated pro forma information has been
prepared as if the distribution of SLH had occurred on January 1, 1996.
Three Months Ended March 31,
1997 1996
-----------------------------------
(in thousands except share amounts)
Revenues $ 42,105 26,635
Investment income, net 643 1,098
Earnings before income taxes 1,941 740
Net loss (669) (4,926)
Net loss per share (.10) (.76)
(3) During 1996, Seafield's subsidiary, Response, acquired stock in or
certain operating assets and assumed certain liabilities of ten oncology
practices. Response's consideration in exchange for the practice
affiliations consisted of $53 million in cash, $27 million in notes payable
and 640,000 shares of Response common stock. The practice affiliations
have been accounted for as purchases and the accompanying consolidated
financial statements include the results of their operations from the
respective dates of acquisition.
In April 1996, Seafield loaned $10 million to Response which was converted
into 909,090 shares of Response common stock at the election of Seafield in
August 1996. In October 1996, Seafield provided to Response a $23.5
million credit facility to finance acquisitions and for working capital.
This credit facility was converted into Response common stock in February
1997, increasing Seafield's ownership to approximately 67%.
(4) Cash and cash equivalents include demand deposits in banks and
overnight investments.
(5) The components of "Intangible Assets" are as follows:
March 31, 1997 December 31, 1996
------------------ -----------------
(in thousands)
Subsidiary management
service agreements $ 99,233 101,963
Goodwill 22,780 15,725
Other 1,050 1,229
-------------- --------------
$ 123,063 118,917
============== ==============
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. Certain purchase accounting
adjustments were made during the first quarter of 1997 which reduced
management service agreements, net of accumulated amortization, by
approximately $2 million. The carrying value of the management service
agreements is reviewed for impairment at the end of each reporting period.
Seafield's 82% owned subsidiary, LabOne, Inc., acquired certain assets,
inventory and customer lists of GIB Laboratories, Inc., a subsidiary of
Prudential Insurance Company of America, for $4.6 million. The acquisition
was accounted for using the purchase method. Accordingly, the purchase
price was allocated to assets acquired based on their fair values. The
total cost in excess of tangible net assets acquired was $4.1 million and
is being amortized on a straight-line basis over 15 years.
(6) The components of "Other Current Assets" are as follows:
March 31, 1997 December 31, 1996
------------------ -----------------
(in thousands)
Inventories $ 4,450 3,775
Prepaid expenses 4,383 2,751
Subsidiary's receivable from
affiliated physicians 14,131 12,422
Other current assets -- 1,656
-------------- --------------
$ 22,964 20,604
============== ==============
The components of "Other Current Liabilities" are as follows:
March 31, 1997 December 31, 1996
------------------ -----------------
(in thousands)
Accrued payroll and benefits $ 2,763 4,039
Accrued commissions
and consulting fees -- 403
Other accrued expenses 6,668 5,360
Other liabilities 187 966
-------------- --------------
$ 9,618 10,768
============== ==============
(7) 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.
(8) In May 1996, Response entered into a $27.5 million bank credit
facility to fund Response's acquisitions and working capital needs. The
credit facility is comprised of a $22 million acquisition facility and a
$5.5 million working capital facility. The interest rate varies from LIBOR
plus 1.5% to LIBOR plus 2.625%. At March 31, 1997, $27.1 million was
outstanding under this credit facility with an interest rate of
approximately 7.7%. In April 1997, the credit facility was amended to
increase the maximum available borrowings to $45 million and to extend the
maturity date to March 1999.
(9) Under the Distribution Agreement and Assignment, SLH assumed the
rights and obligations of Seafield with respect to the following legal
matter.
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. 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. Subsequently, the parties waived a jury trial
and in July 1996, this case was retried to a judge. On January 21, 1997,
the judge entered a judgment in favor of Seafield. The amount of that
judgment, together with interest is approximately $5.8 million. Although
the judgment has been appealed, counsel for the Company expects that it
will be difficult for the defendants to cause the judgment to be reversed.
The final outcome is not expected until at least 1998. Settlement
arrangements with other defendants have resulted in payments to plaintiff
which have substantially offset legal fees and costs to date of
approximately $481,000. Future legal fees and costs can not reliably be
estimated. Pursuant to the Distribution Agreement, this matter was
assigned to SLH Corporation.
In the opinion of management, after consultation with legal counsel and
based upon current available information, this lawsuit is not expected to
have a material adverse impact on the consolidated financial position or
results of operations of Seafield.
Pursuant to the Distribution Agreement, SLH assumed from Seafield all of
the contingent tax liabilities described below and acquired all rights to
refunds plus any interest related to these tax years. SLH also assumed all
contingent liabilities and refunds related to any issues raised for the
years 1986-1990 whose resolution may extend to tax years beyond the 1990
tax year.
Seafield has received notices of proposed adjustments (Revenue Agent's
Reports) from the Internal Revenue Service (IRS) with respect to 1986-1990
federal income taxes. These notices claim total federal income taxes due
for the entire five year period in the approximate net amount of
$13,867,000, exclusive of interest thereon. Seafield filed protests
regarding the 1986-1990 notices of proposed adjustments.
On May 9, 1997, Seafield received a formal agreement to the issues and the
final tax computation from the IRS. The agreement provides for a tax
refund of approximately $5.8 million, before interest. The Company expects
to owe interest of approximately $700,000. The agreement is subject to
approval by the Congressional Joint Committee on Taxation. Consideration
by the Joint Committee is expected before the end of 1997.
In December 1996, the California state auditor sent Seafield an audit
report covering the 1987-1989 taxable years. The State of California has
determined to include, as a "unitary taxpayer," all majority owned non-life
insurance subsidiaries and joint ventures of Seafield. The auditor's
report has been forwarded to the California Franchise Tax Board for action.
The total amount of California state income taxes due for the 1987-1989
years is expected to be approximately $750,000 plus interest of
approximately $1 million.
(10) In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share", which revised the calculation and
presentation provisions of Accounting Principles Board Opinion 15 and
related interpretations. Statement No. 128 is effective for Seafield's
fiscal year ending December 31, 1997. Retroactive application will be
required. Seafield believes the adoption of Statement No. 128 will not
have a significant effect on its reported earnings per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Selected financial data:
Three months ended March 31,
----------------------------
1997 1996
----------- ----------
Revenues $ 42,105,000 26,635,000
Earnings (loss) from operations $ 2,256,000 (590,000)
Investment income - net $ 3,805,000 1,170,000
Net loss $ (2,217,000) (114,000)
Per share:
Net loss $ (.34) (.02)
Dividends $ .30 .30
Book value $ 18.78 28.57
Average shares outstanding 6,487,238 6,463,421
Shares outstanding end of period 6,489,103 6,470,801
Introductory remarks about results of operations
Seafield Capital Corporation's (Seafield or Registrant) principal assets
consist of majority ownership of LabOne, Inc. (LabOne) and Response
Oncology, Inc. (Response). Additionally Seafield had investments in real
estate, energy businesses and miscellaneous assets. On March 3, 1997,
Seafield distributed to its shareholders all of the outstanding shares of
common stock of its wholly-owned subsidiary, SLH Corporation (SLH). In
connection with this distribution and pursuant to a Distribution Agreement
between Seafield and SLH, Seafield transferred its real estate and energy
businesses and miscellaneous assets and liabilities to SLH. The spinoff
was accounted for as a dividend. As a result of the distribution,
Seafield's principal assets consist of its stock holdings in LabOne and
Response. See Notes to Consolidated Financial Statements for additional
information.
1997 Compared to 1996
Healthcare Services Segment:
The following businesses are included in the healthcare services segment:
a comprehensive cancer management company and the clinical and substance
abuse laboratory testing services.
Response Oncology, Inc. (Response), a 67%-owned subsidiary of Seafield, is
a publicly-traded company (NASDAQ-ROIX). On February 26, 1997, Seafield
converted its Response note receivable and accrued interest into Response
common stock. The conversion increased Seafield's ownership of Response
shares outstanding from 56% at December 31, 1996 to approximately 67%.
Response is a comprehensive cancer management company. Response provides
advanced cancer treatment services through outpatient facilities known as
IMPACT Centers under the direction of practicing oncologists; owns the
assets of and manages the nonmedical aspects of oncology practices; and
conducts clinical cancer research on behalf of pharmaceutical
manufacturers. Approximately 350 medical oncologists are associated with
Response through these programs.
At March 31, 1997, Response's network consisted of 47 IMPACT Centers,
including 24 wholly-owned, 12 managed programs, and 11 owned and operated
in joint venture with a host hospital. In January 1996, Response commenced
execution of a diversification strategy into practice management. Such
diversification included the affiliation during 1996 with 38 physicians in
10 medical oncology practices in Florida and Tennessee. Response has
sought deep geographic penetration in those markets believing that
significant market share is crucial to achieving efficiencies, revenue
enhancements, and marketing of complete cancer services to diverse payors
including managed care. Pursuant to Service Agreements, Response provides
management services that extend to all nonmedical 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 fees from Service
Agreements includes practice operating expenses and a management fee either
fixed in amount or equal to a percentage of each affiliated oncology
group's adjusted net revenue or operating income. In certain affiliations,
Response may also be entitled to a performance fee if certain financial
criteria are satisfied.
Response records patient services revenue net of contractual allowances and
discounts. The following table is a summary of revenues by source for the
first quarters ended March 31:
1997 1996
----------- -----------
Net patient service revenue $ 9,894,000 9,282,000
Pharmaceutical sales to physicians 4,153,000 3,222,000
Practice management services fees 10,875,000 1,630,000
Physician investigator studies 583,000 374,000
----------- -----------
Total revenues $25,505,000 14,508,000
=========== ===========
Response's net earnings for the first quarter of 1997 were $867,000,
compared to net earnings of $516,000 in the same period in 1996.
Response's revenues increased 83% to $24.4 million in 1997's first quarter,
compared to $13.3 million in 1996's first quarter. The increase is
primarily due to nine additional practice management affiliations made
after March 31, 1996, which were not included in revenue for the first
quarter of 1996. Response's earnings before income taxes were $1.4 million
in 1997's first quarter compared with %516,000 in 1996's first quarter.
Response utilized net operating loss carryforwards in 1996 to fully offset
its income tax provision.
Response's EBITDA (earnings before interest, taxes, depreciation and
amortization) increased $2.5 million or 192% to $3.8 million for the
quarter ended March 31, 1997, in comparison to $1.3 million for the quarter
ended March 31, 1996. EBITDA is not intended to represent net income, cash
flow, or any other measure of performance in accordance with generally
accepted accounting principles, but it is included because Response
believes it is useful for measuring and identifying trends with respect to
operating performance and creditworthiness. The increase in EBITDA is
primarily due to the increase in revenues related to Service Agreements
with affiliated physicians.
Response's operating expenses increased $8.1 million, or 79%, from $10.3
million in 1996's first quarter to $18.4 million in 1997's first quarter.
The increase is primarily due to expenses related to the additional nine
practice management affiliations commenced subsequent to March 31, 1996.
Operating expenses consist primarily of payroll costs, pharmaceutical and
laboratory expenses, medical director fees, and other operational costs.
Operating expenses as a percentage of revenues were 75% and 77% for the
quarters ended March 31, 1997 and 1996, respectively.
Response's general and administrative costs increased $400,000, or 31%,
from $1.3 million in 1996's first quarter to $1.7 million in 1997's first
quarter, primarily due to additional overhead expenses resulting from the
practice management diversification.
Response's depreciation and amortization increased $700,000 from $600,000
in 1996's first quarter to $1.3 million in 1997's first quarter. The
increase is primarily attributable to the amortization of the Service
Agreements purchased in practice management affiliations consummated during
1996.
LabOne, Inc. (LabOne), an 82% owned subsidiary of Seafield, is a publicly-
traded company (NASDAQ-LABS). LabOne provides risk-appraisal laboratory
services to the insurance industry-see Insurance Services Segment below.
LabOne's clinical testing services are provided to the healthcare industry
to aid in the diagnosis and treatment of patients. LabOne markets its
clinical testing services to the payers of healthcare-insurance companies
and self-insured groups. LabOne does this through Lab Card(TM) a
Laboratory Benefits Management (LBM) program.
LabOne's Lab Card program covered approximately 1.2 million lives as of
March 31, 1997, including The Guardian Life Insurance Company of America
(The Guardian) and Principal Healthcare of Kansas City (Principal).
Additionally, LabOne had a signed backlog of approximately 300,000
additional lives to be covered by the program.
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 non-regulated employers.
LabOne's total revenues for the first quarter of 1997 were $17.7 million as
compared to $13.3 million in the first quarter of 1996, a 34% increase.
Healthcare revenues increased to $3.3 million in 1997 from $1.6 million in
the first quarter of 1996 due to increases in substance abuse and
diagnostic testing volumes.
LabOne's total cost of sales increased $2 million (26%) in the first
quarter of 1997 as compared to the prior year due primarily to increases in
supplies and payroll. Laboratory supplies and payroll expenses increased
due primarily to the increase in specimen volumes tested. Healthcare cost
of sales expenses were $3.3 million as compared to $2.2 million in the
first quarter of 1996.
As a result, LabOne's gross profit for the first quarter increased from
$5.8 million in 1996 to $8.3 million in 1997. Healthcare gross profit
increased to $36,000 from a loss of $600,000 in the first quarter of 1996.
LabOne selling, general and administrative expenses increased $600,000
(11%) in the first quarter of 1997 as compared to the prior year due
primarily to increases in payroll expenses, bad debt accruals and use taxes
due to a prior year refund. These were partially offset by a decrease in
consulting and severance expenses. Healthcare overhead expenditures were
$2.4 million as compared to $1.7 million in 1996, primarily due to an
increase in allocated overhead and growth in healthcare segment payroll.
LabOne operating income increased from $15,000 in the first quarter of 1996
to $1.9 million in 1997. The healthcare segment operating loss increased
$100,000 to $2.4 million due to increased corporate overhead allocations.
LabOne non-operating income increased $100,000 due primarily to gains on
equipment disposals, partially offset by lower investment income.
Insurance Services Segment:
The following business is considered to be in the insurance services
segment: LabOne's risk-appraisal laboratory testing for the life and health
insurance industries.
LabOne provides risk-appraisal laboratory services to the insurance
industry. 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.
Effective January 30, 1997, LabOne acquired certain assets, including
customer lists of GIB Laboratories, Inc., a subsidiary of Prudential
Insurance Company of America. Concurrently, Prudential's individual
Insurance Group agreed to use LabOne as its exclusive provider of risk
assessment testing services. At the time of the purchase, GIB served
approximately 5% of the insurance laboratory testing market.
LabOne insurance segment revenue increased in 1997 to $14.4 million from
$11.7 million in the first quarter of 1996. The increase was due
principally to the addition of GIB Laboratories' client base, other market
share gains and an increase in oral fluid testing on applicants applying
for smaller face-amount policies. The total number of insurance applicants
tested in the first quarter of 1997 increased 22% as compared the same
quarter last year. Average revenue per applicant declined 3% during the
same periods. Insurance kit and container revenue increased due primarily
to an increase in the number of blood and oral fluid kits sold.
LabOne's total cost of sales increased $2 million during the first quarter
due primarily to increases in supplies and payroll. Insurance kit supplies
increased due to the increased volume of kits sold. Laboratory supplies
and payroll expenses increased due primarily to the increase in specimen
volumes tested. LabOne's insurance segment gross profit increased to $8.3
million from $5.8 million primarily reflecting the increase in revenues.
LabOne's selling, general and administrative expenses associated with the
insurance segment were approximately $4 million in both periods. The
insurance segment's operating income increased $2 million reflecting the
above factors
Other Segment:
No operational results were recorded in 1997 by Seafield on its oil and gas
subsidiary prior to the SLH distribution on March 3, 1997. In 1996's first
quarter, revenue of $16,000 and expenses of $45,000 were recorded.
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, which increased to $3.8 million from $1.2 million in the
first quarter of 1996, primarily reflects a $3 million gain on the sale of
marketable common stock.
Interest Expense:
Interest expense increased in the first quarter of 1997 to $837,000 from
$192,000 in 1996, reflecting Response's interest expense related to
borrowings under its Credit Facility and debt assumed and/or issued by
Response in connection with practice management affiliations during 1996.
Other:
LabOne's gain on equipment disposals is included as a component of other
income/(loss) in 1997.
Included in general and administrative expenses is an accrual of
approximately $700,000 for termination benefits resulting from the
elimination of certain Seafield positions after the SLH distribution.
Taxes:
The first quarter 1997 increase in income tax expense included Response's
$531,000 provision for income taxes due to the exhaustion of net operating
loss carryovers for the year. Response had utilized net operating losses
to fully offset tax expense during 1996. These net operating losses had
never been recognized in the financial statements as deferred tax assets
due to doubts of their recoverability. Therefore, no deferred tax expense
was recognized upon utilization thereof. Also, tax expense increased
approximately $761,000 due to the ratable growth in taxes on LabOne's
significantly improved earnings, and a write-off of approximately $5
million of the deferred income tax assets related to assets spun off in the
SLH distribution.
Consolidated Results:
The combined effect of the above factors resulted in the first quarter 1997
net loss of $2.2 million compared with a $114,000 net loss in the first
quarter of 1996.
Real Estate - discontinued operations
The real estate assets were distributed pursuant to the SLH Distribution
Agreement. Real estate operations are presented as discontinued operations
in Seafield's 1996 first quarter financial statements.
Net real estate assets distributed on March 3, 1997, were $23 million. Real
estate revenues were $3.6 million in 1997's first two months prior to
distribution compared with $5 million in 1996's first quarter. The real
estate sales revenues in 1997 include the sale of 2 residential units in
Florida and New Mexico ($1.2 million); 547 acres of land in Texas ($2.3
million) and 7 residential lots in Texas ($38,000). The real estate sales
revenues in 1996 include the sale of 11 residential units in New Mexico
($4.8 million).
Cost of the real estate sales in 1997 prior to distribution totaled $3.5
million, compared with a cost of approximately $4.8 million in 1996,
reflecting the mix of real estate sold during each period as discussed
above in the revenue analysis.
Publicly-Traded Subsidiaries
Seafield has investments in two majority-owned entities that are publicly-
traded, LabOne and Response. At March 31, 1997, based on the market prices
of publicly-traded shares of these two subsidiaries, pretax unrealized
gains of approximately $130 million on these investments were not reflected
in either Seafield's book value or stockholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 1997, at the holding company level, Seafield had available for
operations approximately $7.4 million in cash and short-term investments.
Primarily as a result the distribution of SLH on March 3, 1997, Seafield's
working capital decreased $13.6 million during 1997 to $10.4 million at
March 31, 1997.
On a consolidated basis, Seafield and its subsidiaries (primarily LabOne
with $24.5 million) had $31.1 million in cash and short-term investments at
March 31, 1997. Current assets totaled approximately $86.4 million while
current liabilities totaled $18.4 million. Changes in assets and
liabilities on the balance sheet resulted primarily from the SLH
distribution.
Net cash provided by operations totaled $31.4 million in 1997's first
quarter compared with net funds used of $2.5 million in 1996's first
quarter. During 1997 funds provided by changes in trading portfolios were
$32.4 million while 1996's changes in these trading portfolios used $2.4
million in funds. The increase in funds provided by the change in trading
portfolios included the $19.6 million cash portion of the SLH dividend to
Seafield shareholders. The change in accounts receivable during 1997's
first quarter reflects increased sales by both LabOne and Response.
Net cash used by investing activities totaled $11 million in 1997
representing LabOne's purchase of the assets and customer list of GIB
Laboratories, Inc. and purchases of investments. Net cash provided by
investing activities in 1996 totaled $3 million reflecting Response's $5.3
million acquisition of physician practices and a net decrease in long-term
investments of $7.5 million.
Net cash used by financing activities totaled $22.2 million in 1997
primarily due to the $19.6 million cash portion of the SLH dividend to
Seafield shareholders. The 1996 net cash provided by financing activities
was $1.1 million.
In 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 1994, Seafield has acquired 1,462,200 shares of LabOne's stock under the
board authorization at a cost of $17.3 million. No acquisitions of LabOne
stock were made during 1997. At March 31, 1997, the remaining aggregate
authorization totals $7.7 million. In 1994, Seafield's board of directors
approved an additional $8.4 million authorization necessary to complete an
acquisition of Seafield shares. During 1997's first quarter, treasury
stock issued for exercised options totaled 5,169 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 has received notices of proposed adjustments (Revenue Agent's
Reports) from the Internal Revenue Service (IRS) with respect to 1986-1990
federal income taxes. These notices claim total federal income taxes due
for the entire five year period in the approximate net amount of
$13,867,000, exclusive of interest thereon. Seafield filed protests
regarding the 1986-1990 notices of proposed adjustments.
On May 9, 1997, Seafield received a formal agreement to the issues and the
final tax computation from the IRS. The agreement provides for a net tax
refund of approximately $5.8 million, before interest. The Company expects
to owe interest of approximately $700,000. The agreement is subject to
approval by the Congressional Joint Committee on Taxation. Consideration
by the Joint Committee is expected before the end of 1997.
In December 1996, the California state auditor sent Seafield an audit
report covering the 1987-1989 taxable years. The State of California has
determined to include, as a "unitary taxpayer," all majority owned non-life
insurance subsidiaries and joint ventures of Seafield. The auditor's
report has been forwarded to the California Franchise Tax Board for action.
The total amount of California state income taxes due for the 1987-1989
years is expected to be approximately $750,000 and interest of
approximately $1 million.
Pursuant to the Distribution Agreement, SLH assumed from Seafield all of
the contingent tax liabilities described above and acquired all rights to
refunds, plus any interest related to these tax years. SLH Corporation
also assumed all contingent liabilities and refunds related to any issues
raised for the years 1986-1990 whose resolution may extend to tax years
beyond the 1990 tax year.
LabOne paid a dividend in 1997. As an 82% owner, Seafield has received
$1.9 million of cash as dividends from LabOne in 1997. LabOne's working
capital position declined from $38.8 million at December 31, 1996, to $33.5
million at March 31, 1997. This decrease is primarily due to dividends
paid, and the purchase of GIB laboratory assets and customer lists. Net
trade accounts receivable increased 24% over the balance at December 31,
1996, primarily due to increasing sales in February and March, 1997.
LabOne's cash and investments totaled $25 million at March 31, 1997, and
LabOne expects to fund operations, capital additions and future dividend
payments from a combination of cash flow and cash reserves. LabOne had no
short-term borrowings during 1997.
Response's working capital at March 31, 1997, was $24.1 million with
current assets of $36 million and current liabilities of $11.9 million.
In April 1996, Response obtained an unsecured $10 million loan from
Seafield bearing interest at the rate of prime plus 1%, which after August
1, 1996, became convertible at the election of Seafield into shares of
Response's common stock. Proceeds of the loan were used to finance a
practice management affiliation. The loan was exchanged for 909,090 shares
of common stock during August 1996.
In May 1996, Response entered into a $27.5 million Bank Credit Facility to
fund Response's acquisition and working capital needs and to repay an
existing facility. The Credit Facility, comprised of a $22 million
Acquisition Facility and a $5.5 million Working Capital Facility, is
collateralized by the common stock of Response's subsidiaries. The
Acquisition Facility bears interest at a variable rate equal to LIBOR plus
a spread between 1.5% and 2.625%, depending upon borrowing levels. The
Working Capital Facility bears interest at a variable rate equal to LIBOR
plus a spread between 1.875% and 2.375%.
At March 31, 1997, $27.1 million aggregate principal was outstanding under
the Credit Facility with a current interest rate of approximately 7.7%.
Response's available credit under the Credit Facility at March 31, 1997 was
$400,000. The Credit Facility contains affirmative and negative covenants
which, among other things, require Response to maintain certain financial
ratios, including minimum fixed charges coverage, funded debt to EBITDA,
net worth and current ratio.
In April 1997, the Credit Facility was amended to increase the maximum
available borrowings to $45 million and to extend the maturity date to
March 1999.
In October 1996, Response procured a $23.5 million credit facility from
Seafield (the Seafield Facility) to finance acquisitions and for working
capital. On February 26, 1997, the $23.5 million loan and accrued interest
of $664,000 was converted into 3,020,536 shares of Response's common stock
at a rate of $8 per share. Seafield is exploring a possible distribution
to its shareholders of all of its Response shares in 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which revised the calculation and
presentation provisions of Accounting Principles Board Opinion 15 and
related interpretations. Statement No. 128 is effective for Seafield's
fiscal year ending December 31, 1997. Retroactive application will be
required. Seafield believes the adoption of Statement No. 128 will not
have a significant effect on its reported earnings per share.
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" is required to be implemented for
periods ending after December 15, 1997. The adoption of this standard is
not expected to have any significant impact on Seafield's financial
position or results of operations.
No other recently issued accounting standards presently exist which will
require adoption in future periods.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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. 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. Subsequently, the
parties waived a jury trial and in July 1996, this case was retried to a
judge. On January 21, 1997, the judge entered a judgment in favor of
Seafield. The amount of that judgment, together with interest is
approximately $5.8 million. Although the judgment has been appealed,
counsel for the Company expects that it will be difficult for the
defendants to cause the judgment to be reversed. The final outcome is not
expected until at least 1998. Settlement arrangements with other
defendants have resulted in payments to plaintiff which have substantially
offset legal fees and costs to date of approximately $481,000. Future
legal fees and costs can not reliably be estimated. Pursuant to the
Distribution Agreement, this matter was assigned to SLH Corporation.
In the opinion of management, after consultation with legal counsel and
based upon current available information, this lawsuit is not expected to
have a material adverse impact on the consolidated financial position or
results of operations of Seafield.
Seafield has received notices of proposed adjustments (Revenue Agent's
Reports) from the Internal Revenue Service (IRS) with respect to 1986-1990
federal income taxes. These notices claim total federal income taxes due
for the entire five year period in the approximate net amount of
$13,867,000, exclusive of interest thereon. Seafield filed protests
regarding the 1986-1990 notices of proposed adjustments.
On May 9, 1997, Seafield received a formal agreement to the issues and the
final tax computation from the IRS. The agreement provides for a tax
refund of approximately $5.8 million, before interest. The Company expects
to owe interest of approximately $700,000. The agreement is subject to
approval by the Congressional Joint Committee on Taxation. Consideration
by the Joint Committee is expected before the end of 1997.
In December 1996, the California state auditor sent Seafield an audit
report covering the 1987-1989 taxable years. The State of California has
determined to include, as a "unitary taxpayer," all majority owned non-life
insurance subsidiaries and joint ventures of Seafield. The auditor's
report has been forwarded to the California Franchise Tax Board for action.
The total amount of California state income taxes due for the 1987-1989
years is expected to be approximately $750,000 with interest of
approximately $1 million.
Pursuant to the Distribution Agreement, SLH Corporation assumed from
Seafield all of the contingent tax liabilities described above and acquired
all rights to refunds plus any interest related to these tax years. SLH
Corporation also assumed all contingent liabilities and refunds related to
any issues raised for the years 1986-1990 whose resolution may extend to
tax years beyond the 1990 tax year. Seafield believes that adequate
accruals for these income tax liabilities have been made in the
accompanying consolidated financial statements.
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 March 31, 1997 the net assets of Seafield Capital Corporation exceeded
its stated capital by $114,363,000.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule - as filed electronically by
the Registrant in conjunction with this Form 10-Q.
(b) Reports on Form 8-K:
A current report on Form 8-K was filed on January 6, 1997 to
report that Seafield filed a registration statement with the Securities and
Exchange Commission with respect to shares of SLH Corporation, a newly
formed subsidiary.
A current report on Form 8-K was filed on February 5, 1997 to
report that Seafield's 82% owned subsidiary, LabOne, Inc., had completed
the acquisition of Gib Laboratories, Inc., a subsidiary of Prudential
Insurance Company of America.
A current report on Form 8-K was filed on February 19, 1997
to report that the Seafield Board of Directors had declared a dividend to
its shareholders of all of the outstanding shares of common stock of SLH
Corporation. The Form 8-K also reported that the Securities and Exchange
Commission had declared the registration statement of SLH Corporation
effective on February 13, 1997.
A current report on Form 8-K was filed on February 27, 1997
to report that Seafield had converted its $23.5 million note from Response
Oncology, Inc. and accrued interest into Response common stock. The
conversion resulted in Seafield owning approximately 67% of Response.
Also, Seafield announced that it is exploring a possible distribution to
its shareholders of all of its Response shares in the second quarter of
1997.
A current report on Form 8-K was filed on March 17, 1997 to
report the distribution on March 3, 1997 to its shareholders of all the
outstanding shares of stock of its wholly-owned subsidiary, SLH
Corporation. Certain businesses and assets and liabilities of Seafield
were transferred to SLH prior to the distribution of the stock to Seafield
shareholders.
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 May 9, 1997 By /s/ James R. Seward
----------------------------
James R. Seward
Executive Vice President
and Chief Financial Officer
Date May 9, 1997 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 March 31, 1997 and is qualified in its
entirety by reference to such 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,520
<SECURITIES> 27,559
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 86,394
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 232,371
<CURRENT-LIABILITIES> 18,431
<BONDS> 0
0
0
<COMMON> 7,500
<OTHER-SE> 114,363
<TOTAL-LIABILITY-AND-EQUITY> 232,371
<SALES> 0
<TOTAL-REVENUES> 42,105
<CGS> 0
<TOTAL-COSTS> 39,849
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 837
<INCOME-PRETAX> 5,519
<INCOME-TAX> 6,942
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,217)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> 0<F2>
<FN>
<F1>Disclosure not required on interim financial statements
<F2>Computation not applicable
</FN>
</TABLE>
