SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: March 3, 1997
Seafield Capital Corporation
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(Exact name of registrant as specified in its charter)
Missouri 0-16946 43-1039532
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(State of other (Commission File Number) (IRS Employer
jurisdiction of Identification
incorporation) Number)
2600 Grand Ave. Suite 500
P. O. Box 410949
Kansas City, MO 64141
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(Address of principal executive offices) (Zip code)
(816) 842-7000
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(Registrant's telephone number, including area code)
Item 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 3, 1997, the Registrant distributed (the "Distribution") to
its shareholders all of the outstanding shares of stock of its wholly-owned
subsidiary, SLH Corporation, a Kansas corporation ("SLH"). In December
1996, the Registrant and SLH had entered into that certain Distribution
Agreement (the "Distribution Agreement"), and pursuant thereto the
Registrant and SLH executed and delivered the following documents shortly
before the Distribution was consummated: that certain Blanket Assignment,
Bill of Sale, Deed and Assumption Agreement (the "Assignment"), that
certain Facilities Sharing and Interim Services Agreement (the "Interim
Services Agreement"), and that certain Tax Sharing Agreement (the "Tax
Sharing Agreement"). The Distribution Agreement, the Assignment, the
Interim Services Agreement and the Tax Sharing Agreement are all exhibits
to this Form 8-K, and, collectively, they are sometimes referred to herein
as the "Disposition Documents."
Pursuant to the Disposition Documents, certain businesses and assets
of the Registrant (collectively, the "Transfer Assets") and $10 Million in
cash and short-term investments were transferred to SLH and certain
liabilities of the Registrant (collectively, the "Transfer Liabilities")
were assumed by SLH. The Transfer Assets and Transfer Liabilities and the
Disposition Documents are described in the following sections of the
Information Statement comprising a part of Amendment No. 2 to SLH's
Registration Statement on Form 10 (i.e., Form 10/A filed with the
Securities and Exchange Commission ("SEC") on February 12, 1997 (SEC File
No. 0-21911): "Arrangements Between Seafield And The Company Relating To
The Distribution" and "Business And Properties." Portions of said sections
of the Information Statement comprising a part of said Form 10/A are
attached hereto as an exhibit.
The transfer to and assumption by SLH of the Transfer Assets and
Transfer Liabilities was effected in exchange for shares of SLH Common
Stock issued to the Registrant; no consideration other than such shares of
stock was paid by SLH for any of the Transfer Assets or Transfer
Liabilities. The Distribution of all shares of SLH stock to the
Registrant's shareholders was effected as a dividend; the Registrant's
shareholders paid no consideration for any shares of SLH stock received in
the Distribution.
The officers of SLH are all officers of the Registrant and the
directors of SLH are all either directors or officers of the Registrant.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
Not applicable.
(b) Pro Forma Financial Information
The following unaudited pro forma consolidated balance sheet and statement
of operations as of and for the year ended December 31, 1996 reflect the
transfer to and assumption by SLH Corporation of the Transfer Assets and
Transfer Liabilities. The pro forma balance sheet has been prepared as if
the transaction had occurred on December 31, 1996. The pro forma statement
of operations reflects the pro forma results of operations, as adjusted, as
if the transaction had occurred on January 1, 1996. The unaudited pro
forma consolidated financial statements are not necessarily indicative of
what actual results of operations would have been had these transactions
been completed on January 1, 1996 or results which may be obtained in the
future. The unaudited pro forma consolidated financial statements should
be read in conjunction with the historical financial statements and related
notes of Registrant.
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Balance Sheet without SLH Operations
December 31, 1996
- --------------------------------------------------------------------------
SLH Pro Forma Pro Forma
Historical Operations Adjustments Results
---------- ---------- ----------- --------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 5,372 (186) -- 5,186
Short-term investments 55,208 (6,229) (10,000)(a) 38,979
Accounts and notes receivable 24,882 (723) -- 24,159
Income taxes receivable -- 178 -- 178
Deferred income taxes 2,160 (1,185) -- 975
Other current assets 20,604 (236) -- 20,368
-------- -------- -------- --------
Total current assets 108,226 (8,381) (10,000) 89,845
Property, plant and equipment 22,777 (480) -- 22,297
Investments:
Securities 4,019 (3,515) -- 504
Oil and gas 1,543 (1,543) -- --
Intangible assets 124,653 (113) -- 124,540
Other assets 1,830 (1,350) -- 480
Net assets of discontinued
real estate operations 30,466 (30,466) -- --
-------- -------- -------- --------
$293,514 (45,848) (10,000) 237,666
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,599 (383) -- 8,216
Notes payable 7,847 -- -- 7,847
Income taxes payable 724 (724) -- --
Other current liabilities 10,768 (1,825) -- 8,943
-------- -------- -------- --------
Total current liabilities 27,938 (2,932) -- 25,006
Notes payable 39,611 -- -- 39,611
Deferred income taxes 22,075 (6,140) -- 15,935
Other liabilities 1,528 (817) -- 711
-------- -------- -------- --------
Total liabilities 91,152 (9,889) -- 81,263
-------- -------- -------- --------
Minority interests 28,338 -- -- 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 1,748 -- -- 1,748
Equity adj. from foreign
currency translation (439) -- -- (439)
Retained earnings 195,329 (35,959) (10,000)(a) 149,370
-------- -------- -------- --------
204,138 (35,959) (10,000) 158,179
Less cost of 1,016,066
shares of treasury stock
30,114 -- -- 30,114
-------- -------- -------- --------
Total stockholders' equity 174,024 (35,959) (10,000) 128,065
-------- -------- -------- --------
$293,514 (45,848) (10,000) 237,666
======== ======== ======== ========
SEAFIELD CAPITAL CORPORATION AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Statement of Operations
without SLH Operations
Year Ended December 31, 1996
- --------------------------------------------------------------------------
SLH Pro Forma Pro Forma
Historical Operations Adjustments Results
---------- ---------- ----------- --------
(in thousands except per share amounts)
REVENUES
Healthcare services $ 75,985 -- -- 75,985
Insurance services 50,801 -- -- 50,801
Other 2,446 (2,446) -- --
-------- -------- -------- --------
Total revenues 129,232 (2,446) -- 126,786
COSTS AND EXPENSES
Healthcare services 67,014 -- -- 67,014
Insurance services 22,625 -- -- 22,625
Other 2,771 (2,771) -- --
Selling, general and
administrative 36,680 (1,606) -- 35,074
-------- -------- -------- --------
Earnings(loss) from
operations 142 1,931 -- 2,073
Investment income - net 5,004 (1,375) -- 3,629
Interest expense (2,900) -- (2,900)
Other income (expense) (411) 845 -- 434
-------- -------- -------- --------
Earnings(loss) before
income taxes 1,835 1,401 -- 3,236
Income taxes (benefits) 4,050 (249) -- 3,801
-------- -------- -------- --------
Earnings (loss) before minority
interests (2,215) 1,650 -- (565)
Minority interests 1,329 -- -- 1,329
-------- -------- -------- --------
Earnings (loss) from
continuing operations $ (3,544) 1,650 -- (1,894)
======== ======== ======== ========
Per share of common stock
based on 6,481,943 weighted
average shares outstanding:
Earnings (loss) from
continuing operations $ (.55) (.29)
======== ========
Notes to Unaudited Pro Forma Consolidated Financial Statements
(a) Represents the short-term investments, including U. S. Treasury
obligations of $3.1 million, transferred to SLH on the date of
distribution.
(c) Exhibits
2.1 Distribution Agreement, dated December 20, 1996, between
the Registrant and SLH Corporation (filed as Exhibit
2(a) to SLH Corporation's Form 10/A filed February 4,
1997 (File No. 0-21911) and incorporated herein by
reference).
2.2 Blanket Assignment, Bill of Sale, Deed and Assumption
agreement, dated as of February 28, 1997, between the
Registrant and SLH Corporation (filed as Exhibit 2(b) to
SLH Corporation's Form 10/A filed February 4, 1997 (File
No. 0-21911) and incorporated herein by reference).
10.1 Facilities Sharing and Interim Services Agreement, dated
as of February 28, 1997, between the Registrant and SLH
Corporation (filed as Exhibit 10(a) to SLH Corporation's
Form 10/A filed February 4, 1997 (File No. 0-21911) and
incorporated herein by reference).
10.2 Tax Sharing Agreement, dated as of February 28, 1997,
between the Registrant and SLH Corporation (filed as
Exhibit 10(b) to SLH Corporation's Form 10/A filed
February 4, 1997 (File No. 0-21911) and incorporated
herein by reference).
99.1 Portions of the following sections from the Information
Statement comprising a part of SLH Corporation's
Registration Statement on Form 10 (filed as SLH
Corporation's Form 10/A (Amendment No. 2) on February
12, 1997 (File No. 0-21911): "Arrangements Between
Seafield And The Company Relating To the Distribution"
and "Business And Properties". In said sections from
said Information Statement, the term "Company" refers to
SLH Corporation.
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 hereunto duly authorized.
SEAFIELD CAPITAL CORPORATION
Date: March 17, 1997 By: /s/ Steven K. Fitzwater
------------------------------
Steven K. Fitzwater
Vice President, Chief Accounting
Officer and Secretary
Exhibit Index
Exhibit No. Description
2.1 Distribution Agreement, dated December 20, 1996, between
the Registrant and SLH Corporation (filed as Exhibit
2(a) to SLH Corporation's Form 10/A filed February 4,
1997 (File No. 0-21911) and incorporated herein by
reference).
2.2 Blanket Assignment, Bill of Sale, Deed and Assumption
Agreement, dated as of February 28, 1997, between the
Registrant and SLH Corporation (filed as Exhibit 2(b) to
SLH Corporation's Form 10/A filed February 4, 1997 (File
No. 0-21911) and incorporated herein by reference).
10.1 Facilities Sharing and Interim Services Agreement, dated
as of February 28, 1997, between the Registrant and SLH
Corporation (filed as Exhibit 10(a) to SLH Corporation's
Form 10/A filed February 4, 1997 (File No. 0-21911) and
incorporated herein by reference).
10.2 Tax Sharing Agreement, dated as of February 28, 1997,
between the Registrant and SLH Corporation (filed as
Exhibit 10(b) to SLH Corporation's Form 10/A filed
February 4, 1997 (File No. 0-21911) and incorporated
herein by reference).
99.1 Portions of the following sections from the Information
Statement comprising a part of SLH Corporation's
Registration Statement on Form 10 (filed as SLH
Corporation's Form 10/A (Amendment No. 2) on February
12, 1997 (File No. 0-21911): "Arrangements Between
Seafield And The Company Relating To the Distribution"
and "Business And Properties". In said sections from
said Information Statement, the term "Company" refers to
SLH Corporation.
Exhibit 99.1
ARRANGEMENTS BETWEEN SEAFIELD AND THE COMPANY
RELATING TO THE DISTRIBUTION
For the purpose of structuring the Distribution and certain of the
relationships between Seafield and the Company after the Distribution,
Seafield and the Company have entered into the Distribution Agreement, a
Facilities Sharing and Interim Services Agreement (the "Interim Services
Agreement")," and a Tax Sharing Agreement (the "Tax Sharing Agreement") and
will enter into a Blanket Assignment, Bill of Sale, Deed and Assumption
Agreement (the "Assignment"). All of these are described below and are
included as exhibits to the Registration Statement filed with the
Commission, of which this Information Statement is a part. The following
summaries are qualified in their entirety by reference to the agreements as
filed. None of these agreements are the result of arms-length negotiation.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
DISTRIBUTION AGREEMENT AND ASSIGNMENT
The Distribution Agreement and Assignment provide for, among other
things, the principal corporate transactions required to effect the
Distribution and certain other matters governing the relationship between
Seafield and the Company with respect to or in consequence of the
Distribution.
TRANSFER ASSETS AND LIABILITIES. Subject to certain exceptions
described below, the Distribution Agreement contains provisions designed
principally to place with the Company (1) the Transfer Assets and the
personnel currently involved in the management of those assets and (2) and
the Transfer Liabilities, which include Seafield's financial responsibility
for known and contingent or unknown liabilities which relate directly to
the Real Estate, Energy and Miscellaneous businesses and assets as
conducted on the Distribution Date and certain other liabilities of
Seafield described in the Distribution Agreement, including Seafield's
obligations under the Tax Claims described under "BUSINESS - Legal
Matters."
As security for the Company's obligations in connection with the
Distribution, the Company has agreed in the Distribution Agreement that it
will not pay any dividends in cash or property or redeem any of its capital
stock for a period of two years following the Distribution Date, without
the consent of the Seafield Board. That covenant will also limit the extent
to which the Company may pay dividends or otherwise effect a complete
liquidation prior to such date.
CONTINGENT CLAIMS AND INSURANCE. There is pending litigation which
will be the responsibility of the Company following the Distribution. See
"BUSINESS AND PROPERTIES - Legal Matters." Under the Distribution
Agreement, the Company will be entitled to the benefit of insurance
coverage under Seafield policies, to the extent such insurance coverage
existed and is available, for claims relating to the ownership or operation
of the Transfer Assets by Seafield prior to the Distribution Date subject
to, among other things, the obligation to reimburse Seafield for increases
in insurance premiums as a result of payments for such claims.
EMPLOYEE BENEFITS. The Distribution Agreement and Assignment contain
a number of provisions relating to current and former employees. The
provisions generally contemplate that the Company will assume no
obligations or liabilities with respect to employee plans or benefits prior
to the Distribution Date and that after the Distribution Date, the Company
will be responsible for providing employee benefits for certain Seafield
personnel, primarily consisting of employees of Scout Development
Corporation, that become employees of the Company through its acquisition
of Scout. The agreements also contemplate that the Company will contract
with Seafield for executive and administrative services as described under
the Interim Services Agreement described below.
The Distribution Agreement provides that the following actions will be
taken with respect to Seafield employee benefit plans: (a) as soon as
practicable after the Distribution Date, Seafield and the Company will
cause the Seafield Pension and 401(k) Plans to distribute to Company
employees their interests in those plans; (b) The Seafield Stock Purchase
Plan will continue in effect and will remain a retained liability of
Seafield; (c) obligations under the Seafield Stock Option Plans will remain
a liability of Seafield; (d) obligations of Seafield under Seafield
Supplemental Retirement Agreements, Seafield Severance Agreements, Seafield
Termination Compensation Agreements and Seafield Indemnification Agreements
(as defined in the Distribution Agreement) shall continue to be a retained
liability of Seafield; and (e) the Company shall assume and be responsible
for the obligations of Seafield to any Company employee with respect to
accident and health insurance and similar benefits.
No adjustments will be made under the Seafield Stock Option Plans with
respect to the Distribution. Accordingly, the holders of options to
purchase Seafield Common Stock under the Seafield Stock Option Plans may
wish to consider the desirability of exercising those options at least 5
business days prior to the Record Date for the Distribution. However,
persons intending to exercise options should understand that the Seafield
Board may terminate the Distribution at any time prior to the Distribution
Date and therefore there can be no assurance that a timely exercise of any
option under the Seafield Stock Option Plans will entitle the holder of
purchased shares to receive shares of the Company Common Stock.
The Distribution Agreement provides that Seafield and the Company will
take all action necessary to cause the Company to provide to each officer
of the Company employment agreements and participation in a new Company
Stock Incentive Plan, as defined and described in "EXECUTIVE COMPENSATION."
NO REPRESENTATIONS OR WARRANTIES. The Distribution Agreement and
Assignment provide that Seafield is transferring the Transfer Assets and
Transfer Liabilities to the Company without representation or warranty "as
is, where is," except as otherwise expressly provided.
CONDITIONS. The Distribution Agreement provides that the Distribution
is subject to a number of conditions which are described under "THE
DISTRIBUTION - Conditions and Termination." The Distribution Agreement may
be amended or terminated, and the Distribution may be abandoned, or
conditions thereto may be waived, at any time prior to the Distribution
Date for any reason, in the sole discretion of the Seafield Board.
INTERIM SERVICES AGREEMENT
At present all of Seafield's operations are conducted by 17 employees
from 13,674 square feet of leased offices at 2600 Grand Boulevard, Kansas
City, Missouri (the "Lease"). Under the Distribution and Assignment
Agreements Seafield will transfer the Lease to the Company and all Seafield
employees will remain employees of Seafield (the "Seafield Personnel")
except 15 employees of Scout Development Corporation and its subsidiaries
(the "Company Personnel"). In particular, Messrs. Jacobs, Seward, and
Fitzwater and other administrative personnel will remain officers and
employees of Seafield while also serving the Company under the Interim
Services Agreement.
On or prior to the Distribution Date Seafield and the Company will
enter into the Interim Services Agreement for the purpose of permitting
Seafield and the Company to continue to jointly use their respective
personnel and facilities until either party elects to terminate the
arrangement. Under the arrangement, Seafield agrees to provide to the
Company during the term of the arrangement all services required by the
Company for the operation of the offices of the Company's Chairman, Chief
Executive Officer, Chief Financial Officer and Chief Accounting Officer
together with clerical and administrative services, but not including
services required exclusively by Scout Development Corporation and its
subsidiaries. In exchange for those services, the Company agrees to
provide the retained Seafield Personnel with office facilities and
equipment sufficient for the conduct of Seafield's activities. Following
the Distribution, Seafield and the Company will review the amount of
personnel and facilities used under the arrangement and each will reimburse
the other to the extent that the exchange of facilities for services is not
equivalent.
TAX SHARING AGREEMENT
GENERALLY. In connection with the Distribution the Company and
Seafield will enter into a Tax Sharing Agreement which provides, among
other things, for the allocation among the parties thereto of Federal,
state, local, and foreign tax liabilities for all periods through the
Distribution Date. Though valid as between the parties thereto, the Tax
Sharing Agreement is not binding on the IRS and does not affect the joint
and several liability of Seafield and its subsidiaries to the IRS for all
Federal taxes owed to the IRS by such corporations.
PRIOR TAX AGREEMENT. Seafield and all of its subsidiaries are
currently members of a consolidated group of corporations that files
consolidated Federal income tax returns, and all of these corporations are
parties to a tax sharing agreement dated August 1, 1990 that governs their
relationship as members of this consolidated group (the "Prior Tax
Agreement"). The Tax Sharing Agreement modifies and amplifies the Prior
Tax Agreement in certain respects and expressly provides that the Prior Tax
Agreement, as so modified and amplified, will continue in full force and
effect with respect to all tax returns for periods beginning prior to the
Distribution Date that are otherwise covered by such Prior Tax Agreement.
Under the Prior Tax Agreement each member of the Seafield consolidated
group is essentially liable for the amount of Federal income tax that it
would pay if it filed a separate Federal income tax return. As a result of
the continuation of the Prior Tax Agreement, among other things, Seafield
will be responsible and liable for all Federal income tax liability
attributable to it as the payor of the Distribution. See "THE DISTRIBUTION
- -- Material Federal Income Tax Consequences of the Distribution -- Payment
of the Distribution by Seafield." Also under the Prior Tax Agreement as
continued in effect by the Tax Sharing Agreement, each subsidiary of the
Company will be liable to Seafield and will pay to Seafield after the
Distribution Date an amount equal to any Federal income tax liability
attributable to income generated by the subsidiary prior to such date and
Seafield will be liable to the Company and will pay to the Company after
the Distribution Date an amount equal to any Federal income tax savings
attributable to losses generated by the subsidiary prior to such date..
OTHER MATTERS. The Tax Sharing Agreement generally provides that the
parties will cooperate with each other in the preparation and filing of tax
returns and with regard to handling post-filing audits and similar
proceedings. The Tax Sharing Agreement expressly provides that it does not
deal with the liability of the parties with respect to the Tax Claims or
any tax liabilities that arise out of or are related to the Tax Claims,
since such liability is the subject of the Distribution Agreement and the
Assignment.
BUSINESS AND PROPERTIES
OVERVIEW
The Company is primarily engaged in the business of managing,
developing and disposing of Real Estate and Energy businesses and
Miscellaneous assets to be acquired from Seafield immediately prior to the
Distribution (the "Transfer Assets"). Real Estate Assets reflect the
remaining assets of a discontinued real estate development business that
was conducted by Seafield in association with a previously owned life
insurance company that was sold in 1990. The Energy and Miscellaneous
assets also reflect a variety of insurance company assets that were
retained by Seafield following the sale of that insurance business. The
Company is engaged in the sale of all of its assets in an orderly manner
other than its interest in Syntroleum Corporation. See "BUSINESS AND
PROPERTIES -- Management and Disposition of Real Estate Assets;" "BUSINESS
AND PROPERTIES -- Business and Management of Energy Assets" and "BUSINESS
AND PROPERTIES -- Miscellaneous Assets and Liabilities."
Real Estate assets, as of September 30, 1996, consist of (a) the
remaining inventory from three high end condominium developments located in
Santa Fe, New Mexico (comprising 31 completed homes that have been priced
for sale between $225,000 and $750,000; "Quail Run") and Juno Beach,
Florida (primarily comprising three homes that have been priced for sale
between $800,000 and $3.0 million, the "Juno Beach Homes"); (b) a seven
story parking garage in Reno, Nevada (the "Reno Parking Garage"); (c) a
49.9% interest in a community shopping center in Gillette, Wyoming (the
"Shopping Center Interest"); and (d) approximately 1,147 acres of
undeveloped land, with 370 acres in Houston, Texas, approximately 547 acres
in the vicinity of the Alliance Airport, in Ft. Worth, Texas, 205 acres in
West Ft. Worth, Texas, 9 other acres in Corinth, Texas and 16 acres at the
intersection of 119th Street and Interstate 35 in the southern portion of
the Kansas City metropolitan area (the "Undeveloped Land"). The Total Real
Estate Inventory had an aggregate carrying value as of September 30, 1996,
of approximately $ 26.6 million.
Energy assets consist of a 32.5% interest in Syntroleum Corporation
("Syntroleum") and minority interests in four oil and gas general
partnerships which have working interests in producing wells in the Gulf of
Mexico (the "Oil & Gas Properties").
Syntroleum is the developer and owner of a patented process and
several related proprietary technologies ("Syntroleum(registered trademark)
Process") for the conversion of natural gas into synthetic liquid
hydrocarbons which can be further processed into fuels such as diesel,
kerosene (used by jet aircraft) and naphtha and related non fuel chemical
feedstocks and lubricants. Syntroleum is currently engaged in negotiations
for the licensing of the Syntroleum(registered trademark) Process with
major oil companies. Because Syntroleum continues to be in the
developmental phase of its operations, no assurances can be given that it
will be able to successfully conclude any license or agreement on a
favorable basis or that a commercially viable Syntroleum(registered
trademark) Process plant will be constructed and successfully operated.
The Company also owns other assets consisting primarily of (a) three
investments in privately held venture capital limited partnerships having
an aggregate book value at September 30, 1996, of $1,364,538, (b) a common
stock interest in Oclassen Pharmaceuticals, Inc. a privately owned
pharmaceutical manufacturer, which is proposed to be converted into
approximately 183,673 shares of the common stock of Watson Pharmaceuticals,
a publicly traded company, trading in the shares of which closed on January
31, 1997, at $44.81 per share, and (c) a preferred stock interest in Norian
Corporation, a privately owned developer of proprietary bone substitute
technology which had a carrying value of approximately $1.0 million at
September 30, 1996, ("Miscellaneous Assets").
The Company will assume liabilities relating to the Transfer Assets as
well as certain contingent Seafield liabilities ("Transfer Liabilities"),
including Seafield's liability for disputed income taxes which the Internal
Revenue Service claims to be owed by Seafield for its 1986, 1987, 1988,
1989 and 1990 tax years and which the State of California claims to be owed
for the 1987, 1988 and 1989 years (the "Tax Claims"). The Tax Claims
amount to approximately $14.6 million, plus interest. Although the Company
believes that a combination of defenses against the claims and contested
offsetting tax losses generated by a real estate project sold at a loss in
1990, could result in a positive outcome, the Company can not provide any
assurance that its defense of such claims will be successful. See
"BUSINESS - Legal Matters."
The Company is engaged in the sale of all of its assets in an orderly
manner other than Syntroleum. Following the liquidation of non Syntroleum
assets, the Company plans to continue to promote the management, growth and
development of Syntroleum or it may engage in a merger or some other
transaction that would effectively dispose of all of its assets.
The Company's historical operating results during the past four years
reflect the sale or other disposition of a number of real estate assets and
other significant Seafield investments, all of which have culminated in net
capital loss carryforwards at Seafield in the approximate amount of $ 13.0
million. It is the intent of Seafield to utilize such losses in connection
with the Distribution to offset as much as possible any gains that Seafield
is required to recognize for Federal income tax purposes as a result of
making the distribution. However, none of such losses may be applied
against any ordinary income that Seafield shareholders will realize as the
result of their receipt of shares of Company Common Stock in the
Distribution.
As a result of the Distribution, Seafield will own no shares of
Company Common Stock and the Company will operate as an independent
publicly traded company. The Company's principal executive offices are
located at 2600 Grand Boulevard, Suite 500, P.O. Box 410949, Kansas City,
Missouri 64141, and its telephone number is (816) 842-7000.
STRATEGY
Following the Distribution the Company plans to sell all of its
assets, other than Syntroleum, in an orderly manner and under circumstances
that would enable the Company to take advantage of opportunities to
maximize the net amounts to be derived from each asset. Although the
Company does not expect to engage in further Real Estate development
activities, it may utilize available cash to further improve undeveloped
real estate on hand if the improvement would be expected to enhance its
ultimate marketability on a profitable basis. Concurrent with these
activities the Company will continue to assist Syntroleum with its efforts
to license the Syntroleum Process, market its catalyst and to ultimately
construct and operate plants for the conversion of natural gas into
synthetic liquid hydrocarbons. These activities will include assistance
with strategic planning and the acquisition of debt and or equity financing
for the construction of one or more Syntroleum plants. That assistance may
also include further investment by the Company in Syntroleum or directly in
one or more Syntroleum plants. Following the liquidation of non Syntroleum
assets, the Company expects to continue to promote the management, growth
and development of Syntroleum or it may engage in a merger or some other
transaction that would effectively dispose of all of its assets.
The Company's primary source of revenue to support operations will be
derived from the operation and sale of non Syntroleum assets and available
cash. In addition to the support of current operations, those proceeds are
expected to be used to prepare assets for ultimate sale, as is possible
with respect to the Company's undeveloped real estate. Depending on the
progress made by Syntroleum it is expected that such proceeds may also be
used for possible further investment in Syntroleum or in one or more
Syntroleum plants, none of which are presently under development. Pending
any such use, the proceeds of sale and available cash will be invested in
government securities or possibly in other marketable debt or equity
securities or money market instruments to the extent that any such
investments would not cause the Company to become an investment company
under the Investment Company Act of 1940.
MANAGEMENT AND DISPOSITION OF REAL ESTATE ASSETS
Real Estate assets are owned and operated by Scout Development
Corporation and its wholly owned subsidiary Scout Development Corporation
of New Mexico (collectively, "Scout"). Scout and its assets will be a
wholly owned subsidiary of the Company in connection with the Distribution.
Scout was initially formed in 1990 to acquire, develop and manage improved
and unimproved real estate as a means of investing assets of Seafield's
insurance business, which was then Seafield's primary business. However,
in 1992 following the 1990 disposition by Seafield of the insurance
business, the real estate development operations were discontinued. Since
then Scout has concentrated on bringing to completion all of its
development projects and on the disposition of all of its real estate
assets in an orderly manner that would maximize the value of each asset.
By the end of 1995 substantially all real estate development activities had
been concluded and Scout was engaged primarily in the disposition of its
assets.
Real Estate assets at September 30, 1996 primarily consist of (a) the
remaining inventory of three high end condominium developments comprising
34 homes in the Quail Run and Juno Beach Developments (the "Homes"); (b)
the Reno Parking Garage; (c) the Shopping Center Interest in Gillette,
Wyoming and (d) the approximately 1,147 acres of undeveloped real estate
consisting of the Houston, Fort Worth and Kansas City Tracts (the
"Undeveloped Land").
********
The Quail Run and Juno Beach residential condominium developments
consist of inventory remaining from real estate development projects
commenced by Scout. The Juno Beach homes consist of two exclusive ocean
front homes, each of which are listed for sale at $3.0 million, a third
home within another project in the same area listed for sale at $800,000
and three marina boat slips. The Quail Run properties consist of 31 homes
ranging in listing prices from $225,000 to $750,000. The Company is
actively involved in the marketing of these properties and anticipates that
approximately two years will be required to complete all home sales.
Following the disposition of these newly constructed homes, the Company
will continue to have warranty obligations. None of the home properties
are subject to any mortgage or material encumbrance.
The Reno Parking Garage is a seven story 850-space parking garage
located in downtown Reno, Nevada. Scout owns the building unencumbered
except for a ground lease which expires on February 28, 2023 and which
calls for annual lease payments in the amount of $294,000. The building
contains a total of 144,500 square feet of leasable parking space. Parking
revenue totaled approximately $744,000 or $875 per space or $5.15 per
square foot in 1995. In addition, 8,258 square feet located on the ground
floor of the garage is leased to a retail tenant under a 15-year lease.
Revenue from the retail lease during 1995 was $133,800 or $16.20 per square
foot. In addition to basic rent, the retail tenant is responsible for its
pro rata share of real estate taxes and insurance. During 1995, $5,200 was
collected from the retail tenant for taxes and insurance. Scout is
presently actively marketing the property for sale.
The Shopping Center Interest consists of a 49.9% joint venture
interest in a retail shopping center containing approximately 163,000
square feet of net leasable area and 14 acres of undeveloped land in
Gillette, Wyoming. At the end of 1995, the center was 75% occupied.
Rental revenue totaled $686,000 for 1995. The average annual gross rental
per occupied square foot was $6.10. In addition to rental revenue, tenants
are responsible for their share of common area maintenance (CAM). During
1995, CAM collections from tenants totaled $77,000. The property is
subject to industrial revenue refunding bonds pursuant to a refinancing in
1996 in the amount of $6.17 million that are secured by a bank letter of
credit and guaranteed by Scout. The letter of credit is secured by a $3.15
million Treasury Note pledged by Seafield to the issuer of the letter of
credit; the Treasury Note is included in the Transfer Assets and will be
owned by the Company following the Distribution.
The Undeveloped Land consists of an aggregate of approximately 1,147
acres of undeveloped land, with 370 acres in Houston, Texas, approximately
547 acres in the vicinity of the Alliance Airport, in Ft. Worth, Texas,
205 acres in West Ft. Worth, Texas, 9 other acres in Corinth, Texas, and 16
acres at the intersection of 119th Street and Interstate 35 in the southern
portion of the Kansas City metropolitan area. The 547 acre tract in Ft.
Worth was sold after September 30, 1996. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Recent
Developments." The zoning for the tracts other than the Kansas City Tract
varies from residential to light commercial, with the Kansas City Tract
being zoned for commercial use. None of the property is developed, none is
encumbered with any mortgages, except for a $1.2 million non recourse
mortgage on the Kansas City Tract, and all is being actively marketed as
is.
The Company does not plan to engage in further development of any of
the Real Estate Assets except to the extent necessary to maximize the value
of the properties on hand. Following the disposition of all properties it
intends to terminate its real estate operations.
The Company also owns an interest in certain contingent accounts
receivable of Tenenbaum & Associates, Inc. ("TAI"), a real estate tax
consulting firm, the business of which was sold in 1995. The carrying
value of the receivables at September 30, 1996, was $800,000. The Company
also has and is actively marketing a leasehold interest in approximately
14,985 square feet of space located on the second floor of an office
building in Kansas City, Missouri that was formerly occupied by TAI and
that was vacant as of November 30, 1996. The lease, which expires on May
31, 2000, calls for rents of approximately $19,318 per month, subject to
yearly increases of approximately $850.
ENVIRONMENTAL. Scout is subject to the following United States
environmental laws: Clean Air Act, Comprehensive Environmental Response,
Compensation, and Liability Act, Emergency Planning and Community Right-to-
Know Act, Federal Water Pollution Control Act, Oil Pollution Act of 1990,
Resource Conservation and Recovery Act, Safe Drinking Water Act and Toxic
Substances Control Act, all as amended. Scout is also subject to the
United States environmental regulations promulgated under these acts, and
also is subject to state and local environmental regulations which have
their foundation in the foregoing United States environmental laws.
As is the case with many companies, Scout faces exposure to actual or
potential claims and lawsuits involving environmental matters. However, no
such claims are presently pending and Scout has not suffered, and does not
anticipate that it will suffer, a material adverse effect as a result of
any past action by any governmental agency or other party, or as a result
of compliance with such environmental laws and regulations.
BUSINESS AND MANAGEMENT OF ENERGY ASSETS
GENERAL
The Company's Energy assets consist of Syntroleum and interests in
four oil and gas partnerships that have working interests in producing
wells in the Gulf of Mexico. These assets are owned by BMA Resources,
Inc., a wholly owned subsidiary of Seafield that will become a wholly owned
subsidiary of the Company in connection with the Distribution ("BMA
Resources"). BMA Resources was formed by Seafield to acquire, hold and
develop properties in connection with its insurance business that was sold
in 1990. Since that sale BMA Resources has disposed of all of its assets
other than Syntroleum and the Oil and Gas Interests. Following the
Distribution the Company intends to promote the continued development of
Syntroleum. The Company does not intend to acquire additional oil and gas
interests with the exception of additional capital expenditures in existing
partnerships for the purpose of further developing proven reserves.
SYNTROLEUM
SYNTROLEUM BACKGROUND. The Company owns 5,950,000 shares of
Syntroleum Common Stock, which constitutes approximately 32.5% of all
outstanding shares. The shares were acquired by the Company over a number
of years for an aggregate of approximately $2.1 million. Syntroleum is the
developer and owner of a patented process and several related proprietary
technologies ("Syntroleum(registered trademark) Process") for the
conversion of natural gas into synthetic liquid hydrocarbons which can be
further processed into fuels such as diesel, kerosene (used by jet
aircraft) and naphtha and related non fuel chemical feedstocks and
lubricants.
Syntroleum is a privately owned corporation that was founded in 1984
by Kenneth Agee. Mr. Agee is a chemical engineer who is the inventor of
most of Syntroleum's proprietary technology, the Chairman and Chief
Executive Officer and a principal stockholder of Syntroleum. Syntroleum
built an initial two barrel per day pilot plant in 1990-1991 with the
proceeds of the Company's first significant investment in 1988. In 1995
Syntroleum substantially up graded the pilot plant to conduct additional
tests. Recently, Syntroleum entered into a joint development agreement and
master license agreement with Texaco. Under the joint development
agreement Texaco and Syntroleum have agreed to pool resources for the
refinement of certain aspects of the Syntroleum(registered trademark)
Process. Under the master license agreement Syntroleum has granted Texaco a
nonexclusive license to use the Syntroleum(registered trademark) Process
outside North America (United States, Canada and Mexico), China and India
for the construction of processing plants and the production of liquid
fuels.
Syntroleum's strategy is to license the Syntroleum(registered
trademark) Process on a non exclusive basis to producers of natural gas and
oil and gas processors in exchange for license fees and royalties, to
market the principal catalyst used in the Syntroleum(registered trademark)
Process to plant operators (the " Catalyst") and to construct and operate
its own plants in the United States and other parts of the world for the
production of chemical feedstocks and lubricants.
THE SYNTROLEUM(registered trademark) PROCESS. Syntroleum's
Syntroleum(registered trademark) Process essentially involves two catalytic
reactions - the first reaction converts natural gas into synthesis gas
("syngas"). In the syngas reaction, natural gas consisting primarily of
methane, is combined at high temperature with air, consisting primarily of
oxygen and nitrogen, in a proprietary reactor utilizing a commercially
available catalyst to form syngas. The resulting syngas consists primarily
of carbon monoxide and hydrogen that is "diluted" with nitrogen. The
second reaction converts the syngas into hydrocarbons which are primarily
liquid at room temperature through a catalytic reaction commonly referred
to as the Fischer-Tropsch reaction. In the Fischer-Tropsch reaction, the
syngas flows into a reactor containing a proprietary catalyst developed by
Syntroleum. As the syngas passes over the catalyst, it is converted into
hydrocarbons of various molecular weights, with by-product water and carbon
dioxide also being produced. The hydrocarbons and water drain from the
reactor vessel and are subsequently separated. Both reactions generate
considerable amounts of heat. The nitrogen helps to remove a portion of
the heat from the reactor and is ultimately vented into the atmosphere.
The Syntroleum(registered trademark) Process contemplates that a portion of
the excess heat energy will be used in the compression energy necessary for
the syngas and Fischer-Tropsch reactions, with any remaining surplus heat
energy being converted for commercial sale if circumstances permit. Energy
integration is a key component of the capital efficiency of the Syntroleumr
Process and is the subject of several patent applications that Syntroleum
has in process.
The Syntroleum(registered trademark) Process involves a number of
unique characteristics that differentiate it from competing processes
developed or under development by a number of large companies. The
Syntroleum(registered trademark) Process utilizes oxygen directly from the
atmosphere for the syngas reaction while others utilize pure oxygen to
create a syngas that is free of nitrogen. This difference significantly
reduces costs and equipment to produce syngas in the Syntroleum(registered
trademark) Process. The Syntroleum(registered trademark) Process also
utilizes a unique catalyst under development by Syntroleum for use in the
Fischer-Tropsch conversion reaction. The Catalyst produces hydrocarbon
molecules that are primarily in the liquid fuels range. This reduces
subsequent processing where the desired product is a liquid fuel.
Syntroleum has also developed a catalyst which produces a very waxy
synthetic crude oil which requires further processing in order to produce a
liquid fuel. A third major difference relates to the use of nitrogen in
the Syntroleum(registered trademark) Process rather than eliminating it
prior to the initial syngas reaction as with competing processes. The
combination of these and other features have led Syntroleum to believe that
plants using its proprietary Syntroleum(registered trademark) Process may
be constructed at a capital cost significantly less than those based on
competing processes of comparable size. In addition, Syntroleum believes
that the Syntroleum(registered trademark) Process will permit the
construction of relatively small cost effective processing plants that may
be used on ships, barges and offshore platforms for the conversion of gas
production from small fields in remote locations.
PATENTS AND PROPERTIES. Syntroleum holds the following patents
relating to the Syntroleum(registered trademark) Process: United States
Patent No. 4,833,170 issued May 23, 1989 and No. 4,973,453 issued November
27, 1990. These patents were granted for a term of seventeen years from
the date of issuance. Patent applications were subsequently filed in
Argentina, Australia, Canada, China, India, Malaysia, Mexico, Netherlands,
Nigeria, Norway, Pakistan, United Kingdom and Venezuela. Subsequent
patents have been granted in Australia, Canada, China, India, Malaysia,
Mexico, Nigeria, Norway, Pakistan and the United Kingdom. The applications
in Argentina, Netherlands and Venezuela are still pending.
Syntroleum also has several additional patent applications filed and
others in progress.
Syntroleum owns a prototype two barrel per day pilot plant located on
2 acres in Tulsa, Oklahoma and leases 2,500 square feet of laboratory and
office space and 4,500 square feet of executive office space in Tulsa.
AVAILABLE NATURAL GAS AND DEMAND FOR THE SYNTROLEUM(REGISTERED
TRADEMARK) PROCESS. Syntroleum believes that a significant demand exists
for cost effective gas to liquids plants due to the availability of large
quantities of natural gas in remote regions of the world that are not
currently marketable because the distance to a market makes them
uneconomical to transport as natural gas. When crude oil is associated
with unmarketable natural gas, it is frequently flared or re-injected in
order to produce the associated oil. However, in many countries flaring is
not allowed by law and re-injection is frequently not an economical option.
Natural gas may also be unmarketable due to the nature or quantity of
impurities in the gas, such as excessive quantities of carbon dioxide,
nitrogen or hydrogen sulfide. A cost effective Syntroleum plant may be a
viable option in many of these cases.
In the Syntroleum(registered trademark) Process certain impurities
such as nitrogen and carbon dioxide do not have to be removed in order for
the gas to be used as a viable feedstock. The liquid hydrocarbon or
"Syncrude" that results from the Syntroleum(registered trademark) Process
is free from sulfur, metals, aromatics, nitrogen, salt and other impurities
that may be found in crude oil. These and other characteristics make the
Syncrude a valuable blending stock for upgrading natural crude oil
products.
PRODUCTS. Depending on the catalyst used and the design of the plant
the Syntroleum(registered trademark) Process will produce short chain
liquid hydrocarbons that can be upgraded into liquid fuels such as diesel,
kerosene (for jet fuel) and naphtha (for use in gasoline production).
These may be differentiated from existing commodity fuels because they are
free of sulfur, metals, particulates and aromatics and may therefore be
marketed at premium prices as a blending agent in US and European markets
and as a substitute for LNG (liquefied natural gas). Other proprietary
catalysts may be used to produce longer chain hydrocarbons that can be
further processed to produce synthetic lubricants, waxes and petrochemical
feedstocks.
COMPETITION-EARLY STATE DEVELOPMENT. The Syntroleum(registered
trademark) Process is in direct competition with processes developed by or
under development by a number of major oil companies which have
substantially greater financial and technical resources relative to those
available to Syntroleum. Furthermore, the Syntroleum(registered trademark)
Process has not been tested in a plant designed to produce commercial
quantities and such testing can not occur until a plant has been developed,
which could take up to two years from the commencement of construction.
Although, Syntroleum has entered into a joint development agreement with
Texaco, that agreement does not assure that the development process will be
completed or that Texaco will use its license rights to build a plant using
the Syntroleum(registered trademark) Process. Accordingly, until a plant
is constructed and placed in profitable operation, Syntroleum will not have
assurance of the commercial feasibility of its process or whether it will
be able to successfully compete with processes developed by companies
having much greater financial resources.
NO MARKET FOR SYNTROLEUM COMMON STOCK. Syntroleum's capital stock
consists of a single class of Common Stock, 18,311,057 shares of which were
outstanding at September 30, 1996. There is no public market for the
Syntroleum Common Stock. It is privately held by approximately 114
stockholders under agreements which restrict the transfer of the stock.
Transfers are not permitted except to certain affiliates and in connection
with sales to other third parties after the stock has first been offered to
Syntroleum and then to the other Syntroleum stockholders. During 1996
Syntroleum has sold shares in two private transactions at $7.42 per share,
the largest of which transactions involved a catalyst supplier who
purchased a portion of the shares for $1.0 million in cash and agreed to
purchase the balance at $7.42 per share through the delivery of $7.0
million of catalyst and other non cash consideration.
SYNTROLEUM FINANCIAL CONDITION AND RESULTS OF OPERATIONS. As of
September 30, 1996, Syntroleum had unaudited accumulated deficit of $3.3
million and net shareholders' equity of $1.4 million. Unaudited losses
from operations for the nine months ended September 30, 1996, were
$766,000.
********
OIL AND GAS PROPERTIES
BMA Resources owns minority general partnership interests in four oil
and gas general partnerships, which were formed from 1987 to 1989, with the
purpose of engaging in the business of acquiring, exploring and developing
oil and gas prospects. The partnerships have working interests in
producing wells in the Gulf of Mexico and have a combined carrying value of
$4,102,122 as of September 30, 1996.
MISCELLANEOUS ASSETS AND LIABILITIES
The Company also owns other assets consisting primarily of (a) three
investments in privately held venture capital limited partnerships having
an aggregate book value at September 30, 1996, of $1,364,538, (b) a common
stock interest in Oclassen Pharmaceuticals, Inc.,. a privately owned
pharmaceutical manufacturer, which is proposed to be converted into
approximately 183,673 shares of the common stock of Watson Pharmaceuticals,
a publicly traded company , trading in the shares of which closed on
January 31, 1997, at $44.81 per share, and (c) a preferred stock interest
in Norian Corporation, a privately owned developer of proprietary bone
substitute technology, which had a carrying value of approximately $1.0
million at September 30, 1996. These assets were acquired by Seafield in
connection with its Insurance Business that was sold in 1990. Following the
Distribution, the Company plans to liquidate all of these investments in an
orderly manner with the view to maximizing their value to stockholders.
The Company will assume certain contingent Seafield liabilities,
including Seafield's liability for disputed income taxes which the Internal
Revenue Service and the State of California claims to be owed by Seafield
for its 1986, 1987, 1988, 1989 and 1990 tax years (the "Tax Claims"). The
Tax Claims amount to approximately $14.6 million, plus interest. Although
the Company believes that a combination of defenses against the claims and
contested offsetting tax losses generated by a real estate project sold at
a loss in 1990, could result in a positive outcome, the Company can not
provide any assurance that its defense of such claims will be successful.
The Company has accrued for the estimated settlement with the IRS in the
accompanying combined financial statements and has established on the pro
forma balance sheet herein appropriate accruals for the California state
income tax liability plus interest. See "BUSINESS - Legal Matters."
COMPANY EMPLOYEES
As of the Distribution Date, it is anticipated that the Company and
Scout, but not including Syntroleum will employ approximately 15
individuals, none of whom will be covered by collective bargaining
agreements. All of its employees other than 12 property management
employees of Scout provide management, financial, accounting, tax,
administrative and other services with respect to its assets.
The Company believes that relations with its employees are good.
COMPANY PROPERTIES
The Company's headquarters occupy approximately 13,700 square feet of
leased space in a building at 2600 Grand Boulevard, Suite 500, P.O. Box
410949, Kansas City, Missouri 64141. The term of this lease expires on
April 1, 2002, subject to an option to cancel the lease on April 1, 1999.
Owned real estate is described under "Management and Disposition of Real
Estate Assets."
********
LEGAL MATTERS
Under the Distribution Agreement and Assignment and Assumption
Agreement, the Company will assume the rights and obligations of Seafield
with respect to the legal matters described below.
INTERNAL REVENUE SERVICE AUDITS. 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.
The substantive issues raised in these notices for the years 1986-1990
are primarily composed of the former television subsidiaries' amortization
of film rights, the sale of the stock of a former television station,
certain insurance company tax issues and a $27 million loss on the sale of
a real estate partnership interest.
The IRS' denial of film right amortization equates to approximately
$10.5 million of the $13.9 million in additional taxes; provided that if
the IRS were to prevail on the amortization issues, the tax basis in the
television stations would be increased. This would have the effect of
reducing income taxes in connection with the sale of the television
stations.
With respect to the loss on the sale of the real estate partnership
interest, the IRS has claimed that the sale did not occur during 1990, but
rather occurred after 1990. If the sale did not occur in 1990, then 1990
losses could not be carried back to 1987, to reduce Seafield's significant
taxable income in 1987.
Seafield has filed protests regarding the 1986-1990 notices of
proposed adjustments. Seafield is currently pursuing a compromise with the
Appeals Division of the IRS for the 1986-1989 years. The 1990 issues have
not yet been formally addressed at the Appeals Division but Seafield is
advised by IRS representatives that tax issues in all years under audit
will be addressed together. Resolution of these tax disputes may
reasonably be expected during 1997, but is not certain.
The Company is assuming from Seafield all contingent tax liabilities
and is acquiring all rights to refunds as well as any interest thereon
related to these tax years (the "Tax Claims") and liabilities and refunds
related to any issues raised by the IRS for years 1986-1990 whose
resolution may extend to tax years beyond the 1990 tax year. Based upon
the advice of counsel, the Company believes that it will prevail on the
1990 loss carryback issue. In addition, there are meritorious defenses or
pending favorable compromises for many of the other substantive issues.
The Company believes that adequate accruals for these income tax
liabilities have been made.
CALIFORNIA TAX ISSUES. 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. A billing is expected to be made to
Seafield within six months from the submission of the report by the
auditor. The total amount of California state income taxes due for the
1987-1989 years is expected to be approximately $750,000, exclusive of
interest. The Company is assuming all potential tax liabilities and
interest thereon regarding the California audit for the 1987-1989 taxable
years. The Company believes that it has established on the pro forma
balance sheet herein appropriate accruals for the California state income
tax liability.
The Company believes that final resolution of the above Tax Claims
after taking into account offsetting claims for refunds and amounts
accrued, should not have a material adverse effect on the Company's
financial position.
CLAIM AGAINST SKIDMORE, OWINGS & MERRILL, ET AL. 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. Under the Distribution Agreement Seafield has assigned to the
Company all of its rights to any recoveries and the Company has assumed any
costs relating to the prosecution of any of the above described claims.
Thus any recovery will be for the benefit of the Company and all costs
incurred in connection with the litigation will be paid by the Company.
Any ultimate recovery will be recognized as income when received and would
be subject to income taxes. In September 1993, the Missouri Court of
Appeals reversed a $5.7 million judgment granted in 1992 in favor of
Seafield; the Court of Appeals remanded the case to the trial court for a
jury trial limited to the question of whether or not the applicable statute
of limitations barred the claim. The Appeals Court also set aside $1.7
million of the judgment originally granted in 1992. In July 1996, the 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 Company believes the judgment
will be appealed, counsel for the Company expects that it will be difficult
for the defendants to cause the judgment to be reversed. If appealed, the
final outcome would not be expected for at least another year.
CLAIM AGAINST SCOUT. On January 30, 1997, Scout Development
Corporation was served with a complaint filed in the District Court of
Tarrant County, Texas by the parents of a 36 week old fetus who did not
survive an automobile accident at an intersection in Fort Worth, Texas, the
view of which is alleged to have been obstructed by weeds growing on
property that is alleged to have been owned by Scout. The Company expects
to deny liability, has turned the matter over to its insurance carrier and
believes that if it has any liability, it is adequately covered by an
existing policy of insurance.
