As Filed with the Securities and Exchange Commission on March 31, 1998
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997
SLH CORPORATION
(name of registrant as specified in its charter)
Commission File No. 0-21911
Kansas 43-1764632
(State of incorporation or organization) (IRS Employer Identification No.)
5000 West 95th Street
Suite 260, P.O. Box 7568
Shawnee Mission, Kansas 66207
(Address, including zip code, of principal executive offices)
913-652-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value and Preferred Share Purchase Rights
Number of shares outstanding of only class of Registrant's common stock
as of March 12, 1998:
Common Stock, $0.01 par value - 10,074,721
The aggregate market value of the Common Stock of the Company held by
non-affiliates, based upon the last sales price of such stock at $35.25 per
share on February 24, 1998 was $282,466,005.
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
SLH CORPORATION
FORM 10-K
For the Year Ended December 31, 1997
CONTENTS
PAGE
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PART I
Item 1. Business.................................................. 4
Overview.................................................. 4
Syntroleum................................................ 6
Management and Disposition of Real Estate and
Miscellaneous Assets................................... 13
Miscellaneous Contingent Interests and Liabilities........ 14
Company Employees...................................... 15
Regulation--Potential
Application of the Investment
Company Act of 1940.................................... 15
Item 2. Properties................................................ 16
Item 3. Legal Proceedings......................................... 16
Item 4. Submission of Matters to a Vote of Security Holders....... 17
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.................................... 18
Item 6. Selected Financial Data................................... 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 19
Item 8. Financial Statements and Supplementary Data............... 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................. 46
PART III
Item 10. Directors and Executive Officers of the Registrant........ 47
Item 11. Executive Compensation.................................... 48
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................. 54
Item 13. Certain Relationships and Related Transactions............ 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K............................................... 56
SIGNATURES.............................................................. 58
FINANCIAL STATEMENT SCHEDULE........................................... S-1
Schedule III. Real Estate and Accumulated Depreciation............... S-2
The calculation of the aggregate market value of the Common Stock of
the Company held by non-affiliates is based on the assumption that
non-affiliates do not include directors. Such assumption does not constitute an
admission by the Company or any director that any director is an affiliate of
the Company.
3
PART I
This report contains forward-looking statements as well as historical
information. Forward-looking statements are identified by or are associated with
such words as "intend," "believe," "estimate," "expect," "anticipate,"
"hopeful," "should" and similar expressions. They reflect management's current
beliefs and estimates of future economic circumstances, industry conditions,
Company performance and financial results and are not guarantees of future
performance. In particular, all statements relating to GTL plants using the
Syntroleum Process are based on Syntroleum's experience in operating the pilot
plant, laboratory data and numerous engineering feasibility studies and no
assurance can be given that commercial-scale GTL plants using the Syntroleum
Process will achieve similar results. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will be met. These and other
forward-looking statements are based on many assumptions and factors, all of
which may not be detailed in this report. Any changes in the assumptions or
factors could produce materially different results than those predicted and
could impact stock values.
Item 1. Business.
Overview.
SLH Corporation (the "Company") was incorporated in Kansas on December
5, 1996. The Company is primarily engaged in promoting the development of
Syntroleum Corporation, an Oklahoma corporation ("Syntroleum") that is 31% owned
by the Company. Syntroleum is the developer and owner of a proprietary process
(the "Syntroleum Process"). The Syntroleum Process is designed for use in the
conversion of natural gas into synthetic liquid hydrocarbons which can be
further processed into fuels such as diesel, kerosene and naphtha and related
nonfuel chemical feed stocks and lubricants ("gas to liquids" or "GTL"). The
Company is also in the business of managing, developing and disposing of real
estate and certain miscellaneous assets.
These assets, together with the stock of Syntroleum, were acquired from
Lab Holdings, Inc. ( formerly Seafield Capital Corporation). Concurrent with
that acquisition Lab Holdings distributed to its stockholders on March 3, 1998,
all of the outstanding shares of the Company's Common Stock and certain
Preferred Share Purchase Rights in a transaction commonly referred to as a
"spin-off" or "distribution" (the "Distribution"). The Distribution was effected
pursuant to a Distribution Agreement (the "Distribution Agreement"), a Blanket
Bill of Sale and Assumption Agreement (" the Assignment Agreement"), a
Facilities Management and Interim Services Agreement ("Interim Services
Agreement") and a Tax Sharing Agreement ("Tax Sharing Agreement"), copies of
which are exhibits to this report. The Distribution is more particularly
described in the Information Statement that was furnished to all stockholders on
February 13, 1997 (the "Information Statement"), and the Company's related
Registration Statement on Form 10 ("Form 10").
The Syntroleum Process is a simplification of traditional GTL
technologies aimed at substantially reducing both the capital cost and the
minimum economical size of a GTL plant, as well as plant operating costs.
Syntroleum believes that the Syntroleum Process can be cost effective at GTL
plants with throughput levels as low as 2,000 barrels per day ("Bbls/d") (based
on energy prices experienced during recent years), and can be competitive with
other GTL processes at any plant size. GTL plants can be designed to further
refine the synthetic liquid hydrocarbons (or "synthetic crude oil") produced by
the Syntroleum Process into liquid fuels such as diesel, kerosene and naphtha,
or specialty products such as liquid normal paraffins, synthetic drilling fluid,
synthetic lubricants, waxes and certain chemical feedstocks. Due to their
relatively small footprint, Syntroleum believes that GTL plants using the
Syntroleum Process can be built stand alone or placed on skids, barges and
ocean-going vessels ("mobile GTL plants"), allowing these plants to be used at a
variety of locations, including isolated and offshore areas. Although no
commercial-scale GTL plant using the Syntroleum Process has yet been built,
Syntroleum owns and operates a 2 Bbls/d pilot plant in Tulsa, Oklahoma where it
has successfully demonstrated certain elements critical to the Syntroleum
Process.
Syntroleum is currently focusing on commercializing the Syntroleum
Process by (i) entering into agreements with oil and gas industry participants
to license the Syntroleum Process for use in GTL plants designed to produce
4
synthetic crude oil and liquid fuels, (ii) establishing joint ventures with
Texaco, Inc. ("Texaco"), Enron Capital & Trade Resources Corp. ("Enron") and
other oil and gas industry partners and/or financial partners to design,
construct and operate GTL plants designed to produce fuels and specialty
products and (iii) providing mobile GTL plants to customers on a contract basis
through efforts with Brown & Root, Inc. ("Brown & Root") and others. To date,
Syntroleum has entered into license agreements with Texaco, Atlantic Richfield
Company ("ARCO"), Marathon Oil Company ("Marathon"), an affiliate of Yacimientos
Petroliferos Fiscales, S.A. ("YPF"), Enron and Kerr-McGee Corporation
("Kerr-McGee"), and is currently in discussions with several other oil and gas
companies with respect to additional license agreements and joint ventures to
develop specialty product GTL plants. In summary, Syntroleum's strategy is to be
a leading GTL technology provider to the oil and gas industry by broadly
licensing the Syntroleum Process, to participate as an equity partner in
specialty product GTL plants, to provide mobile GTL plants to customers on a
contract basis and to continue to improve Syntroleum's technology with the
participation of licensees and joint development partners.
Syntroleum's major customers for licensing and contract GTL plants are
expected to be energy companies worldwide with significant stranded natural gas
reserves that cannot be economically marketed and are therefore generally
shut-in, flared or reinjected. Syntroleum believes that these energy companies
could significantly enhance the value of their reserves by using the Syntroleum
Process to convert stranded natural gas to liquids that could be economically
marketed. Syntroleum's major customers for specialty products are expected to
include these energy companies, as well as a variety of manufacturing, chemical
and refining companies.
Because Syntroleum has not constructed and operated a commercial scale
GTL plant, no assurances can be given that the Syntroleum Process will
ultimately be commercially viable.
The Company's real estate assets reflect the remaining assets of a real
estate development business that was conducted by Lab Holdings in association
with a previously owned life insurance company that was sold in 1990. Real
estate assets, as of December 31, 1997, consist of (i) the remaining inventory
from a condominium development located in Santa Fe, New Mexico (comprising 9
completed homes that have been priced for sale between $375,000 and $600,000;
"Quail Run"); (ii) a seven story parking garage in Reno, Nevada (the "Reno
Parking Garage"); (iii) a 49.9% interest in a community shopping center in
Gillette, Wyoming (the "Shopping Center Interest"); and (iv) undeveloped land in
Houston, Texas (370 acres comprising the "Houston Project"), Corinth, Texas (9
acres comprising the "Corinth Tract") and the Kansas City metropolitan area (16
acres at the intersection of I-35 and 119th Streets, comprising the "Kansas City
Tracts"). The total real estate inventory had an aggregate carrying value at
December 31, 1997, of approximately $10.8 million. All of the real estate assets
are held for sale except for the Houston Project that is being developed.
The Company's miscellaneous assets at December 31, 1997, consisted of (i) a
convertible preferred stock interest in Norian Corporation, a privately owned
developer of proprietary bone substitute technology which had a carrying value
of approximately $1 million, (ii) $39 million of cash, government securities and
current receivables, and (iii) an investment in a privately held venture capital
limited partnership which had a carrying value of $515,000 ("Miscellaneous
Assets").
The Company's majority owned significant subsidiaries consist of BMA
Resources, Inc., a wholly owned Missouri corporation ("BMA Resources"), Scout
Development Corporation ("Scout Development"), a wholly owned Missouri
corporation, Scout Development Corporation of New Mexico ("Scout New
Mexico"), a Missouri corporation wholly owned by Scout Development (with Scout
Development and Scout New Mexico referred to collectively as "Scout"), and 529
Partners, Ltd. ("529 Partners"), a Texas limited partnership in which Scout
Development owns a 75% equity interest. The Company owns a 31% interest in
Syntroleum. The interest is held by BMA Resources. See Item 7 and Notes to
Consolidated Financial Statements for additional information.
The Company's principal executive offices are located at 5000 West
95th Street, Suite 260, Shawnee Mission, Kansas 66207, and its telephone number
is (913) 652-1000.
5
Syntroleum
The Company owns 5,950,000 shares of the common stock of Syntroleum,
which constitutes approximately 31% of Syntroleum's outstanding shares. The
shares were acquired by the Company over a number of years for an aggregate of
approximately $2.1 million. 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. He is the Chairman and
Chief Executive Officer and a principal stockholder of Syntroleum.
The Syntroleum 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 and a small amount of steam, 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 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 Process
utilizes a portion of the excess heat energy to drive the compression necessary
for the syngas and Fischer-Tropsch reactions, with any remaining surplus
heat energy being dissipated or converted to electricity for commercial sale
if circumstances permit. Energy integration is a key component of the capital
efficiency of the Syntroleum Process and is the subject of several patent
applications that Syntroleum has in process.
The Syntroleum Process involves certain unique characteristics that
differentiate it from competing processes developed or under development by a
number of other companies. The Syntroleum Process utilizes air 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 Process. The Syntroleum
Process also utilizes a proprietary catalyst developed by Syntroleum for use in
the Fischer-Tropsch conversion reaction. In addition, the Syntroleum process
incorporates other proprietary methods, a number of which are the subject of
pending Syntroleum patent applications.
Syntroleum's goal in developing this process has been to substantially
reduce both the capital cost and the minimum economical size of a GTL plant, as
well as plant operating costs. Syntroleum believes that by reducing the
complexity of the process it has achieved this goal and that plants utilizing
the Syntroleum Process will be economic at relatively low levels of throughput
(2,000 Bb1/day and higher) based on energy prices of between ($15 to $20 per Bbl
for oil and $.50 per MMBtu for stranded natural gas in remote locations. Due to
their relatively small footprint, Syntroleum believes that GTL plants using the
Syntroleum Process can be built stand alone or placed on skids, barges and
ocean-going vessels, allowing these plants to be used at a variety of locations,
including isolated and offshore areas.
Syntroleum completed construction of its first pilot plant in 1990, and
the plant was successfully operated in 1990 and 1991. The proceeds of the
Company's first significant investment in 1988 were used by Syntroleum in the
construction of this pilot plant. Between 1991 and 1995, Syntroleum focused the
majority of its research and development efforts on catalyst development for the
Fischer-Tropsch reaction. The pilot plant was extensively modified in 1995 to
test new catalysts and again in 1997 to test new reactor designs. Syntroleum's 2
Bb1/d pilot plant has successfully demonstrated certain elements critical to the
Syntroleum Process. However, no commercial-scale GTL plant that uses the
Syntroleum Process has yet been constructed.
6
Syntroleum is currently focusing on commercializing the Syntroleum
Process by (i) entering into agreements with oil and gas industry participants
to license the Syntroleum Process for use in GTL plants designed to produce
synthetic crude oil and liquid fuels, (ii) establishing joint ventures with
Texaco and other oil and gas industry partners and/or financial partners to
design, construct and operate GTL plants designed to produce fuels and specialty
products and (iii) providing mobile GTL plants to customers on a contract basis
through efforts with Brown & Root. However, there can be no assurance that
licensees will construct any plants under their license agreements, that
financing for mobile and specialty product GTL plants will be obtained by
Syntroleum, that construction of any of these plants will be successfully
completed, that any of these plants will be commercially successful, that these
plants will be constructed or utilized on a cost-effective basis or that these
plants will yield the same economics and results as those demonstrated on a
pilot plant basis. Adverse energy prices and other operating conditions may
negatively impact the economic application of GTL plants using the Syntroleum
Process. In addition, certain improvements to the Syntroleum Process are under
development and may not prove to be commercially applicable.
Licensing Agreements. Syntroleum currently markets four types of
license agreements: (i) master license agreements, (ii) regional license
agreements, (iii) volume license agreements and (iv) site license agreements.
Syntroleum's first license agreement was a master license agreement entered into
with Texaco in September 1996. To date, Syntroleum has also entered into master
license agreements with ARCO and Marathon, and has entered into volume license
agreements with YPF, Enron and Kerr-McGee. Syntroleum has received an aggregate
of $11 million as initial payments and rights to certain technologies under its
existing agreements. Syntroleum intends to continue to market the Syntroleum
Process for license primarily to major oil and gas companies with significant
stranded natural gas reserves and is currently in negotiations with several
companies.
Specialty Product GTL Plants. All current licenses of the Syntroleum
Process limit the licensee to the production of fuel products and prohibit the
licensee from producing specialty products. Syntroleum intends to design and
construct GTL plants that produce specialty products, such as synthetic
lubricants, synthetic drilling fluid, waxes, solvents and certain chemical
feedstocks. Syntroleum intends to own these plants through joint ventures and
may retain significant equity interests in these joint ventures. In most cases,
these specialty plants will require additional refining technologies and
expertise to convert and separate synthetic crude oil into the desired products.
In May 1997, Syntroleum formed Syntroleum/Sweetwater Company, L.L.C.,
("Sweetwater LLC") through which Syntroleum intends to design and construct an
8,000 Bbl/d specialty product plant in Sweetwater County, Wyoming. In June 1997,
the Company contributed $1.5 million in exchange for an interest in Sweetwater
LLC (which is expected to be approximately 1% following expected additional
equity contributions). Syntroleum has contributed a site license and $500,000 to
Sweetwater LLC and plans, subject to the necessary capital being available, to
make additional contributions that would result in the retention by Syntroleum
of a majority interest in Sweetwater LLC. In January 1998, Enron contributed $1
million in exchange for a 4% interest in Sweetwater LLC, and agreed to
contribute an additional approximately $14 million in exchange for an additional
7% interest in Sweetwater LLC upon the satisfaction of certain conditions,
including the execution of agreements which provide for the remaining equity and
debt financing for the plant and the execution of fixed price engineering and
construction contracts. If financing is obtained, construction of the plant is
scheduled to commence in 1999, and the plant is scheduled to be operational in
2001. Syntroleum is the managing member of Sweetwater LLC, but it may
subcontract with a third party that would manage the operations of the plant.
Syntroleum currently anticipates that this plant will produce lube oil, normal
paraffins, drilling fluid and naphtha. Syntroleum also anticipates that
Sweetwater LLC would enter into supply and offtake agreements with respect to
this plant.
In November 1997, Syntroleum, Texaco and Brown & Root entered into a
project development agreement that provides for the development of a 2,500 Bbl/d
GTL plant using the Syntroleum Process. The parties currently anticipate that
the plant would use a hybrid, multi-phase (HMX) reactor currently under
development by Syntroleum and Texaco. It is anticipated that Syntroleum, Texaco
and Brown & Root would each initially own a 33-1/3% interest in a joint venture
to be formed to own the plant and that Texaco would be the designated operator
of the plant. However, the parties contemplate that additional interests would
likely be sold to third parties, including existing or future licensees of
Syntroleum, which would dilute such interests. Under the project development
agreement, decisions with respect
7
to the development of the plant, including expenses and additional equity
participants, require unanimous approval of the parties. Although the agreement
terminates on July 15, 1998, Syntroleum anticipates that the parties will, if
necessary, extend the term of the project development agreement to allow
sufficient time to execute definitive documents. However, no assurance can be
given that this plant will ultimately be constructed.
Syntroleum is also in discussions with several oil and gas companies
and anticipates forming several joint ventures in order to finance and operate
additional specialty product GTL plants. Syntroleum's plans for international
plants will focus on partnering with companies who have low-cost gas reserves
and/or have distribution networks in place for the specialty products to be
produced in the plant.
Syntroleum's major customers for licensing and contract GTL plants are
expected to be energy companies worldwide with significant stranded natural gas
reserves that cannot be economically marketed and are therefore generally
shut-in, flared or reinjected. Syntroleum believes that these energy companies
could significantly enhance the value of their reserves by using the Syntroleum
Process to convert stranded natural gas to liquids that could be economically
marketed. Syntroleum's major customers for specialty products are expected to
include these energy companies, as well as a variety of manufacturing, chemical
and refining companies.
Research and Development. One of Syntroleum's strategies is to continue to
lower the cost of its GTL technologies through research and development.
Syntroleum's research and development. Syntroleum's research and development
effort is being conducted in three primary areas: catalyst development; reactor
design; and heat integration and power recovery. Currently, Syntroleum has
ongoing joint development activities with Texaco, ARCO, Marathon, Catalytica
Combustion Systems, Catalytica Advanced Technologies and AGC Manufacturing
Services, Inc. Generally, Syntroleum acquires ownership or licensing rights to
inventions or improvements to the Syntroleum Process resulting from these joint
development efforts.
Syntroleum Intellectual Property
Syntroleum pursues protection of the Syntroleum Process primarily
through trade secrets and patents. Syntroleum's policy is to seek, when
appropriate, protection for its proprietary products and processes by filing
patent applications in the United States and certain foreign countries, and to
encourage or further the efforts of others who have licensed technology to
Syntroleum to file such patent applications. It is also Syntroleum's policy to
seek, when appropriate, a license under the patents of others, so that it can
sell the products or use the processes covered by those patents in connection
with its own technology.
The following patents relating to the Syntroleum Process have been
issued to Syntroleum: United States Patent No.4,833,170 which was issued May 23,
1989 entitled "Process Applications for the Production of Heavier Hydrocarbons
from Gaseous Light Hydrocarbons" and No.4,973,453, which was issued November 27,
1990 and entitled "Apparatus for the Production of Heavier Hydrocarbons from
Gaseous Light Hydrocarbons." In addition, Syntroleum has acquired United States
Patent No. 5,593,569 which was issued January 14, 1997 entitled "Hydro-cracking
Processes Using a Homogenous Catalysis System Comprising a Metal Halide Lewis
Acid, a Bronsted Acid and an Alkane, as well as two pending patent applications.
Subsequent patents related to the Syntroleum Process have been granted in
Argentina, Australia, Canada, China, India, Malaysia, Mexico, Nigeria, Norway,
Pakistan, the United Kingdom and Venezuela and an application in The Netherlands
is currently pending.
Syntroleum also has seven additional patent applications filed in the
United States and approximately fifteen foreign applications based on one or
more of them.
In general, the patent position of Syntroleum involves complex legal,
scientific and factual questions and is uncertain. There can be no assurance
that any other patents will be granted with respect to any of Syntroleum's
patent applications filed by Syntroleum or its licensors. Further, there can be
no assurance that any patents issued or licensed to Syntroleum will provide
commercial benefit to Syntroleum or will not be infringed, invalidated or
circumvented by others.
8
In addition to patent protection, Syntroleum also relies significantly
on trade secrets, proprietary know-how and technological advances which it seeks
to protect, in part, by confidentiality agreements with its collaborators,
licensees, employees and consultants. There can be no assurance that these
agreements will not be breached, that Syntroleum would have adequate remedies
for any breach or that Syntroleum's trade secrets and proprietary know-how will
not otherwise become known or be independently discovered by others.
Syntroleum has received federal trademark and service mark
registrations for the name "Syntroleum" in the United States. Syntroleum also
has pending United States trademark applications seeking protection for marks
that will be used as brand names for Syntroleum products.
Commercialization of Syntroleum's GTL technologies may give rise to
claims that they infringe upon the patents or other proprietary rights of
others. Many major oil and gas companies have an interest in protecting
proprietary technologies in order to maintain their competitive advantage and
may be particularly protective vis-a-vis competitors, such as Syntroleum, that
have the ability to broadly license similar technologies to their competitors
and erode their competitive advantage. As a result, no assurance can be given
that one or more of such companies will not attempt to prevent Syntroleum from
commercializing the Syntroleum Process by claiming infringement of new patents.
Syntroleum may not become aware of such patents or rights until after it has
made a substantial investment in the development and commercialization of the
Syntroleum Process. Such other persons, companies or institutions could bring
legal actions against Syntroleum, its partners or licensees, claiming damages
and seeking an injunction that would prevent Syntroleum, its partners or
licensees, from testing, marketing or commercializing the affecting
technologies. If such action were successful, in addition to potential liability
for damages, Syntroleum, its partners or licensees, could be required to obtain
from a license in order to continue to test, market or commercializing the
affected technologies. There can be no assurance that any such required license
would be made available or, if available, would be available on acceptable
terms, and syntroleum may be prevented entirely from testing, marketing or
commercialize the affected technology by a company that intends to maintain its
competitive advantage. Syntroleum may have to expend substantial resources in
litigation, either in enforcing its patents, defending against the infringement
claims of others, or both, and many possible claimants, such as major oil and
gas companies, have significantly more resources to spend on such litigation.
Syntroleum intends to vigorously enforce its patents and defend against the
infringement claims of others. Syntroleum has conducted a limited review of
existing patents, and believes that it is not infringing on the patents of
others. However, Syntroleum has not conducted an exhaustive patent search.
Syntroleum Employees
Syntroleum had 42 employees at February 28, 1998, including 14 engineering
and research personnel, five employees in business development and marketing,
and seven employees in administration, legal and finance. None of Syntroleum's
employees is represented by a labor union. Syntroleum has experienced no work
stoppages and believes that its relations with its employees are excellent.
Syntroleum Property
Syntroleum owns a two barrel-per-day pilot plant located on two acres
in Tulsa, Oklahoma. Syntroleum also leases 4,500 square feet of laboratory and
office space and approximately 37,000 square feet of executive office space in
Tulsa, Oklahoma. In addition, Syntroleum has entered into an agreement to
acquire approximately 16,500 square feet of laboratory space and approximately
100 acres of property on which the laboratory is located. Syntroleum has
also entered into a letter of intent with respect to the acquisition of 35
acres of land in Sweetwater County, Wyoming on which the Sweetwater Plant is
planned to be constructed.
Syntroleum Competition
The development of GTL technology is highly competitive, and the
Syntroleum Process is based on technology that has been used by several
companies in synthetic fuel projects during the past 60 years. Given expensive
alternatives and volumes of trapped natural gas reserves, a significant
opportunity exists to anyone who can develop economic GTL
9
technology. Syntroleum competes with several major integrated oil and gas
companies and other companies having materially greater financial and other
resources. These competitors have a greater ability to bear the economic risks
inherent in the development of GTL technology. Several companies have developed
GTL conversion technology, including Exxon, Shell and Sasol. Each of these
companies has significantly more resources to spend on research and development
of its technology and on funding construction and operation of commercial GTL
plants. In addition, several small companies are developing competing GTL
technologies. The Department of Energy has also sponsored a number of research
programs relating to GTL technology, including a recent program relating to the
development of a ceramic membrane technology that could potentially lower the
cost of producing oxygen needed to produce synthetic gas in competitive
processes. There can be no assurance that these companies or the Department of
Energy will not develop technologies that will be more commercially successful
or accepted than Syntroleum's technology or that renders the Syntroleum Process
obsolete.
The market for natural gas is highly competitive in many areas of the
world and may affect Syntroleum's business, operating results and financial
condition. The conversion of natural gas to liquefied natural gas (LNG) will
compete with GTL plants for use of natural gas as feedstocks in many locations.
Local markets, power generation, ammonia, methanol and petrochemicals are
alternative markets for natural gas which will also be competitive uses. Unlike
Syntroleum, many of its competitors also produce or have access to large volumes
of natural gas, which may be used in connection with their GTL operations. The
availability of natural gas at economic prices for use as feedstocks for GTL
plants may also depend on whether natural gas pipelines are located in the areas
where such plants are located. New pipelines may need to be built in, or
existing pipelines may need to be expanded into, areas where GTL plants are
built, and this may affect the operating margins of such plants. The United
States and Western Europe have well developed natural gas markets. In these
markets, the relationship between natural gas prices and liquid hydrocarbon
prices is such that investments in GTL plants that produce fuels are unlikely to
be economic in most circumstances. Other areas around the world that have
developed local markets for gas may also have higher valued uses than GTL
technology. In addition, the commercialization of the GTL technologies may have
an adverse effect on the availability to GTL plants of natural gas at economic
prices. The oil and gas industry also competes with other industries that supply
the energy and fuel requirements of industrial, commercial, individual and other
consumers.
Syntroleum Government Regulation
Syntroleum will be subject to extensive federal, state and local laws
and regulations relating to the protection of the environment, including laws
and regulations relating to the release, emission, use, storage, handling,
cleanup, transportation and disposal of hazardous materials and employee health
and safety. In addition, Syntroleum's GTL plants will be subject to the
environmental and health and safety laws and regulations of any foreign
countries in which such plants are to be located.
Although Syntroleum does not believe that compliance with environmental
and health and safety laws in connection with current Company operations will
have a material adverse effect on Syntroleum, the future costs of complying with
environmental laws and regulations and containing or remediating contamination
cannot be predicted with certainty and there can be no assurance that material
liabilities or costs related to environmental matters will not be incurred in
the future or that such environmental liabilities or costs will not have a
material adverse effect on Syntroleum's business, operating results and
financial condition. Syntroleum does not currently carry environmental
impairment liability insurance to protect it against such contingencies but may,
in the future, seek to obtain such insurance in connection with its
participation in the construction and execution of GTL plants if such coverage
is available at reasonable cost and without unreasonably broad exclusions.
Syntroleum Legal Proceedings
Syntroleum is not a party to, nor is any of its property the subject
of, any pending legal proceedings, which, in the opinion of management, are
expected to have a material adverse effect on Syntroleum's consolidated results
of operations or financial position.
10
Syntroleum Common Stock.
Syntroleum's outstanding capital stock consists of a single class of
Common Stock, 18,993,950 shares of which were outstanding at March 30, 1998,
and 747,434 shares of which were subject to outstanding employee and director
stock options. There is no public market for the Syntroleum Common Stock, which
is privately held by approximately 144 stockholders, a substantial number of
which have entered into agreements which restrict the transfer of the stock.
Transfers are not permitted except to certain affiliates and into in connection
with sales to other third parties after the stock has first been offered to
Syntroleum and then to the other Syntroleum stockholders.
Syntroleum Financial Condition and Results of Operations.
For summary information concerning Syntroleum's financial condition and
results of operations see Note 4 to the Notes to Consolidated Financial
Statements under Item 8.
Syntroleum Management
Kenneth L. Agee is the Chief Executive Officer and Chairman of the
Board of Syntroleum. Mr. Kenneth L. Agee is the founder of Syntroleum and has
served as the Chief Executive Officer of Syntroleum since February 1996 and
Chairman of the Board of Syntroleum since November 1995. Prior thereto, he
served as Syntroleum' s President and as a director of Syntroleum. He is a
graduate of Oklahoma State University and is a licensed Professional Engineer in
the State of Oklahoma. In addition, he has over 15 years of experience in the
oil and gas industry and is listed as Inventor on two U.S. Patents and several
foreign patents, all of which have been assigned to Syntroleum.
Mark A. Agee is President, Chief Operating Officer and a director of
Syntroleum. Mr. Mark A. Agee joined Syntroleum in January 1994 and has served as
President and Chief Operating Officer of Syntroleum since February 1996. He has
also served as a director of Syntroleum since March 1985. From 1989 to May 1993,
he served as President, Chief Executive Officer and Director of Convergent
Communications, a company which he founded in 1989. From 1981 to 1989, he served
as President, Chief Executive Officer and a Director of XETA Corp., a computer
company which he founded in 1981 and which became public in 1987. He holds a
Bachelor's degree in Chemical Engineering from the University of Tulsa and is a
licensed Professional Engineer in the State of Oklahoma.
Eric Grimshaw is Vice President, General Counsel and Secretary of
Syntroleum. Mr. Grimshaw joined Syntroleum in June 1997. Prior to joining
Syntroleum, Mr. Grimshaw was a partner with the law firm of Pray, Walker,
Jackman, Williamson & Malar. Mr. Grimshaw received a B.A. degree from the
University of Colorado and received his law degree from the University of Tulsa.
Peter Snider is the Vice President of Sales for Syntroleum. He joined
Syntroleum in January 1996. From 1979 to 1984, he served as Product Manager of
Synthetic Waxes for Moore and Manger ("M&M"), Sasol's North American
distribution company. From 1984 until 1989, he served as Director of Specialty
Products for M&M and became Vice President and Director of Marketing in 1989. He
joined C&C Petroleum and Chemicals Group in January 1991 as President and Chief
Executive Officer. Mr. Snider has over 18 years of experience in the lubes,
chemicals and wax business and has been a member of the board of the Adhesive
and Sealants Council, one of the largest wax-consuming industries in the world,
since 1996. He is also a graduate of the Taft School and the University of North
Carolina.
Randal M. Thompson is the Chief Financial Officer and Vice President of
Syntroleum. Mr. Thompson joined Syntroleum in January 1997. From January 1994
through December 1996, he held various financial and marketing positions with
Tenneco Energy Corporation, as vice president of strategic planning, marketing
and business development. From 1983 through 1994, Mr. Thompson was employed by
Atlantic Richfield Company and held management/analyst positions. Mr. Thompson
holds a B.A. in Economics from the University of Colorado and an M.B.A. from The
Wharton School at the University of Pennsylvania.
11
Larry J Weick is Vice President of Business Development for Syntroleum.
Mr. Weick joined Syntroleum in 1996 and has served as Vice President of Business
Development since April 1997. From 1971 to 1982 he was a consultant in the
natural gas and electric utility industry. From 1982 to 1993, he held several
finance, planning and business development positions with Atlantic Richfield
Company. He holds a B.S. in Electrical Engineering from the University of
Nebraska at Lincoln and an M.S. in Engineering-Economics from Stanford
University. Mr. Weick is also a Licensed Professional Engineer in both Nebraska
and Texas.
Charles A.Bayens joined Syntroleum in July 1997 as Business Development
Manager and became Vice President of Engineering in December 1997. Prior to
joining Syntroleum, Mr. Bayens was with Shell Oil Company from 1967-97 in
various technical and business assignments. From 1991-97 he was President of
Shell Synthetic Fuels, Inc. where he managed commercialization of Shell's $500
million suite of synfuels technologies. Concurrently, from 1991-194, he was also
Manager, Technology Licensing, for Shell. Mr. Bayens holds a Ph.D. in Chemical
Engineering from Johns Hopkins University.
Alvin Albe has served as a director of Syntroleum since December 1988.
Mr. Albe is currently the managing director of Trust Company of the West("TCW"),
a capital management firm. Prior to joining TCW in 1991, Mr. Albe was President
of Oakmont Corporation, a privately held corporation which administers and
manages assets for several families and individuals. Mr. Albe was associated
with Oakmont from 1982 to 1991. Before that, he was Manager of Accounting at
McMoRan Oil and Gas Co., and a Certified Public Accountant with Arthur Andersen
& Co. in New Orleans. Mr. Albe graduated from the University of New Orleans with
a B.S. in Accounting. Mr. Able also serves as a director of TCW Americas
Development, Inc.
Frank M. Bumstead has served as a director of Syntroleum since May
1993. He has also served as the President of Flood, Bumstead, McCready &
McCarthy, Inc., a financial and business management firm. Mr. Bumstead has
served as Vice Chairman of the Board of Response Oncology, Inc., a health care
services firm, since 1986. He has served as a director of First Union National
Bank of Tennessee since 1996. He has also served as a director of American
Retirement Corp. since 1995 and of TBA Entertainment, Inc. since 1991.
P. Anthony Jacobs has served as a director of Syntroleum since November
1995. Mr. Jacobs has served as the Chairman of the Board of the Company since
December 1996. Mr. Jacobs also serves as President and Chief Executive Officer
of Lab Holdings, a company principally engaged in the laboratory testing
business, a position he has held since December 1997. From 1990 to 1993, he
served as Executive Vice President and Chief Operating Officer of Lab Holdings,
and from May 1993 to December 1997, he also served as President and Chief
Operating Officer of Lab Holdings. He also serves on the board of directors for
Lab Holdings as well as the board of directors for Trenwick Group, Inc. and
Response Oncology, Inc. Mr. Jacobs holds an M.B.A. from the University of Kansas
and also is a Chartered Financial Analyst.
Robert Rosene, Jr. has served as a director of Syntroleum since March
1985. In 1984, Mr. Rosene co-founded Boyd Rosene and Associates, Inc., a natural
gas consulting and marketing firm. From 1976 to 1984, he was employed with
Transok Pipeline Company, where he served in various positions, including
Manager of Rates and Contract Administration and Director of Gas Acquisitions.
In 1987, Mr. Rosene co-founded MBR Resources, an oil and gas production company
with operations in Arkansas, New Mexico, Oklahoma and Texas. Mr. Rosene holds a
B.A. in Accounting from Oklahoma Baptist University.
James R. Seward has served as a director of Syntroleum since November
1988. Mr. Seward has served as the President and Chief Executive Officer and a
director of the Company since its inception in December 1996. From 1990 to
September 1997, Mr. Seward served as Chief Financial Officer and a director of
Lab Holdings, and from 1990 to May 1993 also served as Senior Vice President and
from May 1993 to September 1997 served as Executive Vice President of Lab
Holdings. He also serves as a Director of Response Technologies, Inc., LabOne,
Inc. and Concorde Career Colleges. Mr. Seward holds an M.B.A. in Finance and a
M.P.A. from the University of Kansas and is also a Chartered Financial Analyst.
12
J. Edward Sheridan has served as a director of Syntroleum since
November 1995. In 1985 he founded and is President of Sheridan Management
Corporation, a company whose purpose is to provide support services to
businesses in industries deemed critical to the globalized markets of the next
century. Mr. Sheridan also holds an M.B.A. from Harvard University with an
emphasis on Finance and International Operations.
There are no family relations, of first cousin or closer, among
Syntroleum's directors or executive officers, by blood, marriage or adoption,
except that Mr. Kenneth L. Agee and Mr. Mark A. Agee are brothers.
Management and Disposition of Real Estate and Miscellaneous Assets
Real estate assets are owned and operated by Scout. Scout was initially
formed in 1990 to acquire, develop and manage improved and unimproved real
estate as a means of investing assets of Lab Holdings' insurance business, which
was then Lab Holdings' primary business. Scout has focused on the completion of
all of its development projects and the disposition of its real estate assets in
an orderly manner to maximize the value of each asset. By the end of 1997, the
bulk of the undeveloped real estate assets had been disposed of and all real
estate development activities had been concluded other than ongoing development
of the 370 acre Houston Project.
Real estate assets at December 31, 1997 primarily consist of (a) the
remaining inventory from the Quail Run condominium development located in Santa
Fe, New Mexico; (b) the seven story Reno Parking Garage in Reno, Nevada; (c) a
49.9% interest in a community shopping center in Gillette, Wyoming; and (d)
undeveloped land in the Houston Project (370 acres), the Corinth Tract (9 acres)
and the Kansas City Tracts (16 acres at the intersection of I-35 and 119th
Streets). The total real estate inventory had an aggregate carrying value at
December 31, 1997 of approximately $10.8 million. All of the real estate assets
are held for sale other than the 370 acre Houston Project.
The following table shows the carrying value of the inventory of the
Company's real estate assets as of December 31, 1997:
REAL ESTATE INVENTORY
Carrying value as of
Asset Location December 31, 1997
Quail Run Residential Condominiums Santa Fe New Mexico $ 3,177,000
The Reno Parking Garage Reno, Nevada 2,738,000
The Houston Project Houston, Texas 2,424,000
The Corinth Tract Ft Worth, Texas 33,000
The Kansas City Tracts Olathe, Kansas 2,659,000
-----------
11,031,000
The Shopping Center Interest Gillette, Wyoming (220,000)
-----------
Total $ 10,811,000
===========
The Quail Run residential condominium development consists of inventory
remaining from real estate development projects commenced by Scout. The nine
homes remaining at December 31, 1997 have been listed for sale at prices ranging
from $375,000 to $600,000 and two were subject to contracts of sale at that
date. The Company is actively involved in marketing these properties and had
reduced the inventory to seven homes by March 1, 1998, with three homes subject
to contracts of sale. The Company anticipates that the remaining inventory
should be liquidated by the end of 1998.
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 Reno Parking Garage contains a total of
144,500 square feet
13
of leasable parking space. Parking revenue totaled approximately $591,000 or
$695 per space or $4.09 per square foot in 1997. 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 1997 was $149,000 or $18.08
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 1997,
approximately $5,400 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 1997, the center was 86% occupied. Rental revenue totaled $801,000 for 1997.
The average annual gross rental per occupied square foot was $5.62. In addition
to rental revenue, tenants are responsible for their share of common area
maintenance ("CAM"). During 1997, CAM collections from tenants totaled $112,000.
The property is subject to industrial revenue refunding bonds in the amount of
$6.1 million that are secured by a bank letter of credit and guaranteed by
Scout. The letter of credit is secured by a $3.1 million Treasury Note that is
pledged by the Company to the issuer of the letter of credit.
Undeveloped land consists of an aggregate of approximately 395 acres, with
370 acres in Houston, Texas comprising the Houston Project, 16 acres near the
intersection of 119th Street and Interstate 35 in the southern portion of the
Kansas City metropolitan area comprising the Kansas City Tracts and
approximately 9 acres in Corinth, Texas, comprising the Corinth Tract. The
Company has conveyed the Houston Project to 529 Partners, in exchange for a $2.1
million note and a 75% interest in the partnership. 529 Partners intends to
develop the property for residential and light commercial purposes. Recently,
529 Partners entered into a contract to sell 17 acres of the Houston Project for
retail use for approximately $2.3 million. It is expected that the balance of
the tract will be developed by 529 Partners for residential use. The Corinth
Tract, is zoned for commercial use and is being actively marketed.
The Kansas City Tracts consist of tracts aggregating approximately 16 acres
near the intersection of Interstate Highway 35 and 119th Street in the
southwestern section of the Kansas City metro area. In January 1998,
approximately 3 acres were sold for $800,000. As of March 1, 1998, 4 acres were
under contract for sale for retail purposes for approximately $1.1 million. The
remaining 9 acres, which is also zoned for retail purposes, is being actively
marketed.
The Company believes that the real estate properties are adequately covered
by insurance with coverages for real and personal property, commercial general
liability, commercial crime, garage keepers legal liability, earthquake, flood,
windstorm and hail.
The Company also owns a convertible 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 December
31, 1997 and an investment in a privately held venture capital limited
partnership having a carrying value at December 31, 1997, of $515,000. The
Company plans to liquidate all of these investments in an orderly manner to
maximize their value to stockholders.
Miscellaneous Contingent Interests and Liabilities. The Company and Scout
are subject to certain contingent liabilities and rights which are mentioned
below, none of which the Company believes to be materially adverse, individually
or in the aggregate, with respect to its financial condition.
The Company is the holder of a judgment against Skidmore, Owings & Merrill,
et al in the approximate amount of $5.6 million, including interest. An appeal
of the judgement is expected to be heard during the 2nd quarter of 1998.
See "Legal Proceedings" under Item 3.
Under the Distribution Agreement, the Company assumed from Lab Holdings all
contingent tax liabilities, and received all of Lab Holdings' rights to refunds,
related to the 1986-1990 tax years of Lab Holdings, including any liabilities
and refunds related to any issues raised by the IRS for the years 1986-1990 and
whose resolution may extend to tax years beyond the 1990 tax year. The Company
also assumed all of Lab Holdings' potential tax liabilities arising
14
out of an audit by the state of California for the 1987-1989 taxable years.
Although the Company has settled potential liabilities to the IRS and California
for the tax years in question, the settlement will make it necessary for the
Company to file amended tax returns in certain states to reflect the results of
the settlement. The Company believes that it has established adequate accruals
for any additional liability that might arise from the filing of any amended
state returns.
The Company and Scout are subject to contingent obligations under leases
and other instruments incurred in connection with real estate activities and
other operations. The Company believes that adequate accruals have been made for
the contingent liabilities on the Company's financial statements and that none
of these are deemed to be material, individually or in the aggregate.
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 may face exposure to actual or
potential claims and lawsuits involving environmental matters with respect to
its current inventory of real estate as well as previously owned real estate.
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.
Company Employees
The Company and Scout, but not including Syntroleum, employed nine full
time and four part time individuals as of March 1, 1998, none of whom are
covered by collective bargaining agreements. All of the Company's employees,
other than three property maintenance 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.
Regulation--Potential Future Application of the Investment Company Act of 1940
Generally, and subject to certain exceptions, an issuer of securities is an
"investment company" under the Investment Company Act of 1940 (the "1940 Act")
if, among other criteria, it is engaged in or proposes to engage in the business
of investing, owning, holding or trading of securities and it owns or proposes
to acquire investment securities having a value exceeding 40% of the value of
such issuer's total assets (exclusive of government securities and cash items)
on an unconsolidated basis (the "40% Test"). "Investment securities" for
purposes of this definition, includes stock of non-majority owned companies, so
the Company's holding of Syntroleum would be part of its investment securities.
Although the value of the Company's investment securities as of December 31,
1997, appear to exceed 40% of the value of its total assets due to value
attributable to the Syntroleum common stock held by the Company, the Company
believes that it was not an investment company at that date due to the
application of Rule 3a-1 adopted under the 1940 Act by the Securities and
Exchange Commission (the "SEC").
Under Rule 3a-1, an issuer generally will not be deemed to be an investment
company under the 1940 Act if (a) no more than 45% of the value of the issuer's
total assets (exclusive of government securities and cash items) consists of,
and no more than 45% of the issuer's net income after taxes is derived from,
investment securities (for the last four fiscal quarters combined). For purposes
of this test, "investment securities" are securities other than (i) government
securities, (ii) securities issued by certain employees' securities companies,
(iii) securities issued by majority owned subsidiaries of the issuer and (iv)
securities issued by companies other than investment companies which are
controlled primarily by the issuer and through which the issuer engages in a
business other than that of investing, reinvesting, owning, holding or trading
in securities (the "45% Test"). Under the 1940 Act an issuer is presumed to be
in control
15
of another company if it holds more than 25% of the voting stock of the company.
The Company believes that Syntroleum is "primarily controlled" by the Company
based on the amount of actual control exercised by the Company over Syntroleum's
business and the amount of its ownership of voting stock in Syntroleum.
Accordingly, the Company believes that its only assets as of December 31, 1997
that are investment securities for purposes of the 45% test are its limited
partnership interests and investments in Norian and miscellaneous receivables
which had a December 31, 1997 carrying value of approximately $1.7 million, and
which the Board of Directors has valued on a "fair value" basis at approximately
$1.5 million. Based on these values, the Company's Board believes that the value
of those assets as of December 31, 1997, would be less than one percent of the
Company's total assets as of that date, exclusive of government securities and
cash items, and that the income from such assets and other investment securities
held from March 3, 1997 until December 31, 1997, was approximately 26% of the
Company's net income after taxes. Based on current estimates, the Company also
believes that it will satisfy the 45% Test through the end of 1998.
Nevertheless, if the Company's percentage ownership interest in Syntroleum
should drop below 25% or if the amount of the Company's Miscellaneous Assets and
other securities that do not fall within the exclusion should become greater
than 45% of the Company's total assets (other than government securities and
cash) or if the income derived from such securities exceeds 45% of the Company's
net income after taxes, and if the Company can not meet the 40% Test, then the
Company could become subject to regulation by the SEC under the 1940 Act, which
regulation could significantly and adversely affect the Company's activities.
Syntroleum has been considering a public or private offering of its common stock
as a means of raising capital for the construction of plants and other
developmental activities. Such an offering could dilute the Company's ownership
of Syntroleum below the 25% level. Accordingly, no assurance can be given that
it will continue to meet the 45% Test.
If the Company fails to meet the requirements of the 40% and 45% Tests, it
may nevertheless avoid regulation under the 1940 Act if it meets the
requirements of another SEC rule applicable to "transient" investment companies.
Under this rule, a company will not, for a period of one year, be deemed an
investment company, even though it fails the test under the 45% Rule, if it has
a bona fide intent to be engaged primarily, and as soon as reasonably possible
(and in any event by the end of the one-year period), in a non-investment
company business or, under an SEC statement respecting the rule, a bona fide
intent to liquidate within such period of time. The transient investment company
rule is frequently relied on by companies which have received a substantial
amount of cash through a sale of significant assets or through a securities
offering; they typically need time to expand their business or to start up or
acquire a new operating business.
Under the transient investment company rule, a company's intent to engage
primarily in a non-investment company business must be evidenced by appropriate
resolutions of its board of directors and by its business activities. Although
the Company is not currently relying on the transient investment company rule,
the Company's Board of Directors has adopted a resolution evidencing its intent
to engage primarily in a non-investment company business.
Item 2. Properties.
The Company's headquarters occupy approximately 3,400 square feet of
leased space in a building at 5000 West 95th street, Shawnee Mission, Kansas.
The term of this lease expires on April 30, 2000. Owned real estate is described
under "Management and Disposition of Real Estate Assets."
Item 3. Legal Proceedings.
Under the Distribution Agreement and Assignment Agreement, the Company has
assumed the rights and obligations of Lab Holdings with respect to the legal
matters described below.
Claim Against Skidmore, Owings & Merrill, et al. In 1986, a lawsuit was
initiated in the Circuit Court of Jackson County, Missouri by Lab Holdings'
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.
16
Because the removal and replacement costs had been incurred prior to the sale of
the insurance subsidiary, Lab Holdings negotiated with the buyer for an
assignment of the cause of action from the insurance subsidiary. Under the
Distribution Agreement, Lab Holdings has assigned to the Company all of its
rights to any recoveries and the Company has assumed all costs relating to the
prosecution of the 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.
In September 1993, the Missouri Court of Appeals reversed a $5.7 million
judgment which was granted in 1992 in favor of Lab Holdings; the Court of
Appeals and remanded the case to the trial court for a retrial limited to the
question of whether or not the applicable statute of limitations barred the
claim. The Missouri Court of Appeals 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 the Lab Holdings for
the benefit of the Company. The amount of that judgment, together with interest
is approximately $5.6 million as of December 31, 1997. In 1997, the defendants
appealed the judgment to the Missouri Court of Appeals, Kansas City Division,
and posted an appeal bond to stay collection of the judgement pending the
outcome of the appeal. The Company expects the appeal to be heard during the
second quarter of 1998, with a final decision by the end of 1998.
Internal Revenue Service Audits. Prior to the Distribution, Lab Holdings
had received notices of proposed adjustments (the "Revenue Agent's Reports")
from the Internal Revenue Service (the "IRS") with respect to its 1986- 1990
federal income taxes. These notices claimed total federal income taxes due for
the entire five year period in the approximate net amount of $13,867,000, plus
interest. However, Lab Holdings also had claims against the IRS for refunds
relating to a $27 million loss claimed for 1990 on a sale of a real estate
partnership interest which the IRS claimed had not occurred in 1990. In
connection with the Distribution, the Company assumed from Lab Holdings all its
contingent tax liabilities to the IRS and acquired all of its related rights to
refunds as well as any interest thereon related to the Lab Holdings' 1986-1990
tax years. During 1997, the Company settled all of the claims and disputes
between Lab Holdings and the IRS for the 1986-1990 years entitling the Company
to a net refund of $5.5 million. This refund, which is primarily due to the
Company's real estate operations, resulted in a $5.1 million increase in the
Company's net income for 1997.
California Tax Issues. The Company also assumed Lab Holdings' rights and
liabilities with respect to an audit being conducted by the State of California
for Lab Holdings' 1987-1989 taxable years which the Company settled in 1998.
Although the Company has settled potential liabilities to the IRS and
California for the tax years in question, the settlement will make it necessary
for the Company to file amended tax returns in certain states to reflect the
results of the settlement. The Company believes that it has established adequate
accruals for any additional liability that might arise from the filing of any
amended state returns.
Claims 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 claim was settled in 1998 with payment of the settlement being
made by the Company's insurance carrier.
Scout has pending against it warranty claims by the purchasers of a home in
Florida and the purchasers of a home in the Quail Run development in Santa Fe,
New Mexico, neither of which are deemed material to the financial condition of
the Company. During 1997, the Company entered into a global settlement of claims
by the homeowners' association of the Company's real estate development in Quail
Run. Pursuant to that settlement, the Company was released from future claims
with respect to the common elements and limited common elements of the
development.
Item 4. Submissions of Matters to a Vote of Security Holders.
No matters have been submitted to a vote of stockholders during the fourth
quarter of the fiscal year covered by this report.
17
PART II
Item 5. Market for Registrants Common Equity and Related Stockholders Matters.
The Common Stock of the Company has been traded on the National Market
System of The NASDAQ Stock Market under the symbol SLHO since July 29, 1997.
Prior to that it traded over-the-counter through the OTC Bulletin Board and NQB
Pink Sheets.
The table below reflects the high and low sales prices of the Company's
Common Stock for each quarter during the year ended December 31, 1997. Trading
in the first quarter of 1997 did not commence until February 24, 1997. Cash
dividends have not been paid since inception. The information has been adjusted
for a three-for-one stock split on July 21, 1997 and a two-for-one stock split
on February 9, 1998 (the "1997 and 1998 stock splits").
Sales Price
High Low
Year Ended December 31, 1997:
First Quarter..................... $ 5.16 2.66*
Second Quarter.................... 13.29 5.00
Third Quarter..................... 29.87 12.08
Fourth Quarter.................... 36.50 23.87
------------------
* Reflects when issued trading prior to the March 3, 1997
Distribution Date.
At March 9, 1998, there were approximately 1,582 holders of record of
the Company's Common Stock.
18
Item 6. Selected Financial Data.
The following table sets forth a summary of selected historical financial
data for the Company. The historical financial information presented reflects
periods during which the Company did not exist but rather reflects the financial
information of Lab Holdings' businesses and assets transferred to the Company on
March 3, 1997, in connection with the Distribution as well as related
liabilities assumed by the Company. The historical financial information
presented may not necessarily be indicative of the results of operations or
financial condition that would have been obtained if the Company had been a
separate, independent company during the periods shown. Neither should the
information be deemed to be indicative of the Company's future performance. The
financial information should be read in conjunction with the Financial
Statements and the notes thereto. See Item 7, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
Years ended December 31,
------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
Statement of Operations
Data
Real estate sales..... $ 16,557 15,606 10,485 10,932 16,297
Real estate rentals
and other............ 786 759 1,001 1,059 1,173
----------------------------------------------------------
Total Revenues...... $ 17,343 16,365 11,486 11,991 17,470
==========================================================
Cumulative effect of
change in accounting
principle (1)....... $ -- (1,400) -- -- --
Net earnings (loss)... 9,093 (5,598) (11,232) (6,545) 4,166)
Balance Sheet Data
Current assets........ $ 39,517 5,529 4,432 3,707 6,006
Real estate held for
sale................ 6,791 24,202 35,073 40,998 39,047
Real estate under
development......... 2,267 -- -- -- --
Investment securities. 1,530 4,718 5,136 6,161 6,624
Investment in oil and gas
partnerships and
interests........... -- 3,526 5,255 6,703 8,543
Total assets.......... 53,169 38,474 51,638 64,627 70,155
Current liabilities... 2,039 2,165 365 239 2,150
Long-term debt ....... 21 -- 1,289 2,689 1,153
Stockholders' equity . 51,051 -- -- -- --
Combined equity....... -- 35,813 49,686 61,147 66,438
(1) Adoption of statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of"
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
Introductory remarks about results of operations
On March 3, 1997, Lab Holdings distributed to its shareholders all of the
outstanding shares of common stock of the Company, on the basis of one share of
common stock of the Company for each four shares of Lab Holdings common stock
held. In connection with this distribution and pursuant to the Distribution
Agreement, Lab Holdings 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 the Company. The net
assets distributed to the Company totaled approximately $48 million.
19
This Management's Discussion and Analysis of Financial Condition and
Results of Operations covers periods when the Company's assets were owned by Lab
Holdings and operated as part of Lab Holdings. It should be read in conjunction
with Items 1 and 6 and the Notes to Consolidated Financial Statements.
Prior to October 20, 1997, Lab Holdings was named Seafield Capital
Corporation (Seafield). Seafield changed its name to Lab Holdings for better
identification with its primary asset, an 82% ownership of LabOne, Inc.
1997 Compared to 1996
Real estate revenues in 1997 were $17.3 million compared with $16.4 million
in 1996. The real estate sales revenues in 1997 include the sale of 28
residential units and lots in Florida, New Mexico and Texas totaling $13.5
million, and 752 acres of land in Texas totaling $3.1 million. In 1996, the real
estate sales revenue included the sale of 40 residential units in Florida and
New Mexico totaling $14.8 million; 20 acres of land in Oklahoma for $275,000 and
1.5 acres of land in Kansas for $580,000. Real estate rental and other revenues
increased slightly from $759,000 in 1996 to $786,000 in 1997, primarily
reflecting easements and forfeited deposits on real estate property.
At the end of 1997, real estate holdings include residential land,
undeveloped land, single-family housing, and commercial structures (all of which
are listed for sale, except the Houston Project which is being developed)
located in the following states: Kansas, Nevada, New Mexico, Texas and Wyoming.
The total acreage consisted of approximately 395 acres and approximately 40 lots
or units for sale. Real estate operations have been influenced from period to
period by several factors including seasonal sales cycles for projects in
Florida and New Mexico. The recent substantial reduction in inventory will
influence future period to period comparisons.
Cost of the real estate sales in 1997 totaled $16.6 million, compared with
a cost of approximately $15.3 million in 1996, reflecting the mix of real estate
sold during each period as discussed above in the revenue analysis. Real estate
operating expenses totaled $2.4 million in 1997, compared with $2.7 million in
1996. The decrease is attributable to a reduction in expenses associated with
the completion of the residential projects and the inventory reductions.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," was implemented effective January 1, 1996.
Adoption of SFAS No. 121 resulted in an impairment loss on real estate held for
sale of $1.4 million which is included in the accompanying statement of
operations for 1996 as the cumulative effect of a change in accounting
principle. This impairment loss resulted primarily from discounting expected
future cash flows in estimating fair values less cost to sell of certain real
estate properties.
Net impairment losses of $706,000 in 1997 and $1.1 million in 1996 were
recorded on real estate held for sale. The impairment losses resulted from
changes in estimated expected future cash flows and sales prices on certain
properties based on appraisals and other current market conditions.
General and administrative expenses totaled $1.9 million in 1997 as
compared to $1.6 million in 1996. General and administrative expenses in 1997
include an estimate of $250,000 for overhead operating costs in January and
February of 1997, expenses of an executive stock performance based bonus program
and other expenses associated with the move of the Company's office in 1997. The
1996 general and administrative expenses in the statements of operations
included a $1.5 million estimate of Lab Holdings' actual costs.
The above factors produced a loss from operations of $4.3 million in both
1997 and 1996.
Investment income totaled $6.6 million in 1997, as compared with $401,000
in 1996. Investment income for 1997 consists of the sales of Watson
Pharmaceuticals, Inc. ("Watson") common stock by Lab Holdings before the
Distribution and by the Company following the Distribution and the sale of other
marketable common stocks and interest earned on invested cash. The Watson shares
were received as a result of a venture investment in Oclassen Pharmaceuticals,
20
Inc. which was acquired by Watson. The Watson sales resulted in a gain of
approximately $4.4 million during 1997. Investment income for 1996 primarily
reflects cash received in excess of basis from two venture capital funds.
Interest expense increased to $570,000 in 1997 from $107,000 in 1996
primarily due to interest costs associated with tax issues.
Equity in affiliates' operations produced a loss of $350,000 in 1997,
compared with a loss of $1.2 million in 1996. During 1997, the oil and gas
partnership interests were sold. The Company's share of these partnerships' 1997
losses prior to the sale totaled $143,000 while the Company's share of the
partnerships' losses for 1996 were $291,000. Equity in Syntroleum's operations
resulted in a loss of $251,000 in 1997 and a loss of $811,000 in 1996. The 1997
loss was limited as the Company's investment in Syntroleum was reduced to zero.
Syntroleum is expected to incur losses until it demonstrates the commercial
viability of its proprietary technology. The real estate joint venture had
earnings of $43,000 in 1997 compared to a loss of $115,000 in 1996. See Item 1
and Notes to Consolidated Financial Statements for additional information.
Equity in earnings of venture capital investment funds totaled $207,000 in
1997 and $890,000 in 1996. These funds invested in development stage companies
which caused earnings to be subject to significant variations.
The $1.8 million gain on sale of affiliates in 1997 reflects the Company's
sale of its oil and gas partnership interests. The $632,000 of other income in
1997 consists of receipts on receivables from the formerly owned Tenenbaum &
Associates, Inc. ("Tenenbaum") net of costs associated with the Company's move
to a new location in 1997. The $159,000 of other income in 1996 consists of
receipts on Tenenbaum receivables. All future Tenenbaum receipts, if any, will
be recognized as earnings since all costs have been recovered on this asset that
has been accounted for on the cost recovery method.
Net tax benefits of $5 million were recorded in 1997 as compared with a tax
expense of $56,000 in 1996. The 1997 results reflect the resolution of certain
tax refund issues and the Company's negotiated tax settlement with the Internal
Revenue Service relating to tax years of 1986 through 1990, which refund has
been approved by Congress' Joint Committee on Taxation. The Company expects to
receive a federal refund in 1998 of approximately $5.5 million, net of interest
costs. The agreement with the IRS will require the filing of amended state
income tax returns during 1998 for the tax years 1986 through 1990. A liability
of $750,000 was established in the financial statements for state payments that
may result from the filing of the amended state returns. The federal and state
valuation allowances decreased by approximately $2.7 million during 1997 and
increased by approximately $2.6 million during 1996. See Note 8 to Consolidated
Financial Statements for additional information.
The net earnings in 1997 of $9.1 million and a net loss of $5.6 million in
1996 reflect the above results of operations.
1996 Compared to 1995
Real estate revenues in 1996 were $16.4 million compared with $11.5 million
in 1995. The real estate sales revenues in 1996 include the sale of 40
residential units in Florida and New Mexico totaling $14.8 million; 20 acres of
land in Oklahoma for $275,000 and 1.5 acres of land in Kansas for $580,000. In
1995, the real estate sales revenue included the sale of 29 residential units or
lots in Florida, Missouri, New Mexico and Texas totaling $7.9 million and 302
acres of land in Kansas and Texas totaling $2.6 million. Real estate rental and
other revenues decreased from $1 million in 1995 to $759,000 in 1996, reflecting
sales of rental property and an approximate 15% decrease in rentals at the Reno
Parking Garage.
At the end of 1996, real estate holdings include residential land,
undeveloped land, single-family housing and commercial structures (all of which
are listed for sale) located in the following states: Florida, Kansas, Nevada,
New Mexico, Texas and Wyoming. The total acreage consisted of approximately
1,160 acres and approximately 68 lots or
21
units for sale. Real estate operations are influenced from period to period by
several factors including seasonal sales cycles for projects in Florida and New
Mexico.
Cost of the real estate sales in 1996 totaled $15.3 million, compared with
a cost of approximately $10.9 million in 1995, reflecting the mix of real estate
sold during each period as discussed above in the revenue analysis. Real estate
operating expenses totaled $2.7 million in 1996, compared with $3.2 million in
1995. The decrease is attributable to a reduction in expenses associated with
the substantial completion of the residential projects and a reduction of
depreciation in 1996 as real estate available for sale is not depreciated under
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which was implemented effective January 1,
1996.
Adoption of SFAS No. 121 resulted in an impairment loss on real estate held
for sale of $1.4 million which is included in the accompanying statement of
operations for 1996 as the cumulative effect of a change in accounting
principle. This impairment loss resulted primarily from discounting expected
future cash flows in estimating fair values less costs to sell certain real
estate properties.
An additional $1.1 million net impairment loss on real estate held for sale
was recorded in 1996. This impairment loss resulted from changes in estimated
expected future cash flows based primarily on lower than expected sales prices
on certain properties based on appraisals and other current market conditions.
General and administrative expenses in the statements of operations include
a $1.5 million estimate in both 1996 and 1995 of Lab Holdings' actual costs.
Management estimated that the Company would incur approximately $1.5 million of
expenses annually when the Company operated on a stand alone basis.
The above factors produced a loss from operations of $4.3 million in 1996,
compared with $12.2 million in 1995.
Investment income in 1996 increased to $401,000 from $278,000 in 1995. The
1996 income primarily reflects cash received in excess of basis from two venture
capital funds while 1995 income consists of interest on notes receivable from
the sale of real estate.
Interest expense decreased to $107,000 in 1996 from $189,000 in 1995
reflecting retirement of a real estate note payable in 1995.
Equity in affiliates' operations produced a loss of $1.2 million in 1996,
compared with a loss of $267,000 in 1995. During 1996, the oil and gas
operations produced a loss of $291,000, as compared to a $70,000 loss in 1995,
reflecting variances in operating results. Equity in Syntroleum's operations
resulted in a loss of $811,000 in 1996 and a loss of $139,000 in 1995. A real
estate joint venture had a loss of $115,000 in 1996 compared to a loss of
$58,000 in 1995.
Equity in earnings of venture capital investment funds totaled $890,000 in
1996 while 1995 produced a loss of $249,000. These funds invested in development
stage companies which cause earnings to be subject to significant variations.
The $159,000 of other income in 1996 consists of cash received during the
fourth quarter in excess of the $800,000 of Tenenbaum assets at September 30,
1996. The 1995 gain on sale of affiliates reflects the Company's net gain of
$111,000 on the sale of a partnership interest in a commercial property in
Colorado.
Tax expense of $56,000 was recorded in 1996 compared with tax benefits of
$1.3 million in 1995. Because the Company is a party to a tax sharing agreement
with other Lab Holdings entities, some tax benefits were recorded in 1995 for
utilization of the Company's losses by Lab Holdings. Valuation allowances of
$2.6 million in 1996 and $3.7 million in 1995 were provided for the tax benefits
because utilization within the Lab Holdings group was not expected.
See Note 8 to Consolidated Financial Statements for additional information.
22
The net loss in 1996 of $5.6 million and $11.2 million in 1995 reflect the
above results of operations.
Liquidity and Capital Resources
Prior to September 30, 1996, the Company's liquidity was provided by Lab
Holdings. However, as provided in the Distribution Agreement, Lab Holdings
transferred to the Company on March 3, 1997, cash of $6.9 million and
approximately $3.1 million of short-term investments (consisting of a U.S.
Treasury Note which is pledged to a bank for a real estate letter of credit).
Additionally, cash generated from operations and the sale of the Company's
assets from October 1, 1996 to March 3, 1997 totaling $9.6 million, was
transferred to the Company as provided in the Distribution Agreement. The $3.9
million of cash and cash equivalents in the December 31, 1996 balance sheet
represents the net cash generated by the Company during the fourth quarter of
1996 and was included in the transferred cash.
At December 31, 1997, the Company had available approximately $32 million
in cash and short-term investments. The Company expects to receive a federal
income tax net refund of approximately $5.5 million in early 1998. Current
assets totaled approximately $39.5 million while current liabilities totaled $2
million. Changes in assets and liabilities on the balance sheet resulted
primarily from reductions in the real estate portfolio, sale of the oil and gas
interests, the IRS settlement agreement and the initial capitalization of the
Company during 1997.
Cash provided by operations in 1997 totaled $11 million, as compared to
$8.9 million in 1996. The increase in funds provided primarily reflects earnings
reported in 1997 of $9.1 million, a loss of $5.6 million in 1996 and changes in
tax assets resulting from the IRS settlement agreement. Cash provided by real
estate operations (sales less notes received, net of additions) was
approximately $12 million in 1997, as compared with $11.1 million in 1996.
Cash used by investing activities was $1.4 million in 1997 primarily
reflecting a $1.5 million equity investment in Syntroleum's proposed plant to be
located in Sweetwater County, Wyoming (the "Sweetwater Plant"), purchases of
investments available for sale exceeding sales of investments by $5.9 million
and $5.1 million from the sales of the oil and gas partnership interests. The
$3.4 million of cash provided by investing activities in 1996 primarily reflects
distributions from venture capital investment funds and from affiliates.
Cash provided by financing activities was $6.3 million in 1997 primarily
representing the Company's capitalization by Lab Holdings, payment of long-term
debt and the net issuance of the Company's common stock pursuant to the
Company's stock option plan. In 1996, the Company's net cash used by financing
activities of $8.4 million primarily represented the net cash transferred to Lab
Holdings from the Company's sale of real estate assets.
Debt associated with real estate totaled $21,000 at December 31, 1997, down
from $1.2 million at December 31, 1996. A $1.2 million note payable was paid off
at maturity in December 1997. The Company is obligated under recourse debt (with
an unpaid balance of $6.2 million) of an affiliate which is accounted for on the
equity method. The Company's obligation on this recourse debt is secured by a
$3.1 million U.S. Treasury Note transferred to the Company at the Distribution
Date. See Notes to Consolidated Financial Statements for additional information.
The 1997 results reflect Congress' Joint Committee on Taxation recent
approval of tax refund issues included in the Company's negotiated tax
settlement with the Internal Revenue Service relating to tax years of 1986
through 1990. The Company expects to receive a federal refund of approximately
$5.5 million net of an interest expense amount which will be finalized in early
1998. The settlement will require the filing of amended state income tax returns
during 1998 for the tax years 1986 through 1990. A liability of $750,000 is
reflected in the Company's 1997 financial statements for potential state
payments that may result from the filing of the amended state returns.
Management anticipates that future additions to property, plant and
equipment will be minimal. The Company estimates that construction and disposal
costs to complete real estate projects in development will be approximately $2
million. The Company is actively addressing Year 2000 computer concerns and will
upgrade one computer system. Management expects that the total cost for Year
2000 compliance should be approximately $15,000.
23
Subsequent Events
The Company's $1.5 million equity investment in the Sweetwater Plant
allowed for the commencement of certain engineering and permitting efforts on
the plant. In February 1998, Syntroleum announced the signing of definitive
agreements with a capital investor to fund an additional $1 million for detailed
engineering, land purchase and other development costs. Subject to certain
conditions, the capital investor committed an additional $14.5 million for a
minority ownership interest in the plant.
The Company's Board of Directors declared a two for one split of the
Company's common stock effective February 9, 1998. As a result of the split,
which was effected as a stock dividend, each stockholder of record on February
2, 1998 received one additional share of common stock for each share of common
stock held of record on that date.
On February 17, 1998, the Company announced that Syntroleum will
participate in funding Catalytica Advanced Technologies' research project to
develop an advanced process for directly converting natural gas into liquid
fuels, such as methanol and gasoline.
A contract has been signed for the sale of the commercial part of the
Houston project for approximately $2.3 million.
Recently Issued Accounting Standards
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share". The adoption of this
standard did not have any significant impact on the Company's reported earnings
per share.
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" has been implemented for the year ended
December 31, 1997. The adoption of this standard did not have any significant
impact on the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," is effective for fiscal years beginning after December
15, 1997. This standard requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," is effective for fiscal
years beginning after December 15, 1997. Retroactive application will be
required. The adoption of this standard is not expected to have any significant
impact on the Company's financial position or results of operations.
No other recently issued accounting standards presently exist which will
require adoption in future periods.
24
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Page
Report of Independent Auditors with Respect to SLH Corporation....... 26
SLH Corporation Consolidated Balance Sheets as of December 31, 1997
and 1996.......................................................... 27
SLH Corporation Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995........................... 29
SLH Corporation Statement of Consolidated Equity..................... 30
SLH Corporation Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995.......................... 31
Notes to SLH Corporation Consolidated Financial Statements........... 32
25
Independent Auditors' Report
The Board of Directors and Stockholders
SLH Corporation:
We have audited the accompanying consolidated balance sheets of SLH and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, retained earnings, and cash flows for each of the
years in the three-year period ended December 31, 1997. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management,
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SLH Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
S/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Kansas City, Missouri
February 20, 1998
26
SLH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
1997 1996
--------------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents........................ $ 20,054 3,925
Short-term investments........................... 11,992 --
Accounts and notes receivable.................... 146 33
Real estate under contract....................... 1,973 1,223
Current income taxes............................. 5,109 --
Other current assets............................. 243 348
-------------------------
Total current assets ......................... 39,517 5,529
Real estate held for sale............................. 6,791 24,202
Real estate under development......................... 2,267 --
Investment securities ................................ 1,530 4,718
Investment in affiliates:
Oil and gas partnerships......................... -- 3,526
Other ......................................... 1,280 (116)
Property, plant and equipment......................... 83 425
Notes receivable ..................................... 1,680 --
Intangible assets..................................... -- 113
Deferred income taxes................................. -- 73
Other assets.......................................... 21 4
-------------------------
Total Assets..................................... $ 53,169 38,474
=========================
27
SLH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
1997 1996
---------------------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 150 289
Interest payable ............................... 1,479 --
Notes payable .................................. -- 1,194
Other current liabilities ...................... 410 682
-------------------------
Total current liabilities.................... 2,039 2,165
Notes payable........................................ 21 --
Deferred income taxes ............................... -- 183
Other liabilities ................................... 12 313
-------------------------
Total liabilities............................... 2,072 2,661
-------------------------
Minority interests .................................. 46 --
-------------------------
Stockholders' equity:
Preferred stock of $.01 par value with $100
liquidation preference. Authorized
1,000,000 shares; none issued ............... --
Common stock of $.01 par value. Authorized
30,000,000 shares; issued 9,902,588 shares ..... 99
Paid-in capital.................................... 45,438
Net unrealized gains on marketable equity securities. 81
Retained earnings.................................... 5,433
-------------------------
Total stockholders' equity ..................... 51,051
-------------------------
Combined equity..................................... 35,813
-------------------------
Commitments and contingencies....................... -------------------------
Total Liabilities and Stockholders' Equity.......... $ 53,169 38,474
=========================
See accompanying notes to consolidated financial statements.
28
SLH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended December 31,
1997 1996 1995
--------------------------------
(in thousands)
REVENUES
Real estate sales.................... $ 16,557 15,606 10,485
Real estate rentals and other........ 786 759 1,001
----------------------------------
Total revenues.................... 17,343 16,365 11,486
COSTS AND EXPENSES
Real Estate:
Cost of sales..................... 16,566 15,250 10,984
Operating expense................. 2,428 2,733 3,217
Provision for loss on real estate.
held for sale, net.............. 706 1,069 7,901
General and administrative........ 1,937 1,581 1,564
----------------------------------
Loss from operations .................... (4,294) (4,268) (12,180)
Investment income - net.............. 6,642 401 278
Equity in net loss of affiliates..... (350) (1,217) (267)
Equity in net earnings (loss) of
venture capital investment funds... 207 890 (249)
Interest expense..................... (570) (107) (189)
Gain on sale of affiliates........... 1,795 -- 111
Other income......................... 632 159 --
----------------------------------
Earnings (loss) before income taxes...... 4,062 (4,142) (12,496)
----------------------------------
Taxes on income (benefits):
Current........................... (5,100) 11 (1,225)
Deferred.......................... 73 45 (39)
----------------------------------
Total ............................ (5,027) 56 (1,264)
----------------------------------
Earnings (loss) before minority interests. 9,089 (4,198) (11,232)
Minority interests.................... (4) -- --
----------------------------------
Earnings (loss) before cumulative effect
of change in accounting principle..... 9,093 (4,198) (11,232)
Cumulative effect of change in
accounting principle.................. -- (1,400) --
----------------------------------
NET EARNINGS (LOSS)....................... $ 9,093 (5,598) (11,232)
==================================
Earnings per share--basic................. $ .92
Earnings per share--diluted............... $ .84
See accompanying notes to consolidated financial statements.
29
SLH CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Period Ended
December 31, 1997
-----------------
(in thousands)
Common stock:
Capitalization on February 28, 1997..................... $ 16
Stock split effected in the form of a dividend.......... 82
Issuance of 84,466 shares pursuant to stock option plan. 1
--------------
Balance, end of year................................... 99
-------------
Paid-in capital:
Capitalization on February 28, 1997...................... 47,947
Exercise of stock options................................ (2,509)
-------------
Balance, end of year................................... 45,438
-------------
Net unrealized gains on marketable equity securities:
Change during the period................................. 81
-------------
Balance, end of year................................... 81
-------------
Retained earnings:
Net earnings............................................. 5,515
Stock split effected in the form of a dividend........... (82)
-------------
Balance, end of year..................................... 5,433
-------------
Stockholders' Equity........................................ $ 51,051
=============
See accompanying notes to consolidated financial statements.
30
SLH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
1997 1996 1995
--------------------------------
(in thousands)
OPERATING ACTIVITIES
Net earnings (loss)..........................$ 9,093 (5,598) (11,232)
Adjustments to reconcile net earnings
(loss) to net cash provided (used) by
operations:
Cumulative effect of change in
accounting principle.................. -- 1,400 --
Depreciation and amortization............ 106 374 582
Losses applicable to minority interests.. (4) -- --
Equity in net loss of affiliates......... 350 1,217 267
Equity in net (earnings) loss of
venture capital investment funds...... (207) (890) 249
Gain on sale of oil and gas partnerships. (1,795) -- --
Gain on sale of affiliates ............. -- -- (111)
Provision for loss on sale of real estate
held for sale ........................ 706 1,069 7,901
Sales of real estate .................... 15,042 12,773 9,890
Collections of notes receivable from
sales of real estate.................. 100 14 4,132
Increase in notes receivable from sales
of real estate........................ (1,780) -- --
Additions to real estate held for sale... (1,157) (1,726) (12,637)
Additions to real estate under
development........................... (196) -- --
Change in short-term trading portfolio,
net................................... (3,498) -- --
Change in accounts receivable............ (113) 22 352
Change in accounts payable............... (140) 174 8
Decrease (increase) in deposits.......... (225) 225 --
Income taxes and other................... (5,094) (201) 566
----------------------------------
Net cash provided (used) by operations .. 11,188 8,853 (33)
----------------------------------
INVESTING ACTIVITIES
Investments in affiliates ................... (1,500) (44) (1,000)
Distributions from affiliates ............... 36 1,383 1,447
Distributions from venture capital investment
funds .................................. 896 1,308 776
Purchase of investments available for sale..(13,650) -- --
Sale of investments available for sale ..... 7,738 -- --
Additions to property, plant and equipment,
net ..................................... (89) (27) (21)
Sale of oil and gas partnerships............. 5,142 -- --
Proceeds from sale of affiliates............. -- -- 425
Other ................................... 50 822 35
----------------------------------
Net cash provided (used) by investing
activities............................... (1,377) 3,442 1,662
----------------------------------
FINANCING ACTIVITIES
Proceeds from long-term debt ............... 41 -- --
Payments of principal on long-term debt...... (1,215) (95) (1,400)
Capitalization by Lab Holdings, Inc.......... 10,000 -- --
Net issuance of stock pursuant to stock
option plan.............................. (2,508) -- --
Net transactions with Lab Holdings, Inc. .... -- (8,275) (229)
----------------------------------
Net cash provided (used) by financing
activities............................... 6,318 (8,370) (1,629)
----------------------------------
Net change in cash and cash equivalents ..... 16,129 3,925 --
Cash and cash equivalents--beginning of year. 3,925 -- --
----------------------------------
Cash and cash equivalents--end of year ......$20,054 3,925 --
==================================
Supplemental disclosures of cash flow information: Cash paid (received)
during the year for:
Interest..............................$ 109 107 189
==================================
Income taxes, net ....................$ 769 12 (1,224)
==================================
See accompanying notes to consolidated financial statements.
31
SLH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
Pursuant to a Distribution Agreement between SLH Corporation (SLH or the
Company) and Lab Holdings, Inc. (Lab Holdings), the former parent company of
SLH, Lab Holdings transferred certain assets (the Transfer Assets) and
liabilities (the Transfer Liabilities), including two wholly-owned subsidiaries,
Scout Development Corporation (Scout) and BMA Resources, Inc. (Resources), to
SLH on February 28, 1997. The net amount transferred to SLH totaled
approximately $48 million. The Transfer Assets and Transfer Liabilities are
reflected in SLH's financial statements at Lab Holdings' historical cost. All
stock of SLH was then distributed to the shareholders of Lab Holdings (the
Distribution) on March 3, 1997. Lab Holdings was formerly known as Seafield
Capital Corporation and changed its name to Lab Holdings in October 1997.
The accompanying consolidated statement of operations and statement of cash
flows for the twelve month period ending December 31, 1997 includes the results
of operations and cash flows for January and February 1997 when the Transfer
Assets and Transfer Liabilities were owned and operated by Lab Holdings.
The accompanying combined balance sheet as of December 31, 1996 and the
combined statements of operations and combined statements of cash flows for the
twelve month periods ended December 31, 1996 and 1995 present the financial
position, results of operations and cash flows of the business, assets and
liabilities comprising the Transfer Assets and Transfer Liabilities which relate
directly to the businesses transferred.
The accompanying consolidated financial statements include the accounts of
SLH and all majority-owned subsidiaries and joint ventures. Investments in
affiliated companies of 20% to 50% in which SLH does not have a controlling
interest are accounted for by the equity method. All significant intercompany
transactions have been eliminated in consolidation. Certain 1996 and 1995
amounts have been reclassified for comparative purposes with no effect on net
earnings.
The Company is primarily engaged in promoting the development of Syntroleum
Corporation, an Oklahoma corporation (Syntroleum) that is 31% owned by the
Company. Syntroleum is the developer and owner of a proprietary process (the
Syntroleum(R) Process) designed for use in the conversion of natural gas into
synthetic liquid hydrocarbons (gas to liquids or GTL). The Company is also in
the business of managing, developing and disposing of Real Estate and certain
miscellaneous assets which, together with the stock of Syntroleum, were acquired
from Lab Holdings.
The financial information included herein may not necessarily be indicative
of the financial position and results of operations of the Company in the future
or reflect what these amounts would have been if it had been a separate,
stand-alone entity during the periods presented.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant assumptions include estimates of fair value less cost to sell
assets to be disposed of, principally real estate properties. Management
utilizes a variety of sources in estimating fair values including recent sales
of comparable assets, internal appraisals based on current market conditions,
discounted cash flows, and, to a lesser extent,
32
independent appraisals. Significant assumptions used in discounting cash flows
include the amount and timing of expected cash flows and the discount rate.
Management estimates the amount and timing of cash flows as described above.
Discount rates estimated to be commensurate with the risk involved for
individual properties are selected based on current economic conditions and
industry practices. The amounts the Company will ultimately realize could
materially differ from the carrying amounts in the accompanying balance sheets.
General and administrative expenses have been included in the 1996 and 1995
statements of operations based on management's estimate of what expenses would
have been incurred had the Company operated on a stand alone basis. Estimated
general and administrative expenses included in the statements of operations
were approximately $250,000 for January and February 1997 and $1.5 million for
each of the years ended December 31, 1996 and 1995.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or
less when purchased are considered to be cash equivalents.
Real Estate and Other Long-lived Assets
Real estate sales are recognized when consummated. Profit is recognized
using the full accrual method when the down payment, continuing investment, and
transfer of risk criteria have been satisfied. Payments received from buyers
prior to recording of a sale are recorded as deposits. Real estate rentals and
other revenues are accrued in the period when earned.
Prior to January 1, 1996, real estate held for sale was valued at the lower
of cost, including development costs less allowances for depreciation, or
market. Development costs which are incurred during the period of development or
construction are capitalized. Capitalized costs are charged to operations as
properties or units are sold or, in the case of income producing properties, are
amortized as part of the depreciation charges.
During 1995, the Company made a provision for loss on real estate held for
sale of $7.9 million. The provisions resulted from changes in net realizable
value based upon management's analysis of recent sales transactions and other
current market conditions.
With the adoption of SFAS 121, long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less costs to sell. Any
impairment loss is recognized as the amount by which the carrying amount of the
asset exceeds the fair value of the asset less cost to sell. The best evidence
of fair value is quoted market prices. When quoted market prices are not
available, the estimate of fair value is based on the best information available
including prices for similar assets or discounted cash flows of estimated
expected future cash flows. Assets to be held and used in operations are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. If the sum of the
expected future cash flows (undiscounted and without interest charges) of the
asset is less than the carrying amount of the asset, an impairment would be
recognized as the difference between the carrying amount and estimated fair
value.
Adoption of SFAS 121 on January 1, 1996 resulted in an impairment loss on
real estate held for sale of $1.4 million which is included in the accompanying
1996 statement of operations as the cumulative effect of a change in accounting
principle. This impairment loss resulted primarily from discounting expected
future cash flows in estimating fair values less cost to sell of certain real
estate properties.
Additional net impairment losses on real estate held for sale of $706,000
and $1.1 million were recorded in 1997 and 1996, respectively. These impairment
losses resulted from changes in estimated expected future cash flows based
primarily on lower expected sales prices on certain properties based on
appraisals and other current market conditions.
33
Short-Term Investments
Short-term investments consist of US Treasury securities, debt obligations
of US Government Agencies and equity securities. The classification of debt and
equity securities as trading, available for sale or held to maturity is made at
the time of purchase. Trading securities are stated at fair value and unrealized
holding gains and losses are included in income. Marketable equity securities
and all debt securities which are classified as available for sale are stated at
market value, with unrealized gains and losses, if any, excluded from earnings
and reported in a separate component of stockholders' equity. Securities which
the Company has the intent and ability to hold to maturity are stated at
amortized cost.
Investment Securities
Investment securities consisting of stock investments of two privately-held
corporations (representing 2% ownership in 1997 and 1996 and 5% ownership in
1996) are accounted for at cost. Investment in limited partnership interests in
privately-held venture capital funds (representing 4%, 9% and 8% ownership) are
accounted for using the equity method. Fair values are not readily determinable;
however, management believes the estimated fair value of each investment exceeds
its carrying value. See Note 10 for additional information about fair values of
financial instruments.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost with depreciation
provided over the useful lives. Upon sale or retirement, the costs and related
accumulated depreciation are eliminated from the accounts. Any resulting gains
or losses are included in the results of operations.
Oil and Gas Investments
Prior to 1997, investments in oil and gas partnerships were accounted for
using the equity method as they were less than 50% owned and the Company was a
noncontrolling investor. The Company used the full cost method of accounting for
oil and gas properties. Under this method, all costs incurred in acquisition and
development were capitalized. Depletion was computed on the units of production
method based on all proven reserves. All general operating costs were expensed
as incurred. During 1997, the Company sold its interests in these oil and gas
partnerships.
Intangible Assets
Goodwill is recorded at acquisition as the excess of cost over fair value
of net assets acquired and is being amortized on a straight-line basis over
periods up to twenty years. Goodwill is presented net of accumulated
amortization of $286,000, $277,000 and $195,000 at December 31, 1997, 1996 and
1995, respectively. On a periodic basis, the Company estimates the fair value of
the business to which goodwill relates in order to ensure that the carrying
value of goodwill has not been impaired. During 1997, the goodwill was fully
amortized.
Income Taxes
Income taxes are accounted for as if the Company filed separate tax returns
pursuant to tax sharing agreements among its subsidiaries. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
34
Earnings per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share". The adoption of this
standard did not have any significant impact on the Company's reported earnings
per share.
Basic earnings per share is computed using the weighted average number of
common shares and diluted earnings per shares is computed using the weighted
average number of common shares and dilutive stock options. All share and per
share amounts presented in the financial statements reflect the two for one
common stock split that was effective on February 9, 1998.
Recently issued Accounting Standards
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" has been implemented for the year ended
December 31, 1997. The adoption of this standard did not have any significant
impact on the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," is effective for fiscal years beginning after December
15, 1997. This standard requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," is effective for fiscal
years beginning after December 15, 1997. Retroactive application will be
required. The adoption of this standard is not expected to have any significant
impact on the Company's financial position or results of operations.
No other recently issued accounting standards presently exist which will
require adoption in future periods.
NOTE 2 - REAL ESTATE HELD FOR SALE AND REAL ESTATE UNDER DEVELOPMENT
A summary of real estate held for sale follows:
December 31,
1997 1996
---------------------
(In thousands)
Land investments/developments.......................... $ 3,480 26,658
-----------------------
Commercial building
Gross amount...................................... 5,296 5,296
Less accumulated depreciation ................. 1,293 1,293
-----------------------
4,003 4,003
-----------------------
Residential developments
Gross amount: Land ........................ 204 1,940
Buildings/improvements .......... 12,780 24,259
-----------------------
12,984 26,199
-----------------------
20,467 56,860
Less valuation allowance for write-downs............... 10,543 28,966
Less valuation allowance for impairments............... 1,160 2,469
-----------------------
8,764 25,425
Less real estate under contract .......... 1,973 1,223
-----------------------
Net real estate.......................... $ 6,791 24,202
=======================
35
Real estate under development consists of land being developed with a joint
venture partner.
A summary of real estate revenues follows (dollars in thousands):
Year Ended December 31
-----------------------------------------
1997 1996 1995
-----------------------------------------
Units/ Units/ Units/
Amounts Acres Amounts Acres Amounts Acres
---------------------------------------------------
Real estate sales:
Condominiums and homes.$ 13,487 28 14,751 40 7,348 24
Improved lots.......... -- -- -- -- 546 5
Undeveloped land....... 3,070 752 855 21.5 2,591 302
------ ------ ------
Total real estate sales. 16,557 15,606 10,485
------ ------ ------
Real estate rentals and other:
Lease revenue.......... 149 134 134
Commercial parking
operations.......... 591 595 744
Other.................. 46 30 123
-- -- ---
Total real estate rentals
and other........... 786 759 1,001
Total real estate ------- ------- -------
revenues.......... $17,343 $16,365 $11,486
======= ======= =======
NOTE 3 - INVESTMENT IN OIL AND GAS PARTNERSHIPS AND INTERESTS
The Company's interests in four oil and gas general
partnerships were sold during 1997 for $5.1 million. The oil and gas
partnerships represented 36% and 40% interests in general partnerships. These
partnerships were accounted for on the equity method as they were less than 50%
owned and the Company was a noncontrolling investor. Prior to 1996, the Company
also had investments in oil and gas working interests.
Equity in operations of oil and gas partnerships were
generally recorded based on periods ended within one month of the Company's
accounting period. Shown below is unaudited financial information for the oil
and gas investments:
5 Months Ended Year Ended December 31
May 31, 1997 1996 1995
-----------------------------------------------
Results of Operations (in thousands)
- ---------------------
Oil and gas revenue $ 2,038 7,731 6,344
Net loss (202) (797) (647)
The Company's equity in net loss (143) (291) (70)
Cash distributions received from the partnerships were $36,000,
$1,382,000 and $1,348,000 in 1997, 1996 and 1995, respectively.
36
NOTE 4 - INVESTMENT IN OTHER AFFILIATES
The Company's 31% investment in Syntroleum Corporation (Syntroleum) is
accounted for on the equity method. During 1997, the Company's investment in
Syntroleum was reduced to zero as the result of Syntroleum's cumulative losses.
Syntroleum is the developer and owner of a patented process and several
related proprietary technologies (Syntroleum 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. Sale of the Company's
common shares of Syntroleum is subject to certain restrictions pursuant to
shareholder agreements which require that a selling shareholder first offer the
shares to be sold to Syntroleum and if Syntroleum does not accept the offer,
then to the other Syntroleum shareholders.
Summarized financial information derived from Syntroleum audited financial
statements is shown below.
Year Ended December 31,
1997 1996 1995
------------------------------
(in thousands)
Results of Operations
Revenue............................ $ 2,007 616 45
Net loss........................... (9,612) (1,937) (1,146)
The Company's equity in net loss... (251) (811) (139)
December 31,
1997 1996
----------------------
(in thousands)
Financial Position
Current assets 10,622 $888
Other assets 1,469 664
-----------------------
Total assets 12,091 1,552
-----------------------
Current liabilities 776 287
Deferred revenue 11,000 --
Other liabilities 60 --
Long-term borrowing -- 1,000
-----------------------
Total liabilities 11,836 1,287
-----------------------
Minority interest 1,497 --
-----------------------
The Company's investment in Syntroleum -- 147
Total investment in Syntroleum is presented on the balance sheets as follows:
December 31,
1997 1996
-----------------------
(in thousands)
Investment in affiliate $ -- 147
Intangible asset - goodwill, net -- 113
-----------------------
Total $ -- 260
=======================
The Company has a $1.5 million equity investment in Syntroleum-Sweetwater
LLC, a subsidiary of Syntroleum. The Company acquired an initial 6% interest in
the Sweetwater subsidiary which will be diluted to approximately 1% after
financing by additional equity investors. The Sweetwater subsidiary plans to
commence construction of a commercial
37
plant during 1998. The Company's investment in Sweetwater allowed for the
commencement of certain engineering and permitting efforts for the plant.
The Company is a 49.9% partner in a general partnership which owns a shopping
center. Prior to September 1995, the Company was also a 49.9% partner in a
general partnership which owned a commercial building. These partnerships are
accounted for on the equity method. Summarized unaudited financial information
for these partnerships is shown below.
Year Ended
December 31,
1997 1996 1995
--------------------------
(in thousands)
Results of Operations
Revenue $ 913 816 764
Net earnings (loss) 86 (207) (160)
The Company's equity in
net earnings (loss) of affiliates 44 (115) (58)
December 31,
1997 1996
---------------------
(in thousands)
Financial Position
Current assets $ 726 367
Real estate 4,909 5,190
Other assets 191 205
---------------------
Total assets 5,826 5,762
Short-term borrowings 165 --
Other current liabilities 98 121
Long-term borrowings 6,005 6,170
---------------------
Total liabilities 6,268 6,291
---------------------
The Company's investment in
real estate affiliates (220) (263)
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT AND ACCOUNTS AND NOTES RECEIVABLE
A summary of property, plant and equipment follows:
Rate of December 31,
Depreciation 1997 1996
-----------------------------------
(in thousands)
Property, plant and equipment 20%-33% $ 320 2,580
Less accumulated depreciation 237 2,155
-------------------
$ 83 425
===================
38
A summary of accounts and notes receivable follows:
December 31,
1997 1996
-------------------
(in thousands)
Accounts receivable $ 146 33
Notes receivable:
16% note receivable, secured
by real estate, final maturity
in January 2000 1,425 --
12% note receivable, secured
by real estate, final
maturity in June 2000 255 --
--------------------
1,826 33
Less current portion 146 33
--------------------
$1,680 --
====================
The 16% note receivable was issued in conjunction with the sale of land
in 1997 (see Note 6). The note requires quarterly payments of interest only and
a lump sum payment of any outstanding principal on January 15, 2000. In
addition, certain prepayment charges may be assessed if principal payments are
made prior to the maturity date.
The 12% note receivable was issued upon the sale of land in 1997. The
note requires quarterly payments of interest only, and all outstanding principal
is due June 20, 2000. The note may be prepaid without penalty.
NOTE 6 - NOTES PAYABLE
Notes payable are as follows:
December 31,
1997 1996
---------------------
(in thousands)
16% unsecured note,
final maturity in January 2000 $ 21 --
8.625% loan, secured by real estate,
final maturity in December 1997 -- 1,194
------------------------
$ 21 1,194
========================
The 16% note represents a portion of the real estate commission due a
broker arising from a land sale. Principal and interest is payable only when
like payments of principal and interest are received under a note receivable
(See Note 5) issued in conjunction with the 1997 sale of land.
The 8.625% loan required semiannual payments of interest only and a lump
sum payment of any outstanding principal on December 31, 1997. The loan was paid
off at maturity.
The Company is obligated under recourse debt (with an unpaid balance of
$6,170,000 at December 31, 1997) of an affiliate accounted for on the equity
method (see Note 4). The Company's obligation on this recourse debt is secured
by a $3.1 million U.S. Treasury note transferred to the Company as part of the
Distribution and is included in Short- Term Investments in the accompanying
balance sheet at December 31, 1997.
39
NOTE 7 - OTHER ASSETS AND LIABILITIES
The components of other current assets, other current liabilities and other
liabilities follow:
December 31
1997 1996
----------------------
(in thousands)
Other Current Assets
Prepaid expenses $ 132 238
Restricted cash 111 110
----------------------
Total $ 243 348
======================
Other Current Liabilities
Accrued property tax $ 124 150
Deposits 10 235
Accrued rent expense 250 250
Other 26 47
----------------------
Total $ 410 682
======================
Other Liabilities
Deferred income $ -- 59
Accrued rent expense 12 250
Other -- 4
----------------------
Total $ 12 313
======================
40
NOTE 8 - INCOME TAXES
The real estate assets, energy assets, and other miscellaneous assets of the
Company were acquired from Lab Holdings, and were included in Lab Holdings'
consolidated U.S. federal income tax returns through the distribution date. For
the pre-distribution periods, the income tax provisions and tax liabilities have
been calculated as if the Company had filed separate returns, utilizing a tax
sharing agreement with Lab Holdings. The Company files a consolidated federal
income tax return for taxable years beginning after the Distribution Date.
During 1997, the Company generated approximately $5.7 million in current capital
losses that exceeded capital gains and generated a net operating loss of
approximately $11.4 million. These losses are carried forward through the year
2002 and the year 2012, respectively. Future realization of these tax assets or
any existing deductible temporary differences or carry- forwards ultimately
depend on sufficient taxable income of the appropriate character occurring
within the carryover period. When it becomes more likely than not that a
deferred tax asset will not be realized, a valuation allowance is accrued
against that deferred tax asset.
The components of the provision (benefit) for income taxes on income from the
Company are as follows:
Year ended December 31,
1997 1996 1995
----------------------------
(in thousands)
Current:
Federal $ (5,850) -- (1,234)
State 750 11 9
----------------------------
(5,100) 11 (1,225)
----------------------------
Deferred:
Federal -- -- --
State 73 45 (39)
-----------------------------
73 45 (39)
-----------------------------
$ (5,027) 56 (1,264)
=============================
The reconciliation of income tax computed at federal statutory tax rates to
income tax expense is as follows:
Year ended December 31,
1997 1996 1995
---------------------------
(in thousands)
Computed expected tax expense (benefit) $ 1,381 (1,408) (4,249)
State income taxes, net of federal benefit
and changes in state valuation allowances 543 37 (20)
Goodwill amortization 3 28 20
Tax benefits not available for subsidiary losses 85 276 47
Increase in federal taxes due to
valuation allowances -- 1,333 2,845
Other, net 29 (210) 93
Pretax income not included in SLH tax return (1,218) -- --
Resolution of IRS dispute (5,850) -- --
------------------------------
Actual income tax expense (benefit) $(5,027) 56 (1,264)
==============================
Effective tax rates (124%) (1%) 10%
41
The significant components of deferred income tax assets and liabilities are as
follows:
Year ended
December 31,
1997 1996
-------------------
(in thousands)
Current deferred income tax assets(liabilities):
Excess book expense accruals $ 347 782
State income tax deficiency and interest -- 661
IRS interest accrual 145 19
Other, net (53) --
---------------------
Gross current deferred income tax assets 439 1,462
Current valuation allowance (439) (1,462)
---------------------
Net current deferred income tax assets -- --
Non-current deferred income tax assets (liabilities):
Excess book expense accruals -- 176
Excess book partnership expenses 268 273
Excess book oil and gas expenses -- 519
Real estate valuation allowances and other basis
differences 2,436 7,618
Excess book depreciation and amortization (19) 82
Other, net (34) 92
Capital loss carryforwards, federal and state 2,842 337
Federal net operating loss carryforwards 3,881 1,100
Federal audit adjustment carryback -- 535
State net operating loss carryforwards 2,702 2,954
---------------------
Gross non-current deferred income tax assets 12,076 13,686
Valuation allowance for non-current deferred
income tax assets (12,076) (13,796)
---------------------
Net non-current deferred income tax assets
(liabilities) -- (110)
---------------------
Net deferred income tax assets (liabilities) $ -- (110)
=====================
Presented on the balance sheet as:
Deferred income tax asset $ -- 73
Deferred income tax liability -- (183)
---------------------
$ -- (110)
=====================
Included in SLH, on a historical basis, are deferred income tax liabilities
that had been accrued for potential Internal Revenue Service (IRS) audit
adjustments to Lab Holdings' 1986-1990 federal income tax years. During early
1998, the tentative settlement reached during 1997 was ratified by the Joint
Committee on Taxation. The result of this agreement will be a refund of federal
income tax of approximately $5.8 million before interest of $350,000 which is
included in Interest Payable on the December 31, 1997 balance sheet.
The accruals for the IRS audit adjustment were as follows for the year
ended December 31, 1996 (in thousands).
Deferred income tax liability for IRS adjustments $(7,782)
Deferred income tax asset for 1990 loss carryback 7,599
---------
Net deferred tax liability for IRS adjustments $ (183)
=========
The federal and state valuation allowances decreased during 1997 by
approximately $2,743,000 and increased during 1996 by approximately $2,643,000.
The federal and state valuation allowances as of January 1, 1996 were
$12,615,000.
42
NOTE 9 - LEASE COMMITMENTS
Office space, equipment, land and buildings are leased under various,
noncancelable leases that expire over the next several years. Rental expense,
including an allocation of Lab Holdings' lease expense, was $500,000, $371,000
and $372,000 for 1997, 1996 and 1995, respectively.
Total future minimum lease payments under these agreements as of December
31, 1997 are as follows:
Year Amount
---- ------
(in thousands)
1998 $ 406
1999 379
2000 321
2001 294
2002 294
Thereafter 5,924
Included above is annual rent for the ground lease on a parking garage in
Reno, Nevada of $294,000. The lease agreement provides for increases every five
years based on the Consumer Price Index and expires in 2023.
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are
summarized as follows:
December 31, 1997 December 31, 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------------
(in thousands)
Cash equivalents $ 20,054 20,054 3,925 3,925
Short-term investments 11,992 11,992 -- --
Accounts receivable 146 146 33 33
Investment securities-not
practical to estimate
fair value 1,530 -- 4,718 --
Notes receivable 1,680 1,680 -- --
Notes payable 21 21 1,194 1,012
The fair value of the short-term investments and accounts receivable
approximates cost because of the short-term maturity of these financial
instruments. The estimated fair value of the notes receivable and notes payable
were calculated by discounting scheduled cash flows using estimated market
discount rates.
At December 31, 1997, the Company owned an equity investment in a privately
held venture capital limited partnership having a carrying value of
approximately $515,000; and a preferred stock interest in Norian Corporation, a
privately owned developer of proprietary bone substitute technology, which had a
carrying value of approximately $1 million. At December 31, 1996 the Company
owned (a) three equity investments in privately held venture capital limited
partnerships having an aggregate carrying value of $1.2 million, (b) a common
stock interest in Oclassen Pharmaceuticals, Inc., a privately owned
pharmaceutical manufacturer, which had a carrying value of $2.5 million and (c)
a preferred stock interest in Norian Corporation with a carrying value of
approximately $1 million. Investment in these closely-held enterprises was made
on a principal-to-principal basis at negotiated values. Therefore, it is not
practical to estimate fair value for these investments at December 31, 1997 and
1996.
On February 27, 1997, Watson Pharmaceuticals, Inc., a publicly traded
company, merged with Oclassen Pharmaceuticals which converted the Company's
Oclassen stock into 184,878 shares of Watson. During 1997, the Company sold its
investment in Watson for proceeds of $6.9 million and a gain of approximately
$4.4 million.
43
NOTE 11 - EARNINGS PER SHARE
There were no adjustments to the income available to common stockholders used in
the computation of diluted earnings per share. The following table reconciles
the weighted average common shares used in the basic earnings per share
calculation and the weighted average common shares and common share equivalents
used in the diluted earnings per share calculation.
1997
---------
Weighted average common shares 9,790,864
Employee stock options 1,190,890
---------
Weighted average common shares and
common share equivalents 10,981,754
==========
All share and per share amounts in the accompanying financial statements
reflect the two for one common stock split that was effective on February 9,
1998. Earnings per share are not presented for 1996 and 1995 because the Company
did not become public until March 3, 1997.
NOTE 12 - INVESTMENT SECURITIES
A summary of investment securities information relating to quoted market
values and holding gains and losses at December 31, 1997 is in the following
table.
Amount at
Which
Amortized Market Shown in Unrealized Unrealized
Cost Value Balance Holding Holding
Sheet Gains Losses
--------------------------------------------------
(In thousands)
Available for Sale
US Treasury Securities $ 5,273 5,354 5,354 81 --
===================================================
Held to Maturity
US Treasury Note $ 3,140 3,140 3,140 -- --
===================================================
The US Treasury Note will mature in 1998.
Information about proceeds from sales of available for sale securities and
the gross realized gains and losses on those sales for the year ended December
31, 1997 is summarized in the following table. Cost is determined by specific
identification for computing realized gains and losses.
(In thousands)
Proceeds $ 7,738
=========
Gross realized gains $ 4,396
=========
Gross realized losses $ --
=========
Trading securities consist of United States government agency securities and
totaled approximately $3.5 million at December 31, 1997. The change in net
unrealized holding gains and losses on trading securities that has been included
in operations is a gain $6,000 for the year ended December 31, 1997.
44
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company has entered into an agreement with Lab Holdings whereby the
Company will provide accounting and administrative services and record storage
space for Lab Holdings. Under this agreement, Lab Holdings pays $75,000 annually
for these services and storage space.
During the year, the Company sold certain common stock holdings in its
trading portfolio for total proceeds of approximately $1.2 million. At the same
time, Lab Holdings purchased an identical number of shares of these securities.
These sales were accomplished through stock brokers at market rates.
NOTE 14 - STOCK OPTIONS
The Company has a Stock Option Plan which provides for the granting of
non-qualified stock options for not more than 1,560,000 shares of the Company's
common stock. The Company granted these stock options at their fair market value
on the March 3, 1997 Distribution Date. All options have ten year terms and
become exercisable in equal installments as follows: one fourth on March 3,
1997, and one-fourth on each of the first, second and third anniversary dates of
the grant.
The Company accounts for stock options in accordance with the
provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees," and related interpretations (APB 25). As such,
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. The Company has
adopted Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation," (FAS 123) which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternately, FAS 123 allows entities to continue to apply the
provisions of APB 25 and provide pro forma net earnings and pro forma earnings
per share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS 123 had been applied. The Company has
elected to continue to apply the provisions of APB 25 and provide the pro forma
disclosure provisions of FAS 123.
A summary of the status of the Company's stock option plan as of
December 31, 1997 and changes during the year then ended is presented below:
Weighted Options
Number of Average Exercisable
Shares Exercise Price at Year-end
- --------------------------------------------------------------------------------
Granted 1,560,000 3.1917
Exercised (292,798) 3.1917
---------
Outstanding December 31, 1997 1,267,202 3.1917 97,202
=========
The following table summarizes information about stock options at December 31,
1997.
Options outstanding Options Exercisable
- -------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (yrs) Price Exercisable Price
- -------------------------------------------- ------------------------------
$3.1917 1,267,202 9.17 $3.1917 97,202 $3.1917
The weighted average per share fair value of stock options granted during 1997
was $.64 on the date of the grant using the Black Scholes option-pricing model
with the following weighted average assumptions: expected dividend yield of 0%
(SLH is prohibited from paying dividends for at least two years in accordance
with the Distribution Agreement), risk-free interest rate of 5.5%, expected
volatility factor of 25.4% and an expected life of 2.3 years.
45
Since the Company applies APB 25 in accounting for its plans, no compensation
cost has been recognized for its stock options in the financial statements. Had
the Company recorded compensation cost based on the fair value at the grant date
for its stock options under SFAS 123, the Company's 1997 net earnings would have
been reduced by approximately $530,000. Basic and diluted earnings per share
would each have been reduced by $.05.
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized 1997 quarterly financial data is as follows:
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
Quarter Ended 1997 1997 1997 1997
- --------------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues $ 4,214 7,186 4,654 1,289
==========================================
Net earnings $ 2,176 926 1,018 4,973
==========================================
Earnings Per share:
Basic $ .22 .10 .10 .50
Diluted $ .21 .09 .09 .45
Stock prices:
High $ 5.165 13.295 29.875 36.500
Low $ 2.660* 5.000 12.080 23.875
*Reflects when issued trading prior to the March 3, 1997 Distribution Date.
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
Quarter Ended 1996 1996 1996 1996
- --------------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues $ 4,969 3,615 4,793 2,988
Net loss $ (1,940) (1,427) (1,536) ( 695)
1997 quarterly earnings per share and stock prices have been adjusted to reflect
the two for one common stock split effective on February 9, 1998. Quarterly
earnings per share amounts may not add to the annual earnings per share amounts
due to the effect of common stock equivalents.
The first quarter 1997 and all 1996 revenues and earnings include amounts when
the Transfer Assets and Transfer Liabilities were owned and operated by Lab
Holdings.
Earnings per share and stock prices are not presented for 1996 because the
Company did not become public until March 3, 1997.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
46
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Officers
The directors and executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
James R. Seward, CFA 45 President, Chief Executive Officer and Class A
Director
P. Anthony Jacobs, CFA 56 Chairman of the Board and Class A Director.
Steven K. Fitzwater 51 Vice President, Chief Accounting and Financial
Officer, Treasurer and Secretary and Class
C Director
Lan C. Bentsen 50 Class C Director
W. D. Grant 81 Class B Director
W.T. Grant II 47 Class B Director
Michael E. Herman 56 Class A Director
David W. Kemper 47 Class B Director
Mr. Seward has been the President, Chief Executive Officer and director of
the Company since its inception in December 1996. Previously he was the
Executive Vice President, Chief Financial Officer and a director of Lab Holdings
from 1993 until September 1997 and Senior Vice President, Chief Financial
Officer and director of Lab Holdings from 1990 to 1993. Mr. Seward also is a
director of Syntroleum, Response Oncology, Inc., a public company that manages
oncology practices and clinics and that was a former subsidiary of Lab Holdings
("Response"), LabOne, Inc, a publicly traded subsidiary of Lab Holdings
("LabOne") and Concorde Career Colleges, Inc.
Mr. Jacobs has been the Chairman of the Board and a director since
inception. He has been the President, Chief Executive Officer and a director of
Lab Holdings since September 1997, and previously was the President, Chief
Operating Officer and a director of Lab Holdings from May 1993 to September
1997, and Chief Operating Officer and a director of Lab Holdings from May 1990
to May 1993. He is also a director of Response, Syntroleum, and Trenwick Group,
Inc.
Mr. Fitzwater has been the Vice President, Chief Accounting and Financial
Officer, Treasurer and Secretary and a director of the Company since inception.
Mr. Fitzwater has also been the Vice President, Chief Accounting and Financial
Officer, Secretary and director of Lab Holdings since September 1997. Previously
he was the Vice President, Chief Accounting Officer and Secretary of Lab
Holdings from 1990 to September 1997.
Mr. Bentsen has been a director of the Company since inception. Mr. Bentsen
has been the Executive Vice President of Frontera Resources since 1996 (oil and
gas). He has been Managing Partner of Remington Partners (investments) since
1995. Prior to its sale in 1994, Mr. Bentsen was Chairman and Chief Executive
Officer of Sovereign National Management, Inc.(property management). Mr. Bentsen
is also a director of Lab Holdings.
Mr. W. D. Grant has been a director of the Company since inception. He was
a consultant to Lab Holdings from August 1990 to December 1997 and Chairman of
the Board of Lab Holdings until May 1993. Mr. W. D. Grant also is a director of
LabOne and NationsBank, N.A.
Mr. W. T. Grant II has been a director of the Company since inception. He
has been Chairman, President and Chief Executive Officer of LabOne since
September 1997. Previously he was the Chairman and Chief Executive Officer of
Lab Holdings from May 1993 to September 1997, and President of Lab Holdings
prior to May 1993. Mr. W.T. Grant also is a director of AMC Entertainment, Inc.,
Commerce Bancshares, Inc., Kansas City Power & Light Company, LabOne and
Response.
Michael E. Herman has been a director of th e Company since inception. He
has been engaged in private
47
investments since 1990 (partner Herman Family Trading Company), President of
Kansas City Royals Baseball Team (major league baseball) since 1993 and Chairman
of the Finance Committee of Ewing Marion Kauffman Foundation since 1990. Mr.
Herman also is a director of NationsBank, N.A., Cerner Corporation, Janus
Capital Corporation and Agouron Pharmaceuticals, Inc.
Mr. Kemper has been a director of the Company since inception. He has been
Chairman of the Board, President and Chief Executive Officer of Commerce
Bancshares, Inc. (bank holding company) and Chairman and Chief Executive Officer
and a director of Commerce Bank, N.A. (St. Louis) for more than the past five
years. Mr. Kemper also is a director of Ralcorp Holdings, Inc., Wave
Technologies International, Inc. and Tower Properties Company.
The Articles of Incorporation and Bylaws provide that the Company Board
will be divided into three classes of directors, with the classes to be as
nearly equal in number as possible. The Bylaws further provide that of the
initial directors of the Company as identified above, the Class A directors will
continue to serve until the 2000 Annual Meeting of Stockholders, the Class B
Directors will continue to serve until the 1998 Annual Meeting of Stockholders
and the Class C Directors will continue to serve until the 1999 Annual Meeting
of Stockholders. Starting with the 1997 Annual Meeting of Stockholders, which
was held in January 1997, one class of directors is elected each year for a
three-year term. The Bylaws provide that beginning in 1998, annual meetings of
stockholders shall be held on the second Wednesday in May or such other date as
may be fixed by resolution of the Company Board. Due to the proposed Merger, the
Board intends to fix the date of the annual meeting for 1998 to coincide with
the date fixed for the proposed vote on the Merger. It is expected that date
will be a date in June 1998.
Certain Board Committees
The Company Board has established an Executive Committee consisting of
Messrs Seward, Jacobs, Fitzwater and Grant II, an Audit Committee consisting of
Messrs. Kemper, Bentsen and W.D. Grant, and a Nominating and Compensation
Committee (the "Compensation Committee") consisting of Messrs. Bentsen, Kemper
and Herman.
During the year ended December 31, 1997, the Board met 5 times, the
Nominating and Compensation Committee met twice and the Executive Committee met
once. The attendance at Committee and Board meetings by all Directors in the
aggregate was 98% and each Director attended at least 80% of the meetings of the
Board and the Committees of which the Director was a member.
The Audit Committee recommends to the Board of Directors an independent
auditor to audit the books and records of the Company and its subsidiaries for
the year. It also reviews, to the extent it deems appropriate, the Company's
Employee Conduct Policy, litigation and pending claims, the scope, plan and
findings of the independent auditors' annual audit and internal audits,
recommendations of the auditor, the adequacy of internal accounting controls and
audit procedures, the Company's audited financial statements, non-audit services
performed by the independent auditor, and fees paid to the independent auditor
for audit and non-audit services.
The Compensation Committee recommends to the Board of Directors the
compensation of all officers and administers the Company's Stock Incentive Plan.
It also recommends to the Board of Directors the qualifications for new Director
nominees, candidates for nomination, and policies concerning director
compensation and length of service.
Item 11. Executive Compensation.
Compensation of Directors
Non-employee directors of the Company receive compensation consisting
of annual cash retainers, meeting fees and stock option awards.
Cash Compensation. Directors who are not employees of the Company are
paid an annual retainer for Company Board service of $1,000 per quarter and a
fee of $500 for each Company Board meeting attended. Directors who are employees
of the Company, which presently consist of Messrs Seward, Jacobs and Fitzwater,
are not paid any fee or additional remuneration for services as members of the
Company Board or any committee thereof.
48
Directors' Stock Options. Pursuant to the SLH Corporation 1997 Stock
Incentive Plan (the "Stock Option Plan"), all of the above named directors of
the Company other than Messrs. Seward, Jacobs and Fitzwater received options to
purchase 16,200 shares of the Company's Common Stock (97,200 shares after
adjustment for the 1997 and 1998 stock splits) at the fair market value of such
stock as of the close of business on March 3, 1997. The Board determined the
fair market value to be $19.15 per share on that date ($3.19 after adjustment
for the 1997 and 1998 stock splits) based on an appraisal rendered by George K.
Baum & Company and over-the-counter trading in the Company's Common Stock on and
immediately before that date.
Compensation of Executive Officers
The table below sets forth information concerning compensation for
the year ending December 31, 1997 awarded to, earned by, or paid to all persons
who served as executive officers of the Company during 1997 for services
rendered during that year ("Named Executive Officers"). Information for prior
years is not included since compensation arrangements were not placed in effect
until the Distribution which occurred on March 3, 1997.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
----------------------------- ------------
Securities
Other Annual Underlying All Other
Name and Salary Bonus Compensation Options Compensation
Principal Position Year ($)(1) ($)(2) ($) (#)(3) ($)(4)
- --------------------- ------- ------ ----- ------------ ---------- -----------
James R. Seward, CFA
President and Chief 1997 $64,647 $450,000 --- 390,000 $854
Executive Officer
P. Anthony Jacobs, CFA
Chairman of the Board 1997 111,204 --- --- 390,000 980
Steven K. Fitzwater
Vice President-Chief
Financial Officer,
Chief Accounting 1997 50,129 --- --- 243,000 1,302
Officer, Secretary
and Treasurer
-----------------
(1) From the date of the Distribution until June 1, 1997, the base salaries
of the Named Executive Officers were paid by Lab Holdings pursuant to
the Interim Services Agreement between the Company and Lab Holdings
that is Exhibit 10(a) to this report. On that date the arrangement was
terminated and the Company commenced the payment of base compensation
to Messrs. Seward and Jacobs at the rate of $75,000 per annum and to
Mr. Fitzwater at the rate of $60,000 per annum as contemplated by
employment agreements between the Company and each executive, the form
of which is shown at Exhibit 10(d) to this report. The table reflects
amounts paid to the Executives by Lab Holdings during 1997 less the
share of such compensation that is properly allocable to Lab Holdings
plus all amounts paid to the executives by the Company.
(2) The bonus was paid to Mr. Seward pursuant to an action of the
Compensation Committee in June 1997, as described under "Report of the
Compensation Committee."
(3) The options reflect adjustments made for the 1997 and 1998 stock
splits. All options were granted pursuant to the Stock Option Plan
concurrent with the Distribution and are non-qualified stock options.
The options were granted at their fair market value on the March 3,
1997 Distribution Date. The Board determined the fair market value to
be $19.15 per share on that date ($3.19 after adjustment for 1997 and
1998 stock splits) based on an appraisal rendered by George K. Baum &
Company and over-the-counter trading in the Company's Common Stock on
and immediately before that date. All options have ten year terms and
become exercisable in equal installments as follows: one-fourth on
March 3, 1997, and one-fourth on each of the first, second and
49
third anniversary dates of such date. The Stock Option Plan and form of
option agreements are shown at Exhibits 10(c) and 10(e) to this report.
(4) Reflects auto allowances.
Employment Agreements and Termination of Interim Services Agreement
Each of the Named Executive Officers is a party to an Employment
Agreement with the Company. Each Employment Agreement provides for employment of
the Executive Officer for an initial term commencing on the date the Executive
Officer ceases to be employed by Lab Holdings under the Interim Services
Agreement on behalf of the Company and ending on the third anniversary of the
Distribution Date. The three Named Executive Officers ceased to be employees of
Lab Holdings on May 31, 1997 so that the Employment Agreements were activated
and became effective on June 1, 1997. The term of the Employment Agreements is
automatically extended for successive one year periods unless a notice of
non-extension is given by either party at least twelve months prior to the end
of the then current term.
The initial base compensation payable under the employment agreements
is as described in Note 3 to the Summary Compensation Table. It is subject to
adjustment annually by the Board, provided that base salary may not be decreased
by more than five percent year to year. The Employment Agreements provide that
an executive officer's full time is not required and that the executive officer
is entitled to pursue other employment or business opportunities simultaneously
with his duties to the Company.
The employment of each of the Company's Named Executive Officers is
subject to termination for cause, which is defined as including willful
misconduct with respect to an executive officer's duties, or the perpetration of
a fraud, embezzlement, or other act of dishonesty, or a breach of trust or
fiduciary duty which materially adversely affects the Company or its
stockholders or the other employment or business activities of such executive
officer conflicting with the Company's business. The Employment Agreements
provide that the Named Executive Officers will not compete with the Company
during the term of the Employment Agreements and, if an executive officer is
terminated with cause or voluntarily terminates his employment, for a period of
one year thereafter.
Effective with the termination of the Interim Service Agreement, the
Company and Lab Holdings entered into a similar arrangement pursuant to which
the Company agreed to provide Lab Holdings with administrative and accounting
services as well as space in the Company's offices for books and records in
exchange for an annual fee of $75,000. The arrangement is terminable by either
party on 30 days notice.
50
Stock Options
The table shown below contains information concerning the grant of
stock options under the Company's Stock Option Plan to the Named Executive
Officers during 1997. All information has been adjusted to reflect the 1997 and
1998 stock splits.
OPTION GRANTS IN 1997
Potential
Individual Grants Realizable Value
Number of % of Total at Assumed
Securities Options Annual Rates of
Underlying Granted to Stock Price
Options Employees Exercise Appreciation for
Granted in Fiscal Price Expiration Option Term
Name (#)(1) Year ($/Sh) Date 5%($) 10%($)
---- ---------- ---------- -------- ---------- -----------------
James R. Seward, CFA 390,000 36.3 3.19 3/3/07 $780,000 $1,981,200
P. Anthony Jacobs, CFA 390,000 36.3 3.19 3/3/07 780,000 1,981,200
Steven K. Fitzwater 243,000 22.6 3.19 3/3/07 486,000 1,234,440
Option Exercises and Year End Holdings
The table shown below provides information, with respect to the Named
Executive Officers, concerning the exercise of options during the year ended
December 31, 1997, and unexercised options held as of the end of fiscal 1997.
All information has been adjusted to reflect the 1997 and 1998 stock splits.
AGGREGATED OPTION EXERCISES IN 1997
AND FY-END OPTION VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise(#) ($) Unexercisable Unexercisable(1)
---- --------------- -------------- ------------- ---------------
James R. Seward, CFA 97,500 $2,346,858 0/292,500 0/$7,256,428
P. Anthony Jacobs, CFA 97,500 2,391,463 0/292,500 0/ 7,256,428
Steven K. Fitzwater 60,750 1,546,895 0/182,250 0/ 4,521,313
51
Performance of the Company's Common Stock
The following performance graph compares the performance of the
Company's Common Stock during the period beginning from the Distribution Date on
March 3, 1997, and ending December 31, 1997, to the NASDAQ Stock Market index
consisting of US companies (the "NASDAQ COMPOSITE") and a peer group index
consisting of 114 publicly traded companies having a segment of business with
SIC code 1321 for the same period. SIC code 1321 covers establishments primarily
engaged in producing hydrocarbons from oil and gas field gases. The graph
assumes a $100 investment in the Company's Common Stock and in each of the
indexes at the beginning of the period and a reinvestment of dividends paid on
such investments throughout the period.
VALUE OF $100 INVESTMENTS
ASSUMING REINVESTMENT OF DIVIDENDS AT MARCH 3, 1997
AND AT THE END OF EVERY OTHER MONTH THROUGH DECEMBER 31, 1997
[PERFORMANCE GRAPH OMITTED. GRAPH WHICH REFLECTS DATA SHOWN IN TABLE BELOW]
Mar 3 April 30 June 30 Aug 31 Oct 31 Dec 31
SLH $100 $220 $385 $702 $766 $841
SIC CODE 1321 $100 $99 $107 $114 $123 $111
NASDAQ COMPOSITE $100 $96 $110 $121 $122 $120
Report of the Compensation Committee
Compensation Committee Interlocks and Insider Participation. Executive
compensation is based primarily upon (a) the structure created by Lab Holdings
as the organizer and sole shareholder of the Company in connection with the
structuring of the Distribution and the related agreements, including the Stock
Option Plan and Employment Agreements and (b) the recommendations made to the
Board of Directors by the Compensation Committee (the "Committee"). The
Committee for the year ended December 31, 1997 consisted of Lan C. Bentsen
(Chairman), Michael E. Herman and David W. Kemper. All of the members of the
Committee are non-employee directors of the Company. Mr. Bentsen is also a
director of Lab Holdings and Messrs. Herman and Kemper were directors of Lab
Holdings until September, 1997. The Committee administers the Stock Option Plan.
Subject to the terms of the
52
Employment Agreements, the Committee also recommends to the Board of Directors
other compensation and compensation plans for officers. Committee
recommendations are acted upon by the full board which includes Messrs. Seward,
Jacobs and Fitzwater who are the Named Executive Officers. Mr. Seward and Mr.
Jacobs were also members of the Lab Holdings Board which passed on the
arrangements for the Distribution.
This report is provided by the Committee to assist stockholders in
understanding the Committee's philosophy in establishing the compensation of the
Chief Executive Officer and all other Executive Officers of the Company for the
year ended December 31, 1997 ("the Year").
Compensation Philosophy. The basic compensation structure for the
Company consisting of the Stock Option Plan, the employment agreements and the
Interim Services Agreement were developed by Lab Holdings as the Company's sole
shareholder and by the Board in connection with the Lab Holdings strategy to
create the Company and to cause the Company's stock to be distributed to Lab
Holdings shareholders in the Distribution. Accordingly, as described under Item
13 below, none of the compensation arrangements implemented pursuant to the
Distribution are the result of arm's-length negotiation between independent
parties.
The intent of Lab Holdings and the Company's Board in developing the
initial compensation structure was to have compensation for executive officers
focus on two elements: (a) base salary and (b) long term compensation in the
nature of non-qualified stock options. It was believed that base compensation
should be kept relatively low and that superior performance should be rewarded
in relation to the growth in value of each stockholder's investment in the
Company. The low base compensation also reflected the fact that the Named
Executive Officers under the employment Agreements are not required to devote
full time to the affairs of the Company. In connection with and following the
Distribution it has been the policy of the Compensation Committee during 1997 to
follow this philosophy.
Base Salary. Following the March 3, 1997, Distribution and until June
1, 1997, the Named Executives were compensated by Lab Holdings under the Interim
Services Agreement and as reflected in the Summary Compensation Table. That
agreement was terminated effective at the close of business on May 31, 1997, and
the Employment Agreements were activated. Under the Employment Agreements,
annual base salary for Messrs. Seward and Jacobs is fixed at $75,000 each and
$60,000 for Mr. Fitzwater. During 1997, no adjustments were made to base
salaries since the employment agreements generally contemplate that adjustments,
if any, be made annually.
Stock Option Plan. Grants under the Stock Option Plan were made to the
Named Executive Officers in connection with the Distribution as discussed under
the Summary Compensation Table. The intent of Lab Holdings and the Committee,
was to structure the Stock Option Plan to provide for the grant of non qualified
stock options at exercise prices equal to fair market value for the Board, all
Executive Officers and other key employees for up to approximately 15% of the
Company's outstanding stock assuming the exercise of all covered options. It was
believed that this was consistent with option programs adopted by many small cap
companies in similar businesses. The option plan was considered to be an
appropriate vehicle to provide incentives for management to take steps that
would maximize the values of the assets being contributed to the Company and
therefore provide long term benefits to stockholders. Also, by having stock
options granted at the market price at the Distribution Date executive rewards
would accrue only with increases in the value of stockholder interests. In this
way, it was believed that the Company's stock price would provide an appropriate
yardstick by which to measure and reward management performance.
Compensation of the Chief Executive Officer for 1997. All of the
components of the 1997 compensation of the Chief Executive Officer other than
cash bonuses were determined in accordance with the criteria described above for
the other Named Executive Officers. In connection with the termination of the
Interim Services Agreement and the implementation of the Employment Agreements
the Committee concluded that in addition to the relatively low base
compensation, a performance based bonus be established for the Company's CEO.
The Committee decided to use the Company stock price as a measurement of both
performance and reward so that benefits would accrue only in proportion to
increases in the value of stockholder interests. Accordingly, under the program
that was adopted in June 1997, Mr. Seward was granted a cash bonus equal to one
times his $75,000 base annual compensation at such time as (a) the thirty-day
average trading price of the Company's common stock equaled or exceeded $10.00
per share (as adjusted for the 1997 and 1998 stock splits) and (b) that a bonus
in the same amount be paid each time the thirty-day average trading price of the
Company 's Common Stock equaled or exceeded $3.34 more than the price for which
the then most recent bonus had been paid (as adjusted for the 1997 and 1998
stock splits). Pursuant to this program, Mr. Seward's cash bonus for 1997
amounted to $450,000. The cash bonus program terminates on June 1, 1998.
53
This report is being made over the names of Lan C. Bentsen, Michael E.
Herman and David W. Kemper who were the members of the Committee which passed on
executive compensation for the year.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
By Management
The table shown below sets forth the number of shares of Company Common
Stock beneficially owned as of February 1, 1998, directly or indirectly, by each
director, each Named Executive Officer and all directors and executive officers
as a group. Except as otherwise indicated, each individual named has sole
investment and voting power with respect to the securities shown. All holdings
have been adjusted to reflect the 1997 and 1998 stock splits.
Amount and Nature of
Name Beneficial Ownership (1)(2) Percentage(3)
---- --------------------------- ------------
James R. Seward (4)............. 190,460 1.9%
P. Anthony Jacobs (5)........... 222,606 2.2%
Steven K. Fitzwater............. 107,908 1.1%
Lan C. Bentsen (6).............. 60,372 --
W. D. Grant (7)................. 1,504,386 15.0%
W.T. Grant II (8)............... 128,526 1.3%
Michael E. Herman (9)........... 115,302 1.1%
David W. Kemper (10) .......... 34,258 --
All Directors and Officers
as a group of eight (11)...... 2,363,818 22.5%
- ----------------
(1) A beneficial owner of a security includes a person who, directly or
indirectly, has or shares voting or investment power with respect to
such security. Voting power is the power to vote or direct the voting
of the security and investment power is the power to dispose or direct
the disposition of the security. Each person listed has stated that he,
either alone or with his spouse, has sole voting power and sole
investment power with respect to the shares shown as beneficially
owned, except as otherwise indicated.
(2) Shares of Company Common Stock shown as beneficially owned include
shares issuable upon the exercise of stock options that were
exercisable on February 1, 1998, or that become exercisable within 60
days thereafter, as follows:Lan C. Bentsen, 48,600 shares, W. D. Grant,
48,600 shares; W.T. Grant II, 48,600 shares; Michael E. Herman, 48,600
shares; David W. Kemper, 24,300 shares; P. Anthony Jacobs, 97,500
shares, James R. Seward, 97,500 shares; Steven K. Fitzwater, 60,750
shares, and all directors and executive officers as a group, 474,450
shares.
(3) The percentages represent the total number of shares of Common Stock
shown in the adjacent column divided by 9,902,588, the number of issued
and outstanding shares of the Company's Common Stock on February 1,
1998, plus, in each instance, all shares of Common Stock issuable to
the person or group named upon the exercise of stock options granted
under the SLH Corporation Stock Option Plan for 1997 that were
exercisable on February 1, 1998, or that become exercisable within 60
days thereafter. Percentages of less than one percent are omitted.
(4) Includes 2,250 shares held in a family trust for which Mr. Seward
serves as a co-trustee with his mother, and in that capacity shares
voting and investment powers.
(5) Includes 1,500 shares owned by the wife of P. Anthony Jacobs as to
which he disclaims beneficial ownership.
(6) Includes 2,148 shares held by a family trust for the benefit of Mr.
Bentsen's children for which Mr. Bentsen serves as trustee with sole
voting and investment powers.
54
(7) Includes 746,802 shares held by W.D. Grant in trust for himself;
356,940 shares held by a family trust for which W.D. Grant serves as a
co-trustee and in that capacity shares voting and investment powers
with UMB Bank, Kansas City, N.A., as to which he disclaims beneficial
ownership; 170,124 shares in a trust for the benefit of W.D. Grant for
which W.D. Grant acts as co-trustee and in that capacity shares voting
and investment powers with UMB Bank, Kansas City, N.A.; 60,648 shares
held by a trust for the benefit of W.D. Grant in which UMB Bank, Kansas
City, N.A. is the sole trustee but W.D. Grant has sole investment
control, as to which he disclaims beneficial ownership; 60,648 shares
held by a family trust for which W. D. Grant serves as a co-trustee and
in that capacity shares voting and investment powers with UMB Bank,
Kansas City, N.A., as to which he disclaims beneficial ownership; also
including 10,176 shares owned by W.D. Grant's wife and 40,272 shares
held by a trust for the benefit of W.D. Grant's wife, as to which he
disclaims beneficial ownership.
(8) Includes 46,884 shares held by W. T. Grant II as custodian for his
children; also includes 17,802 shares owned by the wife of W.T.
Grant II, as to which he disclaims beneficial ownership.
(9) Includes 30,000 shares owned by the Herman Family Trading Company of
which Mr. Herman is a general partner and approximately 73% owner and
300 shares owned by ARK Management.
(10) Includes 8,980 shares held in a family trust for which Mr. Kemper
serves as a trustee, and in that capacity shares voting power and has
sole investment power.
(11) Includes 474,450 shares of Company Common Stock issuable upon the
exercise of stock options granted under the SLH 1997 Stock Incentive
Plan that were exercisable on February 1, 1998 or that become
exercisable within 60 days thereafter.
By Others
The table below sets forth each person or entity (other than persons
set forth in the preceding table) that has reported to the Company beneficial
ownership of more than 5% of the Company's Common Stock as of February 15, 1998.
The percentage of ownership is based on 9,902,588 shares outstanding as of
February 1, 1998.
Amount and Nature of
Name Beneficial Ownership Percentage
---- -------------------- ----------
Gotham Partners, L.P. (1)............ 746,750 7.46%
110 East 42nd Street, 18th Floor,
New York, New York 10017.
- ------------
(1) The shares include 6,006 shares reported in the Gotham Partners, L.P.
Schedule 13D, filed on February 3, 1998, as being owned by Gotham
Partners II, L.P.
Item 13. Certain Relationships and Related Transactions.
The Company and Lab Holdings have entered into certain agreements for
the purpose of effecting the Distribution and defining the ongoing relationship
between them. These agreements consist of the Distribution Agreement, an
Assignment and Assumption Agreement , the Interim Services Agreement (which was
terminated effective June 1, 1997) and a Tax Sharing Agreement. These agreements
have been described in the Company's registration statement on Form 10, as
amended and the Company's Form 10-K for the year ended December 31, 1996.
Copies of the Agreements are Exhibits to this report.
The above agreements were developed by Lab Holdings in connection with
its strategy to create the Company and to cause the Company's stock to be
distributed to Lab Holdings shareholders in the Distribution. Accordingly, none
of the agreements are the result of arm's-length negotiation between independent
parties.
55
P. Anthony Jacobs, CFA, and Steven K. Fitzwater, who are the President
and Chief Executive Officer and Vice President and Chief Financial and
Accounting Officer of Lab Holdings, respectively, are the Chairman and Vice
President and Chief Financial and Accounting Officer of the Company,
respectively. All but one of the directors of Lab Holdings are also directors of
the Company. These officers and directors of the Company will continue in such
dual capacities with Lab Holdings and the Company for an indefinite period of
time. Because the management of both Lab Holdings and the Company are
essentially identical, conflicts may arise with respect to the operation and
effect of the agreements and arrangements described above and also with respect
to the negotiation of any additional agreements which may well arise between Lab
Holdings and the Company. Although Lab Holdings and the Company plan to utilize
independent directors who have no affiliation with the Company to resolve any
material issue that may arise between Lab Holdings and the Company following the
Distribution, such resolutions may not reflect the results of actual arms-length
negotiations. Accordingly, conflicts arising out of the management of both Lab
Holdings and the Company by the same persons could have an adverse affect on the
Company and its stockholders if not properly resolved.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following documents are filed as part of this report:
(a) Financial Statements:
Report of Independent Auditors with respect to SLH Corporation
SLH Corporation Consolidated Balance Sheets as of December 31,
1997 and 1996 SLH Corporation Consolidated Statements of
Operations for the years ended December 31, 1997,
1996 and 1995
SLH Corporation Statements of Consolidated Equity
SLHCorporation Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995
Notes to SLH Corporation Consolidated Financial Statements
(b) Financial Statement Schedules:
Auditors Report on Financial Statement Schedules
III. Real Estate and Accumulated Depreciation
Allother schedules are omitted because they are not applicable
or the information is contained in the Consolidated
Financial Statements or notes thereto.
(c) Exhibits:
Exhibit
Number Description
------- -----------
2(a) Copy of Distribution Agreement [incorporated by
reference to Exhibit 2(a) to Form 10/A of the Company
dated February 3, 1997].
2(b) Copy of Blanket Assignment, Bill of Sale, Deed and
Assumption Agreement [incorporated by reference to
Exhibit 2(b) to the Company's Report on Form 10-K for
the year ended December 31, 1996].
3(a) Articles of Incorporation of SLH Corporation
[incorporated by reference to Exhibit 3(a) to the
Form 10 of the Company filed December 24, 1996].
3(b) Bylaws of SLH Corporation [incorporated by reference
to Exhibit 3(b) to the Form 10 of the Company filed
December 24, 1996].
56
4 Copy of Rights Agreement dated as of January 31, 1997
[incorporated by reference to Exhibit 4 to the Form
10/A of the Company filed February 12, 1997].
10(a) Copy of Facilities Management and Interim Services
Agreement [incorporated by reference to Exhibit 10(a)
to the Company's Report on Form 10-K for the year
ended December 31, 1996].
10(b) Copy of Tax Sharing Agreement [incorporated by
reference to Exhibit 10(b) to the Company's Report on
Form 10-K for the year ended December 31, 1996] .
10(c) Copy of SLH Corporation 1997 Stock Incentive Plan
[incorporated by reference to Exhibit 10(c) to the
Form 10/A of the Company filed February 12, 1997].
10(d) Form of Employment Agreements with certain executive
officers of SLH [incorporated by reference to Exhibit
B to Exhibit 2(a)].
10(e) Form of Option Agreement with certain executive
officers under the Stock Option Plan.
10(f) Form of Option Agreement with directors under the
Stock Option Plan.
10(g) Certified copy of resolutions approving a certain
bonus arrangement for James R. Seward.
21 Subsidiaries of SLH Corporation
Scout Development Corporation
(a Missouri Corporation)
Scout Development Corporation of New Mexico
(a Missouri Corporation)
BMA Resources, Inc. (a Missouri Corporation)
529 Partners, Ltd. (a Texas Limited Partnership)
Lot Development, Inc. (a Texas Corporation)
Carousel Apartment Homes, Inc.
(a Georgia Corporation)
23 Consent of Independent Auditors
24 Powers of Attorney for officers and directors of the
Registrant (incorporated by reference to the
signature page).
27 Financial Data Schedule
No reports on Form 8-K have been filed during the quarter ended
December 31, 1997.
57
SIGNATURES
Pursuant to requirements of Section 13 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, in the city of Prairie Village,
State of Kansas, on this 30th day of March 1998.
SLH CORPORATION
By S/ James R. Seward
-------------------------------
James R. Seward, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James R. Seward, P. Anthony Jacobs and
Steven K. Fitzwater and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and re-substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all reports of
the Registrant on Form 10-K and to sign any and all amendments to such reports
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities & Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the dates indicated.
Name Title Date
---- ----- ----
S/James R. Seward
- ---------------------------- President (Principal
James R. Seward Executive Officer) and Director March 30, 1998
S/P. Anthony Jacobs
- ---------------------------- Chairman of the Board and
P. Anthony Jacobs Director March 30, 1998
S/Steven K. Fitzwater
- ---------------------------- Vice President, Treasurer,
Steven K. Fitzwater Secretary and Chief Financial and
Accounting Officer and Director March 30, 1998
S/Lan C. Bentsen
- --------------------------- Director
Lan C. Bentsen March 30, 1998
S/W. D. Grant
- --------------------------- Director
W.D. Grant March 30, 1998
S/W. T. Grant II
- --------------------------- Director
W. T. Grant II March 30, 1998
S/Michael E. Herman
- --------------------------- Director
Michael E. Herman March 30, 1998
S/David W. Kemper
- --------------------------- Director
David W. Kemper March 30, 1998
58
SLH CORPORATION
Consolidated Financial Statement Schedule
(Form 10-K)
December 31, 1997
SLH CORPORATION
Schedule III
Real Estate and Accumulated Depreciation
December 31, 1997
(Page 1 of 2)
Costs Capitalized Gross Amount
Initial Cost Subsequent At Which Carried
to Company to Acquisition at December 31, 1997
----------------------------------------------------------
Buildings & Buildings &
Improve- Improve- Carrying Improve-
Description Land ments ments Costs Land ments Total
- ------------ ----------------------------------------------------------
(In thousands)
Land Investments/
Developments:
Houston, TX $ 6,158 49 1,120 1,604 2,228 195 2,423
Ft Worth, TX 1,000 -- -- -- 665 -- 665
Olathe, KS 3,292 -- 49 -- 2,659 -- 2,659
Parking:
Reno, NV -- 5,277 19 -- -- 5,296 5,296
Residential:
Santa Fe, NM 4,576 -- 67,202 17,607 204 12,780 12,984
-----------------------------------------------------------
$ 15,026 5,326 68,390 19,211 5,756 18,271 24,027
===========================================================
Reserves (11,703)
Net real estate before depreciation 12,324
Accumulated depreciation (1,293)
-------
Net real estate 11,031
Less current portion (1,973)
-------
Real estate, net of current portion $ 9,058
=======
(1)Reserves have been established to reflect lower net realizable values based
on periodic evaluation of changes in market conditions, recent sales
prices, and appraisals.
S-2
SLH CORPORATION
Schedule III
Real Estate and Accumulated Depreciation
December 31, 1997
(Page 2 of 2)
Date
(1) Accum. Tax Constr. Date Depr.
Description Reserves Depr. Basis Began Acquired Life
- --------------------------------------------------------------------------------
(In thousands)
Land Investments/
Developments
Houston, TX $ -- -- 4,779 1997 1974 --
Ft Worth, TX 632 -- 665 -- 1986 --
Olathe, KS -- -- 2,442 -- 1991 --
Parking:
Reno, NV 1,264 1,293 4,205 -- 1989 20 yrs
Residential:
Santa Fe, NM 9,807 -- 4,195 1987 1985 --
-------------------------------------
$ 11,703 1,293 16,286
=====================================
S-3
SLH CORPORATION
Schedule III
Real Estate and Accumulated Depreciation
Reconciliation Between Years
A) Reconciliations of total real estate carrying value for the three years ended
December 31, 1997 are as follows:
1997 1996 1995
----------------------------------
(In thousands)
Balance at beginning of year $ 26,718 40,234 44,595
Additions during year:
Improvements 1,353 1,726 12,637
----------------------------------
28,071 41,960 57,232
Deductions during year:
Value of real estate sold 15,041 12,773 9,890
Provision for loss on real estate held
for sale 706 1,069 7,108
Cumulative effect of change in accounting
principle -- 1,400 --
----------------------------------
15,747 15,242 16,998
----------------------------------
Balance at end of year $ 12,324 26,718 40,234
==================================
B) Reconciliations of accumulated depreciation for the three years ended
December 31, 1997 are as follows:
1997 1996 1995
----------------------------------
(In thousands)
Balance at beginning of year $ 1,293 1,293 1,081
Additions during year - depreciation -- -- 212
----------------------------------
1,293 1,293 1,293
Deductions during year - accumulated
depreciation of real estate sold -- -- --
----------------------------------
Balance at end of year $ 1,293 1,293 1,293
==================================
S-4
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
2(a) Copy of Distribution Agreement [incorporated by reference
to Exhibit 2(a) to Form 10/A of the Company dated February
3, 1997].
2(b) Copy of Blanket Assignment, Bill of Sale, Deed and
Assumption Agreement [incorporated by reference to Exhibit
2(b) to the Company's Report on Form 10-K for the year
ended December 31, 1996].
3(a) Articles of Incorporation of SLH Corporation [incorporated
by reference to Exhibit 3(a) to the Form 10 of the Company
filed December 24, 1996].
3(b) Bylaws of SLH Corporation [incorporated by reference to
Exhibit 3(b) to the Form 10 of the Company filed December
24, 1996].
4 Copy of Rights Agreement dated as of January 31, 1997
[incorporated by reference to Exhibit 4 to the Form 10/A
of the Company filed February 12, 1997].
10(a) Copy of Facilities Management and Interim Services
Agreement [incorporated by reference to Exhibit 10(a) to
the Company's Report on Form 10-K for the year ended
December 31, 1996].
10(b) Copy of Tax Sharing Agreement [incorporated by reference
to Exhibit 10(b) to the Company's Report on Form 10-K for
the year ended December 31, 1996].
10(c) Copy of SLH Corporation 1997 Stock Incentive Plan
[incorporated by reference to Exhibit 10(c) to the Form
10/A of the Company filed February 12, 1997].
10(d) Form of Employment Agreements with certain executive
officers of SLH [incorporated by reference to Exhibit B to
Exhibit 2(a)].
10(e) Form of Option Agreement with certain executive officers
under the Stock Option Plan.
10(f) Form of Option Agreement with directors under the Stock
Option Plan.
10(g) Certified copy of resolutions approving a certain bonus
arrangement for James R. Seward.
21 Subsidiaries of SLH Corporation
Scout Development Corporation (a Missouri corporation)
Scout Development Corporation of New Mexico
(a Missouri corporation)
BMA Resources, Inc. (a Missouri corporation)
529 Partners, Ltd. (a Texas Limited Partnership)
Lot Development, Inc. (a Texas Corporation)
Carousel Apartment Homes, Inc. (a Georgia Corporation)
23 Consent of Independent Auditors
24 Powers of Attorney for officers and directors of the
Registrant (incorporated by reference to the signature
page).
27 Financial Data Schedule