UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-21911
SLH CORPORATION
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(Exact name of registrant as specified in its charter)
Kansas 43-1764632
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 7568
5000 W. 95th St., Suite 260
Shawnee Mission, KS 66207
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(Address of principal (Zipcode)
executive offices)
Registrant's telephone number, including area code (913) 652-1000
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Number of shares outstanding of only class of Registrant's common stock as of
November 4, 1997: $1 par value common - 4,933,554 (after three for one stock
split on July 21, 1997)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SLH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
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September 30, December 31,
1997 1996
(unaudited)
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(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 22,821 3,925
Short-term investments 6,178 --
Accounts and notes receivable 4,346 33
Real estate under contract 910 1,223
Other current assets 303 348
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Total current assets 34,558 5,529
Real estate held for sale 8,372 24,202
Real estate under development 2,173 --
Investment securities 1,587 4,718
Investment in affiliates:
Oil and gas partnerships -- 3,526
Other 1,276 (116)
Property, plant and equipment 94 425
Notes receivable 1,680 --
Intangible assets -- 113
Deferred income taxes -- 73
Other assets 15 4
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$ 49,755 38,474
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 118 289
Notes payable 1,194 1,194
Other current liabilities 1,562 682
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Total current liabilities 2,874 2,165
Notes payable 21 --
Deferred income taxes -- 183
Other liabilities 73 313
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Total liabilities 2,968 2,661
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Minority interests 50 --
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Stockholders' Equity:
Preferred stock of $.01 par value
with $100 liquidation preference.
Authorized 1,000,000 shares;
none issued. --
Common stock of $.01 par value.
Authorized 30,000,000 shares;
issued 4,933,554 shares 49
Paid-in capital 46,109
Net unrealized gains on marketable
equity securities 69
Retained earnings 510
------------------------
Total stockholders' equity 46,737
Combined equity 35,813
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$ 49,755 38,474
========================
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and
results of operations.
SLH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
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(in thousands except share amounts)
REVENUES
Real estate sales $ 4,438 4,588 15,453 12,801
Real estate rentals and other 216 205 601 576
--------------------- --------------------
Total revenues 4,654 4,793 16,054 13,377
COSTS AND EXPENSES
Real Estate:
Cost of sales 4,443 4,507 15,462 12,720
Operating expenses 391 627 1,954 1,930
Provision for loss on real
estate held for sale, net -- 1,315 220 1,500
General and administrative 777 398 1,464 1,195
--------------------- --------------------
Loss from operations (957) (2,054) (3,046) (3,968)
Investment income 1,060 393 6,184 399
Interest expense (27) (26) (116) (81)
Equity in net loss of affiliates 14 (136) (355) (572)
Equity in net earnings of
venture capital investment
funds 82 233 164 790
Other income 927 -- 1,362 --
--------------------- --------------------
Earnings (loss) before
income taxes and
cumulative effect 1,099 (1,590) 4,193 (3,432)
Income taxes (benefit) 81 (54) 73 71
--------------------- --------------------
Earnings (loss) before cumulative
effect of change in accounting
principle 1,018 (1,536) 4,120 (3,503)
Cumulative effect of change
in accounting principle -- -- -- (1,400)
--------------------- --------------------
Net earnings (loss) $ 1,018 (1,536) 4,120 (4,903)
====================== ====================
Per share of common stock:
Net earnings (loss) $ .18 (.27) .77 (.91)
Book value $ 9.47 9.47
Average shares outstanding 5,510,532 5,510,532 5,370,624 5,370,624
Shares outstanding
end of period 4,933,554 4,933,554 4,933,554 4,933,554
See accompanying notes to consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.
SLH CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
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(unaudited)
Nine Months Ended
September 30, 1997
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(in thousands)
Common stock:
Balance, beginning of year $ 1
Capitalization by Lab Holdings, Inc. 15
Stock dividend 32
Exercise of stock options 1
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Balance, end of period 49
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Paid-in capital:
Balance, beginning of year 99
Capitalization by Lab Holdings, Inc. 47,848
Exercise of stock options (1,838)
---------
Balance, end of period 46,109
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Net unrealized gains on marketable equity securities:
Balance, beginning of year --
Net change during period 69
---------
Balance, end of period 69
---------
Retained earnings:
Balance, beginning of year --
Net earnings for the period from the date of
distribution (March 3, 1997) to Sept. 30, 1997 543
Stock dividend (33)
---------
Balance, end of period 510
---------
Stockholders' Equity $ 46,737
=========
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and
results of operations.
SLH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(unaudited)
Nine months ended
September 30,
1997 1996
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(in thousands)
OPERATING ACTIVITIES
Net earnings (loss) $ 4,120 (4,903)
Adjustments to reconcile net earnings (loss)
to net cash provided by operations
Cumulative effect of change in accounting
principle -- 1,400
Depreciation and amortization 92 297
Equity in losses of affiliates 355 572
Equity in earnings of venture capital
investment funds (164) (790)
Provision for loss on real estate held for sale 220 1,500
Sales of real estate 14,095 10,612
Increase in notes receivable from sales
of real estate (1,780) --
Collections of notes receivable from sales
of real estate 100 14
Additions to real estate held for sale (245) (1,436)
Additions to real estate under development (102) --
Change in accounts receivable (4,313) (527)
Change in accounts payable (171) 45
Increase in deposits -- 225
Income taxes and other (535) 195
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Net cash provided by operations 11,672 7,204
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INVESTING ACTIVITIES
Investments in affiliates (1,500) (44)
Distribution from affiliates 36 872
Distribution from venture capital
investment funds 796 1,047
Purchase of investments available for sale (11,347) --
Sale of investments available for sale 7,738 --
Additions to property, plant and equipment, net (79) (25)
Sale of oil and gas partnerships 3,346 --
Other 50 22
---------------------
Net cash provided (used) by investing
activities (960) 1,872
---------------------
FINANCING ACTIVITIES
Proceeds from long-term debt 41 --
Payment of principal on long-term debt (21) (95)
Capitalization by Lab Holdings, Inc. 10,000 --
Net issuance of stock pursuant to stock option
plan (1,836) --
Net transactions with Lab Holdings, Inc. -- (8,981)
---------------------
Net cash provided (used) by financing
activities 8,184 (9,076)
---------------------
Net increase in cash and cash equivalents 18,896 --
Cash and cash equivalents - beginning of period 3,925 --
---------------------
Cash and cash equivalents - end of period $ 22,821 --
=====================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 55 --
=====================
Income taxes, net $ 769 --
=====================
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and
results of operations.
SLH CORPORATION
Notes to Consolidated Financial Statements
September 30, 1997
(1) The financial information furnished herein is unaudited; however, in
the opinion of management, the financial information reflects all
adjustments which are necessary to fairly state SLH's financial position at
September 30, 1997 and December 31, 1996 and the results of its operations
and cash flows for the nine month periods ended September 30, 1997 and
1996. In the opinion of management, all adjustments made in the interim
period were of a normal recurring nature. The financial statements have
been prepared in conformity with generally accepted accounting principles
appropriate in the circumstances, and therefore included in the financial
statements are certain amounts based on management's informed estimates and
judgments. The financial information herein is not necessarily
representative of a full year's operations because levels of sales,
interest rates and other factors fluctuate throughout the fiscal year.
These same considerations apply to all year to year comparisons. Certain
1996 amounts have been reclassified for comparative purposes with no effect
on net earnings (loss). See SLH's Annual Report pursuant to Section 13 to
the Securities Exchange Act of 1934 (Form 10-K) for additional information
not required by this Quarter's Report (Form 10-Q).
(2) Pursuant to a Distribution Agreement between SLH and Lab Holdings,
Inc. (formerly named Seafield Capital Corporation), 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 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.
The accompanying consolidated statement of operations and statement of cash
flows for the nine month period ending September 30, 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 statement of operations and combined statement of cash flows for
the nine months ended September 30, 1996 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.
(3) Cash and cash equivalents include all highly liquid investments with
an original maturity of three months or less when purchased.
(4) The components of "Other Liabilities" are as follows:
September 30, 1997 December 31, 1996
Current Noncurrent Current Noncurrent
---------------------- ----------------------
(in thousands)
Accrued property tax $ 126 -- 150 --
Interest payable 1,053 -- -- --
Accrued rent expense 250 73 250 250
Payroll taxes payable 121 -- -- --
Deposits 10 -- 235 --
Deferred income -- -- 47 59
Other 2 -- -- 4
---------------------- ----------------------
$ 1,562 73 682 313
====================== ======================
(5) Earnings per share of common stock are based on the weighted average
number of shares of common stock outstanding and the common share
equivalents of dilutive stock options, where applicable, and are adjusted
for the Registrant's three for one split in the form of a two for one stock
dividend of the Registrant's shares. As a result of the split, each
stockholder of record on July 14, 1997 received two additional shares of
common stock for each share of common stock held. Certificates for the
additional shares were mailed to stockholders on July 21, 1997.
(6) Under the Distribution Agreement and Related Assignment, the Company
has assumed the rights and obligations of Lab Holdings with respect to the
legal matters described below.
(a) 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. 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
any costs relating to the prosecution of any of the above described claims.
Thus any recovery will be for the benefit of the Company and all costs
incurred in connection with the litigation will be paid by the Company.
Any ultimate recovery will be recognized as income when received and would
be subject to income taxes. In September 1993, the Missouri Court of
Appeals reversed a $5.7 million judgment granted in 1992 in favor of Lab
Holdings; the Court of Appeals remanded the case to the trial court for a
jury trial limited to the question of whether or not the applicable statute
of limitations barred the claim. The Appeals Court also set aside $1.7
million of the judgment originally granted in 1992. Subsequently, the
parties waived a jury trial and in July 1996, the case was retried to a
judge. On January 21, 1997, the judge entered a judgment in favor of Lab
Holdings for the benefit of the Company. The amount of that judgment,
together with interest is approximately $5.8 million. While the judgment
has been appealed, counsel for the Company expects that it will be
difficult for the defendants to cause the judgment to be reversed. The
final outcome is not expected until at least 1998. Settlement arrangements
with other defendants have resulted in payments to plaintiff which have
significantly offset legal fees and costs to date of approximately
$487,000. Future legal fees and costs can not reliably be estimated.
(b) Claim Against Scout. On January 30, 1997, Scout Development
Corporation was served with a complaint filed in the District Court of
Tarrant County, Texas by the parents of a 36 week old fetus. The fetus was
aborted, allegedly as a result of an automobile accident at an intersection
in Fort Worth, Texas, the view of which is alleged to have been obstructed
by weeds growing on property that is alleged to have been owned by Scout.
The Company has denied liability, has turned the matter over to its
insurance carrier and believes that if it has any liability, it is
adequately covered by an existing policy of insurance. In October 1997, a
court ordered mediation was held which did not result in a settlement of
the matter. However, settlement discussions continue.
(c) Internal Revenue Service Audits. Lab Holdings has received
notices of proposed adjustments (Revenue Agent's Reports) from the Internal
Revenue Service (IRS) with respect to 1986-1990 federal income taxes.
These notices claim total federal income taxes due for the entire five year
period in the approximate net amount of $13,867,000, exclusive of interest
thereon. Lab Holdings has filed protests regarding the 1986-1990 notices
of proposed adjustments.
On May 9, 1997, Lab Holdings received a formal agreement to the issues and
the final tax computation from the IRS. The agreement provides for a tax
refund of approximately $5.8 million, before interest. The Company expects
to owe interest of approximately $700,000. The agreement has been
submitted to the Congressional Joint Committee on Taxation for approval.
Consideration by the Joint Committee is expected before the end of 1997.
The Company assumed from Lab Holdings all contingent tax liabilities
and is acquiring all rights to refunds as well as any interest thereon
related to these tax years (the Tax Claims) and liabilities and refunds
related to any issues raised by the IRS for the years 1986-1990 whose
resolution may extend to tax years beyond the 1990 tax year. The Company
believes that adequate accruals for these income tax liabilities have been
made.
(d) California Tax Issues. In December 1996, the California state
auditor sent Lab Holdings an audit report covering the 1987-1989 taxable
years. The State of California has determined to include, as a "unitary
taxpayer," all majority owned non-life insurance subsidiaries and joint
ventures of Lab Holdings. The auditor's report was forwarded to the
California Franchise Tax Board for action. In June 1997, the California
Franchise Tax Board sent a notice of taxes due for the 1987-1989 years of
$769,213 which was paid in the same month. A billing for the interest is
expected to be approximately $1 million. The Company has assumed all
potential tax liabilities and interest thereon regarding the California
audit for the 1987-1989 taxable years. The Company believes that it has
established appropriate accruals for the California state income tax
liability.
(7) In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share", which revised the calculation and
presentation provisions of Accounting Principles Board Opinion 15 and
related interpretations. Statement No. 128 is effective for SLH's fiscal
year ending December 31, 1997. Retroactive application will be required.
SLH believes the adoption of Statement No. 128 will not have a significant
effect on its reported earnings per share.
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" is required to be implemented for
periods ending after December 15, 1997. The adoption of this standard is
not expected to have any significant impact on SLH's financial position or
results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." Statement No. 130 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 SLH's financial position or results of
operations.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information."
Statement No. 131 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 SLH's financial
position or results of operations.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Selected financial data:
Three months ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ---------
Revenues $ 4,654,000 4,793,000 16,054,000 13,377,000
Loss from operations $ (957,000) (2,054,000) (3,046,000) (3,968,000)
Other income $ 927,000 -- 1,362,000 --
Investment income - net $ 1,060,000 393,000 6,184,000 399,000
Earnings (loss) before
cumulative effect of
change in accounting
principle $ 1,018,000 (1,536,000) 4,120,000 (3,503,000)
Net earnings (loss) $ 1,018,000 (1,536,000) 4,120,000 (4,903,000)
Per share:
Net earnings (loss) $ 0.18 (0.27) 0.77 (0.91)
Book value per share $ 9.47 9.47
Average shares
outstanding 5,510,532 5,510,532 5,370,624 5,370,624
Shares outstanding
end of period 4,933,554 4,933,554 4,933,554 4,933,554
The above per share and shares totals reflect a July 1997, three for one
stock split in the form of a two for one stock dividend. Each SLH
Corporation (SLH) stockholder of record on July 14, 1997, received two
additional shares of common stock for each share of common stock held.
These stock dividend certificates were distributed on July 21, 1997.
Introductory remarks about results of operations
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, Inc. (Lab Holdings) and operated as part of Lab Holdings.
It should be read in conjunction with the Notes to the Company's 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.
On March 3, 1997, Lab Holdings distributed to its shareholders all of the
outstanding shares of common stock of its wholly-owned subsidiary, SLH
Corporation, on the basis of one share of common stock of SLH for each four
shares of Lab Holdings common stock held. In connection with this
distribution and pursuant to a Distribution Agreement between Lab Holdings
and SLH, 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
SLH. The net assets distributed to SLH totaled approximately $48 million.
Third Quarter Analysis
Real estate revenues in 1997's third quarter were $4.7 million compared
with $4.8 million in 1996's third quarter. The real estate sales revenues
in 1997 include the closing on sales of 4 residential units or lots in
Florida and New Mexico ($4.4 million). The last Florida residential unit
sale closed on July 1, 1997. In 1996's third quarter, real estate sales
revenue included the closing on sales of 11 residential units in New Mexico
($4.3 million). Real estate rental and other revenues increased slightly
to $216,000 in 1997's third quarter from $205,000 in 1996's third quarter.
At September 30, 1997, real estate holdings include residential land,
undeveloped land, single-family housing and commercial structures located
in the following states: Kansas, Nevada, New Mexico, Texas and Wyoming.
The total acreage consisted of approximately 415 acres and 42 lots or units
for sale. Real estate operations are influenced from period to period by
several factors including seasonal sales cycles.
Cost of the real estate sales in 1997's third quarter totaled $4.4 million,
compared with a cost of approximately $4.5 million in the third quarter of
1996, reflecting the mix of real estate sale closings during each period as
discussed above in the revenue analysis. Real estate operating expenses
totaled $391,000 in 1997's third quarter, compared with $627,000 in 1996's
third quarter. The decrease is attributable to reduced expenses associated
with position eliminations related to the decreasing real estate portfolio.
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 cost to sell of
certain real estate properties.
A $1.3 million net impairment loss on real estate held for sale was
recorded in 1996's third quarter. The impairment losses resulted from
changes in estimated expected future cash flows based primarily on lower
expected sales prices on certain properties based on market conditions.
General and administrative expenses include estimates for overhead
operating costs totaling $375,000 for the third quarter of 1996. The third
quarter 1997 general and administrative expenses totaled $863,000. The
increase primarily reflects expenses of an executive stock performance
based bonus program and other expenses associated with the recent move of
SLH's office.
The above factors produced a loss from operations of $957,000 in the third
quarter of 1997, compared with a loss of $2.1 million in the third quarter
of 1996.
Investment income totaled $1.1 million in 1997's third quarter compared
with $393,000 in 1996's third quarter. The increase in investment income
reflects additional funds available for investments resulting from the
significant reduction in the real estate portfolio during the past year and
the sale of other assets.
Equity in affiliates' operating earnings totaled $14,000 in 1997's third
quarter while losses of $136,000 were incurred in 1996's third quarter.
The 1997 earnings were from a real estate partnership as compared to the
third quarter 1996 losses which reflected $72,000 in operating losses by
the oil and gas general partnership interests, $3,000 of earnings by the
real estate partnership, and $67,000 for costs recorded by Syntroleum
Corporation. As Syntroleum was a developmental venture, it was expected to
incur losses during its development stage. However, during 1997's second
quarter, losses reduced SLH's book value in Syntroleum to zero.
Interest expense of $27,000 in 1997's third quarter and $26,000 in 1996's
comparable quarter reflect interest accruals on a real estate note payable.
Equity in earnings of venture capital investment funds totaled $82,000 in
1997's third quarter while 1996's comparable quarter produced earnings of
$233,000. These funds invest in development stage companies which cause
earnings to be subject to significant variations.
The $927,000 of other income in 1997's third quarter reflects $146,000 of
receipts on Tenenbaum receivables accounted for on the cost recovery
method, a $760,000 gain on the sale of most of SLH's oil and gas interests
for $4.1 million on September 30, 1997 and a gain on the sale of excess
office furniture and equipment.
Income taxes of $81,000 were recorded in 1997's third quarter, as compared
to a tax benefits of $54,000 in 1996's third quarter. Valuation allowances
were provided in 1997 on the federal tax benefits generated because
utilization within the group is not expected.
The combined effect of the above factors resulted in net earnings of $1
million in the third quarter of 1997 and a net loss of $1.5 million in the
third quarter of 1996.
Year To Date Analysis
Real estate revenues in 1997's first nine months were $16 million compared
with $13.4 million in 1996's first nine months. The real estate sales
revenues in 1997 include the closing on sales of 24 residential units or
lots in Florida, New Mexico and Texas ($12.4 million) and 752 acres of land
in Texas ($3.1 million). In 1996's first nine months, real estate sales
revenue included the closing on sales of 34 residential units in New Mexico
and Florida ($11.9 million), 20 acres of land in Oklahoma ($275,000) and
1.5 acres of land in Kansas ($580,000).
Real estate rental and other revenues increased slightly to $601,000 in
1997's first nine months from $576,000 in 1996's first nine months. Real
estate operations have been influenced from period to period by several
factors including seasonal sales cycles for projects in Florida and New
Mexico. All units have been sold in Florida and only 11 units remain in
inventory in New Mexico.
Cost of the real estate sales in 1997's first nine months totaled $15.5
million, compared with a cost of $12.7 million in the first nine months of
1996, reflecting the mix of real estate sale closings during each period as
discussed above in the revenue analysis. Real estate operating expenses
totaled $2 million in 1997's first nine months, compared with $1.9 million
in 1996's first nine months. The slight increase is attributable to
expenses associated with termination benefits resulting from position
eliminations associated with the decreasing real estate portfolio.
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 cost to sell of
certain real estate properties.
A $220,000 net impairment loss on real estate held for sale was recorded in
1997's first nine months, as compared with $1.5 million in 1996's first
nine months. The impairment losses resulted from changes in estimated
expected future cash flows based primarily on lower expected sales prices
on certain properties based on current market conditions.
General and administrative expenses include estimates for overhead
operating costs totaling $1.1 million for the first nine months of 1996.
The 1997's first nine months includes an estimate of $250,000 for overhead
operating costs in January and February. Actual SLH post-distribution
expenses for March through September 1997, on a stand alone basis, were
approximately $1.2 million.
The above factors produced a loss from operations of $3 million in the
first nine months of 1997, as compared with a loss of $4 million in the
first nine months of 1996.
Investment income totaled $6.2 million in 1997's first nine months, as
compared with $399,000 in 1996's first nine months. The 1997 income
consists of the sales of Watson Pharmaceuticals, Inc. common stock, other
marketable common stocks and interest earned on invested cash. The Watson
shares were received as a result of an venture investment in O'Classen
Pharmaceuticals which was acquired by Watson Pharmaceuticals. The Watson
sales resulted in a gain of approximately $4.4 million during 1997's first
nine months.
Equity in affiliates' operating losses were $355,000 in 1997's first nine
months and $572,000 in 1996's first nine months. During 1997, the oil and
gas operations recorded affiliated losses of $394,000, as compared to a
$597,000 loss in the first nine months of 1996, reflecting variances in
operating results of the oil and gas general partnership interests and
$251,000 for costs recorded by Syntroleum Corporation. As Syntroleum is a
developmental venture, it is expected to incur losses during its
development stage. However, the above expense reduced SLH's book value in
Syntroleum to zero.
Interest expense increased to $116,000 in 1997's first nine months from
$81,000 in 1996's comparable period reflecting additional interest accruals
on a state tax liability.
Equity in earnings of venture capital investment funds totaled $164,000 in
1997's first nine months while 1996's comparable period produced earnings
of $790,000. These funds invest in development stage companies which cause
earnings to be subject to significant variations.
The $1.4 million of other income in 1997 primarily reflects a $760,000 gain
on the sale of most of SLH's oil and gas interests for $4.1 million on
September 30, 1997, and receipts on Tenenbaum receivables accounted for on
the cost recovery method, net of costs associated with the move of SLH to a
new location in June 1997.
A $73,000 provision for income taxes was recorded in 1997's first nine
months, as compared to a $71,000 provision in 1996's first nine months.
Valuation allowances were provided on the federal tax benefits generated
because utilization within the group is not expected.
The combined effect of the above factors resulted in net earnings of $4.1
million in the first nine months of 1997 and a net loss of $4.9 million in
the first nine months of 1996.
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 of or 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 1996's fourth quarter and was included in the transferred cash.
At September 30, 1997, SLH had available approximately $29 million in cash
and short-term investments. Approximately $4 million is being collected in
early fourth quarter from the oil and gas interests sale on September 30,
1997. Subject to the completion of closing documentation, SLH anticipates
receiving approximately an additional $1 million from selling its remaining
oil and gas assets during the fourth quarter. Current assets totaled
approximately $34.6 million while current liabilities totaled $2.9 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 and the initial capitalization of SLH.
Cash provided by operations in the first nine months of 1997 totaled $11.7
million, as compared to $7.2 million in the first nine months of 1996. The
increase in funds provided reflects earnings reported in 1997 of $4.1
million compared to a loss of $4.9 million in 1996, net of an increase in
accounts receivable resulting from the oil and gas interest sales on
September 30, 1997. Cash provided by real estate operations (sales less
notes received, net of additions) was approximately $12.1 million in 1997,
as compared with $9.2 million in 1996.
Cash used by investing activities was $960,000 in 1997's first nine months
primarily reflecting a $1.5 million equity investment in a Syntroleum
chemical plant while receipts from sales were slightly less than purchase
of investments. The $1.9 million of cash provided by investing activities
in 1996 reflects distributions from venture capital investment funds and
from affiliates. SLH's equity investment in the Syntroleum chemical plant
will allow for the commencement of certain engineering and permitting
efforts on the plant. Syntroleum is presently negotiating with other
potential capital providers; the development of the plant is contingent
upon financing.
Cash provided by financing activities was $8.2 million in the first nine
months of 1997 primarily representing SLH's capitalization by Lab Holdings.
In the first nine months of 1996, SLH's net cash used by financing
activities of $9.1 million primarily represents the net cash transactions
with Lab Holdings on SLH assets. The timing of receipts from real estate
sales and/or collections of notes thereon, as well as distributions from
venture capital investments, may vary significantly.
Debt associated with real estate totaled $1.2 million at both September 30,
1997 and December 31, 1996 and is due in December 1997. The lender has
made a proposal to extend the maturity date which SLH is currently
reviewing. This consolidated debt is non-recourse and comprises the
current notes payable on the balance sheets. SLH is obligated under
recourse debt (with an unpaid balance of $6.2 million) of an affiliate
accounted for on the equity method. SLH's obligation on this recourse debt
is secured by a $3.1 million U.S. Treasury Note transferred to SLH at the
Distribution Date.
SLH management expects cash flow from operations, cash from the
capitalization at the Distribution Date and the sale of assets to be
sufficient to fund cash needs.
In July 1997, SLH declared a three for one split in the form of a two for
one stock dividend. Each SLH stockholder of record on July 14, 1997,
received two additional shares of common stock for each share of common
stock held. These stock dividend certificates were distributed on July 21,
1997.
The stock of SLH was accepted for listing on the National Market System of
NASDAQ and began trading on July 29, 1997 under the symbol - SLHO. The
symbol is the same as used when SLH's stock traded on the OTC electronic
bulletin board.
During 1997, SLH entered into a joint development agreement for its 370
acres in Houston, Texas. The land was contributed to a partnership in
exchange for a note receivable with a 10% preferential return on both the
land contribution and future development cash requirements. The estimated
future development cash requirements are approximately $2.5 million. SLH's
ownership position is approximately 75%. This investment is classified as
real estate under development on the September 30, 1997 balance sheet.
On May 9, 1997, Lab Holdings received a formal agreement to the issues
discussed in Note 7(c) to the financial statements and the final tax
computation from the IRS. The agreement provides for a tax refund of
approximately $5.8 million, before interest. The Company expects to owe
interest of approximately $700,000. The agreement has been submitted to
the Congressional Joint Committee on Taxation for approval. Consideration
by the Joint Committee is expected before the end of 1997. The Company
assumed the liability and rights to any refund as part of the Distribution
Agreement. Accordingly, the Company would record a significant gain if the
agreement is formally approved.
On January 21, 1997, the Circuit Court of Jackson County, Missouri entered
a judgment favorable to the Company in the claim against Skidmore, Owings &
Merrill (see Notes to Consolidated Financial Statements). The amount of
the judgment, together with accrued interest at December 31, 1996, is
approximately $5.8 million. While the judgment has been appealed, the
Company has been advised by its Counsel that it will be difficult for the
defendants to cause the judgment to be reversed. The final outcome is not
expected until at least 1998.
As further assurance for SLH's obligations in connection with the
Distribution Agreement, SLH has agreed that it will not pay cash dividends
or redeem any of its capital stock for a period of two years after the
Distribution Date (March 3, 1997), without the consent of the Lab
Holdings Board of Directors.
During 1997's second quarter, a major oil company licensee of Syntroleum,
converted a previously issued Syntroleum $1 million debenture into
Syntroleum common stock at a previously negotiated conversion price of $12
per share, thereby decreasing SLH's ownership position in Syntroleum
slightly to 32.3%. SLH owns 5,950,000 shares of Syntroleum common stock.
On August 4, 1997, Syntroleum announced the execution of a non-exclusive
license agreement with YPF International. In addition to YPF, Syntroleum
has license agreements with Texaco, ARCO and Marathon. Syntroleum is the
developer and owner of a patented process and several related proprietary
technologies for the conversion of natural gas into synthetic liquid fuels.
Syntroleum has retained the rights to build lube and specialty chemical
plants for the production of synthetic lubricants, solvents and chemical
feedstocks from natural gas. The Syntroleum Process (registered trademark)
has not been tested in a plant designed to produce commercially viable
quantities and such testing cannot occur until a plant has been developed
and constructed, which could take up to two years from the commencement of
construction.
Recent Developments
On October 20, 1997, Criterion Catalyst exercised its option to purchase
Syntroleum common stock for $2 million cash, modified an agreement
regarding the purchase of future catalyst by Syntroleum and canceled future
stock option rights. The option exercise decreased SLH's ownership
position in Syntroleum slightly to 31.3%.
On October 24, 1997, Syntroleum announced a joint development project in
which ARCO will construct a pilot-scale, natural gas-to-liquids (GTL)
conversion facility on the West Coast. The project will demonstrate a new
reactor design that enhances the GTL conversion process licensed by
Syntroleum for large-scale applications.
On October 29, 1997, Syntroleum announced the execution of a definitive
agreement that will permit AMEC Process and Energy Limited to represent and
market the Syntroleum Process and provide engineering services to
Syntroleum licensees.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which revised the calculation and
presentation provisions of Accounting Principles Board Opinion 15 and
related interpretations. Statement No. 128 is effective for SLH's fiscal
year ending December 31, 1997. Retroactive application will be required.
SLH believes the adoption of Statement No. 128 will not have a significant
effect on its reported earnings per share.
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" is required to be implemented for
periods ending after December 15, 1997. The adoption of this standard is
not expected to have any significant impact on SLH's financial position or
results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." Statement No. 130 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 SLH's financial position or results of
operations.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information."
Statement No. 131 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 SLH's financial
position or results of operations.
No other recently issued accounting standards presently exist which will
require adoption in future periods.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Under the Distribution Agreement and Related Assignment, the
Company has assumed the rights and obligations of Lab Holdings with respect
to the legal matters described below.
(a) 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. 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
any costs relating to the prosecution of any of the above described claims.
Thus any recovery will be for the benefit of the Company and all costs
incurred in connection with the litigation will be paid by the Company.
Any ultimate recovery will be recognized as income when received and would
be subject to income taxes. In September 1993, the Missouri Court of
Appeals reversed a $5.7 million judgment granted in 1992 in favor of Lab
Holdings; the Court of Appeals remanded the case to the trial court for a
jury trial limited to the question of whether or not the applicable statute
of limitations barred the claim. The Appeals Court also set aside $1.7
million of the judgment originally granted in 1992. Subsequently, the
parties waived a jury trial and in July 1996, the case was retried to a
judge. On January 21, 1997, the judge entered a judgment in favor of Lab
Holdings for the benefit of the Company. The amount of that judgment,
together with interest is approximately $5.8 million. While the judgment
has been appealed, counsel for the Company expects that it will be
difficult for the defendants to cause the judgment to be reversed. The
final outcome is not expected until at least 1998. Settlement arrangements
with other defendants have resulted in payments to plaintiff which have
significantly offset legal fees and costs to date of approximately
$487,000. Future legal fees and costs can not reliably be estimated.
(b) Claim Against Scout. On January 30, 1997, Scout Development
Corporation was served with a complaint filed in the District Court of
Tarrant County, Texas by the parents of a 36 week old fetus. The fetus was
aborted, allegedly as a result of an automobile accident at an intersection
in Fort Worth, Texas, the view of which is alleged to have been obstructed
by weeds growing on property that is alleged to have been owned by Scout.
The Company has denied liability, has turned the matter over to its
insurance carrier and believes that if it has any liability, it is
adequately covered by an existing policy of insurance. In October 1997, a
court ordered mediation was held which did not result in a settlement of
the matter. However, settlement discussions continue.
(c) Internal Revenue Service Audits. Lab Holdings has received
notices of proposed adjustments (Revenue Agent's Reports) from the Internal
Revenue Service (IRS) with respect to 1986-1990 federal income taxes.
These notices claim total federal income taxes due for the entire five year
period in the approximate net amount of $13,867,000, exclusive of interest
thereon. Lab Holdings has filed protests regarding the 1986-1990 notices
of proposed adjustments.
On May 9, 1997, Lab Holdings received a formal agreement to the issues and
the final tax computation from the IRS. The agreement provides for a tax
refund of approximately $5.8 million, before interest. The Company expects
to owe interest of approximately $700,000. The agreement has been
submitted to the Congressional Joint Committee on Taxation for approval.
Consideration by the Joint Committee is expected before the end of 1997.
The Company assumed from Lab Holdings all contingent tax liabilities
and is acquiring all rights to refunds as well as any interest thereon
related to these tax years (the Tax Claims) and liabilities and refunds
related to any issues raised by the IRS for the years 1986-1990 whose
resolution may extend to tax years beyond the 1990 tax year. The Company
believes that adequate accruals for these income tax liabilities have been
made.
(d) California Tax Issues. In December 1996, the California
state auditor sent Lab Holdings an audit report covering the 1987-1989
taxable years. The State of California has determined to include, as a
"unitary taxpayer," all majority owned non-life insurance subsidiaries
and joint ventures of Lab Holdings. The auditor's report was forwarded to
the California Franchise Tax Board for action. In June 1997, the
California Franchise Tax Board sent a notice of taxes due for the 1987-1989
years of $769,213 which was paid in the same month. A billing for the
interest is expected to be approximately $1 million. The Company has
assumed all potential tax liabilities and interest thereon regarding the
California audit for the 1987-1989 taxable years. The Company believes
that it has established appropriate accruals for the California state
income tax liability.
Item 2. Changes in Securities
(a) Changes in Securities: None
(b) Under the Kansas General Corporation Code, dividends may be
paid out of the Corporation's surplus, or if there is no surplus, out of
the Corporation's net profits for the fiscal year in which the dividend is
declared or the preceding fiscal year. At September 30, 1997, the
Corporation's surplus (as defined under the Kansas General Corporation
Code) was approximately $46,688,000. However, in connection with the
distribution by Lab Holdings, Inc. of all shares of SLH Corporation common
stock to Lab Holdings shareholders, effected March 3, 1997, the Corporation
agreed that it will not, for a period of two years following the
distribution, pay any dividends in cash or property or redeem any of its
shares of capital stock, without the consent of Lab Holdings.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
On July 3, 1997, the Registrant's board of directors declared a
three for one split of the Registrant's shares of common stock. As a
result of the split, which was effected as a stock dividend, each
stockholder of record on July 14, 1997 received two additional shares of
common stock for each share of common stock held. Certificates for the
additional shares were mailed to stockholders on July 21, 1997.
The stock of SLH was accepted for listing on the National Market
System of NASDAQ and began trading on July 29, 1997, under the symbol -
SLHO. The symbol is the same as before when SLH's stock traded on the OTC
electronic bulletin board.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule - as filed electronically by
the Registrant in conjunction with this Form 10-Q.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SLH Corporation
Date November 12, 1997 By /s/ James R. Seward
----------------------------
James R. Seward
President and Chief
Executive Officer
Date November 12, 1997 By /s/ Steven K. Fitzwater
----------------------------
Steven K. Fitzwater
Vice President, Chief Financial and
Accounting Officer and Secretary