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 June 30, 1998
----- 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
July 27, 1998: $.01 par value common - 10,074,721
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SLH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
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(unaudited)
June 30, December 31,
1998 1997
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(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 866 20,054
Short-term investments 38,094 11,992
Accounts and notes receivable 3,267 146
Real estate under contract 1,436 1,973
Current income taxes 180 5,109
Other current assets 245 243
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Total current assets 44,088 39,517
Real estate held for sale 3,969 6,791
Real estate under development 2,011 2,267
Investment securities 1,522 1,530
Investment in affiliates 1,400 1,280
Property, plant and equipment 69 83
Notes receivable 255 1,680
Other assets 29 21
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$ 53,343 53,169
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LIABILITIES AND COMBINED EQUITY
Current liabilities:
Accounts payable $ 162 75
Other accrued expenses 451 475
Interest payable -- 1,479
Other current liabilities 10 10
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Total current liabilities 623 2,039
Notes payable -- 21
Other liabilities 79 12
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Total liabilities 702 2,072
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Minority interests 473 46
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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 $.01 par value.
Authorized 30,000,000 shares;
issued 10,074,721 shares
(1997-9,902,588 shares) 101 99
Paid-in capital 42,455 45,438
Retained earnings 9,612 5,433
Accumulated other comprehensive income -- 81
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Total stockholders' equity 52,168 51,051
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$ 53,343 53,169
========================
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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
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(in thousands except share amounts)
REVENUES
Real estate sales $ 3,886 6,975 6,954 11,015
Real estate rentals and other 251 211 421 385
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Total revenues 4,137 7,186 7,375 11,400
COSTS AND EXPENSES
Real Estate:
Cost of sales 2,044 6,981 4,948 11,019
Operating expenses 299 818 622 1,563
Provision for loss on real
estate held for sale, net (199) 41 (199) 220
General and administrative 529 354 1,532 687
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Earnings (loss) from operations 1,464 (1,008) 472 (2,089)
Investment and interest income 519 1,918 3,040 5,124
Interest expense -- (45) (1) (89)
Equity in net earnings (loss)
of affiliates 14 (137) 20 (369)
Equity in net earnings of
venture capital investment
funds 61 24 110 82
Other income 18 169 52 435
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Earnings before income taxes 2,076 921 3,693 3,094
Income taxes (benefit) -- (5) (913) (8)
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Earnings before minority interests 2,076 926 4,606 3,102
Minority interests 428 -- 427 --
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Net earnings $ 1,648 926 4,179 3,102
===================== ====================
Per share of common stock
Basic net earnings $ .16 .10 .42 .32
Diluted net earnings $ .15 .09 .38 .29
Book value $ 5.18 4.88 5.18 4.88
Weighted average common shares 10,074,721 9,733,656 10,014,286 9,733,656
Weighted average common shares
and equivalents 10,925,601 10,697,394 10,966,308 10,624,866
Shares outstanding
end of period 10,074,721 9,733,656 10,074,721 9,733,656
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 and Comprehensive Income
Six Months Ended June 30, 1998 (unaudited)
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Comprehensive Stockholders'
Income Equity
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(in thousands)
Common stock:
Balance, beginning of period $ 99
Exercise of stock options 2
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Balance, end of period 101
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Paid-in capital:
Balance, beginning of period 45,438
Exercise of stock options (2,983)
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Balance, end of period 42,455
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Retained earnings:
Balance, beginning of period 5,433
Net earnings 4,179 4,179
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Balance, end of period 9,612
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Accumulated other comprehensive income
Balance, beginning of year 81
Unrealized gains on securities, net of
reclassification adjustment (81) (81)
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Balance, end of period -------- --
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Totals $ 4,098 52,168
======== ========
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)
Six months ended
June 30,
1998 1997
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(in thousands)
OPERATING ACTIVITIES
Net earnings $ 4,179 3,102
Adjustments to reconcile net earnings
to net cash provided by operations:
Depreciation and amortization 27 78
Earnings applicable to minority interests 427 --
Equity in (earnings) losses of affiliates (20) 369
Equity in earnings of venture capital
investment funds (76) (82)
Provision for loss on real estate held for sale (199) 220
Sales of real estate 4,334 10,045
Increase in notes receivable from sales
of real estate -- (1,780)
Collections of notes receivable from sales
of real estate 1,425 100
Additions to real estate held for sale (133) (233)
Additions to real estate under development (235) --
Change in short-term trading portfolio, net 1,968 (2,279)
Change in accounts receivable (3,122) (1,178)
Change in accounts payable 87 (27)
Change in interest payable (1,479) --
Increase in deposits -- (225)
Income taxes and other 4,760 (534)
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Net cash provided by operations 11,943 7,576
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INVESTING ACTIVITIES
Investments in affiliates (100) (1,500)
Distribution from venture capital
investment funds 84 445
Purchase of investments available for sale (59,567) (10,119)
Sale of investments available for sale 31,473 2,500
Additions to property, plant and equipment, net (19) (51)
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Net cash used by investing activities (28,129) (8,725)
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FINANCING ACTIVITIES
Proceeds from long-term debt -- 41
Payment of principal on long-term debt (21) (20)
Capitalization by Lab Holdings, Inc. -- 10,000
Net issuance of stock pursuant to stock option
plan (2,981) --
--------------------
Net cash provided (used) by financing
activities (3,002) 10,021
--------------------
Net increase (decrease) in cash
and cash equivalents (19,188) 8,872
Cash and cash equivalents - beginning of period 20,054 3,925
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Cash and cash equivalents - end of period $ 866 12,797
====================
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest (net of amount capitalized) $ 2 54
====================
Income taxes, net $ (5,842) 33
====================
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
June 30, 1998 and 1997
(1) The interim financial information furnished herein is unaudited while
the balance sheet at December 31, 1997 is derived from audited financial
statements. In the opinion of management, the financial information
reflects all adjustments which are necessary to fairly state SLH
Corporation's (SLH or the Company) financial position at June 30, 1998 and
December 31, 1997 and the results of its operations and cash flows for the
periods ended June 30, 1998 and 1997. 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
1997 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 as amended) for additional
information not required by this Quarterly Report on Form 10-Q.
(2) On March 31, 1998, SLH and Syntroleum Corporation (which is 31% owned
by SLH) announced a definitive agreement to merge the two companies. The
merger had been approved by the boards of directors of both companies. On
July 2, 1998, the Securities and Exchange Commission declared effective the
SLH Registration Statement on Form S-4 which includes a Joint Proxy
Statement for SLH and Syntroleum Corporation (Syntroleum) stockholders'
meetings to consider and vote on the merger. Both stockholders' meetings
will take place on August 6, 1998.
In the merger, each outstanding share of Syntroleum common stock will be
converted into a number of SLH shares of common stock equal to the ratio of
an "implied" market value of Syntroleum common stock divided by the market
value of the SLH common stock during the five trading days before the SLH
meeting of stockholders. In addition, the name of SLH will be changed to
Syntroleum, and SLH management and six of the eight SLH directors will be
replaced with Syntroleum management and directors.
(3) Pursuant to a Distribution Agreement between SLH 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 six month period ending June 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.
(4) Cash and cash equivalents include all highly liquid investments with
an original maturity of three months or less when purchased.
(5) Basic earnings per share is computed using the weighted average number
of common shares and diluted earnings per share is computed using the
weighted average number of common shares and dilutive stock options.
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.
Six Months Ended
June 30,
1998 1997
-------------------------
Weighted average common shares 10,014,286 9,733,656
Stock options 952,022 891,210
-------------------------
Weighted average common shares and
common share equivalents 10,966,308 10,624,866
=========================
(6) The Company adopted the provisions of the Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" on January
1, 1998. Comprehensive income is defined as any change in equity from
transactions and other events originating from non-owner sources. For SLH,
those changes are composed of reported net income and changes in unrealized
holding gains and losses on marketable equity securities. The components
of comprehensive income are as follows.
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
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(in thousands)
Net earnings $ 1,648 926 4,179 3,102
--------------------------------------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gain
arising during the period -- 56 -- 1,431
Less: reclassification
adjustment for gains
included in net income -- (1,389) (81) (1,389)
Tax expense -- -- -- --
--------------------------------------
Total other comprehensive income -- (1,333) (81) 42
--------------------------------------
Total Comprehensive Income $ 1,648 (407) 4,098 3,144
======================================
(7) (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
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 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 Lab Holdings for
the benefit of the Company. The amount of that judgment, together with
interest is approximately $5.7 million. 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 judgment pending the
outcome of the appeal. The appeal was heard during the second quarter of
1998, and a final decision is expected by the end of 1998.
(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 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 the first quarter 1998 with payment of the settlement being made
by the Company's insurance carrier.
(c) 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. 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. In the second quarter 1998,
the Company received federal tax refunds of approximately $5.9 million for
the 1986-1990 years. An additional check for interest on the 1990 tax
refund is still pending.
(d) 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 the first quarter 1998.
Although the Company has settled potential liabilities to the IRS and
California for the tax years in question, the settlement made it necessary
for the Company to file amended tax returns in certain states to reflect
the results of the settlement. Approximately $20,000 was paid with the
amended state returns and a $170,000 delayed state tax refund is now
expected.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Selected Financial Data
Three months ended Six Months Ended
June30, June 30,
----------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ---------
Revenues $ 4,137,000 7,186,000 7,375,000 11,400,000
Earnings (loss) from
operations $ 1,464,000 (1,008,000) 472,000 (2,089,000)
Investment and interest
income - net $ 519,000 1,918,000 3,040,000 5,124,000
Net earnings $ 1,648,000 926,000 4,179,000 3,102,000
Per share of common stock:
Basic net earnings $ .16 .10 .42 .32
Diluted net earnings $ .15 .09 .38 .29
Book Value per share $ 5.18 4.88 5.18 4.88
Introductory remarks about results of operations
On March 3, 1997, Lab Holdings, Inc. (Lab Holdings) distributed to its
shareholders all of the outstanding shares of common stock of its wholly-
owned subsidiary, SLH Corporation (SLH or the Company), 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.
The 1997 financial information reflects the split of SLH's common stock
three for one on July 21, 1997 and two for one on February 9, 1998 through
stock dividends of additional shares.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations covers periods during which SLH's assets were owned
and operated by Lab Holdings. It should be read in conjunction with 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.
SECOND QUARTER ANALYSIS
Real estate revenues in 1998's second quarter were $4.1 million compared
with $7.2 million in 1997's second quarter. The real estate sales revenues
in 1998 include the sale of 17.5 acres of land for commercial usage in
Texas for $2.3 million, the sale of one residential unit in New Mexico for
$525,000, and the sale of approximately 4 acres of land zoned for retail
use in Kansas for $1.1 million. In 1997, the real estate sales revenue
included the sale of 10 residential units in Florida and New Mexico for a
total of $6.2 million and 205 acres of undeveloped land in Texas for
$820,000. Real estate rental and other revenues increased slightly in the
second quarter primarily reflecting prepayment fees received on a purchase
money mortgage.
At June 30, 1998, real estate holdings include undeveloped commercial and
residential land (359 acres), three single-family condominium units in New
Mexico, and commercial structures. The real estate holdings are all listed
for sale, except the 341 acre Houston Project which is being developed and
a second quarter 1998 equity investment in a hotel in Tulsa, and are
located in the following states: Kansas, Nevada, New Mexico, Oklahoma,
Texas and Wyoming. Real estate under contract for sale at June 30, 1998
included the last three residential units in New Mexico and 23 lots in
Texas. Real estate operations have been influenced from period to period
by several factors including seasonal sales cycles. The recent substantial
reduction in real estate inventory will influence future period to period
comparisons. Revenues should decrease with less inventory available for
sale. The timing of these fewer sales will also create variances in period
to period earnings recognition.
Cost of the real estate sales in 1998's second quarter totaled $2 million,
compared with a cost of approximately $7 million in 1997's second quarter,
reflecting the mix of real estate sold during each period as discussed in
the revenue analysis above. Real estate operating expenses totaled
$299,000 in 1998, compared with $818,000 in 1997. The reduction is
attributable to position eliminations and other cost reductions associated
with the decreasing real estate portfolio.
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. A net impairment loss of $41,000 in 1997's second quarter was
recorded on real estate held for sale. The impairment loss resulted from
changes in estimated expected future cash flows and sales prices on certain
properties based on appraisals and other current market conditions. In
1998's second quarter, the significant reductions in real estate inventory
from sales, project completion and market condition changes produced net
gains of $199,000.
General and administrative expenses totaled $529,000 in 1998's second
quarter compared to $354,000 in 1997's second quarter. The increase during
1998 primarily reflects costs associated with the proposed merger of SLH
with Syntroleum Corporation (Syntroleum) and slightly increased expenses as
a stand alone company in 1998.
The above factors produced earnings from operations of $1.5 million in
1998's second quarter compared to a loss of $1 million in 1997's second
quarter.
Investment and interest income in 1998's second quarter totaled $519,000,
compared with $1.9 million in 1997's second quarter. The second quarter of
1997 included a gain of approximately $1.4 million on the sale of shares of
a public company (Watson Pharmaceuticals, Inc.) owned by SLH and received
as the result of a merger with one of SLH's venture capital investments.
Interest expense was zero in 1998's second quarter compared to $45,000 in
1997's second quarter. Interest expense last year was primarily due to
non-recurring interest costs in 1997 associated with state tax issues and
the fourth quarter 1997 payment of a real estate mortgage.
Equity in affiliates' operations produced earnings of $14,000 in 1998's
second quarter compared with a loss of $137,000 in 1997's second quarter.
During 1997, the Company's oil and gas partnership interests were sold.
SLH's share of these partnerships' second quarter 1997 losses totaled
$145,000. SLH's shopping center joint venture had earnings of $14,000 in
1998's second quarter compared to earnings of $8,000 in 1997's second
quarter.
Equity in earnings of venture capital investment funds totaled $61,000 in
1998's second quarter and $24,000 in 1997's second quarter. These funds
are invested in development stage companies which may cause earnings in
these funds to be subject to significant variations.
The $18,000 of other income in 1998's second quarter primarily consists of
Lab Holdings' services agreement fees, while 1997's second quarter other
income of $169,000 reflects receipts on receivables accounted for on the
cost recovery method.
Taxable gains on the sale of real estate in 1998 were offset by loss
carryovers from 1997. In 1997's second quarter, limited tax benefits of
$5,000 were recorded as valuation allowances were provided on the remaining
federal tax benefits because utilization within the group was not expected.
Minority interest of $428,000 in 1998's second quarter reflects a minority
partner's share of the sale of the commercial acres in the Houston real
estate project.
The net earnings in 1998's second quarter of $1.6 million and $926,000 in
1997 reflect the above results of operations.
FIRST SIX MONTHS ANALYSIS
Real estate revenues in 1998's first six months were $7.4 million compared
with $11.4 million in 1997's first six months. Real estate sales revenues
in 1998 include the closing on sales of 6 residential units or lots in New
Mexico ($2.8 million) and 24.5 acres of land in Texas and Kansas ($4.2
million). In 1997's first six months, real estate sales revenue included
the closing on sales of 20 residential units or lots in Florida, New Mexico
and Texas ($7.9 million) and 752 acres of land in Texas ($3.1 million).
Real estate rental and other revenues increased slightly to $421,000 in
1998's first six months from $385,000 in 1997's first six months. 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 1998's first six months totaled $4.9
million, compared with a cost of $11 million in the first six months of
1997, reflecting the mix of real estate sale closings during each period as
discussed in the revenue analysis above. Real estate operating expenses
totaled $622,000 in 1998's first six months, compared with $1.6 million in
1997's first six months. The reduction is attributable to position
eliminations and other cost reductions associated with the decreasing real
estate portfolio.
A $220,000 net impairment loss on real estate held for sale was recorded in
1997's first six 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. In
1998's second quarter, the significant reductions in real estate inventory
from sales, project completion and market condition changes produced net
gains of $199,000.
General and administrative expenses totaled $1.5 million in 1998's first
six months compared to $687,000 in 1997's first six months. The increase
during 1998 primarily reflects costs associated with the proposed merger of
SLH with Syntroleum, executive bonuses and increased expenses as a stand
alone company in 1998.
The above factors produced earnings from operations of $472,000 in 1998's
first six months compared to a loss of $2.1 million in 1997's first six
months.
Investment and interest income in 1998's first six months totaled $3
million, compared with $5.1 million in 1997's first six months. The first
six months of 1998 included a gain of approximately $1 million on the sale
of shares of a public company (Watson Pharmaceuticals, Inc.) owned by SLH
and received as the result of a merger with one of SLH's venture capital
investments. Additionally in 1998, interest of $885,000 on the federal
income tax refunds was recognized as well as interest on invested cash. In
1997's first six months, investment income consisted primarily of the sale
of Watson Pharmaceuticals shares for a gain of approximately $4.4 million.
Interest expense decreased to $1,000 in 1998's first six months from
$89,000 in the same period of 1997 primarily due to non recurring interest
costs in 1997 associated with state tax issues and the fourth quarter 1997
payment of a real estate mortgage.
Equity in affiliates' operations produced earnings of $20,000 in 1998's
first six months, compared with a loss of $369,000 in 1997's first six
months. During 1997, the Company's oil and gas partnership interests were
sold. SLH's share of these partnerships' losses during the first six
months of 1997 losses were $394,000. SLH's shopping center joint venture
had earnings of approximately $25,000 in the first six months of both 1998
and 1997.
Equity in earnings of venture capital investment funds totaled $110,000 in
1998's first six months and $82,000 in 1997's first six months. These
funds invested in development stage companies which may cause earnings in
these funds to be subject to significant variations.
The $52,000 of other income in 1998's first six months primarily consists
of gain on sale of miscellaneous assets and Lab Holdings' services
agreement fees. The $435,000 of other income in 1997's first six months
reflects receipts on receivables accounted for on the cost recovery method,
net of $300,000 for costs associated with the move of SLH offices to a new
location in 1997.
During the first six months of 1998, income tax benefits of $913,000 were
recognized after filing amended state income tax returns reflecting the IRS
settlement last year. Taxable gains on the sale of real estate in 1998's
first six months were offset by losses carried forward from 1997. In
1997's first six months, limited tax benefits of $8,000 were recorded as
valuation allowances were provided on the remaining federal tax benefits
because utilization within the group was not expected.
Minority interest of $427,000 in 1998's first six months reflects a
minority partner's share of the sale of commercial acres in the Houston
real estate project.
The net earnings in 1998's first six months of $4.2 million and $3.1
million in 1997 reflect the above results of operations.
Liquidity and Capital Resources
Prior to September 30, 1996, SLH's liquidity was provided by Lab Holdings.
However, as provided in the Distribution Agreement, Lab Holdings
transferred to SLH 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 SLH's assets
from October 1, 1996 to March 3, 1997 totaling $9.6 million, was
transferred to SLH as provided in the Distribution Agreement.
At June 30, 1998, SLH had available $39 million in cash and short-term
investments. SLH received a federal income tax net refund of approximately
$5.9 million in the second quarter of 1998 for the 1986 to 1990 tax years.
Current assets totaled approximately $44.1 million while current
liabilities totaled $623,000. Changes in assets and liabilities on the
balance sheet reflect reductions in the real estate portfolio, the payment
of interest on a state income tax liability and the federal income tax
refunds.
Cash provided by operations in 1998's first six months totaled $11.9
million, compared to $7.6 million in 1997's first six months. During 1998,
net cash provided by operations primarily consisted of federal tax refunds
and real estate sales. During 1997, the net cash provided by operations
primarily resulted from real estate sales net of changes in accounts
receivable and the short-term trading portfolio.
Cash used by investing activities was $28.1 million in 1998's first six
months reflecting purchases of investments available for sale exceeding
sales of investments and a $100,000 equity investment in a hotel being
renovated in Tulsa adjacent to Syntroleum's corporate headquarters. Cash
used by investing activities totaled $8.7 million in 1997's first six
months and reflected purchases of investments available for sale exceeding
sales of investments and a $1.5 million equity investment in an affiliate
of Syntroleum engaged in the proposed development of a specialty products
GTL plant.
Cash used by financing activities in 1998's first six months reflects the
net issuance of SLH's common stock pursuant to SLH's stock option plan,
while in 1997's first six months the cash provided by financing activities
represented the capitalization of SLH by Lab Holdings.
A $1.4 million note receivable was prepaid during 1998's second quarter,
therefore the associated debt of $21,000 was also prepaid during 1998's
second quarter. SLH is obligated under recourse debt (with an unpaid
balance of $6 million) of an affiliate which is accounted for on the equity
method. SLH's obligation on this recourse debt is secured by a $3 million
U.S. Treasury Note.
In January 1998, the United States Congress Joint Committee on Taxation
approved the tax refund issues included in SLH's negotiated tax settlement
with the Internal Revenue Service relating to tax years 1986 through 1990.
In 1998's second quarter, SLH received federal tax refunds of approximately
$5.9 million which had been accrued at December 31, 1997 for the tax years
1986-1990. An additional refund for interest on the 1990 tax year is still
pending. The settlement required the filing of amended state income tax
returns during 1998 for the tax years 1986 through 1990.
Management anticipates that future additions to property, plant and
equipment will be minimal. SLH estimates that construction and disposal
costs to complete real estate projects in development will be approximately
$3 million. SLH is actively addressing Year 2000 computer concerns and is
upgrading one computer system. Management expects that the total cost for
Year 2000 compliance should be approximately $15,000.
SLH's Board of Directors declared a two for one split of SLH'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.
Merger
On March 31, 1998, SLH and Syntroleumr Corporation (Syntroleum) signed a
definitive agreement to merge the two companies.
On July 2, 1998, SLH announced that the Securities and Exchange Commission
(SEC) had declared effective the SLH Registration Statement on Form S-4
which includes a Joint Proxy Statement for SLH and Syntroleum stockholders'
meetings on August 6, 1998 to consider and vote on the merger.
In the merger, each outstanding share of Syntroleum common stock is to be
converted into a number of SLH shares of common stock equal to the ratio of
an "implied" market value of Syntroleum common stock divided by the market
value of the SLH common stock during the five trading days before the SLH
meeting of stockholders. In addition, the name of SLH will be changed to
Syntroleum, and SLH management and six of the eight SLH directors will be
replaced with Syntroleum management and directors. P. Anthony Jacobs,
Chairman of SLH, and James R. Seward, President and CEO of SLH, who are
currently directors of both companies, will remain as directors of the
merged company.
The merger will be accounted for as a reverse acquisition using the
purchase method of accounting in accordance with the Accounting Principles
Board Opinion No. 16. Although SLH is the surviving corporation in the
merger for legal purposes, Syntroleum will be the acquirer for accounting
purposes. For purposes of preparing its consolidated financial statements,
the combined company will establish a new accounting basis for SLH's assets
and liabilities using the fair values thereof, based upon the consideration
paid in the merger and Syntroleum's costs of the merger. A final
determination of required purchase accounting adjustments, including the
allocation of the purchase price to the assets acquired and liabilities
assumed based on their respective fair values, has not yet been made;
however, management does not believe the adjustments to the SLH assets, if
any, will be material. For financial reporting purposes, the results of
operations of SLH will be included in the combined company's consolidated
statement of operations following the effective date of the merger.
Because Syntroleum expects to incur significant costs in connection with
the development, design and construction of its specialty product plants
and plants constructed through its efforts with industry partners and
others and does not anticipate receiving any revenues from such ventures in
the near future, the combined company may operate at a loss unless and
until revenues are recognized from these plants or additional license fees
are received from licensees and recognized as revenue. In this regard,
Syntroleum reported a net loss of $2.7 million during the second quarter of
1998 and a net loss of $5.6 million for the six months ended June 30, 1998.
Syntroleum's operating revenues during the second quarter of 1998 and the
six months ended June 30, 1998 were $466,000 and $851,000, respectively.
Syntroleum's total costs and expenses during the second quarter of 1998 and
the six months ended June 30, 1998 were $3.3 million and $6.7 million,
respectively. Syntroleum's other income during the second quarter of 1998
and the six months ended June 30, 1998 were $85,000 and $205,000,
respectively. Syntroleum funded its expenses during the first quarter of
1998 primarily using its operating revenues and cash received as deposits
and option fees under its license agreements. Syntroleum's accounting
policy is to initially defer recognition as revenue of the deposits and
option fees under its license agreements and recognize 50% of such deposits
and option fees in the period in which the process design package under the
agreement is delivered and recognize 50% of such fees when the plant has
passed certain performance tests.
Syntroleum's estimated expenses of $1,250,000 incurred in connection with
the merger will be capitalized in accordance with the purchase method of
accounting. SLH's estimated expenses of approximately $1,750,000 in
connection with the merger are being expensed.
The Assignment and Assumption Agreement between SLH and Lab Holdings
imposes a restriction on the payment of dividends and redemptions of SLH
capital stock that expires on February 28, 1999. On June 1, 1998, SLH and
Lab Holdings agreed that the restrictions would expire upon the effective
date of the Merger.
Recently Issued Accounting Standards
No recently issued accounting standards presently exist which will require
adoption in future periods.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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
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 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 Lab Holdings
for the benefit of the Company. The amount of that judgment, together with
interest is approximately $5.7 million. The defendants appealed the
judgment to the Missouri Court of Appeals, Kansas City Division, and posted
an appeal bond to stay collection of the judgment pending the outcome of
the appeal. The appeal was heard during the second quarter of 1998, and a
final decision is expected by the end of 1998.
(b) 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. 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. In the second quarter 1998,
the Company received federal tax refunds of approximately $5.9 million for
the 1986-1990 years. An additional amount for interest on the 1990 tax
refund is still pending.
(c) 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 the first quarter 1998.
Although the Company has settled potential liabilities to the IRS and
California for the tax years in question, the settlement made it necessary
for the Company to file amended tax returns in certain states to reflect
the results of the settlement. Approximately $20,000 was paid with the
amended state returns and a $170,000 delayed state tax refund is now
expected.
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 June 30, 1998, the Corporation's
surplus (as defined under the Kansas General Corporation Code) was
approximately $52,067,000. In connection with the distribution by Lab
Holdings of all shares of SLH common stock to Lab Holdings shareholders,
effected March 3, 1997, SLH 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. On June 1, 1998, SLH and Lab Holdings agreed that the
restrictions would expire upon the effective date of the proposed merger
between SLH and Syntroleum.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Certificate of Designations of Series A Junior
Participating Preferred Stock of SLH Corporation dated February 19, 1997,
together with Statement of Increase dated June 1, 1998 (incorporated by
reference to Exhibit 4.3 to the SLH Registration Statement on Form S-4,
Registration No. 333-50253).
10.1 Lab Holdings, Inc. Facilities Sharing and Interim
Services Agreement, dated as of June 1, 1998, (incorporated by reference to
Exhibit 10.29 to the SLH Registration Statement on Form S-4, Registration
No. 333-50253).
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 August 3, 1998 By /s/ James R. Seward
----------------------------
James R. Seward
President and Chief
Executive Officer
Date August 3, 1998 By /s/ Steven K. Fitzwater
----------------------------
Steven K. Fitzwater
Vice President, Chief Financial and
Accounting Officer and Secretary