<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
-- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 1-7949
-----------------
REGENCY AFFILIATES, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 72-0888772
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3340 S.E. Federal Hwy., Suite 210, Stuart, Fla. 34997
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(Address of principal executive offices) (Zip Code)
10842 Old Mill Road, # 5B, Omaha, Nebraska 68154
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(Address of administrative offices) (Zip Code)
Registrant's Telephone Number (executive office), including Area Code:
(561-334-1010)
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Registrant's Telephone Number (administrative office), including Area Code:
(402-330-8750)
- -------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of Each Exchange on Which
------------------------------
Title of Each Class Registered
------------------- ----------
Common Stock, $0.40 Par Value None
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT.
________________________ None _____________________
(Title of Class)
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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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was approximately $5,050,000 on March 14, 1997, which value has been
computed on the basis of $0.61 per share of Common Stock, the mean of the bid
and asked price as reported on the bulletin board section of NASDAQ on that
date.
The number of shares outstanding of the registrant's $.40 Par Value Common
Stock, as of March 14, 1997 was 11,399,871.
DOCUMENTS INCORPORATED BY REFERENCE (See Exhibit Listing).
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FORM 10-K
PART I
ITEM 1. BUSINESS.
General development of business.
Regency Affiliates, Inc. (the "Company" or "Regency" or the
"Registrant") formerly Transcontinental Energy Corporation, was organized as a
Delaware corporation in 1980 to be the successor to Transcontinental Oil
Corporation which existed since 1947.
Subsequent to a restructuring in 1992, the Company, on July 7, 1993,
acquired an 80% interest in National Resource Development Corporation ("NRDC")
(the "NRDC Transaction") by the issuance of 2,975,000 shares of the Company's
$0.40 p.v. Common Stock, 208,850 shares of the Company's cumulative $100 Series
C Preferred Stock and 20% of the outstanding shares of Transcontinental Drilling
Company, a subsidiary of the Company. NRDC's principal asset consists of
previously quarried and stockpiled aggregate inventory located at a mine site in
Michigan. The aggregate inventory was, and continues to be, pledged to secure
repayment of certain Zero Coupon bonds which have been issued by NRDC having a
face value at maturity of $542,000 on January 1, 2002.
On July 7, 1993, Statesman designated eight (8) persons to fill
existing vacancies on the Board of Directors of the Company. The appointments
were made by the sole acting director to fill the vacancies until their
successors are duly elected and qualified.
Statesman, in addition to receiving the Company's Common Stock in the
NRDC Transaction, through its right to designate the eight persons to fill the
existing vacancies on the Board of Directors until a Shareholders' Meeting,
effectively has current voting control of a total of 3,515,701 shares, or
approximately 30.8% of the 11,399,871 outstanding shares as of December 31,
1996, consisting of irrevocable proxies over 855,991 shares given to a proxy
committee of the Board of Directors as part of the NRDC Transaction, and
the 2,659,710 shares currently held by Statesman.
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PRINCIPAL PRODUCTS AND RELATED INFORMATION
NRDC
NRDC has as its sole asset 75 million short tons of previously quarried
and stock piled rock located at the site of the Groveland Mine in Dickinson
County, Michigan. During the year ended December 31, 1996, NRDC made only casual
sales of Aggregate (less than $4,900).
Aggregate is primarily sold for railroad ballast, road construction,
construction along shore lines and decorative uses. The market for aggregate
stone is highly competitive and, as shipping costs are high, the majority of
sales, if any, can be anticipated to be made locally. Other companies that
produce rock and aggregate products are located in the same region as the
Groveland Mine. Many of these competitors will have greater financial and
personnel resources than the Company. As a consequence, there can be no
assurance that acting alone NRDC will be able to consummate sales of material
amounts of its Aggregate.
The Company is actively seeking a joint venture partner presently in
the business of marketing and selling aggregate to assist in the sale of the
aggregate held by NRDC. It is contemplated that such a joint venture partner
would provide the crushing and loading equipment necessary in order to stockpile
crushed aggregate and ready it for sale during the 1997 building season. While
the Company is reasonably optimistic that such a joint venture can be formed,
there can be no assurance that such a transaction will come to fruition.
Moreover, the success of such a venture will be dependant upon the market for
aggregate in the State of Michigan and the ability of the Company to negotiate
favorable royalty rates with M.A. Hanna Company.
SECURITY LAND AND DEVELOPMENT COMPANY LIMITED PARTNERSHIP
On November 18, 1994, Regency Affiliates, Inc. acquired a limited
partnership interest in Security Land And Development Company Limited
Partnership (the "Partnership") for an equity investment of $350,000, which
amount was used to pay brokerage fees related to Regency's purchase of its
interest in the Partnership. Regency has no obligation to make any further
capital contribution to the Partnership. The Partnership owns the 34.3 acre
complex at 1500 Woodlawn Drive, Woodlawn, MD containing the Security West
Buildings consisting of a two-story office building and a connected six-story
office tower occupied by the United States Social Security Administration Office
of Disability and International Operations under a nine year lease expiring
October 31, 2003 (the "Lease"). The buildings have a net rentable area of
approximately 717,011 square feet. The construction of the Security West
Buildings was completed in 1972 and the building has been occupied by the Social
Security Administration since 1972 under prior leases between the U.S.
Government and the Partnership.
During 1994, the Partnership completed the placement of a $56,450,000
non-recourse project note, due November 15, 2003, issued by the Partnership. The
placement of the project note was undertaken by the issuance of 7.90%
certificates of participation and was underwritten by Dillon Read
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& Co., Inc. The net proceeds received from the sale of the certificates have or
are being used to refinance existing debt of the Partnership related to the
project, to finance certain alterations to the project by the Partnership, to
fund certain reserves and to pay costs of the project note issue. The project
note is a non-recourse obligation of the Partnership and is payable solely from
the Lease payments from the U.S. Government. Such rental payments under the
Lease are not subject to annual appropriation by the United States Congress and
accordingly, the obligations to make such payments are unconditional general
obligations of the government backed by the full faith and credit of the United
States. The payments under the Lease consist of base rent, maintenance rent,
additional base rent, additional maintenance rent and the government tax
reimbursement amount. The base rent, maintenance rent and additional base rent
are fixed amounts and are not subject to adjustment. The base rent and the
additional base rent together constitute the finance rent, which will be
utilized to pay principal and interest on the project note, certain real estate
taxes and costs of insurance and other reserves.
The terms of the Security Land and Development Company Limited
Partnership Agreement (as amended) and the project note (which note will be
fully amortized over the term of the lease) call for Regency Affiliates, Inc. to
be allocated 95% of the profits and losses of the Partnership until October 31,
2003, and 50% thereafter. Regency is to receive certain limited cash flow after
debt service, and a contingent equity build-up depending upon the value of the
project upon termination of the Lease.
The transaction with Security Land and Development Company Limited
Partnership provides for the Company to receive management fees equaling
$100,000 per annum.
Related information.
On June 21, 1996, the Company closed a loan transaction with Southern
Indiana Properties, Inc. ("SIPI"), as lender, for a $3.5 million zero coupon
loan. The loan has a term of approximately 9 1/2 years, with a final maturity
date of December 31, 2005. Except for certain rights of the Company to make
voluntary prepayments or of the lender to require prepayments in certain limited
circumstances, principal and accrued interest on the loan become due at the
maturity date. The Company intends to use the proceeds of the loan for
acquisitions and/or general corporate purposes. The loan transaction provides
for the loan to be secured by a pledge of the shares of stock of certain of
the Company's subsidiaries, a lien on the loan's proceeds, and a security
interest in the Company's limited partnership interest in Security Land And
Development Company Limited Partnership. SIPI is also given a security interest
in all of the other property of the Company. However, SIPI has agreed to
subordinate its position in other collateral of the Company, if requested to do
so by the Company. Furthermore, if the Company prepays at least $750,000 of the
loan by December 21, 1998, SIPI is obligated to release its security interest
in all collateral except the Company's Limited Partnership Interest in the
Partnership.
As of December 31, 1996, Regency Affiliates, Inc. had as its sole
employees, Pamlyn Kelly, Ph.D., the Company's President and Eunice M. Antosh,
the Company's Secretary. Both were employed by the Company on a part time basis.
Dr. Kelly was elected as the Company's interim President following the removal
of Gary K. Nuttall as President.
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ITEM 2. PROPERTIES
As of December 31, 1996, NRDC owned approximately 75 million short tons
of Aggregate located at the site of the Groveland Mine in Dickinson County,
Michigan. The Groveland Mine is an iron ore mine that was shut down in 1981 by a
former owner and operator, M.A. Hanna Company. The mine was acquired by
International Aggregate Corporation in December, 1989. Subsequent thereto,
International Aggregate Corporation transferred title to the Aggregate to
National Resource Development Corporation (Delaware), NRDC's predecessor.
The 75 million short tons of Aggregate is commingled with other
aggregate not owned by NRDC and is rock that was separated from iron ore during
previous mining operations. The ownership of the Aggregate is subject to a
Royalty Agreement between North American Demolition Company (International
Aggregate Corporation's predecessor in title) and M.A. Hanna Company dated
December 22, 1989, as amended, which requires the payment of certain royalties
to M.A. Hanna Company upon sales of Aggregate.
Reference is made to Item 1, Business, page 4 of this report, for a
description of the Security West Building at 1500 Woodlawn Drive, Woodlawn, MD,
which property is owned by Security Land And Development Company Limited
Partnership.
During the third quarter of 1996, the Company acquired a real estate
investment in Stuart, Florida, consisting of a one-story commercial building
located on a one-eighth acre parcel of land. The property was purchased for
approximately $51,000, and is leased to a single tenant.
ITEM 3. LEGAL PROCEEDINGS
The sole legal proceeding to which the Company or any of its
subsidiaries is a party is an action pending in the United States District Court
for the District of Arizona captioned, Hotel Corporation of Downtown Tucson v.
Texas-Florida Hotel Group, Case No. 96-739, in which the plaintiff alleges that
a $250,000 NRDC Zero Coupon Non-Recourse Secured Bond due January 1, 2002 was
pledged as security for a lease entered into between Hotel Corporation of
Downtown Tucson and Texas-Florida Hotel Group. NRDC, which was named as a
defendant in the action, was served with process on or about November 20, 1996.
In the action, the plaintiff seeks a declaration that the plaintiff has legal
and equitable rights to the bond as liquidated damages for breach of the lease.
NRDC is defending the action and the Company is confident that it will not have
a material impact upon the Company or any of its assets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of security holders during the
quarter ending December 31, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS' MATTERS
Market information.
Regency's Common Stock is traded in the over-the-counter market on the
bulletin board section of NASDAQ. The following table sets forth the high and
low bid prices for each calendar quarter during the last two fiscal years of the
Company. The bid quotations represent interdealer prices and do not include
retail markups, mark-downs or commissions. The prices indicated may not reflect
the actual market for substantial quantities of the Company's Common Stock. As
of December 31, 1996, Regency estimated that the outstanding shares were held by
4,000 shareholders.
<TABLE>
<CAPTION>
Year Ended
---------- ($) ($)
December 31, 1995 High Low
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<S> <C> <C>
First Quarter .69 .25
Second Quarter .56 .25
Third Quarter .44 .13
Fourth Quarter .41 .13
Year Ended
----------
December 31, 1996 High Low
---- ---
First Quarter .63 .13
Second Quarter .47 .38
Third Quarter .50 .28
Fourth Quarter .69 .41
</TABLE>
The Company has not paid or declared cash dividends on its Common Stock
during the last two fiscal years. The Company has no present intention to pay
cash dividends on its Common Stock in the future.
In early 1990, Continental Illinois National Bank & Trust of Chicago
("Continental") resigned as the Company's registrar and transfer agent because
of the Company's inability to pay Continental for services performed. The
records were forwarded to the Company and the Company has since assumed the
record keeping responsibility until such time as the Company has the funds to
secure the services of an independent transfer agent. As of December 31, 1996,
and the date of this report, such record keeping
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services were provided to the Company by L.J. Horbach & Associates. On February
7, 1995, Regency Affiliates, Inc. entered into an agreement with L.J. Horbach &
Associates, Inc. pursuant to which L.J. Horbach & Associates, Inc. will provide
certain administrative services to the Company for a monthly fee of $3,000,
including but not limited to financial reporting, accounting and stock transfer
record keeping. L.J. Horbach & Associates, Inc. is wholly owned by Larry J.
Horbach, a member of the Board of Directors of the Company.
Securities of the registrant.
On February 9, 1995, Regency Affiliates, Inc. completed the placement
of 57 Units ($566,400) of the Company's Cumulative Convertible $100 Series-E
Preferred Stock and $0.40 p.v. Common Stock. The securities were offered in
Units consisting of 88.5 shares in Cumulative Convertible $100 Series-E
Preferred Stock and 6,000 shares of the Common Stock to accredited investors as
defined in Regulation D for a cost of $10,000 per unit. Statesman converted
$20,000 of the debt owing to it by the Company into two Units as part of the
offering.
VOTING $0.40 PAR VALUE COMMON
Regency Affiliates, Inc. has authorized 25,000,000 shares of its voting
$0.40 p.v. Common Stock. Holders of the Common Stock are entitled to one vote
per share on matters submitted to shareholders for approval or upon the
election of directors.
CUMULATIVE CONVERTIBLE 7% PREFERRED $10 STATED VALUE SERIES-A STOCK - $0.10 PAR
VALUE
All of the authorized, issued and outstanding shares of the Series-A
Preferred Stock were converted into 1,380,796 shares of the Company's $0.40 p.v.
Common Stock as part of the NRDC Transaction.
CUMULATIVE CONTINGENT CONVERTIBLE PREFERRED $10 STATED VALUE SERIES-B STOCK -
$0.10 PAR VALUE
By agreement and in settlement of the Senior Lenders' obligations as
part of the Company's Restructuring Plan, 212,747 shares of the Series-B
Preferred Stock were issued to Washington Square Capital and 158,000 shares to
Cargill Financial Services. Such shares (370,747 in the aggregate) represent
100% of the shares of Series-B authorized, issued and outstanding. Semi-annual
dividend periods commence on the 24th month from the consummation of an "Initial
Business Combination", as defined in the Certificate of Designation for the
Series-B Preferred Stock, and accrue for a period of 35 months without cash
payment. Dividends accrue at the rate of 6% per annum. The holders of the
Series-B Preferred Stock hold contingent rights to convert into Common Stock
exercisable on the earlier of the date that the Company (and its tax
consolidated subsidiaries) has accumulated consolidated taxable earnings of $55
Million, or the date that at least 80% in value of any convertible securities of
the Company, as adjusted in certain circumstances, issued in the Initial
Business Combination are retired or converted by the holders thereof. The
Series-B shares carry a preference upon liquidation. Except in limited
circumstances, the
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Series-B shares carry no voting rights. The Company has the right to redeem the
Series-B Preferred Stock, at any time.
CUMULATIVE SENIOR PREFERRED $100 STATED VALUE SERIES-C STOCK - $0.10 PAR VALUE
On July 7, 1993, 208,850 shares of the Company's Cumulative Senior
Preferred $100 Series-C Stock were delivered to Statesman Group, Inc. as part of
the 1993 Transaction. Such shares represent 100% of the issued and outstanding
Series-C shares. 210,000 shares of the Series-C Preferred Stock are authorized.
Quarterly dividend periods commenced on September 30, 1993 and quarterly
dividends per share are equal to 20%, not to exceed $500,000, of the annual
after tax earnings of NRDC, divided by the number of shares outstanding. The
Series-C shares carry a preference upon liquidation. Except in limited
circumstances, the Series-C shares carry no voting rights. The Company has the
right to redeem the Series-C Preferred Stock at any time.
CUMULATIVE CONTINGENT CONVERTIBLE JUNIOR PREFERRED $10 STATED VALUE SERIES-D
STOCK - $0.10 PAR VALUE
The Series-D junior preferred shares were issued in exchange for the
serial restructuring promissory notes issued as part of Company's 1992
Restructuring. The total issued was 25,694 shares and was required by the
Acquisition Agreement as a condition to closing. 26,000 shares of the Series-D
Preferred Stock are authorized. Annual dividend periods commenced on January 1,
1993. Dividends accrue at the rate of 7% per annum. The holders of the Series-D
Preferred Stock hold contingent rights to convert into Common Stock, but can not
convert without the consent of a majority of the holders of the Series-C
Preferred Stock. The Series-D shares carry a preference upon liquidation. Except
in limited circumstances, the Series-D shares carry no voting rights. The
Company has the right to redeem the Series-D Preferred Stock, at any time.
SERIES-E CUMULATIVE CONVERTIBLE PREFERRED STOCK - $100 STATED VALUE - $0.10 PAR
VALUE
Quarterly dividends on the Series-E Preferred Stock are cumulative from
the dates of original issue and are payable in cash or accrued at the option of
the Company. The Series-E Preferred Stock carries the right to receive an annual
dividend of $12.50 per share. Subject to certain conditions, the Series-E
Preferred Stock must be redeemed by the Company commencing on the fifth
anniversary from the date of issuance. At any time after the second anniversary
of the date of issuance, the Company may redeem the shares at their stated value
plus accrued and unpaid dividends. Holders of the Series-E Preferred Stock,
commencing on the second anniversary of the date of issuance, have the right to
convert their shares into a number of shares of Common Stock of the Company
determined by dividing $100, plus accrued and unpaid dividends, by a figure
equal to 88% of the average bid price for Common Stock for the 90 days previous
to the date the Series-E stock is surrendered for conversion. Redemption of the
Series-E shares by the Company will terminate the conversion rights. The
Series-E shares carry a preference upon liquidation. Except in limited
circumstances, the Series-E shares carry no voting rights. As of December 31,
1996, 5,044.5 shares of the Series-E Preferred Stock are issued and outstanding.
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REGTRANSCO, INC. OWNERSHIP
RegTransco, Inc. (RTI) has two classes of outstanding common stock,
Class A and Class B. There are 20,000 shares of Class A common stock
outstanding, all of which are owned by Drilling (an 80% owned subsidiary of
Regency Affiliates, Inc.). Five thousand (5,000) shares of Class B common stock
were issued to the Original Investors who financed the Company's Chapter XI
filing in 1986 and 1987 and represented 20% of the voting power of RTI's
outstanding common stock. As part of the 1992 Restructuring, the holders of the
Class B stock returned their 20% interest as a group to RTI. RTI's Class A and
Class B common stock are equal to each other in all respects except dividend
preference. Holders of shares of Class A and Class B common stock are entitled
to one vote per share in the election of directors.
TRANS CONTINENTAL DRILLING COMPANY OWNERSHIP
As part of the NRDC Transaction, Drilling issued sufficient shares to
transfer 20% of the issued and outstanding stock of Drilling to Statesman. The
remainder (80%) is owned by Regency Affiliates, Inc.
NRDC
As part of the NRDC Transaction, Regency Affiliates, Inc. acquired 80%
of the issued and outstanding stock of NRDC. The remainder (20%) is owned by
Statesman.
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<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA.
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES $6,102 $2,597 $5,125 $0 $0
INCOME FROM EQUITY
INVESTMENT IN PARTNERSHIP 4,268,904 3,718,056 100,000 0 0
EXTRAORDINARY GAIN FROM DEBT
RESTRUCTURING 0 0 0 0 78,000
NET INCOME (LOSS) 2,802,467 3,298,589 (102,541) (121,789) (50,568)
INCOME (LOSS) FROM CONTINUING
OPERATIONS PER SHARE 0.24 0.29 (0.01) (0.01) (0.03)
EXTRAORDINARY GAIN PER SHARE 0 0 0 0 0.02
NET INCOME (LOSS) PER SHARE
(PRIMARY) 0.24 0.29 (0.01) (0.01) (0.01)
NET INCOME (LOSS) PER SHARE
(FULLY DILUTED)(1995 RESTATED) 0.20 0.21 (0.01) (0.01) (0.01)
TOTAL ASSETS 11,566,678 4,980,148 1,473,832 853,922 93
LONG-TERM DEBT & REDEEMABLE 4,600,994 691,254 557,954 272,100 0
PREFERRED STOCK
</TABLE>
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The Company may, from time to time, issue forward looking statements,
including, but not limited to the statements of future economic performance
contained in Item 7 of this Report, or elsewhere herein. Such forward looking
statements, whether contained in this report on Form 10-K, or elsewhere, are
subject to the following factors that could cause actual results to differ
materially from those contained in the forward looking statements:
(i) The Company currently does not generate positive cash flow.
(ii) The Company currently lacks the necessary infrastructure at
the site of the Groveland Mine in order to permit the Company
to make more than casual sales of the Aggregate.
(iii) As of December 31, 1996, the Company was dependent upon the
investment in Security Land And Development Company Limited
Partnership for a material portion of its cash flow and for a
material portion of its reportable income.
(iv) The investment activities of the Company do not, in and of
themselves, generate sufficient cash flow to cover its
corporate operating expenses.
(v) An unsecured default in the Lease or sudden catastrophe to the
Security West Building from uninsured acts of God or war could
have a materially adverse impact upon the Company's investment
in Security Land And Development Company Limited Partnership.
Liquidity and Capital Resources.
The investment in Security Land And Development Company Limited
Partnership is estimated to provide the Company with management fees of
approximately $100,000 per annum until 2003. In the fiscal year ending December
31, 1996, the Company's income from its equity investment in the Partnership was
$4,268,904.
Despite the cash flow from the Partnership and the proceeds of the SIPI
loan, the Company had not completed acquisitions as of December 31, 1996 that
would provide the Company with sufficient positive cash flow to cover its
corporate expenses. Subsequent to December 31, 1996 (on March 17, 1997), the
Company completed the acquisition of the assets of Rustic Crafts Co., Inc.,
which acquisition is anticipated to provide positive cash flow for use by the
Company. See, SUBSEQUENT EVENT at page 24 of this Report.
The Company is continuing to explore opportunities for the acquisition
of companies with operations that will provide additional liquidity and cash
flow. The Company anticipates that such
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acquisitions would be financed by borrowings secured by the assets acquired and
by the proceeds of the SIPI loan. There can be no assurances that any such
acquisitions or transactions will come to fruition.
Results of Operations.
The operations of Regency Affiliates, Inc. and its subsidiaries in 1996
were limited to casual sales of Aggregate and rental income (less than
$6,200.00) and the Company's ongoing effort to secure acquisitions and/or
business combinations to provide the Company with material operations and cash
flow.
SFAS 121.
In March 1995, the Financial Accounting Standards Board issued a new
standard (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS 121 requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS 121 is
effective for financial statements for fiscal years beginning after December 15,
1995. The Company adopted SFAS 121 in the first quarter of 1996. The Company's
adoption has not had a material effect on the Company's financial position or
results of operation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following pages contain the Financial Statements and supplementary
data required by Item 8 of Part II of Form 10-K for the year ending December 31,
1996.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
1996 CONSOLIDATED FINANCIAL REPORT
F-1
<PAGE> 15
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONTENTS
- ------------------------------------------------------------------------------
Page
----
AUDITORS' REPORT F-3-F-5
FINANCIAL STATEMENTS
Consolidated balance sheets F-6-F-7
Consolidated statements of operations F-8
Consolidated statements of shareholders' equity F-9
Consolidated statements of cash flows F-10
Notes to consolidated financial statements F-11-F-25
F-2
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Independent Auditors' Report
----------------------------
Shareholders and Board of Directors
Regency Affiliates, Inc.
Stuart, Florida
We have audited the accompanying consolidated balance sheets of Regency
Affiliates, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We did not audit the 1996 and 1995 financial statements of Security
Land and Development Company Limited Partnership, the investment in which is
reflected in the accompanying financial statements using the equity method of
accounting. The investment in this partnership represents 71% and 82% of
consolidated total assets as of December 31, 1996 and 1995, respectively, and
100% of the income from equity investment in partnership for the years ended
December 31, 1996 and 1995. Those financial statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to the 1996 and 1995 amounts included for Security Land and Development
Company Limited Partnership, is based solely on the reports of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Regency Affiliates,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As more fully discussed in Note 1.G. to the financial statements, the
Company adopted Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" in the first quarter of 1996. In 1995, the Company adopted Statement of
Position 94-6 (SOP 94-6), "Disclosure of Certain Risks and Uncertainties."
Disclosures required by SOP 94-6 are included throughout the notes to the
Company's financial statements with an emphasis in Notes 1 and 12.
HAUSSER + TAYLOR
Cleveland, Ohio
March 24, 1997
F-3
<PAGE> 17
_________________________________
Reznick Fedder & Silverman
Certified Public Accountants - Business Consultants
A Professional Corporation
4520 East-West Highway - Suite 300 - Bethesda, MD 20814-3319 - (301) 652-9100
- - Fax (301) 652-1848
INDEPENDENT AUDITORS' REPORT
To the Partners
Security Land and Development Company Limited Partnership
We have audited the accompanying balance sheet of Security Land and
Development Company Limited Partnership as of December 31, 1996, and the related
statements of operations, changes in partners' capital and cash flows for the
year then ended. These financial statements are the responsibility of the
partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Security Land and
Development Company Limited Partnership as of December 31, 1996, and the results
of its operations, changes in partners' capital and cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Reznick Fedder & Silverman
Bethesda, Maryland
February 4, 1997
217 East Redwood St. 212 S. Tryon St. 745 Atlantic Ave.
Baltimore, MD 21202-3316 Charlotte, NC 28281-8100 Boston, MA 02111-2735
Telephone (410) 727-4340 Telephone (704) 332-9100 Telephone (617) 423-5855
P.O. Box 501298
Atlanta, GA 31150-12998
Telephone (770) 844-0644
F-4
<PAGE> 18
_________________________________
Reznick Fedder & Silverman
Certified Public Accountants - Business Consultants
A Professional Corporation
4520 East-West Highway - Suite 300 - Bethesda, MD 20814-3319 - (301) 652-1848
- - Fax (301) 652-1848
INDEPENDENT AUDITORS' REPORT
To the Partners
Security Land and Development Company Limited Partnership
We have audited the accompanying balance sheet of Security Land and
Development Company Limited Partnership as of December 31, 1995, and the related
statements of operations, changes in partners' capital and cash flows for the
year then ended. These financial statements are the responsibility of the
partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Security Land and
Development Company Limited Partnership as of December 31, 1995, and the results
of its operations, changes in partners' capital and cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Reznick Fedder & Silverman
Bethesda, Maryland
January 25, 1996
217 East Redwood St. 212 S. Tryon St. 745 Atlantic Ave.
Baltimore, MD 21202-3316 Charlotte, NC 28281-8100 Boston, MA 02111-2735
Telephone (410) 727-4340 Telephone (704) 332-9100 Telephone (617) 423-5855
Fax (410) 727-0460 Fax (704) Fax (617) 423-6651
P.O. Box 501298
Atlanta, GA 31150-12998
Telephone (770) 844-0644
Fax (770) 844-0644
F-5
<PAGE> 19
<TABLE>
<CAPTION>
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
--------------------------
1996 1995
ASSETS ---- ----
-----
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,303,655 $ 39,689
Other current assets 4,415 2,691
----------- -----------
Total current assets 2,308,070 42,380
INVESTMENTS
Investment in partnership 8,233,731 4,068,056
Rental property 50,884 --
----------- -----------
Total investments 8,284,615 4,068,056
OTHER ASSETS
Inventory 850,000 850,000
Other 123,993 19,712
----------- -----------
Total other assets 973,993 869,712
----------- -----------
$11,566,678 $ 4,980,148
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 20
<TABLE>
<CAPTION>
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
--------------------------
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY ---- ----
------------------------------------
CURRENT LIABILITIES
<S> <C> <C>
Note payable - related party $ -- $ 80,000
Accounts payable 79,906 95,980
Accrued expenses 58,176 79,816
------------ ------------
Total current liabilities 138,082 255,796
4,199,940 323,000
LONG-TERM DEBT
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 101,110 106,449
SERIAL PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION (liquidation preference and redemption
value, $504,400 in 1996 and 1995) 401,054 368,254
SHAREHOLDERS' EQUITY
Serial preferred stock not subject to mandatory redemption
(maximum liquidation preference, $24,921,354 and
$24,903,368 in 1996 and 1995, respectively) 1,052,988 1,052,988
Common stock, par value $.40, authorized 25,000,000 shares
issued and outstanding 11,399,871 and 11,166,537 shares
in 1996 and 1995, respectively (net of 22,460 treasury shares) 4,549,642 4,456,308
Additional paid-in capital 140,000 140,000
Readjustment resulting from quasi-reorganization at
December 31, 1987 (1,670,596) (1,670,596)
Retained earnings (deficit) 2,654,458 (52,051)
------------ ------------
Total shareholders' equity 6,726,492 3,926,649
------------ ------------
$ 11,566,678 $ 4,980,148
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 21
<TABLE>
<CAPTION>
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
NET SALES $ 6,102 $ 2,597 $ 5,125
GENERAL AND ADMINISTRATIVE EXPENSES 920,789 311,611 166,213
----------- ----------- -----------
(914,687) (309,014) (161,088)
INCOME FROM EQUITY INVESTMENT IN PARTNERSHIP 4,268,904 3,718,056 100,000
INTEREST INCOME 74,137 -- --
INTEREST EXPENSE (404,838) (45,395) (45,329)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST 3,023,516 3,363,647 (106,417)
INCOME TAX EXPENSE 226,388 70,000 --
MINORITY INTEREST 5,339 4,942 3,876
----------- ----------- -----------
NET INCOME (LOSS) $ 2,802,467 $ 3,298,589 $ (102,541)
=========== =========== ===========
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON SHAREHOLDERS
[after paid or accrued preferred stock
dividends of $81,144, $78,526
and $17,986 in 1996, 1995, and 1994,
respectively, and preferred stock
accretion of $32,800 and $27,800
in 1996 and 1995, respectively] $ 2,688,523 $ 3,192,263 $ (120,527)
=========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
PRIMARY $ 0.24 $ 0.29 $ (0.01)
=========== =========== ===========
FULLY DILUTED - (RESTATED FOR 1995, See
Note 1.B.) $ 0.20 $ 0.21 $ (0.01)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 22
<TABLE>
<CAPTION>
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
Preferred Stock* Common Stock** Additional
------------------- ---------------------- Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1994 605,291 $ 1,052,988 10,304,537 $ 4,111,508 $ --
Issuance of common stock -- -- 220,000 88,000 --
Net loss -- -- -- -- --
------- ----------- ---------- ----------- -----------
BALANCE - DECEMBER 31, 1994 605,291 1,052,988 10,524,537 4,199,508 --
Issuance of common stock -- -- 642,000 256,800 140,000
Net income -- -- -- -- --
Accretion of Series E preferred stock -- -- -- -- --
Payment of dividend on Series E
preferred stock -- -- -- -- --
------- ----------- ---------- ----------- -----------
BALANCE - DECEMBER 31, 1995 605,291 1,052,988 11,166,537 4,456,308 140,000
Issuance of common stock -- -- 233,334 93,334 --
Net income -- -- -- -- --
Accretion of Series E preferred stock -- -- -- -- --
Payment of dividend on Series E
preferred stock -- -- -- -- --
------- ----------- ---------- ----------- -----------
BALANCE - DECEMBER 31, 1996 605,291 $ 1,052,988 11,399,871 $ 4,549,642 $ 140,000
======= =========== ========== =========== ===========
<CAPTION>
Readjustment
Resulting Retained
From Quasi- Earnings Shareholders'
Reorganization (Deficit) Equity
-------------- ------------ -------------
<S> <C> <C> <C>
BALANCE - JANUARY 1, 1994 $(1,670,596) $(3,159,759) $ 334,141
Issuance of common stock -- -- 88,000
Net loss -- (102,541) (102,541)
----------- ----------- -----------
BALANCE - DECEMBER 31, 1994 (1,670,596) (3,262,300) 319,600
Issuance of common stock -- -- 396,800
Net income -- 3,298,589 3,298,589
Accretion of Series E preferred stock -- (27,800) (27,800)
Payment of dividend on Series E
preferred stock -- (60,540) (60,540)
----------- ----------- -----------
BALANCE - DECEMBER 31, 1995 (1,670,596) (52,051) 3,926,649
Issuance of common stock -- -- 93,334
Net income -- 2,802,467 2,802,467
Accretion of Series E preferred stock -- (32,800) (32,800)
Payment of dividend on Series E
preferred stock -- (63,158) (63,158)
----------- ----------- -----------
BALANCE - DECEMBER 31, 1996 $(1,670,596) $ 2,654,458 $ 6,726,492
=========== =========== ===========
</TABLE>
* Preferred stock does not include Series E Preferred Stock which is
subject to mandatory redemption
** Common stock is net of 22,460 treasury shares
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 23
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,802,467 $ 3,298,589 $ (102,541)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Minority interest (5,339) (4,942) (3,876)
Income from equity investment in partnership (4,268,904) (3,718,056) (100,000)
Distribution of equity earnings from partnership 103,229 100,000 --
Interest amortization on long-term debt 376,940 26,500 24,400
Amortization of debt issuance costs 7,401 -- --
Issuance of common stock in lieu of cash compensation 93,334 -- --
Issuance of treasury stock in lieu of cash compensation -- -- 4,000
Changes in operating assets and liabilities:
Other current assets (1,724) (562) (2,129)
Other assets 13,113 1,964 (21,676)
Accounts payable (16,074) 22,598 64,832
Accrued expenses (21,640) 74,111 (18,159)
----------- ----------- -----------
Total adjustments (3,719,664) (3,498,387) (52,608)
----------- ----------- -----------
Net cash used by operating activities (917,197) (199,798) (155,149)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in partnership -- -- (50,000)
Acquisition of rental property (50,884) -- --
----------- ----------- -----------
Net cash used by investing activities (50,884) -- (50,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 3,500,000 -- --
Debt issuance costs (124,795) -- --
Net short-term borrowings (80,000) (5,800) 5,800
Proceeds from issuance of preferred stock -- 152,000 266,000
Proceeds from issuance of common stock -- 48,000 84,000
Offering costs -- (44,200) (4,546)
Dividends paid (63,158) (60,540) --
----------- ----------- -----------
Net cash provided by financing activities 3,232,047 89,460 351,254
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,263,966 (110,338) 146,105
CASH AND CASH EQUIVALENTS - BEGINNING 39,689 150,027 3,922
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 2,303,655 $ 39,689 $ 150,027
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 23,890 $ 20,944 $ 20,301
Income taxes 257,838 -- --
Supplemental disclosure of noncash investing and financing
activities:
In 1994, the Company, as part of its investment in the
partnership, issued a $300,000 note payable. In 1995,
the note was converted into 400,000 shares of the
Company's common stock
In 1995, $20,000 of debt was converted into equity and
$44,000 of stock offering costs were satisfied by the
issuance of 110,000 shares of the Company's common
stock
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 24
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation and Nature of Business - The
consolidated financial statements include the accounts of Regency
Affiliates, Inc. (the "Company") and its 80% owned subsidiaries
National Resource Development Corporation ("NRDC"),
Transcontinental Drilling Company ("Drilling") and RegTransco,
Inc. ("RTI"). All significant intercompany balances and
transactions have been eliminated in consolidation. Regency
Affiliates, Inc.'s (Registrant's) share of consolidated net
assets at December 31, 1996 and 1995 consist principally of cash
and cash equivalents of approximately $2,297,000 and $37,000,
respectively, investment in partnership of approximately
$8,234,000 and $4,068,000, respectively, and liabilities of
approximately $3,985,000 and $256,000, respectively.
On July 7, 1993 the Company entered into an Acquisition Agreement
with National Resource Development Corporation and Statesman
Group, Inc. ("Statesman"), an international business corporation
organized under the laws of the Bahamas which provided for the
acquisition of an 80% interest in National Resource Development
Corporation, which was wholly owned by Statesman in exchange for
2,975,000 shares of the Company's common stock, 208,850 shares of
the Company's Series C Preferred stock and 20% of the outstanding
shares of Transcontinental Drilling Co. (the "Transaction").
Statesman has the right to transfer some or all of these shares
to its nominees. Through its right to designate eight individuals
to fill vacancies on the Board of Directors, Statesman also
controls 855,991 common shares by virtue of irrevocable proxies
given to a proxy committee of the Board of Directors.
In November 1994, the Company acquired a limited partnership
interest in a real estate partnership which owns and operates an
office complex. The office complex is occupied solely by a
governmental agency under a lease which expires in October 2003.
The Company's investment is accounted for using the equity method
of accounting (See Note 2).
B. Earnings (Loss) Per Share - Primary earnings (loss) per share are
computed by dividing net income (loss) attributable to common
shareholders (net income (loss) less preferred stock dividend
requirements and periodic accretion) by the weighted average
number of common and dilutive equivalent shares outstanding
during the year. Fully diluted earnings per share computations
assume the conversion of Series E, Series B, and Junior Series D
preferred stock during the period that the preferred stock issues
were outstanding. If the result of these assumed conversions is
dilutive, the dividend requirements and periodic accretion for
the preferred stock issues are reduced (See Note 7).
The weighted average number of shares used in primary earnings
(loss) per share computations for 1996, 1995 and 1994 were
approximately 11,400,000, 10,941,000 and 10,327,000 respectively.
The weighted average number of shares used in the computation of
fully diluted earnings per share for 1996 was approximately
14,252,000. The fully diluted earnings per share for 1995 was
restated to reflect a 1996 correction to the Series E Preferred
Stock Certificate of Designation as described in Note 7. The
weighted average number of shares used in the computation of
fully diluted earnings per share for 1995, as restated, was
approximately 15,632,000. The computation of fully diluted
earnings (loss) per
F-11
<PAGE> 25
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
share for the year ended December 31, 1994 was antidilutive;
therefore, the amounts reported for primary and fully diluted
earnings per share are the same for that year. The Company's
stock is thinly traded in the over-the-counter market on the
bulletin board section of NASDAQ. In 1996 and 1995, market prices
of $.525 per share and $.25 per share, respectively, were
utilized in the conversion formulas for the computation of fully
diluted earnings per share. In 1996 and 1995, if market prices of
$.25 per share and $.125 per share, respectively, the lowest bid
price of the Company's common shares during the year, were used
in the conversion formulas, the weighted average number of shares
utilized in the computation of fully diluted earnings per share
would amount to approximately 16,164,000 and 19,229,000 (as
restated), respectively, yielding fully diluted earnings per
share of $.17 and $.17 (as restated), respectively.
C. Cash and Cash Equivalents - Cash and cash equivalents represent
cash and short-term highly liquid investments with original
maturities of three months or less. The Company places its cash
and cash equivalents with high credit quality financial
institutions which may exceed federally insured amounts at times.
D. Inventory - Inventory, which consists of 75 million short tons of
previously quarried and stockpiled aggregate rock located at the
site of the Groveland Mine in Dickinson County, Michigan, is
stated at lower of cost or market. Liens have been attached to
the aggregate inventory by the holders of the zero coupon bonds.
The Company is also subject to a royalty agreement which requires
the payment of certain royalties to a previous owner of the
aggregate inventory upon sales of the aggregate.
During the year ended December 31, 1996, the Company made only
casual sales of aggregate. Aggregate is primarily sold for
railroad ballast, road construction, construction along shore
lines and decorative uses. The market for aggregate stone is
highly competitive and, as shipping costs are high, the majority
of sales, if any, can be anticipated to be made locally. Other
companies that produce rock and aggregate products are located in
the same region as the Groveland Mine. Many of these competitors
will have greater financial and personnel resources than the
Company. Therefore, the Company is actively seeking a joint
venture partner presently in the business of marketing and
selling aggregate to assist in the sale of the aggregate. It is
contemplated that such a joint venture partner would provide the
crushing and loading equipment necessary in order to stockpile
crushed aggregate and ready it for sale during the 1997 building
season. While the Company is reasonably optimistic that such a
joint venture can be formed, there can be no assurance that such
a transaction will come to fruition. Moreover, the success of
such a venture will be dependent upon the market for aggregate in
the State of Michigan and the ability of the Company to negotiate
favorable royalty rates with M. A. Hanna Company. As a
consequence, there can be no assurance that the Company will be
able to consummate sales of material amounts of its aggregate
(See Note 12).
F-12
<PAGE> 26
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. Income Taxes - The Company utilizes Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. The
difference between the financial statement and tax basis of
assets and liabilities is determined annually. Deferred income
tax assets and liabilities are computed for those temporary
differences that have future tax consequences using the current
enacted tax laws and rates that apply to the periods in which
they are expected to affect taxable income. In some situations
SFAS 109 permits the recognition of expected benefits of
utilizing net operating loss and tax credit carryforwards.
Valuation allowances are established based upon management's
estimate, if necessary. Income tax expense is the current tax
payable or refundable for the period plus or minus the net change
in the deferred tax assets and liabilities.
F. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
G. Statement of Financial Accounting Standards No. 121 - In March
1995, the Financial Accounting Standards Board issued a new
standard, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS
121 is effective for financial statements for fiscal years
beginning after December 15, 1995. The Company adopted SFAS 121
in the first quarter of 1996. The Company's primary long-lived
assets are the aggregate inventory (as described in Note 1.D.),
the investment in partnership (as described in Note 2), and the
Company's net operating loss carryforward (as described in Note
9). The adoption did not have a material effect on the Company's
financial position or results of operations.
F-13
<PAGE> 27
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. Statement of Financial Accounting Standards No. 123 - In October
1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued which
establishes accounting and reporting standards for stock-based
compensation plans. This standard encourages the adoption of the
fair value-based method of accounting for employee stock options
or similar equity instruments, but continues to allow the Company
to measure compensation cost for those equity instruments using
the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Under the fair value-based method,
compensation cost is measured at the grant date based on the
value of the award. Under the intrinsic value-based method,
compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date or other measurement date
over the amount the employee must pay to acquire the stock. The
Company uses the intrinsic value-based method for stock-based
compensation to employees. As a result, this standard does not
have any effect to the Company's financial statement other than
to require disclosure of the pro forma effect on net income of
using the fair value-based method of accounting. Management
believes this effect to currently be immaterial.
NOTE 2. INVESTMENT IN PARTNERSHIP
In November 1994, the Company invested $350,000 for a limited partner
interest in Security Land and Development Company Limited Partnership
("Security"), which owns and operates an office complex. The Company
has limited voting rights and is entitled to be allocated 95% of the
profit and loss of the partnership until October 31, 2003 (the lease
termination date of the sole tenant of the office complex) and 50%
thereafter. The Company is entitled to 95% of operating cash flow
distributions, as defined, until October 31, 2003, which are expected
to be limited in amount, and 50% thereafter. Further, the partners are
entitled to the net cash flow generated from the sale or refinancing
of the property in the proportion of their individual positive capital
account balance to the total positive capital account balances of all
the partners. The Company can force the sale of the property after
December 31, 2004.
Security was organized to own and operate, for investment purposes,
two buildings containing approximately 717,000 net rentable square
feet consisting of a two-story office building and a connected
six-story office tower. The building was purchased by Security in 1986
and is located on approximately 34.3 acres of land which is also owned
by Security. The building has been occupied by the United States
Social Security Administration's Office of Disability and
International Operations for approximately 23 years under leases
between the United States of America, acting by and through the
General Services Administration ("GSA"). Effective November 1, 1994,
Security and the GSA entered into a nine-year lease (the "Lease") for
100% of the building. The lease, among other provisions, requires
substantial renovations and improvements to the building, which are
continually being made. Security has received an opinion of the
Assistant General Counsel to the GSA that lease payments are not
subject to annual appropriation by the United States Congress and the
obligations to make such payments are unconditional general
obligations of the United States Government.
F-14
<PAGE> 28
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INVESTMENT IN PARTNERSHIP (CONTINUED)
The Company accounts for the investment in partnership on the equity
method, whereby the carrying value of the investment is increased or
decreased by the Company's allocable share of income or loss. The
investment in partnership included in the Consolidated Balance Sheets
at December 31, 1996 and 1995 was $8,233,731 and $4,068,056,
respectively. The income from the Company's equity investment in the
partnership for the years ended December 31, 1996, 1995 and 1994 was
$4,268,904, $3,718,056, and $100,000 respectively. The undistributed
earnings from the Company's equity investment in the partnership as of
December 31, 1996 and 1995 amounted to $7,883,731 and $3,718,056,
respectively.
Summarized financial information for Security is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
BALANCE SHEET DATA
------------------
<S> <C> <C>
Cash and receivables $ 1,258,676 $ 1,344,049
Restricted cash 8,215,088 18,514,573
Real estate 49,644,320 38,706,350
Other assets 2,024,640 2,252,224
------------ ------------
Total assets $ 61,142,724 $ 60,817,196
============ ============
Accounts payable and accrued expenses $ 2,083,908 $ 1,510,030
Project note payable 46,626,589 51,380,596
Other liabilities 4,743,902 4,623,171
------------ ------------
Total liabilities 53,454,399 57,513,797
Partners' capital:
Regency Affiliates, Inc. 8,233,731 4,068,056
Other partners (545,406) (764,657)
------------ ------------
Total partners' capital 7,688,325 3,303,399
------------ ------------
Total liabilities and partners' capital $ 61,142,724 $ 60,817,196
============ ============
</TABLE>
F-15
<PAGE> 29
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INVESTMENT IN PARTNERSHIP (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
STATEMENT OF OPERATIONS DATA
----------------------------
<S> <C> <C> <C>
Revenues $ 11,760,267 $ 11,757,102 $ 5,880,551
Expenses 5,080,768 4,215,587 3,920,118
------------ ------------ ------------
Net operating income 6,679,499 7,541,515 1,960,433
Other revenue and expenses (2,185,911) (3,627,772) (2,487,007)
------------ ------------ ------------
Income (loss) before
extraordinary item 4,493,588 3,913,743 (526,574)
Extraordinary gain on forgiveness
of debt -- -- 10,322,652
------------ ------------ ------------
Net income $ 4,493,588 $ 3,913,743 $ 9,796,078
============ ============ ============
</TABLE>
See Note 12. Contingencies, Risks and Uncertainties related to
the Company's investment in Security.
NOTE 3. NOTE PAYABLE - RELATED PARTY
Note payable - related party in the amount of $-0- and $80,000 at
December 31, 1996 and 1995, respectively, is due Statesman. The
principal amount of the note and accrued interest was paid in
October 1996.
NOTE 4. LONG-TERM DEBT
Credit Agreement - In June 1996, the Company entered into a Credit
Agreement (the "Agreement") with Southern Indiana Properties, Inc.
(the "Lender") for the purpose of obtaining loans secured by the
Company's investment in Security. Under terms of the Agreement,
the Lender advanced to the Company $2,750,000 under Loan A and
$750,000 under Loan B. The due date of the loans is December 31,
2005. Both Loan A and Loan B bear interest at the rate of 14% per
annum ("the Regular Interest Rate"). Interest at the Regular
Interest Rate is calculated semi-annually on June 21 and December
21 of each year. The Regular Interest may be paid by the Company
in cash on these semi-annual dates or the Company may elect to add
the Regular Interest to the principal of the loan then
outstanding.
F-16
<PAGE> 30
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. LONG-TERM DEBT (CONTINUED)
In addition to the Regular Interest Rate, the Agreement provides
for additional consideration ("the Contingent Interest") as is
necessary to enable the lender to achieve an Internal Rate of
Return on each loan of twenty percent (20%) per annum on a
cumulative basis over the term of such loan. However, no
Contingent Interest or prepayment penalties are due on Loan B if
such loan is repaid prior to December 21, 1998. The Contingent
Interest is payable from distributions from Security after payment
of all principal and Regular Interest and excluding a maximum of
$120,000 per year which may be retained by the Company. The
Company has elected to add the first semi-annual amount of Regular
Interest to the respective loan balances at December 21, 1996. The
Company has recorded the Contingent Interest on Loan A. However,
the Company intends to prepay Loan B prior to December 21, 1998
and therefore has not recorded Contingent Interest on such loan.
The Credit Agreement and the loans made under such Agreement are
secured by the Partnership Collateral and the General Collateral.
Partnership Collateral is defined as all the Company's interest in
Security including the right to receive distributions, the right
to title and interest in Security's property, the right to
participate in management and voting of Security, and the right to
the Escrow Account. General Collateral is defined as all accounts
of the Company, all chattel, contracts, documents, equipment,
fixtures, general intangibles, inventory (including the
aggregate), shares of NRDC and all cash and cash equivalents.
The Company may make voluntary prepayments at any time on Loan B
and at any time after June 21, 1998 on Loan A, however,
prepayments can only be made on the semi-annual interest
calculation dates. Prepayment penalties, except on prepayments of
Loan B until December 21, 1998, for which there are no prepayment
penalties, are due as follows:
Third year 6%
Fourth year 5%
Fifth year 4%
Sixth year 3%
Seventh year 2%
Eighth year 1%
F-17
<PAGE> 31
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. LONG-TERM DEBT (CONTINUED)
The following is a summary of the outstanding balance of Loan A and
Loan B as of December 31, 1996.
<TABLE>
<CAPTION>
Loan A Loan B Total
------ ------ -----
<S> <C> <C> <C>
Principal Advanced, June 21, 1996 $2,750,000 $ 750,000 $3,500,000
Regular Interest added to principal
at December 21, 1996 195,708 53,375 249,083
Regular Interest from December 22
to December 31, 1996 11,455 3,124 14,579
Contingent Interest* 83,978 -- 83,978
---------- ---------- ----------
$3,041,141 $ 806,499 $3,847,640
========== ========== ==========
<FN>
* Contingent interest not recorded on Loan B, due to the
Company's intent to prepay the loan prior to December 21, 1998
and thus not be liable for Contingent Interest which would have
amounted to approximately $23,000 at December 31, 1996.
</TABLE>
Zero Coupon Bonds - The zero coupon non-recourse secured bonds, due
January 1, 2002, have a face value of $542,000 and a carrying value of
$352,300 and $323,000 at December 31, 1996 and 1995, respectively. The
bonds were issued by NRDC and the difference (discount) between the
face value and carrying value is being amortized utilizing the
interest method at 9%. Interest expense related to the bonds for 1996
and 1995 was $29,300 and $26,500, respectively. The bonds are
redeemable at anytime at the option of the Company at an amount that
approximates the carrying value. As of December 31, 1996, a sinking
fund has not been established to fund the payment of the zero coupon
non-recourse secured bonds upon maturity. The Collateral Trust
Indenture ("Indenture"), dated as of April 1, 1991, states that the
Company is prohibited from selling all or any of the pledged aggregate
inventory unless the Company makes a payment to the bond trustee for
deposit into the sinking fund. The Indenture grants the trustee, to
secure the bonds, a first priority mortgage lien and security interest
in the aggregate and establishes a "mandatory sinking fund payment per
short ton sold" of pledged aggregate inventory until the maturity of
the bonds. The minimum payment for sales during calendar years 1994
through 2002 ranges from $0.60 to $1.00 per short ton. The Indenture
provides that the Company will have no personal liability for the
payment of the debts evidenced by the Indenture or any bond or for the
performance of the covenants, representations and warranties of the
Company in the Indenture or any bond, and that the rights of the
trustee and the bondholders shall be limited to the foreclosure on the
lien, with certain exceptions.
Based on borrowing rates currently available to the Company for loans
with similar terms and average maturities, the fair value of long-term
debt is estimated to be approximately $4,065,000.
NOTE 5. MINORITY INTEREST
Statesman Group, Inc. has a 20% minority interest in the Company's
subsidiaries. In addition, Statesman holds a significant common stock
interest in the Company.
F-18
<PAGE> 32
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. STOCK OFFERING
Through a private placement memorandum dated November 18, 1994, and
concluded in 1995, the Company offered for sale 80 units of
securities, each unit consisting of 88.5 shares of 12.5% cumulative
convertible Series E preferred stock and 6,000 shares of common stock.
The units were priced at $10,000 per unit. Subscriptions for 57 units,
were received and offering costs of $92,746, were incurred.
NOTE 7. SERIAL PREFERRED STOCK
At December 31, 1996 and 1995, the Company had 5,000,000 authorized
shares of $.10 par value serial preferred stock. Serial preferred
stock at December 31, 1996 and 1995, all of which is convertible
(other than Series C) and cumulative consists of:
Mandatory Redeemable Shares - Series E, $100 stated value, 12.5%
cumulative
----------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
----------------------- ---------------------
Designated Outstanding Carrying Liquidation
---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1994 -- -- $ -- $ --
Issuance, net of offering costs 566,400 3,097 261,454 309,700
-------- -------- -------- --------
Balance, December 31, 1994 566,400 3,097 261,454 309,700
Issuance, net of offering costs 1,947 79,000 194,700
Accretion 27,800
-------- -------- -------- --------
Balance, December 31, 1995 566,400 5,044 368,254 504,400
Accretion 32,800
-------- -------- -------- --------
Balance, December 31, 1996 566,400 5,044 $401,054 $504,400
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Redeemable Shares at Company's Option
-------------------------------------
Shares Value
------------------------ -----------------------------------------------
1996 1995
Designated Outstanding Carrying Liquidation Liquidation
---------- ----------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Series C, $100 stated
value, cumulative 210,000 208,850 $ 229,136 $20,885,000(a) $ 20,885,000(a)
Series B, $10 stated
value, 6% cumulative 370,747 370,747 566,912 3,707,470 3,707,470
Junior Series D, $10 stated
value, 7% cumulative 26,000 25,694 256,940 328,884(b) 310,898(b)
----------- ----------- ----------- ----------- ------------
606,747 605,291 $ 1,052,988 $24,921,354 $ 24,903,368
=========== =========== =========== =========== ============
<FN>
(a) This represents the estimated maximum possible liquidation value of the Series C preferred shares,
which is defined as the lesser of: 1) net proceeds of the assets of NRDC, or 2) the redemption
value (defined below). In the event of liquidation, the Series C shares are senior to all other
shares of the Company's stock, with the exception of the Series E shares.
(b) The liquidation value of the Junior Series D shares includes accrued and unpaid dividends of $71,944
and $53,958 at December 31, 1996 and 1995, respectively.
</TABLE>
F-19
<PAGE> 33
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. SERIAL PREFERRED STOCK (CONTINUED)
SERIES E - The Series E shares must be redeemed by the Company at the
stated value plus accrued and unpaid dividends on the fifth
anniversary from the date of issuance. The Company, at its option, may
redeem the shares beginning on the second anniversary of the date of
issuance. The carrying value of the Series E stock was recorded at its
issue price (net of issue costs). Beginning in 1995, the carrying
value is being increased by periodic accretion to the Company's
retained earnings (deficit), for the difference between the initial
carrying value and the redemption value. Accretion, utilizing the
interest method, for 1996 and 1995 was $32,800 and $27,800,
respectively. Dividends of $63,158 and $60,540 on the Series E stock
were paid or accrued in 1996 and 1995, respectively. Holders of Series
E stock may convert their shares to common stock based on the stated
value divided by 88% of the average bid price for the 90 days
preceding the conversion date of the Company's common shares beginning
on the second anniversary from the date of issuance of the Series E
shares. In 1996, the Company filed a correction to the Series E
Certificate of Designation due to an error in the conversion right.
The conversion right is based on the stated value of $100 per share
not $1,000 per share. The 1995 fully diluted earnings per share has
been restated due to this correction.
SERIES C - The Series C shares were issued on July 7, 1993 as part of
the transaction to acquire an 80% interest in NRDC. The cumulative
dividend right is equal to 20% (not to exceed $500,000) of annual
after tax earnings of NRDC. At the Company's option, the Series C may
be redeemed at the lesser of (a) the stated value plus accrued and
unpaid dividends, or (b) the fair market value of the common stock
interest acquired by the Company in NRDC. The Company and Statesman,
the sole shareholder of Series C shares, agreed to permanently waive
the contingent conversion feature related to such shares for no
consideration.
SERIES B - The Series B shares were issued in 1991 as part of a
restructuring plan limited to senior lenders and was issued in
exchange for all obligations and any claims or causes of action
relating to the Company's obligations and guarantees. Such preferred
stock includes, among other provisions and preferences, the following:
a) A 6% cumulative dividend right commencing on the 24th
month from the consummation of a defined "initial
business combination transaction" and if the Company
has reached a defined ratio of earnings to fixed
charges. In addition, dividends accrue for a period of
35 additional months without cash payment.
b) At the Company's option, the shares may be redeemed
subject to certain limitations, by cash payment or by
exchanging shares of its common stock at 77% of its
stated value divided by the quoted market value of its
common stock.
c) A contingent conversion provision which conversion
right, and the Company common shares to be issued in
connection with the conversion, would be based on the
stated value divided by the average bid and asked price
for the 90 days preceding the conversion date of the
Company's common shares. In addition, the number of the
Company's common shares to be received upon conversion
is subject to certain limitations.
F-20
<PAGE> 34
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. SERIAL PREFERRED STOCK (CONTINUED)
JUNIOR SERIES D - The junior preferred stock was issued in 1992 in
exchange for the Company's Restructuring Serial Promissory Notes. This
preferred stock is redeemable, at the Company's option, at the stated
value plus accrued and unpaid dividends and is contingently
convertible into common at the fair market value of the common as
determined by the average of the bid and asked price for the thirty
(30) day period preceding the conversion date.
Generally, no dividends can be made on the Company's common stock
until all cumulative dividends on the serial preferred stock have been
paid. Additionally, no dividends on the Company's common shares can be
made if the Company is in default or in arrears with respect to any
sinking or analogous fund or any call or tenders or other agreement
for the purchase, redemption or other retirement of shares of
preferred stock. No provision for dividends has been made for the
Company's Series B and C "increasing rate preferred stock," as defined
in Staff Accounting Bulletin Topic 5Q, due to the contingent nature of
dividends on such shares.
Generally the preferred shares have limited voting rights. However, in
the event dividends payable on the Series C and E shares,
respectively, are accumulated and unpaid for seven quarterly dividends
(whether or not declared and whether or not consecutive), the holders
of record of the Series C and E shares, respectively, shall thereafter
have the right to elect two directors (each) until all arrears in
required cash dividends (whether or not declared) on such shares have
been paid. Its bylaws provide for eight members on its Board of
Directors. At December 31, 1996, the Company had no accumulated and
unpaid dividends on Series C and E preferred shares.
NOTE 8. STOCK OPTION PLANS
The Company has reserved 125,000 shares of its common stock for
issuance upon exercise of incentive stock options under the 1984
Incentive Stock Option Plan. The plan provides that options must be
granted within ten years after February 8, 1984, the effective date of
the plan, must have not more than a ten year term, and, in general,
must be exercised during the optionee's employment. The exercise price
must be equal to the fair market value of the common stock on the date
of the grant. Subject to the limitations in the plan, an Employee
Incentive Stock Option Plan committee of the Board of Directors
determines the optionee, the number of shares covered by each option
and the duration of each option. As of December 31, 1996 and 1995,
options aggregating 50,000 shares had been granted, exercisable at
prices of $1.31 to $1.75 per share.
In addition, the Company has reserved 500,000 shares of common stock
for issuance upon exercise of incentive stock options under the 1988
Incentive Stock Option Plan. The plan provides that no option is
exercisable less than six months nor more than ten years from the
grant date, and, in general, must be exercised during the optionee's
employment. The exercise price must be at least equal to the fair
market value of the common stock on the date of the grant. Subject to
limitations in the plan, a Personnel and Compensation Committee of the
Board of Directors determines the optionee, the number of shares to be
granted to each employee and the restrictions to be imposed upon each
grant. As of December 31, 1996 and 1995, no options to purchase stock
under this plan were outstanding. The Employment Agreement described
in Note 10 provides for the issuance of options. Such options have not
been issued by the Company.
F-21
<PAGE> 35
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES
As referred to in Note 1, the Company accounts for income taxes under
SFAS 109, "Accounting for Income Taxes." The deferred taxes are the
result of long-term temporary differences between financial reporting
and tax reporting for earnings from the Company's partnership
investment in Security Land and Development Company Limited
Partnership related to depreciation and amortization and the
recognition of income tax carryforward items.
At December 31, 1996 and 1995, the Company's net deferred tax asset,
utilizing a 34% effective tax rate, consists of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Investment partnership earnings $ 1,570,000 $ 1,020,000
Net operating loss carryforwards 13,270,000 15,060,000
Alternative minimum tax credits 260,000 --
------------ ------------
Total deferred tax assets before valuation allowance 15,100,000 16,080,000
Valuation allowance (15,100,000) (16,080,000)
------------ -----------
Net deferred tax asset $ -- $ --
============ ============
</TABLE>
The valuation allowance was established to reduce the net deferred tax
asset to the amount that will more likely than not be realized. This
reduction is necessary due to uncertainty of the Company's ability to
utilize the net operating loss and tax credit carryforwards before
they expire.
For regular federal income tax purposes, the Company has remaining net
operating loss carryforwards of approximately $39,200,000. These
losses can be carried forward to offset future taxable income and, if
not utilized, will expire in varying amounts beginning in the year
2000. The Company's tax returns have not recently been examined by the
Internal Revenue Service ("Service") and there is no assurance that
the Service would not attempt to limit the Company's use of its net
operating loss and tax credit carryforwards.
For the years ended December 31, 1996, 1995 and 1994, the tax effect
of net operating loss carryforwards reduced the current provision for
regular federal income taxes by approximately $1,030,000, $1,150,000
and $1,020,000, respectively. At December 31, 1996 and 1995, the
Company has provided $226,388 and $70,000, respectively, for taxes,
which relate to alternative minimum tax liabilities (See Note 12).
F-22
<PAGE> 36
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. EMPLOYMENT AGREEMENT
On February 1, 1996, the Company entered into a written agreement
("Employment Agreement") with Gary K. Nuttall pursuant to which Mr.
Nuttall was employed as the Company's President and Chief Executive
Officer, in which capacities he served, until his removal on August
26, 1996. Mr. Nuttall's Employment Agreement provided for him to
receive 466,667 shares of the Company's common stock upon execution,
233,333 shares of which have been deemed forfeited under the terms of
the Employment Agreement. During his employment with the Company, Mr.
Nuttall received base compensation in the amount of $3,000 payable
semi-monthly, and certain other benefits. Mr. Nuttall also received a
bonus in the amount of $350,000 in connection with the consummation of
the $3.5 million loan the Company secured from Southern Indiana
Properties, Inc. Mr. Nuttall's Employment Agreement with the Company
provided for him to receive options to purchase 450,000 shares of the
Company's common stock pursuant to the terms of the Company's 1988
Incentive Stock Option Plan, as described in Note 8, which options
have not been issued by the Company, nor does the Company intend to
issue such options in the future due to Mr. Nuttall's removal. The
Employment Agreement provided for the options to become exercisable at
the rate of 150,000 shares for each $.03 annual increase in the per
share book value of the Company, excluding the effects of the non-cash
income accrual on the Company's investment in Security, and the
effects of any non-cash interest expense on indebtedness of the
Company secured by the investment in Security. The option price was to
be the greater of 50% of the average of the bid price for the
Company's common stock during the week ended December 1, 1995 or the
par value of the stock at the date of the grant.
NOTE 11. RELATED PARTY TRANSACTIONS
In 1996, Pamlyn Kelly, Ph.D., Interim President and a director of the
Company, was paid $16,899 as a consultant for testing administered to
candidates for the presidency of the Company.
In 1996 and 1995, L. J. Horbach and Associates, of which L. J.
Horbach, a director of the Company, is the sole owner, was compensated
for services rendered in the amount of $36,000 and $33,000,
respectively, under an agreement to provide certain administrative
services to the Company.
In 1994, Mr. Horbach was issued 10,000 shares of the Company's common
stock, out of treasury shares, for the payment of commitment fees. L.
J. Horbach and Associates was also compensated for services rendered
in the amount of $1,500. Mr. Horbach also holds 1,238 shares of the
Junior Series D preferred stock.
F-23
<PAGE> 37
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. CONTINGENCIES, RISKS AND UNCERTAINTIES
The Company is subject to numerous contingencies, risks and
uncertainties including, but not limited to the following, that could
have a severe impact on the Company:
(i) The Company currently does not generate positive cash flow and,
historically, the Company has had limited operating activities
and substantially all of its efforts have been devoted to
acquiring or developing profitable operations. The Company's
ability to become an operating entity and to continue in
existence is partly dependent upon its ability to attain
satisfactory levels of operating cash flows, including its
ability to develop positive cash flow and profitable operations
in NRDC to meet its obligations.
(ii) The Company currently lacks the necessary infrastructure at the
site of the Groveland Mine in order to permit the Company to
make more than casual sales of the aggregate (See Note 1.D.).
(iii) As of December 31, 1996, the Company was dependent upon the
investment in Security Land and Development Company Limited
Partnership for a material portion of its cash flow and for a
material portion of its reportable income.
(iv) The investment activities of the Company do not, in and of
themselves, generate sufficient cash flow to cover its
corporate operating expenses.
(v) An unsecured default in the Lease or sudden catastrophe to the
Security office complex from uninsured acts of God or war could
have a materially adverse impact upon the Company's investment
in Security Land and Development Company Limited Partnership
and therefore its financial position and results of operations
(See Note 2).
(vi) The Company has significant tax loss and credit carryforwards
and no assurance can be provided that the Internal Revenue
Service would not attempt to limit or disallow altogether the
Company's use, retroactively and/or prospectively, of such
carryforwards, due to ownership changes or any other reason.
The disallowance of the utilization of the Company's net
operating loss would severely impact the Company's financial
position and results of operations due to the significant
amounts of taxable income (generated by the Company's
investment in Security) that has in the past been, and is
expected in the future to be, offset by the Company's net
operating loss carryforwards (See Note 9).
F-24
<PAGE> 38
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. SUBSEQUENT EVENT
On March 17, 1997, the Company through a newly formed subsidiary,
Rustic Crafts, International, Inc. signed a Purchase and Sale
Agreement with Rustic Crafts Co., Inc. ("Rustic") to acquire all of
its operating assets including accounts receivable, inventory,
property and equipment and intangibles. On that date the Company
paid $1,100,000 in cash and 100,000 shares of the Company's common
stock and assumed Rustic's trade accounts payable, bank debt and
certain other accrued liabilities. Total liabilities assumed were
approximately $550,000.
The cash purchase price was provided by the funds borrowed from
Southern Indiana Properties, Inc. ("SIPI") as discussed in Note 4.
The Company has also made available to its subsidiary $850,000 of
working capital which was also provided by funds borrowed from SIPI.
On March 17, 1997, the Company used a portion of the working capital
funds advanced to retire the bank debt of approximately $201,000. On
December 31, 1996, Rustic had total assets of approximately
$1,200,000.
F-25
<PAGE> 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There has not been and do not presently exist any disagreements between
the Company and its accountants concerning accounting principles, auditing
procedures or financial disclosure.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS OF THE
REGISTRANT.
Identification of directors and officers.
Since there has not been an annual meeting of the stockholders since
August of 1988, the sitting Directors have appointed persons to fill existing
vacancies on the Board. Executive officers are elected annually by the Board of
Directors or until their successors are duly elected and qualified. In
connection with the NRDC Transaction, new directors were designated to fill
eight vacant director positions to serve until elected at the next annual
meeting of stockholders. Following is a list of the names and addresses, ages,
positions with the Company, principal occupation and periods of service of the
directors.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES HELD AND PRINCIPAL
OCCUPATIONS OR EMPLOYMENT DURING PAST FIVE
NAME, ADDRESS (AGE) YEARS
<S> <C>
William R. Ponsoldt, Sr. (55) Director since June, 1996. Chairman of the Board
3340 S.E. Federal Hwy., Suite of Directors since August, 1996. During the past
210, Stuart, Florida 34997 five years, Mr. Ponsoldt has served as the portfolio
manager for several hedge funds. Mr. Ponsoldt is
the father of William R. Ponsoldt, Jr., a director of
the Company.
Stephanie Carey (46) Director since July 1993. Ms. Carey is a principal
West Bay Street and the Investment Manager for Managed
P.O. Box CB 10985 Companies with Bradley Management (Bahamas)
Nassau, Bahamas Limited. She is also a director of Regal Bahamas
International Airways Limited.
</TABLE>
14
<PAGE> 40
<TABLE>
<S> <C>
Martin J. Craffey (59) Director since July 1993. From January 1988 until
58 Mainsail Drive December 31, 1993, Mr. Craffey was a real estate
Patchogue, New York 11772 and business broker and contract vendee with
Prudential Realty of Long Island, N.Y. Mr. Craffey
is presently employed in seeking financing for and
reorganizing real estate projects.
Larry J. Horbach (55) Director from 1987 to 1990, from 1992 to February
1869 South 120th Street 15, 1994 and since November 16, 1994. Interim
Omaha, Nebraska 68144 Secretary and Treasurer from July 1993 until his
resignation effective February 15, 1994. Mr.
Horbach has been Chairman of the Board,
President and Chief Executive Officer of
Gateway Energy Corporation since June
1990 and had served as a director of Seilon,
Inc., both reporting companies under the
Securities Exchange Act of 1934. In addition,
during the past five years, Mr. Horbach has
been associated with L.J. Horbach &
Associates, a firm specializing in
re-organizations and restructurings. Mr.
Horbach was designated to fill a vacancy on the
Board on November 16, 1994.
Pamlyn Kelly, Ph.D. (53) Director since July 1993. Dr. Kelly is principal and
10 Winged Foot Drive Chief Executive Officer of Human Resource
Novato, California 94949 Concepts, Novato, CA, a registered minority owned
management consulting firm and has a private
practice. Dr. Kelly is a licensed Psychologist in both
Arizona and California. Dr. Kelly received her Ph.D.
in Clinical Psychology in 1990.
William R. Ponsoldt, Jr. (30) Director since July 1993. Mr. Ponsoldt is an attorney
1100 S. Federal Highway engaged in the private practice of law in Florida with
Stuart, Fla. 34995 the law firm of Warner, Fox, Seeley, Dungey &
Sweet. Formerly, he was with Kohl, Metzter, Spotts,
Ponsoldt & Tapper, P.A. Mr. Ponsoldt is the son of
William R. Ponsoldt, Sr., a director of the Company.
</TABLE>
15
<PAGE> 41
<TABLE>
<S> <C>
Eunice M. Antosh (47) Secretary of the Company since February 25, 1994.
Rural Route One Prior to October, 1993, Mrs. Antosh was employed
Box 130 by L.J. Horbach & Associates, Inc. Since October,
Yutan, Nebraska 68073 1993, Mrs. Antosh has been employed, on a part-
time basis, by Gateway Energy Corporation and
is responsible for stockholder relations
and certain accounting functions.
</TABLE>
Each of Messrs. Ponsoldt, Jr. and Craffey, Dr. Kelly and Ms. Carey were
appointed directors of the Company by Statesman as part of the closing of the
Transaction on July 7, 1993. Each had an understanding with Statesman and/or the
Company that as an inducement to accept their positions as directors he or she
would receive certain consideration from Statesman and/or the Company as set
forth in Item 11, COMPENSATION OF DIRECTORS, to which reference is made.
Mr. Horbach was a Director of the Company from 1987 to 1990 and again
from 1992 to February 15, 1994. As noted above, he rejoined the Board on
November 16, 1994 agreeing to serve as a director until the next shareholders'
meeting, at which time he intends not to stand for re-election. Mr. Horbach
served as the interim President of the Registrant on a part time basis until the
closing of the 1993 Transaction. Mr. Horbach had served as the chief financial
officer of the Company from 1987 to 1989 and as Secretary of the Company from
July 7, 1993 to February 15, 1994. From 1976 through the current date, Mr.
Horbach was primarily self-employed with L.J. Horbach & Associates, a firm
specializing in reorganizations. He previously served as Vice President and
Chief Financial Officer of American Beef Packers, Inc., now Sudbury Holdings,
Inc., on a part time basis from 1977 through that Company's reorganization in
1983, after which he continued to work for Sudbury on a project by project
basis. From 1963 to 1976 he was with Arthur Andersen & Co., a public accounting
firm. In January 1990, Mr. Horbach was elected to the Board of Directors of
Gateway Sporting Goods Company, a public company (name later changed to Gateway
Energy Corporation). In June 1990, Mr. Horbach was appointed the interim
President and agreed to serve as the interim Chairman of the Board upon the
resignation of the then president and chairman, and is currently serving as
Gateway's Chairman, President and Chief Executive Officer. In January 1992, Mr.
Horbach was also elected to the Board of Directors of Seilon, Inc., a public
company currently restructuring and without operations and resigned therefrom on
December 13, 1994. On February 7, 1995, Regency Affiliates, Inc. entered into an
agreement with L.J. Horbach & Associates, Inc. pursuant to which L.J. Horbach &
Associates, Inc. will provide certain administrative services to the Company for
a monthly fee of $3,000, including but not limited to accounting and stock
transfer record keeping. L.J. Horbach & Associates, Inc. is wholly owned by
Larry J. Horbach.
Item 405 Disclosure.
None.
16
<PAGE> 42
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table.
The following table sets forth the annual and long-term compensation,
attributable to all service in the fiscal year 1996 to Mr. Gary K. Nuttall,
Pamlyn Kelly, Ph.D., and Ms. Eunice M. Antosh, the only officers who received
compensation during fiscal 1996.
(The balance of this page was intentionally left blank).
17
<PAGE> 43
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------------------------------
Annual Compensation Awards Payouts
------------------------------------- --------------------------- --------------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
Other Securities
Name and Annual Restricted Underlying All Other
Principal Compen- Stock Options/ LTIP Payouts Compensation
Position Year Salary ($) Bonus ($) sation ($) Award(s) ($) SARs (#) ($) $
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary K. 1996 56,062 350,000 -0- 102,154(1) -0- -0- -0-
Nuttall -0-
-0-
Gary F. 1996 -0- -0- -0- -0- -0- -0- -0-
Spahn 1995 -0- -0- -0- -0- -0- -0- -0-
1994 20,000 -0- -0- -0- -0- -0- -0-
Craig R. 1996 -0- -0- -0- -0- -0- -0- -0-
Grossman, 1995 25,000 -0- -0- -0- -0- -0- -0-
President 1994 18,000 -0- -0- -0- -0- -0- -0-
Pamlyn 1996 14,000(2) -0- -0- -0- -0- -0- -0-
Kelly, Ph.D. 1995 6,000 -0- -0- -0- -0- -0- -0-
President 1994 500 -0- -0- -0- -0- -0- -0-
Eunice M. 1996 12,000 -0- -0- -0- -0- -0- -0-
Antosh, 1995 11,000 -0- -0- -0- -0- -0- -0-
Secretary 1994 -0- -0- -0- -0- -0- -0- -0-
<FN>
- --------
(1) As at the end of the fiscal year, Mr. Nuttall held 233,334 shares
of the Company's $0.40 p.v. Common Stock that had been issued to him pursuant to
the Employment Agreement with the Company entered into on February 1, 1996.
Approximately one half of the total number of shares (466,667 shares) issued to
Mr. Nuttall have been deemed forfeited under the terms of the Employment
Agreement. Based on the closing price for the Company's unrestricted Common
Stock on December 31, 1996, the 233,334 shares deemed outstanding to Mr. Nuttall
had a year end value of $102,154. The Company has no present intention to pay
dividends upon its $0.40 p.v. Common Stock.
(2) During the reporting year ended December 31, 1996, Dr. Kelly was
paid an additional $16,899 for consulting services, $2,000 for attendance at
meetings of the Board of Directors, and was reimbursed $14,692 for expenses
incurred.
</TABLE>
18
<PAGE> 44
STOCK OPTIONS.
The Option/SAR Grants Table is omitted as there were no individual
grants of stock options (whether or not in tandem with SARs) nor freestanding
SARs made during the last completed fiscal year.
The Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values table is omitted as there were no exercise of stock options
(nor tandem SARs) nor freestanding SARs during the last completed fiscal year.
Incentive Stock Option Plans.
The Company has reserved 500,000 shares of its Common Stock for
issuance under the 1988 INCENTIVE STOCK PLAN. In addition, 125,000 shares were
reserved for issuance under the 1984 INCENTIVE STOCK OPTION PLAN.
OTHER.
LTIP Awards.
There have been no awards under any Long-Term Incentive Plan during the
last completed fiscal year.
Defined Benefit Plans.
The Company has no defined benefit or actuarial plans.
Compensation of Directors.
Standard Arrangements. The members of the Board of Directors of Regency
Affiliates, Inc. each receive the sum of $500 for their attendance at directors'
meetings.
Other Arrangements. There were no other arrangements pursuant to which
any director of Regency Affiliates, Inc. was compensated during the
Company's last completed fiscal year for services provided as a director,
although Pamlyn Kelly, Ph.D. was paid $16,899 as a consultant for testing
administered to candidates for the presidency of the Company.
Employment Contracts, Termination of Employment and Change in Control
Arrangements.
On February 1, 1996, the Company entered into a written employment
agreement with Gary K. Nuttall pursuant to which Mr. Nuttall was employed as the
Company's President and Chief
19
<PAGE> 45
Executive Officer. Mr. Nuttall's agreement called for him to receive 466,667
shares of the Company's $0.40 p.v. Common Stock upon execution, 233,333 of which
have been deemed forfeited by Mr. Nuttall under the terms of his agreement with
the Company. During his employment with the Company, Mr. Nuttall was to receive
base compensation in the amount of $3,000 payable semi-monthly, a cash flow
bonus equal to 20% of eligible cash flow, payable in cash or in warrants to
purchase the Company's $0.40 p.v. Common Stock, at the option of the Company,
and certain other benefits. Mr. Nuttall was also to receive a bonus equal to 10%
of any financing secured solely by the Company's investment in Security Land And
Development Company Limited Partnership. The agreement also provided for a grant
of options to purchase 450,000 shares of the Company's $0.40 p.v. Common Stock
pursuant to the terms of the Company's 1988 Incentive Stock Option Plan, none of
which have been or are intended to be issued by the Company. The agreement
provided for the option price to be the greater of 50% of the average of the bid
price for the Company's $0.40 p.v. Common Stock during the week ending December
1, 1995 or the par value of the stock at the date of the grant.
Mr. Nuttall was removed as the Chairman of the Board, President and
Chief Executive Officer of the Company on August 26, 1996. Pamlyn Kelly, Ph.D.
was elected interim President to serve until her sucessor is elected by the
Board of Directors.
Dr. Kelly has an informal arrangement with the Company pursuant to
which she is paid $6,000 per month for her services as interim President. She is
also reimbursed for her reasonable expenses incurred on behalf of the Company.
As of December 31, 1996, Regency Affiliates, Inc. had no formal
employment contracts with any executive officers.
Compensation Committee Report on Executive Compensation.
This item is omitted as Regency Affiliates, Inc. qualifies as a "small
business issuer" under Rule 405 and Regulation S-B.
Performance Graph.
This item is omitted as Regency Affiliates, Inc. qualifies as a "small
business issuer" under Rule 405 and Regulation S-B.
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions.
This item is omitted as Regency Affiliates, Inc. qualifies as a "small
business issuer" under Rule 405 and Regulation S-B.
20
<PAGE> 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Security ownership of certain beneficial owners.
To the best of the Company's knowledge, the only beneficial owners of
more than five percent of Regency's voting securities as of February 28, 1997
are listed below:
<TABLE>
<CAPTION>
(2) Name and address of (3) Amount and nature (4) Percent of
-------------------- ----------------- ----------
(1) Title of class beneficial owner of beneficial ownership class
-------------- ---------------- ----------------------- -----
<S> <C> <C> <C>
Regency Statesman Group, Inc. 2,659,710(3) 23.3%
Affiliates, Inc. King & George Streets
$0.40 p.v. Nassau, Bahamas
Common Stock
Transcontinental Statesman Group, Inc. 250(4) 20%
Drilling Company, King & George Streets
Inc. $1.00 p.v. Nassau, Bahamas
Common Stock
</TABLE>
Statesman Group, Inc. is an international business corporation
organized under the laws of the Bahamas. Statesman's principal business is the
making of investments in the United States and elsewhere. Statesman is currently
a holding company for the securities acquired by it in the 1993 Transaction.
Both its principal business and principal office is located at King & George
Streets, Nassau, Bahamas. The William R. Ponsoldt, Sr. Irrevocable Trust dated
April 15, 1991 is the controlling person of Statesman. The William R. Ponsoldt
Sr. Trust is an irrevocable trust for the benefit of William R. Ponsoldt, Jr., a
director of the Company, Tracey A. Ponsoldt, now married and sometimes known as
Tracey A. Powers, and Christopher J. Ponsoldt, all children of William R.
Ponsoldt, Sr. The acting trustee of the William R. Ponsoldt, Sr. Irrevocable
Trust dated April 15, 1991 has the sole right to control the disposition of and
vote the Regency securities acquired by
- --------
(3) The nature of beneficial ownership is sole investment power and
sole voting power as to all shares listed.
(4) The nature of beneficial ownership is sole investment power and
sole voting power as to all shares listed.
21
<PAGE> 47
Statesman and through the designation of eight members of the Board of Directors
to fill the existing vacancies on the Board of Directors, the right to vote the
irrevocable proxies over Regency Common Stock delivered to a proxy committee of
the Board of Directors pursuant to the terms of the NRDC Transaction.
Security ownership of management.
The following tables set forth as of February 28, 1997 the number of
shares of Regency's $0.40 p.v. Common Stock beneficially owned by each
director and by all executive officers and directors of Regency as a group as of
such date. Unless otherwise indicated, each person has sole voting and
investment powers with respect to the shares indicated.
<TABLE>
<CAPTION>
(2) Name of beneficial (3) Amount and nature (4) Percent of
------------------ ----------------- ----------
(1) Title of class owner of beneficial ownership class
-------------- ----- ----------------------- -----
<S> <C> <C> <C>
Regency Larry J. Horbach 385,204(5) 3.4%
Affiliates, Inc.
$0.40 p.v.
Common Stock
Regency Eunice M. Antosh 62,345 .5%
Affiliates, Inc.
$0.40 p.v.
Common Stock
Regency All officers and directors 447,549 3.9%
Affiliates, Inc. as a group (2
$0.40 p.v. individuals)
Common Stock
</TABLE>
Cumulative Senior Preferred $100 Series-C Stock
As of December 31, 1996 certain members of the Board of Directors of
Regency Affiliates, Inc. held warrants to purchase Cumulative Senior Preferred
$100 Series-C Stock from Statesman
- --------
(5) An irrevocable proxy with respect to 375,205 of these shares, so
long as the shares are held by Mr. Horbach, was given to a proxy committee of
the Board of Directors as part of the NRDC Transaction.
22
<PAGE> 48
Group, Inc., as follows: William R. Ponsoldt, Jr. (warrants to purchase 1,000
shares); Pamlyn Kelly, Ph.D. (warrants to purchase 1,000 shares); and Martin J.
Craffey (warrants to purchase 1,000 shares).
Series-D Junior Preferred Stock - $10 Stated Value
Larry J. Horbach holds 1,238 shares of the Series-D Junior Preferred
Stock - $10 Stated Value over which he has sole voting power and sole investment
power.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with management and others.
During the fiscal year ending December 31, 1996, the Company made
payments of interest and principal to Statesman aggregating $89,955.56, leaving
a principal balance due Statesman at year end of $-0-.
Reference is made to Part III, Item 10, page 16 of this report for a
description of certain transactions with L.J. Horbach & Associates, Inc.
Reference is made to Part III, Item 11, page 19 of this report for a
description of the transactions with Mr. Gary K. Nuttall which resulted in Mr.
Nuttall becoming a director and an executive officer of the Company and
receiving the securities described therein.
Certain business relationships.
Not applicable.
Indebtedness of Management.
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K.
Financial information:
(2) Exhibits
23
<PAGE> 49
See Index to Exhibits
(3) Certain schedules are omitted because of the condition under which they
are required or because the required information is included in the
financial statements or notes thereof.
(4) Reports on Form 8-K during the fourth quarter of the Company's fiscal
year: None.
SUBSEQUENT EVENTS
On March 17, 1997, the Company, through Rustic Crafts International,
Inc., a wholly owned subsidiary, acquired the assets and assumed certain
liabilities of Rustic Crafts Co., Inc., a manufacturer of wood and cast marble
decorative electric fireplaces and related accessories. Consideration for the
acquisition consisted of cash of $1,100,000 and 100,000 shares of the restricted
Common Stock of the Company. (See, Note 13 to Notes to Consolidated Financial
Statements.)
24
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
REGENCY AFFILIATES, INC.
----------------------------------------
(Registrant)
April 2, 1997 By: /s/Pamlyn Kelly, Ph.D., President
- ------------- ---------------------------------
Date Pamlyn Kelly, Ph.D., President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
DATE SIGNATURE AND TITLE
April 2, 1997 By: /s/Pamlyn Kelly, Ph.D., President
- ------------- ---------------------------------
Date Pamlyn Kelly, Ph.D., President
April 2, 1997 /s/Eunice Antosh
- ------------- ---------------------------------
Date Eunice Antosh, Secretary
April 2, 1997 /s/ Stephanie Carey
- ------------- ---------------------------------
Date Stephanie Carey,
Director
25
<PAGE> 51
April 2, 1997 /s/ Martin J. Craffey
- ------------- ---------------------------------
Date Martin J. Craffey,*
Director
April 2, 1997 /s/ Larry J. Horbach
- ------------- ---------------------------------
Date Larry J. Horbach,*
Director
April 2, 1997 /s/ Pamlyn Kelly, Ph.D.
- ------------- ---------------------------------
Date Pamlyn Kelly, Ph.D.,
Director
April 2, 1997 /s/ William R. Ponsoldt, Sr.
- ------------- ---------------------------------
Date William R. Ponsoldt, Sr.,*
Director
April 2, 1997 /s/ William R. Ponsoldt, Jr.
- ------------- ---------------------------------
Date William R. Ponsoldt, Jr.,*
Director
*By /s/ Pamlyn Kelly, Ph.D.
--------------------------
Pamlyn Kelly, Ph.D.,
Attorney-in-fact
26
<PAGE> 52
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit No. Description of Document
- ----------- -----------------------
<S> <C>
1 (a) Agreement For Acquisition among Regency Affiliates, Inc., Statesman
Group, Inc., and National Resource Development Corporation, as amended,
and incorporated herein by reference
1 (b) Irrevocable Proxies over 855,991 shares of Regency's $0.40 par value
Common Stock, and incorporated herein by reference
1 (c) National Resource Development Corporation Assignment and Assumption
Agreement, and incorporated herein by reference
1 (d) Security Land And Development Company Limited Partnership
Agreement, as amended, filed as Exhibit 1(a) to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1994, and incorporated
herein by reference
1 (e) Letter Agreement dated November 17, 1994 between TCG Management
Corporation and Regency Affiliates, Inc.,, filed as Exhibit 1(b) to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994, and incorporated herein by reference
1 (f) Security Land And Development Company Limited Partnership Irrevocable
Written Instruction Concerning Payments From Escrow Fund, filed as
Exhibit 1(c) to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994, and incorporated herein by reference
1 (g) Audited financial statement for Security Land And Development Company
Limited Partnership, filed as Exhibit 1(d) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994, and incorporated herein
by reference
3 (a) Certificate of Incorporation of Registrant filed at Exhibit 6.1 to Registrant's
Registration Statement on Form S-14, Registration No. 2-66923 1 (a),
page E-1 Agreement For Acquisition among Regency Affiliates, Inc.,
Statesman Group, Inc., and National Resource Development Corporation,
as amended, and incorporated herein by reference
</TABLE>
27
<PAGE> 53
<TABLE>
<S> <C>
3 (b) Certificate of Amendment of Certificate of Incorporation of Registrant filed
at Exhibit 3.2 to Registrant's Annual Report on Form 10-K, and
incorporated herein by reference
3 (c) Certificate of Amendment of Certificate of Incorporation filed February 15,
1988, and incorporated herein by reference
3 (d) By-laws of Registrant filed at Exhibit 3.4 to Registrant's Registration
Statement on Form S-1, Registration No. 2-86906, and incorporated herein
by reference
4 Certificate of Designation - Series A Cumulative $10 Convertible Preferred
Stock, $.10 par value, filed as Exhibit to Form 8-K dated June 19, 1989,
and incorporated herein by reference
4 (a) Restated Certificate of Designation Series A $10 Convertible Preferred
Stock, $.10 par value filed as Exhibit to Form 10-K dated June 7, 1993 and
incorporated herein by reference
4 (b) Certificate of Designation - Series B Preferred Stock, $10 Stated Value,
$.10 Par Value filed as Exhibit to Form 10-K dated June 7, 1993 and
incorporated herein by reference
4 (c) Certificate of Designation - Series C Preferred Stock, $100 Stated Value,
$.10 Par Value filed as Exhibit to Form 10-K dated June 7, 1993 and
incorporated herein by reference
4 (d) Certificate of Designation - Series D Junior Preferred Stock, $10 Stated
Value, $.10 Par Value filed as Exhibit to Form 10-K dated June 7, 1993 and
incorporated herein by reference
4 (e) Certificate of Designation, Preferences and Rights of Cumulative Senior
Preferred Stock $100, Series C and incorporated herein by reference
4 (f) Specimen of Certificate representing Cumulative Senior Preferred Stock
$100, Series C and incorporated herein by reference
4 (g) Specimen of Certificate representing Warrants and incorporated herein by
reference
4 (h) Restated Certificate of Designation of Preferences and Rights of
Cumulative Senior Preferred $100, Series-C Stock, filed as Exhibit 4(a) to
</TABLE>
28
<PAGE> 54
<TABLE>
<S> <C>
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994,
and incorporated herein by reference
4 (i) Certificate of Designation of Preferences and Rights of Cumulative
Contingent Convertible Senior Preferred $100, Series-E Stock, filed as
Exhibit 4(b) to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994, and incorporated herein by reference
4 (j) Specimen Certificate for Cumulative Contingent Convertible Senior
Preferred $100, Series-E Stock, filed as Exhibit 4(c) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994, and
incorporated herein by reference
4 (k) Certificate of Designation - Series C Preferred Stock, $100 Stated Value,
$.10 Par Value filed as Exhibit 4.1 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1995 at page E-1, and incorporated
herein by reference
9 Letter dated November 30, 1994 from R.L. Quint & Co. to Regency
Affiliates, Inc., filed as Exhibit 4(c) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1994
10 1984 Incentive Stock Option filed as exhibit to Registrants' 1984 Proxy
Statement, and incorporated herein by reference
10 (a) Agreement For Acquisition among Regency Affiliates, Inc., Statesman
Group, Inc., and National Resource Development Corporation filed as
Exhibit to Form 10-K dated June 7, 1993 and incorporated herein by
reference
10 (b) Agreement between Regency Affiliates, Inc. and Edward G. Harshfield, as
amended and incorporated herein by reference
10 (c) Agreement dated July 25, 1994 between Edward G. Harshfield and
Regency Affiliates, Inc., filed as Exhibit 10(a) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994
10 (d) Agreement dated July 21, 1994 between Gary F. Spahn and Regency
Affiliates, Inc., filed as Exhibit 10(b) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994
</TABLE>
29
<PAGE> 55
<TABLE>
<S> <C>
10 (e) Letter Agreement dated February 7, 1995 between L.J. Horbach &
Associates, Inc., filed as Exhibit 10(c) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994
10 (f) Agreement executed February 1, 1996 between Gary K. Nuttall and
Regency Affiliates, Inc. filed as Exhibit 10.1 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995 at page E-12, and
incorporated herein by reference
10 (g) Credit Agreement and Collateral Assignment, Pledge and Security
Agreement dated June 21, 1996 between the Company and Southern
Indiana Properties, Inc. filed as Exhibits 10(a) and 10(b) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996 at page E-1, and incorporated herein by reference.
22 Schedule of Registrant's subsidiaries, and incorporated herein by reference
28 Private Placement Offering Memorandum dated June 3, 1991 offering
$400,000 of Regency Restructuring Serial Promissory Notes filed as
Exhibit to Form 10-K dated June 7, 1993 and incorporated herein by
reference
EXHIBITS FILED HEREWITH:
Exhibit No. Description of Document
- ----------- -----------------------
24.1, page E-1 Power of Attorney for Martin J. Craffey
24.2, page E-3 Power of Attorney for Larry J. Horbach
24.3, page E-5 Power of Attorney for William R. Ponsoldt, Sr.
24.4, page E-7 Power of Attorney for William R. Ponsoldt, Jr.
27.1 Financial Data Schedule
28, page E-9 Audited financial statements for Security Land and
Development Company Limited Partnership
99.1, page E-41 Certified resolution of the Board of Directors of Regency
Affiliates, Inc. authorizing the use of powers of attorney to
execute this report on Form 10-K dated April 10, 1997
</TABLE>
30
<PAGE> 1
Exhibit 24.1
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS:
That I, Martin J. Craffey, do hereby make, constitute and
appoint Pamlyn Kelly, Ph.D. and Eunice M. Antosh, or either of them,
my true and lawful Attorney-in-Fact, for me and in my name, place
and stead, to sign, execute, acknowledge and deliver the report on
Form 10-K for Regency Affiliates, Inc. for the year ended December
31, 1996 to be filed with the Securities and Exchange Commission.
This Power of Attorney is limited to the foregoing acts,
however, it shall not be affected by disability of the Donor and all
of the authority given to the Attorney-in-Fact herein shall be
exercisable by said Attorney-in-Fact as provided in this instrument,
notwithstanding any later disability, incapacity or adjudication of
incompetency of the Donor. All acts therein by said Attorney-in-
Fact, pursuant to this written instrument, during such period of
disability, incapacity or adjudication of incompetency of the Donor
shall have the same effect and inure to the benefit of the Donor and
bind the Donor's heirs, devisees and personal representatives as if
the Donor where competent and not disabled or incapacitated.
IN WITNESS WHEREOF, I have hereunto set my hand, this 26th
day of February, 1997.
In the presence of:
/s/ Kathleen Lloyd /s/ Martin J. Craffey
- ------------------------------------ --------------------------------------
Kathleen Lloyd Martin J. Craffey
KATHLEEN J. LLOYD
NOTARY PUBLIC STATE OF NEW YORK
NO. 4798091, Suffolk County
Term Expires March 30, 1998
- -----------------------------------
E-00l
<PAGE> 2
STATE OF NEW YORK )
) SS:
COUNTY OF SUFFOLK )
Before me, a Notary Public in and for said county and State,
personally appeared the above named, Martin J. Craffey, who
acknowledged to me that he did sign the foregoing Power of Attorney
and that the same is his or her free act and deed.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official
seal this 26th day of February, 1997.
/s/ Kathleen J. Lloyd
----------------------------------
NOTARY PUBLIC
KATHLEEN J. LLOYD
NOTARY PUBLIC STATE OF NEW YORK
NO. 4798091, Suffolk County
Term Expires March 30, 1998
-----------------------------------
THIS INSTRUMENT PREPARED BY:
James F. Koehler, Esq.
Gallagher, Sharp, Fulton & Norman
Seventh Floor, Bulkley Building
1501 Euclid Avenue
Cleveland, Ohio 44115
(216) 522-1055
E-002
<PAGE> 1
Exhibit 24.2
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS:
That I, Larry J. Horbach, do hereby make, constitute and
appoint Pamlyn Kelly, Ph.D. and Eunice M. Antosh, or either of them,
my true and lawful Attorney-in-Fact, for me and in my name, place
and stead, to sign, execute, acknowledge and deliver the report on
Form 10-K for Regency Affiliates, Inc. for the year ended December
31, 1996 to be filed with the Securities and Exchange Commission.
This Power of Attorney is limited to the foregoing acts,
however, it shall not be affected by disability of the Donor and all
of the authority given to the Attorney-in-Fact herein shall be
exercisable by said Attorney-in-Fact as provided in this instrument,
notwithstanding any later disability, incapacity or adjudication of
incompetency of the Donor. All acts therein by said Attorney-in-
Fact, pursuant to this written instrument, during such period of
disability, incapacity or adjudication of incompetency of the Donor
shall have the same effect and inure to the benefit of the Donor and
bind the Donor's heirs, devisees and personal representatives as if
the Donor where competent and not disabled or incapacitated.
IN WITNESS WHEREOF, I have hereunto set my hand, this 21st
day of February, 1997.
In the presence of:
/s/ Roger E. Pfeifer /s/ Larry J. Horbach
- ------------------------------------ ---------------------------------
Larry J. Horbach
/s/ Eunice M. Antosh
- -----------------------------------
E-003
<PAGE> 2
STATE OF NEBRASKA )
) SS:
COUNTY OF DOUGLAS )
Before me, a Notary Public in and for said County and State,
personally appeared the above named, Larry J. Horbach, who
acknowledged to me that he did sign the foregoing Power of Attorney
and that the same is his or her free act and deed.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official
seal this 21st day of February, 1997.
[STAMP-LOGO]
GENERAL NOTARY - State of Nebraska
ROGER E. PFEIFER
My Comm. Exp. Sept. 21, 1998
/s/ Roger E. Pfeifer
-----------------------------------
NOTARY PUBLIC
THIS INSTRUMENT PREPARED BY:
James F. Koehler, Esq.
Gallagher, Sharp, Fulton & Norman
Seventh Floor, Bulkley Building
1501 Euclid Avenue
Cleveland, Ohio 44115
(216) 522-1055
E-004
<PAGE> 1
Exhibit 24.3
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS:
That I, William R. Ponsoldt, Sr., do hereby make, constitute and appoint
Pamlyn Kelly, Ph.D. and Eunice M. Antosh, or either of them, my true and lawful
Attorney-in-Fact, for me and in my name, place and stead, to sign, execute,
acknowledge and deliver the report on Form l0-K for Regency Affiliates, Inc.
for the year ended December 31, 1996 to be filed with the Securities and
Exchange Commission.
This Power of Attorney is limited to the foregoing acts, however, it
shall not be affected by disability of the Donor and all of the authority given
to the Attorney-in-Fact herein shall be exercisable by said Attorney-in-Fact as
provided in this instrument, notwithstanding any later disability, incapacity or
adjudication of incompetency of the Donor. All acts therein by said
Attorney-in-Fact, pursuant to this written instrument, during such period of
disability, incapacity or adjudication of incompetency of the Donor shall have
the same effect and inure to the benefit of the Donor and bind the Donor's
heirs, devisees and personal representatives as if the Donor where competent and
not disabled or incapacitated.
IN WITNESS WHEREOF, I have hereunto set my hand, this 23 day of March,
1997.
In the presence of:
/s/ Jacqueline M. Teske /s/ William R. Ponsoldt, Sr.
- ---------------------------------- ---------------------------------------
William R. Ponsoldt, Sr.
E-005
<PAGE> 2
STATE OF FLORIDA )
) SS:
COUNTY OF )
Before Me, a Notary Public in and for said County and State, personally
appeared the above named, William Ponsoldt, Sr., who acknowledged to me that he
did sign the foregoing Power of Attorney and that the same is his or her free
act and deed.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal
this 23rd day of March, 1997.
/s/ Jacqueline M. Teske
----------------------------------
NOTARY PUBLIC
[LOGO-NOTARY STAMP]
JACQUELINE M. TESKE
MY COMMISSION EXPIRES
NOVEMBER 18, 1998
#00 401647
Bonded thru
Notary Public Underwriters
NOTARY PUBLIC, STATE OF FLORIDA
THIS INSTRUMENT PREPARED BY:
James F. Koehler, Esq.
Gallagher, Sharp, Fulton & Norman
Seventh Floor, Bulkley Building
1501 Euclid Avenue
Cleveland, Ohio 44115
(216) 522-1055
E-006
<PAGE> 1
Exhibit 24.4
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS:
That I, William R. Ponsoldt, Jr., do hereby make, constitute and appoint
Pamlyn Kelly, Ph.D. and Eunice M. Antosh, or either of them, my true and lawful
Attorney-in-Fact, for me and in my name, place and stead, to sign, execute,
acknowledge and deliver the report on Form 10-K for Regency Affiliates, Inc. for
the year ended December 31, 1996 to be filed with the Securities and Exchange
Commission.
This Power of Attorney is limited to the foregoing acts, however, it
shall not be affected by disability of the Donor and all of the authority given
to the Attorney-in-Fact herein shall be exercisable by said Attorney-in-Fact as
provided in this instrument, notwithstanding any later disability, incapacity or
adjudication of incompetency of the Donor. All acts therein by said
Attorney-in Fact, pursuant to this written instrument, during such period of
disability, incapacity or adjudication of incompetency of the Donor shall have
the same effect and inure to the benefit of the Donor and bind the Donor's
heirs, devisees and personal representatives as if the Donor where competent and
not disabled or incapacitated.
IN WITNESS WHEREOF, I have hereunto set my hand, this 24th day of
February, 1997.
In the presence of:
/s/ Kim N. Kyle /s/ William R. Ponsoldt, Jr.
- --------------------------------------- ----------------------------------
William R. Ponsoldt, Jr.
/s/ ?????
- --------------------------------------
E-007
<PAGE> 2
STATE OF FLORIDA )
) SS:
COUNTY OF ?????? )
Before me, a Notary Public in and for said County and State,
personally appeared the above named, William R. Ponsoldt, Jr., who acknowledged
to me that he did sign the foregoing Power of Attorney and that the same is his
or her free act and deed.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official
seal this 24th day of February, 1997.
[NOTARY STAMP]
Kim N. Kyle /s/ Kim N. Kyle
My Comm Exp. 5/16/98 ----------------------------------
Bonded By Service Ins. NOTARY PUBLIC
No. CC365546
NOTARY PUBLIC
STATE OF FLORIDA
THIS INSTRUMENT PREPARED BY:
James F. Koehler, Esq.
Gallagher, Sharp, Fulton & Norman
Seventh Floor, Bulkley Building
1501 Euclid Avenue
Cleveland, Ohio 44115
(216) 522-1055
E-008
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-10-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,303,655
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,308,070
<PP&E> 50,884
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,566,678
<CURRENT-LIABILITIES> 138,082
<BONDS> 4,199,940
<COMMON> 4,549,642
401,054
1,052,988
<OTHER-SE> 1,123,862
<TOTAL-LIABILITY-AND-EQUITY> 11,566,678
<SALES> 6,102
<TOTAL-REVENUES> 6,102
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 404,838
<INCOME-PRETAX> 3,023,516
<INCOME-TAX> 226,388
<INCOME-CONTINUING> 2,802,467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,802,467
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.20
</TABLE>
<PAGE> 1
Exhibit 28
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SECURITY LAND AND DEVELOPMENT COMPANY
LIMITED PARTNERSHIP
DECEMBER 31, 1996
E-009
<PAGE> 2
Security Land and Development Company Limited Partnership
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS
BALANCE SHEET 4
STATEMENT OF OPERATIONS 5
STATEMENT OF CHANGES IN PARTNERS' CAPITAL 6
STATEMENT OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 8
E-010
<PAGE> 3
_________________________________
Reznick Fedder & Silverman
Certified Public Accountants - Business Consultants
A Professional Corporation
4520 East-West Highway - Suite 300 - Bethesda, MD 20814-3319 - (301) 652-9100
- - Fax (301) 652-1848
INDEPENDENT AUDITORS' REPORT
To the Partners
Security Land and Development Company Limited Partnership
We have audited the accompanying balance sheet of Security Land and
Development Company Limited Partnership as of December 31, 1996, and the related
statements of operations, changes in partners' capital and cash flows for the
year then ended. These financial statements are the responsibility of the
partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Security Land and
Development Company Limited Partnership as of December 31, 1996, and the results
of its operations, changes in partners' capital and cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Reznick Fedder & Silverman
Bethesda, Maryland
February 4, 1997
217 East Redwood St. 212 S. Tryon St. 745 Atlantic Ave.
Baltimore, MD 21202-3316 Charlotte, NC 28281-8100 Boston, MA 02111-2735
Telephone (410) 727-4340 Telephone (704) 332-9100 Telephone (617) 423-5855
P.O. Box 501298
Atlanta, GA 31150-12998
Telephone (770) 844-0644
E-011
<PAGE> 4
Security Land and Development Company Limited Partnership
BALANCE SHEET
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Investment in real estate, net of
accumulated depreciation $49,644,320
Cash and cash equivalents 230,262
Restricted escrow 8,215,088
Tenant accounts receivable 1,028,414
Prepaid expenses and other receivables 418,637
Accrued interest income 125,691
Deferred charges, net of accumulated
amortization of $1,148,415 1,480,312
-----------
Total Assets $61,142,724
===========
Note payable, net of discount $46,626,589
Accounts payable and accrued expenses 1,608,792
Accrued interest payable 475,116
Deferred rental income 4,243,902
Deferred interest income 500,000
-----------
53,454,399
Partners' capital 7,688,325
-----------
$61,142,724
===========
</TABLE>
See notes to financial statements
E-012
<PAGE> 5
Security Land and Development Company Limited Partnership
STATEMENT OF OPERATIONS
Year ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Revenue
Rental income $11,748,346
Interest income 1,538,085
Tenant reimbursements and other income 11,921
-----------
Total revenue 13,298,352
-----------
Administrative
Management fees 250,000
Professional fees 55,768
Payroll expenses 418,531
Office expenses 39,615
-----------
763,914
-----------
Operating
Janitorial 1,020,180
Maintenance contracts 92,946
Repairs and maintenance 281,576
Maintenance supplies 208,947
-----------
1,603,649
-----------
Interest, taxes and insurance
Interest 3,723,996
Real estate taxes 595,213
Insurance 93,662
-----------
4,412,871
Depreciation and amortization
Depreciation 1,629,493
Amortization 394,837
-----------
2,024,330
-----------
Total expenses 8,804,764
-----------
Net income $ 4,493,588
===========
</TABLE>
See notes to financial statements
E-013
<PAGE> 6
Security Land and Development Company Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Year ended December 31, 1996
<TABLE>
<CAPTION>
Special
General Limited Limited
Total Partner Partner Partner
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, beginning $3,303,399 $ 697,652 $ (1,462,309) $ 4,068,056
Net income 4,493,588 181,540 43,139 4,268,909
Distributions (108,662) (4,390) (1,043) (103,229)
---------- ---------- ------------ -----------
Balance, ending $7,688,325 $ 874,802 $ (1,420,213) $ 8,233,736
========== ========== ============ ===========
</TABLE>
See notes to financial statements
E-014
<PAGE> 7
Security Land and Development Company Limited Partnership
STATEMENT OF CASH FLOW
Year ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities
Net income $ 4,493,588
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 1,629,493
Amortization 394,837
Deferred rental income 480,719
Amortization of debt discount 119,251
Increase in tenant accounts receivable (15,528)
Increase in prepaid expenses and other receivables (41,562)
Increase in accrued interest income (125,691)
Increase in accounts payable and accrued expenses - operating 48,261
Decrease in accrued interest payable (37,938)
Decrease in deferred interest payable (359,988)
------------
Net cash provided by operating activities 6,585,442
------------
Cash flows from investing activities
Withdrawals from restricted escrow 10,299,485
Investment in real estate (12,003,908)
------------
Net cash used in investing activities (1,704,423)
------------
Cash flows from financing activities
Payments on notes payable (4,873,258)
Distributions (108,662)
------------
Net cash used for financing activities (4,981,920)
------------
NET DECREASE IN CASH (100,901)
Cash and cash equivalents, beginning 331,163
------------
Cash and cash equivalents, end $ 230,262
============
Cash paid for interest during the year, net of amount capitalized $ 3,642,683
============
Significant non-cash investing activities:
Accounts payable and accrued expenses of $1,314,637 have been capitalized
to the real estate.
</TABLE>
E-015
<PAGE> 8
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Security Land and Development Company Limited Partnership (the
"partnership") was formed under the laws of the State of Maryland. The
partnership was organized to own and operate, for investment purposes, the
project (the "project") which consists of a building known as the Security
West Building (the "building").
The building is approximately 717,000 square foot, two-phase office
building, consisting of a two-story office building and a connected
six-story office tower, located at 1500 Woodlawn Drive, Woodlawn, Maryland.
The building was purchased by the partnership in 1986 and is located on
land which is approximately 34.3 acres, also owned by the partnership. The
building has been occupied by the United States Social Security
Administration's Office of Disability and International Operations (the
"tenant") for approximately 23 years under leases between the United States
of America, acting by and through the General Services Administration
("GSA"). Effective November 1, 1994, the partnership and GSA entered into a
nine-year lease (the "lease") for the Building. The terms of the lease
agreement call for substantial alterations to the building. The partnership
has executed a contract in the original amount of approximately $24,000,000
to complete the alterations.
The general partner of the partnership is 1500 Woodlawn Limited Partnership
(the "general partner"), a Delaware limited partnership with an 80.8
percent general partner interest. Three limited partners ("limited
partners"), own the remaining 19.2 percent limited partnership interest.
The limited partners and the general partner are herein referred to as
Class A partners.
Regency Affiliates, Inc. (the "special limited partner") is a special
limited partner with no stated voting interest in the partnership.
Profits, losses and cash available for distribution to partners as defined
by the partnership agreement, as amended, is allocated as follows:
E-016
<PAGE> 9
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
<TABLE>
<CAPTION>
Before After
11/1/2003 10/31/2003
--------- ----------
<S> <C> <C>
General partner 4.04% 40.4%
Special limited partner 95.00 50.0
Limited partners 0.96 9.6
------ -----
100.00% 100.0%
====== =====
</TABLE>
Notwithstanding these allocation percentages, the partnership has made
arrangements so that to the extent that 95% of cash available for
distribution is less than $100,000, funds which would otherwise be used to
pay management fees to TCG Management (see note F) up to the $100,000 will
be made available for distribution. For financial reporting purposes,
income or loss is allocated among the partners based upon their stated
interests in cash available for distribution.
Taxable gains recognized upon sale, exchange or liquidation of the
partnership are allocated: first, to bring negative capital accounts to
zero; second, to bring the capital accounts of the Class A partners as a
group equal to the capital account of the special limited partner; third,
$1,000,000 to the Class A partners as a group; and then 50% to the Class A
partners as a group and 50% to the special limited partner. Taxable losses
recognized upon sale, exchange or liquidation of the partnership are
generally allocated: first, to bring the capital account of the special
limited partner to not less than zero and to bring the capital accounts of
the Class A partners as a group to not less than a $1,000,000 deficit;
second, in accordance with each partner's risk of loss, as called for by
the partnership agreement; and third, in accordance with partnership
interests.
The terms of the partnership agreement call for the proceeds from
liquidation, sale of any assets or refinancing to be used first in
settlement of partnership liabilities and for the establishment of reserves
(as deemed necessary by the general partner) and then to the partners in
proportion to their positive capital account balances.
E-017
<PAGE> 10
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Real Estate
-----------
Real estate is carried at cost. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives by use of the straight-line method for
financial reporting purposes.
Deferred Charges
----------------
Deferred charges consist of permanent loan closing costs which are being
amortized over the term of the related note payable using the effective
interest method.
Deferred Rental Income
----------------------
Rents of $2,785,769 received upon signing the lease agreement are being
amortized on a straight-line basis over the life of the lease. Rental
income received for phases under construction is deferred until
construction is complete and is then amortized over the remaining term of
the lease.
Deferred Interest Income
------------------------
Interest earned on the Project Account in excess of the estimated cost of
alterations was deferred because such funds, if not expended, must be paid
to the tenant (see note D). Deferred amounts are recognized as income when
it is determined that the funds will be used for the cost of alterations.
E-018
<PAGE> 11
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Cash and Cash Equivalents
-------------------------
For purposes of the statement of cash flow, cash and cash equivalents
include the partnership's operating money market accounts, excluding
restricted escrow held by the escrow agent (see note C).
Restricted Escrow
-----------------
The partnership has a portfolio of investments in money market accounts,
repurchase agreements, and debt securities, which are held in trust by
Fleet National Bank (see note D). Management determines the appropriate
classification of the debt securities at the time they are acquired and
evaluates the appropriateness of such classifications at each balance sheet
date. As of December 31, 1996, the company has classified all investments
in debt securities as held-to-maturity. Held-to-maturity securities consist
solely of debt securities which the company has the positive intent and
ability to hold to maturity and are stated at amortized cost.
Income Taxes
------------
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reportable by, the partners individually.
NOTE B - INVESTMENT IN REAL ESTATE
Investment in real estate is carried at cost and consist of the following:
<TABLE>
<CAPTION>
Estimated
Useful Life
-----------
<S> <C> <C>
Land - $ 2,151,154
Building 40 years 28,436,133
Improvements - Building 40 years 15,210,064
Improvements - Tenant 9 years 4,615,264
Improvements - Land 10 years 1,610,778
Furniture and equipment 7 years 810,752
Construction in progress 5,294,953
- -----------
58,129,098
Less accumulated depreciation 8,484,778
-----------
$49,644,320
===========
</TABLE>
E-019
<PAGE> 12
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE B - INVESTMENT IN REAL ESTATE (Continued)
For income tax reporting purposes, depreciation has been computed in
accordance with the Internal Revenue Code, generally using shorter lives
and accelerated methods.
NOTE C - NOTE PAYABLE
The partnership has a note payable to Fleet National Bank, as Trustee
(Trustee), dated November 17, 1994. The note is in the principal amount of
$56,450,000, and is effectively secured by substantially all the assets of
the partnership and rights to future lease payments. In addition, the
partnership has agreed to various covenants including those that require
the partnership to conduct its affairs as a separate entity and prohibit it
from selling all or substantially all of its assets; conducting business
other than related to the project; conducting business other than arms
length; commingling assets with other entities; acting as creditor or
pledging its assets for the benefit of another entity; and incurring
certain types of indebtedness.
The debt proceeds were obtained by the trustee through the sale of
Certificates of Participation (COPs) representing interests in a trust
established pursuant to a trust agreement between the partnership and the
Trustee. The net proceeds received from the sale of the COPs were used to
repay the then existing debt of the partnership, to fund certain reserves,
and to pay costs of issuance.
The COPs were issued at a discount of $705,625 which is being amortized
over the life of the note on the effective interest method. Unamortized
discount at December 31, 1996 was $440,216. Amortized discount for the year
ending December 31, 1996 was $119,251 and is included in interest
expense on the accompanying statement of operations.
E-020
<PAGE> 13
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE C - NOTE PAYABLE (Continued)
The note requires semiannual payments of principal and interest in
accordance with the terms of the COPs. Those terms require payments of
interest at a rate of 7.9% and two principal payments per year (May 15 and
November 15) aggregating to:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 5,265,850
1998 5,690,068
1999 6,148,461
2000 6,643,763
2001 7,179,009
Thereafter 16,139,654
-----------
Total 47,066,805
Less: Unamortized
Discount 440,216
-----------
Total $46,626,589
===========
</TABLE>
Interest incurred during the year ending December 31, 1996 was $3,970,941
excluding discount amortization of $119,251. $366,196 of interest relating
to construction has been capitalized to the cost improvements.
NOTE D - RESTRICTED ESCROW
The partnership is required to setup and maintain escrow accounts with
Shawmut Bank, NA as the escrow agent. Amounts on deposit are classified as
restricted escrow in the accompanying balance sheet. The required accounts
and funded balance at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Description Amount
------------------------ -----------
<S> <C> <C>
Project Account To be used for alterations $5,550,889
Note Payment To repay Certificates of
Accounts Participation 904,105
Liquidity Account To be used for debt liquidity 740,178
Replacement To be used for capital
Reserve Account improvements 377,442
Tax Account To pay real estate taxes 304,323
Insurance Account To pay insurance expense 53,954
Operations Account To pay operating expenses 107,767
Partnership Account To pay partnership distributions 94,234
Supplemental retention To be used as additional funds
account to repay COPs 82,196
-----------
$8,215,088
===========
</TABLE>
E-021
<PAGE> 14
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE D - RESTRICTED ESCROW (Continued)
Restricted escrow is invested in money market funds of $2,952,413 and a
repurchase agreement of $400,000, which approximate fair value. The
remaining funds are invested in debt securities and at December 31, 1996
are as follows:
<TABLE>
<CAPTION>
Held-to-Maturity
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government
Debt Securities $4,862,675 $620,165 $- $5,482,840
========== ======== === ==========
</TABLE>
The amortized cost and fair value of debt securities classified as
held-to-maturity, by contractual maturity, as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Due within one year $4,862,675 $5,482,840
========== ==========
</TABLE>
Any amounts remaining in the project account after the alterations have
been completed revert back to the tenant either in a lump sum payment or to
be applied against rental income. (Accordingly, earnings on funds deposited
in the project account in excess of the estimated cost of alterations have
been deferred.) If any changes to the budgeted alterations require the use
of the amounts earned, the income will be recognized at that time. Total
earnings deferred at December 31, 1996, is $500,000.
The partnership deposited with the escrow agent a letter of credit to
satisfy the requirements for the Supplemental Disbursement Account. At
December 31, 1996, $450,000 was outstanding.
E-022
<PAGE> 15
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE E - RENTAL OPERATIONS
On November 17, 1994, the partnership and the tenant entered into a lease
agreement for 100% of the building with a term of nine years expiring on
October 31, 2003. The lease agreement provides for minimum annual lease
payments of $12,154,632 payable monthly in arrears, plus provisions for
escalations in the event of increased operating costs and real estate
taxes.
Future minimum rentals are as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31, 1997 $12,154,632
1998 12,154,632
1999 12,154,632
2000 12,154,632
2001 12,154,632
Thereafter 22,283,492
-----------
$83,056,652
===========
</TABLE>
The partnership has received an opinion of Assistant General Council to the
General Services Administration that lease payments are not subject to
annual appropriation by the United States Congress and the obligations to
make such payments are unconditional general obligations of the United
States Government.
The Lease requires the partnership to maintain and repair the building and
land in accordance with specific standards, to maintain certain insurance
coverages and to use amounts in the Project Account plus interest accrued
to make certain alterations (the "Alterations").
The partnership assigned its right to receive payments under the lease with
GSA to the Escrow Agent. Payments received or distributions made by the
Escrow Agent and transfers between individual accounts are governed by an
escrow agreement for the ultimate benefit of the partnership.
E-023
<PAGE> 16
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE F - CONCENTRATION OF CREDIT RISK
The partnership maintains a cash account insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. At December 31, 1996 the
balance was $229,262. The uninsured balance at December 31, 1996 was
$129,262.
NOTE G - RELATED PARTY TRANSACTIONS
Janitorial Services
-------------------
The partnership entered into an agreement with Woodlawn Service
Corporation, an affiliate of the general partner, to provide janitorial
services for the building. The agreement provides for a fee for services
provided and for a reimbursement for expenses incurred, not to exceed
$1,905,770 per annum from which Woodlawn Service Corporation is to provide
the cost of materials, salaries and other costs of providing such services.
The agreement extends to the year 2003 with options to renew annually
thereafter. Total janitorial fees for the year ending December 31, 1996
were $1,020,180 with $114,646 remaining unpaid at year end.
Management Services
-------------------
The partnership entered into an agreement with TCG Management Corporation,
an affiliate of the general partner, to provide management services. The
agreement provides for a fee of $250,000 per annum. The agreement is for a
term of one year with automatic renewals through the year 2003. Total
management fees for the year ending December 31, 1996 were $250,000, with
$20,833 remaining unpaid at year end.
Construction Management Services
--------------------------------
The partnership entered into an agreement with TCG Construction Corporation
to provide construction management services relating to the building and
tenant alterations. The agreement provides for a management construction
fee of 10% of total costs incurred in connection with the alterations. In
addition, TCG Construction shall receive 100% of any cost savings payments
received by the partnership related to the alterations. The agreement is
for a term of one year with automatic renewals through the year 2003. Total
fees incurred at December 31, 1996 are $2,360,604 and have been capitalized
to the cost of improvements.
E-024
<PAGE> 17
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SECURITY LAND AND DEVELOPMENT COMPANY
LIMITED PARTNERSHIP
DECEMBER 31, 1995
E-25
<PAGE> 18
Security Land and Development Company Limited Partnership
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS
BALANCE SHEET 4
STATEMENT OF OPERATIONS 5
STATEMENT OF PARTNERS' CAPITAL 6
STATEMENT OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 8
</TABLE>
E-26
<PAGE> 19
[Reznick Fedder & Silverman Letterhead]
INDEPENDENT AUDITORS' REPORT
To the Partners
Security Land and Development Company Limited Partnership
We have audited the accompanying balance sheet of Security Land and
Development Company Limited Partnership as of December 31, 1995, and the related
statements of operations, changes in partners' capital and cash flows for the
year then ended. These financial statements are the responsibility of the
partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Security Land and
Development Company Limited Partnership as of December 31, 1995, and the results
of its operations, changes in partners' capital and cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Reznick Fedder & Silverman
Bethesda, Maryland
January 25, 1996
-3-
E-27
<PAGE> 20
Security Land & Development Company
Limited Partnership
BALANCE SHEET
December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Investment in real estate, net of
accumulated depreciation $38,706,350
Cash and cash equivalents 331,163
Restricted escrow 18,514,573
Tenant accounts receivable 1,012,886
Prepaid expenses and other receivables 377,075
Deferred charges, net of accumulated
amortization of $753,578 1,875,149
-----------
Total Assets $60,817,196
===========
Note payable, net of discount $51,380,596
Accounts payable and accrued expenses 996,976
Accrued interest payable 513,054
Deferred rental income 3,763,183
Deferred interest income 859,988
-----------
57,513,797
Partners' Capital 3,303,399
-----------
$60,817,196
===========
</TABLE>
See notes to financial statements
E-28
-4-
<PAGE> 21
Security Land & Development Company
Limited Partnership
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Revenues
Rental income $11,643,629
Interest income 208,426
Tenant reimbursements 113,473
-----------
Total revenue 11,965,528
-----------
Administrative
Management fees 250,000
Professional fees 62,823
Payroll expenses 434,722
Office expenses 28,889
-----------
776,434
-----------
Operating
Janitorial contract 1,020,180
Maintenance contracts 81,601
Repairs and maintenance 89,847
Maintenance supplies 183,376
-----------
1,375,004
-----------
Interest, taxes and insurance
Interest 3,836,198
Real estate taxes 545,667
Insurance 93,508
-----------
4,475,373
-----------
Depreciation and Amortization
Depreciation 995,733
Amortization 429,241
-----------
1,424,974
-----------
Total expenses 8,051,785
-----------
Net income $ 3,913.743
===========
</TABLE>
See notes to financial statements
-5-
E-29
<PAGE> 22
Security Land & Development Company
Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Year ended December 31, 1995
<TABLE>
<CAPTION>
Special
General Limited Limited
Total Partner Partner Partner
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, beginning $ (505,080) $ 543,790 $(1,498,870) $ 450,000
Net income 3,913,743 158,115 37,572 3,718,056
Distributions (105,264) (4,253) (1,011) (100,000)
----------- --------- ----------- -----------
Balance, ending $ 3,303,399 $ 697,652 $(1,462,309) $ 4,068,056
=========== ========= =========== ===========
</TABLE>
See notes to financial statements
-6-
E-30
<PAGE> 23
Security Land & Development Company
Limited Partnership
STATEMENT OF CASH FLOW
Year Ended December 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities
Net Income $ 3,913,743
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 995,733
Amortization expense 429,241
Deferred rental income 1,029,002
Amortization of debt discount 129,769
Decrease in tenant accounts receivable 3,351
Increase in prepaid expenses and other receivables (107,918)
Decrease in accounts payable and accrued expenses -
operating (21,855)
Decrease in accrued interest payable (32,002)
------------
Net cash provided by operating
activities 6,339,064
------------
Cash flows from investing activities
Withdrawals from restricted escrow 12,212,613
Investment in real estate (13,929,982)
------------
Net cash used in investing activities (1,717,369)
------------
Cash flows from financing activities
Payments on note payable (4,509,934)
Distributions (105,264)
------------
Net cash used for financing activities (4,615,198)
------------
NET INCREASE IN CASH 6,497
Cash and cash equivalents, beginning 324,666
------------
Cash and cash equivalents, end $ 331,163
============
Cash paid for interest during the year, net of amount
capitalized $ 3,738,431
============
</TABLE>
See notes to financial statements
-7-
E-31
<PAGE> 24
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Security Land and Development Company Limited Partnership (the
"partnership") was formed under the laws of the State of Maryland. The
partnership was organized to own and operate, for investment purposes, the
project (the "project") which consists of a building known as the Security
West Building (the "building").
The building is approximately 717,000 square foot, two-phase office
building, consisting of a two-story office building and a connected
six-story office tower, located at 1500 Woodlawn Drive, Woodlawn, Maryland.
The building was purchased by the partnership in 1986 and is located on
land which is approximately 34.3 acres, also owned by the partnership. The
building has been occupied by the United States Social Security
Administration's Office of Disability and International Operations (the
"tenant") for approximately 23 years under leases between the United States
of America, acting by and through the General Services Administration
("GSA"). Effective November 1, 1994, the partnership and GSA entered into
a nine-year lease (the "lease") for the Building. The terms of the lease
agreement call for substantial alterations to the building. The partnership
has executed a contract in the original amount of approximately $24,000,000
to complete the alterations.
The general partner of the partnership is 1500 Woodlawn Limited Partnership
(the "general partner"), a Delaware limited partnership with an 80.8
percent general partner interest. Three limited partners ("limited
partners"), own the remaining 19.2 percent limited partnership interest.
The limited partners and the general partner are herein referred to as
Class A partners. Regency Affiliates, Inc. (the "special limited
partner") is a special limited partner with no stated voting interest in
the partnership.
Profits, losses and cash available for distribution to partners as defined
by the partnership agreement, as amended, is allocated as follows:
-8-
E-32
<PAGE> 25
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Before After
11/1/2003 10/31/2003
--------- ----------
General partner 4.04% 40.4%
Special limited partner 95.00 50.0
Limited partners 0.96 9.6
------ -----
100.00% 100.0%
====== =====
Notwithstanding these allocation percentages, the partnership has made
arrangements so that to the extent that 95% of cash available for
distribution is less than $100,000, funds which would otherwise be used to
pay management fees to TCG Management (see note F) up to the $100,000 will
be made available for distribution. For financial reporting purposes,
income or loss is allocated among the partners based upon their stated
interests in cash available for distribution.
Taxable gains recognized upon sale, exchange or liquidation of the
partnership are allocated: first, to bring negative capital accounts to
zero; second, to bring the capital accounts of the Class A partners as a
group equal to the capital account of the special limited partner; third,
$1,000,000 to the Class A partners as a group; and then 50% to the Class A
partners as a group and 50% to the special limited partner. Taxable losses
recognized upon sale, exchange or liquidation of the partnership are
generally allocated: first, to bring the capital account of the special
limited partner to not less than zero and to bring the capital accounts of
the Class A partners as a group to not less than a $1,000,000 deficit;
second, in accordance with each partner's risk of loss, as called for by
the partnership agreement; and third, in accordance with partnership
interests.
The terms of the partnership agreement call for the proceeds from
liquidation, sale of any assets or refinancing to be used first in
settlement of partnership liabilities and for the establishment of reserves
(as deemed necessary by the general partner) and then to the partners in
proportion to their positive capital account balances.
-9-
E-33
<PAGE> 26
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Real Estate
-----------
Real estate is carried at cost. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives by use of the straight-line method for
financial reporting purposes.
Deferred Charges
----------------
Deferred charges consist of permanent loan closing costs which are being
amortized over the term of the related note payable using the effective
interest method.
Deferred Rental Income
----------------------
Rents of $2,785,769 received upon signing the lease agreement are being
amortized on a straight-line basis over the life of the lease. Rental
income received for phases under construction is deferred until
construction is complete and is then amortized over the remaining term of
the lease.
Deferred Interest Income
------------------------
Interest earned on the Project Account is deferred because such funds, if
not expended, must be paid to the tenant (see note D).
Cash and Cash Equivalents
-------------------------
For purposes of the statement of cash flow, cash and cash equivalents
include the partnership's operating money market accounts, excluding
restricted escrow held by the escrow agent (see note C).
- 10 -
E-34
<PAGE> 27
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Restricted Escrow
-----------------
The partnership has a portfolio of investments in money market accounts,
repurchase agreements, and debt securities, which are held in trust by
Shawmut Bank, NA (see note D). Management determines the appropriate
classification of the debt securities at the time they are acquired and
evaluates the appropriateness of such classifications at each balance sheet
date. As of December 31, 1995, the company has classified all investments
in debt securities as held-to-maturity. Held-to-maturity securities consist
solely of debt securities which the company has the positive intent and
ability to hold to maturity and are stated at amortized cost.
Income Taxes
------------
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reportable by, the partners individually.
Reclassifications
-----------------
Certain 1994 amounts have been reclassified to conform with the 1995
presentation.
NOTE B - INVESTMENT IN REAL ESTATE
Investment in real estate is carried at cost and consist of the following:
<TABLE>
<CAPTION>
Estimated
Useful Life
-----------
<S> <C> <C>
Land - $ 2,151,154
Building 40 years 28,436,133
Improvements - Building 40 years 8,498,091
Improvements - Tenant 9 years 2,441,299
Improvements - Land 10 years 388,858
Furniture and equipment 7 years 65,508
Construction in progress - 3,580,592
-----------
45,561,635
Less accumulated depreciation 6,855,285
-----------
$38,706,350
===========
</TABLE>
- 11 -
E-35
<PAGE> 28
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE B - INVESTMENT IN REAL ESTATE (Continued)
For income tax reporting purposes, depreciation has been computed in
accordance with the Internal Revenue Code, generally using shorter lives
and accelerated methods.
NOTE C - NOTE PAYABLE
The partnership has a note payable to Shawmut Bank, NA, as Trustee
(Trustee), dated November 17, 1994. The note is in the principal amount of
$56,450,000, and is effectively secured by substantially all the assets of
the partnership and rights to future lease payments. In addition, the
partnership has agreed to various covenants including those that require
the partnership to conduct its affairs as a separate entity and prohibit it
from selling all or substantially all of its assets; conducting business
other than related to the project; conducting business other than arms
length; commingling assets with other entities; acting as creditor or
pledging its assets for the benefit of another entity; and incurring
certain types of indebtedness.
The debt proceeds were obtained by the trustee through the sale of
Certificates of Participation (COPs) representing interests in a trust
established pursuant to a trust agreement between the partnership and the
Trustee. The net proceeds received from the sale of the COPs were used to
repay the then existing debt of the partnership, to fund certain reserves,
and to pay costs of issuance.
The COPs were issued at a discount of $705,625 which is being amortized
over the life of the note on the effective interest method. Unamortized
discount at December 31, 1995 was $559,467. Amortized discount for the year
ending December 31, 1995 was $129,769, and is included in interest expense
on the accompanying statement of operations.
- 12 -
E-36
<PAGE> 29
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE C - NOTE PAYABLE (Continued)
The note requires semiannual payments of principal and interest in
accordance with the terms of the COPs. Those terms require payments of
interest at a rate of 7.9% and two principal payments per year (May 15 and
November 15) aggregating to:
1996 $ 4,873,259
1997 5,265,850
1998 5,690,068
1999 6,148,461
2000 6,643,763
Thereafter 23,318,662
-----------
Total 51,940,063
Less: Unamortized
Discount 559,467
-----------
Total $51,380,596
===========
Interest incurred during the year ending December 31, 1995 was $4,315,281
excluding discount amortization of $129,769. $608,852 of interest relating
to construction has been capitalized to the cost improvements.
NOTE D - RESTRICTED ESCROW
The partnership is required to setup and maintain escrow accounts with
Shawmut Bank, NA as the escrow agent. Amounts on deposit are classified as
restricted escrow in the accompanying balance sheet. The required accounts
and funded balance at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Description Amount
----------------------------- -----------
<S> <C> <C>
Project Account To be used for alterations $16,133,217
Note Payment To repay Certificates of
Accounts Participation 879,272
Liquidity Account To be used for debt liquidity 740,178
Replacement To be used for capital
Reserve Account improvements 304,662
Tax Account To pay real estate taxes 307,839
Insurance Account To pay insurance expense 14,287
Operations Account To pay operating expenses 100,000
Partnership Account To pay partnership
distributions 35,118
-----------
$18,514,573
===========
</TABLE>
- 13 -
E-37
<PAGE> 30
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE D - RESTRICTED ESCROW (Continued)
Restricted escrow is invested in money market funds of $2,382,083 and
repurchase agreements of $1,108,000, which approximate fair value. The
remaining funds are invested in debt securities and at December 31, 1995
are as follows:
Held-to-Maturity
---------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- -----------
U.S. Government
Debt Securities $15,024,490 $906,073 $ - $15,930,563
=========== ======== ===== ===========
The amortized cost and fair value of debt securities classified as
held-to-maturity, by contractual maturity, as of December 31, 1995 are as
follows:
Amortized Fair
Cost Value
----------- -----------
Due within one year $ 7,125,543 $ 7,530,447
Due after one year
through three years 7,898,947 8,400,116
----------- -----------
$15,024,490 $15,930,563
=========== ===========
Earnings on funds deposited in the project account have been deferred
because any amounts remaining in this account after the alterations have
been completed revert back to the tenant either in a lump sum payment or to
be applied against rental income. If any changes to the budgeted
alterations require the use of the amounts earned, the income will be
recognized at that time.
The partnership deposited with the escrow agent a letter of credit to
satisfy the requirements for the Supplemental Disbursement Account. At
December 31, 1995, $450,000 was outstanding.
- 14 -
E-38
<PAGE> 31
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE E - RENTAL OPERATIONS
On November 17, 1994, the partnership and the tenant entered into a lease
agreement for 100% of the building with a term of nine years expiring on
October 31, 2003. The lease agreement provides for minimum annual lease
payments of $12,154,632 payable monthly in arrears, plus provisions for
escalations in the event of increased operating costs and real estate
taxes.
Future minimum rentals are as follows:
December 31, 1996 $12,154,632
1997 12,154,632
1998 12,154,632
1999 12,154,632
2000 12,154,632
Thereafter 34,438,124
-----------
$95,211,284
===========
The partnership has received an opinion of Assistant General Council to the
General Services Administration that lease payments are not subject to
annual appropriation by the United States Congress and the obligations to
make such payments are unconditional general obligations of the United
States Government.
The Lease requires the partnership to maintain and repair the building and
land in accordance with specific standards, to maintain certain insurance
coverages and to use amounts in the Project Account plus interest accrued
to make certain alterations (the "Alterations").
The partnership assigned its right to receive payments under the lease with
GSA to the Escrow Agent. Payments received or distributions made by the
Escrow Agent and transfers between individual accounts are governed by an
escrow agreement for the ultimate benefit of the partnership.
NOTE F - CONCENTRATION OF CREDIT RISK
The partnership maintains a cash account insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. At December 31, 1995 the
balance was $330,163. The uninsured balance at December 31, 1995 was
$230,163.
- 15 -
E-39
<PAGE> 32
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE G - RELATED PARTY TRANSACTIONS
Janitorial Services
-------------------
The partnership entered into an agreement with Woodlawn Service
Corporation, an affiliate of the general partner, to provide janitorial
services for the building. The agreement provides for a fee for services
provided and for a reimbursement for expenses incurred, not to exceed
$1,905,770 per annum from which Woodlawn Service Corporation is to provide
the cost of materials, salaries and other costs of providing such services.
The agreement extends to the year 2003 with options to renew annually
thereafter. Total janitorial fees for the year ending December 31, 1995
were $1,020,180 with $85,015 remaining unpaid at year end.
Management Services
-------------------
The partnership entered into an agreement with TCG Management Corporation,
an affiliate of the general partner, to provide management services. The
agreement provides for a fee of $250,000 per annum. The agreement is for a
term of one year with automatic renewals through the year 2003. Total
management fees for the year ending December 31, 1995 were $250,000, with
$20,833 remaining unpaid at year end.
Construction Management Services
--------------------------------
The partnership entered into an agreement with TCG Construction Corporation
to provide construction management services relating to the building and
tenant alterations. The agreement provides for a management construction
fee of 10% of total costs incurred in connection with the alterations. In
addition, TCG Construction shall receive 100% of any cost savings payments
received by the partnership related to the alterations. The agreement is
for a term of one year with automatic renewals through the year 2003. Total
fees incurred at December 31, 1995 are $1,249,809 and have been capitalized
to the cost of improvements.
- 16 -
E-40
<PAGE> 1
Exhibit 99.1
CERTIFICATE
-----------
The undersigned, the duly elected Secretary of Regency Affiliates,
Inc., does hereby certify that the following is a true and accurate copy of a
resolution of the Board of Directors adopted on April 10th, 1997:
RESOLVED, that the President and Secretary of the Corporation shall be
authorized to file the Corporation's report on SEC Form 10-K for the
year ending December 31, 1996 and that the same officers shall be, and
they hereby are authorized to execute said report utilizing powers of
attorney provided to them by the members of the Board of Directors
of the Corporation.
/s/ Eunice M. Antosh
--------------------------
Eunice M. Antosh
Dated this 10th day of April, 1997.
E-41
