<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, 1997 COMMISSION FILE NO. 1-7949
----------- ----
REGENCY AFFILIATES, INC.
------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 72-0888772
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
729 South Federal Hwy., Suite 307, Stuart, Fla. 34994
----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
10842 Old Mill Road, # 5B, Omaha, Nebraska 68154
------------------------------------------ -----
(Address of administrative offices) (Zip Code)
Registrant's Telephone Number (executive office), including Area Code: (561-220-7662)
-------------
Registrant's Telephone Number (administrative office), including Area Code: (402-330-8750)
-------------
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
<TABLE>
<CAPTION>
Name of Each Exchange
---------------------
Title of Each Class on Which Registered
------------------- -------------------
<S> <C>
Common Stock, $0.40 Par Value None
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT.
_______________________________ None _______________________________
(Title of Class)
<PAGE> 2
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 $6,963,000 on February 28, 1998, computed on the
basis of $.56 per share of Common Stock, the mean of the bid and asked price as
reported on the over-the-counter market of the bulletin board on that date.
The number of shares outstanding of the registrant's $.40 Par Value Common
Stock, as of February 28, 1998, was 12,435,089.
Documents incorporated by reference (See Exhibit Listing).
This report on Form 10-K consists of 35 pages, including two cover pages.
(The remainder of this page is intentionally left blank.)
2
<PAGE> 3
FORM 1O-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 ("Drilling"), 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 owning the shares of the Company's Common
Stock received 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
3,982,368 shares, or approximately 32% of the 12,435,089 outstanding shares as
of December 31, 1997, by virtue 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 3,126,377 shares currently held by Statesman.
On November 18, 1994, the Company acquired a limited partnership
interest in Security Land and Development Company Limited Partnership for an
equity investment of $350,000. The Partnership owns an office building complex
in Woodlawn, Maryland, which is leased to the United States Social Security
Administration.
3
<PAGE> 4
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, assumption of certain liabilities,
and 100,000 shares of the Company's Common Stock, which shares are restricted
under the federal securities laws.
Financial information about industry segments and foreign and domestic
operations.
Reference is made to the Company's financial statements at page F-1
for this information.
Narrative description of business.
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
Security West complex at 1500 Woodlawn Drive, Woodlawn, MD 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 717,000 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 & 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
4
<PAGE> 5
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 of $100,000 per
year.
RUSTIC CRAFTS INTERNATIONAL, INC.
Rustic Crafts International, Inc., a wholly owned subsidiary of the
Company, is a manufacturer of decorative wood and cast marble fireplaces,
mantels, shelves, fireplace accessories and other home furnishings. Its business
is conducted from leased premises in Scranton, Pennsylvania. It employs
approximately 46 persons.
Since the acquisition of the business by the Company in March, 1997,
Rustic Crafts has generated $2,873,000 in revenues, representing 99% of the
total revenues of the Company, excluding income from equity investment in the
Partnership. Rustic Crafts secures its raw materials from a variety of sources
and at competitive prices. Its largest customer, J.C. Penney Co., Inc.
represents 28% of the consolidated revenues of Regency. Approximately 37% of the
sales of Rustic Crafts occur in the fourth quarter of the calendar year. As of
December 31, 1997, Rustic Crafts had a backlog of orders of $435,000 of which
approximately $350,000 was subject to termination.
Rustic Crafts has a number of competitors for its products, and
management considers the business to be competitive.
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, 1997, NRDC made only casual
sales of Aggregate (less than $30,000).
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 the competitors have greater financial and personnel
resources than the Company. As a
5
<PAGE> 6
consequence, there can be no assurance that acting alone NRDC will be able to
consummate sales of material amounts of its Aggregate.
Employees
As of December 31, 1997, Regency and its subsidiaries employed 49
people.
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 92 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 loan transaction provides for the loan to be secured by a
pledge of the shares of stock 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.
ITEM 2. PROPERTIES
Reference is made to Item 1, Business, page 3 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.
Rustic Crafts International, Inc. conducts its manufacturing operations
in a multistory leased facility located at 315 Cherry Street, Scranton,
Pennsylvania and in a second leased facility located at 305 Cherry Street,
Scranton, Pennsylvania. Both premises are occupied pursuant to a sublease with
Rustic Crafts Co., Inc., the seller of the assets of the business in the March,
1997, Asset Purchase and Sale Agreement with Rustic Crafts International, Inc.,
the Company's wholly owned subsidiary. Management considers the leased
facilities to be inadequate for the future needs of the business. Accordingly,
in March, 1998, the Company purchased a building in Scranton, Pennsylvania for
a purchase price of approximately $1,200,000, as more fully described in Item
14, Subsequent Events, page 28 of this report.
As of December 31, 1997, 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.
6
<PAGE> 7
International Aggregate Corporation subsequently 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.
The Company owns a one-story commercial building located on a
one-eighth acre parcel of land located in Stuart, Florida and a condominium
located at 7370 S. Ocean Drive, Jensen Beach, Florida. The former property was
purchased for approximately $51,000 in 1996, and is leased to a single tenant.
The latter was purchased for approximately $68,000 in 1997.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1997 and the date of this report there were no legal
proceedings involving the Company or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of security holders during the
quarter ending December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
Market information.
Regency's Common Stock is traded in the over-the-counter market on the
bulletin board. The following table sets forth the high and low bid prices for
each calendar quarter during the last two fiscal years of the Company. The bid
quotations represent interdealer prices and do not include retail markups,
mark-downs or commissions. The prices indicated may not reflect the actual
market for substantial quantities of the Company's Common Stock. As of December
31, 1997, there were approximately 3,200 common shareholders of record.
7
<PAGE> 8
<TABLE>
<CAPTION>
YEAR ENDED
----------
DECEMBER 31, 1996 HIGH ($) LOW ($)
----------------- -------- -------
<S> <C> <C> <C>
First Quarter .63 .13
Second Quarter .47 .38
Third Quarter .50 .28
Fourth Quarter .69 .41
<CAPTION>
YEAR ENDED
----------
DECEMBER 31, 1997 HIGH ($) LOW ($)
----------------- -------- -------
<S> <C> <C> <C>
First Quarter .72 .44
Second Quarter .69 .50
Third Quarter .94 .56
Fourth Quarter .69 .48
</TABLE>
Dividend policy.
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.
Issuance of securities.
In March 1997, the Company issued 100,000 shares of its Common Stock at
a value of $60,000 to certain of the sellers of the assets of Rustic Crafts
Co., Inc., as part of the sale of that business to Rustic Crafts International,
Inc. The Company received no cash consideration for the issuance of these
shares and no underwriter was involved. The Company claims an exemption from
registration pursuant to Section 4 of the Securities Act of 1933.
Effective June 3, 1997, the Company issued 466,667 shares of Common
Stock at a value of $233,333 and options to purchase an additional 6.1 million
shares of Common Stock to Statesman Group, Inc. as part of the consideration to
secure the release of Mr. William R. Ponsoldt, Sr. to serve as President and
Chief Executive Officer of the Company and in consideration of the agreement by
Statesman to provide loan guarantees not to exceed the sum of $300,000 upon the
request of the Company and a showing of reasonable need. Pursuant to the Amended
and Restated Agreement between the Company and Statesman, until their date of
expiration, the options are exercisable at
8
<PAGE> 9
any time in whole or in part at a price equal to the lower of (a) the closing
trading price of the shares as of the most recent date on which at least 10,000
shares of such stock were traded, or (b) the average closing trading price of
the shares during the ninety day period immediately preceding the date of
exercise. The Company agreed to reserve sufficient shares to meet the
requirements of the options. The options are exercisable immediately and remain
exercisable until April 15, 2007. At the option of Statesman, payment may be
made by Statesman for exercise of the options, in whole or in part, in the form
of a promissory note executed by Statesman, secured only by a pledge of the
shares purchased, with interest accruing for any quarter at the prime rate, and
interest and principal payable in a balloon payment five years after the date of
the note, provided that if the Company's Board of Directors reasonably
determines that exercising the options by delivery of a note would render the
respective purchase of shares void or voidable, then the Board may require, as a
condition to exercise of the options, that Statesman either (i) pay at least the
par value of the shares in cash (with the balance paid by delivery of a note),
or (ii) provide acceptable collateral other than the shares themselves to secure
payment of the note. The Company has determined that these options have no
readily determinable fair value consistent with the provisions of SFAS No. 123.
Therefore, the Company has not recognized any cost associated with the issuance
of these warrants, and net earnings per share for 1997 have not reflected any
such costs.
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.
Securities of the registrant.
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 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 1992 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
9
<PAGE> 10
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 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 NRDC 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
10
<PAGE> 11
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, 1997, a total of 2,477 shares of the Series-E Preferred Stock have
been converted into 468,551 shares of the Company's Common Stock, leaving 2,567
shares of the Series-E Preferred Stock issued and outstanding at year end.
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.
TRANSCONTINENTAL DRILLING COMPANY ("DRILLING") 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.
RUSTIC CRAFTS INTERNATIONAL, INC.
Regency Affiliates, Inc. is the owner of 100% of the issued and
outstanding common stock of Rustic Crafts International, Inc.
(The balance of this page was intentionally left blank).
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
=================================================================================================================
<S> <C> <C> <C> <C> <C>
REVENUES $ 2,908,253 $ 6,102 $ 2,597 $ 5,125 $ 0
INCOME FROM EQUITY INVESTMENT IN
PARTNERSHIP 3,820,913 4,268,904 3,718,056 100,000 0
NET INCOME (LOSS) 2,187,618 2,802,467 3,298,589 (102,541) (121,789)
NET INCOME (LOSS) PER SHARE
(BASIC) 0.17 0.24 0.29 (0.01) (0.01)
NET INCOME (LOSS) PER SHARE
(DILUTED)(1995 RESTATED) 0.15 0.20 0.21 (0.01) (0.01)
TOTAL ASSETS $15,432,529 11,566,678 4,980,148 1,473,832 853,922
LONG-TERM DEBT (INCLUDING CURRENT
PORTION) & REDEEMABLE
PREFERRED STOCK $ 5,175,400 4,600,994 691,254 557,954 272,100
</TABLE>
(The balance of this page was intentionally left blank).
12
<PAGE> 13
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 sufficient cash flow
to meet its ongoing expenses.
(ii) The Company currently lacks the necessary infrastructure at
the site of the Groveland Mine to permit the Company to make
more than casual sales of the Aggregate.
(iii) As of December 31, 1997, the Company was dependent upon its
investment in Security Land And Development Company Limited
Partnership and the operations of Rustic Crafts
International, Inc. 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.
(vi) The failure of the Social Security Administration to renew its
lease of the Security West Buildings upon its expiration on
October 31, 2003 could have a materially adverse impact upon
the Company's investment in Security Land And Development
Company Limited Partnership.
(vii) 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.
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 year until 2003. In the fiscal year ending December
31, 1997, the Company's income from its equity investment in the Partnership was
$3,820,913. These funds, however, are presently committed for the amortization
of the outstanding principal balance on the real estate mortgage of the Security
Land and Development Company Limited Partnership and while the Company's equity
investment has increased to $11,951,819, the partnership does not provide
liquidity to the Company in excess of the $100,000 management fee.
13
<PAGE> 14
On March 17, 1997, the Company, through Rustic Crafts International,
Inc., completed the acquisition of the assets of Rustic Crafts Co., Inc., which
acquisition is performing within management's expectations, but is not
generating sufficient surplus cash flow to fund the consolidated corporate
expenses. Rustic Crafts provided revenues of $2,872,900 and earnings of
$305,644 prior to allocation of $230,000 of corporate general and
administrative expenses for their ten months ended December 31, 1997. During
1997 Rustic Crafts was operating at 100% of capacity. In 1998, Rustic Crafts
purchased a building of 126,000 square feet located near the current facility
in Scranton, Pennsylvania. Management anticipates that the cost of acquiring
and equipping this facility will approach $2 million, the majority of which
will be funded by new borrowings which have recently been obtained (see
Subsequent Events, page 28). This new facility will significantly increase the
operating capacity and enable Rustic Crafts to service its current order
backlog and enhance its customer base. Rustic Crafts has recently employed a
new President who has substantial industry background and plans to increase not
only its manufactured product but also the imported product revenues as well as
expanding the distribution of its products. Management anticipates that Rustic
Crafts will provide significant cash distributions for use by the Company.
The Company experimented during 1997 for a one month period by
installing aggregate crushing and marketing operations at the Groveland Mine in
an informal joint venture with another company. The joint venture processed and
marketed approximately 25,000 tons of aggregate rock. Based on this experiment,
the Company is negotiating with an experienced aggregate supply company to
establish a permanent infrastructure to commercialize the inventory of
previously quarried and stockpiled aggregate at the Groveland Mine. At this time
there is no assurance that such commercialization will occur. The Company is
also exploring opportunities to monetize this asset for the benefit of the
Company's shareholders.
The Company is continuing to explore opportunities for the acquisition
of companies with operations that can provide additional liquidity and cash
flow. The Company anticipates that such acquisitions would be financed by
borrowings secured by the assets acquired and by the proceeds of other
financings. There can be no assurances that any such acquisitions or
transactions will come to fruition.
The Company is presently negotiating a new financing at favorable rates
which, if consummated, would provide the funds to prepay the SIPI Loan and make
future acquisitions. Such a loan would be secured by the guaranty of an
affiliate of a major U.S. insurance company which in turn would be secured by
the Company's interest in the Security Land And Development Company Limited
Partnership. While no closing date has been set for the funding of the loan
transaction, management believes a closing, if it occurs, will take place in the
second quarter of 1998. Management anticipates the proceeds of the loan, before
payment of fees, the cost of the insurance guaranty and related expenses will be
approximately $9-$10 million.
14
<PAGE> 15
Results of Operations.
The operations of Regency Affiliates, Inc. and its subsidiaries in 1997
include the casual sales of aggregate, limited rental income and the sale of
wood and cast marble decorative fireplaces, heater logs, and related accessories
as well as an active merger and acquisition program with a view to enhance
future company operations.
1997 Compared to 1996
1997 included ten months of operations of Rustic Crafts which reflect
net sales of $2,872,865, cost of sales of $1,912,413 and general and
administrative expenses of $610,714 exclusive of the allocation of general and
administrative expenses of $230,000 from Regency. There were no operations of
Rustic Crafts included in 1996.
Income from the Company's equity investment in Security Land and
Development decreased $448,000 in 1997 as compared to 1996. This decrease was
the result of lower interest income as escrow funds were invested in
renovations, and higher depreciation expense due to capitalized improvements,
offset by reductions in interest expense and increases in other income. The
renovations required by the lease are expected to be completed in 1998.
Interest expense increased $396,800 primarily due to interest on the
SIPI loan for twelve months in 1997 compared to six months in 1996.
Income tax expense decreased $152,700 in 1997. Income taxes in 1996
included provisions for years prior to 1996.
Net income attributable to common shareholders decreased $587,000 in
1997 compared to 1996. The decrease is the result of operating income from
Rustic Crafts and lower income taxes offset by increases in administrative
expenses, lower equity earnings from investment in Security Land and Development
and increased interest expense.
Year 2000 issues.
The company does not anticipate that the cost of addressing the year
2000 issue will be a material event or uncertainty that would have a material
impact upon the Company's operations, financial results, or financial condition.
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
15
<PAGE> 16
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.
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.
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128), and Statement of Financial Accounting
Standards No. 129, "Disclosure of Information About Capital Structure" (SFAS
129), were issued. SFAS 128 establishes new standards for computing and
reporting earnings per share. SFAS 129 requires an entity to explain the
pertinent rights and privileges of outstanding securities. The Company adopted
these new standards in the fourth quarter ended December 31, 1997. All prior
period earnings per share data were restated for the adoption of SFAS 128. The
adoption did not have a material effect on the Company's financial statements
or notes thereto.
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), was issued. SFAS 130 establishes new
standards for reporting comprehensive income and its components and is
effective for periods beginning after December 15, 1997. The Company expects
that comprehensive income (loss) will not differ materially from net
income (loss).
In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosure
About Segments of an Enterprise and Related Information" (SFAS 131), was
issued. SFAS No. 131 changes the standards for reporting financial results by
operating segments, related products and services, geographic areas, and major
customers. The Company must adopt the new standard for periods beginning after
December 15, 1997.
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,
1997.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
16
<PAGE> 17
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
1997 CONSOLIDATED FINANCIAL REPORT
F-1
<PAGE> 18
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONTENTS
- --------------------------------------------------------------------------------
Page
----
AUDITORS' REPORT F-3
FINANCIAL STATEMENTS
Consolidated balance sheets F-4 - F-5
Consolidated statements of operations F-6
Consolidated statements of shareholders' equity F-7
Consolidated statements of cash flows F-8 - F-9
Notes to consolidated financial statements F-10 - F-28
F-2
<PAGE> 19
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, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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 1997, 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 77% and 71%
of consolidated total assets as of December 31, 1997 and 1996, respectively, and
100% of the income from equity investment in partnership for the years ended
December 31, 1997, 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 1997, 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
As more fully discussed in Note 1.K. to the financial statements, the
Company has adopted various Statements of Financial Accounting Standards as
required. 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 LLP
Cleveland, Ohio
March 25, 1998
F-3
<PAGE> 20
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
--------------------------
<TABLE>
<CAPTION>
1996 1997
---- ----
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 252,354 $ 2,303,655
Accounts receivable, net of allowance of $1,125 in 1997 581,585 -
Inventory 536,150 -
Other current assets 120,891 4,415
----------- -----------
Total current assets 1,490,980 2,308,070
PROPERTY, PLANT AND EQUIPMENT, NET 140,182 -
INVESTMENTS
Investment in partnership 11,951,819 8,233,731
Rental property, net 113,217 50,884
----------- -----------
Total investments 12,065,036 8,284,615
OTHER ASSETS
Aggregate inventory 848,937 850,000
Goodwill, net of amortization 677,248 -
Other 210,146 123,993
----------- -----------
Total other assets 1,736,331 973,993
$15,432,529 $11,566,678
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 21
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
--------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt $ 925,040 $ -
Note payable 140,000 -
Accounts payable 256,465 79,906
Accrued expenses 424,401 58,176
------------ ------------
Total current liabilities 1,745,906 138,082
LONG-TERM DEBT, NET OF CURRENT PORTION 4,031,060 4,199,940
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 94,555 101,110
SERIAL PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION (liquidation preference and redemption
value, $256,700 in 1997 and $504,400 in 1996) 219,300 401,054
SHAREHOLDERS' EQUITY
Serial preferred stock not subject to mandatory redemption
(maximum liquidation preference, $24,939,340 and
$24,921,354 in 1997 and 1996, respectively) 1,052,988 1,052,988
Common stock, par value $.40, authorized 25,000,000 shares
issued and outstanding 12,435,089 and 11,399,871 shares
in 1997 and 1996, respectively (net of 22,460 treasury shares) 4,963,729 4,549,642
Additional paid-in capital 221,600 140,000
Readjustment resulting from quasi-reorganization at
December 31, 1987 (1,670,596) (1,670,596)
Retained earnings 4,773,987 2,654,458
------------ ------------
Total shareholders' equity 9,341,708 6,726,492
------------ ------------
$ 15,432,529 $ 11,566,678
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 22
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997, 1996 and 1995
--------------------------------------------
<TABLE>
<CAPTION>
1997 1995 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES $ 2,908,253 $ 6,102 $ 2,597
COSTS AND EXPENSES
Cost of goods sold 1,928,491 - -
General and administrative expenses 1,787,650 920,789 311,611
----------- ----------- -----------
3,716,141 920,789 311,611
----------- ----------- -----------
LOSS FROM OPERATIONS (807,888) (914,687) (309,014)
INCOME FROM EQUITY INVESTMENT IN PARTNERSHIP 3,820,913 4,268,904 3,718,056
OTHER INCOME, NET 45,300 74,137 -
INTEREST EXPENSE (801,597) (404,838) (45,395)
----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE AND
MINORITY INTEREST 2,256,728 3,023,516 3,363,647
INCOME TAX EXPENSE 73,665 226,388 70,000
MINORITY INTEREST 4,555 5,339 4,942
----------- ----------- -----------
NET INCOME $ 2,187,618 $ 2,802,467 $ 3,298,589
=========== =========== ===========
NET INCOME ATTRIBUTABLE TO COMMON
SHAREHOLDERS
[after paid or accrued preferred stock dividends of $65,475,
$81,144 and $78,526 in 1997, 1996 and 1995, respectively,
and preferred stock accretion of $20,600, $32,800 and
$27,800 in 1997, 1996 and 1995, respectively] $ 2,101,543 $ 2,688,523 $ 3,192,263
=========== =========== ===========
NET INCOME PER COMMON SHARE:
BASIC $ 0.17 $ 0.24 $ 0.29
=========== =========== ===========
DILUTED $ 0.15 $ 0.20 $ 0.21
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 23
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
--------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock* Common Stock**
---------------------- -------------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 1, 1995 605,291 $ 1,052,988 10,524,537 $ 4,199,508
Issuance of common stock - - 642,000 256,800
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
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
Issuance of common stock - - 566,667 226,667
Conversion of Series E preferred stock - - 468,551 187,420
Accretion of Series E preferred stock - - - -
Payment of dividend on Series E
preferred stock - - - -
Net income - - - -
------- ----------- ---------- -----------
BALANCE - DECEMBER 31, 1997 605,291 $ 1,052,988 12,435,089 $ 4,963,729
======= =========== ========== ===========
<CAPTION>
Readjustment
Additional Resulting Retained
Paid-in From Quasi- Earnings Shareholders'
Capital Reorganization (Deficit) Equity
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 1, 1995 $ - $(1,670,596) $(3,262,300) $ 319,600
Issuance of common stock 140,000 - - 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 140,000 (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 140,000 (1,670,596) 2,654,458 6,726,492
Issuance of common stock 66,666 - - 293,333
Conversion of Series E preferred stock 14,934 - - 202,354
Accretion of Series E preferred stock - - (20,600) (20,600)
Payment of dividend on Series E
preferred stock - - (47,489) (47,489)
Net income - - 2,187,618 2,187,618
----------- ----------- ----------- -----------
BALANCE - DECEMBER 31, 1997 $ 221,600 $(1,670,596) $ 4,773,987 $ 9,341,708
=========== =========== =========== ===========
</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-7
<PAGE> 24
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,187,618 $ 2,802,467 $ 3,298,589
Adjustments to reconcile net income to net cash
used by operating activities:
Minority interest (4,555) (5,339) (4,942)
Income from equity investment in partnership (3,820,913) (4,268,904) (3,718,056)
Distribution of equity earnings from partnership 102,825 103,229 100,000
Interest amortization on long-term debt 756,160 376,940 26,500
Depreciation and amortization 91,573 7,401 -
Issuance of common stock in lieu of cash compensation 233,333 93,334 -
Changes in operating assets and liabilities:
Accounts receivable (327,259) - -
Inventory (49,137) - -
Other current assets (96,156) (1,724) (562)
Other assets (135,813) 13,113 1,964
Accounts payable 26,335 (16,074) 22,598
Accrued expenses 102,671 (21,640) 74,111
----------- ----------- -----------
Net cash used by operating activities (933,318) (917,197) (199,798)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of cash of $13,535 (1,086,465) - -
Expenditures for property and equipment (122,029) (50,884) -
----------- ----------- -----------
Net cash used by investing activities (1,208,494) (50,884) -
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt - 3,500,000 -
Debt issuance costs - (124,795) -
Net short-term proceeds (payments) 140,000 (80,000) (5,800)
Proceeds from issuance of preferred stock - - 152,000
Proceeds from issuance of common stock - - 48,000
Offering costs - - (44,200)
Dividends paid (47,489) (63,158) (60,540)
Dividends paid to minority interest (2,000) - -
----------- ----------- -----------
Net cash provided by financing activities 90,511 3,232,047 89,460
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,051,301) 2,263,966 (110,338)
CASH AND CASH EQUIVALENTS - BEGINNING 2,303,655 39,689 150,027
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 252,354 $ 2,303,655 $ 39,689
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 25
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995 1997
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 27,187 $ 23,890 $ 20,944
Income taxes 60,750 257,838 --
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
In 1997, the Company issued 468,551 shares of common stock in exchange for
2,477 shares of Series E mandatorily redeemable preferred stock.
In 1997, the Company issued 100,000 shares of its common stock and paid
$1,100,000 in cash for all of the assets of Rustic Crafts, Inc. (see Note
2). In connection therewith, the Company acquired assets and assumed certain
liabilities as follows:
<TABLE>
<S> <C>
Fair value of assets acquired including goodwill $ 1,573,778
Cash paid (1,100,000)
Common stock issued (60,000)
------------
Liabilities assumed $ 413,778
============
</TABLE>
In 1995, the Company converted a $300,000 note payable 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.
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 26
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"), its wholly owned
subsidiary, Rustic Crafts International, Inc. ("Rustic
Crafts") 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. Substantially all of net sales in
1997 were generated through Rustic Crafts, which manufactures
wood and cast marble decorative fireplaces, heater logs and
related accessories. Rustic Crafts extends credit to its
customers who primarily are mass merchants, fireplace
specialty distributors and furniture stores. One customer
accounted for approximately 28% of consolidated sales for
1997. The loss of this customer could have a significant
effect on Rustic Crafts' results of operations.
Regency Affiliates, Inc.'s (Registrant's) share of
consolidated net assets at December 31, 1997 and 1996 consists
principally of cash and cash equivalents of approximately
$248,000 and $2,297,000, respectively, investment in
partnership of approximately $11,952,000 and $8,234,000,
respectively, property, plant and equipment (including rental
property) of approximately $133,000 and $-0-, respectively,
and liabilities of approximately $5,070,000 and $3,985,000,
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.
B. Earnings Per Share - Basic earnings per share are computed by
dividing net income attributable to common shareholders (net
income less preferred stock dividend requirements and periodic
accretion) by the weighted average number of common shares
outstanding during the year. 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).
F-10
<PAGE> 27
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. Earnings Per Share (Continued)
The weighted average number of shares used in basic earnings
per share computations for 1997, 1996 and 1995 was
approximately 12,038,000, 11,400,000 and 10,941,000,
respectively. The weighted average number of shares used in
the computation of diluted earnings per share for 1997, 1996
and 1995 was approximately 14,231,000, 14,252,000 and
15,632,000, respectively. The Company's stock is thinly traded
in the over-the-counter market on the bulletin board section.
In 1997, 1996 and 1995, market prices of $.616 per share,
$.525 per share and $.25 per share, respectively, were
utilized in the conversion formulas for the computation of
diluted earnings per share. In 1997, 1996 and 1995, if market
prices of $.437 per share, $.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 diluted earnings per share would amount to
approximately 14,631,000, 16,164,000 and 19,229,000,
respectively, yielding diluted earnings per share of $.15,
$.17 and $.17, respectively.
C. Fair Value of Financial Instruments - The fair values of cash,
accounts receivable, accounts payable and other short-term
obligations approximate their carrying values because of the
short maturity of these financial instruments. The carrying
values of the Company's long-term obligations approximate
their fair value. In accordance with Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of
Financial Instruments," rates available at balance sheet dates
to the Company are used to estimate the fair value of existing
debt.
D. 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.
E. Inventory - Inventories are stated at the lower of cost or
market using the first-in, first-out (FIFO) method. Inventory
is comprised of the following at December 31, 1997:
<TABLE>
<S> <C>
Finished products $ 294,564
Work-in-process 56,049
Raw materials and supplies 185,537
-------
$ 536,150
=========
</TABLE>
F. Property, Plant and Equipment/Rental Property - Property,
plant and equipment and rental property are carried at cost.
Depreciation is provided over the estimated useful lives of
the assets by the use of the straight-line and declining
balance methods. These items consist of the following at
December 31, 1997:
F-11
<PAGE> 28
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. Property, Plant and Equipment/Rental Property (Continued)
<TABLE>
<CAPTION>
Property, Plant
and Equipment Rental Property
------------- ---------------
1997 1996 1997
---- ---- ----
<S> <C> <C> <C>
Real property $ - $118,877 $ 50,884
Leasehold improvements 73,200 - -
Machinery and equipment 99,389 - -
--------- --------- ---------
172,589 118,877 50,884
Accumulated depreciation 32,407 5,660 -
--------- --------- ---------
$140,182 $113,217 $ 50,884
========== ======== =========
</TABLE>
Depreciation expense for the years ended December 31, 1997,
1996 and 1995 was $36,194, $-0- and $-0-, respectively.
G. Aggregate 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, 1997, 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 pursuing various ventures to process and market
the aggregate. While the Company is hopeful that such a
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).
H. Goodwill - Goodwill resulted from the acquisition of Rustic
Crafts in 1997. The goodwill is being amortized straight-line
over a period of 15 years. Accumulated amortization was
$37,884 at December 31, 1997.
F-12
<PAGE> 29
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. 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.
J. 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.
K. New Authoritative Pronouncements - 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.G.), the investment in
partnership (as described in Note 3), the Company's net
operating loss carryforward (as described in Note 9), and
goodwill (as described in Note 1.H.). The adoption did not
have a material effect on the Company's financial position or
results of operations.
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.
F-13
<PAGE> 30
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. New Authoritative Pronouncements (Continued)
In February 1997, Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (SFAS 128), and Statement of
Financial Accounting Standards No. 129, "Disclosure of
Information About Capital Structure" (SFAS 129), were issued.
SFAS 128 establishes new standards for computing and reporting
earnings per share. SFAS 129 requires an entity to explain the
pertinent rights and privileges of outstanding securities. The
Company adopted these new standards in the fourth quarter
ended December 31, 1997. All prior period earnings per share
data were restated for the adoption of SFAS 128. The adoption
did not have a material effect on the Company's financial
statements or notes thereto.
In June 1997, Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), was issued.
SFAS 130 establishes new standards for reporting comprehensive
income and its components and is effective for periods
beginning after December 15, 1997. The Company expects that
comprehensive income (loss) will not differ materially from
net income (loss).
In June 1997, Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS 131), was issued. SFAS No. 131 changes the
standards for reporting financial results by operating
segments, related products and services, geographic areas and
major customers. The Company must adopt the new standard for
periods beginning after December 15, 1997.
NOTE 2. ACQUISITION OF RUSTIC CRAFTS INTERNATIONAL, INC.
In March 1997, the Company, through its newly formed subsidiary, Rustic
Crafts International, Inc. ("Rustic Crafts"), acquired all of the
operating assets, including cash, accounts receivable, inventory,
property and equipment and intangibles, of Rustic Crafts, Co., Inc.
Rustic Crafts is involved in the manufacture of wood and cast marble
decorative fireplaces, heater logs and related accessories. The Company
paid $1,100,000 in cash and issued 100,000 shares of common stock and
assumed trade accounts payable, bank debt and certain other accrued
liabilities of $413,778. The transaction was accounted for using the
purchase method and resulted in goodwill and intangibles of $715,000.
Such goodwill is being amortized on a straight-line basis over a
fifteen year period.
The cash purchase price was provided by funds obtained under the
Agreement (see Note 5). The Company advanced $201,000 to retire the
bank debt of Rustic Crafts, subsequent to the purchase.
The following unaudited pro forma consolidated results of operation
assumes that the purchase of Rustic Crafts' assets occurred at the
beginning of 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net sales $3,372,400 $2,816,700
Net income 2,214,300 2,936,400
Net income applicable to common stock 2,128,200 2,822,500
Net income per common share:
Basic 0.18 0.25
Diluted 0.16 0.20
</TABLE>
F-14
<PAGE> 31
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. INVESTMENT IN PARTNERSHIP
In November 1994, the Company invested $350,000 for a limited
partnership 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 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.
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, 1997 and 1996 was $11,951,819 and $8,233,731,
respectively. The income from the Company's equity investment in the
Partnership for the years ended December 31, 1997, 1996 and 1995 was
$3,820,913, $4,268,904 and $3,718,056, respectively. The undistributed
earnings from the Company's equity investment in the Partnership as of
December 31, 1997 and 1996 amounted to $11,601,819 and $7,883,731,
respectively.
F-15
<PAGE> 32
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. INVESTMENT IN PARTNERSHIP (CONTINUED)
Summarized financial information for Security is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
BALANCE SHEET DATA
------------------
<S> <C> <C>
Cash and receivables $ 1,304,814 $ 1,258,676
Restricted cash 4,113,938 8,215,088
Real estate 52,999,775 49,644,320
Other assets 1,537,967 2,024,640
------------ ------------
Total assets $ 59,956,494 $ 61,142,724
============ ============
Accounts payable and accrued expenses $ 1,625,287 $ 2,083,908
Project note payable 41,467,993 46,626,589
Other liabilities 5,261,112 4,743,902
------------ ------------
Total liabilities 48,354,392 53,454,399
Partners' capital:
Regency Affiliates, Inc. 11,951,819 8,233,731
Other partners (349,717) (545,406)
------------ ------------
Total partners' capital 11,602,102 7,688,325
------------ ------------
Total liabilities and partners' capital $ 59,956,494 $ 61,142,724
============ ============
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
STATEMENT OF OPERATIONS DATA
----------------------------
<S> <C> <C> <C>
Revenues $ 11,865,721 $ 11,760,267 $ 11,757,102
Expenses 5,673,776 5,080,768 4,215,587
----------- ------------ ------------
Net operating income 6,191,945 6,679,499 7,541,515
Other expenses (2,169,931) (2,185,911) (3,627,772)
----------- ------------ ------------
Net income $ 4,022,014 $ 4,493,588 $ 3,913,743
============ ============ ============
</TABLE>
See Note 12. Contingencies, Risks and Uncertainties related to the
Company's investment in Security.
NOTE 4. NOTE PAYABLE
The Company's subsidiary, Rustic Crafts, has established a $1,000,000
line of credit with PNC Bank. The line of credit expires on May 18,
1998 and bears interest at the Bank's prime rate plus .5% (9.0% at
December 31, 1997).
F-16
<PAGE> 33
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. NOTE PAYABLE (CONTINUED)
The accounts receivable, inventory and other assets, such as property
and equipment, of Rustic Crafts have been pledged as collateral to
secure the line of credit. Rustic Crafts has agreed to maintain certain
net worth, current ratio and debt service coverage and is in compliance
with these requirements at December 31, 1997. The line of credit is
guaranteed by the Company.
At December 31, 1997, the amount outstanding under the line of credit
was $140,000.
NOTE 5. 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.
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 semi-annual amounts of Regular Interest to the
respective loan balances at December 31, 1997 and 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. As a result of this
intention to prepay Loan B in 1998, the balance of Loan B at December
31, 1997 of $925,040 is presented as a current liability.
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.
F-17
<PAGE> 34
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. LONG-TERM DEBT (CONTINUED)
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 on Loan
A 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:
<TABLE>
<S> <C>
Third year 6%
Fourth year 5%
Fifth year 4%
Sixth year 3%
Seventh year 2%
Eighth year 1%
</TABLE>
The following is a summary of the outstanding balance of Loan A and
Loan B as of December 31, 1997 and 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 - 1996 207,163 56,499 263,662
Contingent Interest* - 1996 83,978 - 83,978
---------- --------- -----------
Balance - December 31, 1996 3,041,141 806,499 3,847,640
Regular Interest added to principal - 1997 434,647 118,541 553,188
Contingent Interest* - 1997 171,772 - 171,772
---------- --------- -----------
Balance - December 31, 1997 $3,647,560 $ 925,040 $4,572,600
========== ========= ===========
<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 $68,000 at December 31, 1997. As a result of the
intention to prepay, the balance of Loan B is presented as a
current liability at December 31, 1997.
</TABLE>
F-18
<PAGE> 35
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. LONG-TERM DEBT (CONTINUED)
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
$383,500 and $352,300 at December 31, 1997 and 1996, 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 1997, 1996 and
1995 was $31,200, $29,300 and $26,500, respectively. The bonds are
redeemable at any time at the option of the Company at an amount that
approximates the carrying value. As of December 31, 1997, 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 1995
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.
NOTE 6. MINORITY INTEREST
Statesman Group, Inc. has a 20% minority interest in the Company's
three 80% owned subsidiaries. In addition, Statesman holds a
significant common stock interest and holds significant options (see
Note 8) in the Company.
NOTE 7. SERIAL PREFERRED STOCK
At December 31, 1997 and 1996, the Company had 5,000,000 authorized
shares of $.10 par value serial preferred stock. Serial preferred stock
at December 31, 1997 and 1996, all of which is convertible (other than
Series C) and cumulative, consists of:
F-19
<PAGE> 36
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. SERIAL PREFERRED STOCK (CONTINUED)
<TABLE>
<CAPTION>
Mandatory Redeemable Shares - Series E, $100 stated value, 12.5% cumulative
---------------------------------------------------------------------------
Shares Value
------------------------ ------------------------
Designated Outstanding Carrying Liquidation
---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 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
Converted to common shares - (2,477) (202,354) (247,700)
Accretion - - 20,600 -
------- ------ -------- --------
Balance, December 31, 1997 566,400 2,567 $ 219,300 $ 256,700
======= ====== ======== ========
</TABLE>
Certain Series E holders elected to convert 2,477 shares of Series E
preferred stock into 468,551 shares of common stock during 1997.
Redeemable Shares at Company's Option
-------------------------------------
<TABLE>
<CAPTION>
Shares Value
-------------------------- -------------------------------------------
1997 1996
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 25,694 256,940 346,870(b) 328,884(b)
------- ------- ------------ ----------- -------------
606,747 605,291 $ 1,052,988 $24,939,340 $24,921,354
======= ======= =========== =========== ===========
<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 $89,930 and $71,944 at December
31, 1997 and 1996, respectively.
</TABLE>
F-20
<PAGE> 37
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
1997, 1996 and 1995 was $20,600, $32,800 and $27,800, respectively.
Dividends of $47,489, $63,158 and $60,540 on the Series E stock were
paid or accrued in 1997, 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
1997, certain holders of Series E stock elected to convert 2,477 Series
E shares into 468,551 shares of common stock. 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.
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.
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" (which occurred
with the acquisition of Rustic Crafts in 1997 (see
Note 2)) 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-21
<PAGE> 38
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, 1997, the Company had no accumulated and unpaid dividends on Series
C and E preferred shares.
NOTE 8. STOCK OPTIONS/STOCK OPTION PLANS
Effective June 3, 1997, the Company issued options to purchase 6.1
million shares of common stock to Statesman Group, Inc. as part of the
consideration to secure the release of Mr. William R. Ponsoldt, Sr. to
serve as President and Chief Executive Officer of the Company and
Statesman agreed to provide loan guarantees not to exceed the sum of
$300,000 upon the request of the Company and the showing of reasonable
need. Pursuant to the Amended and Restated Agreement between the
Company and Statesman, until their date of expiration, the options
shall be exercisable at any time in whole or in part at a price equal
to the lower of (a) the closing trading price as of the most recent
date on which at least 10,000 shares of such stock were traded or (b)
the average closing trading price of the shares during the ninety day
period immediately preceding the date of exercise. The Company agreed
to reserve sufficient shares to meet the requirements of the options.
The options became exercisable immediately and remain exercisable until
April 15, 2007. At the option of Statesman, payment may be made by
Statesman for exercise of the options, in whole or in part, in the form
of a promissory note executed by Statesman, secured only by a pledge of
the shares purchased, which promissory note will accrue interest for
any quarter at the prime rate in effect on the last day of the quarter
at Chase Manhattan Bank, with interest and principal payable in a
balloon payment five years after the date of execution of the note,
provided that if the Company's Board of Directors reasonably determines
that exercising the options by delivery of a note would render the
respective purchase of shares void or voidable, then the Board may
require, as a condition to exercise of the options, that Statesman
either (i) pay at least the par value
F-22
<PAGE> 39
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCK OPTIONS/STOCK OPTION PLANS (CONTINUED)
of the shares in cash (with the balance paid by delivery of a note) or
(ii) provide acceptable collateral other than the shares themselves to
secure payment of the note. The Company has determined that these
options have no readily determinable fair value consistent with the
provisions of SFAS No. 123. Therefore, the Company has not recognized
any cost associated with the issuance of these options and net earnings
per share for 1997 have not reflected any such costs.
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, 1997 and 1996,
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, 1997 and 1996, 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.
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.
F-23
<PAGE> 40
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES (CONTINUED)
At December 31, 1997 and 1996, the Company's net deferred tax asset,
utilizing a 34% effective tax rate, consists of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Investment partnership earnings $ 1,921,000 $ 1,570,000
Net operating loss carryforwards 12,197,000 13,270,000
Alternative minimum tax credits 321,000 260,000
------------ ------------
Total deferred tax assets before valuation allowance 14,439,000 15,100,000
Valuation allowance (14,439,000) (15,100,000)
------------ ------------
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 $35,800,000. 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, 1997, 1996 and 1995, the tax effect of
net operating loss carryforwards reduced the current provision for
regular federal income taxes by approximately $708,000, $1,030,000 and
$1,150,000, respectively. At December 31, 1997, 1996 and 1995, the
Company has provided $73,665, $226,388 and $70,000, respectively, for
taxes, which relate to alternative minimum tax liabilities (See Note
12).
F-24
<PAGE> 41
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. EMPLOYMENT AGREEMENTS
On June 3, 1997, Regency entered into an Employment Agreement with
William R. Ponsoldt, Sr. pursuant to which he became the President and
CEO of the Company. The Agreement provides for Mr. Ponsoldt to continue
in these duties until his attainment of retirement age, provided that
he may resign upon the provision of 30 days notice to the Company and
further provided that Mr. Ponsoldt may be removed from office upon
death or disability or for just cause. The Agreement provides for a
base salary in annual installments, in advance, of $250,000 each, which
salary is to be adjusted on January 1 of every year by any increase
since the previous January 1 in the Consumer Price Index ("CPI") for
All Urban Consumers, U.S. city average, as published by the U.S.
Department of Labor Bureau of Labor Statistics. At December 31, 1997,
approximately $104,000 of advance salary is included in other current
assets in the consolidated balance sheet. As additional compensation,
Mr. Ponsoldt is to receive an amount equal to 20% of the Company's
increase in quarterly common stock net worth, which is defined to be
the difference between (i) total shareholders' equity and (ii) any
shareholders' equity accounts relating to preferred stock. At December
31, 1997, approximately $292,000 of additional compensation is included
in accrued expenses in the consolidated balance sheet. The Company may
elect to pay up to 50% of the additional compensation by the issuance
of warrants to purchase the Company's common stock at a price equal to
50% of the average bid price for the Company's common stock for the
calendar quarter for which the increased compensation is payable. The
Agreement further provides for Mr. Ponsoldt to receive health and
disability insurance ($100,000/year in the event of long term
disability), an automobile allowance of $600/month (to be adjusted by
increases in the CPI), and reimbursement of expenses. The Agreement
provides that Mr. Ponsoldt will not compete with the Company for a two
year period following the termination of his employment and provides
for indemnification under certain circumstances. Any disputes between
the Company and Mr. Ponsoldt under the Agreement are to be resolved
through arbitration.
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
233,334 shares of the Company's common stock. 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.
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 1997, 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, $36,000 and $33,000,
respectively, under an agreement to provide certain administrative
services to the Company.
F-25
<PAGE> 42
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 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.G.).
(iii) As of December 31, 1997, the Company was dependent upon the
investment in Security Land and Development Company Limited
Partnership and the operations of Rustic Crafts International,
Inc. 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 3).
(vi) The failure of the Social Security Administration to renew its
lease of the Security West Buildings upon its expiration on
October 31, 2003 could have a materially adverse impact upon
the Company's investment in Security Land and Development
Company Limited Partnership.
(vii) 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).
NOTE 13. LEASE COMMITMENTS
The Company, through Rustic Crafts, leases a manufacturing facility
through March 15, 2000. Base annual lease payments are approximately
$55,200. The Company also leases office space through July 2002. Base
annual lease payments are approximately $34,000.
F-26
<PAGE> 43
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. LEASE COMMITMENTS (CONTINUED)
Future minimum lease payments under operating leases that have initial
or remaining noncancelable lease terms in excess of one year are as
follows:
<TABLE>
<S> <C> <C>
1998 $ 89,200
1999 89,200
2000 45,500
2001 34,100
2002 19,900
------
$ 277,900
=========
</TABLE>
NOTE 14. SUBSEQUENT EVENTS
On March 25, 1998, Rustic Crafts purchased a building of 126,000 square
feet on seven acres of land located at 40 Poplar Street, Scranton,
Pennsylvania, for approximately $1.2 million. The financing for this
purchase was provided to Rustic Crafts in part in the form of a first
mortgage loan from PNC Bank in the amount of $960,000. Rustic Crafts
plans to construct improvements to the building over the next few
months and begin moving its manufacturing operation by mid year to this
new facility. PNC Bank has provided a line of credit in the amount of
$410,000 to fund the costs of these improvements. Management believes
this new building will permit greater manufacturing capacity and
efficiency and enable Rustic Crafts to service its current order
backlog.
On the date of acquisition of the new facility, a tenant was renting
23,000 square feet of a separate part of this facility at a base rent
of $17,400 per year plus an allocable share of the real estate taxes.
The Company intends to maintain this tenant relationship on an ongoing
basis.
On January 31, 1998, NRDC entered into a Sales Agreement with World
Vision Entertainment, Inc. to make available five million tons of
non-segregated previously mined and stockpiled aggregate rock for a
purchase price of $1.026 per ton or a total purchase price of
$5,131,247. World Vision Entertainment, Inc. has agreed to escrow
1,666,666 of their common shares and to pay $29,166 and seven monthly
payments of $14,583 for a total of $131,247. World Vision
Entertainment, Inc. has an option prior to October 24, 1998 within
which to rescind this Sales Agreement, have the escrow shares returned
to them, but forfeit the payments of $131,247, with no additional
obligation to the Company. There is no assurance that World Vision
Entertainment, Inc. will proceed with this Sales Agreement rather than
elect to rescind.
F-27
<PAGE> 44
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. SUBSEQUENT EVENTS (CONTINUED)
On January 31, 1998, NRDC entered into a non-binding Letter of Intent
with the Chancellor Group, Inc. to transfer the stock of NRDC in
exchange for $7,000,000 face value preferred shares of the Chancellor
Group, Inc. The preferred shares would carry a seven percent dividend
rate and be convertible at any time after 24 months from the date of
issuance into the common stock of the Chancellor Group, Inc. The
Chancellor Group, Inc. would have the option to redeem said preferred
shares at any time prior to conversion at the stated face value.
Management believes that it may be appropriate to distribute the stock
of NRDC to the Regency shareholders prior to such an exchange of the
NRDC stock for the preferred shares of the Chancellor Group, Inc. While
the non-binding Letter of Intent outlines the terms of an exchange of
the NRDC stock for the preferred shares of the Chancellor Group, Inc.,
there can be no assurance that such an exchange comes to fruition or
that, if a definitive agreement is reached, it will provide for the
same or similar economic terms.
F-28
<PAGE> 45
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.
There has not been an annual meeting of the stockholders since August
of 1988, and, accordingly, 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.
17
<PAGE> 46
Following is a list of the names and addresses, ages, positions with the
Company, principal occupation and periods of service of the directors and
executive officers.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES HELD AND PRINCIPAL OCCUPATIONS
NAME, ADDRESS (AGE) OR EMPLOYMENT DURING PAST FIVE YEARS
======================================================================================================
<S> <C>
William R. Ponsoldt, Sr. (56) Director since June, 1996. Chairman of the Board of
729 South Federal Hwy., Suite 307, Stuart, Directors since August, 1996. President and CEO since
Florida 34994 June, 1997. During the past 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 (47) Director since July 1993. Ms. Carey is a principal and
West Bay Street the Investment Manager for Managed Companies with
P.O. Box CB 10985 Bradley Management (Bahamas) Limited. She is also a
Nassau, Bahamas director of Regal Bahamas International Airways
Limited.
Martin J. Craffey (60) Director since July 1993. From January 1988 until
58 Mainsail Drive December 31, 1993, Mr. Craffey was a real estate and
Patchogue, New York 11772 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 (56) Director from 1987 to 1990, from 1992 to February 15,
1869 South 120th Street 1994 and since November 16, 1994. Interim Secretary
Omaha, Nebraska 68144 and Treasurer from July 1993 until his resignation
effective February 15, 1994. Mr. Horbach has been
Chairman of the Board, and Chief Executive Officer of
Gateway Energy Corporation since June 1990. In
addition, during the past five years, Mr. Horbach has
been associated with L.J. Horbach & Associates.
Pamlyn Kelly, Ph.D. (54) Director since July 1993. Dr. Kelly is principal and
10 Winged Foot Drive Chief Executive Officer of Human Resource Concepts,
Novato, California 94949 Novato, CA, a registered minority owned management
consulting firm, and she has a private practice.
</TABLE>
18
<PAGE> 47
<TABLE>
<S> <C>
William R. Ponsoldt, Jr. (32) Director since July 1993. Mr. Ponsoldt is an attorney
770 S.W. Lighthouse Dr., engaged in the private practice of law in Florida with
Palm City, Florida 34990 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.
Fredric R. Lowe (54) Director since October, 1997. Mr. Lowe has been
1345 Avenue of the Americas employed as a retail stock broker during the past five
21st Floor years. For the past three years he has been employed
New York, New York 10105 by Smith Barney and prior to that he was employed by
its predecessor, Lehman Brothers.
Eunice M. Antosh (48) Secretary of the Company since February 25, 1994.
802 County Road AN@ Prior to October, 1993, Mrs. Antosh was employed by
Yutan, Nebraska 68073 L.J. Horbach & Associates, Inc. Since October, 1993,
Mrs. Antosh has been employed by Gateway Energy
Corporation.
</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
NRDC 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.
Ms. Carey received 100,000 shares of the Company's Common Stock from Statesman
while Messrs. Ponsoldt, Jr. and Craffey and Dr. Kelly received options to
purchase shares of the Company's Cumulative Senior Preferred $100 Series-C Stock
as set forth on page 26 of this report.
Mr. Horbach was a Director of the Company from 1987 to 1990 and again
from 1992 to February 15, 1994. 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. 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 $3,000, including but not limited to accounting and stock
transfer record keeping. L.J. Horbach & Associates, Inc. is wholly owned by
Larry J. Horbach.
Item 405 Disclosure.
None.
19
<PAGE> 48
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table.
The following table sets forth the annual and long-term compensation
during the last three years, of Pamlyn Kelly, Ph.D., William R. Ponsoldt, Sr.
and Eunice M. Antosh, the only officers who received compensation during 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
-----------------------------------------------
AWARDS PAYOUTS
------------------------------------------- ---------------------------------------------- ----------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
====================================================================================================================================
Other
Annual Restricted Securities
Name and Com Stock Underlying All Other
Principal pensa- Award(s) Options/ LTIP Compen-
Position Year Salary ($) Bonus ($) tion ($) ($) SARs (#) Payouts ($) sation $
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William R. 1997 250,000(1) 292,500(2) 5,700 -0-(3) -0- -0- -0-
Ponsoldt,Sr., 1996 -0- -0- -0- -0- -0- -0- -0-
Chairman, 1995 -0- -0- -0- -0- -0- -0- -0-
President & CEO
- ------------------------------------------------------------------------------------------------------------------------------------
- ---------------
<FN>
1 Mr. Ponsoldt's salary is to be adjusted on January 1 of every year by any increase since the previous January 1 in the Consumer
price Index (ACPI@) for All Urban Consumers, U.S. city average, as published by the U.S. Department of Labor Bureau of Labor
Statistics.
2 Under the terms of Mr. Ponsoldt's Employment Agreement dated June 3, 1997, he is entitled to receive as additional
compensation an amount equal to 20% of the Company's increase in quarterly common stock net worth, which is defined to be the
difference between (i) total shareholders= equity and (ii) any shareholders= equity accounts relating to preferred stock.
3 Pursuant to an Agreement dated June 3, 1997 between the Company and Statesman Group, Inc., which agreement provided for the
release of Mr. Ponsoldt to assume the offices of President and CEO of the Company, 466,667 shares of the Company's $0.40 p.v. Common
Stock were issued to Statesman at a value of $233,333.
</FN>
</TABLE>
20
<PAGE> 49
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------------------------
AWARDS PAYOUTS
------------------------------------------------------------------------------------------- ----------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pamlyn 1997 30,000 -0- 2,300(4) -0- -0- -0- -0-
Kelly, Ph.D. 1996 14,000 -0- -0- -0- -0- -0- -0-
President 1995 -0- -0- -0- -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------------------------------
Eunice M. 1997 12,000 -0- -0- -0- -0- -0- -0-
Antosh, 1996 12,000 -0- -0- -0- -0- -0- -0-
Secretary 1995 11,000 -0- -0- -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------------------------------
Gary K. Nuttall, 1997 -0- -0- -0- -0- -0- -0- -0-
President 1996 56,062 350,000 -0- 102,154(5) -0- -0- -0-
1995 -0- -0- -0- -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------------------------------
Craig R. 1997 -0- -0- -0- -0- -0- -0- -0-
Grossman, 1996 25,000 -0- -0- -0- -0- -0- -0-
President 1995 -0- -0- -0- -0- -0- -0-
====================================================================================================================================
- ---------------
<FN>
4 Consisting of $2,000 paid to Dr. Kelly for attendance at directors= meetings and $300 paid to her for contract services.
5 As of December 31, 1996, 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. One half of the total number of shares
(466,667 shares) issued to Mr. Nuttal 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. Nuttal 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.
</FN>
</TABLE>
21
<PAGE> 50
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 to any of the named executive
officers.
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 by
any of the named executive officers.
Stock Options Granted to Statesman Group, Inc.
Pursuant to an Agreement dated June 3, 1997, as amended and restated on
March 24, 1998, Statesman Group, Inc. was granted options to purchase 6.1
million shares of Common Stock. Statesman owned approximately 25% of the
Company's outstanding common stock prior to the issuance of these options. The
options were issued to Statesman in order to secure the release of Mr. William
R. Ponsoldt, Sr. to serve as President and Chief Executive Officer of the
Company and pursuant to the Amended and Restated Agreement between the Company
and Statesman (Exhibit 10.2 to this report), until their date of expiration, the
options shall be exercisable at any time in whole or in part at a price equal to
the lower of (a) the closing trading price as of the most recent date on which
at least 10,000 shares of such stock were traded, or (b) the average closing
trading price of the shares during the ninety day period immediately preceding
the date of exercise. The Company agreed to reserve sufficient shares to meet
the requirements of the options. The options became exercisable immediately and
remain exercisable until April 15, 2007. At the option of Statesman, payment may
be made by Statesman for exercise of the options, in whole or in part, in the
form of a promissory note executed by Statesman, secured only by a pledge of the
shares purchased, which promissory note will accrue interest for any quarter at
the prime rate in effect on the last day of the quarter at Chase Manhattan Bank,
with interest and principal payable in a balloon payment five years after the
date of execution of the note, provided that if the Company's Board of Directors
reasonably determines that exercising the options by delivery of a note would
render the respective purchase of shares void or voidable, then the Board may
require, as a condition to exercise of the options, that Statesman either (i)
pay at least the par value of the shares in cash (with the balance paid by
delivery of a note), or (ii) provide acceptable collateral other than the shares
themselves to secure payment of the note. The Company received no cash
consideration with respect to the issuance of the securities to Statesman, no
commissions were paid, and no underwriter was involved. The options granted to
Statesman have no readily determinable value and, therefore, the Company has not
recognized any costs associated with the issuance of these options.
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.
22
<PAGE> 51
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.
At a meeting of the Board of Directors of Regency held on October 10,
1997, the Board approved, subject to its adoption by the shareholders of the
Company, a compensation plan for directors providing for (i) an annual retainer
for independent directors of $10,000, payable one-half in cash and one-half in
the Common Stock of the Company, (ii) a fee of $125/hour, with a two hour
minimum, for attendance at each meeting of the Board or committee thereof, and
(iii) an award of an option to each independent director for the purchase of
10,000 shares of the Company's Common Stock. As of the date of this report, this
compensation plan had not been submitted to the shareholders of the Company and
had not been implemented.
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 $300 for contract services and Martin J. Craffey was paid
$4,500 for consulting services provided to Rustic Crafts International, Inc., a
wholly owned subsidiary of Regency.
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 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
23
<PAGE> 52
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 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 successor was elected by the
Board of Directors.
On June 3, 1997, Regency entered into an Employment Agreement with
William R. Ponsoldt, Sr. pursuant to which he became the President and CEO of
the Company. The Agreement provides for Mr. Ponsoldt to continue in these
duties until his attainment of retirement age, provided that he may resign upon
30 days notice to the Company and further provided that Mr.
Ponsoldt may be removed from office upon death or disability or for just cause.
The Agreement provides for a base salary in annual installments, in advance, of
$250,000 each, which salary is to be adjusted on January 1 of every year by any
increase since the previous January 1 in the Consumer Price Index ("CPI") for
All Urban Consumers, U.S. city average, as published by the U.S. Department of
Labor, Bureau of Labor Statistics. As additional compensation, Mr. Ponsoldt is
to receive an amount equal to 20% of the Company's increase in quarterly common
stock net worth, which is defined to be the difference between (i) total
shareholders' equity and (ii) any shareholders' equity accounts relating to
preferred stock. The Company may elect to pay up to 50% of the additional
compensation by the issuance of warrants to purchase the Company's Common Stock
at a price equal to 50% of the average bid price for the Company's Common Stock
for the calendar quarter for which the increased compensation is payable. The
Agreement further provides for Mr. Ponsoldt to receive health and disability
insurance (with a benefit of $100,000/year payable in the event of long term
disability), an automobile allowance of $600/month (to be adjusted by increases
in the CPI), and reimbursement of expenses. The Agreement provides that Mr.
Ponsoldt will not compete with the Company for a two year period following the
termination of his employment and provides for indemnification under certain
circumstances. Any disputes between the Company and Mr. Ponsoldt under the
Agreement are to be resolved through arbitration.
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.
24
<PAGE> 53
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.
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>
AMOUNT AND NATURE
-----------------
NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF
------------------- ------------- ----------
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS
-------------- ---------------- --------- -----
<S> <C> <C> <C>
Regency Affiliates, Inc. Statesman Group, Inc. 3,126,377(6) 25.1%
$0.40 p.v. Common Stock King & George Streets
Nassau, Bahamas
Transcontinental Drilling Statesman Group, Inc. 250(7) 20%
Company, Inc. $1.00 p.v. King & George Streets
Common Stock Nassau, Bahamas
- -----------------
<FN>
6 The nature of beneficial ownership is sole investment power and sole
voting power as to all shares listed.
7 The nature of beneficial ownership is sole investment power and sole
voting power as to all shares listed.
</FN>
</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. Both its principal
business and principal office are 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
25
<PAGE> 54
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 trustees of the William R. Ponsoldt, Sr. Irrevocable Trust dated
April 15, 1991, have the sole right to control the disposition of and vote the
Regency securities acquired by 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 table sets forth as of December 31, 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>
NAME OF BENEFICIAL AMOUNT AND NATURE OF
------------------ --------------------
TITLE OF CLASS OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- -------------- ----- -------------------- ----------------
<S> <C> <C> <C>
Regency Affiliates, Inc. Larry J. Horbach 375,204(8) 3.1%
$0.40 p.v. Common Stock
Regency Affiliates, Inc. Eunice M. Antosh 62,345 .5%
$0.40 p.v. Common Stock
Regency Affiliates, Inc. All officers and 437,549 3.6%
$0.40 p.v. Common Stock directors as a group
(8 individuals)
- --------------------------
<FN>
8 An irrevocable proxy with respect to 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.
</FN>
</TABLE>
Cumulative Senior Preferred $100 Series-C Stock
As of December 31, 1997 certain members of the Board of Directors of
Regency Affiliates, Inc. held warrants to purchase Cumulative Senior Preferred
$100 Series-C Stock from Statesman 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).
26
<PAGE> 55
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.
Reference is made to Part III, Item 10, page 18 of this report for a
description of certain transactions with L.J. Horbach & Associates, Inc.
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
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 January 31, 1998, NRDC entered into a nonbinding Letter of Intent
with the Chancellor Group, Inc. to transfer the stock of NRDC in exchange for
$7,000,000 face value preferred shares of the Chancellor Group, Inc. The
preferred shares would carry a 7% dividend rate and be
27
<PAGE> 56
convertible at any time after 24 months from the date of issuance into the
common stock of the Chancellor Group, Inc. The Chancellor Group, Inc. would have
the option to redeem said preferred shares at any time prior to conversion at
the stated face value. Management believes that it may be appropriate to
distribute the stock of NRDC to the Regency shareholders prior to such an
exchange of the NRDC stock for the preferred shares of the Chancellor Group,
Inc. While the nonbinding Letter of Intent outlines the terms of an exchange of
the NRDC stock for the preferred shares of the Chancellor Group, Inc., there can
be no assurance that such an exchange will come to fruition or that, if a
definitive agreement is reached, it will provide for the same or similar
economic terms.
On January 31, 1998, NRDC entered into a Sales Agreement with World
Vision Entertainment, Inc. ("WVE") to make available 5 million tons of
nonsegregated previously mined and stockpiled aggregate rock for a purchase
price of $1.026 per ton or a total purchase price of $5,131,247. WVE agreed to
escrow 1,666,666 of their common shares and to pay $29,166 and seven monthly
payments of $14,583 for a total of $131,247. WVE has an option to rescind this
Sales Agreement until October 24, 1998, but forfeit the payment of $131,247. WVE
has previously paid $58,332 under the Sales Agreement and is current in its
obligations, but there is no assurance that WVE will proceed with the Sales
Agreement rather than elect to rescind.
On March 25, 1998 Rustic Crafts purchased a 126,000 square foot
building on seven acres of land located at 40 Poplar Street, Scranton,
Pennsylvania, for approximately $1.2 million. The financing for this purchase
was provided to Rustic Crafts in part in the form of a first mortgage loan from
PNC Bank in the amount of $960,000. Rustic Crafts plans to construct
improvements to this new building over the next few months and begin moving its
manufacturing operations to this new facility by mid year. PNC Bank has
provided a line of credit in the amount of $410,000 to fund the costs of these
improvements. Management believes this new building will permit greater
manufacturing capacity and efficiency and enable Rustic Crafts to service its
current order backlog.
On the date of acquisition of the building a tenant was renting 23,000
square feet of space in the building at a base rent of $17,400 per year plus an
allocable share of the real estate taxes. The company intends to maintain this
tenant relationship on an ongoing basis. Also, the prior owner of the building
is now renting 28,000 square feet at $3,500 per month on a month-to-month basis.
Management believes that the prior owner will continue renting on this basis for
a few more months and management then intends to relet this 28,000 square feet
to another tenant.
28
<PAGE> 57
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)
<TABLE>
<S> <C>
April 14, 1998 By: /s/William R. Ponsoldt, President
- -------------- ----------------------------------
Date William R. Ponsoldt, President
By: /s/ Douglas F. Long
----------------------------------
Douglas F. Long, CFO
</TABLE>
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.
<TABLE>
<CAPTION>
DATE SIGNATURE AND TITLE
- ---- -------------------
<S> <C>
April 14, 1998 By: /s/William R. Ponsoldt,
- -------------- ----------------------------------
Date William R. Ponsoldt, President
April 14, 1998 /s/Eunice Antosh
- -------------- ----------------------------------
Date Eunice Antosh, Secretary
April 14, 1998 /s/ Stephanie Carey
- -------------- ----------------------------------
Date Stephanie Carey,
Director
April 14, 1998 /s/ Martin J. Craffey
- -------------- ----------------------------------
Date Martin J. Craffey,
Director
</TABLE>
29
<PAGE> 58
<TABLE>
<S> <C>
April 14, 1998 /s/ Larry J. Horbach
- -------------- ----------------------------------
Date Larry J. Horbach,
Director
April 14, 1998 /s/ Pamlyn Kelly, Ph.D.
- -------------- ----------------------------------
Date Pamlyn Kelly, Ph.D.,
Director
April 14, 1998 /s/ William R. Ponsoldt, Sr.
- -------------- ----------------------------------
Date William R. Ponsoldt, Sr.,
Director
April 14, 1998 /s/ William R. Ponsoldt, Jr.
- -------------- -----------------------------
Date William R. Ponsoldt, Jr.,
Director
April 14, 1998 /s/ Fredric R. Lowe
- -------------- ----------------------------------
Date Fredric R. Lowe,
Director
</TABLE>
30
<PAGE> 59
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit No. Description of Document
----------- -----------------------
<S> <C> <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>
31
<PAGE> 60
<TABLE>
<S> <C> <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
</TABLE>
32
<PAGE> 61
<TABLE>
<S> <C> <C>
4(a) to 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>
33
<PAGE> 62
<TABLE>
<S> <C> <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 Exhibit 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.
10(h) Employment Agreement dated June 3, 1997, between Regency Affiliates,
Inc. and William R. Ponsoldt, Sr., and Agreement dated June 3, 1997,
between Regency Affiliates, Inc. and Statesman Group, Inc. filed as
Exhibits 10(a) and (b) to the Registrant's report on Form 8-K dated
June 13, 1997, 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
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS FILED HEREWITH:
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<S> <C> <C>
10.1, page E-1 Asset Purchase and Sale Agreement dated February 27, 1997,
between Rustic Crafts Co., Inc. and certain individuals, as Sellers,
and Regency Affiliates, Inc., as Purchaser, and Assignment and
Assumption of Purchase Agreement dated March 17, 1997, between Regency
Affiliates, Inc., and Rustic Crafts International, Inc.
10.2, page E-36 Amended and Restated Agreement Between Regency Affiliates,
Inc. and the Statesman Group dated March 24, 1998.
21.1, page E-44 Schedule of Registrant's Subsidiaries
</TABLE>
34
<PAGE> 63
<TABLE>
<S> <C> <C>
27.1, page E-45 Financial Data Schedule
99.1, page E-46 Audited financial statement for Security Land And Development
Company Limited Partnership
</TABLE>
35
<PAGE> 1
EXHIBIT 10.1(a)
ASSET PURCHASE AND SALE AGREEMENT
THIS ASSET PURCHASE AND SALE AGREEMENT ("Agreement") made this 27th day
of February 1997, by and between Rustic Crafts Co., Inc., a corporation
organized and existing under the laws of Pennsylvania, with offices at 315
Cherry Street, Scranton, Pennsylvania 18505 (the "Seller"), Ralph J. Lomma,
Joyce J. Lomma, and Anthony C. Lomma, present or former shareholders of Seller,
Lomma Enterprises, Inc., a Pennsylvania corporation with offices at 1120 South
Washington Avenue, Scranton, Pennsylvania 18505 ("LEI"), and Regency Affiliates,
Inc., a corporation organized and existing under the laws of Delaware with
offices at 10 Winged Foot Drive, Novato, California 94949 ("Purchaser"). Ralph
J. Lomma, Joyce J. Lomma, and Anthony C. Lomma are sometimes referred to
individually as "Shareholder" and collectively as "the Shareholders".
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Seller is engaged in the business of manufacturing and selling
decorative fireplaces intended for use without a chimney in offices and
residences, and the manufacture and/or sale of equipment and supplies related to
such fireplaces (collectively the "Business"); and
WHEREAS, Seller is willing to sell to Purchaser and Purchaser is willing
to buy from Seller, and assume, upon the terms and conditions hereinafter set
forth, substantially all of the assets, liabilities, and business of Seller, as
more fully set forth in this Agreement; and
WHEREAS, the Shareholders are or were collectively the owners of all of
the outstanding shares of Seller, and have joined this Agreement for the purpose
of making
E-1
<PAGE> 2
certain representations and warranties to Purchaser, and for the purpose of
entering into certain undertakings with Purchaser as hereinafter provided; and
WHEREAS, the Shareholders have previously transferred their shares of the
Seller to LEI, or will transfer such shares to LEI prior to the Closing Date
hereof, and LEI has therefore joined this Agreement for the purpose of making
certain representations and warranties to Purchaser, and for the purpose of
entering into certain undertakings with Purchaser as hereinafter provided;
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
I. SALE OF ASSETS
Upon the terms and subject to the conditions of this Agreement, Seller
shall, on the Closing Date (as hereinafter defined), convey, sell, transfer,
assign and deliver to Purchaser, and Purchaser shall purchase from Seller, all
of Seller's right, title and interest in all of the assets of Seller, whether
constituting real or personal, tangible or intangible property, and whether or
not in the possession or control of Seller, including without limitation the
following (hereinafter collectively referred to as the "Assets"), except for any
such assets which constitute "Excluded Property" as hereinafter defined:
(a) The goodwill and any and all slogans, trademarks, or trade names used
by Seller in connection with the Business, including but not limited to the
names listed in Schedule 1(a) annexed hereto, and all customer lists, books,
records and correspondence relating to the present and former customers of the
Business (such customers hereinafter sometimes referred to as the "Customers").
E-2
<PAGE> 3
(b) All files, papers, books, records, sales and advertising materials
and records, technical and user manuals, sales and purchase correspondence,
permits, licenses, certificates of any governmental body and quotations
affecting or pertaining to the Business, including but not limited to employee
records of Seller.
(c) All right, title and interest of the Seller in any licenses and
commercially practiced patents, copyrights, trademarks, trademark registration
applications (including all reissues, divisions, continuations and extensions
thereof), patent applications and patent disclosures docketed, if any, relating
to the Business.
(d) All right, title and interest of the Seller to all intellectual
property rights and proprietary expertise, including, without limitation,
proprietary information, technical and technological data, know-how, processes,
invention conception memoranda, manufacturing and engineering data, computer
programs, and trade secrets, relating to the Business.
(e) All permits, authorizations, approvals or indicia of authority to
conduct the Business which were issued by any local, state, federal or foreign
governmental agency.
(f) All right, title and interest of Seller to the purchase orders and
sales or purchase commitments of Seller relating to the Business, a true and
correct list of which is attached as Schedule 1(f) hereto, and Seller's rights
in any other contracts intended to be assumed by Purchaser hereunder, which
contracts are all listed and briefly described in Schedule 1(f) hereto (such
purchase orders and sales or purchase commitments and other agreements
hereinafter collectively referred to as the "Assumed Contracts").
(g) All right, title and interest of Seller to its vehicles, machinery,
tools, equipment, furniture, office equipment, leasehold improvements, and
fixtures wherever located (hereinafter collectively referred to as the "Tangible
Property"), including, without limitation,
E-3
<PAGE> 4
those items listed on Schedule 1(g) hereto. Not included in "Tangible Property"
are leasehold improvements and fixtures of such a type as are ordinarily
considered to remain with the premises upon the expiration of a lease, such as
electrical, plumbing, and heating and air conditioning systems, all of which
Seller has indicated are the property of its landlord and not the property of
Seller.
(h) All right, title and interest of Seller to its inventory existing as
of the close of business on the day before the Closing Date, including without
limitation inventory of spare parts for machinery and equipment, inventory of
purchased materials for use in assembling its products, inventory of finished
goods and work-in-process (hereinafter collectively referred to as the
"Inventory").
(i) All right, title and interest of Seller to its trade and other
accounts receivable, including unbilled receivables, existing as of the close of
business on the day before the Closing Date (hereinafter collectively referred
to as the "Receivables"), an up-to-date listing of which will be provided to
Purchaser on the Closing Date.
(j) All right, title and interest of Seller to its prepaid expenses,
except for any such items not usable by Purchaser after the Closing Date (i.e.,
prepaid taxes, prepaid expenses relating to employee benefit plans).
(k) All right, title and interest of Seller to its cash-on-hand and
marketable securities existing as of the close of business on the day before the
Closing Date whether or not held in one or more accounts with financial
institutions on such date, including any petty cash on hand and any undeposited
payments from customers.
Specifically excluded from the definition of "Assets" for purposes of
this Section 1 are Seller's prepaid or deferred taxes, and
____________________("Excluded Assets").
E-4
<PAGE> 5
II. PURCHASE PRICE FOR THE ASSETS
Purchaser shall pay to Seller for the Assets a purchase price (the
"Purchase Price") equal to the sum of One Million One Hundred Sixty Thousand
Dollars ($1,160,000), payable as provided in Section 3 hereof.
III. PAYMENT OF PURCHASE PRICE
Purchaser shall pay the Purchase Price as follows:
(a) On the Closing Date, Purchaser shall issue to Seller one hundred
thousand (100,000) shares of Purchaser's no par value common stock, such shares
having previously been valued by Purchaser's Board of Directors at $.60 per
share, or a total of $60,000.
(b) On the Closing Date, the sum of One Million, One Hundred Thousand
Dollars ($1,100,000) shall be paid to Seller by bank check or wire transfer of
funds.
(c) For purposes of this Agreement, the Purchase Price shall be allocated
to the respective assets and liabilities of Seller which are either purchased or
assumed by Purchaser at the Closing Date, in such reasonable manner as shall be
determined for the purpose by Purchaser and Seller. The parties agree to use the
resulting allocation for purposes of filing their local, state and federal
income tax returns.
(d) Except for Seller's Trade Accounts Payable as of the close of
business on the day before the Closing Date (the "Accounts Payable"), and the
total owing by Seller as of the close of business on the day before the Closing
Date under its line of credit and other bank debts (hereinafter referred to as
the "Bank Debt"), and any additional liabilities and obligations listed on
Schedule 3(d) (all such items collectively hereinafter referred to as the
"Assumed Liabilities"), the Purchaser shall assume no liabilities or other
obligations of
E-5
<PAGE> 6
Seller of any kind, whether commercial or otherwise, known or unknown, fixed or
contingent, choate or inchoate, liquidated or unliquidated, secured or
unsecured. Prior to closing, Seller shall provide Purchaser with a written
schedule detailing the Accounts Payable and the Bank Debt as of the close of
business on the previous day.
(e) Without limiting the generality of the foregoing, except as provided
to the contrary on Schedule 3(d) attached hereto, Purchaser shall not assume any
obligation or liability of Seller with respect to (i) any transaction involving
Seller occurring after the Closing Date; (ii) any liability of Seller for
federal, state or local taxes, fees, assessments or other similar charges
(including without limitation income taxes, real estate taxes, payroll taxes and
sales taxes); (iii) any liability for defects in merchandise, returns or
allowances arising out of products sold by Seller or services performed by
Seller on or before the Closing Date, except for the obligation to credit
customers for returns of merchandise made after the Closing Date in the normal
course of business; (iv) any responsibility of Seller with respect to salary,
wages, vacation pay, savings plans, severance pay, deferred compensation, or
other obligations for the benefit of any employee of Seller, including pension
benefits accrued (vested or unvested), or arising out of their employment
through the Closing Date; (v) any liability or obligation incurred in connection
with or related to the transfer of the Assets hereunder, including, but not
limited to sales taxes, transfer taxes or stamp taxes; (vi) any liability
resulting from the failure of Seller to comply with the requirements of
applicable building, fire, zoning and environmental laws, laws relating to
occupational health and safety and other laws applicable to Seller or the
conduct of its business; (vii) any liability under any Assumed Contract arising
out of Seller's failure to perform its obligations thereunder to the extent
performance is due on or prior to the Closing Date; (viii) any
E-6
<PAGE> 7
liability of Seller to Seller's stockholders; or (ix) any liability of Seller
arising out of any pension, profit sharing or other employee benefit plan.
IV. DOCUMENTS TO BE DELIVERED AT CLOSING
At the Closing:
(a) Seller shall execute and deliver to Purchaser a Bill of Sale in form
and substance acceptable to Purchaser and its counsel, transferring and
assigning to Purchaser all of the Assets free and clear of all defects, liens,
encumbrances, charges and equities whatsoever, except for liens relating to the
Bank Debt (hereinafter referred to as the "Permitted Encumbrances").
(b) Seller shall execute or endorse and deliver to Purchaser such other
duly executed separate instruments of sale, assignment or transfer as Purchaser
deems reasonably required, including, but not limited to assignments of contract
rights or leases in form suitable, where appropriate, for filing or recording
with the appropriate governmental office or agency, including without limitation
certificates of title for any motor vehicles.
(c) Seller shall deliver to Purchaser Seller's check in the amount of
Seller's total cash-on-hand and marketable securities as of the close of
business on the day before the Closing Date, in keeping with Section 1(k)
hereof.
(d) Purchaser shall pay the Purchase Price for the Assets in accordance
with the terms of Section 3 hereof.
(e) Seller shall deliver to Purchaser copies, certified by the Secretary
of Seller, of (i) certificates of good standing in the jurisdiction of the
Seller's incorporation and in each other jurisdiction in which the Seller is
doing or transacting business, and (ii) resolutions of the Board of Directors
and the shareholders of Seller authorizing this Agreement and the
E-7
<PAGE> 8
other agreements and instruments to be delivered pursuant thereto and the
transactions contemplated hereby and thereby.
(f) Purchaser shall deliver to Seller copies, certified by the Secretary
of Purchaser, of (i) certificates of good standing in the jurisdiction of the
Purchaser's incorporation, and (ii) resolutions of the Board of Directors of
Purchaser authorizing this Agreement and the other agreements and instruments to
be delivered pursuant thereto and the transactions contemplated hereby and
thereby.
(g) Seller shall deliver to the Purchaser all books and records of the
Seller relating to the Seller's Business, the Customers, the Assets , the
Receivables, and the Assumed Liabilities.
(h) Seller shall deliver to the Purchaser all necessary consents of third
parties to the execution and delivery of this Agreement and the consummation of
the transactions contemplated.
(i) Seller shall deliver to the Purchaser an opinion of Seller's counsel
in form and substance satisfactory to Purchaser and its counsel.
V. CLOSING
The Closing of the transactions contemplated by this Agreement, shall
take place on Thursday, March 13, 1997, at 2:00 p.m., at the offices of the
Company in Scranton, Pennsylvania, or at such other time and place as may be
agreed by the parties (said Closing and said date thereof, herein referred to as
the "Closing" and the "Closing Date", respectively).
E-8
<PAGE> 9
Seller and Purchaser represent that no further approval of their
respective Boards of Directors or stockholders or any other approvals will be
required to consummate the transactions contemplated herein after the parties
have signed this Agreement.
VI. CROSS INDEMNITIES
(a) Seller, LEI, and each of the Shareholders jointly and severally
hereby undertake and agree to indemnify Purchaser (and its shareholders,
officers, and directors and their respective successors, heirs, personal
representatives and assigns) and hold it and them harmless against and in
respect of the following:
(i) All claims, debts, liabilities, accounts payable and
obligations of Seller whether absolute or contingent, arising out of
or in connection with the Assets, the Customers and the Seller's
Business arising or which may arise in connection with the Seller's
Business by Seller on or prior to the Closing Date, except for the
Assumed Liabilities, and except for the obligation to credit
customers of the Business for returns of merchandise made after the
Closing Date in the normal course of business; and
(ii) Any products liability claim or related claim or action
relating to the Business, where the occurrence giving rise to such
liability, claim or action takes place on or prior to the Closing
Date; and
(iii) Any and all loss or damage sustained by Purchaser as a
result of any breach of Seller's representations, covenants and
warranties contained in this Agreement; and
(iv) Any and all actions, suits, proceedings, demands,
assessments, judgments, costs and reasonable legal and other
expenses incident to any of the foregoing.
(b) Purchaser hereby undertakes and agrees to indemnify Seller, LEI (and
their shareholders, officers, and directors and their respective successors,
heirs, personal representatives and assigns) and hold them harmless against and
in respect of the following:
(i) All claims, debts, liabilities and obligations of
Purchaser whether absolute or contingent, arising out of or in
connection with the Assets, the
E-9
<PAGE> 10
Customers and the Business arising or which may arise after the
Closing Date, including, but not limited to, the Assumed Liabilities
but expressly excluding any and all claims, debts, liabilities and
obligations described in Section 6(a) of this Agreement; and
(ii) Any products liability claim or related claim or action
relating to the Business, where the occurrence giving rise to such
liability, claim or action takes place after the Closing Date; and
(iii) Any and all loss or damage sustained by Seller as a
result of any breach of Purchaser's representations, covenants and
warranties contained in this Agreement; and
(iv) Any and all actions, suits, proceedings, demands,
assessments, judgments, costs and reasonable legal and other
expenses incident to any of the foregoing.
(c) The covenants of indemnity set forth in this Section 6 are intended
by the parties to be for the benefit of each other and their respective
shareholders, officers and directors and their respective successors, heirs,
personal representatives and assigns. All of the covenants of indemnity set
forth in this Section 6 shall be deemed renewed by the parties at the Closing as
if made at such time and shall survive after the Closing Date for a period of
one (1) year, except that indemnity obligations arising under Section 6(a))(ii)
shall survive indefinitely.
(d) If any legal proceeding shall be instituted or any claim or demand
made against a party (the "Nondefaulting Party") by any third party in respect
of which the other party (the "Defaulting Party") may be liable under the
indemnity set forth in this Section 6, the Nondefaulting Party shall give
written notice thereof to the Defaulting Party within 20 days following the date
of which the Nondefaulting Party is informed in writing of the institution of
such proceeding or receives such claim or demand. Upon receipt of such notice,
the Defaulting Party shall undertake the defense of such proceeding, claim or
demand through counsel selected by the Defaulting Party at its own expenses
(provided
E-10
<PAGE> 11
that the Nondefaulting Party shall be entitled, at its own expense, to
participate in any such legal proceeding or the negotiation and settlement
thereof through counsel of its choice).
(e) The Defaulting Party, in all cases, shall have the absolute right to
settle or compromise any such proceeding, claim or demand or to refrain
therefrom, provided that if the Nondefaulting Party does not consent to a
settlement or compromise proposed by the Defaulting Party and agreed to by the
third party, and such proceeding, claim or demand shall ultimately result in a
judgment or settlement greater than the proposed settlement or compromise, the
Defaulting Party shall be discharged from any liability hereunder with respect
to any amount in excess of the settlement or compromise so proposed and agreed
to by the third party and any expenses incurred subsequent to the date the
settlement or compromise originally was so proposed and agreed to. If the
Nondefaulting Party effects a settlement or compromise without the prior written
consent of the Defaulting Party, the Defaulting Party shall be discharged from
any liability hereunder in excess of expenses incurred prior to the date the
settlement or compromise was effected by the Nondefaulting Party, provided that
such expenses are reasonable in amount and were reasonably required for the
Nondefaulting Party's defense against the settled or compromised claim or demand
which, when it was asserted, reasonably appeared to be a liability for which the
Defaulting Party would be liable to the Nondefaulting Party hereunder.
VII. COVENANTS
(a) COVENANTS OF THE SELLER. Seller, LEI, and the Shareholders jointly
and severally covenant and agree as follows throughout the period from the date
hereof through and including the Closing:
(i) FURTHER ASSURANCE. From the date hereof, Seller shall take
all such action, both before and after the Closing, as may be
reasonably necessary or
E-11
<PAGE> 12
appropriate to consummate the transactions provided for in this
Agreement in accordance with the representations, warranties,
conditions and agreements contained herein, and shall refrain from
taking any action which would result in any of such representations
or warranties not being true and correct, or any of such conditions
not being satisfied, at the Closing.
(ii) CONDUCT OF BUSINESS. Seller covenants and agrees that
from the date hereof through and including the Closing, Seller shall
conduct its business and operations relating to the Business only in
the ordinary course and in accordance with sound business practices
in substantially the manner in which such business and operations
have been previously conducted. Without limiting the foregoing,
Seller agrees that except as provided to the contrary in Schedule
7(a), attached hereto, it will not during such period, institute any
change in accounting methods or practices without Purchaser's
consent, declare, set aside or pay a dividend or other distribution
in respect to the capital stock of Seller, or make any direct or
indirect redemption, purchase or other acquisition by Seller of any
of its shares of capital stock; increase the salary or other
compensation payable or to become payable by Seller to any of its
officers or directors; declare, pay or commit, or become obligated
to pay a bonus or other additional salary or compensation to any
person; lend any amounts to any person or entity; or waive or
release any right of claim of the Seller to collect any of its
accounts receivable, except in the ordinary course of business.
(iii) NOTICE OF BREACH. To the extent Seller or any of the
Shareholders obtains knowledge that any of the representations or
warranties contained in Section 9 hereof would be incorrect in any
material respect were those representations or warranties made
immediately after such knowledge was obtained, Seller or the
respective Shareholders shall notify Purchaser in writing promptly
of such fact and exercise reasonable efforts to remedy same.
(iv) ACCESS. Seller will permit Purchaser, its counsel, its
auditors and its appraisers to inspect and copy all records and
documents relating to the Assets, the Customers and the Seller's
Business in Seller's custody, care or control and to have access to
all places of Seller's Business during regular business hours.
(v) AUTHORIZATION FROM OTHERS. Seller shall use its best
efforts to obtain all authorizations, consents and approvals of
third parties and/or governmental agencies that may be required to
permit the consummation of the transactions contemplated by this
Agreement.
(vi) CONSUMMATION OF AGREEMENT. Seller shall use its best
efforts to satisfy all conditions to the Closing to the end that the
transactions contemplated by this Agreement shall be fully carried
out.
(vii) BUSINESS INTACT; RELATIONSHIPS WITH CUSTOMERS AND
SUPPLIERS. Seller shall use its best efforts to keep intact the
Seller's Business, to keep
E-12
<PAGE> 13
available its key employees and to maintain the goodwill of the
Customers and suppliers and other persons having business dealings
with Seller relating to the Seller's Business.
(viii) REGULATORY FILINGS. Seller will furnish to the
Purchaser such necessary information and reasonable assistance as
the Purchaser may reasonably request in connection with its
preparation of necessary filings or submissions to any governmental
agency. Seller agrees to timely file any information, reports,
applications or notices required to be filed in connection with the
transactions contemplated by this Agreement.
(b) COVENANTS OF THE PURCHASER. Purchaser covenants and agrees as follows
throughout the period from the date hereof through and including the Closing:
(i) FURTHER ASSURANCE. From the date hereof, Purchaser shall
take all action, both before and after the Closing, as may be
necessary or appropriate to consummate the transactions provided for
in this Agreement in accordance with the representations,
warranties, and agreements contained herein, and shall refrain from
taking any action which would result in any of such representations
or warranties not being true and correct at the Closing. However,
nothing in this paragraph shall require Purchaser to consummate this
transaction if any condition specified in Section 10(a) shall not
have been satisfied or waived prior to Closing.
(ii) NOTICE OF BREACH. To the extent Purchaser obtains
knowledge that any of the representations or warranties contained in
Section 8 hereof would be incorrect in any material respect were
those representations or warranties made immediately after such
knowledge was obtained, Purchaser shall notify Seller in writing
promptly of such fact and exercise its reasonable efforts to remedy
same to the extent within Purchaser's control.
(iii) AUTHORIZATION FROM OTHERS. Purchaser shall use its best
efforts to obtain all authorizations, consents and approvals of
third parties and/or governmental agencies that may be required to
permit the consummation of the transactions contemplated by this
Agreement.
(iv) REGULATORY FILINGS. The Purchaser will furnish to the
Seller such necessary information and reasonable assistance as the
Seller may reasonably request in connection with its preparation of
necessary filings or submissions to any governmental agency. Seller
agrees to timely file any information, reports, applications or
notices required to be filed in connection with the transactions
contemplated by this Agreement.
E-13
<PAGE> 14
(c) SPECIAL COVENANTS RELATING TO EMPLOYEES. Effective as of the Closing
Date Seller agrees to terminate all of its employees, except for any employees
who by mutual agreement of the parties will not be offered employment by
Purchaser. Purchaser agrees to offer employment as of the Closing Date to all
present employees of Seller, on substantially the same terms regarding
compensation and benefits as were provided by Seller immediately prior to the
Closing, except for any employees who are also shareholders of Seller or members
of their immediate families. In all cases such employment will be "at will", and
except as provided to the contrary in Schedule 3(d), Purchaser will not assume
any obligations to such persons relating to the period of their employment by
Seller. Notwithstanding the foregoing, Purchaser shall enter into an Employment
Agreement with John D. Wright.
VIII. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller as follows:
(a) Purchaser is a corporation duly organized, validly existing and in
good standing under the laws of Delaware and is duly qualified, licensed and
authorized to do business as a foreign corporation and is in good standing as a
foreign corporation in each jurisdiction in which the conduct of its business
requires such qualification, licensing or authorization. Purchaser has full
corporate power to own or lease its properties and carry on its business as now
being conducted.
(b) Purchaser has full corporate power and authority to execute and
deliver this Agreement and the other agreements and instruments to be executed
and delivered by it in connection herewith, and to consummate the transactions
contemplated hereby and thereby. All corporate acts and other proceedings
required to be taken by or on the part of
E-14
<PAGE> 15
Purchaser to authorize it to carry out this Agreement and such other agreements
and instruments and the transactions contemplated hereby and thereby have been
duly and properly taken. This Agreement has been duly executed and delivered by
Purchaser and constitutes, and such other agreements and instruments when duly
executed and delivered by Purchaser will constitute, legal, valid and binding
obligations of Purchaser, enforceable in accordance with their respective terms.
(c) Neither the execution and delivery nor the performance of this
Agreement will (i) violate any provision of law, or any judgment, writ,
injunction, decree or order of any court or other governmental authority
relating to Purchaser, or (ii) violate any deed, mortgage, instrument,
indenture, agreement, contract, other commitment or restriction to which
Purchaser is a party or by which it is bound, or (iii) be in conflict with, or
result in or constitute a breach or default (or an occurrence which by lapse of
time and/or the giving of notice would constitute a breach or default), on the
part of Purchaser, under any such deed, mortgage, instrument, indenture,
agreement, contract, other commitment or restriction.
(d) All of the representations and warranties set forth in this
Section 8 shall be deemed renewed by Purchaser at the Closing as if made at such
time and shall survive the Closing Date for a period of one (1) year.
IX. REPRESENTATIONS AND WARRANTIES OF SELLER, LEI, AND THE SHAREHOLDERS
Seller, LEI, and the Shareholders jointly and severally represent and
warrant to Purchaser as follows:
E-15
<PAGE> 16
(a) Seller is duly organized, validly existing and in good
standing under the laws of Pennsylvania and is duly qualified, licensed and
authorized to do business as a foreign corporation and is in good standing as a
foreign corporation in each jurisdiction in which the conduct of its business
requires such qualification, licensing or authorization. Seller has full
corporate power and authority to execute and deliver this Agreement and the
other agreements and instruments to be executed and delivered by it in
connection herewith and to consummate the transactions contemplated hereby and
thereby. All corporate acts and other proceedings required to be taken by or on
the part of Seller, including, if necessary, all appropriate stockholder action,
to authorize it to carry out this Agreement and such other agreements and
instruments and the transactions contemplated hereby and thereby have been duly
and properly taken. This Agreement has been duly executed and delivered by
Seller and constitutes, and such other agreements and instruments when duly
executed and delivered by Seller will constitute, legal, valid and binding
obligations of Seller enforceable in accordance with their respective terms.
(b) Neither the execution and delivery nor the performance of this
Agreement will (i) violate any provision of law, or any judgment, writ,
injunction, decree or order of any court or other governmental authority
relating to Seller, or (ii) violate any deed, mortgage, instrument, indenture,
agreement, contract, other commitment or restriction to which Seller is a party
or by which it is bound, or (iii) be in conflict with, or result in or
constitute a breach or default (or any occurrence which by lapse of time and/or
giving of notice would constitute a breach or default), on the part of Seller,
under any such deed, mortgage, instrument, indenture, agreement, contract, other
commitment or restriction, or
E-16
<PAGE> 17
(iv) result in the creation or imposition of any lien, charge or encumbrance of
any nature whatsoever upon the Assets.
(c) The Business has been conducted by Seller in accordance with
all applicable laws, governmental regulations and judicial and administrative
decisions, including without limiting the generality of the foregoing, laws,
regulations and decisions concerning employment and environmental matters, the
failure to comply with which would have a material adverse effect on Purchaser's
ability to carry on the Seller's Business as now being conducted. All licenses
or permits issuable by any governmental authority which are necessary for
Seller's operation of the Business, if any, have been obtained and are currently
in full force and effect. All such licenses and permits are freely transferrable
to Purchaser without the consent of the issuing authority.
(d) Except for those matters set forth in Schedule 9(d), there is
(and has not been within the past three years) no claim, litigation, action,
suit or proceeding, administrative or judicial, pending or threatened against or
affecting Seller, or involving any of the Assets, at law or in equity or before
any foreign, federal, state, local or other governmental authority, including,
without limitation, any product liability claim, or any claim, proceeding, or
litigation for the purpose of enjoining or preventing the consummation of this
Agreement, or the transactions contemplated hereby, or otherwise claiming this
Agreement, or any of the transactions contemplated hereby or the consummation
thereof, is illegal or otherwise improper, nor to Seller's knowledge is there
any basis upon which any such claim, litigation, action, suit or proceeding
could be brought or initiated. Seller is not (and has not been within the past
three years) subject to or in default under any judgment, order, writ,
injunction or decree of any court or any governmental authority, and no
E-17
<PAGE> 18
replevins, attachments, or executions have been issued or are now in force
against Seller. No petition in bankruptcy or receivership has ever been filed by
or against Seller. Seller is not in default under any express or implied
contract, agreement, lease or other arrangement, oral or written, to which
Seller is a party. Neither Seller nor the other party to any of the Assumed
Contracts is in default thereunder.
(e) No consent, authorization, license, permit, order, certificate
or approval which has not heretofore been obtained is required by any person,
corporation, partnership, estate, trust, governmental agency or other person or
entity not a party to this Agreement in connection with the transactions
contemplated by this Agreement.
(f) Seller has not received any notice from any court or
governmental agency of any violation or alleged violation of any applicable
laws, ordinances, regulations, rules, decrees, awards or orders enacted or
entered by any federal, state or local governmental authority or court.
(g) Seller now has, and by virtue of the deliveries made at the
Closing, Purchaser will obtain good and marketable title to the Assets, free and
clear of all liens, encumbrances, charges and equities of any nature whatsoever,
except for the Permitted Encumbrances.
(h) The physical properties, business and assets of Seller's
business are and have been insured by such insurers, against such risks
(including but not limited to products liability claims), in such amounts, and
upon such terms and conditions as are disclosed in Schedule 9(h) annexed hereto
and all other insurance policies and similar arrangements of Seller's business
are disclosed in said Schedule. Said insurance policies and arrangements are in
full force and effect as of the date of the Closing and are adequate
E-18
<PAGE> 19
and customary for the business currently engaged in by Seller. Seller shall
exercise its reasonable efforts to execute such assignments and to take such
other actions as shall in Purchaser's reasonable opinion be appropriate to
ensure that Purchaser obtains the benefits of all of such policies to the extent
permissible thereunder, including but not limited to reasonable notice of the
cancellation or nonrenewal of any such policy of insurance for any reason.
(i) Neither the business of Seller as conducted prior to the
Closing nor the ownership or sale by Seller of any of the Assets were, are or
will be in contravention of any patent, trademark, copyright or franchise
agreements, licensing agreements, or other proprietary right of any third party
or was, is or will be dependent for no-contravention upon the acquiescence,
agreement or consent of any such third party.
(j) Schedule 1(a) attached hereto and incorporated herein by
reference sets forth all patents, patent applications, registered trademarks,
registered service marks, trademark and service mark applications, unregistered
trademarks and service marks, copyrights and copyright applications, owned or
filed by the Seller or in which the Seller has an interest and the nature of
such interest. No other patent, trademark or service mark, copyright or license
under any thereof, is necessary to permit the Business to be conducted as now
conducted or as heretofore conducted. No person, firm or corporation has any
proprietary, financial or other interest in any of such patents, patent
applications, registered trademarks, registered service marks, trademark and
service mark applications, unregistered trademarks and service marks, copyrights
and copyright applications, and there are no violations by others of any of the
rights of the Seller thereunder. To the best of Seller's knowledge, Seller is
not infringing upon any patent, trademark or service mark, or
E-19
<PAGE> 20
copyright or otherwise violating the rights of any third party. No proceedings
have been instituted or are threatened, and no claim has been received by the
Seller alleging any such violation, and Seller is not a party to, or bound by,
any license agreement requiring payment.
(k) Seller has delivered to Purchaser on or before the date hereof
originals or copies of (1) all current written contracts and agreements with the
Customers, except for purchase and sales orders made in the ordinary course of
business; (2) all constituent agreements relating to any indebtedness of the
Seller relating to the Business or the Assets; and (3) leases and any other
material contracts by which the Seller is bound or is a party including but not
limited to leases for its real property, and any contracts with any supplier or
distributor of materials used in connection with the development, manufacture,
marketing and sale of the Business; and (4) any other written agreements (and
summaries of any oral agreements) included in the Assumed Liabilities.
(l) Seller has no knowledge of any termination, cancellation,
limitation, modification or change in the business relationship of Seller with
any of its twenty largest Customers.
(m) As of the date hereof, Seller has no liabilities of any
nature, whether accrued, absolute, contingent or otherwise except (i)
liabilities as shown on Schedule 9(m) as liabilities intended to be retained by
Seller, and (ii) any other liabilities specifically included in the definition
of Assumed Liabilities contained in Section 3(d), and listed on Schedule 3(d).
(n) The items of Tangible Property included within the Assets to
be purchased hereunder, constitute all items of Tangible Property needed for
Purchaser to
E-20
<PAGE> 21
conduct the Business after the Closing Date as such Business has been conducted
by Seller in the twenty-four months prior to the Closing Date. All of the items
included in the Tangible Property have been well maintained and are in normal
operating condition.
(o) The Receivables to be assigned to Purchaser hereunder on the
Closing Date will on the Closing Date each be valid and subsisting obligations
owing to Seller in accordance with the respective amounts for which each
receivable is carried on the books of Seller on such date. An up-to-date
schedule of the receivables will be provided to Purchaser at the Closing.
(p) Each of the items of Inventory included in the Assets sold to
Purchaser hereunder will be usable or saleable by Purchaser in the ordinary
course of business, without the need for any significant write-down below cost.
(q) Seller has paid, or will cause to be paid, all income taxes,
payroll and employee benefits, social security, withholding, sales, use,
unemployment insurance taxes, and any and all other taxes due and payable by
Seller to all municipal, state and federal governmental authorities for periods
up to and including the Closing Date. To the extent any such obligations will be
an obligation of the Business after the purchase of the Assets and the Business
by Purchaser, and such amounts accrued during periods prior to the Closing Date,
all such amounts are listed in Schedule 9(q) hereof.
(r) All federal, state and municipal tax and information returns
required to have been filed prior to the Closing Date by Seller have been duly
and timely filed and each such return correctly reflects the income, franchise
and other tax liability and all other information required to be reported
thereon.
E-21
<PAGE> 22
(s) Since June 30, 1996, and continuing until the close of
business on the Closing Date, Seller has operated the Business in the ordinary
course of business, as it has been conducted in the twenty-four months prior to
the Closing Date, and the Business has operated profitably during such period,
at the same or greater levels of profit as have resulted during the two-year
period ending June 30, 1996. Since June 30, 1996, and continuing until the close
of business on the Closing Date, Seller has not directly or indirectly increased
the compensation paid or payable to any of its Shareholders or employees with
annual compensation of more than $30,000, and Seller has incurred no liabilities
and paid no dividends or other distributions to any of its Shareholders or their
immediate family members or affiliates, except for any payments of liabilities
carried on the Seller's unaudited June 30, 1996 balance sheet, or payments
disclosed on Schedule 9(s).
(t) Neither this Agreement, nor any Exhibit, schedule,
certificate, instrument or other document furnished or to be furnished to
Purchaser pursuant hereto or in connection with the transactions contemplated
hereby, contains or will contain any untrue statement of a material fact, or
omits or will omit to state a material fact necessary to make the statements
contained therein not misleading. There is no fact which materially adversely
affects, or may materially adversely affect, the business or condition
(financial or otherwise) of the Seller or any of its properties or assets which
has not been set forth herein, or in an Exhibit, Schedule, certificate or other
document furnished or to be furnished to Purchaser prior to the Closing Date
pursuant hereto.
(u) The foregoing representations and warranties set forth in this
Section 9 shall be deemed renewed by Seller and the Shareholders at the Closing
as if made at such time and shall survive for a period of one (1) year after the
Closing Date.
E-22
<PAGE> 23
X. CONDITIONS OF CLOSING
(a) CONDITIONS TO PURCHASER'S OBLIGATIONS. All obligations of
Purchaser hereunder shall be subject to the following conditions, any one of
which may be waived by Purchaser:
(i) All representations and warranties of Seller and the
Shareholders contained in this Agreement shall be true and correct
as of the Closing Date in all material respects.
(ii) Purchaser shall have executed a lease for the real
property presently occupied by Seller for a minimum three-year
term. Such lease shall be on terms reasonably acceptable to
Purchaser and its counsel, except that the rent and other
financial terms specified in such lease shall be fair market
rates, determined by current appraisal, which, however, shall in
no event exceed the rates paid by Seller for such items during the
twelve month period preceding the Closing Date.
(iii) During the period following execution of this Agreement,
and prior to the Closing Date, Purchaser shall have been provided
with reasonable access to the facilities, Customers, employees and
business records of Seller, and such third parties as Purchaser
deems necessary, for the purpose of conducting its due diligence,
and Purchaser's due diligence conducted during this period shall
not have revealed any material adverse changes in the Business, or
in the prospects that Purchaser will be able to operate the
Business profitably after the Closing Date. Without limiting the
foregoing, Purchaser shall have been provided with up to date
financial information regarding Seller for the period up and
including the close of business on the day before the Closing
Date, in such summary form as Purchaser shall deem reasonably
necessary to analyze the financial condition and prospects of the
Business as of the Closing Date. During the period immediately
preceding the Closing Date, Purchaser shall have been provided
with an opportunity to participate in a physical counting of the
Inventory with representatives of its choice, and shall have been
provided with access to Seller's employees and files for the
purpose of independently determining the value of individual items
of the Inventory. As a result of such investigation, Purchaser
shall not have determined that a material portion of the Inventory
is obsolete, or otherwise not usable or saleable in the ordinary
course of business, or is not carried on the financial books and
records of the company at appropriate costs. Furthermore, as a
result of such inspection of such Inventory, Purchaser shall not
have reasonably concluded that the assets include an unreasonably
large amount of Inventory (unless justified by backlogs), or an
unreasonably small amount of Inventory (except to the extent this
results from unusually large sales).
E-23
<PAGE> 24
(iv) As a result of its investigations prior to the Closing
Date, Purchaser shall not have concluded that it no longer wishes
to consummate this transaction. The parties acknowledge that a
determination by Purchaser not to consummate this transactions in
accordance with this paragraph may be made by Purchaser for any
reason, including, but not limited to, a determination by
Purchaser that the value of the Assets does not exceed the value
of the Assumed Liabilities by a sufficient amount to justify the
Purchase Price; that the Business has not generated levels of
profitability prior to the Closing Date in amounts high enough to
justify the specified Purchase Price; or that any materially
adverse circumstances exist which might affect the Business or its
prospects after the Closing Date.
(v) Purchaser shall have succeeded in obtaining financing
from a bank or other institutional lender in a minimum amount of
$1,000,000 for the purpose of consummating this transaction, on
interest rates and other terms reasonably acceptable to Purchaser.
Promptly after executing this Agreement, Purchaser shall make
application for such financing, and if Purchaser fails to apply
for such financing within thirty days after signing this
Agreement, then this condition shall be deemed waived.
(vi) Purchaser shall have entered into an employment agreement
with John D. Wright on terms reasonably acceptable to Purchaser to
take effect on the Closing Date.
(vii) Purchaser shall have obtained audited financial
statements for Seller covering the three-year period ending March
31, 1996 which financial statements are identical in all material
respects to financial statements previously furnished to Purchaser
by Seller. Promptly after execution of this Agreement, Purchaser
agrees to engage a qualified accounting firm to perform such
audit, and Purchaser agrees to bear the expense of such audit
regardless of whether this transaction is ultimately consummated.
(viii) Seller shall have performed all commitments hereunder up
to the Closing Date and shall have tendered the required
documents, instruments and certificates as set forth in Section 4
hereof.
(ix) No action, suit, proceeding or investigation by or before
any court, administrative agency or other governmental authority
shall have been instituted or threatened to restrain, prohibit or
invalidate the transactions contemplated by this Agreement or
which may affect the right of Purchaser to own, operate or control
the Assets and the Seller's Business after the Closing Date.
(x) All corporate action, necessary to authorize (a) the
execution, delivery and performance by the Seller of this
Agreement and any other agreements or instruments contemplated
hereby or thereby to which Seller is a party and (b) the
consummation of the transactions contemplated hereby and thereby
shall have
E-24
<PAGE> 25
been duly and validly taken by Seller, and Purchaser shall have
been furnished with copies of all applicable resolutions of Seller
certified by the Secretary or Assistant Secretary of the Seller.
(xi) The Seller shall have obtained the approvals, consents
and authorizations of all third parties and/or governmental
agencies if any necessary for the communication of the
transactions contemplated hereby in accordance with the
requirements of applicable laws and agreements.
(b) CONDITIONS TO SELLER'S OBLIGATIONS. All obligations of Seller
hereunder are, at the option of Seller, subject to the conditions that, at the
Closing:
(i) All representations and warranties made in this Agreement
by Purchaser shall be true and correct as of the Closing Date in
all material respects.
(ii) Purchaser shall have tendered the required documents and
certificates at the Closing as set forth in Section 4 hereof.
(iii) The payment described in Section 3 hereof due at the
Closing shall have been paid by Purchaser.
(iv) All corporate action necessary to authorize (a) the
execution, delivery and performance by Purchaser of this Agreement
and any other agreements or instruments contemplated hereby to
which Purchaser is a party and (b) the consummation of the
transactions and performance of its other obligations contemplated
hereby and thereby shall have
been duly and validly taken by Purchaser, and the Seller shall
have been furnished with copies of all applicable resolutions
adopted by the board of directors of Purchaser, certified by the
Secretary of Purchaser.
(v) Purchaser shall have repaid in full Seller's term loan
and working capital line of credit with PNC Bank (the "Loans"), or
Purchaser shall have assumed such Loans; provided, that in the
event of the assumption by Purchaser of the Loans, Seller, the
Shareholders, and any of their respective affiliates shall have
been relieved of any obligations relating to the Loans.
XI. TERMINATION OF AGREEMENT
(a) TERMINATION. At any time prior to the Closing Date, this
Agreement may be terminated (i) by the consent of the Purchaser and Seller, (ii)
by the Seller if the conditions stated in Section 10(b) have not been satisfied
at or prior to the Closing Date or (iii) by Purchaser if the conditions stated
in Section 10(a) have not been satisfied at or prior
E-25
<PAGE> 26
to the Closing Date. Purchaser agrees that, in the event of the termination of
this Agreement for any reason, it will return to Seller all information it has
obtained with respect to the Business, and it will not divulge, indicate, use to
the detriment of Seller and/or the Business, or for the benefit of any other
person or persons, or misuse in any way, any confidential information or trade
secrets of Seller relating to the Business, including personnel information,
secret processes, know-how, customer lists, formulas, or other technical data.
(b) RIGHT TO PROCEED. Anything in this Agreement to the contrary
notwithstanding, if any of the conditions specified in Section 10(a) hereof have
not been satisfied at or prior to the Closing, Purchaser shall have the right to
proceed with the transactions contemplated hereby without waiving any of its
rights hereunder, and if any of the conditions specified in Section 10(b) hereof
have not been satisfied at or prior to the Closing, the Seller may determine to
proceed with the transactions contemplated hereby without waiving any of its
rights hereunder.
XII. FINANCIAL ADVISORS
Seller and/or the Shareholders have previously entered into an Agreement
with Geneva Capital Markets Company and/or Dictor Capital Corporation regarding
the sale of Seller, and Shareholders agree that they will be solely responsible
for any compensation due to Geneva Capital Markets Company as a result of this
transaction and/or Dictor Capital Corporation. Seller and Purchaser each
acknowledge to the other that there are no other financial advisors or brokers
in connection with this Agreement and agree to indemnify the other for any
claims by any other financial advisors or broker in connection
E-26
<PAGE> 27
with this Agreement and the transactions contemplated hereby resulting from any
act by such party.
XIII. OTHER AGREEMENTS
(a) Between the date of this Agreement and the Closing Date,
neither Seller, LEI nor the Shareholders shall, directly or indirectly,
negotiate with any third party regarding the merger or consolidation of Seller,
or the sale of substantially all of the assets of Seller, or the sale of any
capital stock of Seller. In addition, neither Seller, LEI nor any of the
Shareholders shall solicit any inquiry regarding any of the foregoing from any
third-party during such period. Furthermore, neither Seller, LEI nor any of the
Shareholders shall during such period engage indirectly in any such activities
through a finder, broker, consultant, other stockholder of Seller, or other
intermediary.
(b) Seller, LEI, and each of the Shareholders agrees that they
will not, at any time within the five (5) year period immediately following the
Closing Date, directly or indirectly engage in, or have any interest in, any
person, firm, corporation, or business (whether as an employee, officer,
director, agent, creditor, consultant, or otherwise) that engages in any
activity in the continental United States which is the same as, similar to, or
competitive with, any activity now engaged in by the Seller; provided, however,
that the covenant contained in this paragraph shall not preclude Seller, LEI or
the Shareholders from owning securities of any firm or corporation which are
traded on a national or public securities exchange, or "over-the-counter",
unless the ownership of such securities gives any of such parties control,
directly or indirectly, of at least five percent (5%) of the voting stock of
such firm or corporation.
E-27
<PAGE> 28
(c) From the date of this Agreement and continuing indefinitely
after the Closing Date, Seller, LEI, and the Shareholders agree not to divulge,
indicate, use to the detriment of Purchaser or the Business, or for the benefit
of any other person or persons, or misuse in any way, any confidential
information or trade secrets of Seller relating to the Business, including
personnel information, secret processes, know-how, customer lists, formulas, or
other technical data.
(d) Seller, LEI, and the Shareholders acknowledge that their
agreements and covenants contained in this Section 13 have been materially
relied upon by Purchaser in agreeing to enter into this Agreement, and that the
terms of such provisions are reasonable. In the event of any breach or
threatened breach by Seller, LEI or any of the Shareholders of such provisions,
then in addition to any other right or remedy to which Purchaser is entitled
under the terms of this Agreement or at law or in equity, the parties agree that
Purchaser shall be entitled to obtain from any court of competent jurisdiction,
an injunction to prevent any threatened or actual breach of such provisions.
(e) After the Closing Date, Purchaser agrees that, should it
register any shares of its common stock or other voting securities under the
Securities Act of 1933, the Securities Exchange Act of 1934, or any other
applicable legislation, as such acts may be amended from time to time in the
future, then at such time it will also register the shares of common stock which
are described in Section 3(a) hereof.
(f) Purchaser acknowledges that the Shareholders have not been
involved in the day-to-day operation of the Business, and the Shareholders have
relied upon the
E-28
<PAGE> 29
information provided to them by management of Seller in joining in the
representations, warranties and covenants included in this Agreement.
(g) After the Closing, Seller, LEI and the Shareholders shall have
the right to review portions of the records of the Business relating to
operations prior to the Closing Date, as reasonably necessary to permit them to
file necessary tax returns.
XIV. NOTICES
Any notice or other documents to be given or delivered hereunder by any
party to any other party shall be in writing and shall be delivered by express
courier service, by fax transmission, or by certified mail, to the other party
at the following address:
If to Purchaser: Regency Affiliates, Inc.
Attention: William R. Ponsoldt, Sr.
3340 SE Federal Highway, Ste. 210
Stuart, Florida 34997
Copy to: James F. Koehler, Esq.
Gallagher, Sharp, Fulton & Norman
1501 Euclid Avenue
Cleveland, Ohio 44115
If to Seller or the
Shareholders: Rustic Crafts Co., Inc.
c/o Ralph J. Lomma
The Lomma Group
1120 S. Washington Avenue
Scranton, PA 18505
Copy to: Stephen A. Salvo, Esq.
Salvo, Russell and Fichter
1767 Sentry Parkway West, Suite 210
Blue Bell, Pennsylvania 19422
XV. MERGER; AMENDMENT
This Agreement, the attachments hereto and the agreements and other
documents expressly referred to herein embody the entire representations,
warranties, agreements
E-29
<PAGE> 30
and conditions in relation to the subject matter hereof, and no representation,
warranty, understanding or agreement, oral or otherwise, in relation thereto
exists between the parties except as herein expressly set forth. This Agreement
may not be amended, augmented or terminated except as expressly provided herein
or by an instrument in writing duly executed by the parties hereto.
XVI. ASSIGNMENT
At any time before or after the Closing, Purchaser may assign all of its
rights and/or obligations under this Agreement to any person; provided, however,
that any such assignment by Purchaser shall not relieve Purchaser of its
obligations hereunder, and provided further, that Purchaser may only assign this
Agreement to a subsidiary of Purchaser or an affiliated corporation, except with
the advance written consent of Seller. This Agreement and the various rights and
obligations arising hereunder shall inure only to the benefit of and be binding
upon the parties hereto and their respective successors, heirs, personal
representatives and permitted assigns.
XVII. INVALIDITY
The invalidity or unenforceability of any term or provision of this
Agreement or the application of such term or provision to any person or
circumstances shall not impair or affect the remainder of this Agreement and its
application to other persons and circumstances, and the remaining terms and
provisions hereof shall not be invalidated but shall remain in full force and
effect.
XVIII. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with the
laws of Pennsylvania.
E-30
<PAGE> 31
XIX. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which, taken together, shall be deemed
but one and the same instrument.
XX. SURVIVAL
The representations and warranties of the Purchaser and Seller set forth
in Sections 8 and 9 of this Agreement, the indemnities set forth in Section 6 of
this Agreement, and the covenants set forth in Section 7(a), (b) and (c), and
Section 12 of this Agreement, shall survive the execution and delivery of this
Agreement for a period of one (1) year after the Closing Date. The provisions of
Section 13 shall survive for the periods therein indicated.
XXI. CAPTIONS
The captions in this Agreement are for convenience only and shall not be
considered a part of or affect the construction or interpretations of any
provision of this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed and delivered as of
the day and year first above written.
RUSTIC CRAFTS CO., INC.
By: /s/ John D. Wright
--------------------------------
Title: President
-----------------------------
/s/ Ralph J. Lomma
-----------------------------------
Ralph J. Lomma, Individually
/s/ Joyce J. Lomma
-----------------------------------
Joyce J. Lomma, Individually
E-31
<PAGE> 32
/s/ Anthony C. Lomma
-----------------------------------
Anthony C. Lomma, Individually
LOMMA ENTERPRISES, INC.
By: /s/ Ralph J. Lomma
-----------------------------------
Title: President
-----------------------------
REGENCY AFFILIATES, INC.
By: /s/ William R. Ponsoldt
--------------------------------
Title: Chairman
----------------------------
E-32
<PAGE> 33
INDEX TO SCHEDULES
Schedule 1(a) - Trade Names, Patents and Trademarks
Schedule 1(f) - Assumed Contracts
Schedule 3(d) - Additional Assumed Liabilities
Schedule 7(a) - Exceptions to Section 7(a)
Schedule 9(d) - Litigation
Schedule 9(h) - Insurance
Schedule 9(m) - Seller's Retained Liabilities
Schedule 9(q) - Accrued Liabilities of the Business
Schedule 9(s) - Exceptions to Section 9(s)
E-33
<PAGE> 34
ASSIGNMENT AND ASSUMPTION OF PURCHASE AGREEMENT
-----------------------------------------------
This Assignment and Assumption of Purchase Agreement (the "Assignment")
is made and entered into as of the 17th day of March 1997, by and between
Regency Affiliates, Inc., a Delaware corporation ("Assignor") and Rustic Crafts
International, Inc., a Delaware corporation ("Assignee"), based upon the
following.
A. Assignor has agreed with Rustic Crafts Co., Inc., a Pennsylvania
corporation ("Seller") to purchase substantially all the assets and assume
certain of the liabilities of Seller, pursuant to a certain Asset Purchase and
Sale Agreement executed by Seller on February 27, 1997 (such Agreement
hereinafter referred to as the "Purchase Agreement").
B. Assignee is a wholly-owned subsidiary of Assignor.
C. Assignor wishes to assign Assignor's rights and interest in and to
the Purchase Agreement to Assignee, and Assignee wishes to complete such
assignment, and to assume the obligations of Assignor under the Purchase
Agreement.
D. Seller has joined in executing this document solely for purposes of
indicating its consent to the above assignment.
NOW THEREFORE, in consideration of the mutual promises and agreements
contained in this Assignment and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
Assignor and Assignee hereby agree as follows:
1. Assignor hereby transfers and assigns to Assignee, all of Assignor's
right, title, and interest in, to and under the Purchase Agreement.
2. Assignee hereby accepts the transfer and assignment of Assignor's
interest in the Purchase Agreement.
3. Assignee hereby assumes and agrees to be bound by the terms and
provisions of the Purchase Agreement as if Assignee were an original party
thereto, and to perform all of the obligations of Assignor thereunder when due.
4. Assignor agrees that it shall not be relieved of liability for the
performance of its obligations under the Purchase Agreement, notwithstanding the
assignment to Assignee hereunder, but that Assignor shall nonetheless remain
jointly liable to Seller for the full and complete performance of Purchaser's
obligations under the Purchase Agreement.
5. This Agreement is governed by the laws of the state of Pennsylvania.
E-34
<PAGE> 35
The parties hereto have executed this Assignment as of the day and year
first above written.
ASSIGNOR:
REGENCY AFFILIATES, INC.
Witnesses:
J. Jandrlich By: /s/ William R. Ponsoldt
- ---------------------------- --------------------------------------
Title: Chairman
- ---------------------------- ----------------------------------
ASSIGNEE:
RUSTIC CRAFTS INTERNATIONAL, INC.
Martin J. Craffey By: /s/ William R. Ponsoldt
- ---------------------------- --------------------------------------
Title: Chairman
- ---------------------------- ----------------------------------
SELLER:
RUSTIC CRAFTS CO., INC.
J. Jandrlich By: /s/ John D. Wright
- ---------------------------- --------------------------------------
Title: President
- ---------------------------- -------------------------------
E-35
<PAGE> 1
Exhibit 10.2
AMENDED AND RESTATED AGREEMENT
------------------------------
THIS AMENDED AND RESTATED AGREEMENT, is made as of the 24th day of
March, 1998, with an effective date of June 3, 1997, by and between The
Statesman Group, Inc. (the "Group") and Regency Affiliates, Inc. (the
"Company").
W I T N E S S E T H:
WHEREAS, the Company wishes to obtain the future services of William R.
Ponsoldt, Sr. ("Ponsoldt"), for the Company; and
WHEREAS, Ponsoldt is willing, upon the terms and conditions herein set
forth, to provide such services; and
WHEREAS, Ponsoldt has contracted to exclusively provide services and
labor for the Group, and WHEREAS, the Group is willing to forbear from competing
with the Company; and WHEREAS, there exists a lack of mutual understanding
between the parties to the previous agreement regarding the subject matter
hereof, which agreement was signed by the parties on June 3, 1997, and WHEREAS,
the parties desire to restate the Agreement of June 3, 1997 to more accurately
reflect their understanding and agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, and intending to be legally bound hereby, the parties agree
that the Agreement entered into by them on June 3, 1997, shall be amended and
restated to provide as follows:
E-36
<PAGE> 2
1. RELEASE
The Group hereby releases Ponsoldt from all of his employment
obligations with the Group.
2. EMPLOYMENT OF PONSOLDT.
Simultaneously with the execution of this Agreement, the Company
proposes to enter into an Employment Agreement with Ponsoldt on terms acceptable
to the Company and Ponsoldt. The execution of this Agreement by the Company is
conditioned upon the execution of such Employment Agreement by both the Company
and Ponsoldt.
3. COMPENSATION.
As an inducement for the Group to enter into this Agreement, and
release Ponsoldt from his conflicting obligations to the Group, the Company
shall issue 466,667 shares of its common stock to the Group upon execution of
this Agreement.
4. STOCK OPTIONS.
(a) The Group is hereby granted the option to purchase Six
Million, One Hundred Thousand (6,100,000) shares of the Company=s common stock,
$0.40 par value, as hereinafter provided. Until their date of expiration, the
options shall be exercisable at any time in whole or in part at a price equal to
the lower of (a) the closing trading price as of the most recent date on which
at least 10,000 shares of such stock were traded, or (b) the average closing
trading price of the shares during the ninety day period immediately preceding
the date of exercise. The Company agrees to reserve sufficient shares to meet
the requirements of this paragraph. The options shall become exercisable
immediately and shall remain exercisable until April 15, 2007. At the option of
the Group, payment may be
E-37
<PAGE> 3
made by the Group for exercise of the option to purchase shares of the Company
granted hereunder, in whole or in part, in the form of a promissory note
executed by the Group, secured only by a pledge of the shares purchased, which
promissory note will accrue interest for any quarter at the prime rate in effect
on the last day of the quarter at Chase Manhattan Bank, with interest and
principal payable in a balloon payment five years after the date of execution of
the note.
(b) With regard to any shares purchased by the Group as a
result of the foregoing options (such shares referred to in this subparagraph as
the "Stock"), Statesman acknowledges that the Stock is acquired for the purposes
of investment and not for distribution and will not, at the time of issuance, be
registered with the Securities and Exchange Commission (the "SEC"). Statesman
acknowledges that the shares received by it may not be resold or distributed
except in a registered offering or pursuant to an exemption under the federal
securities laws. If Regency determines to file a registration statement to
register for public offering any of its securities, it shall so notify
Statesman. At the request of Statesman, Regency shall include, to the extent
then permissible under the Securities Act of 1933, as amended (the "Act") and
the rules and regulations of the SEC, the Stock in the registration. Prior to
the effective date of each registration statement relating to any of the shares
of the Stock, Regency and Statesman shall enter into an agreement providing for
reciprocal indemnification against any losses, claims, damages, or liabilities
to which Statesman or Regency may become subject under the Act or otherwise. The
form of the reciprocal indemnification provisions shall be the form customarily
appearing in underwriting agreements used by reputable investment bankers.
E-38
<PAGE> 4
5. AGREEMENT NOT TO COMPETE.
(A) SCOPE. For so long as Ponsoldt shall be employed by the
Company, the Group agrees that it will not engage in any business or activity in
competition with the Company within the United States of America, either
directly or indirectly, whether for itself or a third party, without the express
written permission of the Company.
The Group promises that for a period of two (2) years
following the termination of Ponsoldt employment with the Company, it will not,
either directly or indirectly, whether for itself or a third party, without the
express written permission of the Company, pursue any business opportunity that
was actively pursued by the Company during William Ponsoldt's tenure of
employment and not abandoned by the Company.
(B) REMEDIES. The parties agree that the violation or
threatened violation by the Group of its non-compete obligation hereunder, will
cause the Company irreparable harm for which damages will be inadequate or
unascertainable. Accordingly, in such case the Company shall be entitled to
appropriate temporary and permanent injunctive relief.
6. LOAN GUARANTEES BY STATESMAN. As further consideration for the grant
of shares and options to Statesman hereunder, until such time as the options
granted in Section 4 hereof shall expire, Statesman agrees to guarantee one or
more third-party loans to Regency or its subsidiaries, in a total face amount
not to exceed at any time the aggregate sum of $300,000. Such guarantee shall be
provided by Statesman upon request by the Company and upon a showing of
reasonable need to have Statesman provide its guarantee.
E-39
<PAGE> 5
7. EFFECTIVE DATE.
This Agreement, as amended and restated, shall relate back and become
effective as of June 3, 1997.
8. NOTICES.
Any notice, request, demand or other communication required or
permitted to be given under this Agreement shall be given in writing and if
delivered personally, or sent by certified or registered mail, return receipt
requested, as follows (or to such other addressee or address as shall be set
forth in a notice given in the same manner):
If to the Group: Statesman Group, Inc.
P.O. Box EE17757
Nassau N.P. Bahamas
If to the Company: Regency Affiliates, Inc.
10842 Old Mill Road, Suite #5
Omaha, Nebraska 68154
Any such notices shall be deemed to be given on the date personally
delivered or such return receipt is issued.
9. ARBITRATION.
It is agreed that in the event that any disagreement, dispute,
controversy or claim arises out of or in relation to or in connection with this
Agreement or breach thereof, the parties shall seek to solve the matter amicably
through discussions between parties. Each party agree to consider in good faith
any reasonable request by the other party to engage in mediation or any other
means of alternative dispute resolution short of arbitration. Only if the
parties fails to resolve such disagreement, dispute, controversy, claim or
breach by amicable agreement and compromise within 60 days, may the aggrieved
party seek arbitration as set forth herein. Any disagreement, dispute,
controversy or claim with
E-40
<PAGE> 6
respect to the validity of this Agreement or arising out of or in relation to
the construction or interpretation of this Agreement or arising out of or in
relation to the construction or interpretation of this Agreement, or breach
hereof, shall be finally settled by binding arbitration. The arbitration shall
take place in Fort Lauderdale, Florida in accordance with the rules of the
American Arbitration Association or as the parties shall otherwise agree. The
arbitration shall be brought before three (3) arbitrators, one (1) each
appointed by the respective parties and one (1) additional arbitrator selected
by the two (2) appointed arbitrators. Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. The
arbitrators shall have the power, in addition to the power of determining the
merits of the arbitration, to determine the scope and limits of discovery and to
enforce the rights, remedies, including specific performance, if requested,
procedures, duties, liabilities, and obligations of discovery by the imposition
of the same terms, conditions, consequences, liabilities, sanctions, and
penalties as can be or may be imposed on the like circumstances in a civil
action by a State Court of the State of Florida under the provisions of Florida
Rules of Civil Procedure, except the power to order the arrest or imprisonment
of a person. Each party shall absorb its own costs of arbitration, including
attorney's fees, and the parties shall split equally any arbitrators' fees.
Notwithstanding the section above, the parties shall have recourse to
the courts of Florida for the purpose of obtaining any injunctive relief remedy
as permitted by the laws of the State of Florida.
10. SEVERABILITY.
Whenever possible, each provision of this Agreement will be interpreted
in such manner so effective and valid under applicable law, but if any provision
of this Agreement is held to be invalid, illegal or unenforceable in any respect
under any applicable law or
E-41
<PAGE> 7
rule in any jurisdiction, such invalidity, illegality or unenforceability will
not affect any other provision or any other jurisdiction, but this Agreement
will be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
11. WAIVER OF BREACH.
The waiver by the Company or the Group of a breach of any provision of
this Agreement by the other party shall not operate, or be construed, as a
waiver of any other breach of such other party. Each of the parties to this
Agreement will be entitled to enforce its rights under this Agreement
specifically, to recover damages by reason of any breach of any provision of
this Agreement and to exercise all other rights existing in its favor.
12. AMENDMENT; ENTIRE AGREEMENT.
This Agreement may not be changed orally but only by an agreement in
writing agreed to by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought. This Agreement embodies the
entire agreement and understanding of the parties hereto in respect of the
subject matter of this Agreement, and supersedes and replaces all prior
Agreements, understandings and commitments with respect to such subject matter.
13. GOVERNING LAW.
This Agreement shall be governed by, construed, applied and enforced in
accordance with the Laws of the State of Florida, and no doctrine of choice of
law shall be used to apply to any law other than that of Florida, and no
defense, counterclaim or right of set-off given or allowed by the laws of any
other state or jurisdiction, or arising out of the enactment, modification or
repeal of any law, regulation, or ordinance or decree of any foreign
jurisdiction, shall be interposed in any action hereon.
E-42
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
day and year first above written.
STATESMAN GROUP, INC. REGENCY AFFILIATES, INC.
BY: /s/ Robert Marceca BY: /s/ Eunice M. Antosh
-------------------------- --------------------------
ITS: Vice President ITS: Secretary
-------------------------- --------------------------
E-43
<PAGE> 1
EXHIBIT 21.1
REGENCY AFFILIATES, INC.
SCHEDULE OF SUBSIDIARIES
<TABLE>
<CAPTION>
PERCENT STATE OF
NAME OF SUBSIDIARY OWNED INCORPORATION OTHER NAMES USED
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
National Resource Development
Corp. 80% Nevada None
- ----------------------------------------------------------------------------------------
Drilling Co. 80% Delaware None
("Drilling")
- ----------------------------------------------------------------------------------------
RegTransco, Inc. 80%(1) Delaware None
- ----------------------------------------------------------------------------------------
Rustic Crafts International, Inc. 100% Delaware None
- ----------------------------------------------------------------------------------------
</TABLE>
- --------------
1 RegTransco, Inc. is wholly owned by Drilling, which is itself an 80%
owned subsidiary of the Registrant.
E-44
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 252,354
<SECURITIES> 0
<RECEIVABLES> 582,710
<ALLOWANCES> 1,125
<INVENTORY> 536,150
<CURRENT-ASSETS> 1,490,980
<PP&E> 172,589
<DEPRECIATION> 32,407
<TOTAL-ASSETS> 15,432,529
<CURRENT-LIABILITIES> 1,745,906
<BONDS> 4,031,060
219,300
1,052,988
<COMMON> 4,963,729
<OTHER-SE> 3,324,991
<TOTAL-LIABILITY-AND-EQUITY> 15,432,529
<SALES> 2,908,253
<TOTAL-REVENUES> 2,908,253
<CGS> 1,928,491
<TOTAL-COSTS> 1,928,491
<OTHER-EXPENSES> 1,787,650
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 801,597
<INCOME-PRETAX> 2,261,283
<INCOME-TAX> 73,665
<INCOME-CONTINUING> 2,187,618
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,187,618
<EPS-PRIMARY> .17
<EPS-DILUTED> .15
</TABLE>
<PAGE> 1
Exhibit 99.1
FINANCIAL STATEMENTS AND
DEPENDENT AUDITORS'REPORT
SECURITY LAND AND DEVELOPMENT COMPANY
LIMITED PARTNERSHIP
DECEMBER 31, 1997
E-46
<PAGE> 2
Security Land and Development Company Limited Partnership
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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
</TABLE>
E-47
<PAGE> 3
[Reznick Fedder & Silverman LOGO]
Reznick Fedder & Silverman
Certified Public Accountants * A Professional Corporation
4520 EastWest Highway * Suite 300 * Bethesda, Maryland 20814-3319
* Phone (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, 1997, 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, 1997, 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 17, 1998
E-48
<TABLE>
<S> <C> <C> <C>
Two Hopkins Plaza 212 S. Tryon Street 745 Atlantic Avenue Two Premier Plaza, 5th Floor
Suite 2100 Suite 1180 Suite 800 5605 Glenridge Drive
Baltimore, MD 21201-2911 Charlotte, NC 28281-8100 Boston, MA 02111-2735 Atlanta, GA 30342-1375
Phone (410) 783-4900 Phone (704) 332-9100 Phone (617) 423-5855 Phone (404) 847-9447
Fax (410) 727-0460 Fax (704) 332-6444 Fax (617) 423-6651 Fax (404) 847-9495
</TABLE>
<PAGE> 4
Security Land and Development Company Limited Partnership
BALANCE SHEET
December 31, 1997
<TABLE>
<S> <C>
Investment in real estate, net of accumulated depreciation $52,999,775
Cash and cash equivalents 274,075
Restricted escrow 4,113,938
Tenant accounts receivable 1,030,739
Prepaid expenses and other receivables 397,205
Accrued interest income 16,294
Deferred charges, net of accumulated amortization of $1,504,259 1,124,468
-----------
Total assets $59,956,494
===========
Note payable, net of discount $41,467,993
Accounts payable and accrued expenses 1,203,326
Accrued interest payable 421,961
Deferred rental income 4,761,112
Deferred interest income 500,000
-----------
48,354,392
Partners' capital 11,602,102
-----------
Total liabilities and partners' capital $59,956,494
===========
</TABLE>
See notes to financial statements
E-49
<PAGE> 5
Security Land and Development Company Limited Partnership
STATEMENT OF OPERATIONS
Year ended December 31, 1997
<TABLE>
<S> <C>
Revenue
Rental income $ 11,765,563
Interest income 909,628
Tenant reimbursements and other income 100,158
------------
Total revenue 12,775,349
------------
Administrative
Management fees 250,000
Professional fees 53,073
Payroll expenses 506,352
Office expenses 38,626
------------
848,051
------------
Operating
Janitorial l,075,388
Maintenance contracts 86,959
Repairs and maintenance 184,359
Maintenance supplies 209,181
------------
1,555,887
------------
Interest, taxes and insurance
Interest 3,079,559
Real estate taxes 600,000
Insurance 90,202
------------
3,769,761
------------
Depreciation and amortization
Depreciation 2,223,792
Amortization 355,844
------------
2,579,636
------------
Total expenses 8,753,335
------------
Net income $ 4,022,014
============
</TABLE>
See notes to financial statements
E-50
<PAGE> 6
Security Land and Development Company Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Year ended December 31, 1997
<TABLE>
<CAPTION>
Special
General Limited limited
Total partner partner partner
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, beginning $ 7,688,325 $ 874,802 $ (1,420,213) $ 8233,736
Net income 4,022,014 162,489 38,612 3,820,913
Distributions (108,237) (4,374) (1,038) (102,825)
----------- ------------ ----------- -----------
Balance, end $11,602,102 $ 1,032,917 $(1.382,639) $11,951,824
=========== ============ =========== ===========
</TABLE>
See notes to financial statements
E-51
<PAGE> 7
Security Land and Development Company Limited Partnership
STATEMENT OF CASH FLOWS
Year ended December 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities
Net income $ 4,022,Ol4
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation 2,223,792
Amortization 355,844
Deferred rental income 517,210
Amortization of debt discount 107,255
Increase in tenant accounts receivable (2,325)
Decrease in prepaid expenses and other receivables 21,432
Decrease in accrued interest income 109,397
Decrease in accounts payable and accrued expenses - operating (25,191)
Decrease in accrued interest payable (53,155)
-----------
Net cash provided by operating activities 7,276,273
-----------
Cash flows from investing activities
Withdrawals from restricted escrow 4,101,150
Investment in real estate (5,959,522)
-----------
Net cash used in investing activities (1,858,372)
-----------
Cash flows from financing activities
Payments on note payable (5,265,851)
Distributions (108,237)
-----------
Net cash used in financing activities (5,374,088)
-----------
NET INCREASE IN CASH 43,813
Cash and cash equivalents, beginning 230,262
-----------
Cash and cash equivalents, end $ 274,075
===========
Cash paid for interest during the year, net of amount capitalized $ 3,025,459
===========
Significant noncash investing and financing activities
Accounts payable and accrued expenses of $934,362 have been capitalized to the real estate.
</TABLE>
See notes to financial statements
E-52
<PAGE> 8
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
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 an 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:
<TABLE>
<CAPTION>
Before After
11/l/2003 10/31/2003
--------- ----------
<S> <C> <C>
General partner 4.04% 40.4%
Special limited partner 95.00 50.0
Limited partners .96 9.6
------- -----
100.00% 100.0%
======= =====
</TABLE>
E-53
<PAGE> 9
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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 G) up to the $ 1 00,000 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.
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.
E-54
<PAGE> 10
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 has been 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.
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.
Restricted Escrow
-----------------
The partnership has a portfolio of investments in money market accounts which
are held in trust by State Street Bank and Trust Company (see note, D).
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.
E-55
<PAGE> 11
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
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>
Land - $ 29151,154
Building 40 years 28,436,133
Improvements - building 40 years 23,231,609
Improvements - tenant 9 years 7,455,934
Improvements - land 10 years l,610,778
Furniture and equipment 7 years 822,737
-----------
63,708,345
Less accumulated depreciation 10,708,570
-----------
$52,999,775
===========
</TABLE>
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 State Street Bank and Trust Company, as
Trustee (Trustee), dated November 17, 1994 and maturing in 2003. 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 anus 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.
E-56
<PAGE> 12
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE C - NOTE PAYABLE (Continued)
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, 1997 was $332,961. Amortized discount for the year ending
December 31, 1997 was $107,255, and is included in interest expense on the
accompanying statement of operations.
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>
<S> <C>
1998 $ 5,690,068
1999 6,148,461
2000 6,643,763
2001 7,179,009
2002 7,757,350
Thereafter 8,382,303
--------------
Total 41,800,954
Less: unamortized discount 332,961
--------------
Total $ 41,467,993
==============
</TABLE>
Interest incurred during the year ended December 31, 1997 was $3,563,135
excluding discount amortization of $107,255. $590,831 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 State
Street Bank and Trust Company 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, 1997 are as follows:
E-57
<PAGE> 13
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE D - RESTRICTED ESCROW (Continued)
<TABLE>
<CAPTION>
Description Amount
------------------------------------ --------
<S> <C> <C>
Project account To be used for alterations $ 1,346,923
Note payment accounts To repay Certificates of Participation 930,273
Liquidity account To be used for debt liquidity 740,178
Replacement reserve account To be used for capital improvements 380,221
Tax account To pay real estate taxes 322,924
Insurance account To pay insurance expense 49,085
Operations account To pay operating expenses 100,000
Partnership account To pay partnership expenses 74,568
Supplemental retention account To be used as additional funds to repay
COPs 169,630
Lease payment account To be used for collection of monthly
rent payments 136
-----------
$ 4,113,938
===========
</TABLE>
All of the restricted escrows are invested in money market funds.
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, 1997, are $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,
1997, $450,000 was outstanding.
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.
E-58
<PAGE> 14
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE E - RENTAL OPERATIONS (Continued)
Future minimum rentals are as follows:
<TABLE>
<S> <C>
December 31, 1998 $12,154,632
1999 12,154,632
2000 12,154,632
2001 12,154,632
2002 12,154,632
Thereafter 10,128,860
-----------
$70,902,020
===========
</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.
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, 1997 the balance
was $273,075. The uninsured balance at December 31, 1997 was $173,075.
E-59
<PAGE> 15
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
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 ended December 31, 1997 were $1,075,388 with $117,302 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 annwu. 'ne agreement is for a
term of one year with automatic renewals through the year 2003. Total
management fees for the year ended December 31, 1997 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 1 0%
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, 1997 are $3,008,215 and have been capitalized to the cost of
improvements.
E-60
<PAGE> 16
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SECURITY LAND AND DEVELOPMENT COMPANY
LIMITED PARTNERSHIP
DECEMBER 31, 1996
E-61
<PAGE> 17
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-62
<PAGE> 18
_________________________________
Reznick Fedder & Silverman
Certified Public Accountants - Business Consultants
A Professional Corporation
4520 East-West Highway - Suite 300 - Bethesda, MD 20814-3319 - (301) 652-9100
- - 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-63
<PAGE> 19
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-64
<PAGE> 20
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-65
<PAGE> 21
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-66
<PAGE> 22
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-67
<PAGE> 23
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-68
<PAGE> 24
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-69
<PAGE> 25
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-70
<PAGE> 26
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-71
<PAGE> 27
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-72
<PAGE> 28
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-73
<PAGE> 29
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-74
<PAGE> 30
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-75
<PAGE> 31
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-76
