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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, 1998 COMMISSION FILE NO. 1-7949
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REGENCY AFFILIATES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 72-0888772
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
729 South Federal Hwy., Suite 307, Stuart, Fl. 34994
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(Address of principal executive offices) (Zip Code)
10842 Old Mill Road, # 5B, Omaha, NE 68154
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(Address of administrative offices) (Zip Code)
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Registrant's Telephone Number (executive office), including Area Code: (561-220-7662)
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Registrant's Telephone Number (administrative office), including Area Code: (402-330-7460)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of Each Exchange
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Title of Each Class on Which Registered
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Common Stock, $0.40 Par Value None
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT.
______________________________ None ______________________________
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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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 non affiliates of the
registrant was approximately $8,842,000 on February 28, 1999, computed on the
basis of $.70 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, 1999, was 12,632,089.
Documents incorporated by reference (See Exhibit Listing).
This report on Form 10-K consists of 36 pages, including two cover pages.
(The remainder of this page is intentionally left blank.)
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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 to the Statesman Group, Inc.
("Statesman"), an international business corporation organized under the laws of
the Bahamas (see Item 12). 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 12,632,089 outstanding shares as
of December 31, 1998, 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.
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,
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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 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
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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.
Rustic Crafts employs approximately 50 persons.
In 1998 and 1997 Rustic Crafts generated revenues of approximately
$3,698,000 and $2,873,000, respectively, which represented 98% and 99% of total
revenues of the Company, excluding income from its equity investment in the
Partnership. Its largest customer, J.C. Penney Co., Inc. represents 53% and 28%
of the consolidated revenues of Regency in 1998 and 1997, respectively.
Approximately 35% of the sales of Rustic Crafts occur in the fourth quarter of
the calendar year. As of December 31, 1998, Rustic Crafts had a backlog of
orders of approximately $1,110,000. Although orders are generally subject to
termination, the Company has historically experienced minimal cancellation of
orders.
Rustic Crafts purchases the raw materials used in its manufacturing
process from several suppliers. The Company believes that there is minimal risk
from any cancellation of suppliers and that there are several suppliers who are
capable of supplying similar quality products at competitive prices.
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 approximately 75 million short tons of
previously quarried and stockpiled rock ("Aggregate") located at the site of the
Groveland Mine in Dickinson County, Michigan. During the year ended December 31,
1998, NRDC made only casual sales of Aggregate (less than $100,000).
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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 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, 1998, Regency and its subsidiaries employed 54
people.
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 which
terminates July 31, 2001, with Rustic Crafts Co., Inc., the seller of the assets
of the business. In March 1998, the Company purchased a 126,000 square foot
building located at 40 Poplar Street in Scranton, Pennsylvania. The Company has
renovated the building and will begin to occupy the space during 1999. Almost
all manufacturing operations will eventually be moved to this location.
Approximately 50,000 square feet in this building are leased to other tenants.
As of December 31, 1998, 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. 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.
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As of December 31, 1998 the Company owned a one-story commercial
building located on a one-eighth acre parcel of land located in Stuart, Florida
which was leased to a single tenant. The Company also owned a condominium in
Jensen Beach, Florida. These properties were sold in March 1999 at approximately
their original purchase price.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1998 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, 1998.
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, 1998, there were approximately 3,200 common shareholders of record.
YEAR ENDED
DECEMBER 31, 1997 HIGH ($) LOW ($)
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First Quarter .72 .44
Second Quarter .69 .50
Third Quarter .94 .56
Fourth Quarter .69 .48
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YEAR ENDED
DECEMBER 31, 1998 HIGH ($) LOW ($)
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First Quarter .63 .44
Second Quarter .78 .59
Third Quarter .85 .50
Fourth Quarter .66 .50
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.
Issuance of securities.
In 1998, the Company issued 187,000 shares of its Common Stock to
William R. Ponsoldt, Sr. as part of his compensation. Also, in 1998, the Company
issued 10,000 shares of its Common Stock to two employees of Rustic Crafts as
part of their compensation.
In March 1997, the Company issued 100,000 shares of its Common Stock at
a value of $60,000 to Rustic Crafts Co., Inc., as part of the sale of that
corporation's 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 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.
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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 options, and net earnings per
share for 1997 have not reflected any such costs.
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 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.
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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 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,
1998, 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.
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RegTransco, Inc. Ownership
RegTransco, Inc. (RTI) has two classes of outstanding common stock,
Class A and Class B. There are 20,000 shares of Class A common stock
outstanding, all of which are owned by Drilling (an 80% owned subsidiary of
Regency Affiliates, Inc.). Five thousand (5,000) shares of Class B common stock
were issued to the Original Investors who financed the Company's Chapter XI
filing in 1986 and 1987 and represented 20% of the voting power of RTI's
outstanding common stock. As part of the 1992 Restructuring, the holders of the
Class B stock returned their 20% interest as a group to RTI. RTI's Class A and
Class B common stock are equal to each other in all respects except dividend
preference. Holders of shares of Class A and Class B common stock are entitled
to one vote per share in the election of directors.
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.
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ITEM 6. SELECTED FINANCIAL DATA.
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<CAPTION>
1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
REVENUES $3,789,839 $2,908,253 $6,102 $2,597 $5,125
INCOME FROM EQUITY INVESTMENT IN
PARTNERSHIP 3,950,090 3,820,913 4,268,904 3,718,056 100,000
NET INCOME (LOSS) 1,794,560 2,187,618 2,802,467 3,298,589 (102,541)
NET INCOME (LOSS) PER SHARE
(BASIC) 0.14 0.17 0.24 0.29 (0.01)
NET INCOME (LOSS) PER SHARE
(DILUTED)(1995 RESTATED) 0.12 0.15 0.20 0.21 (0.01)
TOTAL ASSETS 24,127,416 15,432,529 11,566,678 4,980,148 1,473,832
LONG-TERM DEBT (INCLUDING CURRENT
PORTION) & REDEEMABLE PREFERRED 11,795,480 5,175,400 4,600,994 691,254 557,954
STOCK
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General.
Regency Affiliates, Inc. (the "Company") is the parent company of
several subsidiary business operations. The Company is committed to develop
and/or monetize these business operations for the benefit of its shareholders
and continue to commit both financial and personnel resources to an active
merger and acquisition program in order to enhance common stockholders' values.
The Company's Stockholders' Equity at December 31, 1998 was $11,219,050 as
compared to $9,341,708 at December 31, 1997, an increase of $1,877,342 for the
year ended December 31, 1998.
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Liquidity and Capital Resources.
The investment in Security is estimated to provide the Company with
management fees of approximately $100,000 per annum until 2003. In the year
ending December 31, 1998, the Company's income from its equity investment in the
Partnership was $3,950,090. These funds, however, are presently committed for
the amortization of the outstanding principal balance on Security's real estate
mortgage and, while the Company's equity investment has increased to
$15,799,631, the partnership does not provide liquidity to the Company in excess
of the $100,000 annual management fee. The Company has, however, been successful
in obtaining financing with respect to this investment.
On March 15, 1998, Rustic Crafts purchased a building of 126,000 square
feet located near the current facility in Scranton, Pennsylvania. The cost of
acquiring and equipping this facility of approximately $2 million is being
funded by new borrowings from PNC Bank in the form of a first mortgage in the
amount of $960,000, a construction line of credit of $410,000 and equipment
financing of $400,000. This new facility will significantly increase the
operating capacity and enable Rustic Crafts to more efficiently meet its current
order backlog and increase its customer base. Rustic Crafts has recently
employed a new President who has substantial industry background and plans to
increase its sales and distribution of both manufactured and imported products.
Management anticipates that Rustic Crafts will provide significant cash
distributions for use by the Company.
On the date of acquisition of the new facility, a tenant was renting
23,000 square feet 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. As of August 15, 1998, the Company
rented an additional 28,000 square feet at an annual minimum rent of $71,680 and
plans to occupy the remainder of this facility for operations.
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 Company marketed
approximately 60,000 tons of aggregate rock and had revenue from all sources of
approximately $92,000,000 during the year ended December 31, 1998. Based on this
experiment, the Company is attempting to establish a permanent infrastructure to
commercialize the inventory of previously quarried and stockpiled aggregate at
the Groveland Mine in conjunction with an experienced aggregate supply company.
At this time there is no assurance that such
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commercialization will occur. The Company is also exploring opportunities to
monetize this asset for the benefit of the Company's shareholders and has thus
entered in an Agreement and Plan of Merger with Cotton Valley with respect to
this property (see Subsequent Events).
The Company is continuing to explore opportunities for the acquisition
of companies with operations that will provide additional liquidity and cash
flow (see Subsequent Events with respect to GuildMaster). The Company
anticipates that such acquisitions would be financed by borrowings secured by
the assets acquired and by the proceeds of its recent Loan Agreement, or other
loans. There can be no assurance that any such acquisition or transaction will
come to fruition. On August 17, 1998, the Company engaged Cruttenden Roth, Inc.
a California based Investment Banking firm, to assist the Company with its
acquisition program. The Company has agreed to pay Cruttenden Roth a fee of
$25,000 payable over 12 months and a success fee if the Company acquires a
business within the next two years. The Company is analyzing the acquisition
prospects introduced by Cruttenden Roth.
Results of Operations.
The operations of Regency Affiliates, Inc. and its subsidiaries during
the year ended December 31, 1998, included 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 value.
1998 Compared to 1997
Net sales increased $881,586 in 1998 over 1997 reflecting twelve months
of sales of Rustic Crafts in 1998 compared to ten months in 1997. Sales for the
ten-month period ended December 31, 1998 increased 14% or $396,000 over the
comparable period in 1997. As a result of increased volumes, Rustic Crafts
purchased an additional facility in order to meet the increased demand for its
products. Rustic Crafts also hired a new president to oversee the manufacturing
operations which has slightly increased its administrative costs.
Gross margins increased $188,714 as a result of the increase in sales
described above. However, the percentage of gross margin to sales declined from
33.7% in 1997 to 30.8% in 1998, primarily as a result of higher direct labor
costs at Rustic Crafts.
General and administrative expenses increased $255,221 or 14.3% in 1998
over 1997, largely as a result of increased corporate expenses, particularly
executive salaries and bonuses and a transition of management at Rustic Crafts.
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Income from equity in partnership increased $129,177 over 1997 due to
higher rental income from renovated space partially offset by higher net
interest expense, depreciation and other operating costs.
Other income increased $95,920 in 1998 primarily as a result of rental
income from the building purchased by Rustic Craft in early 1998, and interest
income from short-term investments purchased with the proceeds of long-term
debt.
Interest expense increased $512,754 in 1998 over 1997. This reflects
the higher principal of the KBC loan and the payment of a penalty to pay off the
SIPI loan before maturity. The effective interest rate was reduced from almost
20% on the SIPI loan to less than 9% on the KBC loan.
Net income decreased $393,058 in 1998. Although gross margins increased
$188,714, the increase was offset by increases in general and administrative
expenses and interest expense.
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 $447,991 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.
Interest expense increased $396,759 primarily due to interest on the
SIPI loan for twelve months in 1997 compared to six months in 1996.
Income tax expense decreased $152,723 in 1997. Income taxes in 1996
included provisions for years prior to 1996.
Net income attributable to common shareholders decreased $586,980 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.
Subsequent Events
On March 1, 1999, the Company and Cotton Valley Resources Corporation
("Cotton Valley") entered into an Agreement and Plan of Merger (the "Merger
Agreement") which was subsequently approved by each company's Board of
Directors. The Merger Agreement provides that Cotton
15
<PAGE> 16
Valley will exchange 15 million of its common shares for the Company's interest
in NRDC and 10 million of its common shares for Statesman's interest in NRDC and
Statesman's interest in International Aggregate Company. The Merger Agreement is
contingent upon the vote of the Cotton Valley shareholders which is scheduled
for May 21, 1999, Cotton Valley maintaining its American Stock Exchange listing,
and other matters. While the Company expects that these contingencies will be
satisfied, there can be no assurance that these expectations will be met and the
transaction will be consummated.
In March 1999, the Company reached an agreement in principle to acquire
the assets and assume certain liabilities of GuildMaster, Inc. ("GuildMaster").
The agreement provides that the Company will acquire the assets of GuildMaster
in exchange for $500,000 in cash, $1,800,000 of face value convertible preferred
shares with terms and conditions to be designated by the Board of Directors, the
assumption of certain liabilities and other consideration based on the future
performance of GuildMaster. GuildMaster manufactures innovative and
fashion-forward decorative accessories for the home. Revenues for 1998 are
estimated to be $4,500,000. While the Company believes that this transaction
will be consummated, there can be no assurance that the transaction will be
completed or that, if completed, it will be on the same or similar economic
terms.
Year 2000 Issues.
The Company has determined that there will be no material effect on the
Company's business, results of operations or financial condition as a
consequence of its Year 2000 issues, considering the Company's efforts to avoid
any such consequences.
Statements of Financial Accounting Standards.
The Financial Accounting Standards Board issued "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 has not had a material effect on the Company's
financial position or results of operation.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," 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-
16
<PAGE> 17
based method for stock-based compensation to employees. As a result, this
standard does not have any effect to the Company's financial statements 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.
Forward-Looking Statements.
This Report contains forward-looking statements which are made pursuant
to the safe harbor provisions of the Securities Litigation Reform Act of 1995.
Statements as to what the Company "believes," "intends," "expects," or
"anticipates", and other similarly anticipatory expressions, are generally
forward-looking and are made only as of the date of this Report. Readers of this
Report are cautioned not to place undue reliance on such forward-looking
statements, as they are subject to risks and uncertainties which could cause
actual results to differ materially from those discussed in the forward-looking
statements and from historical results of operations. 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.
(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, 1998, the Company was dependent upon its
investment in Security Land And Development Company Limited
Partnership, the operations of Rustic Crafts International,
Inc. and its interest income 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 and thus the Company must rely on
its cash reserves to fund these 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
and therefore its financial position and results of
operations.
(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.
17
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and supplementary data required by Item 8 of
Part II of Form 10-K for the year ending December 31, 1998, are included as
follows:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996 F-6
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996 F-7
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 F-8
</TABLE>
18
<PAGE> 19
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
1998 CONSOLIDATED FINANCIAL REPORT
F-1
<PAGE> 20
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-29
F-2
<PAGE> 21
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, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. 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 1998, 1997 and 1996 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 65% and 77%
of consolidated total assets as of December 31, 1998 and 1997, respectively, and
100% of the income from equity investment in partnership for the years ended
December 31, 1998, 1997 and 1996. Those financial statements were audited by
other auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to the 1998, 1997 and 1996 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, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
As more fully discussed in Note 1.L. to the financial statements, the
Company has adopted various Statements of Financial Accounting Standards and
other professional standards as required. The disclosure requirements of
Statement of Position 94-6 (SOP 94-6), "Disclosure of Certain Risks and
Uncertainties" 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 31, 1999
F-3
<PAGE> 22
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1998 1997
---- ----
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 2,168,541 $ 252,354
Accounts receivable 752,861 581,585
Inventory 806,006 536,150
Other current assets 130,375 120,891
----------- -----------
Total current assets 3,857,783 1,490,980
PROPERTY, PLANT AND EQUIPMENT, NET 1,980,063 140,182
INVESTMENTS
Investment in partnership 15,799,631 11,951,819
Rental property, net 108,512 113,217
----------- -----------
Total investments 15,908,143 12,065,036
OTHER ASSETS
Aggregate inventory 843,049 848,937
Goodwill, net of amortization 631,788 677,248
Debt issuance costs, net of amortization 869,643 128,253
Other 36,947 81,893
----------- -----------
Total other assets 2,381,427 1,736,331
----------- -----------
$24,127,416 $15,432,529
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 23
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 38,300 $ 925,040
Current portion of serial preferred stock subject to
mandatory redemption 163,600 -
Note payable 464,200 140,000
Accounts payable 282,945 256,465
Accrued expenses 276,165 424,401
----------- -----------
Total current liabilities 1,225,210 1,745,906
LONG-TERM DEBT, net of current portion 11,519,930 4,031,060
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 89,576 94,555
SERIAL PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION (liquidation preference and redemption
value, $256,700 in 1998 and 1997), net of current portion 73,650 219,300
SHAREHOLDERS' EQUITY
Serial preferred stock not subject to mandatory redemption
(maximum liquidation preference, $24,957,326 and
$24,939,340 in 1998 and 1997, respectively) 1,052,988 1,052,988
Common stock, par value $.40, authorized 25,000,000 shares
issued and outstanding 12,632,089 and 12,435,089 shares
in 1998 and 1997, respectively (net of 12,460 and
22,460 treasury shares, respectively) 5,047,129 4,963,729
Additional paid-in capital 270,510 221,600
Readjustment resulting from quasi-reorganization at
December 31, 1987 (1,670,596) (1,670,596)
Retained earnings 6,519,019 4,773,987
----------- -----------
Total shareholders' equity 11,219,050 9,341,708
----------- -----------
$24,127,416 $15,432,529
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 24
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES $ 3,789,839 $ 2,908,253 $ 6,102
COSTS AND EXPENSES
Cost of goods sold 2,621,363 1,928,491 -
General and administrative expenses 2,042,871 1,787,650 920,789
----------- ----------- -----------
4,664,234 3,716,141 920,789
----------- ----------- -----------
LOSS FROM OPERATIONS (874,395) (807,888) (914,687)
INCOME FROM EQUITY INVESTMENT IN PARTNERSHIP 3,950,090 3,820,913 4,268,904
OTHER INCOME, NET 141,220 45,300 74,137
INTEREST EXPENSE (1,314,351) (801,597) (404,838)
----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE AND
MINORITY INTEREST 1,902,564 2,256,728 3,023,516
INCOME TAX EXPENSE (98,583) (73,665) (226,388)
MINORITY INTEREST (9,421) 4,555 5,339
----------- ----------- -----------
NET INCOME $ 1,794,560 $ 2,187,618 $ 2,802,467
=========== =========== ===========
NET INCOME ATTRIBUTABLE TO COMMON
SHAREHOLDERS
[after paid or accrued preferred stock dividends of $49,564,
$65,475 and $81,144 in 1998, 1997 and 1996, respectively,
and preferred stock accretion of $17,950, $20,600 and
$32,800 in 1998, 1997 and 1996, respectively] $ 1,727,046 $ 2,101,543 $ 2,688,523
=========== =========== ===========
NET INCOME PER COMMON SHARE:
BASIC $ 0.14 $ 0.17 $ 0.24
=========== =========== ===========
DILUTED $ 0.12 $ 0.15 $ 0.20
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 25
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock* Common Stock**
----------------- -------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1996 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
Issuance of common stock - - 197,000 83,400
Accretion of Series E preferred stock - - - -
Payment of dividend on Series E
preferred stock - - - -
Net income - - - -
------- ---------- ---------- ----------
BALANCE - DECEMBER 31, 1998 605,291 $1,052,988 12,632,089 $5,047,129
======= ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Readjustment
Additional Resulting Retained Total
Paid-in from Quasi- Earnings Shareholders'
Capital Reorganization (Deficit) Equity
------- -------------- --------- ------
<S> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1996 $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
Issuance of common stock 48,910 - - 132,310
Accretion of Series E preferred stock - - (17,950) (17,950)
Payment of dividend on Series E
preferred stock - - (31,578) (31,578)
Net income - - 1,794,560 1,794,560
-------- ----------- ---------- -----------
BALANCE - DECEMBER 31, 1998 $270,510 $(1,670,596) $6,519,019 $11,219,050
======== =========== ========== ===========
</TABLE>
* Preferred stock does not include Series E preferred stock which is subject to
mandatory redemption
** Common stock is net of 12,460 treasury shares at December 31, 1998 and 22,460
treasury shares at December 31, 1997 and 1996
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 26
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,794,560 $2,187,618 $2,802,467
Adjustments to reconcile net income to net cash
used by operating activities:
Minority interest 9,421 (4,555) (5,339)
Income from equity investment in partnership (3,950,090) (3,820,913) (4,268,904)
Distribution of equity earnings from partnership 102,278 102,825 103,229
Interest amortization on long-term debt 612,855 756,160 376,940
Depreciation and amortization 124,959 91,573 7,401
Issuance of common stock in lieu of cash compensation 132,310 233,333 93,334
Changes in operating assets and liabilities:
Accounts receivable (171,276) (327,259) -
Inventory (269,856) (49,137) -
Other current assets (9,484) (96,156) (1,724)
Other assets 46,644 (135,813) 13,113
Accounts payable 26,480 26,335 (16,074)
Accrued expenses (148,236) 102,671 (21,640)
---------- --------- ----------
Net cash used by operating activities (1,699,435) (933,318) (917,197)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of cash of $13,535 - (1,086,465) -
Expenditures for property and equipment (1,910,484) (122,029) (50,884)
---------- --------- ----------
Net cash used by investing activities (1,910,484) (1,208,494) (50,884)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 10,805,307 - 3,500,000
Payment of long-term debt (4,607,750) - -
Debt issuance costs (949,673) - (124,795)
Net short-term proceeds (payments) 324,200 140,000 (80,000)
Dividends paid (31,578) (47,489) (63,158)
Dividends paid to minority interest (14,400) (2,000) -
---------- --------- ----------
Net cash provided by financing activities 5,526,106 90,511 3,232,047
---------- --------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,916,187 (2,051,301) 2,263,966
CASH AND CASH EQUIVALENTS - BEGINNING 252,354 2,303,655 39,689
---------- --------- ----------
CASH AND CASH EQUIVALENTS - ENDING $2,168,541 $ 252,354 $2,303,655
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 27
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (includes prepayment penalty of $216,702 in 1998) $ 746,413 $ 27,187 $ 23,890
Income taxes 82,350 60,750 257,838
Supplemental disclosures of noncash investing and financing activities:
In 1998, the Company issued 187,000 shares of common
stock as compensation to Mr. William R. Ponsoldt, Sr., the
Company's President.
In 1998, the Company issued 10,000 shares of common
stock held in treasury to two of its employees as
additional compensation.
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:
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>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 28
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 net sales in
1998 and 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 53% and 28% of
consolidated sales for 1998 and 1997, respectively. 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, 1998 and 1997
consists principally of cash and cash equivalents of
approximately $2,105,000 and $248,000, respectively,
investment in partnership of approximately $15,800,000 and
$11,952,000, respectively, property, plant and equipment
(including rental property) of approximately $128,000 and
$133,000, respectively, and liabilities of approximately
$9,965,000 and $5,070,000, 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> 29
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1998, 1997 and 1996 was
approximately 12,546,000, 12,038,000 and 11,400,000,
respectively. The weighted average number of shares used in
the computation of diluted earnings per share for 1998, 1997
and 1996 was approximately 14,892,000, 14,231,000 and
14,252,000, respectively. The Company's stock is thinly
traded in the over-the-counter market on the bulletin board
section. In 1998, 1997 and 1996, market prices of $.547 per
share, $.616 per share and $.525 per share, respectively,
were utilized in the conversion formulas for the computation
of diluted earnings per share. In 1998, 1997 and 1996, if
market prices of $.437 per share, $.437 per share and $.25
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 15,169,000, 14,631,000 and
16,164,000, respectively, yielding diluted earnings per
share of $.12, $.15, 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, 1998
and 1997:
1998 1997
---- ----
Finished products $ 379,672 $ 294,564
Work-in-process 120,416 56,049
Raw materials and supplies 305,918 185,537
--------- ---------
$ 806,006 $ 536,150
========= =========
F-11
<PAGE> 30
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 - 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, 1998 and 1997:
<TABLE>
<CAPTION>
Property, Plant
and Equipment Rental Property
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Real property $1,836,526 $ - $ 118,877 $ 118,877
Leasehold improvements 73,200 73,200 - -
Machinery and equipment 173,347 99,389 - -
---------- --------- --------- ---------
2,083,073 172,589 118,877 118,877
Accumulated depreciation 103,010 32,407 10,365 5,660
---------- --------- --------- ---------
$1,980,063 $ 140,182 $ 108,512 $ 113,217
========== ========= ========= =========
</TABLE>
Depreciation expense for the years ended December 31, 1998,
1997 and 1996 was $81,056, $36,194 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 years ended December 31, 1998, 1997 and 1996, the
Company made only casual sales of aggregate. Aggregate is
primarily sold for railroad ballast, road construction,
construction along shore lines and decorative uses. The
market for aggregate stone is highly competitive and, as
shipping costs are high, the majority of sales, if any, can
be anticipated to be made locally. Other companies that
produce rock and aggregate products are located in the same
region as the Groveland Mine. Many of these competitors will
have greater financial and personnel resources than the
Company. Therefore, the Company is actively 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. 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 $83,344 and $37,884 at December 31, 1998
and 1997, respectively.
I. Debt Issuance Costs - Debt issuance costs are recorded at
cost and are being amortized over 66 months, the life of the
related loan using the effective interest method.
Accumulated amortization was $80,029 and $25,042 at December
31, 1998 and 1997, respectively.
F-12
<PAGE> 31
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. 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.
K. 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.
L. 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 property, plant and
equipment (as described in Note 1.F.), 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> 32
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
L. New Authoritative Pronouncements (Continued)
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 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. 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 and is effective for
periods beginning after December 15, 1997. Segment
information is included in Note 14.
In February 1998, Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures About Pensions
and Other Postretirement Benefits" (SFAS 132), was issued.
SFAS 132 standardizes the disclosure requirements for
pension and other postretirement benefit plans but does not
change the measurement or recognition of those plans. SFAS
132 is effective for fiscal years beginning after December
15, 1997. The adoption did not have a material effect on the
Company's financial statements or notes thereto.
In June 1998, Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), was issued. SFAS 133 establishes
accounting and reporting standards for derivative
instruments and hedging activities. SFAS 133 is effective
for fiscal years beginning after June 15, 1999. Management
believes this pronouncement will have no effect on the
financial statements.
M. Year 2000 - The Company is aware of the implications and
issues associated with certain computer-based systems which
are dependent upon date routines that may cause errors in
computer processing in connection with the year 2000. The
Company is evaluating and responding to the potential impact
of the year 2000 issue on its computer and other operating
systems. The Company is in contact with certain key third
parties, including financial institutions, customers and
suppliers with which the Company does business
electronically to address the compatibility of systems. To
the extent that these key third parties are impacted by
their failure to address the year 2000 problem, such
disruption could have a direct and material impact on the
Company. The Company does not anticipate that the total cost
of being in compliance with year 2000 needs will have a
material effect on the Company's financial position or
results of operations.
N. Reclassifications - Certain reclassifications were made to
prior period financial statement presentations to conform
with current period presentations.
F-14
<PAGE> 33
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. ACQUISITION OF RUSTIC CRAFTS INTERNATIONAL, INC.
In March 1997, the Company, through its newly formed subsidiary,
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.
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 24
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 were completed in 1998.
Security has received an opinion of the Assistant General Counsel
to the GSA that lease payments are not subject to annual
appropriation by the United States Congress and the obligations
to make such payments are unconditional general obligations of
the United States Government.
F-15
<PAGE> 34
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. INVESTMENT IN PARTNERSHIP (CONTINUED)
The Company accounts for the investment in partnership on the
equity method, whereby the carrying value of the investment is
increased or decreased by the Company's allocable share of income
or loss. The investment in partnership included in the
Consolidated Balance Sheets at December 31, 1998 and 1997 was
$15,799,631 and $11,951,819, respectively. The income from the
Company's equity investment in the Partnership for the years
ended December 31, 1998, 1997 and 1996 was $3,950,090, $3,820,913
and $4,268,904, respectively. The undistributed earnings from the
Company's equity investment in the Partnership as of December 31,
1998 and 1997 amounted to $15,449,631 and $11,601,819,
respectively.
Summarized financial information for Security is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
BALANCE SHEET DATA
------------------
<S> <C> <C>
Cash and receivables $ 1,234,122 $ 1,304,814
Restricted cash 3,658,402 4,113,938
Real estate 50,507,072 52,999,775
Other assets 1,181,135 1,537,967
----------- -----------
Total assets $56,580,731 $59,956,494
=========== ===========
Accounts payable and accrued expenses $ 611,411 $ 1,625,287
Project note payable 35,871,949 41,467,993
Other liabilities 4,444,625 5,261,112
----------- -----------
Total liabilities 40,927,985 48,354,392
Partners' capital:
Regency Affiliates, Inc. 15,799,631 11,951,819
Other partners (146,885) (349,717)
----------- -----------
Total partners' capital 15,652,746 11,602,102
----------- -----------
Total liabilities and partners' capital $56,580,731 $59,956,494
=========== ===========
</TABLE>
STATEMENT OF OPERATIONS DATA
----------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $13,207,758 $11,865,721 $11,760,267
Expenses 6,074,879 5,673,776 5,080,768
----------- ----------- -----------
Net operating income 7,132,879 6,191,945 6,679,499
Other expenses (2,974,574) (2,169,931) (2,185,911)
----------- ----------- -----------
Net income $ 4,158,305 $ 4,022,014 $ 4,493,588
=========== =========== ===========
</TABLE>
See Note 12. Contingencies, Risks and Uncertainties related to the Company's
investment in Security.
F-16
<PAGE> 35
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999 and bears interest at the Bank's prime
rate minus one-half percent (7.25% at December 31, 1998).
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, 1998. The line of credit is guaranteed by the Company.
At December 31, 1998 and 1997, the amounts outstanding under the
line of credit were $464,200 and $140,000, respectively.
NOTE 5. LONG-TERM DEBT
KBC Bank Loan - On June 24, 1998, the Company refinanced the
long-term debt previously outstanding with Southern Indiana
Properties, Inc. ("SIPI") and entered into a Loan Agreement (the
"Loan") with KBC Bank N.V. ("KBC"). Under the terms of the Loan
Agreement, KBC advanced $9,383,320. The due date of the Loan is
November 30, 2003 with interest at the rate of 7.5% compounded
semi-annually on each June 1 and December 1, commencing December
1, 1998. The interest may be paid by the Company in cash on these
semi-annual dates or the Company may elect to add the interest to
the principal of the Loan then outstanding. As of December 31,
1998, the amount outstanding under the Loan is $9,756,698,
including $373,378 of interest, through December 31, 1998.
The Loan is secured by all of the Company's interest in Security,
including the Company's interest in all profits and
distributions, other than the payment of management fees of
$100,000 annually, and all of the Company's rights, powers, and
remedies under the Security Land and Development Company Limited
Partnership Agreement as amended and restated. The security
agreement requires the Company to maintain a certain ratio of
debt to equity. At any time, the Company may prepay the entire
principal balance of the Loan, plus accrued and unpaid interest,
plus a make-whole premium as defined in the Loan Agreement, if
any.
To facilitate the loan from KBC, the Company purchased a residual
value insurance policy through R.V.I. American Insurance Company
("RVI") which secures the repayment of the outstanding principal
and interest when due with a maximum liability of $14 million.
Should RVI pay a claim under this policy they will be entitled to
certain of the Company's rights with respect to the property of
Security, including but not limited to the right to solicit bona
fide, third party offers for the property and to accept such
offers and bind the Partnership in order to recoup the amount
paid. The costs related to this insurance in the amount of
$745,000 along with legal fees and other costs associated with
obtaining the Loan in the amount of $205,000 for a total of
$950,000 have been capitalized and are shown as Debt Issuance
Costs. These Debt Issuance Costs will be amortized over the life
of the Loan using the effective interest method.
F-17
<PAGE> 36
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. LONG-TERM DEBT (CONTINUED)
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. Both Loan A
and Loan B had stated interest at the rate of 14% per annum ("the
Regular Interest Rate"). The Company elected, as permitted by the
Agreement, to add the Regular Interest to the principal of the
loan then outstanding.
In addition to the Regular Interest Rate, the Agreement provided
for additional consideration ("the Contingent Interest") as
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 were due on Loan B if
such loan was repaid prior to December 21, 1998. The Company had
recorded the Contingent Interest on Loan A. However, the Company
had intended to and did prepay Loan B prior to December 21, 1998
and, therefore, had not recorded Contingent Interest on such
loan. As a result of the intention to prepay Loan B in 1998, the
balance of Loan B at December 31, 1997 of $925,040 was presented
as a current liability. The total of the amounts outstanding
under the Agreement at December 31, 1997 was $4,572,600.
On June 24, 1998, the Agreement was refinanced by proceeds
advanced from KBC Bank N.V. under terms and conditions described
above. Principal, Regular Interest, Contingent Interest and
Prepayment Penalty in the amount of $5,213,810 was paid to
Southern Indiana Properties, Inc. The prepayment of the Credit
Agreement resulted in additional charges of $335,684 in the year
ended December 31, 1998, resulting from the write-off of
unamortized debt issuance costs and payment of prepayment
penalties. Such amount is included as interest expense in the
Consolidated Statement of Operations.
Mortgage Loans - On March 25, 1998, Rustic Crafts purchased a
building of 126,000 square feet located near the current facility
in Scranton, Pennsylvania. The purchase and the cost of equipping
this facility were funded in part by a first mortgage term loan
in the amount of $960,000 and a convertible line of credit in the
amount of $410,000 from PNC Bank. At December 31, 1998, the
amounts outstanding on these loans were $1,369,901.
The first mortgage term loan is payable in consecutive monthly
installments over 10 years with a 20 year amortization. The
convertible line of credit is available for 80% of the cost of
construction improvements on the building for a 2 year period,
ending in March 2000, at which time the convertible line of
credit becomes payable in consecutive monthly installments over
10 years with a 20 year amortization. The interest rate on the
first mortgage term loan and the convertible line of credit are
at the PNC Bank prime rate minus one-half percent (7.25% at
December 31, 1998).
Rustic Crafts' real and personal property, equipment, accounts
receivable, inventory and other general intangibles are pledged
as security for the loans. The loans are also guaranteed by
Regency Affiliates, Inc., the parent company. The security
agreement requires Rustic Crafts to maintain certain financial
ratios. Rustic Crafts was in compliance with such ratios at
December 31, 1998.
Vehicle Note - Rustic Crafts has outstanding a vehicle note in
the amount of $16,931 at December 31, 1998.
F-18
<PAGE> 37
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 $414,700 and $383,500 at December 31, 1998 and 1997,
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 1998, 1997 and 1996 was $31,200, $31,200
and $29,300, 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, 1998, 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.
Required annual principal payments (based on the current carrying
value of debt securities) on long-term debt at December 31, 1998
are:
1999 $ 38,300
2000 37,200
2001 40,300
2002 456,800
2003 9,798,300
Thereafter 1,187,330
-----------
$11,558,230
===========
Subsequent to year end, Rustic Crafts obtained additional
financing from PNC Bank to fund equipment purchases. Maximum
borrowings under this facility is $400,000.
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, 1998 and 1997, the Company had 5,000,000
authorized shares of $.10 par value serial preferred stock.
Serial preferred stock at December 31, 1998 and 1997, all of
which is convertible (other than Series C) and cumulative,
consists of:
F-19
<PAGE> 38
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. SERIAL PREFERRED STOCK (CONTINUED)
Mandatory Redeemable Shares - Series E, $100 stated value, 12.5%
----------------------------------------------------------------
cumulative
----------
<TABLE>
<CAPTION>
Shares Value
------------------------- -------------------------
Designated Outstanding Carrying Liquidation
---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 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
Accretion - - 17,950 -
------- ------ -------- --------
Balance, December 31, 1998 566,400 2,567 $237,250 $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
---------------------------- -----------------------------------------------------
1998 1997
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 25,694 256,940 364,856 (b) 346,870 (b)
------- ------- ----------- ------------ ------------
606,747 605,291 $ 1,052,988 $ 24,957,326 $ 24,939,340
======= ======= =========== ============ ============
</TABLE>
(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 $107,916 and $89,930 at
December 31, 1998 and 1997, respectively.
F-20
<PAGE> 39
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 (mandatory redemptions from
November 1999 through April 2000). 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 1998, 1997 and 1996
was $17,950, $20,600 and $32,800, respectively. Dividends of
$31,578, $47,489 and $63,158 on the Series E stock were paid or
accrued in 1998, 1997 and 1996, 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.
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> 40
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 paid 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 paid 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, 1998, 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
F-22
<PAGE> 41
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCK OPTIONS/STOCK OPTION PLANS (CONTINUED)
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 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. These options expired in 1998 without being exercised.
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.
During 1998, 1997 and 1996, no options to purchase stock under
this plan were issued or 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> 42
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES (CONTINUED)
At December 31, 1998 and 1997, the Company's net deferred tax
asset, utilizing a 34% effective tax rate, consists of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Investment partnership earnings $ 2,384,000 $ 1,921,000
Net operating loss carryforwards 11,068,000 12,197,000
Alternative minimum tax credits 394,000 321,000
----------- -----------
Total deferred tax assets before valuation allowance 13,846,000 14,439,000
Valuation allowance (13,846,000) (14,439,000)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
</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
$32,500,000. These losses can be carried forward to offset future
taxable income and, if not utilized, will expire in varying
amounts beginning in the year 2001. 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, 1998, 1997 and 1996, the tax
effect of net operating loss carryforwards reduced the current
provision for regular federal income taxes by approximately
$583,000, $708,000 and $1,030,000, respectively. At December 31,
1998, 1997 and 1996, the Company has provided $98,583, $73,665
and $226,388, respectively, for taxes, which relate to
alternative minimum tax liabilities (See Note 12) and state
income taxes.
F-24
<PAGE> 43
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, 1998 and 1997, approximately $43,000 and $104,000,
respectively, of advance salary is included in other current
assets in the consolidated balance sheets. 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, 1998 and 1997,
approximately $136,600 and $292,000, respectively, of additional
compensation is included in accrued expenses in the consolidated
balance sheets. 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.
F-25
<PAGE> 44
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. RELATED PARTY TRANSACTIONS
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 in each of the years ended
December 31, 1998, 1997 and 1996, under an agreement to provide
certain administrative services to the Company.
In 1996, Pamlyn Kelly, Ph.D., former 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.
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, 1998, 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).
F-26
<PAGE> 45
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Future minimum lease payments under operating leases that have
initial or remaining noncancelable lease terms in excess of one
year are as follows:
1999 $ 92,600
2000 48,900
2001 37,400
2002 21,800
---------
$ 200,700
=========
NOTE 14. SEGMENT INFORMATION
The Company's operating structure includes operating segments for
Home Furnishing Accessories (the operations of Rustic Crafts,
which commenced upon its acquisition in March 1997 (Note 2)),
Investment in Partnership (the investment in Security Land and
Development Limited Partnership (Note 3)), and Corporate and
Other. The Company operates and its revenue is generated
primarily in the United States. One Home Furnishing Accessories
customer accounted for approximately 53% and 28% of consolidated
sales for 1998 and 1997, respectively.
Information about the Company's operations by segment follows:
<TABLE>
<CAPTION>
Home Investment
Furnishing in Corporate
Accessories Partnership and Other Consolidated
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1998
----
Net sales $ 3,697,648 $ 92,191 $ 3,789,839
Income (loss) from operations 186,993 (1,061,388) (874,395)
Interest income 250 76,001 76,251
Interest expense 67,785 1,246,566 1,314,351
Income from equity investment in partnership $ 3,950,090 3,950,090
Identifiable operating assets 4,242,019 3,977,254 8,219,273
Investments 15,799,631 108,512 15,908,143
Capital expenditures 1,904,321 6,163 1,910,484
Depreciation and amortization 108,997 15,962 124,959
Income before income tax expense and
minority interest 144,985 3,950,090 (2,192,511) 1,902,564
</TABLE>
F-27
<PAGE> 46
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Home Investment
Furnishing in Corporate
Accessories Partnership and Other Consolidated
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1997
----
Net sales $ 2,872,865 $ 35,388 $ 2,908,253
Income (loss) from operations 119,738 (927,626) (807,888)
Interest income 53,324 53,324
Interest expense 27,670 773,927 801,597
Income from equity investment in partnership $ 3,820,913 3,820,913
Identifiable operating assets 1,955,219 1,412,274 3,367,493
Investments 11,951,819 113,217 12,065,036
Capital expenditures (excluding
acquisition of Rustic Crafts) 29,942 92,087 122,029
Depreciation and amortization 64,556 27,017 91,573
Income before income tax expense and
minority interest 84,040 3,820,913 (1,648,225) 2,256,728
1996
----
Net sales 6,102 6,102
Income (loss) from operations (914,687) (914,687)
Interest income 74,137 74,137
Interest expense 404,838 404,838
Income from equity investment in partnership 4,268,904 4,268,904
Identifiable operating assets 3,282,063 3,282,063
Investments 8,233,731 50,884 8,284,615
Capital expenditures 50,884 50,884
Depreciation and amortization 7,401 7,401
Income before income tax expense and
minority interest 4,268,904 (1,245,388) 3,023,516
</TABLE>
NOTE 15. SUBSEQUENT EVENTS
In March 1999, the Company and Cotton Valley Resources
Corporation ("Cotton Valley") entered into an Agreement and Plan
of Merger (the "Merger Agreement") which was subsequently
approved by each company's Board of Directors. The Merger
Agreement provides that Cotton Valley will exchange 15 million of
its common shares for the Company's interest in NRDC and 10
million of its common shares for Stateman's interest in NRDC and
Stateman's interest in International Aggregate Company. The
Merger Agreement is contingent upon the vote of the Cotton Valley
shareholders which is scheduled for May 21, 1999, Cotton Valley
maintaining its American Stock Exchange listing and other
matters. While the Company expects that these contingencies will
be satisfied, there can be no assurance that these expectations
will be met and the transaction will be consummated.
F-28
<PAGE> 47
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. SUBSEQUENT EVENTS (CONTINUED)
In March 1999, the Company reached an agreement in principle to
acquire the assets and assume certain liabilities of GuildMaster,
Inc. ("GuildMaster"). The agreement provides that the Company
will acquire the assets of GuildMaster in exchange for $500,000
in cash, $1,800,000 of face value convertible preferred shares
with terms and conditions to be designated by the Board of
Directors, the assumption of certain liabilities and other
consideration based on the future performance of GuildMaster.
GuildMaster manufacturers innovative and fashion-forward
decorative accessories for the home. Revenues for 1998 are
estimated to be $4,500,000. While the Company believes that this
transaction will be consummated there can be no assurance that
the transaction will be completed or that, if completed, will be
on the same or similar economic terms.
F-29
<PAGE> 48
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. 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. (57) Director since June, 1996. Chairman of the Board of Directors
729 South Federal Hwy., Suite 307, since August, 1996. President and CEO since June, 1997. During
Stuart, Florida 34994 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 (48) Director since July 1993. Ms. Carey is a principal and the
West Bay Street Investment Manager for Managed Companies with Bradley Management
P.O. Box CB 10985 (Bahamas) Limited. She is also a director of Regal Bahamas
Nassau, Bahamas International Airways Limited.
Martin J. Craffey (61) Director since July 1993. From January 1988 until December 31,
58 Mainsail Drive 1993, Mr. Craffey was a real estate and business broker and
Patchogue, New York 11772 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 (57) Director from 1987 to 1990, from 1992 to February 15, 1994
and 1869 South 120th Street since November 16, 1994. Interim Secretary and Treasurer from
Omaha, Nebraska 68144 July 1993 until his resignation effective February 15, 1994.
Mr. Horbach has been
</TABLE>
19
<PAGE> 49
<TABLE>
<CAPTION>
<S> <C>
Chairman of the Board, and has had other executive positions
with 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. (55) Director since July 1993. Dr. Kelly is principal and Chief
10 Winged Foot Drive Executive Officer of Human Resource Concepts, Novato, CA, a
Novato, California 94949 registered minority owned management consulting firm, and she
has a private practice.
William R. Ponsoldt, Jr. (33) Director since July 1993. Mr. Ponsoldt is an attorney engaged in
770 S.W. Lighthouse Dr., the private practice of law in Florida with the law firm of
Palm City, Florida 34990 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 (55) Director since October, 1997. Mr. Lowe has been employed as a
1345 Avenue of the Americas retail stock broker during the past five years. For the past
21st Floor four years he has been employed by Smith Barney and prior to
New York, New York 10105 that he was employed by its predecessor, Lehman Brothers.
Douglas F. Long (54) Chief Financial Officer of the Company since March, 1998 and
13377 S. Indian River Drive previously an employee. During the past five years Mr. Long was
Jensen Beach, FL 34957 involved in business and real estate development matters.
Eunice M. Antosh (49) Secretary of the Company since February 25, 1994. Since
802 County Road "N" October, 1993, Mrs. Antosh has also been employed by Gateway
Yutan, Nebraska 68073 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. Dr. Kelly and Ms. Carey each received 100,000 shares of the
Company's Common Stock from Statesman while Messrs. Ponsoldt, Jr., 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 27 of this report.
20
<PAGE> 50
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. 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 $3,000, including
but not limited to accounting and stock transfer record keeping. L.J. Horbach &
Associates, Inc. is wholly owned by Larry J. Horbach.
Item 405 Disclosure.
None.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table.
The following table sets forth the annual and long-term compensation
during the last three years of William R. Ponsoldt, Sr., Douglas F. Long and
Eunice M. Antosh, the only officers who received compensation during 1998.
21
<PAGE> 51
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
--------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
- ------------------------------------------------------------------------------------------------------------------------
Other Restricted Securities
Name and Annual Com- Stock Underlying All
Principal Salary Bonus pensa- Award(s) Options/ LTIP Other
Position Year ($) ($) tion ($) ($) SARs (#) Payouts Compen-
($) sation
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William R. 1998 252,333(1) 373,022(2) 7,200 -0-(3) -0- -0- -0-
Ponsoldt,Sr. 1997 250,000(1) 292,500(2) 5,700 -0-(3) -0- -0- -0-
Chairman 1996 -0- -0- -0- -0- -0- -0- -0-
Pres/CEO
- ------------------------------------------------------------------------------------------------------------------------
Douglas F. 1998 52,800 -0- 2,400 -0- -0- -0- -0-
Long, CFO 1997 25,600 -0- -0- -0- -0- -0- -0-
1996 -0- -0- -0- -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------------------
Eunice M. 1998 12,000 -0- -0- -0- -0- -0- -0-
Antosh, 1997 12,000 -0- -0- -0- -0- -0- -0-
Secretary 1996 12,000 -0- -0- -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
---------------------
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 ("CPI") 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.
22
<PAGE> 52
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, 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.
23
<PAGE> 53
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. Martin J. Craffey was paid
$4,750 for consulting primarily with respect to the operations of Rustic Crafts
International, Inc.
Employment Contracts, Termination of Employment and Change in Control
Arrangements.
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
24
<PAGE> 54
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.
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.
25
<PAGE> 55
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, 1999
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, Statesman Group, Inc. 3,126,377 (1) 24.7%
Inc. $0.40 p.v. King & George Streets
Common Stock Nassau, Bahamas
Regency Affiliates, Edward E. Gatz 1,135,750 9.0%
Inc. $0.40 p.v. 10029 Frederick St.
Common Stock Omaha, NE 68124
</TABLE>
- --------------
(1) The nature of beneficial ownership is sole investment power and
sole voting power as to all shares listed.
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 Statesman Irrevocable Trust dated April 15, 1991 is the controlling
person of Statesman. The Statesman Trust is an irrevocable trust for the benefit
of William R. Ponsoldt, Jr., a director of the Company, Tracey A. Ponsoldt, now
married and sometimes known as Tracey A. Powers, and Christopher J. Ponsoldt,
all children of William R. Ponsoldt, Sr. The acting trustees of The Statesman
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, 1998 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.
26
<PAGE> 56
<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE OF
------- --------------------
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- -------------- ---------------- -------------------- ----------------
<S> <C> <C> <C>
Regency Affiliates, Inc. Larry J. Horbach 363,397(1) 2.9%
$0.40 p.v. Common
Stock
Regency Affiliates Inc. Pamlyn Kelly 100,000 .8%
$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 525,742 4.2%
$0.40 p.v. Common directors as a group (8
Stock individuals)
</TABLE>
- ------------------
(1) 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.
Cumulative Senior Preferred $100 Series-C Stock
As of December 31, 1998 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).
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.
27
<PAGE> 57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with management and others.
Reference is made to Part III, Item 10, page 21 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.
a) Documents filed as part of the report.
1) See Item 8.
2) 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.
3) See Index to Exhibits.
b) Reports on Form 8-K - None.
28
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
REGENCY AFFILIATES, INC.
----------------------------------------
(Registrant)
April 13, 1999 By: /s/William R. Ponsoldt Sr., President
- ---------------- --------------------------------------
Date William R. Ponsoldt, President
By: /s/ Douglas F. Long
--------------------------------------
Douglas F. Long, CFO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
DATE SIGNATURE AND TITLE
- ---- -------------------
April 13, 1999 By: /s/ William R. Ponsoldt
- --------------- ------------------------------------
Date William R. Ponsoldt, President
and Director
April 13, 1999 /s/ Stephanie Carey
- --------------- ------------------------------------
Date Stephanie Carey,
Director
April 13, 1999 /s/ Martin J. Craffey
- --------------- ---------------------
Date Martin J. Craffey,
Director
29
<PAGE> 59
April 13, 1999 /s/ Larry J. Horbach
- --------------- ------------------------------------
Date Larry J. Horbach,
Director
April 13, 1999 /s/ Pamlyn Kelly, Ph.D.
- --------------- ------------------------------------
Date Pamlyn Kelly, Ph.D.,
Director
April 13, 1999 /s/ William R. Ponsoldt, Jr.
- ---------------- -----------------------------
Date William R. Ponsoldt, Jr.,
Director
April 13, 1999 /s/ Fredric R. Lowe
- --------------- ------------------------------------
Date Fredric R. Lowe,
Director
30
<PAGE> 60
INDEX TO EXHIBITS
Exhibit No. Description of Document
- ----------- -----------------------
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
31
<PAGE> 61
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
32
<PAGE> 62
4(h) Restated Certificate of Designation of Preferences and
Rights of Cumulative Senior Preferred $100, Series-C
Stock, filed as Exhibit 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
33
<PAGE> 63
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.
10(i) 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., filed as Exhibit 10.1 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997 at page E-1, and incorporated
herein by reference.
10(j) Amended and Restated Agreement Between Regency
Affiliates, Inc. and the Statesman Group dated March
24, 1998 filed as Exhibit 10.2 to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1997, at page E-36, and incorporated herein by
reference.
10(k) Loan Agreement and Pledge and Security Agreement with
KBC Bank N.V. dated June 24, 1998, filed as Exhibits
10.1 and 10.2 to the registrant's report on Form 10-Q
for the quarter ended June 30, 1998, and incorporated
herein by reference.
34
<PAGE> 64
10(l) 7th Amendment to Partnership Agreement of Security
Land and Development Company Limited Partnership dated
June 24, 1998, filed as Exhibit 10.3 to the
Registrant's report on Form 10-Q for the quarter ended
June 30, 1998, 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
35
<PAGE> 65
EXHIBITS FILED HEREWITH:
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
21, page E-37 Schedule of Registrant's Subsidiaries
27, page E-38 Financial Data Schedule
99, page E-39 Audited financial statement for
Security Land And Development Company
Limited Partnership, for three years ended
December 31, 1998, December 31, 1997 and
December 31, 1996.
36
<PAGE> 1
EXHIBIT 21
REGENCY AFFILIATES, INC.
SCHEDULE OF SUBSIDIARIES
<TABLE>
<CAPTION>
Name of Subsidiary Percent Owned State of Incorporation Other Names Used
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
National Resource Development 80% Nevada None
Corp.
TransContinental 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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,168,541
<SECURITIES> 0
<RECEIVABLES> 752,861
<ALLOWANCES> 0
<INVENTORY> 806,006
<CURRENT-ASSETS> 3,857,783
<PP&E> 2,083,073
<DEPRECIATION> 103,010
<TOTAL-ASSETS> 24,127,416
<CURRENT-LIABILITIES> 1,225,210
<BONDS> 11,519,930
237,250
1,052,988
<COMMON> 5,047,129
<OTHER-SE> 5,118,933
<TOTAL-LIABILITY-AND-EQUITY> 24,127,416
<SALES> 3,789,839
<TOTAL-REVENUES> 3,789,839
<CGS> 2,621,363
<TOTAL-COSTS> 2,621,363
<OTHER-EXPENSES> 2,042,871
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,314,351
<INCOME-PRETAX> 1,893,143
<INCOME-TAX> 98,583
<INCOME-CONTINUING> 1,794,560
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,794,560
<EPS-PRIMARY> .14
<EPS-DILUTED> .12
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SECURITY LAND AND DEVELOPMENT COMPANY
LIMITED PARTNERSHIP
DECEMBER 31, 1998
<PAGE> 2
Security Land and Development Company Limited Partnership
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS
BALANCE SHEET 4
STATEMENT OF OPERATIONS 5
STATEMENT OF CHANGES IN PARTNERS' CAPITAL 6
STATEMENT OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 8
<PAGE> 3
[LOGO-COMPANY LETTERHEAD-RF&S]
Reznick Fedder & Silverman
Certified Public Accountants A Professional Corporation
4520 East West 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, 1998, 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, 1998, 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 10, 1999
-3-
<PAGE> 4
<TABLE>
<CAPTION>
Security Land and Development Company Limited Partnership
BALANCE SHEET
December 31, 1998
<S> <C>
Investment in real estate, net of accumulated depreciation $50,507,072
Cash and cash equivalents 202,649
Restricted escrow 3,658,402
Tenant accounts receivable 1,031,473
Prepaid expenses and other receivables 361,623
Accrued interest income 12,682
Deferred charges, net of accumulated
amortization of $ 1,821,897 806,830
-----------
Total assets $56,580,731
===========
Note payable, net of discount $35,871,949
Accounts payable and accrued expenses 246,571
Accrued interest payable 364,840
Deferred rental income 3,944,625
Deferred interest income 500,000
-----------
40,927,985
Partners' capital 15,652,746
-----------
Total liabilities and partners' capital $56,580,731
===========
</TABLE>
See notes to financial statements
-4-
<PAGE> 5
<TABLE>
<CAPTION>
Security Land and Development Company Limited Partnership
STATEMENT OF OPERATIONS
Year ended December 31, 1998
<S> <C>
REVENUE
Rental income $13,143,041
Interest income 254,402
Tenant reimbursements and other income 64,717
-----------
Total revenue 13,462,160
-----------
Administrative
Management fees 270,600
Professional fees 102,803
Payroll expenses 502,817
Office expenses 59.918
-----------
936.138
-----------
Operating
Janitorial 1,087,735
Maintenance contracts 88,596
Repairs and maintenance 184,510
Maintenance supplies 248,329
-----------
1,609,170
-----------
Interest, taxes and insurance
Interest 3,228,976
Real estate taxes 601,560
Insurance 86,150
-----------
3,916,686
-----------
Depreciation and amortization
Depreciation 2,524,223
Amortization 317,638
-----------
2,841,861
-----------
Total expenses 9,303,855
-----------
NET INCOME $ 4,158,305
===========
</TABLE>
See notes to financial statements
-5-
<PAGE> 6
Security Land and Development Company Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Year ended December 31, 1998
<TABLE>
<CAPTION>
Special
General Limited limited
Total partner partner partner
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, beginning $ 11,602,102 $ 1,032,917 $ (1,382,639) $11,951,824
Net income 4,158,305 167,996 39,920 3,950,389
Distributions (107,661) (4,351) (1,032) (102,278)
------------ ----------- ------------ -----------
Balance, end $ 15,652,746 $ 1,196,562 $ (1,343,751) 15,799,935
============ =========== ============ ===========
</TABLE>
See notes to financial statements
-6-
<PAGE> 7
<TABLE>
<CAPTION>
Security Land and Development Company Limited Partnership
STATEMENT OF CASH FLOWS
Year ended December 31, 1998
<S> <C>
Cash flows from operating activities
Net income $ 4,158,305
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 2,524,223
Amortization 317,638
Deferred rental income (816,487)
Amortization of debt discount 94,024
Increase in tenant accounts receivable (734)
Decrease in prepaid expenses and other receivables 35,582
Decrease in accrued interest income 3,612
Decrease in accounts payable and accrued
expenses - operating (22,393)
Decrease in accrued interest payable (57.121)
-----------
Net cash provided by operating activities 6,236,649
-----------
Cash flows from investing activities
Withdrawals from restricted escrow 455,536
Investment in real estate (965,882)
-----------
Net cash used in investing activities (510,346)
-----------
Cash flows from financing activities
Payments on note payable (5,690,068)
Distributions (107,661)
-----------
Net cash used in financing activities (5,797,729)
-----------
NET DECREASE IN CASH (71,426)
Cash and cash equivalents, beginning 274,075
-----------
Cash and cash equivalents, end $ 202,649
===========
Cash paid for interest during the year $ 3,192,073
===========
</TABLE>
See notes to financial statements
-7-
<PAGE> 8
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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 24 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 alterations were completed during the year
ended December, 31, 1998.
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, are allocated as
follows:
<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 .96 9.6
------ -----
100.00% 100.0%
====== =====
</TABLE>
-8-
<PAGE> 9
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998
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 $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.
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.
-9-
<PAGE> 10
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998
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 was deferred until
construction was complete and is being 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.
- 10 -
<PAGE> 11
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998
NOTE B - INVESTMENT IN REAL ESTATE
Investment in real estate is carried at cost and consists 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 23,246,353
Improvements - tenant 7-9 years 7,455,934
Improvements - land 10 years 1,610,778
Furniture and equipment 7 years 839,513
------------
63,739,865
Less accumulated depreciation 13,232,793
------------
$ 50,507,072
============
</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 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.
-11-
<PAGE> 12
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998
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, 1998 was $238,937. Amortized discount for the year
ending December 31, 1998 was $94,024, 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> <C>
1999 $ 6,148,461
2000 6,643,763
2001 7,179,009
2002 7,757,350
Thereafter 8,382,303
------------
Total 36,110,886
Less: unamortized discount 238,937
------------
Total $ 35,871,949
============
</TABLE>
Interest incurred during the year ended December 31, 1998 was $3,134,916
excluding discount amortization of $94,060.
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, 1998 are as follows:
-12-
<PAGE> 13
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998
NOTE D - RESTRICTED ESCROW (Continued)
<TABLE>
<CAPTION>
Description Amount
------------------------------------- ------------
<S> <C> <C>
Project account To be used for alterations $ 496,205
Note payment accounts To repay Certificates of Participation 993,120
Liquidity account To be used for debt liquidity 740,178
Replacement reserve account To be used for capital improvements 546,255
Tax account To pay real estate taxes 339,216
Insurance account To pay insurance expense 69,870
Operations account To pay operating expenses 100,000
Partnership account To pay partnership expenses 146,466
Supplemental retention account To be used as additional
funds to repay COPs 226,431
Lease payment account To be used for collection of monthly
rent payments 661
----------
$3,658,402
==========
</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, 1998, 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, 1998, $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.
- 13-
<PAGE> 14
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998
NOTE E - RENTAL OPERATIONS (Continued)
Future minimum rentals are as follows:
<TABLE>
<S> <C>
December 31, 1999 $ 12,154,632
2000 12,154,632
2001 12,154,632
2002 12,154,632
Thereafter 10,128,860
------------
$ 58,747,388
============
</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, 1998 the
balance was $201,649. The uninsured balance at December 31, 1997 was
$101,649.
- 14 -
<PAGE> 15
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998
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, 1998
were $1,087,735 with $123,724 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
original agreement provides for a fee of $250,000 per annum. In March of
1998, the fee was increased to $269,700 per annum. The 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 $270,600 with
$22,925 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, 1998 are $3,029,213 and have been capitalized
to the cost of improvements.
- 15 -
<PAGE> 1
EXHIBIT 99(b)
-------------
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SECURITY LAND AND DEVELOPMENT COMPANY
LIMITED PARTNERSHIP
DECEMBER 31, 1997
<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>
<PAGE> 3
[REZNICK FEDDER & SILVERMAN LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Partners
Security Land and Development Company Limited Partnership
We have audited the accompanying balance sheet of Security Land and
Development Company Limited Partnership as of December 31, 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
-3-
<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
-4-
<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 1,075,388
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
-5-
<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) $ 8,233,736
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
-6-
<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 $ 4,022,014
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
===========
</TABLE>
Significant noncash investing and financing activities
Accounts payable and accrued expenses of $934,362 have been capitalized to the
real estate.
See notes to financial statements
-7-
<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
11/1/2003 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>
-8-
<PAGE> 9
Security Land and Development Company Limited Partnership
NOTE 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 $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.
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.
-9-
<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.
-10-
<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> <C>
Land - $ 2,151,154
Building 40 years 28,436,133
Improvements - building 40 years 23,231,609
Improvements - tenant 9 years 7,455,934
Improvements - land 10 years 1,610,778
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 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.
-11-
<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:
-12-
<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
earnings escalations in the event of increased operating costs and real
estate taxes.
-13-
<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.
-14-
<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 annum. The 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 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, 1997 are $3,008,215 and have been capitalized
to the cost of improvements.
-15-
<PAGE> 1
EXHIBIT 99(c)
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SECURITY LAND AND DEVELOPMENT COMPANY
LIMITED PARTNERSHIP
DECEMBER 31, 1996
<PAGE> 2
Security Land and Development Company Limited Partnership
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS
BALANCE SHEET 4
STATEMENT OF OPERATIONS 5
STATEMENT OF CHANGES IN PARTNERS' CAPITAL 6
STATEMENT OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 8
<PAGE> 3
--------------------------
Reznick Fedder & Silverman
Certified Public Accountants Business Consultants
A Professional Corporation
4520 East-West Highway Suite 300. Bethesda, MD 20814-3319. (301)
652-9100. Fax (301) 652-1848
INDEPENDENT AUDITORS' REPORT
To the Partners
Security Land and Development Company Limited Partnership
We have audited the accompanying balance sheet of Security Land and
Development Company Limited Partnership as of December 31, 1996, and the related
statements of operations, changes in partners' capital and cash flows for the
year then ended. These financial statements are the responsibility of the
partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Security Land and
Development Company Limited Partnership as of December 31, 1996, and the results
of its operations, changes in partners' capital and cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ REZNICK FEDDER & SILVERMAN
Bethesda, Maryland
February 4, 1997
-3-
<PAGE> 4
<TABLE>
<CAPTION>
Security Land and Development Company Limited Partnership
BALANCE SHEET
December 31, 1996
<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
-4-
<PAGE> 5
<TABLE>
<CAPTION>
Security Land and Development Company Limited Partnership
STATEMENT OF OPERATIONS
Year ended December 31, 1996
<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
-5-
<PAGE> 6
Security Land and Development Company Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Year ended December 31, 1996
<TABLE>
<CAPTION>
Special
General Limited Limited
Total Partner Partner Partner
<S> <C> <C> <C> <C>
Balance, beginning $3,303,399 $ 697,652 $ (1,462,309) $ 4,068,056
Net income 4,493,588 181,540 43,139 4,268,909
Distributions (108,662) (4,390) (1,043) (103,229)
---------- ------------ ------------ -----------
Balance, ending $7,688,325 $ 874,802 $ (1,420,213) $ 8,233,736
========== ============ ============ ===========
</TABLE>
See notes to financial statements
-6-
<PAGE> 7
<TABLE>
<CAPTION>
Security Land and Development Company Limited Partnership
STATEMENT OF CASH FLOW
Year ended December 31, 1996
Cash flows from operating activities
<S> <C>
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
============
</TABLE>
Significant non-cash investing activities:
Accounts payable and accrued expenses of $1,314,637 have been
capitalized to the real estate.
-7-
<PAGE> 8
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Security Land and Development Company Limited Partnership (the
"partnership") was formed under the laws of the State of Maryland. The
partnership was organized to own and operate, for investment purposes, the
project (the "project") which consists of a building known as the Security
West Building (the "building").
The building is approximately 717,000 square foot, two-phase office
building, consisting of a two-story office building and a connected
six-story office tower, located at 1500 Woodlawn Drive, Woodlawn, Maryland.
The building was purchased by the partnership in 1986 and is located on
land which is approximately 34.3 acres, also owned by the partnership. The
building has been occupied by the United States Social Security
Administration's Office of Disability and International Operations (the
"tenant") for approximately 23 years under leases between the United States
of America, acting by and through the General Services Administration
("GSA"). Effective November 1, 1994, the partnership and GSA entered into a
nine-year lease (the "lease") for the Building. The terms of the lease
agreement call for substantial alterations to the building. The partnership
has executed a contract in the original amount of approximately $24,000,000
to complete the alterations.
The general partner of the partnership is 1500 Woodlawn Limited Partnership
(the "general partner"), a Delaware limited partnership with an 80.8
percent general partner interest. Three limited partners ("limited
partners"), own the remaining 19.2 percent limited partnership interest.
The limited partners and the general partner are herein referred to as
Class A partners.
Regency Affiliates, Inc. (the "special limited partner") is a special
limited partner with no stated voting interest in the partnership.
Profits, losses and cash available for distribution to partners as defined
by the partnership agreement, as amended, is allocated as follows:
-8-
<PAGE> 9
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
<TABLE>
<CAPTION>
Before After
11/1/2003 1013112003
<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.
-9-
<PAGE> 10
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
REAL ESTATE
Real estate is carried at cost. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives by use of the straight-line method for
financial reporting purposes.
DEFERRED CHARGES
Deferred charges consist of permanent loan closing costs which are being
amortized over the term of the related note payable using the effective
interest method.
DEFERRED RENTAL INCOME
Rents of $2,785,769 received upon signing the lease agreement are being
amortized on a straight-line basis over the life of the lease. Rental
income received for phases under construction is deferred until
construction is complete and is then amortized over the remaining term of
the lease.
DEFERRED INTEREST INCOME
Interest earned on the Project Account in excess of the estimated cost of
alterations was deferred because such funds, if not expended, must be paid
to the tenant (see note D). Deferred amounts are recognized as income when
it is determined that the funds will be used for the cost of alterations.
- 10 -
<PAGE> 11
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flow, cash and cash equivalents
include the partnership's operating money market accounts, excluding
restricted escrow held by the escrow agent (see note C).
RESTRICTED ESCROW
The partnership has a portfolio of investments in money market accounts,
repurchase agreements, and debt securities, which are held in trust by
Fleet National Bank (see note D). Management determines the appropriate
classification of the debt securities at the time they are acquired and
evaluates the appropriateness of such classifications at each balance sheet
date. As of December 31, 1996, the company has classified all investments
in debt securities as held-to-maturity. Held-to-maturity securities consist
solely of debt securities which the company has the positive intent and
ability to hold to maturity and are stated at amortized cost.
INCOME TAXES
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reportable by, the partners individually.
NOTE B - INVESTMENT IN REAL ESTATE
Investment in real estate is carried at cost and consist of the following:
<TABLE>
<CAPTION>
Estimated
Useful Life
-----------
<S> <C> <C>
Land - $ 2,151,154
Building 40 years 28,436,133
Improvements - Building 40 years 15,210,064
Improvements - Tenant 9 years 4,615,264
Improvements - Land 10 years 1,610,778
Furniture and equipment 7 years 810,752
Construction in progress - 5,294,953
-----------
58,129,098
Less accumulated depreciation 8,484,778
-----------
$49,644,320
===========
</TABLE>
-11-
<PAGE> 12
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE B - INVESTMENT IN REAL ESTATE (Continued)
For income tax reporting purposes, depreciation has been computed in
accordance with the Internal Revenue Code, generally using shorter lives
and accelerated methods.
NOTE C - NOTE PAYABLE
The partnership has a note payable to Fleet National Bank, as Trustee
(Trustee), dated November 17, 1994. The note is in the principal amount of
$56,450,000, and is effectively secured by substantially all the assets of
the partnership and rights to future lease payments. In addition, the
partnership has agreed to various covenants including those that require
the partnership to conduct its affairs as a separate entity and prohibit it
from selling all or substantially all of its assets; conducting business
other than related to the project; conducting business other than arms
length; commingling assets with other entities; acting as creditor or
pledging its assets for the benefit of another entity; and incurring
certain types of indebtedness.
The debt proceeds were obtained by the trustee through the sale of
Certificates of Participation (COPs) representing interests in a trust
established pursuant to a trust agreement between the partnership and the
Trustee. The net proceeds received from the sale of the COPs were used to
repay the then existing debt of the partnership, to fund certain reserves,
and to pay costs of issuance.
The COPs were issued at a discount of $705,625 which is being amortized
over the life of the note on the effective interest method. Unamortized
discount at December 31, 1996 was $440,216. Amortized discount for the year
ending December 31, 1996 was $1 19,251, and is included in interest expense
on the accompanying statement of operations.
-12-
<PAGE> 13
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE C - NOTE PAYABLE (Continued)
The note requires semiannual payments of principal and interest in
accordance with the terms of the COPs. Those terms require payments of
interest at a rate of 7.9% and two principal payments per year (May 15
and November 15) aggregating to:
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
===========
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>
-13-
<PAGE> 14
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE D - RESTRICTED ESCROW (Continued)
Restricted escrow is invested in money market funds of $2,952,413 and
a repurchase agreement of $400,000, which approximate fair value. The
remaining funds are invested in debt securities and at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Held-to-Maturity
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government
Debt Securities $4,862,675 $620,165 $ -- $5,482,840
</TABLE>
The amortized cost and fair value of debt securities classified as
held-to-maturity, by contractual maturity, as of December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Due within one year $4,862,675 $5,482,840
========== ==========
</TABLE>
Any amounts remaining in the project account after the alterations
have been completed revert back to the tenant either in a lump sum
payment or to be applied against rental income. (Accordingly, earnings
on funds deposited in the project account in excess of the estimated
cost of alterations have been deferred.) If any changes to the
budgeted alterations require the use of the amounts earned, the income
will be recognized at that time. Total earnings deferred at December
31, 1996, is $500,000.
The partnership deposited with the escrow agent a letter of credit to
satisfy the requirements for the Supplemental Disbursement Account. At
December 31, 1996, $450,000 was outstanding.
- 14-
<PAGE> 15
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE E - RENTAL OPERATIONS
On November 17, 1994, the partnership and the tenant entered into a
lease agreement for 100% of the building with a term of nine years
expiring on October 31, 2003. The lease agreement provides for minimum
annual lease payments of $12,154,632 payable monthly in arrears, plus
provisions for escalations in the event of increased operating costs
and real estate taxes.
Future minimum rentals are as follows:
<TABLE>
<S> <C> <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.
-15-
<PAGE> 16
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996
NOTE F - CONCENTRATION OF CREDIT RISK
The partnership maintains a cash account insured by the Federal
Deposit Insurance Corporation (FDIC) up to $100,000. At December 31,
1996 the balance was $229,262. The uninsured balance at December 31,
1996 was $129,262.
NOTE G - RELATED PARTY TRANSACTIONS
JANITORIAL SERVICES
The partnership entered into an agreement with Woodlawn Service
Corporation, an affiliate of the general partner, to provide
janitorial services for the building. The agreement provides for a fee
for services provided and for a reimbursement for expenses incurred,
not to exceed $1,905,770 per annum from which Woodlawn Service
Corporation is to provide the cost of materials, salaries and other
costs of providing such services. The agreement extends to the year
2003 with options to renew annually thereafter. Total janitorial fees
for the year ending December31, 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.
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