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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, 1999 COMMISSION FILE NO. 1-7949
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REGENCY AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0888772
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
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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<S> <C>
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
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $0.40 Par Value None
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT.
None
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(Title of Class)
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 $37,600,000 on March 21, 2000, computed on the
basis of $4.25 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
issued as of March 21, 2000, was 17,077,226, including 4,040,375 held by a
majority-owned subsidiary.
Documents incorporated by reference (See Exhibit Listing).
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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 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. These Bonds were retired in 1999 through the issuance of
common stock of the Company.
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 were duly elected and qualified.
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,
and 100,000 restricted shares of the Company's Common Stock.
On April 22, 1999, the Company acquired 513,915 shares of the common
stock of Glas-Aire Industries Group, Ltd. ("Glas-Aire") for the issuance of a
promissory note of $650,000 due January 1, 2000, at an interest rate of 7.5% per
annum, which note is guaranteed by Mr. William Ponsoldt,
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Sr., President of the Company and $1,213,000 in cash. Glas-Aire is a reporting
company, and its shares are listed on the Nasdaq (small caps) "GLAR" and on the
Pacific Exchange "GLA". The cash was obtained from an affiliate of Statesman
through the issuance of an unsecured demand note at 7.5% per annum. The Company
also purchased 3,000 shares of the common stock of Glas-Aire on the open market.
On August 2, 1999, the Company acquired 41,600 shares of the common
stock of Glas-Aire on the open market for $119,619. The funds were provided by
an affiliate of Statesman on an unsecured basis.
On August 14, 1999, the Company sold 2,852,375 shares of the Company's
common stock to Glas-Aire for cash of $1,967,960 and 86,000 shares of Glas-Aire
common stock for an aggregate consideration of $2,281,900.
On September 23, 1999 the Company closed a common stock exchange
agreement with certain shareholders of Glas-Aire. Under the agreement, Regency,
in a private transaction, issued 1,188,000 shares of its restricted common stock
to such shareholders in exchange for 288,000 Glas-Aire common shares held by the
shareholders. With the closing of the agreement, the Company owns approximately
51.3% of the currently the then outstanding common shares of Glas-Aire.
At the Glas-Aire annual shareholders' meeting on November 4, 1999,
William Ponsoldt, Sr. and Marc Baldinger, directors of the Company were elected
to the Glas-Aire board of directors. The Company also proposed two other
nominees who were elected to the six-member board of Glas-Aire.
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.
NATIONAL RESOURCE DEVELOPMENT CORPORATION
NRDC has as its principal asset approximately 70 + million
short tons of previously quarried and stockpiled rock ("Aggregate") located at
the site of the Groveland Mine in Dickinson County, Michigan. 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, are
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.
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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 approved by each company's Board of Directors. The Merger
Agreement provided that Cotton Valley would 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 was contingent upon several matters
dealing with Cotton Valley, including Cotton Valley maintaining its American
Stock Exchange listing and approval by Cotton Valley shareholders. Cotton Valley
was not able to meet certain of the contingencies, and the Plan of Merger was
not consummated. The Company continues to have discussions with several
companies regarding the possible sale of its interest in NRDC. To facilitate the
discussions concerning a possible sale, the zero coupon bonds (secured by the
aggregate inventory) which had been issued by NRDC were retired by the issuance
in 1999 of 121,000 shares of the Company's common stock.
Following the termination of the Plan of Merger, the Company installed
limited aggregate crushing and marketing operations during 1999 at the Groveland
Mine in an informal joint venture with another company. Pending the outcome of
current discussions regarding the possible sale of the Company's interest, the
Company is exploring the possibility of establishing a permanent infrastructure
during the year 2000 to commercialize the inventory of previously quarried and
stockpiled aggregate at the Groveland Mine in cooperation with an experienced
aggregate supply company.
SECURITY LAND AND DEVELOPMENT COMPANY LIMITED PARTNERSHIP
On November 18, 1994, Regency Affiliates, Inc. acquired a limited
partnership interest in Security Land And Development Company Limited
Partnership (the "Partnership") for an equity investment of $350,000. 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. 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 were used to refinance existing debt of the Partnership
related to the project, to finance certain alterations to the project by the
Partnership, to
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fund certain reserves and to pay costs of the project note issue. The project
note is a non-recourse obligation of the Partnership and is payable solely from
the Lease payments from the U.S. Government. Such rental payments under the
Lease are not subject to annual appropriation by the United States Congress and
accordingly, the obligations to make such payments are unconditional general
obligations of the Government backed by the full faith and credit of the United
States. The payments under the Lease consist of base rent, maintenance rent,
additional base rent, additional maintenance rent and the government tax
reimbursement amount. The base rent, maintenance rent and additional base rent
are fixed amounts and are not subject to adjustment. The base rent and the
additional base rent together constitute the finance rent, which will be
utilized to pay principal and interest on the project note, certain real estate
taxes and costs of insurance and other reserves.
The terms of the Security Land And Development Company Limited
Partnership Agreement (as amended) and the project note (which note will be
fully amortized over the term of the lease) call for Regency Affiliates, Inc. to
be allocated 95% of the profits and losses of the Partnership until October 31,
2003, and 50% thereafter. 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, 1999, the Company's income from its equity
investment in the Partnership was $4,261,212. 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 $19,959,517 the partnership does not provide cash flow to the
Company in excess of the $100,000 annual management fee. The partnership
agreement provides for the distribution of "Sale or Refinancing Proceeds" in
accordance with the partner's positive tax capital account balances. At December
31, 1998, Regency was the only partner with a positive tax capital account
balance. Such balance at December 31, 1998 was $23,095,000 and is estimated to
be approximately $28,000,000 at December 31, 1999.
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 35 persons.
In 1999 and 1998 Rustic Crafts generated net sales of approximately
$3,875,000 and $3,698,000, respectively, which represented 49% and 98% of total
revenues of the Company, excluding income from its equity investment in the
Partnership. Its largest customer, J.C. Penney Co., Inc. represents 39% and 54%
of the sales of Rustic Crafts in 1999 and 1998, respectively. Approximately 29%
of the sales of Rustic Crafts occur in the fourth quarter of the calendar year.
As of December 31, 1999, Rustic Crafts had approximately $170,000 of open
orders. Although orders are generally subject to termination, the Company has
historically experienced minimal cancellation of orders.
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Rustic Crafts purchases the raw materials used in its manufacturing
process from several suppliers. The Company believes that there is minimal risk
from any termination 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.
GLAS-AIRE INDUSTRIES GROUP, LTD.
Glas-Aire, a publicly traded company, is a majority owned subsidiary of
the Company. Glas-Aire designs, develops, manufactures and sells sunroof
deflectors, hood protectors and rear air deflectors for cars, light trucks and
vans. It uses plastics and thermoforming technology to produce these products.
Glas-Aire's products are used in the diverse and growing automotive components
market, comprised of after-market accessories, dealer installed accessories, car
care products and other products purchased by consumers for the purpose of
improving their vehicles (versus those purchased for routine maintenance).
Glas-Aire participates in the OEM segment of the appearance accessory market,
providing products to the automotive manufacturers which then distribute the
products to consumers through their dealer networks. During their fiscal year
ended January 31, 2000, approximately 100% of its sales were to automobile
manufacturers. Glas-Aire employs approximately 170 persons.
Glas-Aire generated net sales of $9,725,600 and $6,639,000, and net
income before income taxes and equity earnings of $955,200 and $800,000 for the
fiscal years ended January 31, 2000 and 1999 respectively. Glas-Aire has been
included in the Company's consolidated financial statements effective September
23, 1999, the date that the Company acquired 51.3% control of Glas-Aire.
Included in the Company's fourth quarter operations for 1999 are net sales of
$3,931,000 and income before income taxes of $367,200 related to the operations
of Glas-Aire, which sales and pre-tax income include Glas-Aire's operations
through January 31, 2000, its fiscal year.
Glas-Aire sells principally to automobile manufacturers in the United
States, Canada, Japan and the United Kingdom. For the year ended January 31,
2000, sales in the US accounted for 84% of Glas-Aire's sales, and 13% in Canada.
Four major customers, Nissan North America, Inc. General Motors Corporation,
Honda Access America, Inc. and Subaru of America, Inc, accounted for
approximately 88% of Glas-Aire's sales.
Glas-Aire has several competitors which have substantially greater
technical, financial and marketing resources, and management considers the
business to be competitive.
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Acrylic is the single most expensive raw material used in the
manufacturing process. Glas-Aire normally purchases its acrylic from one or two
suppliers. If Glas-Aire were to lose either of these suppliers management is
confident that other suppliers can be found, although the number of acrylic
suppliers is limited.
Employees
As of December 31, 1999, Regency and its subsidiaries employed 208
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. conducted 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 until early 1999. Both premises were occupied
pursuant to a sublease which was recently terminated. In March 1998, the
Company purchased a 126,000 square foot building located at 40 Poplar Street in
Scranton, Pennsylvania. The Company renovated the building and began to occupy
the space during early 1999. Approximately 51,000 square feet in this building
are leased to other tenants.
As of December 31, 1999, NRDC owned 70 + 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 70 + 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.
Glas-Aire conducts its operations in approximately 25,000 square feet
of leased space located at 3137 Grandview Highway, Vancouver, British Columbia,
Canada under a lease due to expire 2003
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with an option for an additional five years. Glas-Aire also rents on a
month-to-month basis, 5,000 square feet of warehouse space in Bellingham,
Washington. These facilities are adequate for the Company's present level of
business and anticipated growth over the next two years. If sales grow
significantly greater than is anticipated, management believes it will require
additional manufacturing space.
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, 1999 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, 1999.
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 for 1998 and through most of 1999 as
indicated may not reflect the actual market for substantial quantities of the
Company's Common Stock. As of March 21, 2000, there were approximately 5,400
common shareholders of record.
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YEAR ENDED
DECEMBER 31, 1998 HIGH ($) LOW ($)
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First Quarter .63 .44
Second Quarter .78 .56
Third Quarter .85 .50
Fourth Quarter .66 .50
YEAR ENDED
DECEMBER 31, 1999 HIGH ($) LOW ($)
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First Quarter .72 .56
Second Quarter .91 .66
Third Quarter 1.03 .88
Fourth Quarter 1.22 .91
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
responsibilities.
Issuance of securities.
In 1999, the Company issued (a) 10,828 Common Shares in exchange for
88.5 shares of the Company's Series E Preferred Stock, (b) 121,000 Common Shares
to retire the zero coupon debentures issued by NRDC, (c) 77,746 Common Shares in
payment of obligations including 47,736 shares issued to directors as
compensation, and (d) 4,040,375 Common Shares in connection with the acquisition
of Glas-Aire. The common shares issued in connection with the Glas-Aire
transactions are not considered to be outstanding and are reported as Treasury
Stock.
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.
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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.
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. 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 to recognize
in part, the amendment to the Series C Preferred Shares under which Statesman
forfeited the common stock conversion rights with respect thereto. Statesman
also agreed to provide loan guarantees not to exceed the sum of $300,000 upon
the request of the Company and a showing of reasonable need. Statesman and/or
its affiliated interests have provided loan guarantees and/or unsecured prime
interest rate direct loans to the Company in excess of $2,000,000 since June
1997. 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. 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 do not reflect
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.
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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.
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.
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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 terminates 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 January 31, 2000, all of the
Series E Preferred Shares have been retired.
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.
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Regency Affiliates, Inc. is the owner of 100% of the issued and
outstanding common stock of Rustic Crafts International, Inc.
Glas-Aire Industries Group, Ltd.
Regency Affiliates, Inc. is the owner of 51.1% of the outstanding
common shares (955,828 shares) of Glas-Aire. The remaining 48.9% is held by the
public shareholders of Glas-Aire.
ITEM 6. SELECTED FINANCIAL DATA.
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<CAPTION>
1999 1998 1997 1996 1995
------------ ------------ ------------- ------------- -------------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES $7,835,071 $3,789,839 $ 2,908,253 $6,102 $2,597
INCOME FROM EQUITY
INVESTMENT IN PARTNERSHIP 4,261,212 3,950,090 3,820,913 4,268,904 3,718,056
NET INCOME 2,292,922 1,794,560 2,187,618 2,802,467 3,298,589
NET INCOME PER SHARE (BASIC) 0.18 0.14 0.17 0.24 0.29
NET INCOME PER SHARE
(DILUTED) 0.15 0.12 0.15 0.20 0.21
TOTAL ASSETS 33,657,635 24,127,416 15,432,529 11,566,678 4,980,148
LONG-TERM DEBT (INCLUDING CURRENT
PORTION) & REDEEMABLE PREFERRED
STOCK 12,778,244 11,795,480 5,175,400 4,600,994 691,254
</TABLE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
13
<PAGE> 14
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 continues to commit both financial and personnel resources to an active
merger and acquisition program in order to enhance common shareholders' values.
The Company's Shareholders' Equity at December 31, 1999 was $13,636,050 as
compared to $11,219,050 at December 31, 1998, an increase of $2,417,000 for the
year ended December 31, 1999.
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
ended December 31, 1999, the Company's income from its equity investment in the
Partnership was $4,261,212. 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 $19,959,517
the partnership does not provide liquidity to the Company in excess of the
$100,000 annual management fee. The partnership agreement provides for the
distribution of "Sale or Refinancing Proceeds" in accordance with the partner's
positive tax capital account balances. At December 31, 1998, Regency was the
only partner with a positive tax capital account balance. Such balance at
December 31, 1998 was $23,095,000 and is estimated to be approximately
$28,000,000 as of December 31, 1999. The Company has, however, been successful
in obtaining financing with respect to this partnership interest to fund its
acquisition program and cash flow deficits.
On March 15, 1998, Rustic Crafts purchased a building of 126,000 square
feet located near the current facility in Scranton, Pennsylvania. The purchase
of this facility was funded by new borrowings from PNC Bank in the form of a
first mortgage term loan in the amount of $960,000. Rustic Crafts also obtained
financing of approximately $923,000 from the PNC Bank to equip the facility and
purchase new equipment. The move to the new facility was completed in 1999 and
has significantly increased the operating capacity and enabled Rustic Crafts to
more efficiently meet its current order backlog and increase its customer base.
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 December 31, 1999, the Company
has 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.
14
<PAGE> 15
The Company has had discussions with several companies regarding the
possible sale of its interest in NRDC. To facilitate the discussions concerning
a possible sale, the NRDC zero coupon bonds (secured by the aggregate
inventory), were retired in 1999 by the issuance of 121,000 shares of the
Company's common stock. Following the termination of the 1999 NRDC Plan of
Merger with Cotton Valley Resources Corporation, the Company installed limited
aggregate crushing and marketing operations at the Groveland Mine in an
informal joint venture with another company. Pending the outcome of current
discussions regarding the possible sale of the Company's interest, the Company
is also exploring the possibility of establishing a permanent infrastructure
during the year 2000 to commercialize the inventory of previously quarried and
stockpiled aggregate at the Groveland Mine in cooperation with an experienced
aggregate supply company.
On April 22, 1999, the Company acquired 513,915 shares (35%) of the
outstanding common stock of Glas-Aire for the issuance of a promissory note of
$650,000 due January 1, 2000, at an interest rate of 7.5% per annum, which
note is guaranteed by Mr. William Ponsoldt, Sr., President of the Company and
$1,213,000 in cash. As of September 23, 1999 Regency had acquired 51.3% of the
common stock of Glas-Aire. These common stock acquisitions were effected by
open market purchases, with the funding provided by an affiliate of Statesman
on an unsecured basis, by direct purchases from Glas-Aire, and by a common
stock exchange agreement between the Company and certain shareholders of
Glas-Aire. Under the common stock exchange agreement, the Company issued
1,188,000 shares of its restricted common stock in exchange for 288,000
Glas-Aire common shares held by the shareholders.
The Company also sold 2,852,375 shares of its common stock to Glas-Aire
for cash of $1,967,960 and 86,000 shares of Glas-Aire common stock. The proceeds
were used to repay the funding provided by an affiliate of Statesman and other
general corporate requirements.
The Company is continuing to explore opportunities to acquire
companies with operations that will provide additional liquidity and cash flow.
In February 2000, the Company executed Letters of Intent to acquire 55% of
Knight Enterprises, Inc. a leading provider of voice, data, video and fiber
optic high speed digital access to major cable companies throughout Florida;
100% of Southwest Mill and Lumber Company, a California based producer of
picture frame molding and frames; and 100% of Valley Wholesale Supply Corp., a
California based marketer of picture molding, framing supplies and equipment.
The Company anticipates that such acquisitions will be financed by borrowings
secured by the assets acquired, additional borrowings secured by the Company's
partnership interest in Security Land and Development Company, and from
proceeds of a private placement of preferred stock. There can be no assurance,
however, that any of the transactions contemplated by these letter of intents
will be consummated as definitive agreements have not been executed, and, even
if executed, will likely be subject to the occurrence and/or satisfaction of
certain events and contingencies, any of which may or may not occur.
15
<PAGE> 16
Results of Operations
In September 1999, the Company acquired a 51% interest in Glas-Aire
which manufactures automotive accessories sold primarily to automotive
manufacturers. The financial statements for 1999 include the results of
Glas-Aire since September 1999, and the operations of Rustic Crafts acquired in
1997.
1999 Compared to 1998
Net sales increased $4,045,232 over 1998, a 107% increase. Net sales
includes $3,930,541 of Glas-Aire sales. Sales of household accessories increased
$158,039 due to increased advertising and marketing efforts at Rustic Crafts.
Rustic Crafts emphasized higher margin sales in 1999 in order to reduce its
reliance on a single large customer who required discounted prices.
Gross margins increased $1,323,043 in 1999 over 1998, of which
$1,168,970 is attributable to the acquisition of Glas-Aire. Gross margins of
home accessories increased $196,200 in 1999 reflecting the Company's focus on
higher margin products and new, lower discount customers. Rustic Crafts reduced
its reliance on its single largest customer from 54% of its total sales in 1998
to 39% in 1999.
General and administrative expenses increased $1,352,795 or 66% in 1999
compared to 1998. Administrative expenses of $773,943 are attributable to the
acquisition of Glas-Aire. Expenses increased at Rustic Crafts due to increased
costs of selling and marketing including the development and printing of new
promotional materials. Corporate administrative expenses increased due to
higher salaries and bonuses as a result of higher profits; higher consulting
fees and travel related expenses for continued acquisition efforts and the
related financing; and board compensation paid in accordance with the
compensation program adopted by the shareholders in August.
Income from equity investment in partnership increased $311,122 over
1998 due to the reduction of interest expenses on the lower loan principal
balance of the partnership, partially offset by increased operating and
administrative expenses.
Other income increased $49,740 in 1999 compared to 1998. Other income
in 1999 includes $114,960 of equity earnings related to the Company's ownership
in Glas-Aire prior to September 1999. These earnings were offset by decreased
interest income from declining invested cash balances.
Gain on retirement of debt of $330,605 is due to the retirement of the
NRDC zero coupon bonds by the issuance of 121,000 shares of the Company's Common
Stock. Also, a significant amount of the bonds were retired in connection with
the agreement of the Company to discontinue
16
<PAGE> 17
certain claims against one of the holders of the bonds.
Interest expense decreased $128,349 in 1999 from 1998. Interest
expense in 1998 included significant costs and penalties in connection with the
refinancing of the SIPI loan in June 1998. The elimination of the refinancing
costs was partially offset by additional loans for equipment and facilities at
Rustic Crafts and the higher loan balance of the KBC loan which refinanced the
SIPI loan.
Income tax expense increased $136,726 due to income tax expense for
Glas-Aire. The Company cannot use its net operating loss to offset the earnings
of this 51% owned subsidiary.
Minority interest in the Statement of Operations increased $154,976 due
primarily to the inclusion of the results of operations of Glas-Aire since
September 1999, and the minority interest attributable to the gain on the
retirement of the NRDC zero coupon bonds.
Net income rose $498,362 or 27.8% in 1999 over 1998. The increase was
generally due to the increase in income from equity in partnership, the
inclusion of Glas-Aire in consolidated results of operations since September
1999, the gain on retirement of debt and the reduction of interest expense.
These increases were offset by increases in corporate administrative expenses
related primarily to higher salaries and wages and costs incurred in connection
with the acquisition program.
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.
17
<PAGE> 18
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.
Year 2000 Issues.
The Company had not anticipated any material difficulties associated
with Year 2000 issues and none materialized. The Company made no material
expenditures associated with Year 2000 issues and had not anticipated that
any material amounts would be expended in its earlier reports.
Statements of Financial Accounting Standards.
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
struments and hedging activities. SFAS 133, as amended by SFAS 137, is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000.
Management believes this pronouncement will have no effect on the financial
statements.
Forward-Looking Statements.
Certain statements contained in this Annual Report on Form 10-K,
including, but not limited to, those regarding the Company's financial position,
business strategy, acquisition strategy and other plans and objectives for
future operations and any other statements that are not historical facts
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other important factors that
could cause the actual results, performance or achievements expressed or implied
by such forward-looking
18
<PAGE> 19
statements to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Although
the Company believes that the expectations reflected in these forward-looking
statements are reasonable, there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected effect on its business
or operations. These forward-looking statements are made based on management's
expectations and beliefs concerning future events impacting the Company and are
subject to uncertainties and factors (including, but not limited to, those
specified below) which are difficult to predict and, in many instances, are
beyond the control of the Company. As a result, actual results of the Company
may differ materially from those results contemplated by such forward-looking
statements which include, but are not limited to:
(i) The Company currently does not generate positive cash flow as
the current 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. 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 infra structure at
the site of the Groveland Mine in order to permit the Company
to make more than casual sales of the aggregate.
(iii) 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.
(iv) 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 an adverse impact upon the
Company's investment in Security Land And Development Company
Limited Partnership.
(v) 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.
19
<PAGE> 20
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, 1999, are included as
follows:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997 F-6
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997 F-7
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-10
</TABLE>
20
<PAGE> 21
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
1999 CONSOLIDATED FINANCIAL REPORT
F-1
<PAGE> 22
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> 23
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, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. 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 1999, 1998 and 1997 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 59% and 65%
of consolidated total assets as of December 31, 1999 and 1998, respectively, and
100% of the income from equity investment in partnership for the years ended
December 31, 1999, 1998 and 1997. Those financial statements were audited by
other auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to the 1999, 1998 and 1997 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, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
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 Note 13.
HAUSSER + TAYLOR LLP
Cleveland, Ohio
April 10, 2000
F-3
<PAGE> 24
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,348,989 $ 2,168,541
Accounts receivable, net of allowance 2,373,275 752,861
Inventory 1,842,992 806,006
Other current assets 238,687 130,375
----------- -----------
Total current assets 6,803,943 3,857,783
PROPERTY, PLANT AND EQUIPMENT, NET 4,427,891 1,980,063
INVESTMENTS
Investment in partnership 19,959,517 15,799,631
Rental property, net -- 108,512
----------- -----------
Total investments 19,959,517 15,908,143
OTHER ASSETS
Aggregate inventory 838,383 843,049
Goodwill, net of amortization 902,138 631,788
Debt issuance costs, net of amortization 710,493 869,643
Other 15,270 36,947
----------- -----------
Total other assets 2,466,284 2,381,427
----------- -----------
$33,657,635 $24,127,416
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 25
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 176,800 $ 38,300
Current portion of serial preferred stock subject to
mandatory redemption 247,800 163,600
Notes payable 1,149,262 464,200
Accounts payable 991,587 282,945
Accrued expenses 1,236,160 276,165
------------ ------------
Total current liabilities 3,801,609 1,225,210
LONG-TERM DEBT, net of current portion 12,353,644 11,519,930
DEFERRED INCOME TAXES 416,695 -
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 3,449,637 89,576
SERIAL PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION (liquidation preference and redemption value,
$247,800 and $256,700 in 1999 and 1998, respectively),
net of current portion - 73,650
SHAREHOLDERS' EQUITY
Serial preferred stock not subject to mandatory redemption
(maximum liquidation preference, $24,975,312 and
$24,957,326 in 1999 and 1998, respectively) 1,052,988 1,052,988
Common stock, par value $.40, authorized 25,000,000 shares
issued 16,894,488 and 12,644,549 shares in 1999 and
1998, respectively 6,757,806 5,057,831
Additional paid-in capital 2,096,824 270,510
Readjustment resulting from quasi-reorganization at
December 31, 1987 (1,670,596) (1,670,596)
Retained earnings 8,760,736 6,519,019
Accumulated other comprehensive income (23,675) -
Treasury stock, 4,052,825 shares in 1999 and
12,460 shares in 1998 (3,338,033) (10,702)
------------ ------------
Total shareholders' equity 13,636,050 11,219,050
------------ ------------
$ 33,657,635 $ 24,127,416
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 26
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $ 7,835,071 $ 3,789,839 $ 2,908,253
COSTS AND EXPENSES
Cost of goods sold 5,343,552 2,621,363 1,928,491
Selling and administrative expenses 3,395,666 2,042,871 1,787,650
----------- ----------- -----------
8,739,218 4,664,234 3,716,141
----------- ----------- -----------
LOSS FROM OPERATIONS (904,147) (874,395) (807,888)
INCOME FROM EQUITY INVESTMENT IN PARTNERSHIP 4,261,212 3,950,090 3,820,913
OTHER INCOME, NET 190,960 141,220 45,300
INTEREST EXPENSE (1,186,002) (1,314,351) (801,597)
----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE,
MINORITY INTEREST AND EXTRAORDINARY GAIN 2,362,023 1,902,564 2,256,728
INCOME TAX EXPENSE (235,309) (98,583) (73,665)
MINORITY INTEREST (164,397) (9,421) 4,555
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY GAIN 1,962,317 1,794,560 2,187,618
EXTRAORDINARY GAIN - RETIREMENT OF DEBT 330,605 - -
----------- ----------- -----------
NET INCOME $ 2,292,922 $ 1,794,560 $ 2,187,618
=========== =========== ===========
NET INCOME ATTRIBUTABLE TO COMMON
SHAREHOLDERS
[after paid or accrued preferred stock dividends of $49,791,
$49,564 and $65,475 in 1999, 1998 and 1997, respectively,
and preferred stock accretion of $19,400, $17,950 and
$20,600 in 1999, 1998 and 1997, respectively] $ 2,223,731 $ 1,727,046 $ 2,101,543
=========== =========== ===========
NET INCOME PER COMMON SHARE:
BASIC $ 0.18 $ 0.14 $ 0.17
=========== =========== ===========
DILUTED $ 0.15 $ 0.12 $ 0.15
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 27
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Readjustment
Preferred Stock* Common Stock Additional Resulting
--------------------- ------------------------- Paid-in from Quasi-
Shares Amount Shares Amount Capital Reorganization
-------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1997 605,291 $ 1,052,988 11,422,331 $ 4,568,944 $ 140,000 $(1,670,596)
Issuance of common stock 566,667 226,667 66,666
Conversion of Series E preferred stock 468,551 187,420 14,934
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 12,457,549 4,983,031 221,600 (1,670,596)
Issuance of common stock 187,000 74,800 52,360
Accretion of Series E preferred stock
Payment of dividend on Series E
preferred stock
Re-issue treasury stock (3,450)
Net income
-------- ------------ ----------- ------------ ----------- ------------
BALANCE - DECEMBER 31, 1998 605,291 1,052,988 12,644,549 5,057,831 270,510 (1,670,596)
Issuance of common stock 198,736 79,494 110,606
Common stock issued to acquire Glas-Aire 4,040,375 1,616,150 1,711,190
Conversion of Series E preferred stock 10,828 4,331 4,518
Accretion of Series E preferred stock
Payment of dividend on Series E
preferred stock
Purchase of treasury stock
Re-issue treasury stock
Comprehensive income:
Net income
Translation adjustments net
Comprehensive income
-------- ------------ ----------- ------------ ----------- ------------
BALANCE - DECEMBER 31, 1999 605,291 $ 1,052,988 16,894,488 $ 6,757,806 $2,096,824 $(1,670,596)
======== ============ =========== ============ =========== ============
<CAPTION>
Accumulated
Other Treasury Stock Total
Retained Comprehensive -------------------------- Shareholders'
Earnings Income Shares Amount Equity
------------ ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1997 $ 2,654,458 $ - 22,460 $ (19,302) $ 6,726,492
Issuance of common stock 293,333
Conversion of Series E preferred stock 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 4,773,987 - 22,460 (19,302) 9,341,708
Issuance of common stock - 127,160
Accretion of Series E preferred stock (17,950) (17,950)
Payment of dividend on Series E
preferred stock (31,578) (31,578)
Re-issue treasury stock - (10,000) 8,600 5,150
Net income 1,794,560 1,794,560
------------ ---------- ---------- ------------- ------------
BALANCE - DECEMBER 31, 1998 6,519,019 - 12,460 (10,702) 11,219,050
Issuance of common stock 190,100
Common stock issued to acquire Glas-Aire 3,327,340
Conversion of Series E preferred stock 8,849
Accretion of Series E preferred stock (19,400) (19,400)
Payment of dividend on Series E
preferred stock (31,805) (31,805)
Purchase of treasury stock 4,040,375 (3,327,340) (3,327,340)
Re-issue treasury stock (10) 9 9
Comprehensive income:
Net income 2,292,922 2,292,922
Translation adjustments net (23,675) (23,675)
------------
Comprehensive income 2,269,247
------------ ---------- ---------- ------------- ------------
BALANCE - DECEMBER 31, 1999 $ 8,760,736 $ (23,675) 4,052,825 $ (3,338,033) $ 13,636,050
============ ========== ========== ============= ============
</TABLE>
* Preferred stock does not include Series E preferred stock which is subject
to mandatory redemption
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 28
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,292,922 $ 1,794,560 $ 2,187,618
Adjustments to reconcile net income to net cash
used by operating activities:
Minority interest 164,397 9,421 (4,555)
Income from equity investment in partnership (4,261,212) (3,950,090) (3,820,913)
Distribution of equity earnings from partnership 101,326 102,278 102,825
Interest amortization on long-term debt 952,075 612,855 756,160
Depreciation and amortization 351,985 124,959 91,573
Issuance of common stock in lieu of cash compensation 69,100 132,310 233,333
Gain on retirement of debt and disposal of assets (346,211) - -
Undistributed earnings of subsidiaries (114,961) - -
Changes in operating assets and liabilities:
Accounts receivable (100,154) (171,276) (327,259)
Inventory (233,221) (269,856) (49,137)
Other current assets 124,353 (9,484) (96,156)
Other assets 110,764 46,644 (135,813)
Accounts payable (555,802) 26,480 26,335
Accrued expenses 879,332 (148,236) 102,671
------------ ------------ ------------
Net cash used by operating activities (565,307) (1,699,435) (933,318)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of cash of $595,995 in 1999 and
$13,535 in 1997 (885,098) - (1,086,465)
Expenditures for property and equipment (1,002,781) (1,910,484) (122,029)
Proceeds from sales of property 126,565 - -
------------ ------------ ------------
Net cash used by investing activities (1,761,314) (1,910,484) (1,208,494)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 636,323 10,805,307 -
Payment of long-term debt (85,962) (4,607,750) -
Debt issuance costs - (949,673) -
Net short-term proceeds 20,553 324,200 140,000
Issuance of common stock 1,967,960 - -
Dividends paid (31,805) (31,578) (47,489)
Dividends paid to minority interest - (14,400) (2,000)
------------ ------------ ------------
Net cash provided by financing activities 2,507,069 5,526,106 90,511
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 180,448 1,916,187 (2,051,301)
CASH AND CASH EQUIVALENTS - BEGINNING 2,168,541 252,354 2,303,655
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - ENDING $ 2,348,989 $ 2,168,541 $ 252,354
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 29
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<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) $ 259,652 $ 746,413 $ 27,187
Income taxes 78,415 82,350 60,750
Supplemental disclosures of noncash investing and financing activities:
In 1999, the Company issued: 10,828 shares of common stock
in exchange for 88.5 shares of Series E mandatorily redeemable
preferred stock; 121,000 shares of common stock to retire
the zero coupon bonds issued by NRDC; 47,736 shares as
compensation to its board of directors; and 30,010 shares to
satisfy other obligations
In 1999, the Company issued 1,580,425 shares of its common
stock, a promissory note in the amount of $650,000 and
paid cash of $1,481,093 for 51.3% of the outstanding
common stock of Glas-Aire Industries Group, Ltd. In
connection therewith, the Company acquired assets and
assumed certain liabilities as follows:
Fair value of assets acquired, including goodwill $ 5,304,776
Cash paid (1,481,093)
Promissory note issued (650,000)
Common stock issued (1,359,380)
-----------
Liabilities assumed $ 1,814,303
===========
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. 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> 30
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
subsidiaries, Rustic Crafts International, Inc. ("Rustic
Crafts"), and Speed.com, Inc., its 80% owned subsidiaries,
National Resource Development Corporation ("NRDC"),
Transcontinental Drilling Company ("Drilling") and
RegTransco, Inc. ("RTI") and its 51% owned subsidiary,
Glas-Aire Industries Group, Ltd. ("Glas-Aire") since
September 23, 1999, the date in which the Company achieved
an ownership interest greater than 50% through January 31,
2000, the end of its fiscal year. All significant
intercompany balances and transactions have been eliminated
in consolidation. Substantially all net sales in 1998 and
1997, and approximately 50% of net sales in 1999, were
generated through Rustic Crafts, which manufactures wood and
cast marble decorative fireplaces, heater logs and related
accessories. Rustic Crafts (whose customers are primarily
mass merchants, fireplace specialty distributors and
furniture stores) and Glas-Aire (whose customers are
primarily automobile manufacturers) extend credit to their
customers in the ordinary course of business. One Rustic
Crafts customer accounted for approximately 19%, 53% and 28%
of consolidated sales for 1999, 1998 and 1997, respectively.
Three Glas-Aire customers accounted for 41% of consolidated
sales for 1999. On a pro forma basis, it is anticipated that
these three Glas-Aire customers would account for up to 56%
of consolidated sales. The loss of one or more of these
customers could have a significant effect on the Company's
results of operations.
Regency Affiliates, Inc.'s (Registrant's) share of
consolidated net assets at December 31, 1999 and 1998
consists principally of cash and cash equivalents of
approximately $1,442,000 and $2,105,000, respectively,
investment in partnership of approximately $19,959,000 and
$15,800,000, respectively, property, plant and equipment
(including rental property) of approximately $12,000 and
$128,000, respectively, and liabilities of approximately
$11,578,000 and $9,965,000, respectively.
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 8).
The weighted average number of shares used in basic earnings
per share computations for 1999, 1998 and 1997 was
approximately 12,664,000, 12,546,000, and 12,038,000,
respectively. The weighted average number of shares used in
the computation of diluted earnings per share for 1999, 1998
and 1997 was approximately 14,923,000, 14,892,000 and
14,231,000, respectively. The shares of the Company held by
Glas-Aire were treated as treasury shares for earnings per
share computations. The Company's stock was thinly traded in
the over-the-counter market on the bulletin board section
until late 1999. In 1999, 1998 and 1997, market
F-10
<PAGE> 31
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. Earnings Per Share (Continued)
prices of $.984, $.547 per share and $.616 per share,
respectively, were utilized in the conversion formulas for
the computation of diluted earnings per share. In 1999, 1998
and 1997, if market prices of $.563 per share, $.437 per
share and $.437 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 15,435,000,
15,169,000 and 14,631,000, respectively, yielding diluted
earnings per share of $.15, $.12 and $.15, respectively.
Earnings per common share attributable to extraordinary gain
(net of tax) for 1999 are: Earnings per common share - basic
of $.03 and earning per common share - diluted of $.02.
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. Market
value for raw materials is defined as replacement cost and
for work-in-progress and finished products as net realizable
value. Inventory is comprised of the following at December
31, 1999 and 1998:
1999 1998
---- ----
Finished products $ 596,830 $ 379,672
Work-in-process 455,503 120,416
Raw materials and supplies 790,659 305,918
---------- ----------
$1,842,992 $ 806,006
========== ==========
F-11
<PAGE> 32
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, 1999 and 1998:
<TABLE>
<CAPTION>
Property, Plant
and Equipment Rental Property
------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Land $ 100,000 $ 100,000 $ - $ -
Buildings 2,307,411 1,736,526 - 118,877
Leasehold improvements 311,447 73,200 - -
Machinery and equipment 3,147,892 173,347 - -
---------- ---------- -------- ----------
5,866,750 2,083,073 - 118,877
Accumulated depreciation 1,438,859 103,010 - 10,365
---------- ---------- -------- ----------
$4,427,891 $1,980,063 $ - $ 108,512
========== ========== ======== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1999,
1998 and 1997 was $295,193, $81,056, and $36,194,
respectively.
G. Aggregate Inventory - Inventory, which consists of 70+
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. 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, 1999, 1998 and 1997, the
Company made only casual sales of aggregate. Aggregate is
primarily sold for railroad ballast, road construction,
construction along shore lines and decorative uses. The
market for aggregate stone is highly competitive and, as
shipping costs are high, the majority of sales, if any, can
be anticipated to be made locally. Other companies that
produce rock and aggregate products are located in the same
region as the Groveland Mine. Many of these competitors have
greater financial and personnel resources than the Company.
The Company continues to have discussions with several
companies regarding the possible sale of its interest in
NRDC. To facilitate the discussions concerning a possible
sale, the zero coupon bonds (secured by the aggregate
inventory) which had been issued by NRDC were retired by the
issuance of 121,000 shares of the Company's common stock.
The Company has installed limited aggregate crushing and
marketing operations at the Groveland Mine in an informal
joint venture with another company. Pending the outcome of
current discussions regarding the possible sale of the
Company's interest, the Company is exploring the possibility
of establishing a permanent infrastructure during the year
2000 to commercialize the inventory of previously quarried
and stockpiled aggregate at the Groveland Mine in
cooperation with an experienced aggregate supply company.
F-12
<PAGE> 33
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. Goodwill - Goodwill resulted from the acquisition of Rustic
Crafts in 1997 and Glas-Aire in 1999. The goodwill is being
amortized straight-line over a period of 15 years.
Accumulated amortization was $135,946 and $83,344 at
December 31, 1999 and 1998, 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 $239,179 and $80,029 at
December 31, 1999 and 1998, respectively.
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. Foreign Currency Translation - Glas-Aire's functional
currency is the Canadian dollar and its operations have been
translated into the U.S. dollar using Statement of Financial
Accounting Standards No. 52.
L. 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.
M. New Authoritative Pronouncements - 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, as amended by SFAS 137, is effective for all
fiscal quarters of all fiscal years beginning after June 15,
2000. Management believes this pronouncement will have no
material effect on the financial statements.
N. Year 2000 Issues - The Company had not anticipated any
material difficulties to be associated with Year 2000 issues
and none materialized. The Company made no material
expenditures associated with Year 2000 issues and had not
anticipated that any material amounts would be expended in
its earlier reports.
O. Reclassifications - Certain reclassifications were made to
prior period financial statement presentations to conform
with current period presentations.
F-13
<PAGE> 34
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INVESTMENT IN GLAS-AIRE
On April 22, 1999, the Company, through its wholly-owned
subsidiary Speed.com, Inc., acquired 513,915 shares of the common
stock of Glas-Aire in exchange for the issuance of a promissory
note of $650,000 due January 1, 2000, at an interest rate of 7.5%
per annum, which note is guaranteed by Mr. William Ponsoldt, Sr.,
President of the Company and $1,213,000 in cash. The cash was
obtained from an affiliate of Statesman through the issuance of
an unsecured demand note at 7.5% per annum. The Company also
purchased 3,000 shares of the common stock of Glas-Aire on the
open market. On August 2, 1999, the Company acquired 41,600
shares of the common stock of Glas-Aire on the open market for
$119,619. The funds were provided by an affiliate of Statesman on
an unsecured basis. On August 14, 1999, the Company sold
2,852,375 shares of its common stock to Glas-Aire for cash of
$1,967,960 and 86,000 shares of Glas-Aire common stock for an
aggregate consideration of $2,281,900. On September 23, 1999, the
Company closed a common stock exchange agreement with certain
shareholders of Glas-Aire. Under the agreement, the Company, in a
private transaction, issued 1,188,000 shares of its restricted
common stock to such shareholders in exchange for 288,000
Glas-Aire common shares held by the shareholders. These
shareholders had previously exchanged 1,188,000 shares of Company
stock for 288,000 newly issued shares of Glas-Aire stock. With
the closing of the agreement, the Company owned 51.3% of the
then outstanding common shares of Glas-Aire.
The Company accounted for the investment in Glas-Aire on the
equity method from April 22, 1999 until September 23, 1999 when
the Company's ownership exceeded 50%, whereupon the Company began
to consolidate the accounts of Glas-Aire (Note 1.A.). Income
recognized under the equity method related to Glas-Aire in 1999
was $114,961 and is included in other income in the Consolidated
Statement of Operations. The common shares of the Company, held
by Glas-Aire, are treated as treasury shares in these financial
statements.
At the Glas-Aire Annual Shareholders' Meeting held on November 4,
1999, William Ponsoldt, Sr. and Marc Baldinger, current directors
of the Company, along with two other nominees proposed by the
Company, were elected to the six member board of Glas-Aire. Mr.
Ponsoldt, the Company's Chairman, also serves as Chairman of the
Board of Glas-Aire.
Glas-Aire is a leading designer, developer, manufacturer and
world-wide marketer of sunroof deflectors, hood protectors and
rear air deflectors for automobiles, vans and light trucks.
Glas-Aire's corporate offices and manufacturing facilities are
located in Vancouver, Canada. The following unaudited pro forma
consolidated results of operations assumes that the consolidation
of Glas-Aire occurred at January 1, 1998. The pro forma results
are for illustrative purposes only and do not purport to be
indicative of the actual results which would have occurred had
the transaction been consummated at an earlier date, nor are they
indicative of results of operations which may occur in the
future.
<TABLE>
<CAPTION>
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Net sales $13,638,300 $10,429,000
Net income 2,358,800 1,999,400
Net income applicable to common stock 2,307,600 1,931,800
Net income per common shares
Basic 0.19 0.15
Diluted 0.16 0.13
</TABLE>
F-14
<PAGE> 35
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITION OF RUSTIC CRAFTS
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.
NOTE 4. 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.
The investment in Security is estimated to provide the Company
with management fees of approximately $100,000 per annum until
2003. In the year ended December 31, 1999, the Company's income
from its equity investment in the Partnership was $4,261,212.
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 $19,959,517 the partnership does not provide
liquidity to the Company in excess of the $100,000 annual
management fee.
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 25
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> 36
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. 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
Security's book income or loss. The investment in partnership
included in the Consolidated Balance Sheets at December 31, 1999
and 1998 was $19,959,517 and $15,799,631, respectively. The
income from the Company's equity investment in the Partnership
for the years ended December 31, 1999, 1998 and 1997 was
$4,261,212, $3,950,090 and $3,820,913, respectively. The
undistributed earnings from the Company's equity investment in
the Partnership as of December 31, 1999 and 1998 amounted to
$19,609,517 and $15,449,631, respectively.
Summarized financial information for Security is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
BALANCE SHEET DATA
------------------
<S> <C> <C>
Cash and receivables $ 1,154,601 $ 1,234,122
Restricted cash 3,413,241 3,658,402
Real estate, net 48,112,653 50,507,072
Other assets 862,130 1,181,135
------------ ------------
Total assets $ 53,542,625 $ 56,580,731
============ ============
Accounts payable and accrued expenses $ 564,628 $ 611,411
Project note payable 29,818,288 35,871,949
Other liabilities 3,128,137 4,444,625
------------ ------------
Total liabilities 33,511,053 40,927,985
Partners' capital:
Regency Affiliates, Inc. 19,959,517 15,799,631
Other partners 72,055 (146,885)
------------ ------------
Total partners' capital 20,031,572 15,652,746
------------ ------------
Total liabilities and partners' capital $ 53,542,625 $ 56,580,731
============ ============
</TABLE>
STATEMENT OF OPERATIONS DATA
----------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues $ 13,244,631 $ 13,207,758 $ 11,865,721
Expenses 6,229,300 6,074,879 5,673,776
------------ ------------ ------------
Net operating income 7,015,331 7,132,879 6,191,945
Other expenses (2,529,846) (2,974,574) (2,169,931)
------------ ------------ ------------
Net income $ 4,485,485 $ 4,158,305 $ 4,022,014
============ ============ ============
</TABLE>
See Note 13. Contingencies, Risks and Uncertainties related to
the Company's investment in Security.
F-16
<PAGE> 37
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. 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, 2000 and bears interest at the Bank's prime
rate minus one-half percent (8.25% at December 31, 1999). 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, 1999. The line of credit is guaranteed by the Company. At
December 31, 1999 and 1998, the amounts outstanding under the
line of credit were $431,000 and $464,200, respectively.
In connection with the acquisition of the common shares of
Glas-Aire, the Company issued a promissory note in the amount of
$650,000 to the seller of the shares. The note bears interest at
the rate of 7.5% and is secured by a first priority interest in
200,000 shares of Glas-Aire. The outstanding balance at December
31, 1999 was $600,000. The note was repaid in January 2000.
The Company's subsidiary, Glas-Aire, has established a Canadian
$1,000,000 (U.S. $680,000) line of credit with a Canadian bank.
The line of credit is collateralized by accounts receivable and
inventory and bears interest at the rate of the Canadian bank's
prime rate plus one-half percent (6.6% at December 31, 1999). At
December 31, 1999, the amount outstanding under the line of
credit was $118,262.
NOTE 6. 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,
1999 and 1998, the amount outstanding under the Loan is
$10,512,717 and $9,756,698, respectively, including $1,129,397
and $373,378 of interest, through December 31, 1999 and 1998,
respectively.
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.
F-17
<PAGE> 38
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT (CONTINUED)
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 the insurance ($745,000) along with
legal fees and other costs associated with obtaining the Loan
($205,000) have been capitalized as debt issuance costs and are
being amortized over the life of the Loan using the effective
interest method.
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.
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 totaling $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 LOAN - On March 25, 1998, Rustic Crafts purchased a
building of 126,000 square feet located in Scranton,
Pennsylvania. The purchase of this facility was funded in part by
a first mortgage term loan in the amount of $960,000. The first
mortgage term loan is payable in consecutive monthly installments
over 10 years with a 20 year amortization. The balance
outstanding at December 31, 1999 and 1998 was $915,667 and
$945,961, respectively.
EQUIPMENT LOANS - In connection with the purchase of the
building, PNC Bank loaned the Company a total of $767,000 to
finance the acquisition of new equipment and to install such
equipment in the facility. Principal payments on one loan of
$604,000 are due to begin in March 2000 for 120 months in amounts
sufficient to amortize the outstanding balance over twenty years
from March 2000. In March 2000 the interest rate will change to
the average weekly yield on U.S. Treasury Bills, plus 200 basis
points. The remaining loan in the original amount of $163,500 is
payable in equal monthly installments of $2,518. The outstanding
balance of these loans was $747,855 and $423,940 at December 31,
1999 and 1998, respectively.
MISCELLANEOUS LOAN - In June 1999, Rustic Crafts obtained an
additional loan from PNC Bank for the purpose of funding
additional equipment purchases and working capital in the amount
of $156,000. The loan is payable in equal monthly installments,
including principal and interest, of $3,153. The outstanding
balance was $146,263 at December 31, 1999.
The interest rates on the mortgage loan, the equipment loan and
the miscellaneous loan are at the PNC Bank's prime rate minus
one-half percent (8.25% at December 31, 1999).
F-18
<PAGE> 39
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT (CONTINUED)
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, 1999.
VEHICLE NOTE - Rustic Crafts has outstanding a vehicle note in
the amount of $11,922 and $16,931 at December 31, 1999 and 1998,
respectively.
LEASE OBLIGATIONS - Glas-Aire has two long-term lease obligations
to purchase equipment. These obligations were five year capital
leases and have been recorded as a capital asset and long-term
debt. The equipment, with a cost of $303,171 and accumulated
depreciation of $28,980, is pledged as collateral for the leases.
The terms of the leases require equal monthly installments of
$7,484 including principal and interest over a five year period.
Interest rates on the leases range from 6.5% to 8.6%. The total
outstanding balance of these lease obligations is $196,020 at
December 31, 1999.
ZERO COUPON BONDS - The zero coupon non-recourse secured bonds,
due January 1, 2002, had a face value of $542,000 and a carrying
value of $414,700 at December 31, 1998. The bonds were issued by
NRDC and the difference (discount) between the face value and
carrying value was being amortized utilizing the interest method
at 9%. Interest expense related to the bonds for 1999, 1998 and
1997 was $36,905, $31,200 and $31,200, respectively.
In 1999, certain bondholders agreed to exchange these zero coupon
bonds for 121,000 shares of the Company's common stock at an
agreed upon per share value of $1.00. Also, a significant amount
of the bonds were retired in connection with the agreement of the
Company to discontinue certain claims against one of the
bondholders. The exchange of common stock for the bonds and
settlement of the claims resulted in a gain on retirement of debt
of $330,605 (net of tax of $-0-, due to available net operating
loss carryforwards), which is reflected in the accompanying
statement of operations as an extraordinary gain.
Required annual principal payments (based on the current carrying
value of debt securities) on long-term debt at December 31, 1999
are:
2000 $ 176,800
2001 133,200
2002 127,700
2003 10,647,900
2004 113,300
Thereafter 1,331,544
-----------
$12,530,444
===========
NOTE 7. 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 9) in the Company.
F-19
<PAGE> 40
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. SERIAL PREFERRED STOCK
At December 31, 1999 and 1998, the Company had 5,000,000
authorized shares of $.10 par value serial preferred stock.
Serial preferred stock at December 31, 1999 and 1998, all of
which is convertible (other than Series C) and cumulative,
consists of:
MANDATORY REDEEMABLE SHARES - SERIES E, $100 STATED VALUE, 12.5%
CUMULATIVE
<TABLE>
<CAPTION>
Shares Value
-------------------------- ------------------------
Designated Outstanding Carrying Liquidation
---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 566,400 5,044 $ 401,054 $ 504,400
Converted to common shares - (2,477) (202,354) (247,750)
Accretion - - 20,600 -
------- ----- --------- ---------
Balance, December 31, 1997 566,400 2,567 219,300 256,650
Accretion - - 17,950 -
------- ----- --------- ---------
Balance, December 31, 1998 566,400 2,567 237,250 256,650
Converted to common shares - (89) (8,850) (8,850)
Accretion - - 19,400 -
------- ----- --------- ---------
Balance, December 31, 1999 566,400 2,478 $ 247,800 $ 247,800
======= ===== ========= =========
</TABLE>
Certain Series E holders elected to convert 89 shares of Series E
preferred stock into 10,828 shares of common stock during 1999 and
2,477 shares into 468,551 shares in 1997.
REDEEMABLE SHARES AT COMPANY'S OPTION
<TABLE>
<CAPTION>
Shares Value
--------------------------- ----------------------------------------------
1999 1998
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 25,694 256,940 382,842(b) 364,856(b)
------- ------- ----------- ----------- -----------
606,747 605,291 $ 1,052,988 $24,975,312 $24,957,326
======= ======= =========== =========== ===========
</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 $125,902 and $107,916 at
December 31, 1999 and 1998, respectively.
F-20
<PAGE> 41
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. 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 was increased by periodic accretion to
the Company's retained earnings, for the difference between the
initial carrying value and the redemption value. Accretion,
utilizing the interest method, for 1999, 1998 and 1997 was
$19,400, $17,950 and $20,600, respectively. Dividends of $31,805,
$31,578 and $47,489 on the Series E stock were paid or accrued in
1999, 1998 and 1997, 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 1999 and 1997, certain holders of Series E stock
elected to convert 89 and 2,477 Series E shares into 10,828 and
468,551 shares of common stock, respectively.
On January 31, 2000, the holders of the Series E preferred stock
either converted their preferred shares to the Company's common
stock or received cash equal to the par value of the shares, plus
accrued dividends. The Company issued 95,877 of its common shares
in exchange for 885 shares of preferred stock and paid cash in
the amount of $159,300 for 1,593 shares. 88.5 shares of preferred
stock are being held pending a new series of preferred stock
which is expected to be offered by the Company in April 2000.
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 3)) 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.
F-21
<PAGE> 42
NOTE 8. SERIAL PREFERRED STOCK (CONTINUED)
SERIES B (Continued)
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.
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, 1999, the Company had no accumulated and unpaid
dividends on Series C and E preferred shares.
NOTE 9. 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. 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 to recognize in part, the
amendment to the Series C preferred shares under which Statesman
forfeited the common stock conversion rights with respect
thereto. Statesman also agreed to provide loan guarantees not to
exceed the sum of $300,000 upon the request of the Company and a
showing of reasonable need. Statesman and/or its affiliated
interests have provided loan guarantees and/or unsecured prime
interest rate direct loans to the Company exceeding $2,000,000
since June 1997. Pursuant to the Amended and Restated Agreement
between the Company and Statesman, until their date of
expiration, the options shall be exercisable at
F-22
<PAGE> 43
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. STOCK OPTIONS/STOCK OPTION PLANS (CONTINUED)
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 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.
In 1999, the Company issued 90,000 non-qualified common stock
options at the exercise price of $.93, the fair market value of
the Company's common stock on the date of grant, to the directors
in accordance with the Director's Compensation Program approved by
the shareholders. The options will vest completely on February 5,
2000, and are exercisable until August 5, 2004.
The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for options. The Company has
elected to treat these option awards to directors as employee
based compensation and therefore has not recorded the estimated
value of these options in the accompanying statement of
operations. The fair value of the Company's stock-based
compensation to directors was estimated using the Black-Scholes
option pricing model. The Black-Scholes model was developed for
use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, the
Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. The
Company's stock-based compensation has characteristics
significantly different from those traded options and changes in
the subjective input can materially affect the fair value
estimate. The fair value of the Company's stock awards was
estimated assuming the following assumptions: no expected
dividends, risk free interest rate of 5.9%, expected average life
of approximately 3.5 years and expected stock price volatility of
55.46%. The weighted average fair value of options granted was
$.43.
F-23
<PAGE> 44
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. STOCK OPTIONS/STOCK OPTION PLANS (CONTINUED)
A subsidiary of the Company, Glas-Aire, also issued 60,000 options
for its common stock to its directors in 1999. The assumptions
related to the Glas-Aire options were: no expected dividend, risk
free interest rate of 5.64%, expected average life of 3 years and
expected stock price volatility of 216%. The weighted average fair
value of options granted was $4.04.
Had compensation cost for the options been determined based on the
fair value at the grant dates for the awards, net income and net
income per common share (basic and diluted) would have been as
follows for 1999:
<TABLE>
<CAPTION>
As Reported Pro forma
----------- ---------
<S> <C> <C>
Net income $ 2,292,922 $ 2,160,768
Net income attributable to common shareholders 2,223,731 2,091,577
Net income per common share:
Basic .18 .17
Diluted .15 .14
</TABLE>
The following is a summary of the status of the Company's options
for 1999:
Average
Exercise
Options Price
------- -----
Outstanding at beginning of year -0- $ -
Issued 90,000 .93
Cancelled -0- -
------- -----
Outstanding at end of year 90,000 $.93
======= =====
The following table summarizes information about options
outstanding at December 31, 1999:
Number outstanding and exercisable 90,000 shares
Average remaining contractual life 4.65 years
Exercise price $.93 per share
F-24
<PAGE> 45
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. 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 depreciation, earnings
from the Company's partnership investment in Security Land and
Development Company Limited Partnership related to depreciation
and amortization and the recognition of income tax carryforward
items.
At December 31, 1999 and 1998, the Company's net deferred tax
asset, utilizing a 34% effective tax rate, consists of:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Investment partnership earnings $ 2,731,000 $ 2,384,000
Net operating loss carryforwards 9,940,000 11,068,000
Alternative minimum tax credits 454,000 394,000
Valuation allowance (13,125,000) (13,846,000)
------------ ----------
Subtotal - -
Deferred tax liabilities:
Depreciation (416,695) -
------------ ----------
Net deferred tax liabilities $ (416,695) $ -
============ ==========
</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. The deferred tax
liability related to depreciation is due to the consolidation of
the accounts of Glas-Aire in 1999. Glas-Aire files a separate
return for income tax purposes.
For regular federal income tax purposes, the Company has
remaining net operating loss carryforwards of approximately
$29,235,000. 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, 1999, 1998 and 1997, the tax
effect of net operating loss carryforwards reduced the current
provision for regular Federal income taxes by approximately
$980,000, $583,000 and $708,000, respectively. At December 31,
1999, 1998 and 1997, the Company has provided $235,309, $98,583
and $73,665, respectively, for taxes, which relate to federal
taxes, including alternative minimum tax liabilities (See Note
13) and state income taxes.
F-25
<PAGE> 46
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. INCOME TAXES (CONTINUED)
The provision for income taxes is as follows:
1999 1998 1997
-------- -------- --------
Current $212,092 $ 98,583 $ 73,665
Deferred 23,217 - -
-------- -------- --------
$235,309 $ 98,583 $ 73,665
======== ======== ========
NOTE 11. 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, approximately $43,000, 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, 1999 and
1998, approximately $295,500 and $136,600, 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.
NOTE 12. 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 $40,000 in 1999 and $36,000 in each of
the years 1998 and 1997, under an agreement to provide certain
administrative services to the Company.
A separate arrangement was made with Mr. Horbach in June 1999 and
amended in September 1999 under which Mr. Horbach is paid at the
rate of $60 per hour to work on specific projects for the
Company, primarily related to the Company's acquisition and
growth program including these acquisitions. Mr. Horbach was paid
$50,700 under the separate arrangement.
F-26
<PAGE> 47
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. 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
as the current 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. 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 in order to permit the
Company to make more than casual sales of the aggregate
(See Note 1.G.).
(iii) 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 (See Note 4).
(iv) 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.
(v) 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 10).
NOTE 14. LEASE COMMITMENTS
Glas-Aire leases factory, warehouse and office space under a
lease which expires in 2003 with an option for five additional
years. Glas-Aire also leases other warehouse space in the U.S.
Base annual lease payments on all facilities are approximately
$107,590. The Company also leases office space through July 2002
with annual lease payments of approximately $45,000. Rent expense
was $123,614, $94,030 and $66,229 for 1999, 1998 and 1997,
respectively.
Future minimum lease payments under operating leases that have
initial or remaining noncancelable lease terms in excess of one
year are as follows:
2000 $157,100
2001 156,600
2002 138,200
2003 107,600
2004 107,600
F-27
<PAGE> 48
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. SEGMENT INFORMATION
The Company's operating structure includes operating segments for
Automobile Accessories (the operations of Glas-Aire, which was
acquired in September 1999 (Note 2)), Home Furnishing Accessories
(the operations of Rustic Crafts, which was acquired in March
1997 (Note 3)), Investment in Partnership (the investment in
Security Land and Development Limited Partnership (Note 4)), and
Corporate and Other. The Company operates and generates its
revenue in the United States and Canada. One Home Furnishing
Accessories customer accounted for approximately 19%, 53% and 28%
of consolidated sales for 1999, 1998 and 1997, respectively.
Three Automobile Accessories customers accounted for 41% of
consolidated sales for 1999. On a pro forma basis, it is
anticipated that these three customers would account for up to
56% of consolidated sales.
Information about the Company's operations by segment follows:
<TABLE>
<CAPTION>
Home Investment
Autombile Furnishing in Corporate
Accessories Accessories Partnership and Other Consolidated
---------------- ----------------- ---------------- ---------------- ----------------
1999
- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 3,930,541 $ 3,875,263 $ - $ 29,267 $ 7,835,071
Income (loss) from operations 395,027 318,446 - (1,617,620) (904,147)
Other income (expense) 32,686 (30,974) - 189,248 190,960
Interest expense - 164,905 - 1,021,097 1,186,002
Income from equity investment
in partnership - - 4,261,212 - 4,261,212
Identifiable operating assets 5,499,895 4,734,718 - 3,463,505 13,698,118
Investments - - 19,959,517 - 19,959,517
Capital expenditures 406,506 595,586 - 689 1,002,781
Depreciation and amortization 129,002 202,959 - 20,024 351,985
Income before income tax
expense and minority interest 367,193 186,227 4,261,212 (2,122,004) 2,692,628
</TABLE>
<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-28
<PAGE> 49
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Home Investment
Furnishing in Corporate
Accessories Partnership and Other Consolidated
------------ ------------ ------------ ------------
1997
- ----
<S> <C> <C> <C> <C>
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
</TABLE>
NOTE 16. SUBSEQUENT EVENTS
In February 2000, the Company executed letters of intent to
acquire 55% of Knight Enterprises, Inc., a leading provider of
voice, data, video and fiber optic high speed digital access to
major cable companies throughout Florida; 100% of Southwest Mill
and Lumber Company, a California based producer of picture frame
molding and frames; and 100% of Valley Wholesale Supply Corp., a
California based marketer of picture molding, framing supplies
and equipment. The Company anticipates that such acquisitions
will be financed by borrowings secured by the assets acquired,
additional borrowings secured by the Company's partnership
interest in Security Land and Development Company, and from
proceeds of a private placement of preferred stock. There can be
no assurance, however, that any of the transactions contemplated
by these letters of intent will be consummated as definitive
agreements have not been executed, and, even if executed, will
likely be subject to the occurrence and/or satisfaction of
certain events and contingencies, any of which may or may not
occur.
NOTE 17. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------- ----------------- ------------------- -------------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $975,154 $631,832 $ 901,022 $718,551 $1,164,941 $1,177,352 $4,793,954 $1,262,104
Net income 455,472 496,959 465,068 171,675 490,105 530,045 882,277 595,881
Earnings per share:
Basic .04 .04 .04 .01 .04 .04 .06 .05
Diluted .03 .03 .03 .01 .03 .03 .06 .05
</TABLE>
F-29
<PAGE> 50
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.
The following directors were elected at the 1999 meeting of the
stockholders held August 5, 1999 and will serve until the next meeting of
stockholders. Executive officers are elected annually by the Board of Directors
or until their successors are duly elected and qualified. 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 OR
EMPLOYMENT DURING PAST FIVE YEARS
NAME, ADDRESS (AGE)
=====================================================================================================================
<S> <C>
William R. Ponsoldt, Sr. (58) Director since June, 1996. Chairman of the Board of Directors
729 South Federal Hwy., Suite 307 Stuart, since August, 1996. President and CEO since June, 1997. During
Florida 34994 the past five years, Mr. Ponsoldt has also 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 (49) Director since July 1993. Ms. Carey is a principal and the
Beaumont House, 3rd Floor Investment Manager for Managed Companies with Bradley Management
King & George Street (Bahamas) Limited. She is also a director of Regal Bahamas
P.O. Box CB 10985 International Airways Limited.
Nassau, Bahamas
Martin J. Craffey (61) Director since July 1993. From January 1988 until December 31,
145 Roseland Lane 1993, Mr. Craffey was a real estate and business broker and
East 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 (58) Director from 1987 to 1990, from 1992 to February 15, 1994 and
1869 South 120th Street since November 16, 1994. Mr. Horbach was appointed interim
Omaha, Nebraska 68144 Chief Financial Officer upon the resignation of Douglas F. Long
on April 1, 2000. Mr.
</TABLE>
21
<PAGE> 51
<TABLE>
<CAPTION>
<S> <C>
Horbach has been Chairman of the Board, and has had other
executive positions with Gateway Energy Corporation at various
times from June 1990 to August 1999. In addition, during the
past five years, Mr. Horbach has been associated with L.J.
Horbach & Associates. Mr. Horbach also serves on the Board of
Directors of Gateway Energy Corporation and Templeton Savings
Bank.
Pamlyn Kelly, Ph.D. (56) Director since July 1993. Dr. Kelly, a psychologist, is
13655 Khalid Court principal and Chief Executive Officer of Human Resource
Grass Valley, California 95949 Concepts, Grass Valley, CA, a registered minority owned
management consulting firm, and she has a private practice.
William R. Ponsoldt, Jr. (34) 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 stockbroker during the past five years. For
21st Floor the past four years he has been employed by Smith Barney and prior
New York, New York 10105 to that he was employed by its predecessor, Lehman Brothers.
Donald D. Graham (65) Director since August, 1999. Mr. Graham has served as President
14012 Giles Road, Suite 2 of Graham Enterprises, Inc., for the past five years.
Omaha, Nebraska 68138
Marc H. Baldinger (44) Director since August, 1999. Mr. Baldinger is a senior officer
989 S. Federal Hwy in financial services for Riverside National Bank, located in
Stuart, Florida 34994 Palm City, Florida. Prior to his employment at Riverside, he
was a certified financial planner for American Express Financial
Advisors, Inc. and Linsco Private Ledger. Mr. Baldinger was
elected to fill a vacant position on the Board of Directors of
Glas-Aire on April 16, 1999.
Douglas F. Long (55) Mr. Long became Chief Financial Officer of the
</TABLE>
22
<PAGE> 52
<TABLE>
<CAPTION>
<S> <C>
13377 S. Indian River Drive Company in March, 1998 and resigned on April 1, 2000. During
Jensen Beach, Florida 34957 the past five years Mr. Long was involved in business and real
estate development matters.
Eunice M. Antosh (50) Secretary of the Company since February 25, 1994. From October
802 County Road "N" 1993 to November 1999, Mrs. Antosh was also 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 31 of this report.
On February 7, 1995, the Company entered into an agreement with L.J.
Horbach & Associates, pursuant to which L.J. Horbach & Associates, provides
certain corporate and administrative services for a monthly fee of $3,000. In
September 1999, the fee agreement was expanded to include substantially all
general corporate operations and the fee increased to $4,000 per month. A
separate arrangement was made with Mr. Horbach in September 1999 under which Mr.
Horbach is paid at the rate $60 per hour to work on specific projects for the
Company, primarily related to the Company's acquisition and growth program
including the financing of same. Mr. Horbach received $50,700 under this
arrangement in 1999. Mr. Horbach was appointed Interim CFO upon the resignation
of Douglas F. Long effective April 1, 2000. L.J. Horbach & Associates, Inc. is
wholly owned by Larry J. Horbach.
Item 405 Disclosure.
None.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table.
23
<PAGE> 53
The following table sets forth the annual and long-term compensation during the
last three years of William R. Ponsoldt, Sr., Douglas F. Long and Eunice M.
Antosh, the only officers who received compensation during 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------------------
AWARDS PAYOUTS
----------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
- ----------------------------------------------------------------------------------------------------------------------------------
Other
Annual Restricted Securities
Name and Com Stock Underlying All
Principal Salary Bonus pensa- Award(s) Options/ LTIP Other
Position Year ($) ($) tion ($) ($) SARs (#) Payouts Compe
($) nsation
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William R. 1999 258,166 424,646(2) 7,200 -0- -0- -0- -0-
Ponsoldt,Sr. 1998 252,333 373,022(2) 7,200 -0- -0- -0- -0-
Chairman 1997 250,000 292,500(2) 5,700 -0-(3) -0- -0- -0-
Pres/ CEO
(1)
- ----------------------------------------------------------------------------------------------------------------------------------
Douglas F. 1999 52,800 -0- 2,400 -0- -0- -0- -0-
Long, CFO 1998 52,800 -0- 2,400 -0- -0- -0- -0-
1997 25,600 -0- -0- -0- -0- -0- -0-
- ----------------------------------------------------------------------------------------------------------------------------------
Eunice M. 1999 22,935 -0- -0- -0- -0- -0- -0-
Antosh, 1998 12,000 -0- -0- -0- -0- -0- -0-
Secretary 1997 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.
24
<PAGE> 54
Mr. Ponsoldt's compensation does not include options to
purchase 10,000 shares of the Company's common stock issued
pursuant to the board compensation program approved by the
shareholders in August 1999.
(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 shareholder's equity and (ii)
any shareholders' equity account related 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 $.040 P.V. Common Stock were issued to Statesman at
a value of $233,333.
Option/SAR Grants.
There were no options/SAR grants to executive officers in 1999.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Value.
There are no stock options (nor tandem SARs) nor freestanding SARs
outstanding at December 31, 1999.
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 to recognize in part, the amendment to the Series C Preferred Shares
under which Statesman forfeited the common stock conversion rights with respect
thereto. Statesman also agreed to provide loan guarantees not to exceed the sum
of $300,000 upon the request of the Company and a showing of reasonable need.
Statesman and/or its affiliated interests have provided loan guarantees and/or
unsecured prime interest rate direct loans to the Company exceeding $2,000,000
since June 1997. 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
25
<PAGE> 55
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.
Non Qualified Stock Options.
Non qualified options to acquire a total of 90,000 common shares were
granted in August 1999 to directors of the Company in accordance with the
Directors' compensation program as approved by the Shareholders in the 1999
Meeting of Shareholders. The options were granted at an exercise price of $0.93
per share, the fair value of the common shares at date of grant. The options
vest on February 5, 2000, and are exercisable to August 5, 2004.
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.
At the 1999 Meeting of Shareholders held on August 5, 1999, the
Shareholders approved a compensation program for directors providing for (i) an
annual retainer for all 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, provided that multi-day meetings and specific consultations with the
Company's executive management lasting at least eight hours are compensated on
a flat per diem rate of $1,000, and (iii) an award of an option to all
directors to purchase 10,000 shares of the Company's Common Stock, at fair
market value on date of grant.
26
<PAGE> 56
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
$7,000 for consulting primarily with respect to the operations of Rustic Crafts
International, Inc. Pamlyn Kelly, Ph.D. was also paid $1,500 with respect to the
marketing of Rustic Crafts products.
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 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.
27
<PAGE> 57
This item is omitted as Regency Affiliates, Inc. qualifies as a "small
business issuer" under Rule 405 and Regulation S-B.
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions.
This item is omitted as Regency Affiliates, Inc. qualifies as a "small
business issuer" under Rule 405 and Regulation S-B.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security ownership of certain beneficial owners.
To the best of the Company's knowledge, the only beneficial owners of
more than five percent of Regency's voting securities as of March 21, 2000 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 Statesman Group, Inc. 3,126,377 (1) 24.0%
Affiliates, Inc. King & George Streets
$.40 P.V. Nassau, Bahamas
Common Stock
</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
28
<PAGE> 58
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.
Security ownership of management.
The following table sets forth as of March 21, 2000 the number of
shares of Regency's $0.40 P.V. Common Stock beneficially owned by each director
and by all executive officers and directors of Regency as a group as of such
date. Unless otherwise indicated, each person has sole voting and investment
powers with respect to the shares indicated.
<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE OF
------- -------------------- (2)
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- -------------- ---------------- -------------------- ----------------
<S> <C> <C> <C>
Regency Affiliates, Inc. Larry J. Horbach 368,701(1) 2.8%
$.40 P.V. Common
Stock
Regency Affiliates, Inc. William R. Ponsoldt, 5,304 .0%
$.40 P.V. Common Sr.
Stock
Regency Affiliates, Inc. Pamlyn Kelly, Ph.D. 84,304 .6%
$.40 P.V. Common
Stock
Regency Affiliates, Inc. Stephanie Carey 5,304 .0%
$.40 P.V. Common
Stock
Regency Affiliates, Inc. Martin J. Craffey 5,304 .0%
$.40 P.V. Common
Stock
Regency Affiliates, Inc. William R. Ponsoldt, 5,304 .0%
$.40 P.V. Common Jr.
Stock
Regency Affiliates, Inc. Fredric R. Lowe 5,304 .0%
$.40 P.V. Common
Stock
Regency Affiliates, Inc. Marc H. Baldinger 5,304 .0%
</TABLE>
29
<PAGE> 59
<TABLE>
<CAPTION>
<S> <C> <C> <C>
$.40 P.V. Common
Stock
Regency Affiliates, Inc. Donald D. Graham 495,304 .0%
$.40 P.V. Common
Stock
Regency Affiliates, Inc. Eunice M. Antosh 76,183 .0%
$.40 P.V. Common
Stock
Regency Affiliates, Inc. All officers and 1,056,316 8.1%
$.40 P.V. Common directors as a group
Stock (11) individuals
</TABLE>
- -----------------
(1) An irrevocable proxy with respect to 328,701 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. On December 31,
1999, Mr. Horbach transferred a total of 40,000 shares to his children.
Such shares are included in the totals above, as Mr. Horbach retained
the voting rights with respect to said shares. These shares are not
subject to the irrevocable proxy.
(2) These percentages do not include the 4,040,375 shares held by
Glas-Aire, a majority-owned subsidiary of the Company.
Cumulative Senior Preferred $100 Series-C Stock
As of December 31, 1999 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 and Donald D. Graham hold 1,238 and 4,072 shares
respectively of the Series-D Junior Preferred Stock - $10 Stated Value over
which each has sole voting power and sole investment power. There are currently
25,694 Series D Preferred Shares outstanding.
30
<PAGE> 60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with management and others.
Reference is made to Part III, Item 10, 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.
31
<PAGE> 61
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, 2000 By: /s/William R. Ponsoldt Sr., President
- ---------------- -------------------------------------
Date William R. Ponsoldt, Sr., President
By: /s/ Larry J. Horbach
-------------------------------------
Larry J. Horbach, Interim 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, 2000 By: /s/ William R. Ponsoldt, Sr.
- --------------- ----------------------------
Date William R. Ponsoldt, Sr. President
and Director
April 13, 2000 /s/ Stephanie Carey
- --------------- -----------------------------
Date Stephanie Carey,
Director
April 13, 2000 /s/ Martin J. Craffey
- ---------------- -----------------------------
Date Martin J. Craffey,
Director
32
<PAGE> 62
April 13, 2000 /s/ Larry J. Horbach
- ---------------- ---------------------------------
Date Larry J. Horbach, Interim CFO
and Director
April 13, 2000 /s/ Pamlyn Kelly, Ph.D.
- ---------------- ---------------------------------
Date Pamlyn Kelly, Ph.D.,
Director
April 13, 2000 /s/ William R. Ponsoldt, Jr.
- ---------------- ---------------------------------
Date William R. Ponsoldt, Jr.,
Director
April 13, 2000 /s/ Fredric R. Lowe
- ---------------- ---------------------------------
Date Fredric R. Lowe,
Director
April 13, 2000 /s/ Donald D. Graham
- ---------------- ---------------------------------
Date Donald D. Graham,
Director
April 13, 2000 /s/ Marc H. Baldinger
- ---------------- ---------------------------------
Date Marc H. Baldinger,
Director
33
<PAGE> 63
INDEX TO EXHIBITS
Exhibit No. Description of Document
- ----------- -----------------------
1(b) Irrevocable Proxies over 855,991 shares of Regency's
$0.40 par value Common Stock, 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
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
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(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
34
<PAGE> 64
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
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(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.
10(l) 7th Amendment to Partnership Agreement of Security
Land and Development Company Limited Partnership
dated June 24, 1998,
35
<PAGE> 65
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.
EXHIBITS FILED HEREWITH:
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
21 Schedule of Registrant's Subsidiaries
27 Financial Data Schedule
99(a) Financial Statements and Independent Auditors' Report
for Security Land And Development Company Limited
Partnership, for the year ended December 31, 1999.
99(b) Financial Statements and Independent Auditors' Report
for Security Land And Development Company Limited
Partnership, for the year ended December 31, 1998.
99(c) Financial Statements and Independent Auditors' Report
for Security Land And Development Company Limited
Partnership, for the year ended December 31, 1997.
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
Glas-Aire Industries Group, Ltd. 51.1% Nevada 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,348,989
<SECURITIES> 0
<RECEIVABLES> 2,373,275
<ALLOWANCES> 0
<INVENTORY> 1,842,992
<CURRENT-ASSETS> 6,803,943
<PP&E> 5,866,750
<DEPRECIATION> 1,438,859
<TOTAL-ASSETS> 33,657,635
<CURRENT-LIABILITIES> 3,801,609
<BONDS> 12,353,644
247,800
1,052,988
<COMMON> 6,757,806
<OTHER-SE> 5,825,259
<TOTAL-LIABILITY-AND-EQUITY> 33,657,635
<SALES> 7,835,071
<TOTAL-REVENUES> 7,835,071
<CGS> 5,343,552
<TOTAL-COSTS> 5,343,552
<OTHER-EXPENSES> 3,395,666
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,186,002
<INCOME-PRETAX> 2,528,231
<INCOME-TAX> 235,309
<INCOME-CONTINUING> 2,292,922
<DISCONTINUED> 0
<EXTRAORDINARY> 330,605
<CHANGES> 0
<NET-INCOME> 2,292,922
<EPS-BASIC> .18
<EPS-DILUTED> .15
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SECURITY LAND AND DEVELOPMENT COMPANY
LIMITED PARTNERSHIP
DECEMBER 31, 1999
<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 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, 1999, 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, 1999, and the results
of its operations, changes in partners' capital and cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Reznick Fedder & Silverman
Bethesda, Maryland
January 31, 2000
-3-
<PAGE> 4
<TABLE>
<CAPTION>
Security Land and Development Company Limited Partnership
BALANCE SHEET
December 31, 1999
ASSETS
<S> <C>
Investment in real estate, net of accumulated depreciation $48,112,653
Cash and cash equivalents 114,445
Restricted escrow 3,413,241
Tenant accounts receivable 1,040,156
Prepaid expenses and other receivables 354,750
Accrued interest income 12,818
Deferred charges, net of accumulated amortization of $2,134,165 494,562
-----------
Total assets $53,542,625
===========
LIABILITIES AND PARTNERS' CAPITAL
Note payable, net of discount $29,818,288
Accounts payable and accrued expenses 262,172
Accrued interest payable 302,456
Deferred rental income 3,128,137
-----------
33,511,053
Partners' capital 20,031,572
-----------
Total liabilities and partners' capital $53,542,625
===========
</TABLE>
See notes to financial statements
-4-
<PAGE> 5
Security Land and Development Company Limited Partnership
STATEMENT OF OPERATIONS
Year ended December 31, 1999
REVENUE
Rental income $13,177,297
Interest income 236,250
Tenant reimbursements and other income 67,334
-----------
Total revenue 13,480,881
-----------
Administrative
Management fees 276,480
Professional fees 73,494
Payroll expenses 579,184
Office expenses 67,328
-----------
996,486
Operating
Janitorial 1,115,888
Maintenance contracts 169,406
Repairs and maintenance 233,465
Maintenance supplies 222,516
-----------
1,741,275
Interest, taxes and insurance
Interest 2,766,096
Real estate taxes 601,560
Insurance 53,487
-----------
3,421,143
Depreciation and amortization
Depreciation 2,524,224
Amortization 312,268
-----------
2,836,492
Total expenses 8,995,396
-----------
NET INCOME $ 4,485,485
===========
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, 1999
<TABLE>
<CAPTION>
Special
General Limited limited
Total partner partner partner
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, beginning $ 15,652,746 $ 1,196,562 $(1,343,751) $ 15,799,935
Net income 4,485,485 181,214 43,061 4,261,210
Distributions (106,660) (4,309) (1,024) (101,327)
------------ ----------- ----------- ------------
Balance, end $ 20,031,571 $ 1,373,467 $(1,301,714) $ 19,959,818
============ =========== =========== ============
</TABLE>
See notes to financial statements
-6-
<PAGE> 7
Security Land and Development Company Limited Partnership
STATEMENT OF CASH FLOWS
Year ended December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities
Net income $ 4,485,485
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation 2,524,224
Amortization 312,268
Deferred rental income (816,488)
Amortization of debt discount 94,800
Increase in tenant accounts receivable (8,682)
Decrease in prepaid expenses and other receivables 6,873
Increase in accrued interest income (136)
Increase in accounts payable and accrued expenses - operating 15,601
Decrease in accrued interest payable (62,384)
Decrease in deferred interest income (500,000)
-----------
Net cash provided by (used in) operating activities 6,051,561
-----------
Cash flows from investing activities
Withdrawals from restricted escrow 245,161
Investment in real estate (129,805)
-----------
Net cash provided by (used in) investing activities 115,356
-----------
Cash flows from financing activities
Payments on note payable (6,148,461)
Distributions paid to partners (106,660)
-----------
Net cash provided by (used in) financing activities (6,255,121)
-----------
NET INCREASE (DECREASE) IN CASH (88,204)
Cash and cash equivalents, beginning 202,649
-----------
Cash and cash equivalents, ending $ 114,445
===========
Cash paid during the year for interest $ 2,733,680
===========
</TABLE>
See notes to financial statements
<PAGE> 8
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
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.
-8-
<PAGE> 9
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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>
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.
-9-
<PAGE> 10
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
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 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).
-10-
<PAGE> 11
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
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.
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.
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 23,374,246
Improvements - tenant 7-9 years 7,455,934
Improvements - land 10 years 1,610,778
Furniture and equipment 7 years 841,425
-----------
63,869,670
Less accumulated depreciation 15,757,017
-----------
$48,112,653
===========
</TABLE>
-11-
<PAGE> 12
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
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 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.
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, 1999 was $144,137. Amortized discount for the year
ending December 31, 1999 was $94,800, 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, 1999
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:
2000 $ 6,643,763
2001 7,179,009
2002 7,757,350
2003 8,382,303
-------------------
Total 29,962,425
Less: unamortized discount 144,137
-------------------
Total $ 29,818,288
===================
Interest incurred during the year ended December 31, 1999 was $2,671,296
excluding discount amortization of $94,800.
-13-
<PAGE> 14
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
NOTE D - RESTRICTED ESCROW
The partnership is required to set-up 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, 1999 are as follows:
<TABLE>
<CAPTION>
Description Amount
---------------------------------------------------- ----------------
<S> <C> <C>
Project account To be used for alterations $ -
Note payment accounts To repay Certificates of Participation 1,055,414
Liquidity account To be used for debt liquidity 740,178
Replacement reserve account To be used for capital improvements 542,560
Tax account To pay real estate taxes 366,838
Insurance account To pay insurance expense 91,328
Operations account To pay operating expenses -
Partnership account To pay partnership expenses 339,762
Supplemental retention account To be used as additional funds to repay COPs 276,633
Lease payment account To be used for collection of monthly rent payments 528
-----------------
$ 3,413,241
=================
</TABLE>
All of the restricted escrows are invested in money market funds.
The amount remaining in the project account after the alterations were
completed reverted back to the tenant and were applied against rental income.
-14-
<PAGE> 15
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
NOTE E - RENTAL OPERATIONS
On November 17, 1994, the partnership and the tenant entered into a lease
agreement for 100% of the building with a term of nine years expiring on
October 31, 2003. The lease agreement provides for minimum annual lease
payments of $12,154,632 payable monthly in arrears, plus provisions for
escalations in the event of increased operating costs and real estate
taxes.
Future minimum rentals are as follows:
December 31, 2000 $ 12,154,632
2001 12,154,632
2002 12,154,632
2003 10,128,860
--------------------
$ 46,592,756
====================
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, 1999 the
balance was $113,445. The uninsured balance at December 31, 1999 was
$13,445.
-15-
<PAGE> 16
Security Land and Development Company Limited Partnership
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
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, 1999 were
$1,115,888 and $114,811 remained 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 $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, 1999 were $276,480
with $23,615 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. No
fees were incurred for the year ended December 31, 1999.
General Partner Administrative Fees
-----------------------------------
During the current year, the general partner was paid deferred and current
administrative fees of $100,000 directly from a letter of credit issued by
the general contractor.
-16-
<PAGE> 1
EXHIBIT 99(b)
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(c)
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.
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<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-
