UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 1-7949
REGENCY AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0888772
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
729 SOUTH FEDERAL HIGHWAY, SUITE 307, STUART, FLORIDA 34994
----------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code (561) 220-7662
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of May 20, 2002 there were 1,939,874 shares of the $ .01 Par Value Common
Stock
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
INDEX TO THE FINANCIAL STATEMENTS
Page
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . 6-7
Notes to Consolidated Financial Statements . . . . . . . . . . . 8-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . 13-15
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . 16
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 16
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
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Assets
Current Assets
Cash and Cash Equivalents $ 295,191 $ 310,093
Accounts receivable, net of allowance 361,251 495,160
Income taxes receivable 8,988 8,988
Inventory 929,289 953,909
Other current assets 320,194 309,663
----------- -------------
Total current assets 1,914,913 2,077,813
Property, Plant and Equipment, Net 2,313,966 2,192,695
Investment in partnerships 31,565,704 30,183,346
Other Assets
Aggregate inventory 834,194 834,194
Goodwill, net of amortization 514,617 484,312
Debt issuance costs, net of amortization 315,053 362,311
Accrued interest receivable - related party 55,084 -
Other 3,150 5,205
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Total other assets 1,722,098 1,686,022
$37,516,681 $ 36,139,876
=========== =============
The accompanying notes are an integral part of these financial statements.
3
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
------------ --------------
Current Liabilities
Current portion of long-term debt $ 112,060 $ 238,145
Notes Payable - Banks 930,370 906,977
Accounts payable 458,368 366,440
Accrued expenses 1,232,598 1,043,221
Taxes payable 180,000 180,000
------------ --------------
Total current liabilities 2,913,396 2,734,783
Long term debt, net of current portion 14,017,647 13,495,178
Minority interest in consolidated subsidiaries 26,251 31,741
Shareholders' equity
Serial preferred stock not subject to mandatory redemption
(maximum liquidation preference $24,975,312 in 2002 and 2001,
Respectively 1,052,988 1,052,988
Common stock, par value $.01 authorized 25,000,000 shares; issued and
outstanding 1,939,874 shares in 2002 and 2001 19,399 7,759,509
Additional paid-in capital 8,337,404 597,294
Readjustment resulting from quasi-reorganization at December 31, 1987 (1,670,596) (1,670,596)
Retained earnings 15,270,885 14,589,672
Note receivable - related party (2,440,000) (2,440,000)
Treasury stock, 405,283 shares in 2002 and 2001 (10,693) (10,693)
------------ --------------
Total shareholders' equity 20,559,387 19,878,174
------------ --------------
$37,516,681 $ 36,139,876
============ ==============
The accompanying notes are an integral part of these financial statements.
4
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
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Net Sales $ 502,883 $3,385,072
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Costs and expenses
Costs of goods sold 397,884 2,572,388
Selling and administrative 635,271 1,187,923
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1,033,155 3,760,311
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(Loss) from operations (530,272) (375,239)
Income from equity investment in partnerships 1,486,660 1,225,396
Other income, net 62,393 24,583
Interest expense (343,058) (314,345)
----------- -----------
Income before income tax expense, and minority interest 675,723 560,395
Income tax expense - (68,923)
Minority interest 5,490 (37,460)
----------- -----------
Net income $ 681,213 $ 454,012
=========== ===========
Net income per common share:
Basic $ 0.35 $ 0.26
=========== ===========
Diluted $ 0.35 $ 0.26
=========== ===========
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Weighted average number of common shares outstanding 1,939,874 1,725,162
The accompanying notes are an integral part of these financial statements.
5
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
------------ ------------
Cash flows from operating activities
Net income $ 681,213 $ 454,012
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation and amortization 90,589 166,889
Change in deferred income taxes - (21,818)
Minority interest (5,490) 32,460
Income from equity investment in partnerships (1,382,358) (1,225,396)
Interest amortization on long-term debt 252,040 210,771
Changes in operating assets and liabilities
Accounts receivable 133,909 1,143,075
Accrued interest receivable (55,084) -
Inventory 24,620 (65,057)
Other current assets (10,531) (250,579)
Accounts payable 91,928 (246,997)
Accrued expenses 189,377 1,003,337
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Net cash from (used by) operating activities 10,213 1,200,697
Cash flows from investing activities
Capital expenditures (194,907) (73,017)
Other 2,055 8,601
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Net cash used by investing activities (192,852) (64,416)
------------ ------------
Cash flows from financing activities
Net short-term borrowings (payments) 23,393 (89,440)
Net long-term borrowings (payments) 144,344 (741,249)
------------ ------------
Net cash from (used) by financing activities 167,737 (830,689)
------------ ------------
Foreign currency translation adjustment - (28,255)
Increase (decrease) in cash and cash equivalents (14,902) 277,337
Cash and cash equivalents - beginning 310,093 928,636
------------ ------------
Cash and cash equivalents - ending $ 295,191 $ 1,205,973
============ ============
The accompanying notes are an integral part of these financial statements.
6
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2002AND 2001
(UNAUDITED)
2002 2001
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ - $ 86,695
Interest 39,366 6,478
The accompanying notes are an integral part of these financial statements.
7
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Bases of Presentation and Summary of Significant Accounting Policies
A. Basis of Presentation - The accompanying unaudited condensed
consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for
the three-month period ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto included
in the Registrant Company and Subsidiaries' annual report on
Form 10-K for the year ended December 31, 2001.
B. Principals 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"), its 80%
owned subsidiaries, National Resource Development Corporation
("NRDC"), Transcontinental Drilling Company ("Drilling") and
RegTransco, Inc. ("RTI"), its 75% owned subsidiary, Iron Mountain
Minerals, Inc. ("IMM") and its 50% owned subsidiary, Glas-Aire
Industries Group, Ltd. ("Glas-Aire") from September 23, 1999, the
date in which the company achieved an ownership interest greater
than 50% through October 1, 2001, the date this interest was
disposed of. All significant intercompany balances and
transactions have been eliminated in consolidation.
C. Earnings Per Share - Basic earnings per share are computed by
dividing net income attributable to common shareholders by the
weighted average number of common shares outstanding during the
year. Diluted earnings per share computations assume the
conversion of 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. On February 5, 2002 the
Company's stockholders approved a one-for ten reverse stock
split of the Company's common stock, par value $0.40 per
share, and a decrease in the par value to $0.01 per share. The
computation of basic and diluted EPS have been retroactively
adjusted for the period ending March 31, 2001 to reflect this
change in capital structure.
D. Inventory - Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method. Inventory is
comprised of the following at March 31, 2002:
Raw materials and supplies $282,822
Work-in-process 7,144
Finished products 639,323
$929,289
========
E. Aggregate Inventory - Inventory, which consists of 70+ million
short tons 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 sale of the aggregate. In December 2001 the aggregate
inventory was sold to Iron Mountain Minerals, Inc., a 75% owned
subsidiary of the Company. The purchase price was $18,200,000 and
is payable, with interest of 2.46% in ninety-six
8
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Bases of Presentation and Summary of Significant Accounting Policies
(Continued)
equal payments of principal and interest commencing December
2003. The intercompany gain on this transaction has been
eliminated in the consolidation process resulting in the
aggregate inventory being carried at it's historical cost.
Otherwise, the Company has made only casual sales of the
inventory during the periods.
F. 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
exchange in the deferred tax assets and liabilities.
Note 2. Investment in Partnership
In November 1994, the Company purchased 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 to
receive certain limited cash flow after debt service, and a
contingent equity build-up depending upon the value of the
project upon termination of the lease. The Company is also
entitled to receive certain management fees relating to the
partnership.
Security was organized to own and operate two buildings
containing approximately 717,000 net rentable square feet
consisting of a two-story office building and a connected
six-story office tower. The building was purchased by Security in
1986 and is located on approximately 34.3 acres of land, which is
also owned by Security. The building has been occupied by the
United States Social Security Administration's Office of
Disability and International Operations for approximately 24
years under a lease 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. Security
has received an opinion of the Assistant General Counsel to the
GSA that lease payments are not subject to annual appropriation
by the United States Congress and the obligations to make such
payments are unconditional general obligations of the United
States Government.
The Company accounts for the investment in partnership on the
equity method, whereby the carrying value of the investment is
increased or decreased by the Company's allocable share of
income or loss. The investment in partnership included in the
Consolidated Balance Sheets at March 31, 2002 is $31,565,704. The
income from the Company's equity investment in the Partnership
for the three months ended March 31, 2002 was $1,436,660.
9
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Investment in Partnership (Continued)
Summarized operating data for Security for the three months ended
March 31, 2002, and March 31, 2001, is as follows:
2002 2001
Revenues $ 3,387,359 $ 3,352,823
Operating Expenses 963,540 982,451
Depreciation and Amortization 642,000 716,067
Interest Expense, Net 269,545 364,444
Net Income $ 1,512,274 $ 1,289,861
------------ ------------
Effective November 30, 2000 the Company invested $10,000 for a 5%
limited partnership interest in 1500 Wood Lawn Limited
Partnership, the general partner of Security.
The Company recognized income of $50,000 and $47,317 in 2002 and
2001, respectively, from the Woodlawn Limited Partnership
investment.
Note 3. Note and Accrued Interest Receivable - Related Party
On October 15, 2001 the Statesman Group, Inc. (Statesman)
exercised in full its option, which had been granted in 1997, to
acquire 6,100,000 shares of the Company's common stock. The
exercise was made pursuant to an agreement which provided for (1)
a purchase price at $0.40 per share (par value) rather than the
formula price in the option, which would have yielded 25% less to
the Company, (2) the execution of a note from Statesman to the
Company in the principal amount of $2,440,000 payable in five
years with interest to accrue at the prevailing prime rate and
(3) the obligation to be collateralized by the 6,100,000 common
shares of the Company purchased upon exercise of the option as
well as the 20% remaining interest in the Company's 80% owned
subsidiary, NRDC. Accrued interest amounted to $55,084 at March
31, 2002.
Statesman is controlled by The Statesman Irrevocable Trust dated
April 15, 1991, a trust for the benefit of William R. Ponsoldt,
Jr. (a director of the Company) and two other children of William
R. Ponsoldt, Sr., the Company's President and Chief Executive
Officer.
Note 4. Note Payable
The Company's subsidiary, Rustic Crafts, has established a
$1,000,000 line of credit with PNC Bank. The line of credit
expires on May 18, 2002, (with an extention of approximately 90
days) is renewable annually and bears interest at the Bank's
prime rate minus one-half percent (5.25% at March 31, 2002). 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. The line of credit is guaranteed by
the Company. At March 31, 2002, the amount outstanding under the
line of credit was $930,370.
Note 5. Long-Term Debt
KBC Bank Loan - On June 24, 1998, the Company refinanced the
---------------
long-term debt previously outstanding with Southern Indiana
Properties, Inc. ("SIPI") and entered into a Loan Agreement (the
"Loan") with KBC Bank N.V. ("KBC"). Under the terms of the Loan
Agreement, KBC advanced $9,383,320. The due date of the Loan is
November 30, 2003 with interest at the rate of 7.5% compounded
semi-annually on each June 1 and December 1, commencing December
1, 1998. The interest may be paid by the Company in cash on these
semi-annual dates or the Company may elect to add the interest to
the principal of the Loan then outstanding. The loan is secured
by the Company's interest in the partnership. As of March 31,
2002, the amount outstanding under the Loan is $12,409,507,
including $252,040 of interest for the three months ended March
31, 2002.
10
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Long-Term Debt (Continued)
The Company purchased a residual value insurance policy which
secures the repayment of the outstanding principal and interest
when due with a maximum liability of $14 million. The costs
related to the insurance along with legal fees and other costs
associated with obtaining the Loan have been capitalized as debt
issuance costs and are being amortized over the life of the Loan
using the effective interest method.
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.
Equipment Loans - In connection with the purchase of the Rustic
----------------
Crafts 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 began 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 was changed 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.
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 interest rates on the mortgage loan, the equipment loan and
the miscellaneous loan range from 7.52% to 8.25% at March 31,
2002. The outstanding balance on these loans is $1,608,140 at
March 31, 2002.
Rustic Craft's 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 the
Company. The security agreement requires Rustic Crafts to
maintain certain financial ratios. Rustic Crafts was in
compliance with such ratios at March 31, 2002.
Note 6. Income Taxes
As referred to in Note 1, the Company utilizes 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.
For regular federal income tax purposes, the Company has
remaining net operating loss carryforwards of approximately
$7,507,000. These losses can be carried forward to offset future
taxable income and, if not utilized, will expire in varying
amounts beginning in the year 2002.
11
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Income Taxes (Continued)
For the three months ended March 31, 2002, and 2001, the tax
effect of net operating loss carryforwards reduced the current
provision for regular Federal income taxes by approximately
$300,000, and $154,000, respectively. The Company provided $0 and
$68,923, for Canadian, state income and the alternative minimum
tax in the three months ended March 31, 2002 and 2001,
respectively.
Note 7. Related Party Transactions
On November 2, 2000, L. J. Horbach, a director of the Company
through December 5, 2000 and L. J. Horbach and Associates, of
which Mr. Horbach is the sole owner, purchased from Mid City Bank
a certain promissory note of the Company for $71,109, as to which
he had been a guarantor. Thereafter, Mr. Horbach filed suit
against the Company seeking to collect both the principal amount
of the note and accrued interest which amounted to, collectively,
$82,978. In December 2001, the Company filed suit against Mr.
Horbach seeking to avoid it's alleged liability and other
relief.
Note 8. Segment Information
The Company's operating structure includes operating segments
for Automobile Accessories through September 30, 2001 (the
operations of Glas-Aire, which was acquired in September 1999),
Home Furnishing Accessories (the operations of Rustic Crafts,
which was acquired in March 1997), Investment in Partnerships
(the investment in Security Land and Development Limited
Partnership and 1500 Wood Lawn Limited Partnership (Note 2), and
Corporate and Other. The Company operates and generates its
revenue in the United States, Canada and Japan.
Information about the Company's Operations by segment for the
periods presented follows:
Home Investment
Automobile Furnishing in Corporate and
Accessories Accessories Partnership Other Consolidated
March 31, 2002
--------------
Net sales $ - $ 502,883 $ - $ - $ 502,883
Income from equity investment
in partnerships - - 1,486,660 - 1,486,660
Segment profit/(loss) - (177,999) 1,486,660 (627,448) 681,213
March 31, 2001
---------------
Net sales $ 2,962,047 $ 423,025 $ - $ - $ 3,385,072
Income from equity investment
in partnerships - - 1,225,396 - 1,225,396
Segment profit/(loss) 75,780 (178,304) 1,225,396 (668,860) 454,012
12
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General.
Regency Affiliates, Inc. (the "Company") is the parent company of several
subsidiary business operations. The Company is committed to develop and/or
monetize these business operations for the benefit of its shareholders and
continues to commit both financial and personnel resources to an active
merger and acquisition program in order to enhance common stockholder's
values. The Company's Shareholders Equity at March 31, 2002 was
$20,559,387 as compared to $16,501,809 at March 31, 2001, an increase of
$4,057,578 for the twelve months ended March 31, 2002.
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
period ending March 31, 2002, the Company's income from its equity
investment in the Partnership (as well as it's interest in the General
Partner, 1500 WoodLawn L.P.) was $1,486,660. 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 in the Partnership has increased to $31,565,704, neither
provides liquidity to the Company in excess of the $100,000 annual
management fee. The Company has, however, been successful in obtaining
financing with respect to this investment.
On March 15, 1998, Rustic Crafts purchased a building of 126,000 square
feet located near the current facility in Scranton, Pennsylvania. The
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 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 fill its current orders 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
and has rented an additional 28,000 square feet to another tenant at an
annual minimum rent of $71,680.
The Company has had discussions with several companies regarding the
possible sale of its interest in IMM The Company is also exploring the
possibility of establishing a permanent infrastructure during the year 2002
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 ("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 was 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 Group, Inc. ("Statesman"), a
substantial shareholder of the Company, 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.
13
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (CONTINUED)
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.
Results of Operations
In September 1999, the Company acquired a 51% interest in Glas-Aire which
manufacturers automotive accessories. The financial statements for March
31, 2001 include the results of Glas-Aire, but not those for March 31,
2002. The operations of the Company also include the operations of Rustic
Crafts, which is engaged in the manufacturing of decorative fireplaces,
heater logs and related accessories.
On October 1, 2001, The Company announced that it had completed a
transaction for the disposing of the Company's interest in Glas-Aire.
Pursuant to an agreement entered into on September 17, 2001 and amended on
October 1, 2001, the Company exchanged 1,215,105 shares of common stock of
Glas-Aire, representing approximately 50% of the issued and outstanding
shares of Glas-Aire, for $2,500,000 plus 4,040,375 shares of Regency's
common stock, or approximately 23% of the issued and outstanding shares of
Regency. As a result of the transaction, neither Regency nor Glas-Aire owns
any stock of the other. Glas-Aire generated net sales of $8,378,202 for the
nine-month period ending September 30, 2001. Income before income from
equity investment and income tax expense was $449,040 over the same period.
Glas-Aire had been included in Regency's consolidated financial statements
effective September 23, 1999 (the date that we acquired 51.3% control of
Glas-Aire) through September 30, 2001. Gross margins decreased $1,273,429
in 2001 over 2000, which is primarily attributable to the disposition of
Glas-Aire and its inclusion in the company's financial statements through
only September 30, 2001.
During the period that Regency owned it's interest of Glas-Aire, Regency
received no cash from the operations of Glas-Aire, so there will be no
change in cash flow as a result of the disposition of it's interest.
The Company's current operations do not generate sufficient cash flow to
cover corporate operating expenses and thus the Company must rely on
external sources to fund these expenses. The Company currently has unused
borrowing capacity and is in discussion with additional external sources to
provide for additional borrowing capacity to be used if needed.
2002 Compared to 2001
Net sales decreased $2,882,189 in 2002 over the similar period in 2001,
which is largely attributable to the disposition of the Glas-Aire
subsidiary. The remaining difference is due to an increase in sales at
Rustic Crafts of $79,858.
Gross margin decreased $707,685, which is largely attributable to the
disposition of the Glas-Aire subsidiary. The remaining decrease is due to
increase in gross margin from Rustic Crafts of $33,810.
Selling and administrative expenses decreased $552,652 in 2002 as compared
to 2001, which decrease is largely attributable to the disposition of
Glas-Aire.
Income from equity in partnerships increased $261,264. This increase is due
to a decrease in interest expense of $161,822 resulting from payment of
principal and decreases in operating expenses for the quarter as to
Security Land income.
14
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (CONTINUED)
Interest expense increased by $28,713 and is largely attributable to
increased interest expense on the KBC loan.
Net income increased $227,201 in 2002 compared to 2001. Increased equity
earnings from partnerships were offset by the disposition of Glas-Aire
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q,
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
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's current operations do not generate sufficient
cash flow to cover corporate operating expenses and thus the
Company must rely on external sources to fund these expenses. The
Company's ability to continue in existence is partly dependent
upon its ability to generate satisfactory levels of operating
cash flow.
(ii) The Company currently lacks the necessary infrastructure at the
site of the Groveland Mine to permit the Company to make more
than casual sales of the aggregate.
(iii) 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 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 have in the past been, and is expected in the
future to be, offset by the Company's net operating loss
carryforwards.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 7, 2002 a complaint naming Regency Affiliates, Inc. as
Defendant was filed in the District Court of Douglas County, Nebraska,
case number 1012. The Plaintiffs are Larry J. Horbach, individually
and L.J. Horbach & Associates and they are demanding payment on a
Regency Affiliates loan they purchased from Mid City Bank. The
plaintiffs are requesting payment of $82,512.57 plus accrued interest,
costs and attorney fees. We are vigorously defending this litigation
and had previously commenced litigation regarding the same subject in
December 2001.
On December 14, 2001 we initiated a proceeding in The Circuit Court of
the Nineteenth Judicial Circuit in and for Martin County, Florida,
case number 01-1087-CA against Larry J. Horbach, individually and L.J.
Horbach & Associates. Larry Horbach was a former interim CFO and Board
member. We claim that Larry Horbach, without appropriate authority,
borrowed $100,050 from Mid City Bank in the name of Regency. We
further claim that Horbach converted all or part of the proceeds from
the loan for his benefit.
On September 13, 2001, Glas Aire Industries LTD., Multicorp Holdings
Inc., Glas Aire Industries Group Ltd, Craig Grossman, Todd Garrett,
Speed.Com, Inc., Regency Affiliates, Inc., William Ponsoldt, and Marc
Baldinger were listed as defendants in a proceeding in the Supreme
Court of British Columbia with Alex Y. W. Ding as plaintiff. The case
number is S015104. Mr. Ding, the former president of Glas-Aire, has
asserted that the October 2001 Regency-Glas-Aire transaction is in
breach of bank agreements, securities law and fiduciary duties owed to
Glas-Aire and its stockholders. While the company has been served,
plaintiff has not proceeded on this action and has not filed a
statement of claim on a timely basis. Should plaintiff continue with
the action, the defendants, including Regency, would vigorously defend
this litigation
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
REGENCY AFFILIATES, INC.
------------------------
(Registrant)
Date: May 20, 2002 /s/ Marc H. Baldinger
------------------ ----------------------
(Chief Financial Officer and Director)
17