UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended December 31, 2000 - Commission File Number 1-7949
Regency Affiliates, Inc.
(Exact name of registrant as specified in its charter)
Delaware 72-888772
(State of incorporation) (IRS Employer Identification Number)
729 SOUTH FEDERAL HWY.
SUITE 307, STUART, FL. 34994
(Address of principal executive offices) (Zip Code)
(561) 220-7662
(Registrant's Telephone Number, including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class Name of each exchange on which registered
Common Stock, $0.40 Par Value None
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The Aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $6,272,550.24 on March 26, 2001, computed on the
basis of $.48 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 30, 2001, was 17,251,619, including 4,040,375 held by a
subsidiary.
Documents incorporated by reference (See Exhibit Listing)
Table of Contents
Part I Page
Item 1. Business........................................................ 3
General Development of Business................................. 3
Financial information about industry segments
and foreign and domestic operations........................ 4
Narrative description of business............................... 4
National Business Resource Development Corporation.............. 4
Security Land and Development Company
Limited Partnership........................................... 5
Rustic Crafts International, Inc................................ 6
Glas-Aire Industries, Group Ltd............................... 6
Item 2. Properties...................................................... 7
Item 3. Legal Proceedings............................................... 8
Item 4. Submission of Matters to a Vote of Security Holders............. 8
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Part II
Item 5. Market for Registrant's Common Stock and
Related Security Holders Matters............................. 8
Item 6. Selected Financial Data.........................................13
Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition................13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk......18
Item 8. Consolidated Financial Statements and Supplementary Date........18
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure...........45
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Part III
Item 10. Directors and Executive Officers of the Registrant..............46
Item 11. Executive Compensation..........................................48
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................................52
Item 13. Certain Relationships and Related Transactions..................54
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Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................................54
PART I
ITEM 1. BUSINESS
Except for historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Such
forward-looking statements include, but are not limited to, statements regarding
future events and the Company's plans and expectations. The Company's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below under "Factors That May Affect Future Results," and "Forward
looking Statements", as well as those discussed elsewhere in this Form 10-K.
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 was guaranteed by Mr. William Ponsoldt, 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 cap market under the symbol "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 the interest rate of 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 total 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 owned approximately
51.3% of the currently then outstanding common shares of Glas-Aire. At December
31, 2000 the Company owned 50.1% of the 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.
At the December 3, 2000 board of directors meeting, Mr. Horbach and Mr. Graham
resigned their positions as directors of Regency. At the same meeting, the board
of directors elected to close the Omaha, Nebraska office and terminate the
employment of Mr. Horbach and Mrs. Antosh as interim CFO and Secretary,
respectively.
Financial information about industry segments and foreign and domestic
operations.
Reference is made to the Company's financial statements at page 18
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.
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 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 which Cotton Valley was not able to meet. 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. The Company continues to explore
the possibility of establishing a permanent infrastructure to commercialize the
inventory of previously quarried and stockpiled Aggregate at the Groveland Mine
or alternative means of monetizing the asset.
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 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, 2000, the Company's income from its equity investment in the
Partnership was $4,712,615. 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 $24,565,884
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.
On November 30, 2000, The Company invested $10,000 for a 5% Limited Partnership
Interest in 1500 Woodlawn Limited Partnership, the General Partner of Security.
Additional information regarding this transaction may be found in Exhibit 31.
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 40 persons.
In 2000 and 1999 Rustic Crafts generated net sales of approximately $3,389,977
and $3,875,263 respectively. Its largest customer, J.C. Penney Co., Inc.
represents approximately 38% and 60% of the sales of Rustic Crafts in 2000 and
1999, respectively. Approximately 68% of the sales of Rustic Crafts occur in the
fourth quarter of the calendar year. As of December 31, 2000, Rustic Crafts had
approximately $225,000 of open orders. Although orders are generally subject to
termination, the Company has historically experienced minimal cancellation of
orders.
Rustic Crafts purchases the raw materials used in its manufacturing process from
several suppliers. The Company believes that there is minimal risk from any
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 Industries Group, LTD.(Glas-Aire), a publicly traded company, is a
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 the
year ending December 31, 2000, approximately 98% of its sales were to automobile
manufacturers. Glas-Aire employs approximately 208 persons.
Glas-Aire generated net sales of $10,929,775 for the eleven months period ending
December 31, 2000. Net income before income taxes and equity earnings for the
eleven months ending December 31, 2000 was $849,619. 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.
Glas-Aire sells principally to automobile manufacturers in the United States,
Canada, Japan and the United Kingdom. For the eleven months ended December 31,
2000, sales in the US accounted for 84% of Glas-Aire's sales, and 12% in Canada.
Three major customers accounted for approximately 79% of Glas-Aire's sales for
the eleven months ending December 31, 2000.
Glas-Aire has several competitors which have substantially greater technical,
financial and marketing resources, and management considers the business to be
competitive.
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.
As of December 31, 2000, Regency and its subsidiaries employed approximately 249
people.
ITEM 2. PROPERTIES
Reference is made to Item 1, Business, page 5 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 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, 2000, 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 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, 2000 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, 2000.
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 1999 and 2000 as indicated may not
reflect the actual market for substantial quantities of the Company's Common
Stock. As of January 23, 2001, there were approximately 2,500 common
shareholders of record.
YEAR ENDED
DECEMBER 31, 1999 HIGH ($) LOW ($)
First Quarter .72 .56
Second Quarter .91 .66
Third Quarter 1.03 .88
Fourth Quarter 1.22 .91
YEAR ENDED
DECEMBER 31, 2000 HIGH ($) LOW ($)
First Quarter .5.875 .44
Second Quarter 2.93 .9688
Third Quarter 1.01 .70
Fourth Quarter .7188 .41
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 Mr. Horbach of Horbach & Associates who contracted
with Regency to act as transfer agent.
In January 2001, Transfer On-Line was named as transfer agent replacing Horbach
& Associates. Transfer On-Line is located at 227 Pine Street, Suite 300,
Portland, Oregon 97204. Their telephone number is (503) 227-2950 and their
website is www.transferonline.com.
Issuance of unregistered securities.
In 2000, the Company issued (a) 99,293 Common shares for professional services
rendered, (b) 114,000 Common Shares to a shareholder pursuant to an exchange
agreement, (c) 95,877 Common Shares in conjunction with the Series E conversion,
and (d) 47,961 Common shares issued to directors as compensation. The above
listed issuance was exempt from registration under section 4(2) of the
Securities Act.
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.
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. The Company has recently accessed
the Statesman loan. The loan is a demand loan which is collateralized by the
Glas-Aire Stock held by the Company. 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. Statesman has recently given
notice to the Company of it's intention to exercise the options.
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. The number of shares outstanding of the registrant's $.40 Par Value
Common Stock issued, as of March 30, 2001, was 17,251,619, including 4,040,375
held by a subsidiary.
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) which 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.
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. 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 stated value of the shares,
plus accrued dividends.
RegTransco, Inc. Ownership
RegTransco, Inc. (RTI) has two classes of outstanding common stock, Class A and
Class B. There are 20,000 shares of Class A common stock outstanding, all of
which are owned by Drilling (an 80% owned subsidiary of Regency Affiliates,
Inc.). Five thousand (5,000) shares of Class B common stock were issued to the
Original Investors who financed the Company's Chapter XI filing in 1986 and 1987
and represented 20% of the voting power of RTI's outstanding common stock. As
part of the 1992 Restructuring, the holders of the Class B stock returned their
20% interest as a group to RTI. RTI's Class A and Class B common stock are equal
to each other in all respects except dividend preference. Holders of shares of
Class A and Class B common stock are entitled to one vote per share in the
election of directors.
TransContinental Drilling Company ("Drilling") Ownership
As part of the NRDC Transaction, Drilling issued sufficient shares to transfer
20% of the issued and outstanding stock of Drilling to Statesman. The remainder
(80%) is owned by Regency Affiliates, Inc.
NRDC
As part of the NRDC Transaction, Regency Affiliates, Inc. acquired 80% of the
issued and outstanding stock of NRDC. The remainder (20%) is owned by Statesman.
Rustic Crafts International, Inc.
Regency Affiliates, Inc. is the owner of 100% of the issued and outstanding
common stock of Rustic Crafts International, Inc.
Glas-Aire Industries Group, Ltd.
Regency Affiliates, Inc. owned of 50.1% of the outstanding common shares of
Glas-Aire at December 31, 2000. The remaining 49.9% is held by the public
shareholders of Glas-Aire.
ITEM 6. SELECTED FINANCIAL DATA.
---------------------------------- ---------------------- ----------------- ------------------ ------------------ ------------------
2000 1999 1998 1997 1996
---------------------------------- ---------------------- ----------------- ------------------ ------------------ ------------------
Revenues $14,342,613 $7,835,071 $3,789,839 $ 2,908,253 $6,102
Income from Equity Investment 4,712,615 4,261,212 3,950,090 3,820,913 4,268,904
in Partnership
Net Income $2,155,254 $2,292,922 $1,794,560 $2,187,618 $2,802,467
Net Income .16 .18 .14 .17 .24
per Share (basic)
Net Income .14 .15 .12 .15 .20
per Share (diluted)
Total assets $37,016,829 $33,657,635 $24,127,416 $15,432,529 $11,566,678
Long-term debt $13,200,851 $12,778,244 $11,795,480 $5,175,400 $4,600,994
(including current
portion) & redeemable
Preferred Stock
---------------------------------- ---------------------- ----------------- ------------------ ------------------ ------------------
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
General
Regency Affiliates, Inc. (the "Company") is the parent company of several
subsidiary business operations. The Company is committed to develop and/or
monetize these business operations for the benefit of its shareholders and
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, 2000 was $16,076,052 as compared
to $13,636,050 on December 31, 1999, an increase of 17.9%.
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, 2000, the Company's income from its equity investment in the Partnership was
$4,712,615. 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 $24,575,881 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, 1999, Regency was the only partner
with a positive tax capital account balance. The Company has been previously
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 tenant was removed in 2001 for
failure to pay rent. The Company is currently negotiating with the tenant for
payment of back rent. The Company has the space listed for with an agent for a
replacement.
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 2001 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 provider of various 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. Negotiations with Knight Enterprises, Inc.,
Southwest Mill and Lumber Company, and Valley Wholesale Supply Corp. have been
discontinued. The Company expects the Letters of Intent referred to above will
be formally terminated shortly. The Company's ability to continue in existence
is partly dependent upon its ability to attain satisfactory levels of operating
cash flows and it's ability to continue borrowing.
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.
2000 Compared to 1999
Net sales increased $6,507,542 over 1999, an 83% increase. Net sales includes
$10,929,775 of Glas-Aire sales. Sales of household accessories decreased by
$485,286 due to general economic conditions resulting in a decline in sales and
a reduction in backlog orders from the previous period. Rustic Crafts continues
to emphasized higher margin sales in 2000 and to reduce its reliance on it's
single large customer, who requires discounted prices.
Gross margins increased $2,050,695 in 2000 over 1999, which is primarily
attributable to the acquisition of Glas-Aire and it's inclusion in the companies
financial statements for the entire year. Gross margins of home accessories
increased $196,200 in 2000 reflecting the Company's focus on higher margin
products.
Selling and administrative expenses increased $1,960,385 or 58% in 2000 compared
to 1999 The increase is attributable to the inclusion in the companies financial
statement of Glas-Aire activities for the entire year. Expenses increased at
Rustic Crafts by $214,842 as a result of higher costs of selling and marketing,
including the compensation of key employees.
Income from equity investment in partnership increased $415,303 over 1999 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 decreased $91,085 in 2000 as compared to 1999. 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.
Interest expense decreased $12,421 in 2000 from 1999 as a result of lower cost
of funds. 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 $190,984 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 $79,128 due primarily
to the inclusion of the results of operations of Glas-Aire for the full year of
2000.
Net income decreased $137,668 or 6% in 2000 over 1999. The decrease was due to
the recognition of an extraordinary gain in 1999. Income before extraordinary
gain increased $192,197 or 9.8% in 2000 over 1999.
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 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.
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.
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" 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.
(vi) Both of the companies operating subsidiaries (Rustic Crafts and
Glas-Aire) are dependent on a limited number of customers for a
substantial portion of their respective revenues. The loss of one
or more of these customers could have a significant effect on the
Companies results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks due primarily to changes in
interest rates. The Company does not use derivatives to alter the interest
characteristics of its debt securities. The Company has no holdings of
derivative or commodity instruments and does not transact business in foreign
currencies except for payments of salaries and expenses to certain employees
located in foreign countries.
The fair value of the Company's cash and cash equivalents or related income
would not be significantly impacted by changes in interest rates since the
investment maturities are short. Debt from draw downs on our lines of credit
incurs interest at the Prime Lending Rate which would change from time to time.
It is not possible to anticipate the level of interest rates going forward.
Changes in interest rates have little impact as the majority of our debt is at a
fixed interest rate.
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, 2000, are included as follows:
Regency Affiliates, Inc. and Subsidiaries
Index to the Financial Statements
Page
Accountants' Reports on the Financial Statements............................ 1-2
Financial Statements
Consolidated Balance Sheets................................................. 3-4
Consolidated Statements of Operations....................................... 5
Consolidated Statements of Shareholders' Equity............................. 6
Consolidated Statements of Cash Flows....................................... 7-8
Notes to Consolidated Financial Statements..................................9-26
Independent Auditor's Report
To the Board of Directors and Stockholders
of Regency Affiliates, Inc. and Subsidiaries
We have audited the consolidated balance sheet of Regency Affiliates, Inc. and
Subsidiaries as of December 31, 2000 and the related consolidated statements of
operations, retained earnings, and cash flows for the year then end. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated 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, 2000 and the results of its
consolidated operations and its cash flows for the year ended in conformity with
accounting principles generally accepted in the United States of America.
/s/Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
March 27, 2001
Independent Auditors' Report
Shareholders and Board of Directors
Regency Affiliates, Inc.
Stuart, Florida
We have audited the accompanying consolidated balance sheet of Regency
Affiliates, Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two 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 and 1998 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% of consolidated
total assets as of December 31, 1999, and 100% of the income from equity
investment in partnership for the years ended December 31, 1999 and 1998. 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 and 1998
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 auditing standards generally
accepted in the United States. 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 the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
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.
/s/Hausser & Taylor LLP
Cleveland, Ohio
April 10, 2000
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
----------------------------------
2000 1999
---------------- ----------------
Assets
Current Assets
Cash and Cash Equivalents $ 928,636 $ 2,348,989
Accounts receivable, net of allowance 2,553,589 2,373,275
Income taxes receivable 24,556 -
Inventory 2,243,726 1,842,992
Other current assets 127,728 238,687
---------------- ----------------
Total current assets 5,878,235 6,803,943
Property, Plant and Equipment, Net 4,343,170 4,427,891
Investment in partnerships 24,575,881 19,959,517
Other Assets
Aggregate inventory 834,675 838,383
Goodwill, net of amortization 820,774 902,138
Debt issuance costs, net of amortization 551,343 710,493
Other 12,751 15,270
---------------- ----------------
Total other assets 2,219,543 2,466,284
$ 37,016,829 $ 33,657,635
================ ================
See notes to the consolidated financial statements.
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
----------------------------------
2000 1999
---------------- ----------------
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt $ 128,510 $ 176,800
Current portion of serial preferred
stock subject to mandatory redemption - 247,800
Note Payable - Banks 692,174 1,149,262
Notes payable - Related Party 776,000 -
Accounts payable 1,080,904 991,587
Accrued expenses 899,837 1,236,160
Taxes payable 78,820 -
---------------- ----------------
Total current liabilities 3,656,245 3,801,609
Long term debt, net of current portion 13,072,341 12,353,644
Deferred income taxes 402,048 416,695
Minority interest in consolidated subsidiaries 3,810,143 3,449,637
Shareholders' equity
Serial preferred stock not subject to mandatory redemption (maximum
liquidation preference $24,975,312 in 2000 and 1999,
respectively 1,052,988 1,052,988
Common stock, par value$.40 authorized 25,000,000 shares, issued
17,251,619 and 16,894,488 shares in 2000 and 1999, respectively 6,900,659 6,757,806
Additional paid-in capital 2,308,484 2,096,824
Readjustment resulting from quasi-reorganization at December 31, 1987 (1,670,596) (1,670,596)
Retained earnings 10,915,990 8,760,736
Accumulated other comprehensive income (93,440) (23,675)
Treasury stock, 4,052,825 shares, at cost, in 2000 and 1999, respectively (3,338,033) (3,338,033)
---------------- ----------------
Total shareholders' equity 16,076,052 13,636,050
---------------- ----------------
$ 37,016,829 $ 33,657,635
================ ================
See notes to the consolidated financial statements.
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Operations
December 31,
----------------------------------------------------
2000 1999 1998
-------------- ------------------ --------------
Net Sales $ 14,342,613 $ 7,835,071 $ 3,789,839
Costs and expenses
Costs of goods sold 9,800,399 5,343,552 2,621,363
Selling and administrative expenses 5,356,051 3,395,666 2,042,871
-------------- ------------------ ------------
15,156,450 8,739,218 4,664,234
-------------- ------------------ ------------
Loss from operations (813,837) (904,147) (874,395)
Income from equity investment in partnership 4,712,615 4,261,212 3,950,090
Other income, net 99,875 190,960 141,220
Interest expense (1,173,581) (1,186,002) (1,314,351)
-------------- ------------------ --------------
Income before income tax expense, minority interest and
extraordinary gain 2,825,072 2,362,023 1,902,564
Income tax expense (426,293) (235,309) (98,583)
Minority interest (243,525) (164,397) (9,421)
-------------- ------------------ --------------
Income before extraordinary gain 2,155,254 1,962,317 1,794,560
Extraordinary gain - retirement of debt - 330,605 -
-------------- ------------------ --------------
Net income $ 2,155,254 $ 2,292,922 1,794,560
============== ================== ==============
Net income attributable to common shareholders
(after paid or accrued preferred stock
dividends of $0, $49,791, and $49,564 in 2000,
1999 and 1998, respectively, and preferred
stock accretion of $0, $19,400 and
$17,950 in 2000, 1999 and 1998, respectively) $ 2,155,254 $ 2,223,731 1,727,046
============= ================== ==============
Net income per common share:
Basic $ 0.16 $ 0.18 0.14
============== ================== ==============
Diluted $ 0.14 $ 0.15 0.12
============== ================== ==============
See notes to the consolidated financial statements.
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2000, 1999 and 1998
Readjustment Accumu-
Resulting lated
Addit- From Other Total
ional Quasi Compre- Stock-
Paid in reorgani- Retained hensive holders'
Preferred Stock* Common Stock Capital zation Earnings Income Treasury Stock Equity
----------------- ----------------- ------- ------- -------- ------ -------------- -------
Shares Amount Shares Amount Shares Amount
------ -------- --------- -------- ------ -------
Balance -
January 1, 1998 605,291 $1,052,988 12,457,549 $4,983,031 $221,600 $(1,670,596)$4,773,987 $ - 22,460 (19,302) $9,341,708
Issuance of Common Stock - - 187,000 74,800 52,360 - - - - - 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 - - - - (3,450) - - - (10,000) 8,600 5,150
Net Income - - - - - - 1,794,560 - - - 1,794,560
------- ---------- --------- --------- ------ ---------- ---------- ----- -------- ------- ----------
Balance -
December 31, 1998 605,291 1,052,988 12,644,549 5,057,831 270,510 (1,670,596) 6,519,019 - 12,460 (10,702) 11,219,050
Issuance of Common Stock - - 198,736 79,494 110,606 - - - - - 190,100
Common Stock Issued to
Acquire Glas-aire - - 4,040,375 1,616,150 1,711,190 - - - - - 3,327,340
Conversion of Series
E Preferred Stock - - 10,828 4,331 4,518 - - - - - 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 605,291 1,052,988 16,894,488 6,757,806 2,096,824 (1,670,596) 8,760,736 (23,675)4,052,825(3,338,033)13,636,050
Issuance of Common Stock
Common Stock Issued as
Additional
Consideration
to Acquire
Glas-aire - - 114,000 45,600 54,400 - - - - - 100,000
Conversion of Series
E Preferred Stock - - 95,877 38,351 41,299 - - - - - 79,650
Common Stock Issued
for Services - - 147,254 58,902 115,961 - - - - 174,863
Comprehensive Income: - - - - - - - - -
Net Income - - - - - - 2,155,254 - - - 2,155,254
Translation
Adjustments Net - - - - - - - (69,765) - - (69,765)
Comprehensive Income - - - - - - - - - - 2,085,489
--------- ------- -------- --------- -------- --------- --------- -------- -------- ------- ----------
Balance -
December
31, 2000 605,291 $1,052,988 17,251,619 $6,900,659 $2,308,484 $(1,670,596)10,915,990 $(93,440) 4,052,825$(3,338,033)$16,076,052
======= ========= ========== ========== ========= =========== ========== ======== ========= =========== ==========
*Preferred Stock Does Not
Include Series E Preferred
Stock Which is Subject to
Mandatory Redemption
See Notes to the Consolidated Financial Statements.
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
--------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Cash flows from operating activities
Net income $ 2,155,254 $ 2,292,922 $ 1,794,560
Adjustments to reconcile net income to net cash
used by operating activities
Minority interest 360,506 164,397 9,421
Income from equity investment in partnership (4,712,615) (4,261,212) (3,950,090)
Distribution of management fees earnings from
partnership 106,251 101,326 102,278
Interest accretion on long-term debt 799,091 952,075 612,855
Depreciation and amortization 576,727 351,985 124,959
Issuance of common stock in lieu of cash 274,863 69,100 132,310
Gain on retirement of debt and disposal of assets - (346,211) -
Undistributed earnings of subsidiaries - (114,961) -
Deferred taxes (14,647) - -
Changes in operating assets and liabilities
Accounts receivable (180,314) (100,154) (171,276)
Inventory (400,734) (233,221) (269,856)
Other current assets 86,403 124,353 (9,484)
Other assets 6,227 110,764 46,644
Accounts payable 739,317 (555,802) 26,480
Accrued expenses and taxes payable (257,503) 879,332 (148,236)
--------------- --------------- ---------------
Net cash used by operating activities (461,174) (565,307) (1,699,435)
--------------- --------------- ---------------
Cash flows from investing activities
Acquisition of business, net of cash of $0 in 2000,
$595,995 in 1999 and $0 in 1998 (10,000) (885,098) -
Expenditures for property and equipment (251,492) (1,002,781) (1,910,484)
Proceeds from sales of property - 126,565 -
--------------- --------------- ---------------
Net cash used by investing activities (261,492) (1,761,314) (1,910,484)
--------------- --------------- ---------------
Cash flows from financing activities
Redemption of serial preferred stock (168,150) - -
Proceeds from long-term debt 411,224 636,323 10,805,307
Payment of long-term debt (870,996) (85,962) (4,607,750)
Debt issuance costs - - (949,673)
Net short-term proceeds - 20,553 324,200
Issuance of common stock - 1,967,960 -
Dividends paid - (31,805) (31,578)
Dividends paid to minority interest - - (14,400)
--------------- --------------- ---------------
Net cash provided (used) by financing activities (627,922) 2,507,069 5,526,106
--------------- --------------- ---------------
Effect of foreign exchange rates and cash (69,765) - -
--------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents (1,420,353) 180,448 1,916,187
Cash and cash equivalents - beginning 2,348,989 2,168,541 252,354
--------------- --------------- ---------------
Cash and cash equivalents - ending $ 928,636 $ 2,348,989 $ 2,168,541
=============== =============== ===============
See notes to the consolidated financial statements.
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31,
--------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (includes prepayment penalty of $216,702 in 1998) $ 374,490 $ 259,652 $ 746,413
Income taxes 319,453 78,415 82,350
Supplemental disclosures of noncash investing and financing activities:
In 2000, the Company issued 95,877 shares of common stock in exchange for 885
shares of Series E preferred stock.
In 2000, the Company issued 114,000 shares of common stock as payment for
costs in connection with acquisition of Glas-Aire.
In 2000, the Company issued 147,254 shares of common stock for services.
In 2000, accrued compensation in the amount of $650,000 payable to an officer
was converted to debt.
In 1999, the Company issued: 10,828 shares of common stock in exchange for
88.5 shares of Series E mandatory redeemable preferred stock; 121,000 shares
of common stock to retire the zero coupon bonds issued by NRDS; 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 of
two of its employees as additional compensation.
See notes to the consolidated financial statements.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
A. 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"), and
Speed.com, Inc., its 80% owned subsidiaries, National Resource
Development Corporation ("NRDC"), Transcontinental Drilling
Company ("Drilling") and RegTransco, Inc. ("RTI") and its 50%
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%. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Regency Affiliates, Inc.'s (Registrant's) share of consolidated
net assets at December 31, 2000 and 1999 consists principally of
cash and cash equivalents of approximately $12,000 and
$1,442,000, respectively, investment in partnerships of
approximately $24,576,000 and $19,959,000, respectively,
property, plant and equipment of approximately $27,300 and
$12,000, respectively, and liabilities of approximately
$12,303,000 and $11,578,000, respectively.
B. Revenue Recognition - The Company's subsidiaries recognize
revenue from the sale of goods upon shipment to their respective
customers.
C. 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 if applicable) 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 2000, 1999 and 1998 was approximately
13,085,106 and 12,664,000 and 12,546,000, respectively. The
weighted average number of shares used in the computation of
diluted earnings per share for 2000, 1999 and 1998 was
approximately 14,864,004, 14,923,000 and 14,892,000,
respectively. The shares of the Company held by Glas-Aire are
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 prices of $.587, $.984 and $.547 per share,
respectively, were utilized in the conversion formulas for the
computation of diluted earnings per share. In 2000, 1999 and
1998, if market prices of $.406, $.563 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
15,061,106, 15,435,000 and 15,169,000, respectively, yielding
diluted earnings per share of $.14, $.15 and $.12, respectively.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies (Continued)
C. Earnings Per Share (Continued)
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.
D. 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.
E. 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.
F. 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, 2000 and 1999:
2000 1999
------------- -------------
Finished products $ 819,738 $ 596,830
Work-in-process 274,988 455,503
Raw materials and supplies 1,149,000 790,659
-------------- -------------
$ 2,243,726 $ 1,842,992
============== =============
G. Property, Plant and Equipment - Property, plant and equipment 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, 2000 and 1999:
Property, Plant and
Equipment
---------------------------------
2000 1999
--------------- ---------------
Land $ 100,000 $ 100,000
Buildings 2,307,411 2,307,411
Leasehold improvements 320,636 311,447
Machinery and equipment 3,390,195 3,147,892
--------------- ---------------
6,118,242 5,866,750
Accumulated depreciation 1,775,072 1,438,859
--------------- ---------------
$ 4,343,170 $ 4,427,891
=============== ===============
Depreciation expense for the years ended December 31, 2000, 1999 and
1998 was $399,362, $295,193 and $81,056, respectively.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies (Continued)
H. 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 sale of the aggregate.
During the years ended December 31, 2000, 1999 and 1998, 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 in 1999 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 2001 to
commercialize the inventory of previously quarried and stockpiled
aggregate at the Groveland Mine in cooperation with an
experienced aggregate supply company.
I. 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 $208,623 and $135,946 at December 31, 2000 and
1999, respectively.
J. 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 $398,329 and $239,179 at December 31, 2000 and
1999, respectively.
K. 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.
L. 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.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies (Continued)
M. 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.
N. Reclassifications - Certain reclassifications were made to prior
period financial statement presentations to conform with current
period presentations.
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 was guaranteed by Mr. Ponsoldt, Sr., President of the
Company and $1,213,000 in cash. The cash was obtained from an
affiliate of a shareholder 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 a
shareholder 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 newly issued shares
of Glas-Aire stock. On May 17, 2000 the Company also issued 114,000
shares of it's restricted common stock as additional consideration
pursuant to the common stock exchange agreement.
With the closing of the agreement, the Company owned 51.3% of the then
outstanding common shares of Glas-Aire. Through December 31, 2000 the
Company has increased the number of common shares of Glas-Aire to
1,220,123 by virtue of the receipt of 287,608 common shares as the
result of stock dividends. At December 31, 2000 such shares owned by
the Company represented 50.1% of Glas-Aire's total issued and
outstanding common shares.
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 1A.). 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.
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, 1999. 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.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Investment in Glas-Aire (Continued)
1999
(Unaudited)
---------------
Net sales $ 13,638,300
Net income 2,358,800
Net income applicable to common stock 2,307,600
Net income per common shares
Basic .19
Diluted .16
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 Partnerships
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.
In the year ended December 31, 2000, the Company's income from its
equity investment in the Partnership was $4,712,615. 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
$24,565,881 the partnership does not provide liquidity to the
Company in excess of the $100,000 annual management fee.
For the years ended December 31, 2000, 1999 and 1998, the Company
earned $106,251, $101,326, and $102,278, respectively, for
management services provided to Security.
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
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Investment in Partnerships (Continued)
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 Security's book income
or loss. The investment in partnership included in the Consolidated
Balance Sheets at December 31, 2000 and 1999 was $24,565,881 and
$19,959,517, respectively. The income from the Company's equity
investment in the Partnership for the years ended December 31, 2000,
1999 and 1998 was $4,712,615, $4,261,212 and $3,950,090,
respectively. The undistributed earnings from the Company's equity
investment in the Partnership as of December 31, 2000 and 1999
amounted to $24,215,881 and $19,609,517, respectively.
Summarized Financial information for Security is as follows:
2000 1999
--------------- ---------------
Balance Sheet Data
Cash and receivables $ 1,066,481 $ 1,154,601
Restricted cash 3,843,022 3,413,241
Real estate, net 45,692,368 48,112,653
Other assets 573,533 862,130
--------------- ---------------
Total assets 51,175,404 53,542,625
=============== ===============
Accounts payable and accrued expenses 714,389 564,628
Project note payable 23,269,305 29,818,288
Other liabilities 2,311,650 3,128,137
--------------- ---------------
Total liabilities 26,295,344 33,511,053
Partners' capital:
Regency Affiliates, Inc. 24,565,884 19,959,517
Other partners 314,176 72,055
--------------- ---------------
Total partners' capital 24,880,060 20,031,572
---------------
$ 51,175,404 $ 53,542,625
Total liabilities and partners' capital
=============== ===============
3
2000 1999 1998
--------------- -------------- ---------------
Statement of Operations Data
Revenues $ 13,311,337 $ 13,244,631 $ 13,207,758
Expenses 6,394,400 6,229,300 6,074,879
--------------- -------------- ---------------
Net operating income 6,916,937 7,015,331 7,132,879
Other expenses (1,956,606) (2,529,846) (2,974,574)
--------------- -------------- ---------------
Net income $ 4,960,331 $ 4,485,485 $ 4,158,305
=============== ============== ===============
See Note 13. Contingencies, Risks and Uncertainties related to the Company's investment in Security.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Investment in Partnership (Continued)
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.
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,
2001 and is renewable annually, and bears interest at the Bank's prime
rate minus one- half percent (9% at December 31, 2000). 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, 2000. The line of credit is
guaranteed by the Company. At December 31, 2000 and 1999, the amounts
outstanding under the line of credit were $616,174 and $431,000,
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) revolving line of credit due on demand with
a Canadian bank. The line of credit is collateralized by accounts
receivable, inventories certain equipment and other assets and bears
interest at the rate of the Canadian bank's prime rate plus one-half
percent (6.6%). The credit facility is renewable annually. At December
31, 2000 and 1999, the amounts outstanding under the line of credit
were $0 and $118,262, respectively.
The Company has outstanding $126,000 of demand notes bearing interest
at 10%, payable to a shareholder. Additionally, the Company has
outstanding a $650,000 demand note bearing interest at a rate of prime
minus one percent to its President. These obligations are secured by
the shares of Glas-Aire owned by the Company.
On October 24, 2000, the Company obtained a commitment for a short
term loan of $100,050 from a bank bearing interest at the prime rate
plus three-fourths percent, adjusted monthly. As of December 31, 2000
$76,000 remained outstanding; the interest rate was 10.25%. This
obligation is guaranteed by two shareholders, one of whom is a former
officer and director of the Company.
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, 2000 and 1999, the amount outstanding
under the Loan is $11,311,808 and $10,512,717, respectively, including
$1,928,488 and $1,129,397 of interest, through December 31, 2000 and
1999, 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
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6. Long-Term Debt (Continued)
equity. At any time, the Company may prepay the entire principal
balance of the Loan, plus accrued and unpaid interest, plus a
make-whole premium as defined in the Loan Agreement, if any.
To facilitate the loan from KBC, the Company purchased a residual
value insurance policy through R.V.I. American Insurance Company
("RVI") which secures the repayment of the outstanding principal and
interest when due with a maximum liability of $14 million. Should RVI
pay a claim under this policy they will be entitled to certain of the
Company's rights with respect to the property of Security, including
but not limited to the right to solicit bona fide, third party offers
for the property and to accept such offers and bind the Partnership in
order to recoup the amount paid. The costs related to 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, 2000 and 1999
was $903,065 and $915,667, 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 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 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. The
outstanding balance of these loans was $730,797 and $747,855 at
December 31, 2000 and 1999, respectively.
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 $118,927 and $146,263 at December 31, 2000 and
1999, respectively.
The interest rates on the mortgage loan and the equipment loan vary
from 7.52% to 8.50% as of December 31, 2000.
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, 2000.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6. Long-Term Debt (Continued)
Vehicle Note - Rustic Crafts had an outstanding a vehicle note in
the amount of $11,922 at December 31, 1999.
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 $292,273 and $303,171 and accumulated
depreciation of $46,764 and $18,980, as of December 31, 2000 and
1999, respectively, 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 $136,254 at December 31, 2000
and $196,020 at December 31, 1999.
The minimum lease payments required under capital leases of
manufacturing equipment expiring together with the balance of the
obligation are as follows:
2001 $ 57,586
2002 32,345
2003 32,345
2004 31,997
---------------
Total minimum lease payments 154,273
Option to purchase 3,912
---------------
158,185
Less amounts representing interest
at 6.5% to 8.6% per annum 21,931
---------------
136,254
Less current portion 42,971
---------------
$ 93,283
===============
Zero Coupon Bonds - The zero coupon non-recourse secured bonds, due
January 2, 2002, had a face value of $542,000 and a carrying value
of $414,700 at December 31, 1998. The bonds were issued by NRC 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 and 1998 was $36,905 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 carryforward), 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, 2000
are:
2001 $ 85,539
2002 95,974
2003 11,415,452
2004 95,776
2005 80,061
Thereafter 1,291,794
---------------
$ 13,064,596
===============
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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.
Note 8. Serial Preferred Stock
At December 31, 2000 and 1999, the Company had 5,000,000 authorized
shares of $.10 par value serial preferred stock. Serial preferred
stock at December 31, 2000 and 1999, all of which is convertible
(other than Series C) and cumulative, consists of:
Mandatory Redeemable Shares - Series E, $100 stated value, 12.5%
cumulative
Shares Value
-------------------------------- ---------------------------------
Designated Outstanding Carrying Liquidation
--------------- -------------- --------------- ---------------
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
=============== ============== =============== ===============
Converted to common shares - (885) (88,500) (88,500)
Redeemed - (1,593) (159,300) (159,300)
--------------- -------------- --------------- ---------------
Balance, December 31, 2000 566,400 - - -
=============== ============== =============== ===============
Redeemable Shares at Company's Option
Shares Value
-------------------------------- ------------------------------------------------------
2000 1999
Designated Outstanding Carrying Liquidation Liquidation
--------------- -------------- --------------- --------------- --------------
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) 382,842 (b)
--------------- -------------- --------------- --------------- --------------
606,747 605,291 $ 1,052,988 $ 24,975,312 $ 24,975,312
=============== ============== =============== =============== ==============
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8. Serial Preferred Stock (Continued)
(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 $125,902 at
December 31, 2000 and 1999, 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.
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 60% 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.
(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
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8. Serial Preferred Stock (Continued)
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 shares, 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. The Company's bylaws provide for eight members on
its Board of Directors. At December 31, 2000 the company had no
accumulated and unpaid dividends on Series C 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
certain 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 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 2000 and 1999, the Company issued 90,000 and 90,000,
respectively, non-qualified common stock options at the exercise
price of $.84 and $.93, respectively, 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 2000 and 1999 options will vest completely on
February 5, 2001 and 2000, and are exercisable until August 5, 2005
and 2004, respectively.
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
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9. Stock Options/Stock Option Plans (Continued)
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 to 5 years and expected stock price
volatility of 40.69% in 2000 and 55.46% in 1999. The weighted
average fair value of options granted was $.38 during 2000 and $.43
during 1999.
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 2000:
As Reported Pro Forma
---------------- --------------
Net income $ 2,155,254 $ 2,121,054
Net income attributable to common shares 2,155,254 2,121,054
Net income per common share:
Basic .16 .16
Diluted .14 .14
The following is a summary of the status of the Company's options for
2000:
Average
Exercise
Options Price
---------------- ----------------
Outstanding at beginning of year 90,000 $ 0.93
Issued 90,000 0.84
Cancelled - -
---------------- ----------------
Outstanding at end of year 180,000 $ 0.89
================ ================
The following table summarizes information about options outstanding
at December 31, 2000:
Number of outstanding and exercisable 180,000 shares
Average remaining contractual life 4.15 years
Exercise price $.84 to $.93 per share
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 ben as follows for 1999:
As Reported Pro Forma
---------------- ----------------
Net income $ 2,292,922 $ 2,160,768
Net income attributable to common shares 2,223,731 2,091,577
Net income per common share:
Basic .18 .17
Diluted .15 .14
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9. Stock Options/Stock Option Plans (Continued)
The following is a summary of the status of the Company's options
for 1999:
Average
Exercise
Options Price
---------------- ----------------
Outstanding at beginning of year - $ -
Issued 90,000 0.93
Cancelled - -
---------------- ----------------
Outstanding at end of year 90,000 $ 0.93
================ ================
The following table summarizes information about options outstanding
at December 31, 1999:
Number of outstanding and exercisable 90,000 shares
Average remaining contractual life 4.65 years
Exercise price $.93 per share
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, 2000 and 1999, the Company's net deferred tax asset,
utilizing a 34% effective tax rate, consists of:
2000 1999
--------------- ---------------
Deferred tax assets:
Investment partnership earnings $ 2,214,000 $ 2,731,000
Net operating loss carry forward 9,606,000 9,940,000
Alternative minimum tax credits 493,000 454,000
Valuation allowance (12,313,000) (13,125,000)
--------------- ---------------
Subtotal $ - $ -
=============== ===============
2000 1999
--------------- ---------------
Deferred tax liabilities:
Depreciation (402,048) (416,695)
--------------- ---------------
Net deferred tax liabilities $ (402,048) $ (416,695)
=============== ================
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 carry
forwards before they expire. The deferred tax liability relates to
depreciation and 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 $28,253,000. These
losses can be carried forward to offset future taxable income and,
if not
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 10. Income Taxes (Continued)
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, 2000, 1999 and 1998, the tax effect
of net operating loss carryforwards reduced the current provision
for regular Federal income taxes by approximately $670,000, $980,000
and $583,000, respectively. At December 31, 2000, 1999 and 1998, the
Company has provided $425,018, $235,309 and $98,583, respectively,
for taxes, which relate to federal taxes, including alternative
minimum tax liabilities (See Note 13) and state income taxes.
The provision for income taxes is as follows:
2000 1999 1998
-------------- --------------- ---------------
Current $ 254,760 $ 212,092 $ 98,583
Deferred 171,533 23,217 -
-------------- --------------- ---------------
$ 426,293 $ 235,309 $ 98,583
============== =============== ===============
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 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. 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, 2000 and 1999, approximately $147,811 and $295,000,
respectively, of additional compensation is included in accrued
expenses in the consolidated balance sheets, the former to be
converted to debt and secured by the common shares of Glas-Aire
owned by the Company (See Note 5). 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, a director of the Company through December 5, 2000 and
L. J. Horbach and Associates, of which Mr. Horbach is the sole owner,
received $134,180 in 2000, $90,700 in 1999 and $36,800 in 1998 for
services, expenses and certain administrative functions provided to
the Company.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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).
(iv) As described at Note 16, both of the Company's Operating
Subsidiaries (Rustic Crafts and Glas-Aire) are dependent on a
limited number of customers for a substantial portion of
their respective revenues. The loss of one or more of these
customers could have a significant effect on the Company's
results of operations.
Note 14. Lease Commitments
Glas-Aire leases factory, warehouse and office space and is
committed to the minimum lease payment of $110,155 for each of the
next two years under an operating lease for premises. Rent expense
was $165,393, $113,514 and $106,312 for the eleven month period
ended December 31, 2000 and for the years ended January 31, 2000 and
1999 respectively.
Note 15. Profit Sharing Program
In 1994, the Company's subsidiary, Glas-Aire, adopted a profit
sharing program which provides that 10% of the Company's income
before income taxes and provision for profit sharing may be
distributed to officers and employees of the company. For the period
ended December 31, 2000 the provision for profit sharing was
$112,011 (January 31, 2000 - $106,684, January 31, 1999 - $89,496).
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16. 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, Canada and Japan. One Home Furnishing Accessories
customer accounted for approximately 16%, 19%, and 53% of
consolidated sales for 2000, 1999 and 1998, respectively. Three
Automobile Accessories customers accounted for 60% and 40% of
consolidated sales for 2000, and 1999, respectively. On a pro forma
basis, it is anticipated that these three customers would account
for up to 56% of the consolidated sales in 1999.
Information about the Company's Operations by segment follows:
Home Investment
Automobile Furnishing in Corporate and
Accessories Accessories Partnerships Other Consolidated
---------------- ---------------- ----------------- ---------------- ----------------
2000
Net sales $ 10,929,775 $ 3,389,977 $ - $ 22,861 $ 14,342,613
Income (loss) from operations 836,521 312,324 - (1,962,682) (813,837)
Other income (expense) 90,885 8,990 - - 99,875
Interest expense 20,968 222,563 - 930,050 1,173,581
Income from equity investment
in partnership - - 4,712,615 - 4,712,615
Identifiable operating assets 5,820,746 4,828,727 - 1,218,603 11,868,076
Investments - - 24,575,881 - 24,575,881
Capital expenditures 177,136 3,486 - 70,870 251,492
Depreciation and amortization 251,475 189,753 - 135,499 576,727
Income before income tax 564,836 24,915 4,712,615 (2,477,294) 2,825,072
expense and minority interest
Home Investment
Automobile Furnishing in Corporate and
Accessories Accessories Partnership Other Consolidated
----------------- ---------------- ----------------- ---------------- ---------------
1999
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 367,193 186,227 4,261,212 (2,122,004) 2,692,628
expense and minority interest
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16. Segment Information (Continued)
Home Investment
Furnishing in Corporate and
Accessories Partnership Other Consolidated
---------------- ----------------- ---------------- -----------------
1998
Net sales $ 3,697,648 $ - $ 92,191 $ 3,789,839
Income (loss) from operations 186,993 - (1,061,388) (874,395)
Other income (expense) 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 144,985 3,950,090 (2,192,511) 1,902,564
expense and minority interest
Note 17. Quarterly Information (Unaudited)
First Quarter Second Quarter
------------------------------------------------ ----------------------------------------------
2000 1999 1998 2000 1999 1998
------------- -------------- --------------- ------------- ------------- ---------------
Net sales $ 2,139,499 $ 975,154 $ 631,832 $ 2,971,112 $ 901,022 $ 718,551
Net income 393,252 455,472 496,959 439,350 465,068 171,675
Earnings per share:
Basic .03 .04 .04 .03 .04 .01
Diluted .03 .03 .03 .03 .03 .01
Third Quarter Fourth Quarter
------------------------------------------------ -----------------------------------------
2000 1999 1998 2000 1999 1,998
-------------- ------------- --------------- ------------- ------------- ---------
Net sales $ 4,268,915 $ 1,164,941 $ 1,177,352 $ 4,963,087 $ 4,793,954 $ 1,262,104
Net income 585,023 490,105 530,045 737,629 882,277 595,881
Earnings per share:
Basic .04 .04 .04 .06 .06 .05
Diluted .04 .03 .03 .04 .06 .05
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has dismissed Hausser & Taylor LLP as its independent certified
accountant, and has engaged the firm of Rosenberg, Rich, Baker & Berman as its
independent certified accountants. Rosenberg, Rich prepared the audit of the
company's financial statements for the fiscal year ended December 31, 2000.
The change of accountants was pursuant to a bidding procedure undertaken by the
Audit Committee of the Board of Directors. The decision to change accountants to
Rosenberg, Rich was recommended by the Audit Committee to the full Board of
Directors following such procedure, with the full Board approving the change of
accountants at its December 4, 2000 meeting.
Management represents as follows: (a) There have been no disputes between
management and Hausser & Taylor and their reports have not contained an adverse
opinion or disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope, or accounting principles; (b) during the Company's two
most recent fiscal years and any subsequent interim period, there were no
disagreements with Hausser & Taylor on any matter of accounting principles or
practices, financial statement disclosures, or auditing scope or procedure; and
(c) Hausser & Taylor expressed no disagreement or difference of opinion
regarding any "reportable" event as that term is defined in Item 304(a)(1)(v) of
Regulation S-K.
In addition, during the Company's two most recent fiscal years and any
subsequent interim period, Hausser & Taylor has not advised the Company that:
(a) the internal controls necessary to develop reliable financial statements did
not exist; (b) information had come to the attention of Hausser & Taylor which
made it unwilling to rely on management's representation, or unwilling to be
associated with the financial statements prepared by management; (c) the scope
of the audit should have been expanded significantly; or (d) information had
come to Hausser & Taylor's attention that it had concluded would, or if further
investigated might have, materially impacted the fairness or reliability of a
previously issued audit report or the underlying financial statements, or the
financial statements issued or to be issued covering the fiscal period(s)
subsequent to the date of the most recent audited financial statements,
including information that might have precluded the issuance of an unqualified
audit report, and the issue had not been resolved to Hausser & Taylor's
satisfaction.
The Company requested, and Hausser & Taylor has furnished, a letter addressed to
the Securities and Exchange Commission stating that Hausser & Taylor agrees with
the above statements that pertain to Hausser & Taylor.
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.
------------------------------------------------------ ------------------------------------------------------
Name, (Age) Positions and Offices Held and Principal Occupations
Address or Employment During Past Five Years
------------------------------------------------------ ------------------------------------------------------
William R. Ponsoldt, Sr. (59) Director since June, 1996.
Chairman of the Board of
729 South Federal Directors since August, 1996.
Hwy., Suite 307 President and CEO since June, 1997
Stuart, Florida 34994 During 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 (50) Director since July 1993. Ms. Carey is
a principal and the Investment
Beaumont House, 3rd Floor Manager for Managed Companies with
King & George Street Bradley Management (Bahamas)
P.O. Box CB 10985 Limited. Ms. Carey was formally a director of Regal
Nassau, Bahamas Bahamas International Airways Limited and Bank of
the Bahamas. She is also a director of Caribtours
Company Ltd., Y.M.C.A. Bahamas Chapter and
Southwestern District Bahamas School Board.
Martin J. Craffey (62) Director since July 1993. From
January 1988 until December 31, 1993,
145 Roseland Lane Mr. Craffey was a real estate and business broker
East Patchogue, New and contract vendee with Prudential Realty of
York 11772 Long Island, N.Y. Mr. Craffey is presently
employed in seeking financing for and reorganizing
real estate projects.
Pamlyn Kelly, Ph.D. (57) Director since July 1993. Dr. Kelly, a psychologist,
is principal and Chief Executive Officer of Human
13655 Khalid Court Resource a registered minority owned
Grass Valley, management consulting firm, and she has a
California 95949 private practice.
William R. Ponsoldt, Jr. (35) Director since July 1993. Mr. Ponsoldt is
an attorney engaged in the private
770 S.W. Lighthouse Dr., practice of law in Florida with the law firm of
Palm City, Florida 34990 Warner, Fox, Seeley, Dungey & Sweet since 1998.
Formerly, he was with Kohl, Metzer, Spotts,
Ponsoldt & Tapper, P.A. Mr. Ponsoldt is the
son of William R. Ponsoldt, Sr. a director of
the Company.
Fredric R. Lowe (56) Director since October, 1997. Mr. Lowe
has been employed as a retail stockbroker during
1345 Avenue of the Americas, 21st Floor the past five years. For the past four
New York, New York 10105 years he has been employed by Smith Barney and prior
to that he was employed by its predecessor, Lehman
Brothers.
Marc H. Baldinger Director since August, 1999. Mr. Baldinger, C.F.P.
(45) has been a senior officer of financial services for
Riverside National Bank since 1997, located in
989 S. Federal Hwy Stuart, Florida. Prior to his employment at
Stuart, Florida 34994 Riverside, he was a Financial Advisor 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.
Jackie Teske Secretary of the Company since February 2001. From
(50) October 1982 to the present, Ms. Teske was employed
as Secretary of National Investment Company.
1704 SE Tiffany Club Place
Port St. Lucie, Florida 34952
------------------------------------------------------ ------------------------------------------------------
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.
On February 7, 1995, the Company entered into an agreement with L.J. Horbach &
Associates, pursuant to which L.J. Horbach & Associates, provided 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, then a director of the Company, in
September 1999 under which Mr. Horbach was 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 $50,700 under this arrangement in 1999. Mr. Horbach was appointed
Interim CFO upon the resignation of Douglas F. Long effective April 1, 2000.
L.J. Horbach & Associates, Inc. is wholly owned by Larry J. Horbach. These
arrangements were terminated at the December 2000 meeting of the Board of
Directors.
Compliance with Section 16(a) of the Exchange Act
Based solely on a review of reports on Form 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, reports on Form 5
and amendments thereto furnished to the Company with respect to its most recent
fiscal year, the Company believes that no person who, at any time during 2000,
was subject to the reporting requirements of Section 16(a) with respect to the
Company failed to meet such requirements on a timely basis except as follows:
Statesman Group sold shares held, failed to file Form 4 and subsequently filed
Form 5 disclosing the sale of shares .
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table.
The following table sets forth the annual and long-term compensation during the
last three years for William R. Ponsoldt, Sr., Douglas F. Long, Eunice M.
Antosh, and Lawrence Horbach, the only officers who received compensation during
2000.
SUMMARY COMPENSATION TABLE
--------------- -------- ----------- ---------- ------------- ------------ ------------- -------- -----------
Securities
Other Restricted Underly-ing LTIP All
Name & Annual Stock Options/ Pay-outs other
Principal Salary Bonus Comp- Award(s) SARs ($) ($) Comp-ensation
Position Year ($) ($) pensation ($)
--------------- -------- ----------- ---------- ------------- ------------ ------------- -------- -----------
William 2000 269,114 426,316 10,000 0 0 0 0
Ponsoldt, Sr. 1999 258,000 424,646 7,200 0 0 0 0
Pres/CEO (1) 1998 252,333 373,022 7,200 0 0 0 0
Lawrence 2000 0 0 134,180 0 0 0 0
Horbach, 1999 0 0 90,700 0 0 0 0
CFO (2) 1998 0 0 36,800 0 0 0 0
Marc 0
Baldinger 2000 0 0 0 0 0 0 0
(3)
--------------- -------- ----------- ---------- ------------- ------------ ------------- -------- -----------
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. 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.
Under the terms of Mr. Ponsoldt's Employment Agreement dated June 3, 1997, he is
entitled to receive as additional compensation an amount equal to 20% of the
Company's increase in quarterly common stock net worth, which is defined to be
the difference between (i) total shareholders' equity and (ii) any shareholders'
equity account related to preferred stock. 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. Mr. Ponsoldt has agreed to delay receipt
for his compensation in exchange for a demand note which is collateralized by
Glas-Aire Stock. The interest rate on the loan is fixed at 9%.
2. 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, received
$134,180 in 2000, $90,700 in 1999 and $36,800 in 1998 for services, expenses and
certain administrative functions provided to the Company.
3. Marc Baldinger has accepted the position of CFO. The Company and Mr.
Baldinger are currently negotiating employment terms and conditions.
Option/SAR Grants.
There were no options/SAR grants to executive officers in 2000.
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, 2000.
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.
The Company has recently commenced accessing the line of loans from Statesman.
The loans have been collateralized with holdings of Glas-Aire Stock owned by the
Company. 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
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. Statesman
has recently given notice to the Company of it's intention to exercise the
options.
Non Qualified Stock Options.
Non qualified options to acquire a total of 90,000 common shares were granted in
2000 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 and $0.84 per share,
respectively, the fair value of the common shares at date of grant. The options
vest on February 5, 2000 and February 5, 2001,respectivley, and are exercisable
to August 5, 2004 and August 5, 2005, respectively.
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.
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 $14,000 for
consulting primarily with respect to the operations of Rustic Crafts
International, Inc.
Employment Contracts, Termination of Employment and Change in Control
Arrangements.
On June 3, 1997, Regency entered into an Employment Agreement with William R.
Ponsoldt, Sr. pursuant to which he became the President and CEO of the Company.
The Agreement provides for Mr. Ponsoldt to continue in these duties until his
attainment of retirement age, provided that he may resign upon 30 days notice to
the Company and further provided that Mr. Ponsoldt may be removed from office
upon death or disability or for just cause. The Agreement provides for a base
salary in annual installments, in advance, of $250,000 each, which salary is to
be adjusted on January 1 of every year by any increase since the previous
January 1 in the Consumer Price Index ("CPI") for All Urban Consumers, U.S. city
average, as published by the U.S. Department of Labor, Bureau of Labor
Statistics. As additional compensation, Mr. Ponsoldt is to receive an amount
equal to 20% of the Company's increase in quarterly common stock net worth,
which is defined to be the difference between (i) total shareholders' equity and
(ii) any shareholders' equity accounts relating to preferred stock. The Company
may elect to pay up to 50% of the additional compensation by the issuance of
warrants to purchase the Company's Common Stock at a price equal to 50% of the
average bid price for the Company's Common Stock for the calendar quarter for
which the increased compensation is payable. The Agreement further provides for
Mr. Ponsoldt to receive health and disability insurance (with a benefit of
$100,000/year payable in the event of long term disability), an automobile
allowance of $600/month (to be adjusted by increases in the CPI), and
reimbursement of expenses. The Agreement provides that Mr. Ponsoldt will not
compete with the Company for a two year period following the termination of his
employment and provides for indemnification under certain circumstances. Any
disputes between the Company and Mr. Ponsoldt under the Agreement are to be
resolved through arbitration.
Compensation Committee Report on Executive Compensation.
This item is omitted as Regency Affiliates, Inc. qualifies as a "small business
issuer" under Rule 405 and Regulation S-B.
Performance Graph.
This item is omitted as Regency Affiliates, Inc. qualifies as a "small business
issuer" under Rule 405 and Regulation S-B.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions.
This item is omitted as Regency Affiliates, Inc. qualifies as a "small business
issuer" under Rule 405 and Regulation S-B.
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 26, 2001 are listed
below:
------------------------ ------------------------------ ------------------------------- ---------------------
Title of class Name and address of Amount and nature of Percent of Class
beneficial owner beneficial ownership
------------------------ ------------------------------ ------------------------------- ---------------------
Regency Statesman Group,
Affiliates, Inc. Inc. 8,328,068 35.7%
$.40 P.V. (1) (2)
Common Stock King & George
Streets
Nassau, Bahamas
------------------------ ------------------------------ ------------------------------- ---------------------
1. The nature of beneficial ownership is sole investment power and sole voting
power as to all shares listed except as listed below.
2. In addition to 1,345,077 shares owned outright, The Statesman Group, Inc. has
voting trusts for a) 855,991 shares and b) 27,000 shares as of December 31,
2000. The Percent of Class also includes the 6,100,000 options, which Statesman
has given its notice of intention to exercise.
Statesman Group, Inc. is an international business corporation organized under
the laws of the Bahamas. Statesman's principal business is the making of
investments in the United States and elsewhere. Both its principal business and
principal office are located at King & George Streets, Nassau, Bahamas. The
Statesman Irrevocable Trust dated April 15, 1991 is the controlling person of
Statesman. The Statesman Trust is an irrevocable trust for the benefit of
William R. Ponsoldt, Jr., a director of the Company, Tracey A. Ponsoldt, now
married and sometimes known as Tracey A. Powers, and Christopher J. Ponsoldt,
all children of William R. Ponsoldt, Sr. The acting trustees of the Statesman
Trust dated April 15, 1991, have the sole right to control the disposition of
and vote the Regency securities acquired by Statesman.
Security ownership of management.
The following table sets forth as of March 26, 2001 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.
Name of Amount and Nature of
--------------------------- --------------------------- -------------------------- --------------------------
Title of Class Beneficial Owner Beneficial Ownership Percent of
Class
--------------------------- --------------------------- -------------------------- --------------------------
Regency Affiliates, William R. Ponsoldt, Sr.
Inc. $.40 P.V. 10,633 .06%
Common Stock
Regency Affiliates, Pamlyn Kelly, Ph.D
Inc. $.40 P.V. 79,633 .46%
Common Stock
Regency Affiliates, Stephanie Carey
Inc. $.40 P.V. 10,633 .06%
Common Stock
Regency Affiliates, Martin J. Craffey .06%
Inc. $.40 P.V. 10,633
Common Stock
Regency Affiliates, William R. Ponsoldt, Jr. .06%
Inc. $.40 P.V. 10,633
Common Stock
Regency Affiliates, Fredric R. Lowe .06%
Inc. $.40 P.V. 10,633
Common Stock
Regency Affiliates, Marc H. Baldinger .06%
Inc. $.40 P.V. 10,633
Common Stock
Regency Affiliates, All officers and Common
Inc. $.40 P.V. directors as a group (7) 143,431 .82%
Common Stock individuals
--------------------------- --------------------------- -------------------------- --------------------------
Cumulative Senior Preferred $100 Series-C Stock
As of December 31, 2000 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.
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. The following documents are filed as part of this report:
1. Financial Statements: Page
Independent Auditors' Reports 1-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 3-4
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999, and 1998 5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998 6
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999, and 1998 7-8
Notes to Consolidated Financial Statements 9-26
2. Schedules.
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.
b. The following reports on Form 8-K were filed by the registrant
during the quarter ended December 31, 2000:
Current Report on Form 8-K dated December 4, 2000 and Filed January
16, 2001
Current Report on Form 8-K dated December 4, 2000 and Filed January
16, 2001
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 E Preferred Stock, $100 Stated
Value, $.10 Par Value filed as Exhibit to Form 10-K dated June
7, 1993 and incorporated herein by reference
4(d) Certificate of Designation - Series D Junior Preferred Stock, $10
Stated Value, $.10 Par Value filed as Exhibit to Form 10-K dated
June 7, 1993 and incorporated herein by reference
4(k) Certificate of Designation - Series E 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, 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
10.2 Purchase Agreement for a 5% Limited
Partnership Interest in 1500 Woodlawn
Limited Partnership, the General Partner of
Security.
21 Schedule of Registrant's Subsidiaries
23 Consent Letter from Hausser & Taylor LLP
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 16, 2001 By: /s/William R. Ponsoldt Sr., President
Date -------------------------------------
William R. Ponsoldt, Sr., President
By: /s/ Marc H. Baldinger
-------------------------------------
Marc H. Baldinger, 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 16, 2001 By: /s/ William R. Ponsoldt, Sr.
Date -------------------------------------
William R. Ponsoldt, Sr. President
and Director
April 16, 2001 /s/ Stephanie Carey
Date -----------------------------------
Stephanie Carey,
Director
April 16, 2001 /s/ Martin J. Craffey
Date -----------------------------------
Martin J. Craffey,
Director
April 16, 2001 ------------------------------------
Date Pamlyn Kelly, Ph.D.,
Director
April 16, 2001 ------------------------------------
Date William R. Ponsoldt, Jr.,
Director
April 16, 2001 ------------------------------------
Date Fredric R. Lowe,
Director
April 16, 2001 /s/ Marc H. Baldinger
Date ------------------------------------
Marc H. Baldinger,
Director