UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
-
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NUMBER 1-7949
REGENCY AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-0888772
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
729 South Federal Highway, Suite 307, Stuart, Florida 34994
----------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code (561) 220-7662
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
As of November 1, 2001 there were 19,398,773 shares of the $ .40 Par Value
Common Stock outstanding.
Regency Affiliates, Inc. and Subsidiaries
Index to the Financial Statements
Page
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets....................................3-4
Consolidated Statements of Operations...........................5
Consolidated Statements of Cash Flows..........................6-7
Notes to Consolidated Financial Statements.....................8-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................12-18
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings...............................................18
Item 2. Changes in Securities and Use of Proceeds ......................18
Item 3. Defaults Upon Senior Securities ................................18
Item 4. Submission of Matters to a Vote of Security Holders ...........18
Item 5. Other Information ............................................18
Item 6. Exhibits and Reports on Form 8-K .............................18
Signatures...................................................................18
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
September 30, December 31,
2001 2000
---------------- --------------
Assets
Current Assets
Cash and Cash Equivalents $ 3,074,735 $ 928,636
Accounts receivable, net of allowance 2,213,346 2,553,589
Income taxes receivable 162,359 24,556
Inventory 2,176,942 2,243,726
Other current assets 287,918 127,728
--------------- ----------------
Total current assets 7,915,300 5,878,235
Property, Plant and Equipment, Net 4,070,349 4,343,170
Investment in partnerships 28,774,971 24,575,881
Other Assets
Aggregate inventory 834,364 834,675
Goodwill, net of amortization 772,919 820,774
Debt issuance costs, net of amortization 409,569 551,343
Other 4,180 12,751
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Total other assets 2,021,032 2,219,543
---------------- ----------------
$ 42,781,652 $ 37,016,829
================ ================
The accompanying notes are an integral part of these financial statements.
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, December 31,
2001 2000
-------------- --------------
Current Liabilities
Current portion of long-term debt $ 353,562 $ 128,510
Notes Payable - Banks 1,913,150 692,174
Notes payable - Related Parties 1,211,503 776,000
Accounts payable 784,597 1,080,904
Accrued expenses 1,938,616 899,837
Taxes payable 151,549 78,820
--------------- --------------
Total current liabilities 6,352,977 3,656,245
Long term debt, net of current portion 14,269,711 13,072,341
Deferred income taxes 444,142 402,048
Minority interest in consolidated subsidiaries 3,890,546 3,810,143
Shareholders' equity
Serial preferred stock not subject to mandatory
redemption (maximum liquidation preference
$24,975,312 in 2001 and 2000, respectively) 1,052,988 1,052,988
Common stock, par value $.40 authorized 25,000,000
shares; issued and outstanding 17,251,619
shares in 2001 and 2000 6,900,659 6,900,659
Additional paid-in capital 2,308,484 2,308,484
Readjustment resulting from quasi-reorganization at
December 31, 1987 (1,670,596) (1,670,596)
Retained earnings 12,832,025 10,915,990
Accumulated other comprehensive income (261,251) (93,440)
Treasury stock, 4,052,825 shares in 2001 and 2000 (3,338,033) (3,338,033)
---------------- ----------------
Total shareholders' equity 17,824,276 16,076,052
---------------- ----------------
$ 42,781,652 $ 37,016,829
================ ================
The accompanying notes are an integral part of these financial statements.
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2001 and 2000
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------------- --------------- ---------------- ---------------
Net Sales $ 3,358,715 $ 4,268,915 $ 9,953,146 $ 9,379,262
Costs and expenses
Costs of goods sold 2,498,605 3,095,179 7,213,058 6,863,669
Selling and administrative 1,148,741 1,263,602 3,759,649 3,455,326
----------------- --------------- ---------------- ---------------
3,647,346 4,358,781 10,972,707 10,318,995
----------------- --------------- ---------------- ---------------
Income (loss) from operations (288,631) (89,866) (1,019,561) (939,733)
Income from equity investment
in partnerships 1,450,983 1,179,122 4,199,089 3,502,804
Other income (expense), net 64,350 48,052 81,152 80,972
Interest expense (363,854) (314,619) (985,868) (891,198)
----------------- --------------- ---------------- ---------------
Income before income tax expense, 862,848 822,689 2,274,812 1,752,845
and minority interest
Income tax expense (112,892) (145,741) (218,211) (210,935)
Minority interest (79,784) (91,925) (140,566) (124,286)
----------------- --------------- ---------------- ---------------
Net income $ 670,172 $ 585,023 $ 1,916,035 $ 1,417,624
================= =============== ================ ===============
Net income per common share:
Basic $ 0.05 $ 0.04 $ 0.15 $ 0.11
----------------- --------------- ---------------- ---------------
Diluted $ 0.05 $ 0.04 $ 0.15 $ 0.11
================= =============== ================ ===============
The accompanying notes are an integral part of these financial statements.
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 and 2000
(Unaudited)
September 30, September 30,
2001 2000
---------------- --------------
Cash flows from operating activities
Net income $ 1,916,035 $ 1,417,624
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation and amortization 532,365 367,054
Change in deferred income taxes 42,094 30,131
Minority interest 140,566 124,286
Stock issued for services rendered - 292,134
Income from equity investment in partnerships (4,199,089) (3,502,804)
Distribution of equity earnings in partnership - 106,250
Interest amortization on long-term debt 650,764 708,331
Changes in operating assets and liabilities
Accounts receivable 340,243 (141,444)
Inventory 67,095 (714,411)
Other current assets (297,993) 59,191
Accounts payable (296,307) 41,357
Accrued expenses 1,051,344 88,269
---------------- -----------------
Net cash from (used by) operating activities (52,883) (1,124,032)
---------------- -----------------
Cash flows from investing activities
Capital expenditures (69,915) (175,458)
Other 8,571 5,089
---------------- -----------------
Net cash used by investing activities (61,344) (170,369)
---------------- -----------------
Cash flows from financing activities
Net short-term borrowings (payments) 1,656,479 41,895
Net long-term borrowings (payments) 771,658 (99,208)
Redemption of Series E preferred stock - (159,300)
Other - (23,410)
Dividends paid - (5,000)
---------------- -----------------
Net cash from (used) by financing activities 2,428,137 (240,023)
---------------- -----------------
Foreign currency translation adjustment (167,811) (100,059)
Increase (decrease) in cash and cash equivalents 2,146,099 (1,639,483)
Cash and cash equivalents - beginning 928,636 2,348,989
---------------- -----------------
Cash and cash equivalents - ending $ 3,074,735 $ 709,506
================ =================
The accompanying notes are an integral part of these financial statements.
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Nine Months Ended September 30, 2001 and 2000
(Unaudited)
September 30, September 30,
2001 2000
--------------- -----------------
Supplemental disclosures of cash flow information: Cash
paid during the year for:
Income taxes $ 211,960 $ 399,786
Interest 155,940 197,531
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 2001, accrued compensation in the amount of $113,503 was converted
to debt.
The accompanying notes are an integral part of these financial statements.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Bases of Presentation and Summary of Significant Accounting Policies
A. Basis of Presentation - The accompanying unaudited condensed
consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for
the three and nine month periods ended September 30, 2000 and
September 30, 2001 are not necessarily indicative of the results
that may be expected for the years ended December 31, 2000 and
December 31, 2001. For further information, refer to the
consolidated financial statements and footnotes thereto included
in the Registrant Company and Subsidiaries' annual report on Form
10-K for the year ended December 31, 2000.
B. Principals of Consolidation and Nature of Business - The
consolidated financial statements include the accounts of Regency
Affiliates, Inc. (the "Company"), its wholly owned subsidiary,
Rustic Crafts International, Inc. ("Rustic Crafts"), its 80%
owned subsidiaries, National Resource Development Corporation
("NRDC"), Transcontinental Drilling Company ("Drilling") and
RegTransco, Inc. ("RTI") and its approximately 50% owned
subsidiary, Glas-Aire Industries Group, Ltd. ("Glas-Aire"). All
significant intercompany balances and transactions have been
eliminated in consolidation.
C. Earnings Per Share - Basic earnings per share are computed by
dividing net income attributable to common shareholders by the
weighted average number of common shares outstanding during the
year. Diluted earnings per share computations assume the
conversion of Series B, and Junior Series D preferred stock
during the period that the preferred stock issues were
outstanding. If the result of these assumed conversions is
dilutive, the dividend requirements and periodic accretion for
the preferred stock issues are reduced. The shares of the Company
held by Glas-Aire were treated as treasury shares for earnings
per share computations.
D. Inventory - Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method. Inventory is
comprised of the following at:
September 30,
2001
----------------
Raw materials and supplies $ 944,354
Work-in-process 222,967
Finished products 959,621
---------------
$ 2,126,942
================
E. Aggregate Inventory - Inventory, which consists of 70+ million
short tons is stated at lower of cost or market. The Company is
also subject to a royalty agreement which requires the payment of
certain royalties to a previous owner of the aggregate inventory
upon sale of the aggregate. The Company has made only casual
sales of the inventory during the periods.
F. Income Taxes - The Company utilizes Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. The
difference between the financial statement and tax basis of
assets and liabilities is determined annually. Deferred income
tax assets and liabilities are computed for those temporary
differences that have future tax consequences using the current
enacted tax laws and rates that apply to the periods in which
they are expected to affect taxable income. In
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Bases of Presentation and Summary of Significant Accounting Policies
(Continued)
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.
G. Change in Reporting Period - Prior to December 31, 2000 Glas-Aire
had a fiscal year end of January 31. As a result, the Company's
condensed statement of operations for the nine month period ended
September 30, 2000 included the financial activity of Glas-Aire
for the months of February through September 2000 only.
Had the financial activity of Glas-Aire for the month of January
2000 been included, the Company's loss from operations would be
as follows:
Net Sales $ 6,060,205
----------
Costs and expenses
Costs of goods sold 4,380,632
Selling and administrative 2,407,946
----------
6,788,578
----------
Loss from operations $ (728,373)
==========
Note 2. Investment in Partnership
In November 1994, the Company purchased a limited partnership
interest in Security Land and Development Company Limited
Partnership ("Security"), which owns and operates an office
complex. The Company has limited voting rights and is entitled to
be allocated 95% of the profit and loss of the Partnership until
October 31, 2003 (the lease termination date of the sole tenant
of the office complex) and 50% thereafter. The Company is
entitled to receive operating income in the form of management
fees relating to the partnership.
Security was organized to own and operate two buildings
containing approximately 717,000 net rentable square feet
consisting of a two-story office building and a connected
six-story office tower. The building was purchased by Security in
1986 and is located on approximately 34.3 acres of land which is
also owned by Security. The building has been occupied by the
United States Social Security Administration's Office of
Disability and International Operations for approximately 24
years under a lease between the United States of America, acting
by and through the General Services Administration ("GSA").
Effective November 1, 1994, Security and the GSA entered into a
nine-year lease (the "Lease") for 100% of the building. Security
has received an opinion of the Assistant General Counsel to the
GSA that lease payments are not subject to annual appropriation
by the United States Congress and the obligations to make such
payments are unconditional general obligations of the United
States Government.
Effective November 30, 2000 the Company invested $10,000 for a 5%
limited partnership interest in 1500 Woodlawn Limited
Partnership, the general partner of Security.
The Company accounts for the investment in partnerships on the
equity method, whereby the carrying value of the investment is
increased or decreased by the Company's allocable share of income
or loss. The investment in partnerships included in the
Consolidated Balance Sheets at September 30, 2001 is $28,774,971.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Investment in Partnership (Continued)
The income from the Company's equity investment in the
Partnerships for the nine months ended September 30, 2001 was
$4,199,089.
Summarized operating data for Security for the three and nine
months ended September 30, 2001 and September 30, 2000, is as
follows:
Three Months Ended Nine Months Ended
----------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------------- ---------------- ----------------- ---------------
Revenue $ 3,433,245 $ 3,314,136 $ 10,246,680 $ 9,944,759
----------------- ---------------- ----------------- ---------------
Operating Expenses 860,172 866,222 2,585,613 2,640,078
Depreciation and Amortization 664,160 710,067 2,096,294 2,130,201
Interest Expense, Net 431,367 496,666 1,294,101 1,487,318
----------------- ---------------- ----------------- ---------------
Net Income $ 1,477,546 $ 1,241,181 $ 4,270,672 $ 3,687,162
----------------- ---------------- ----------------- ---------------
Note 3. Notes Payable - Banks
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
September 30, 2001 $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.
The Company's subsidiary, Rustic Crafts, has established a
$1,000,000 line of credit with PNC Bank. The line of credit
expires on May 18, 2002 and bears interest at the Bank's prime
rate minus one-half percent. The accounts receivable, inventory
and other assets, such as property and equipment, of Rustic
Crafts have been pledged as collateral to secure the line of
credit. The line of credit is guaranteed by the Company. At
September 30, 2001, the amount outstanding under the line of
credit was $994,921.
The Company's subsidiary, Glas-Aire, has established a Canadian
$3,000,000 (U.S. $2,040,000) line of credit with a Canadian bank.
The line of credit is collateralized by accounts receivable and
inventory and bears interest at the rate of the Canadian bank's
prime rate plus one-half percent. At September 30, 2001, the
amount outstanding under the line of credit was $842,229.
Note 4. Notes Payable - Related Parties
The Company has outstanding $448,000 of demand notes bearing
interest at 10% payable to a principal shareholder. Additionally
the Company has outstanding a $763,503 demand note bearing
interest at a rate of prime minus 1% to its President. These
obligations are secured by the shares of Glas-Aire owned by the
Company.
Note 5. Long-Term Debt
KBC Bank Loan - On June 24, 1998, the Company refinanced the
long-term debt previously outstanding with Southern Indiana
Properties, Inc. ("SIPI") and entered into a Loan Agreement (the
"Loan") with KBC Bank N.V. ("KBC"). Under the terms of the Loan
Agreement, KBC advanced $9,383,320. The due date of the Loan is
November 30, 2003 with interest at the rate of 7.5% compounded
semi-annually on each June 1 and
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5. Long-Term Debt (Continued)
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 September 30, 2001, the amount outstanding
under the Loan is $11,961,658, including $649,850 of interest for
the nine months ended September 30, 2001.
The Company purchased a residual value insurance policy which
secures the repayment of the outstanding principal and interest
when due with a maximum liability of $14 million. The costs
related to the insurance along with legal fees and other costs
associated with obtaining the Loan have been capitalized as debt
issuance costs and are being amortized over the life of the Loan
using the effective interest method.
Mortgage Loan - On March 25, 1998, Rustic Crafts purchased a
building of 126,000 square feet located in Scranton,
Pennsylvania. The purchase of this facility was funded in part by
a first mortgage term loan in the amount of $960,000. The first
mortgage term loan is payable in consecutive monthly installments
over 10 years with a 20 year amortization.
Equipment Loans - In connection with the purchase of the
building, PNC Bank loaned the Company a total of $767,000 to
finance the acquisition of new equipment and to install such
equipment in the facility. Principal payments on one loan of
$604,000 began March 2000 for 120 months in amounts sufficient to
amortize the outstanding balance over twenty years from March
2000. In March 2000 the interest rate was changed to the average
weekly yield on U.S. Treasury Bills, plus 200 basis points. The
remaining loan in the original amount of $163,500 is payable in
equal monthly installments of $2,518.
Miscellaneous Loan - - In June 1999, Rustic Crafts obtained an
additional loan from PNC Bank for the purpose of funding
additional equipment purchases and working capital in the amount
of $156,000. The loan is payable in equal monthly installments,
including principal and interest, of $3,153.
The interest rates on the mortgage loan, the equipment loan and
the miscellaneous loan range from approximately 7.25% to 8.25% at
September 30, 2001. The outstanding balance on these loans is
$1,677,381 at September 30, 2001.
Rustic Craft's real and personal property, equipment, accounts
receivable, inventory and other general intangibles are pledged
as security for the loans. The loans are also guaranteed by the
Company.
Glas-Aire's long term debt amounts to $984,234 and is comprised
of capital leases of $97,317 and installment obligations of
$886,917.
Note 6. Income Taxes
As referred to in Note 1, the Company utilizes SFAS 109,
"Accounting for income Taxes." The deferred taxes are the result
of long-term temporary differences between financial reporting
and tax reporting for depreciation, earnings from the Company's
partnership investment in Security Land and Development Company
Limited Partnership related to depreciation and amortization and
the recognition of income tax carryforward items.
For regular federal income tax purposes, the Company has
remaining net operating loss carryforwards of approximately
$27,000,000. These losses can be carried forward to offset future
taxable income and, if not utilized, will expire in varying
amounts beginning in the year 2001. 11
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6. Income taxes (Continued)
For the three and nine months ended September 30, 2001, and 2000,
the tax effect of net operating loss carryforwards reduced the
current provision for regular Federal income taxes by
approximately $163,000 and $424,000, respectively. The Company
provided $210,935 and $145,741 for Canadian, state income and the
alternative minimum tax in the three and nine months ended
September 30,2001 and 2000, respectively.
Note 7. Redemption of Series E Preferred Stock
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.
Note 8. Subsequent Events
Pursuant to an agreement entered into on September 17, 2001 and
amended on October 1, 2001, the Company exchanged 1,215,105
shares of common stock of Glas-Aire, representing approximately
50% of the issued and outstanding shares of Glas-Aire, for
$2,500,000 plus 4,040,375 shares of Regency's common stock, or
approximately 23% of the issued and outstanding shares of
Regency. As a result of the transaction, neither Regency nor
Glas-Aire owns any stock of the other.
The exchange rate was based on negotiations between the parties
and confirmed as to fairness by independent valuation firms,
hired by respective committees of each of the Boards of
Directors of Regency and Glas-Aire.
The former president of Glas-Aire has commenced litigation in
British Columbia, Canada against Glas-Aire and the Company, among
others asserting, among other things, that the Regency -
Glas-Aire transaction is in breach of bank agreements, securities
law and fiduciary duties owed to Glas-Aire and its shareholders.
The defendants are vigorously defending this litigation.
On October 15, 2001, Statesman Group, Inc. exercised an option to
acquire 6,100,000 shares of the Company's common stock. The
exercise price was $.40 per share (par value) rather than the
formula price in the option, which would have yielded the Company
approximately 25% less. Statesman Group issued its $2,440,000
five year note to the Company as payment, secured (in addition to
the shares purchased) by the 20% stock interest owned by
Statesman in NRDC, the Company's 80% owned subsidiary.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General.
Regency Affiliates, Inc. (the "Company") is the parent company of several
subsidiary business operations. The Company is committed to develop and/or
monetize these business operations for the benefit of its shareholders and
continues to commit both financial and personnel resources to an active
merger and acquisition program in order to enhance common stockholders'
values. The Company's Shareholders' Equity at September 30, 2001 was
$17,824,276 as compared to $15,308,128 at September 30, 2000, an increase
of $2,516,148 for the twelve months ended September 30, 2001. 12
Liquidity and Capital Resources.
The investment in Security is estimated to provide the Company with
management fees of approximately $100,000 per annum until 2003. In the
period ending September 30, 2001, the Company's income from its equity
investment in the Partnership (as well as its interest in Security's
General Partner, 1500 WoodLawn L.P.) was $4,199,089. These funds, however,
are presently committed for the amortization of the outstanding principal
balance on Security's real estate mortgage and, while the Company's equity
investment in the Partnerships has increased to $28,774,971, neither
provides liquidity to the Company in excess of the $100,000 annual
management fee. The Company has, however, been successful in obtaining
financing with respect to this investment.
On March 15, 1998, Rustic Crafts purchased a building of 126,000 square
feet located near the current facility in Scranton, Pennsylvania. The
purchase of this facility was funded by new borrowings from PNC Bank in the
form of a first mortgage term loan in the amount of $960,000. Rustic Crafts
also obtained financing of approximately $923,000 from PNC Bank to equip
the facility and purchase new equipment. The move to the new facility was
completed in 1999 and has significantly increased the operating capacity
and enabled Rustic Crafts to more efficiently fill its current orders and
increase its customer base.
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. The
Company is also exploring the possibility of establishing a permanent
infrastructure during the year 2001 or thereafter to commercialize the
inventory of previously quarried and stockpiled aggregate at the Groveland
Mine in cooperation with an experienced aggregate supply company.
In October 2001, the Company announced that it had completed a transaction
for the disposition of its interest in its partially owned subsidiary,
Glas-Aire Industries Group Ltd. ("Glas-Aire"). Prior to the transaction,
each corporation owned a substantial percentage of the common stock of the
other, and they had certain officers and directors in common. Pursuant to
an agreement entered into on September 17, 2001 closed on October 1, 2001,
Regency exchanged 1,215,105 shares of common stock of Glas-Aire,
representing approximately 50% of the issued and outstanding shares of
Glas-Aire, for $2,500,000 plus 4,040,375 shares of Regency's common stock,
or approximately 23% of the issued and outstanding shares of Regency. As a
result of the transaction, neither Regency nor Glas-Aire owns any stock of
the other. Regency's cash position improved as a result of the transaction.
However, it is still mot able to generate positive cash flow from
operations, and the Glas-Aire transaction will not have an immediate
positive impact on cash flow.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Statesman Group, Inc. exercised an option it has held since 1997 to acquire
6,100,000 shares of the Company's Common Stock on October 15, 2001. As a result
of the transaction, the Statesman Group owns approximately 38.2% of the
Company's common stock.
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.
On October 15, 2001, Statesman exercised the option in full pursuant to an
agreement that (1) provided for a purchase price at $.40 per share (par value)
rather than the formula price in the option, which would have yielded the
Company approximately 25% less and (2) provided for collateral for the $2.44
million 5 year note issued by Statesman to the Company (in addition to the
shares purchased) in the form of the 20% stock interest owned by Statesman in
National Resource Development Corporation, the Company's 80% owned subsidiary.
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 Bay Street, 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.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
The trustee of the Statesman Trust, dated April 15, 1991, is Liedenhall Bank and
Trust, Nassau, Bahamas, which has the sole right to control the disposition of
and vote the Company's securities acquired by Statesman.
The Transaction will not efect liquidity of the Company, as no payments are due
on the note until maturity in five years.
Results of Operations
The following discussion is of the Company's historic results. Going forward,
results will be materially affected by the disposition of Glas-Aire.
As a result of the Glas-Aire transaction, the operations of Regency will no
longer include the operations of Glas-Aire as in the historical financial
statements herein. The Form 8-K/A filed on November 5, 2001 by Regency
shows the pro forma effects at June 30, 2001 of the removal of the assets
and liabilities of Glas-Aire from the Regency balance sheet, as well as the
elimination of Glas-Aire's minority interest in Regency and the receipt of
$2,500,000 from Glas-Aire. The pro forma financial statements in Form 8K/A
also reflect, for the period ended June 30, 2001, the removal of the
results of operations of and minority interest in the income of Glas-Aire.
Readers are urged to review those pro forma financial statements for
information as to how the sale of Glas-Aire is likely to affect Regency in
the immediate future. Similar effects would occur for the period ended
September 30, 2001. On a balance sheet basis , the Glas-Aire transaction
will reduce assets by approximately $4 million and stockholders equity by
approximately $2 million. On an income statement basis, Glas-Aire has
represented over 75% of Regency's net revenues, although only approximately
10-15% of Regency's profits. Regency's cash position improved as a result
of the transaction. However, it is still not able to generate positive cash
flow from operations, and the exchange with Glas-Aire will not have an
immediate positive impact on cash flow from operations.
2001 Compared to 2000
For the three-months ended September 30, 2001:
Net sales decreased $910,200 over the similar period in 2000. The
decrease is due to $519,302 in decreased sales from Glas-Aire and
$5,637 from NRDC, plus a decrease in sales at Rustic Crafts of
$385,261. The decrease at Rustic Crafts was due to smaller backlogs at
December 31, 2000 and the decrease in sales of low margin products.
Gross margin decreased $313,626. The decrease is due to a decrease in
gross margin from Glas-Aire of $104,226 and from NRDC of $3,993, plus
a decrease in gross margin from Rustic Crafts of $205,407.
Selling and administrative expenses decreased $114,861 in 2001 as
compared to 2000. These include an increase of $2,415 related to
Glas-Aire offset by a net reduction of selling and administrative
expenses incurred by Regency, Rustic Crafts and NRDC amounting to
$117,276.
Income from equity in partnerships increased $271,861. This increase
is due to a decrease in interest expense resulting from payment of
principal offset by increases in operating expenses for the quarter as
to Security and income resulting from the Company's acquisition of a
5% limited partnership interest in Woodlawn, L.P.
Interest expense increased by $49,235 and is largely attributable to
increased interest expense on the KBC loan, increased indebtedness of
Glas-Aire, indebtedness to related parties offset by borrowings costs
of Rustic Crafts.
Net income increased $85,149 in 2001 compared to 2000 of which
$271,861 represents increased equity earnings from partnerships less
losses from operations (net of income tax and minority interest) of
$186,712.
For the nine months ended September 30, 2001:
Net sales increased $573,884 in 2001 over the similar period in 2000,
of which $273,569 and $5,206 is attributable to Glas-Aire and NRDC,
respectively, and $934,528 is attributable to Glas-Aire's change in
fiscal year Sales of Rustic Crafts decreased $639,419 during this
period.
Gross margin increased $224,495 of which $153,995 , ($258,609) and
$6,723 is derived from Glas-Aire, Rustic Crafts and NRDC,
respectively. The remaining difference of $322,386 is attributable to
Glas-Aire's change in fiscal year.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
Selling and administrative expenses increased $304,323 and were
incurred primarily by Glas-Aire ($244,342), a difference of $216,943
attributable to Glas-Aire's change in year end, and decreases for
Regency of ($120,751) and Rustic Crafts ($36,211).
Income from equity in partnerships increased $696,285. This increase
is due to a decrease in interest expense resulting from payment of
principal offset by increases in operating expenses for the quarter as
to Security and income resulting from the Company's acquisition of a
5% limited partnership interest in Woodlawn, L.P.
Interest expense increased by $94,670 and is largely attributable to
increased interest expense on the KBC loan, increased indebtedness of
Glas-Aire, indebtedness to related parties offset by borrowings costs
of Rustic Crafts.
Net income increased $498,411, of which $696,285 represents increased
equity earnings from partnerships, less losses from operations (net of
income tax and minority interest) of $197,874.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form
10-Q, including, but not limited to those regarding the Company's financial
position, business strategy, acquisition strategy and other plans and
objectives for future operations and any other statements that are not
historical facts constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results,
performance or achievements expressed or implied by such forward-looking
statements to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Although the Company believes that the expectations reflected in these
forward-looking statements are reasonable, there can be no assurance that
the actual results or developments anticipated by the Company will be
realized or, even if substantially realized, that they will have the
expected effect on its business or operations. These forward-looking
statements are made based on management's expectations and beliefs
concerning future events impacting the Company and are subject to
uncertainties and factors (including, but not limited to, those specified
below) which are difficult to predict and, in many instances, are beyond
the control of the Company.
As a result, actual results of the Company may differ materially from those
results contemplated by such forward-looking statements which include, but
are not limited to:
(i) The Company's current operations do not generate sufficient cash
flow to cover corporate operating expenses and thus the Company
must rely on external sources to fund these expenses. The
Company's ability to continue in existence is partly dependent
upon its ability to generate satisfactory levels of operating
cash flow, notwithstanding the receipt of the $2,500,000
resulting from the Glas Aire transaction.
(ii) The Company currently lacks the necessary infrastructure at the
site of the Groveland Mine to permit the Company to make more
than casual sales of the aggregate.
(iii)An unsecured default in the Lease or sudden catastrophe to the
Security West Building from uninsured acts of God or war could
have a materially adverse impact upon the Company's investment in
Security Land and Development Company Limited Partnership and
therefore its financial position and results of operations.
(iv) The failure of the Social Security Administration to renew its
lease of the Security West Buildings upon its expiration on
October 31, 2003 could have a materially adverse impact upon the
Company's investment in Security Land and Development Company
Limited Partnership.
(v) The Company has significant tax loss and credit carryforwards and
no assurance can be provided that the Internal Revenue Service
would not attempt to limit or disallow altogether the Company's
use, retroactively and/or prospectively, of such carryforwards,
due to ownership changes or any other reason. The disallowance of
the utilization of the company's net operating loss would
severely impact the Company's financial position and results of
operations due to the significant amounts of taxable income
(generated by the Company's investment in Security) that have in
the past been, and is expected in the future to be, offset by the
Company's net operating loss carryforwards.
Regency Affiliates, Inc. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On September 13, 2001 in the Supreme Court of British Columbia, the
former president of Glas-Aire has commenced litigation in against
Glas-Aire, the Company, Mr. Ponsoldt and Mr. Baldinger asserting,
among other things, that the Regency - Glas-Aire transaction is in
breach of bank agreements, securities law and fiduciary duties owed to
Glas-Aire and its shareholders. The defendants are vigorously
defending this litigation.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
On October 16, 2001 the Company filed a current report on Form 8-K
disclosing the exchange of shares with Glas-Aire. That filing was amended on
Form 8-K/A on November 5, 2001 to include pro forma financial information.
On October 25, 2001 the Company filed a current report on Form 8-K
disclosing the exercise of the Statesman Group stock option.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
REGENCY AFFILIATES, INC.
(Registrant)
Date: November 19, 2001 /s/ Marc H. Baldinger
----------------------- ----------------------
(Chief Financial Officer and Director)