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 June 30, 2002
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NUMBER 1-7949
REGENCY AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0888772
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
610 JENSEN BEACH BLVD., JENSEN BEACH, FLORIDA 34957
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code (772) 334-8181
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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 August 13, 2002 there were 1,939,874 shares of the $ .01 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 . . . . . . . . . . . 8-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . 13-17
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 18-19
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . 19
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 19
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30 December 31,
2002 2001
(Unaudited) (Audited)
------------ --------------
Assets
Current Assets
Cash and Cash Equivalents $ 71,621 $ 310,093
Accounts receivable, net of allowance 316,812 495,160
Income taxes receivable 8,988 8,988
Inventory 1,042,390 953,909
Other current assets 323,832 309,663
------------ --------------
Total current assets 1,763,643 2,077,813
Property, Plant and Equipment, Net 2,284,926 2,192,695
Investment in partnerships 33,065,843 30,183,346
Other Assets
Aggregate inventory 834,194 834,194
Goodwill, net of amortization 501,094 484,312
Debt issuance costs, net of amortization 267,795 362,311
Accrued interest receivable - related party 83,979 -
Other 1,373 5,205
------------ --------------
Total other assets 1,688,435 1,686,022
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Total Assets $ 38,802,847 $ 36,139,876
============ ==============
The accompanying notes are an integral part of these financial statements.
3.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30 December 31,
2002 2001
(unaudited) (audited)
------------ --------------
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt $ 112,060 $ 238,145
Notes Payable - Banks 1,000,000 906,977
Accounts payable 647,636 366,440
Accrued expenses 1,459,917 1,043,221
Taxes payable 180,000 180,000
------------ --------------
Total current liabilities 3,399,613 2,734,783
Long term debt, net of current portion 14,216,273 13,495,178
Minority interest in consolidated subsidiaries 9,277 31,741
Shareholders' equity
Serial preferred stock not subject to mandatory redemption 1,052,988 1,052,988
(maximum liquidation preference $24,975,312 in 2002
and 2001, respectively
Common stock, par value $.01 authorized 25,000,000 shares; 19,399 19,399
issued and outstanding 1,939,874 shares in 2002 and 2001
Additional paid-in capital 8,337,404 8,337,404
Readjustment resulting from quasi-reorganization at
December 31, 1987 (1,670,956) (1,670,596)
Retained earnings 15,889,182 14,589,672
Note receivable - related party (2,440,000) (2,440,000)
Treasury stock, 405,283 shares in 2002 and 2001 (10,693) (10,693)
------------ --------------
Total shareholders' equity 21,177,324 19,878,174
------------ --------------
Total Liabilities and Shareholders' Equity $38,802,487 $ 36,139,876
============ ==============
The accompanying notes are an integral part of these financial statements.
4.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
Three Months Ended Six Months Ended
------------------------ -------------------------
June 30, June 30 June 30, June 30,
2002 2001 2002 2001
----------- ----------- ------------ -----------
Net Sales $ 405,750 $3,209,359 $ 908,633 $6,594,431
----------- ----------- ------------ -----------
Costs and expenses
Costs of goods sold 370,274 2,142,065 768,158 4,714,453
Selling and administrative 748,248 1,423,015 1,383,519 2,610,938
----------- ----------- ------------ -----------
1,118,522 3,565,080 2,151,677 7,325,391
----------- ----------- ------------ -----------
(Loss) from operations (712,772) (355,721) (1,243,044) (730,960)
Income from equity investment in partnerships 1,500,140 1,522,710 2,986,800 2,748,106
Other income (expense), net 42,938 (7,781) 105,331 16,802
Interest expense (217,733) (307,669) (560,791) (622,014)
----------- ----------- ------------ -----------
Income before income tax expense, and minority 612,573 851,539 1,288,296 1,411,934
interest
Income tax expense - (36,396) - (105,319)
Minority interest 5,724 (23,322) 11,214 (60,782)
----------- ----------- ------------ -----------
Net income $ 618,297 $ 791,821 $ 1,299,510 $1,245,833
=========== =========== ============ ===========
Net income per common share:
Basic $ 0.32 $ 0.60 $ 0.67 $ 0.94
=========== =========== ============ ===========
Diluted $ 0.32 $ 0.60 $ 0.67 $ 0.94
=========== =========== ============ ===========
Weighted average number of common shares
outstanding 1,939,874 1,319,879 1,939,874 1,319,879
----------- ----------- ------------ -----------
The accompanying notes are an integral part of these financial statements.
5.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
June 30, June 30,
2002 2001
------------ ------------
Cash flows from operating activities
Net income $ 1,299,510 $ 1,245,833
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation and amortization 180,410 334,401
Change in deferred income taxes - 3,468
Minority interest (22,464) 60,782
Undistributed income from equity investment in partnerships (2,882,497) (2,748,106)
Interest accretion on long-term debt 481,662 427,140
Changes in operating assets and liabilities
Accounts receivable 178,348 703,126
Accrued interest receivable - related party (83,979) -
Inventory (88,481) (181,336)
Other current assets (14,169) (287,472)
Accounts payable 281,196 (183,138)
Accrued expenses 416,696 885,998
------------ ------------
Net cash provided by operating activities (253,768) 260,696
------------ ------------
Cash flows from investing activities
Capital expenditures (194,907) (67,565)
Other 3,832 9,601
------------ ------------
Net cash (used) by investing activities (191,075) (57,964)
------------ ------------
Cash flows from financing activities
Net short-term borrowings (payments) 93,023 659,414
Net long-term borrowings (payments) 113,348 (154,355)
------------ ------------
Net cash provided (used) by financing activities 206,371 505,059
------------ ------------
Foreign currency translation adjustment - (7,395)
Increase (decrease) in cash and cash equivalents (238,472) 700,396
Cash and cash equivalents - beginning 310,093 928,636
------------ ------------
Cash and cash equivalents - ending $ 71,621 $ 1,629,032
============ ============
The accompanying notes are an integral part of these financial statements.
6.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
2002 2001
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ - $86,695
Interest 74,399 6,478
Supplemental disclosures of non-cash investing and financing activities:
In 2002, the stockholders approved a one-for-ten reverse stock split of the
Corporation's common stock, par value $0.40 per share, and a decrease in the par
value to $0.01 per share of common stock. This resulted in a decrease in the
value of common stock and corresponding increase in the value of additional
paid-in capital of $7,740,110. This transaction has been given retroactive
treatment for the year ended December 31, 2001 in the accompanying financial
statements.
The accompanying notes are an integral part of these financial statements.
7.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Bases of Presentation and Summary of Significant Accounting Policies
A. Basis of Presentation - The accompanying unaudited condensed
consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for
the three and six month periods ended June 30, 2002 are not
necessarily indicative of the results that may be expected for
the year ended December 31, 2002. For further information, refer
to the consolidated financial statements and footnotes thereto
included in the Registrant Company and Subsidiaries' annual
report on Form 10-K for the year ended December 31, 2001.
B. Principals of Consolidation and Nature of Business - The
consolidated financial statements include the accounts of Regency
Affiliates, Inc. (the "Company"), its wholly owned subsidiary,
Rustic Crafts International, Inc. ("Rustic Crafts"), its 80%
owned subsidiaries, National Resource Development Corporation
("NRDC"), Transcontinental Drilling Company ("Drilling") and
RegTransco, Inc. ("RTI"), its 75% owned subsidiary, Iron Mountain
Minerals, Inc. ("IMM"). The consolidated financial statements for
2001 also include its 50% owned subsidiary, Glas-Aire Industries
Group, Ltd. ("Glas-Aire") from September 23, 1999, the date in
which the company achieved an ownership interest greater than 50%
through October 1, 2001, the date this interest was disposed of.
All significant intercompany balances and transactions have been
eliminated in consolidation.
C. Earnings Per Share - Basic earnings per share are computed by
dividing net income attributable to common shareholders by the
weighted average number of common shares outstanding during the
year. Diluted earnings per share computations assume the
conversion of Series B, and Junior Series D preferred stock
during the period that the preferred stock issues were
outstanding. If the result of these assumed conversions is
dilutive, the dividend requirements and periodic accretion for
the preferred stock issues are reduced. On February 5, 2002 the
Company's stockholders approved a one-for ten reverse stock split
of the Company's common stock, par value $0.40 per share, and a
decrease in the par value to $0.01 per share. The computation of
basic and diluted EPS have been retroactively adjusted for the
period ending June 30, 2001 to reflect this change in capital
structure.
D. Inventory - Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method. Inventory is
comprised of the following at June 30, 2002:
Raw materials and supplies $ 269,462
Work-in-process 12,746
Finished products 760,182
---------------
$ 1,042,390
===============
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.
8.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Bases of Presentation and Summary of Significant Accounting Policies
(Continued)
In December 2001 the aggregate inventory was sold to Iron Mountain
Minerals, Inc., a 75% owned subsidiary of the Company. The purchase
price was $18,200,000 and is payable, with interest of 2.46% in
ninety-six equal payments of principal and interest commencing
December 2003. The intercompany gain on this transaction has been
eliminated in the consolidation process resulting in the aggregate
inventory being carried at its historical cost. Otherwise, the Company
has made only casual sales of the inventory during the periods.
F. Income Taxes - The Company utilizes Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. The
difference between the financial statement and tax basis of
assets and liabilities is determined annually. Deferred income
tax assets and liabilities are computed for those temporary
differences that have future tax consequences using the current
enacted tax laws and rates that apply to the periods in which
they are expected to affect taxable income. In some situations
SFAS 109 permits the recognition of expected benefits of
utilizing net operating loss and tax credit carryforwards.
Valuation allowances are established based upon management's
estimate, if necessary. Income tax expense is the current tax
payable or refundable for the period plus or minus the net
exchange in the deferred tax assets and liabilities.
Note 2. Investment in Partnership
In November 1994, the Company purchased a limited partnership interest
in Security Land and Development Company Limited Partnership
("Security"), which owns and operates an office complex. The Company
has limited voting rights and is entitled to be allocated 95% of the
profit and loss of the Partnership until October 31, 2003 (the lease
termination date of the sole tenant of the office complex) and 50%
thereafter. The Company is to receive certain limited cash flow after
debt service, and a contingent equity build-up depending upon the
value of the project upon termination of the lease. The Company is
also entitled to receive certain fees relating to the partnership.
Security was organized to own and operate two buildings containing
approximately 717,000 net rentable square feet consisting of a
two-story office building and a connected six-story office tower. The
building was purchased by Security in 1986 and is located on
approximately 34.3 acres of land, which is also owned by Security. The
building has been occupied by the United States Social Security
Administration's Office of Disability and International Operations for
approximately 24 years under a lease between the United States of
America, acting by and through the General Services Administration
("GSA"). Effective November 1, 1994, Security and the GSA entered into
a nine-year lease (the "Lease") for 100% of the building. Security has
received an opinion of the Assistant General Counsel to the GSA that
lease payments are not subject to annual appropriation by the United
States Congress and the obligations to make such payments are
unconditional general obligations of the United States Government.
The Company accounts for the investment in partnership on the equity
method, whereby the carrying value of the investment is increased or
decreased by the Company's allocable share of income or loss. The
investment in partnership included in the Consolidated Balance Sheets
at June 30, 2002 is $33,065,843. The income from the Company's equity
investment in the Partnership for the three and six months ended June
30, 2002 was $1,500,140 and $2,986,800, respectively.
9.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Investment in Partnership (Continued)
Summarized operating data for Security for the three and six months
ended June 30, 2002 , and June 30, 2001, is as follows:
Three Months Ended Six Months Ended
---------------------- --------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- --------------
Revenues $3,376,933 $3,460,613 $6,764,292 $ 6,813,436
---------- ---------- ---------- --------------
Operating Expenses 958,783 648,355 1,922,323 1,630,806
Depreciation and Amortization 622,142 716,067 1,264,142 1,432,134
Interest Expense, Net 269,545 498,290 539,090 862,734
---------- ---------- ---------- --------------
Net Income $1,526,463 $1,597,901 $3,038,737 $ 2,887,762
---------- ---------- ---------- --------------
Effective November 30, 2000 the Company invested $10,000 for a 5%
limited partnership interest in 1500 Wood Lawn Limited Partnership,
the general partner of Security. The Company recognized income of
$100,000 and $94,634 in 2002 and 2001, respectively, from this
investment.
Note 3. Note and Accrued Interest Receivable - Related Party
On October 15, 2001 the Statesman Group, Inc. (Statesman) exercised in
full its option, which had been granted in 1997, to acquire 6,100,000
shares of the Company's common stock. The exercise was made pursuant
to an agreement which provided for (1) a purchase price at $0.40 per
share (par value) rather than the formula price in the option, which
would have yielded 25% less to the Company, (2) the execution of a
note from Statesman to the Company in the principal amount of
$2,440,000 payable in five years with interest to accrue at the
prevailing prime rate and (3) the obligation to be collateralized by
the 6,100,000 common shares of the Company purchased upon exercise of
the option as well as the 20% remaining interest in the Company's 80%
owned subsidiary, NRDC. Accrued interest amounted to $83,979 at June
30, 2002.
Statesman is controlled by The Statesman Irrevocable Trust dated April
15, 1991, a trust for the benefit of William R. Ponsoldt, Jr. (a
director of the Company) and two other children of William R.
Ponsoldt, Sr., the Company's President and Chief Executive Officer.
Note 4. Note Payable
The Company's subsidiary, Rustic Crafts, has established a $1,000,000
line of credit with PNC Bank. The line of credit expired on May 18,
2002 and bears interest at the Bank's prime rate minus one-half
percent (5.25% at June 30, 2002). The accounts receivable, inventory
and other assets, such as property and equipment, of Rustic Crafts
have been pledged as collateral to secure the line of credit. The line
of credit is guaranteed by the Company. At June 30, 2002, the amount
outstanding under the line of credit was $1,000,000.
At May 18, 2002, Rustic Crafts was given a July 31, 2002 extension
date for this line of credit. The Company is currently negotiating a
further extension/renewal with PNC Bank. There are no assurances that
such negotiations will be successful.
10.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Long-Term Debt
KBC Bank Loan - On June 24, 1998, the Company refinanced the long-term
-------------
debt previously outstanding with Southern Indiana Properties, Inc.
("SIPI") and entered into a Loan Agreement (the "Loan") with KBC Bank
N.V. ("KBC"). Under the terms of the Loan Agreement, KBC advanced
$9,383,320. The due date of the Loan is November 30, 2003 with
interest at the rate of 7.5% compounded semi-annually on each June 1
and December 1, commencing December 1, 1998. The interest may be paid
by the Company in cash on these semi-annual dates or the Company may
elect to add the interest to the principal of the Loan then
outstanding. The loan is secured by the Company's interest in the
partnership. As of June 30, 2002, the amount outstanding under the
Loan is $12,639,128, including $481,662 of interest for the six months
ended June 30, 2002.
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.
Remodeling Loans - In connection with the purchase of the Rustic
-----------------
Crafts building, PNC Bank loaned the Company a total of $760,000 to
finance remodeling of the facility purchased in March 1998. Principal
payments on one loan of $604,000 began June 1999 for 120 months in
amounts sufficient to amortize the outstanding balance over twenty
years. The remaining loan in the original amount of $156,000 is
payable in 120 equal monthly installments of $2,518.
Miscellaneous Loans - In January 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 $163,512. The
loan is payable in equal monthly installments, including principal and
interest, of $3,153.
In 2002, Rustic Crafts assumed loans in connection with the purchase
of a small business involved in kitchen cabinet manufacturing called
Alpine Resources, Inc. The total long-term debt assumed was $194,907.
The interest rates on the mortgage loan, the equipment loan and the
miscellaneous loans range from 4.25% to 7.96% at June 30, 2002. The
outstanding balance on these loans is $1,689,205 at June 30, 2002.
Rustic Craft's real and personal property, equipment, accounts
receivable, inventory and other general intangibles are pledged as
security for the loans. The loans are also guaranteed by the Company.
The security agreement requires Rustic Crafts to maintain certain
financial ratios.
11.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Long Term Debt (continued)
Rustic Crafts was not in compliance with such ratios at June 30, 2002
as a result of changes in the interpretation of such ratios by PNC.
Rustic Crafts was given a July 31, 2002 extension date. The Company is
currently negotiating a further extension/renewal with PNC Bank. There
are no assurances that such negotiations will be successful.
Note 6. Income Taxes
As referred to in Note 1, the Company utilizes SFAS 109, "Accounting
for Income Taxes." The deferred taxes are the result of long-term
temporary differences between financial reporting and tax reporting
for depreciation, earnings from the Company's partnership investment
in Security Land and Development Company Limited Partnership related
to depreciation and amortization and the recognition of income tax
carryforward items. For regular federal income tax purposes, the
Company has remaining net operating loss carryforwards of
approximately $7,507,000. These losses can be carried forward to
offset future taxable income and, if not utilized, will expire in
varying amounts beginning in the year 2002.
For the three and six months ended June 30, 2002, and 2001, the tax
effect of net operating loss carryforwards reduced the current
provision for regular Federal income taxes by approximately $300,000,
$300,000, $154,000 and $259,000, respectively. The Company provided
$0, $0, $36,396 and $105,319, for Canadian, state income and the
alternative minimum tax in the three and six months ended June 30,
2002 and 2001, respectively.
Note 7. Related Party Transactions
On November 2, 2001, L. J. Horbach, a director of the Company through
December 5, 2001 and L. J. Horbach and Associates, of which Mr.
Horbach is the sole owner, purchased from Mid City Bank a certain
alleged promissory note of the Company for $71,109, as to which he and
another shareholder (Dr. Gatz) had been guarantors. In December 2001,
the Company filed suit against Mr. Horbach seeking to avoid its
alleged liability and other relief. Thereafter, Mr. Horbach filed a
counterclaim against the Company seeking to collect both the principal
amount of the alleged note and accrued interest, which amounted to,
collectively, $82,978.
Note 8. Segment Information
The Company's operating structure includes operating segments for
Automobile Accessories through September 30, 2001 (the operations of
Glas-Aire, which was acquired in September 1999), Home Furnishing
Accessories (the operations of Rustic Crafts, which was acquired in
March 1997), Investment in Partnerships (the investment in Security
Land and Development Limited Partnership and 1500 Wood Lawn Limited
Partnership (Note 2)), and Corporate and Other. The Company operates
and generates its revenue in the United States and Canada.
12.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Litigation
In May 2002, a complaint in the form of a class action and a
derivative action, was instituted against the Company, its officers
and its directors. The complaint alleges the undertaking of various
actions taken from 1993 to the present, which comprise a fraudulent
scheme violative of the Board's fiduciary duties to the Company's
shareholders. The Company intends to vigorously contest the
allegations made in the complaint
Information about the Company's Operations by segment for the periods
presented follows:
Home Investment Corporate
Automobile Furnishing in and
Accessories Accessories Partnership Other Consolidated
June 30, 2002
-------------
Net sales $ - $ 908,633 $ - $ - $ 908,633
Income from equity investment
in partnerships - - 2,986,800 - 2,986,800
Segment profit/(loss) - (428,995) 2,986,800 (1,258,295) 1,299,510
June 30, 2001
-------------
Net sales $ 5,690,563 $ 891,775 $ - $ 12,093 $ 6,594,431
Income from equity investment
in partnerships - - 2,748,106 - 2,748,106
Segment profit/(loss) 118,026 (211,849) 2,748,106 (1,408,450) 1,245,833
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. The
Company's Shareholders' Equity at June 30, 2002 was $21,177,324 as compared
to $17,314,490 at June 30, 2001, an increase of $3,862,834 for the twelve
months ended June 30, 2002.
Liquidity and Capital Resources.
The investment in Security is estimated to provide the Company with
management fees of approximately $100,000 per annum until 2003. In the
period ending June 30, 2002, the Company's income from its equity
13.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (CONTINUED)
investment in the Partnership (as well as its interest in Security's
General Partner, 1500 Woodlawn L.P.) was $2,986,800. 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 $33,065,843, neither
provides liquidity to the Company in excess of the $100,000 annual
management fee.
The outstanding principal on Security's real estate mortgage balance is
expected to be amortized in November of 2003. Under the current structure
and assuming the building remains occupied, KBC has indicated it is willing
to extend the maturity of the loan (under certain circumstances) under the
condition that all income with the exception of $100,000 will then be paid
to KBC to amortize the loan. In that event, the KBC loan would be
liquidated in approximately 2006. Until that time, Regency would continue
to receive only the $100,000 of cash flow. Currently the Company is
exploring options, which include refinancing the building, monetizing the
asset, or restructuring the debt to provide a more appropriate level of
cash flow. There are no assurances that any of these options will be
implemented.
On March 15, 1998, Rustic Crafts purchased a building of 126,000 square
feet located near the current facility in Scranton, Pennsylvania. The
purchase of this facility was funded by new borrowings from PNC Bank in the
form of a first mortgage term loan in the amount of $960,000. Rustic Crafts
also obtained financing of approximately $923,000 from PNC Bank to equip
the facility and purchase new equipment. The move to the new facility was
completed in 1999 and has significantly increased the operating capacity
and enabled Rustic Crafts to more efficiently fill its current orders and
increase its customer base. On the date of acquisition of the new facility,
a tenant was renting 23,000 square feet of this facility at a base rent of
approximately $17,400 per year plus an allocable share of the real estate
taxes. The Company intends to maintain this tenant relationship on an
ongoing basis. Previously, Rustic Crafts had a tenant for 28,000 square
feet, which is now vacant. Rustic Crafts is currently attempting to find a
tenant for the 28,000 square feet.
Rustic Crafts has continued the trend of losses that began in early 2001
and was exacerbated by the disaster of September 11th as well as
substantially reduced sales from its largest customer, J.C. Penney.
Management of Rustic Crafts has reduced overhead by eliminating personnel,
cutting several employee benefits, and other cost reduction steps in 2001
and 2002. In addition, the Company is currently studying other available
options for Rustic Crafts.
The Company has had discussions with several companies regarding the
possible sale of its interest in IMM. The Company is also exploring the
possibility of establishing a permanent infrastructure to commercialize the
inventory of previously quarried and stockpiled aggregate at the Groveland
Mine in cooperation with an experienced aggregate supply company.
14.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (CONTINUED)
The Board of Directors has approved the formation of a wholly owned
subsidiary called Neptune Trading, Inc. ("Neptune"). Neptune Trading will
engage in real estate development and other related industries. Neptune
will initially assume building contracts of single family residential
properties that have appreciated in value from Marc Baldinger and William
Ponsoldt, Sr. at their cost. Neptune will thereafter enter into agreements
on its own. In addition, Neptune intends to purchase vacant lots for the
purpose of resale and to build single-family residential homes. If
successful, the Neptune venture is expected to generate substantial sales
for Regency. To date, there have been no closing but the first closing is
scheduled for mid September. The Company will need outside financing to
fund the purchase of the houses and the lots. There is no assurances
currently that Neptune or Regency will attain such financing.
The Company historically has relied primarily on debt financing to sustain
the liquidity for ongoing operations. The Company's ability to continue in
existence is largely dependent upon its ability to continue to find
financing.
Results of Operations
In September 1999, the Company acquired a 51% interest in Glas-Aire which
manufacturers automotive accessories. The financial statements for June 30,
2001 include the results of Glas-Aire. The operations of the Company also
include the operations of Rustic Crafts, which is engaged in the
manufacturing of decorative fireplaces, heater logs and related
accessories.
On October 1, 2001, the Company announced that it had completed a
transaction for the disposing of the Company's interest in Glas-Aire.
Pursuant to an agreement entered into on September 17, 2001 and amended on
October 1, 2001, the Company exchanged 1,215,105 shares of common stock of
Glas-Aire, representing approximately 50% of the issued and outstanding
shares of Glas-Aire, for $2,500,000 plus 4,040,375 shares of Regency's
common stock, or approximately 23% of the issued and outstanding shares of
Regency. As a result of the transaction, neither Regency nor Glas-Aire owns
any stock of the other. Glas-Aire generated net sales of $8,378,202 for the
nine-month period ending September 30, 2001. Income before income from
equity investment and income tax expense was $449,040 over the same period.
Glas-Aire had been included in Regency's consolidated financial statements
effective September 23, 1999 (the date that we acquired 51.3% control of
Glas-Aire) through September 30, 2001.
During the period that Regency owned its interest of Glas-Aire, Regency
received no cash from the operations of Glas-Aire, so there will be no
change in cash flow as a result of the disposition of its interest.
15.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (CONTINUED)
The Company's current operations do not now, or have ever, generated
sufficient cash flow to cover corporate operating expenses and thus the
Company must rely on external sources to fund these expenses. The Company
currently has unused borrowing only with the Statesman Group, Inc. and is
in discussion with additional external sources to provide for additional
borrowing capacity to be used, if needed. There are no assurances that any
source can be found.
2002 Compared to 2001
For the six months ended June 30, 2002:
Net sales decreased $5,685,798 in 2002 over the similar period in 2001,
which is almost solely attributable to the disposition of the Glas-Aire
subsidiary. There was an increase in sales at Rustic Crafts of $16,858 and
a decrease in sales at NRDC of $12,093. Gross margin decreased $1,739,503,
which is largely attributable to the disposition of the Glas-Aire
subsidiary. Selling and administrative expenses decreased $1,227,419 in
2002 as compared to 2001, which decrease is largely attributable to the
disposition of Glas-Aire.
Income from equity in partnerships increased $238,694. This increase is due
to a decrease in interest expense of $323,644 reduced by increases in
operating expenses for the period. Interest expense decreased by $61,223
and is largely attributable to increased interest expense on the KBC loan
less interest expense previously attributable to Glas-Aire.
Net income increased $53,677 in 2002 compared to 2001. Increased equity
earnings from partnerships and reduced corporate expenses were offset by
the disposition of Glas-Aire and increased losses of Rustic Crafts.
For the three months ended June 30, 2002:
Net sales decreased $2,803,609 in 2002 over the similar period in 2001,
which is largely attributable to the disposition of the Glas-Aire
subsidiary. Sales of Rustic Crafts decreased $63,000 during this period.
Gross margin decreased $1,031,818, which is largely attributable to the
disposition of the Glas-Aire subsidiary.
Selling and administrative expenses decreased $674,767 which is largely
attributable to the disposition of the Glas-Aire subsidiary and an increase
of $89,513 of corporate expense.
Income from equity in partnerships decreased $22,570. This decrease is due
to a decrease in interest expense resulting from payment of principal
offset by increases in operating expenses for the quarter.
Interest expense increased by $89,936 and is largely attributable to
increased interest expense on the KBC loan less interest expense previously
attributable to Glas-Aire.
Net income decreased $173,523, which is largely attributable to the
disposition of the Glas-Aire subsidiary and increased losses of Rustic
Crafts.
16.
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 now, or have ever,
generated sufficient cash flow to cover corporate operating
expenses and thus the Company must rely on external sources to
fund these expenses. The Company's ability to continue in
existence is partly dependent upon its ability to generate
satisfactory levels of operating cash flow.
(ii) The Company currently lacks the necessary infrastructure at the
site of the Groveland Mine to permit the Company to make more
than casual sales of the aggregate.
(iii) An unsecured default in the Lease or sudden catastrophe to the
Security West Building from uninsured acts of God or war could
have a materially adverse impact upon the Company's investment in
Security Land and Development Company Limited Partnership and
therefore its financial position and results of operations.
(iv) The failure of the Social Security Administration to renew its
lease of the Security West Buildings upon its expiration on
October 31, 2003 could have a materially adverse impact upon the
Company's investment in Security Land and Development Company
Limited Partnership.
(v) The Company has significant tax loss and credit carryforwards and
no assurance can be provided that the Internal Revenue Service
would not attempt to limit or disallow altogether the Company's
use, retroactively and/or prospectively, of such carryforwards,
due to ownership changes or any other reason. The disallowance of
the utilization of the company's net operating loss would
severely impact the Company's financial position and results of
operations due to the significant amounts of taxable income
(generated by the Company's investment in Security) that have in
the past been, and is expected in the future to be, offset by the
Company's net operating loss carryforwards.
17.
Regency Affiliates, Inc. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On May 2, 2002, a lawsuit was filed in the Federal District Court for
the District of Nebraska by two dissident Company shareholders, Edward
E Gatz and Donald D. Graham, against the Company, its Board of
Directors and Statesman Group, Inc. The five-count Complaint purports
to be brought on behalf of the named plaintiffs, individually, as
members of a class of the Company's shareholders, and derivatively,
and it purports to allege RICO violations against Mr. Ponsoldt, Sr.
and Statesman Group, Inc., and direct and derivative breaches of
fiduciary duties by members of the Company's Board of Directors. The
Complaint asserts that plaintiffs claims arise from a variety of
actions taken from 1993 to the present, including the Company's 1996
employment agreement with Mr. Ponsoldt, Sr., the options granted to
Statesman pursuant to a 1997 agreement, as amended in 1998,
Statesman's exercise of its options, the exchange of the Company's
interest in Glas-Aire Industries Group, Ltd. for Regency Affiliates,
Inc. stock and cash, and the Company's reverse stock split which was
approved at the Company's last shareholder meeting. In addition to
damages, the Complaint seeks to void the shares owned and controlled
by Mr. Ponsoldt, Sr. and Statesman Group, Inc.
On or about July 24, 2002, the plaintiffs moved for a preliminary
injunction which seeks, among other things, to enjoin any funding to
Mr. Ponsoldt Sr., under his employment agreement, any acquisition by
or transfer of Company stock to Mr. Ponsoldt, Sr. or Statesman Group,
Inc., prohibiting the redemption of Series C preferred stock, barring
the monetization of the Security Land partnership interest without
notice to the Court or plaintiffs, and, in the event of such
monetization, prohibiting the distribution of any proceeds of such
monetization.
The Defendants responses to the Complaint and Motion for Preliminary
Injunction are due to be filed on August 30, 2002. The Company
believes the plaintiffs' claims are without merit and is defending,
and will continue to defend, against them vigorously. However, due to
the inherent uncertainties of litigation, the Company cannot predict
the ultimate outcome of this litigation. An unfavorable outcome could
have a material adverse impact on the Company's business, financial
condition and results of operations.
On February 7, 2002 a complaint naming Regency Affiliates, Inc. as
Defendant was filed in the District Court of Douglas County, Nebraska,
case number 1012. The Plaintiffs are Larry J. Horbach, individually
and L.J. Horbach & Associates and they are demanding payment on an
alleged Regency Affiliates, Inc. loan they purchased from Mid City
Bank. The plaintiffs are requesting payment of $82,512.57 plus accrued
interest, costs and attorney fees. We are vigorously defending this
litigation and had previously commenced litigation regarding the same
subject in December 2001.
On December 14, 2001 we initiated a proceeding in The Circuit Court of
the Nineteenth Judicial Circuit in and for Martin County, Florida,
case number 01-1087-CA against Larry J. Horbach, individually and L.J.
18.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION (CONTINUED)
Horbach & Associates. Larry Horbach was a former interim CFO and Board
member. We claim that Larry Horbach, without appropriate authority,
borrowed $100,050 from Mid City Bank in the name of Regency
Affiliates, Inc. Horbach and another shareholder, Dr. Gatz, personally
guaranteed the loan. We further claim that Horbach converted all or
part of the proceeds from the loan for his benefit.
On September 13, 2001, Glas-Aire Industries LTD., Multicorp Holdings
Inc., Glas-Aire Industries Group Ltd, Craig Grossman, Todd Garrett,
Speed.Com, Inc., Regency Affiliates, Inc., William Ponsoldt, Sr., and
Marc Baldinger were listed as defendants in a proceeding in the
Supreme Court of British Columbia with Alex Y. W. Ding as plaintiff.
The case number is S015104. Mr. Ding, the former president of
Glas-Aire, has asserted that the October 2001 Regency-Glas-Aire
transaction is in breach of bank agreements, securities law and
fiduciary duties owed to Glas-Aire and its stockholders. While the
company has been served, plaintiff has not proceeded on this action
and has not filed a statement of claim on a timely basis. Should
plaintiff continue with the action, the defendants, including Regency
Affiliates, Inc., would vigorously defend this litigation.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None.
19.
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
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: August 19, 2002 /s/ Marc H. Baldinger
------------------------ ------------------------
(Chief Financial Officer and Director)
20.