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, 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
------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or organization)
610 JENSEN BEACH BLVD., JENSEN BEACH, FLORIDA 34957
--------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code (772) 334-8181
--------------
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 13, 2002 there were 1,950,549 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. . . . . . . . . . . . . . . . . 8-14
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations . . . . . . . . . . . . . . . . . . . . . . 15-17
Item 3. Quantitative and Qualitative Disclosure About Market Risk. . . . . . . 18
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . 18
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 18-20
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . 20
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 21
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 21-22
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
(Unaudited) (Audited)
--------------- --------------
Assets
Current Assets
Cash and Cash Equivalents $ 18,821 $ 310,093
Accounts Receivable, net of allowance - 495,160
Notes Receivable - current 127,653 -
Inventory 354,439 953,909
Other Current Assets 35,116 318,651
--------------- --------------
Total Current Assets 536,029 2,077,813
Notes Receivable - net of current portion 979,347 -
Property, Plant and Equipment, net 2,057,478 2,192,695
Investment in Partnership 34,550,839 30,183,346
Other Assets
Aggregate Inventory 833,763 834,194
Goodwill, net of amortization 487,757 484,312
Debt Issuance Costs, net of amortization 220,537 362,311
Accrued Interest Receivable - related party 113,193 -
Other 14,873 5,205
--------------- --------------
Total Other Assets 1,670,123 1,686,022
--------------- --------------
Total Assets $ 39,793,816 $ 36,139,876
=============== ==============
The accompanying notes are an integral part of these financial statements.
3
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
(unaudited) (audited)
--------------- --------------
Liabilities and Shareholders' Equity
Current Liabilities
Current Portion of Long-Term Debt $ 1,038,300 $ 238,145
Notes Payable - banks 1,261,536 906,977
Note Payable 110,018 -
Accounts Payable 349,746 366,440
Accrued Expenses 223,141 256,805
Accrued Compensation 1,417,173 786,416
Loan Payable 10,068 -
Taxes Payable 180,000 180,000
--------------- --------------
Total Current Liabilities 4,589,982 2,734,783
Long Term Debt, net of current portion 13,405,756 13,495,178
Minority Interest in Consolidated Subsidiaries 3,881 31,741
Shareholders' Equity
Serial preferred stock not subject to mandatory redemption
(maximum liquidation preference $24,975,312) 1,052,988 1,052,988
Common Stock, par value $.01 authorized 25,000,000
shares; issued and outstanding 1,955,599 shares 19,556 19,556
Additional Paid-in Capital 8,337,247 8,337,247
Readjustment resulting from quasi-reorganization at
December 31, 1987 (1,670,596) (1,670,596)
Retained Earnings 16,505,695 14,589,672
Note Receivable (2,440,000) (2,440,000)
Treasury Stock, 40,528 shares in 2002 and 2001 (10,693) (10,693)
--------------- --------------
Total Shareholders' Equity 21,794,197 19,878,174
--------------- --------------
Total Liabilities and Shareholders' Equity $ 39,793,816 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30 September 30 September 30 September 30
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net Sales $ 425,647 $ 5,295 $ 425,647 $ 17,388
-------------- -------------- -------------- --------------
Costs and Expenses
Costs of Goods Sold 425,455 185 425,455 312
Selling and Administrative 536,307 383,685 1,408,973 1,187,023
-------------- -------------- -------------- --------------
961,762 383,870 1,834,428 1,187,335
Loss from Operations (536,115) (378,575) (1,408,781) (1,169,947)
Income from Equity Investment in Partnership 1,484,996 1,450,983 4,471,796 4,199,089
Other Income 30,998 7,480 115,817 7,500
Interest Expense (283,548) (291,546) (811,896) (878,424)
-------------- -------------- -------------- --------------
Income before income tax expense, minority interest,
and discontinued operations 696,331 788,342 2,366,936 2,158,218
Income Tax Expense - (10,000) - (30,000)
Minority Interest 5,395 - 16,609 -
-------------- -------------- -------------- --------------
Income from Continuing Operations $ 701,726 $ 778,342 $ 2,383,545 $ 2,128,218
Discontinued Operations
Loss from operations of discontinued
components, after gain on disposal of $262,550
in September 2002, net of 0 income tax in 2002
and 2001 (85,213) (108,140) (467,522) (212,183)
-------------- -------------- -------------- --------------
Net Income $ 616,513 $ 670,202 $ 1,916,023 $ 1,916,035
============== ============== ============== ==============
Net Income per Common Share:
Basic
Continuing Operations $ 0.36 $ 0.45 $ 1.22 $ 1.22
Discontinued Operations (0.04) (0.06) (0.24) (0.12)
-------------- -------------- -------------- --------------
$ 0.32 $ 0.39 $ 0.98 $ 1.10
============== ============== ============== ==============
Diluted
Continuing Operations $ 0.36 $ 0.45 $ 1.22 $ 1.22
Discontinued Operations (0.04) (0.06) (0.24) (0.12)
-------------- -------------- -------------- --------------
$ 0.32 $ 0.39 $ 0.98 $ 1.10
============== ============== ============== ==============
Weighted Average Number of Common Shares
Outstanding 1,955,599 1,747,159 1,955,599 1,747,159
============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements.
5
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
September 30, September 30,
2002 2001
--------------- ---------------
Cash Flows from Operating Activities
Net Income $ 1,916,023 $ 1,916,035
Adjustments to reconcile Net Income to Net Cash
used by Operating Activities
Depreciation and Amortization 458,129 532,365
Change in Deferred Income Taxes - (18,069)
Minority Interest (27,860) 140,566
Undistributed Income from Equity Investment in Partnership (4,367,493) (4,199,089)
Gain on Sale of Net Assets of Subsidiary (262,550) -
Interest Accretion on Long-Term Debt 722,603 650,764
Changes in Operating Assets and Liabilities
Accounts Receivable 163,506 340,243
Accrued interest Receivable (113,193) -
Inventory (238,223) 67,095
Other Current Assets 54,255 (297,993)
Accounts Payable 522,716 (296,307)
Accrued Expenses 638,780 1,111,507
--------------- ---------------
Net Cash Used by Operating Activities (533,307) (52,883)
--------------- ---------------
Cash Flows from Investing Activities
Capital Expenditures (201,004) (69,915)
Other (9,668) 8,571
--------------- ---------------
Net Cash Used by Investing Activities (210,672) (61,344)
--------------- ---------------
Cash Flows from Financing Activities
Net Short-Term Borrowings 464,577 1,656,479
Net Long-Term Borrowings (11,870) 771,658
--------------- ---------------
Net Cash Provided by Financing Activities 452,707 2,428,137
--------------- ---------------
Foreign Currency Translation Adjustment - (167,811)
--------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents (291,272) 2,146,099
Cash and Cash Equivalents - Beginning 310,093 928,636
--------------- ---------------
Cash and Cash Equivalents - Ending $ 18,821 $ 3,074,735
=============== ===============
The accompanying notes are an integral part of these financial statements.
6
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
2002 2001
-------- --------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Income Taxes $ - $211,960
Interest 144,129 155,940
Supplemental disclosures of non-cash investing and financing activities:
On September 30, 2002 the Corporation's subsidiary, Rustic Crafts, sold a
majority of its net assets with a book value of $844,450 and obtained notes
receivable totaling $1,107,000. The resultant gain of $262,550 is reflected
in the financial statements as a reduction of loss from discontinued
operations.
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.
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.
7
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Summary of Significant Accounting
Policies
A. Bases 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, 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 Company and Subsidiaries' annual report on Form
10-K for the year ended December 31, 2001.
B. Principals of Consolidation and Nature of Business - The
consolidated financial statements include the accounts of Regency
Affiliates, Inc. (the "Company"), its wholly owned subsidiaries,
Rustic Crafts International, Inc. ("Rustic Crafts"),
substantially all of the net operating assets of which were
disposed of on September 30, 2002 and Neptune Trading Co., Inc.
("Neptune"), its 80% owned subsidiaries, National Resource
Development Corporation ("NRDC"), Transcontinental Drilling
Company ("Drilling") and RegTransco, Inc. ("RTI") , its 75% owned
subsidiary, Iron Mountain Minerals, Inc. ("IMM") and its 50%
owned subsidiary, Glas-Aire Industries Group, Ltd. ("Glas-Aire")
from September 23, 1999 the date in which the company achieved an
ownership interest greater than 50% through October 1, 2001 the
date this interest was disposed of. All significant intercompany
balances and transactions have been eliminated in consolidation.
C. Earnings Per Share - Basic earnings per share are computed by
dividing net income attributable to common shareholders by the
weighted average number of common shares outstanding during the
year. Diluted earnings per share computations assume the
conversion of Series B, and Junior Series D preferred stock
during the period that the preferred stock issues were
outstanding. If the result of these assumed conversions is
dilutive, the dividend requirements and periodic accretion for
the preferred stock issues are reduced. On February 5, 2002 the
Company's stockholders approved a one-for ten reverse stock split
of the Company's common stock, par value $0.40 per share, and a
decrease in the par value to $0.01 per share. The computation of
basic and diluted EPS has been retroactively adjusted for the
period ending September 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 September 30, 2002 and December 31,
2001:
September 30, December 31,
2002 2001
------------- -------------
Raw materials and supplies $ - $ 646,958
Work-in-process - 8,793
Finished products - 298,158
Construction in Process 354,439 -
------------- -------------
$ 354,439 $ 953,909
============= =============
8
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Bases of Presentation and Summary of Significant Accounting
Policies (Continued)
E. Aggregate Inventory - Inventory, which consists of 70+ million
short tons of aggregate is stated at lower of cost or market. The
Company is also subject to a royalty agreement which requires the
payment of certain royalties to a previous owner of the aggregate
inventory upon sale of the aggregate. In December 2001, the
aggregate inventory was sold to Iron Mountain Minerals, Inc., a
75% owned subsidiary of the Company. The purchase price was
$18,200,000 and is payable, with interest of 2.46% per annum in
ninety six equal payments of principal and interest commencing
December 31, 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.
G. Reclassifications - Certain reclassifications were made to prior
period financial statement presentations to conform with current
period presentations.
Note 2. Investment in Partnership
In November 1994, the Company purchased a limited partnership interest
in Security Land and Development Company Limited Partnership
("Security"), which owns and operates an office complex. The Company
has limited voting rights and is entitled to be allocated 95% of the
profit and loss of the Partnership until October 31, 2003 (the lease
termination date of the sole tenant of the office complex) and 50%
thereafter. The Company is to receive certain limited cash flow after
debt service, and a contingent equity build-up depending upon the
value of the project upon termination of the lease. The Company is
also entitled to receive certain management fees relating to the
partnership.
Security was organized to own and operate two buildings containing
approximately 717,000 net rentable square feet consisting of a
two-story office building and a connected six-story office tower. The
building was purchased by Security in 1986 and is located on
approximately 34.3 acres of land which is also owned by Security. The
building has been occupied by the United States Social Security
Administration's Office of Disability and International Operations for
approximately 24 years under 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. 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
9
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Investment in Partnership (Continued)
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 September
30, 2002 is $34,550,839. The income from the Company's equity
investment in the Partnership for the nine months ended September 30,
2002 and 2001 was $4,321,796 and $4,057,138, respectively.
Summarized operating data for Security for the three and nine months
ended September 30, 2002 and September 30, 2001 is as follows:
Three Months Ended Nine Months Ended
---------------------- ------------------------
September September September September
30, 30, 30, 30,
2002 2001 2002 2001
---------- ---------- ----------- -----------
Revenues $3,362,843 $3,433,245 $10,127,135 $10,246,680
---------- ---------- ----------- -----------
Operating Expenses 960,634 860,172 2,882,957 2,585,613
Depreciation and 622,142 664,160 1,886,284 2,096,294
Amortization
Interest Expense, Net 269,545 431,367 808,635 1,294,101
---------- ---------- ----------- -----------
Net Income $1,510,522 $1,477,546 $ 4,549,259 $ 4,270,672
---------- ---------- ----------- -----------
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 $150,000 and $141,951 for the
nine-month periods ended September 30, 2002 and 2001, respectively,
from this investment.
Note 3. Note and Accrued Interest Receivable - Other
On October 15, 2001 the Statesman Group, Inc. (Statesman), a former
shareholder, exercised in full its option, which had been granted in
1997 to acquire 6,100,000 (610,000 after one for ten reverse split)
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 610,000 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 $113,193 at
September 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 former
director of the Company) and two other children of William R.
Ponsoldt, Sr., the Company's former President and Chief Executive
Officer.
On October 16, 2002 the Company redeemed the common shares acquired by
Statesman as a result of the above described exercise. See Subsequent
Events.
10
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Discontinued Operations
On October 1, 2001 the Company disposed of its greater than fifty
percent ownership interest in Glas-Aire. On September 30, 2002 the
Company's subsidiary, Rustic Crafts, sold all of its operating assets
subject to the assumption of certain of its liabilities, recognizing a
gain on disposal of $262,550.
The results of these businesses have been reflected as discontinued
operations in the accompanying financial statements. For the nine
months ended September 30, 2002 and 2001 revenues attributable to such
discontinued operations through the date of disposition amount to
$1,299,985 and $9,935,758, respectively. For the nine months ended
September 30, 2002 and 2001 net loss attributable to such discontinued
operations through the date of disposition were ($730,772) and
($212,183), respectively.
Rustic Crafts received the following consideration from the buyer of
its operating assets:
1. A note for $707,000;
2. A note for $400,000 without interest payable on September 30,
2003 absent the occurrence of certain events requiring
prepayment; and
3. $200,000 (the proceeds of which were from a $250,000 loan from
the Company to the buyer).
Additionally, Rustic Crafts entered into a three year lease with the
Buyer for its land and building which it retained, requiring payments
of $6,500 per month for a thirty six (36) month term.
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 expired on May 18,
2002 and bears interest at the Bank's prime rate minus one-half
percent (5.25% at September 30, 2002). The line of credit is
guaranteed by the Company. At September 30, 2002 the amount
outstanding under the line of credit was $900,000. In conjunction with
the Rustic Crafts' asset sale, Rustic Crafts' indebtedness under the
line of credit together with its mortgage loan from PNC (see Note 6 -
Long Term Debt) and certain other PNC indebtedness was restructured to
replace such indebtedness with five notes totaling $2,432,782, all of
which are due in June 2004 and have a ten year amortization schedule.
As part of PNC debt restructuring, Rustic Crafts' was required to pay
down the outstanding loan balance with $200,000 of the purchase price
in the Rustic Crafts asset sale, and is required to make a $540,000
payment in December 2002. The Company was also required to pledge up
to five million tons of rock aggregate as additional collateral for
the loans from PNC.
The Company's subsidiary, Neptune Trading Co., Inc. obtained
non-recourse financing in connection with its purchase of residential
real property and vacant lots. At September 30, 2002 Neptune had
demand notes at 7% interest outstanding totaling $361,536
collateralized by construction in process with a book value of
$354,439.
11
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The loan is secured by the Company's interest in the
partnership. As of September 30, 2002 the amount outstanding under the
Loan is $12,880,069, including $722,603 of interest for the nine
months ended September 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 from PNC, which is guaranteed by the Company.
The first mortgage term loan was payable in consecutive monthly
installments over 10 years with a 20 year amortization but was
restructured in connection with the September 30, 2002 Rustic Crafts
asset sale (see Note 5).
Note 7. Income Taxes
As referred to in Note 1, the Company utilizes SFAS 109, "Accounting
for Income Taxes."
For 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 months ended September 30, 2002 and 2001 the tax effect
of net operating loss carryforwards reduced the current provision for
regular Federal income taxes by approximately $210,000 and $230,000,
respectively. For the nine months ended September 30, 2002 and 2001
the tax effect of net operating loss carryforwards reduced the current
provision for regular Federal income taxes by approximately $650,000
in each of the years. The Company provided for $0 state income taxes
in the three months ended September 30, 2002 and 2001, respectively.
The Company provided $10,000 and $30,000 for state income taxes in the
nine months ended September 30, 2002 and 2001, respectively.
12
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. 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 in Florida 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 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.
Note 10. Subsequent Events
On October 16, 2002 the Company redeemed the 754,950 shares of common
stock of the Company owned by Statesman for an aggregate redemption
price of $1,020,000 ($1.35 per share - or the approximate market value
of the common stock at the time of redemption) pursuant to the terms
of a Redemption Agreement, dated October 16, 2002 between the Company
and Statesman (the "Redemption Agreement"). In connection with the
redemption, each of the Company's directors as of such time resigned
effective October 28, 2002 at which time persons designated by the
Lender (as defined below) were appointed to serve as the successor
members of the Board of Directors. In addition, simultaneously with
the redemption, all of the officers of the Company as of such time
resigned. Laurence S. Levy, an affiliate of the Lender, was appointed
President and Chief Executive Officer of the Company. Neil N. Hasson,
also an affiliate of the Lender, was appointed Chief Financial Officer
and Secretary of the Company. Both new executive officers entered into
employment agreements with the Company. On November 18, 2002 Mr.
Hasson resigned as Secretary of the Company and Carol Zelinski was
appointed as his successor.
The Company funded the redemption price and the related transactions
with Statesman discussed below with the proceeds of loans from Royalty
Holding LLC (the "Lender"), an unaffiliated third party, pursuant to a
Note Purchase Agreement (the "Note Purchase Agreement"), dated October
16, 2002. Pursuant to the Note Purchase Agreement, the Lender
purchased (i) a $3,500,000 5% Convertible Promissory Note of the
Company due October 16, 2012 and (ii) a $1,250,000 9% Promissory Note
of the Company due October 16, 2007. Under both notes, interest
payments not paid currently accrue without penalty or default. All
unpaid interest and principal under the 5% Convertible Note may be
converted at any time at the option of the holder into shares of
Company common stock at a conversion
13
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Subsequent Events (Continued)
rate of $2.00 per share. On November 7, 2002 the Lender converted an
aggregate of $1,500,000 in principal and accrued interest under the 5%
Convertible Note into 750,000 shares of Company Common Stock. The
notes are prepayable at any time without premium or penalty and the 9%
Promissory Note must be prepaid upon the receipt by the Company of
sufficient proceeds from its investment in Security after discharge of
certain pre-existing indebtedness of the Company. In addition to
customary default provisions under the notes, the notes would be in
default if within thirty days following the expiration or earlier
termination of the current lease relating to the property held by
Security, the current tenant under such lease has not renewed such
lease or entered into a new lease for the property. A default under
one note would also trigger a default under the other note.
In connection with the Redemption Agreement, the Company acquired from
Statesman a three year option to purchase the 20% stock interest in
NRDC held by Statesman. To exercise the option, the Company must
deliver to Statesman for cancellation the $2.44 million note issued to
the Company by Statesman in October 2001. As consideration for the
option, the Company (i) paid Statesman $250,000, (ii) amended the
$2.44 million note and related pledge agreement to limit the Company's
recourse under the note and (iii) transferred to Statesman certain
office furniture and equipment owned by the Company.
In connection with the Redemption Agreement, the Company also entered
into a Payment Agreement with William R. Ponsoldt, Sr., the former
President and Chief Executive Officer of the Company, whereby payment
of $1,508,000 of accrued compensation owed to Mr. Ponsoldt by the
Company became subject to the satisfaction of certain conditions
precedent.
In connection with the Redemption Agreement, the Company also entered
into an agreement with Statesman providing for (i) an amendment to the
Certificate of Designations of the Series C Preferred Stock for the
Company and (ii) certain limitations on the ability of Statesman to
issue or transfer shares or other beneficial interests in Statesman or
to sell, transfer, purchase or acquire any capital stock of the
Company, in each case without first receiving written confirmation
from the Company that such issuance or transfer would not adversely
affect the Company's ability to utilize its net operating loss
carryforwards. The Company paid Statesman an aggregate amount of
$2,730,000 in consideration of the foregoing agreements. The
Certificate of Designations of the Series C Preferred Stock was
amended to make certain ministerial changes as well as to provide that
(i) no dividends will accrue or be payable on the Series C Preferred
Stock as a result of the December 2001 sale of assets of NRDC to Iron
Mountain Minerals, Inc. or as a result of the receipt by NRDC of any
proceeds of the note issued to NRDC in connection with such
transaction and (ii) the Company may satisfy the redemption price for
the shares of Series C Preferred Stock by delivery of the NRDC common
stock.
More information regarding the transactions described above can be
found in the Company's Current Report on Form 8-K filed on October 18,
2002.
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.
General.
The Company's Shareholders' Equity at September 30, 2002 was $21,794,197 as
compared to $17,824,276 at September 2001, an increase of $3,969,921 for
the twelve months ended September 30, 2002.
Liquidity and Capital Resources.
The investment in Security provides the Company with management fees of
approximately $100,000 per annum until 2003. In the period ending September
30, 2002 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 $4,471,796. 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 $34,550,839, 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,
subject to certain conditions, including that the building remains
occupied, the maturity date of the KBC loan will be extend to 2006;
provided that all income to the Company from the partnership is used to
amortize the loan. 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. 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.
As of September 30, 2002 the Company's wholly-owned subsidiary, Rustic
Crafts, sold its operating assets to RCI Wood Products, Inc. ("RCI"), a
newly-formed Pennsylvania corporation that is controlled by the former
President of Rustic Crafts, Kevin Sheard. In addition to assuming the
operating liabilities of Rustic Crafts, as consideration for the sale, RCI
paid Rustic Crafts $240,000 in cash (which was advanced by the Company
under a short term note due December 2002) and delivered two notes in the
aggregate amount of $1,107,000. The retained assets of Rustic Crafts
consist of the real estate and notes from RCI, with an estimated value of
$2,850,000 and related liabilities in the amount of approximately
$2,400,000. In connection with the Rustic Crafts asset sale, the PNC
indebtedness was restructured (see Note 5 to Consolidated Financial
Statements).
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 historically has relied primarily on debt financing to sustain
liquidity for ongoing operations. The Company's ability to continue in
existence is largely dependent upon its ability to continue to source
financing. The Company is currently evaluating the availability of
additional financing to the Company from a number of sources. There can be
no assurance, however, that any such financing will become available.
Results of Operations
2002 Compared to 2001
For the nine months ended September 30, 2002:
Net sales increased $408,259 over the similar period in 2001, which is
attributable to Neptune, the company's newly formed residential development
corporation. Selling and administrative expenses increased $221,950 in 2002
as compared to 2001, which increase is largely attributable to increased
legal fees and contractual compensation agreements.
Income from equity in partnerships increased $272,707. Interest expense was
lower by $485,466 but partially offset by a rise in operating expenses for
the period. Corporate interest expense decreased by $66,528. While interest
on the KBC loan was higher than last year, the company was not required to
pay interest on short term borrowing as it did in the previous year.
Net income of $1,916,023 is substantially the same as net income for the
previous nine month period. Net income from continuing operations, which
increased $255,327 was decreased by losses from discontinued operations of
$255,339.
For the three months ended September 30, 2002:
Net sales increased $420,352 in 2002 over the similar period in 2001, again
as a result of the inclusion of Neptune.
Selling and administrative expenses increased $152,622 due to increased
legal fees and contractual compensation agreements.
Income from equity in partnerships increased $34,013. This increase is due
to a decrease in interest expense offset by increases in operating expenses
for the quarter.
Corporate interest expense decreased by $7,998. While interest expense on
the KBC loan was higher than last year, the company was not required to pay
interest on short term borrowing as it did in the previous year.
Net income decreased $53,689. Net income from continuing operations
decreased $76,616 while losses from discontinued operations decreased
$22,927.
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 generate sufficient cash
flow to cover corporate operating expenses and thus the Company
must rely on external sources of capital 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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not expect its operating results, cash flows, or credit
available to be affected to any significant degree by a sudden change in
market interest rates. Furthermore, the Company does not engage in any
transactions involving financial instruments or in hedging transactions
with respect to its operations.
ITEM 4. CONTROLS AND PROCEDURES
(a) Within the 90-day period prior to the date of this report, the
Company's management, including its Chief Executive Officer and Chief
Financial Officer, evaluated the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and
procedures are functioning effectively to provide reasonable assurance
that the Company can meet its obligations to disclose in a timely
manner material information required to be included in the Company's
reports under the Exchange Act.
(b) There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect those
internal controls subsequent to the date the Company's management
carried out its evaluation.
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.
18
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION (CONTINUED)
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.
During the third quarter ended September 30, 2002 there were no material
developments in previously reported legal proceedings other than as
follows:
On August 30, 2002 the Defendants moved to dismiss the Complaint filed on
May 2, 2002 by two dissident shareholders against the Company and its Board
of Directors, Gatz et al. v. Ponsoldt, Sr., et al., Case No. 4:02 CV 3113
(D. Neb.) ("Shareholder Litigation") on the grounds that the Court does not
possess personal jurisdiction over the individual defendants and for
failure to state a claim for which relief could be granted. On the same
date, Defendants also filed their Opposition to plaintiffs' preliminary
injunction motion.
On August 27, 2002 Defendants moved for a protective order to prevent
plaintiffs from interfering with Regency's existing and prospective
commercial relations and from distributing confidential Regency documents.
The Magistrate Judge granted Defendants motion and, with the Company's
agreement, on September 12, 2002, the Magistrate Judge entered an Order
requiring Defendants to give plaintiffs 10 days pre-closing notice of any
transaction that concerned a monetization of Regency's interest in the
Security Land partnership.
Since September 30, 2002 and the filing of this report, the following
material developments have occurred:
Following the Company's announcement of its recapitalization, Plaintiffs
filed an additional motions for sanctions against the Defendants arguing
that under the Magistrate Judge's September 12, 2002 Order, Defendants were
required to give notice of the recapitalization but did not, and Plaintiffs
filed an additional motion for preliminary injunction with the District
Court Judge. After hearing, the Magistrate Judge denied Plaintiffs' motion
for sanctions. After hearing on October 24, 2002 the District Court Judge
denied both of Plaintiffs' preliminary injunction motions and, pursuant to
the parties' agreement, entered an order requiring the same 10-day
pre-closing notice that was ordered by the Magistrate Judge on September
12, 2002.
On November 8, 2002 Donald D. Graham, one of the plaintiffs in the
Shareholder Litigation, served a demand letter upon the Company's CEO. In
that letter, Mr. Graham alleges various wrongs by the Company's former
Board of Directors, including but not limited to the Board's approving the
recapitalization, and Mr. Graham makes various demands of the Board. On
November 12, 2002 the Company responded, informing Mr. Graham it intends to
form an independent committee of the Board to investigate his allegations
and demands and determine whether the actions he proposed are in the
Company's best interests. On November 15, 2002 Plaintiffs filed a motion
seeking leave to file an
19
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION (CONTINUED)
amended complaint and add additional parties. Defendants' response to this
motion is due to be filed on November 29, 2002.
Other Litigation:
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. 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.
20
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION (CONTINUED)
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.
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ------------------------
3.1(i)(a) Restated Certificate of Incorporation of the
Company
3.1(i)(b) Corrected Certificate of Amendment reflecting
amendment to Restated Certificate of Incorporation
of the Company
3.1(i)(c) 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).
3.1(i)(d) Amended and Restated Certificate of Designation,
Series C Preferred Stock, $100 Stated Value, $.10
par value (filed as Exhibit 99.4 to the Company's
Current Report on Form 8-K filed on October 18,
2002, and incorporated herein by reference).
3.1(i)(e) 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).
3.1(i)(f) 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).
21
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION (CONTINUED)
3.1(ii)(a) By-laws of the Company (filed as Exhibit 3.4 to
the Company's Registration Statement on Form S-1,
Registration Number 2-86906, and incorporated
herein by reference)
3.1(ii)(b) Amendment No. 1 to By-Laws of the Company
99.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
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, 2002 /s/ Neil N. Hasson
------------------------ ------------------
(Chief Financial Officer)
22
CERTIFICATION
-------------
I, Neil N. Hasson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Regency, Affiliates,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Neil N. Hasson
-------------------------------
Neil N. Hasson
Chief Financial Officer
23
CERTIFICATION
-------------
I, Laurence. S. Levy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Regency, Affiliates,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Laurence S. Levy
-------------------------------
Laurence S. Levy
Chief Executive Officer
24