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, 2001
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NUMBER 1-7949
REGENCY AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-0888772
-------- ----------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
729 South Federal Highway, Suite 307, Stuart, Florida 34994
- ----------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code (561) 220-7662
--------------
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 June 30, 2001 there were 17,251,619 shares of the $ .40 Par Value Common
Stock outstanding, including 4,040,375 shares held by a majority owned
subsidiary
Regency Affiliates, Inc. and Subsidiaries
Index to the Financial Statements
Page
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets 3-4
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets
Part I - Financial Information (Unaudited)
Item 1.Financial Statements
June 30, 2001 December 31, 2000
---------------- -----------------
Assets
Current Assets
Cash and Cash Equivalents $ 1,629,032 $ 928,636
Accounts receivable, net of allowance 1,850,463 2,553,589
Income taxes receivable 110,124 24,556
Inventory 2,425,189 2,243,726
Other current assets 329,632 127,728
---------------- ---------------
Total current assets 6,344,440 5,878,235
Property, Plant and Equipment, Net 4,203,989 4,343,170
Investment in partnerships 27,323,987 24,575,881
Other Assets
Aggregate inventory 834,548 834,675
Goodwill, net of amortization 787,635 820,774
Debt issuance costs, net of amortization 456,827 551,343
Other 3,150 12,751
---------------- --------------
Total other assets 2,082,160 2,219,543
---------------- --------------
$ 39,954,576 $ 37,016,829
================ ==============
The accompanying notes are an integral part of these financial statements.
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2001 December 31, 2000
---------------- -----------------
Current Liabilities
Current portion of long-term debt $ 122,384 $ 128,510
Notes Payable - Banks 958,085 692,174
Notes payable - Related Parties 1,169,503 776,000
Accounts payable 897,766 1,080,904
Accrued expenses 1,746,808 899,837
Taxes payable 117,847 78,820
---------------- --------------
Total current liabilities 5,012,393 3,656,245
Long term debt, net of current portion 13,351,252 13,072,341
Deferred income taxes 405,516 3402,048
Minority interest in consolidated subsidiaries 3,870,925 3,810,143
Shareholders' equity
Serial preferred stock not subject to mandatory redemption 1,052,988 1,052,988
(maximum liquidation preference $24,975,312 in 2001 and
2000, respectively
Common stock, par value $.40 authorized 25,000,000
shares; issued 6,900,659 6,900,659 and outstanding
17,251,619 shares in 2001 and 2000
Additional paid-in capital 2,308,484 2,308,484
Readjustment resulting from quasi-reorganization
at December 31, 1987 (1,670,596) (1,670,596)
Retained earnings 12,161,823 10,915,990
Accumulated other comprehensive income (100,835) (93,440)
Treasury stock, 4,052,825 shares in 2001 and 2000 (3,338,033) (3,338,033)
---------------- ----------------
Total shareholders' equity 17,314,490 16,076,052
---------------- ----------------
$ 39,954,576 $ 37,016,829
================ ================
The accompanying notes are an integral part of these financial statements.
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2001 and 2000
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
2001 2000 2001 2000
---------------- --------------- ------------- ------------
Net Sales $ 3,209,359 2,971,112 $ 6,594,431 $ 5,125,677
Costs and expenses
Costs of goods sold 2,142,065 2,232,399 4,714,453 3,768,490
Selling and administrative 1,423,015 1,187,233 2,610,938 2,191,003
---------------- --------------- --------------- -------------
3,565,080 3,419,632 7,325,391 5,959,493
---------------- --------------- --------------- -------------
Income (loss) from operations (355,721) (448,520) (730,960) (833,816)
Income from equity investment
in partnerships 1,522,710 1,193,165 2,748,106 2,323,682
Other income, net (7,781) 6,890 16,802 16,870
Interest expense (307,669) (315,169) (622,014) (576,580)
------------- ------------- --------------- ------------
Income before income tax expense,
and minority interest 851,539 436,366 1,411,934 930,156
Income tax expense (36,396) 701 (105,319) (65,194)
Minority interest (23,322) 2,283 (60,782) (32,361)
------------- -------------- --------------- ------------
Net income $ 791,821 $ 439,350 $ 1,245,833 $ 832,601
============= ============== =============== ============
Net income per common share:
Basic $ 0.06 $ 0.03 $ 0.09 $ 0.06
---------------- --------------- --------------- ---------------
Diluted $ 0.06 $ 0.03 $ 0.09 $ 0.06
================ =============== =============== ===============
The accompanying notes are an integral part of these financial statements.
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000
(Unaudited)
June 30, June 30,
2001 2000
--------------- ---------------
Cash flows from operating activities
Net income $ 1,245,833 $ 832,601
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation and amortization 334,401 235,932
Change in deferred income taxes 3,468 30,131
Minority interest 60,782 32,361
Stock issued for services rendered 0 217,134
Income from equity investment in partnerships (2,748,106) (2,323,682)
Distribution of equity earnings in partnership 0 106,250
Interest amortization on long-term debt 427,140 460,895
Changes in operating assets and liabilities
Accounts receivable 703,126 566,787
Inventory (181,336) (286,590)
Other current assets (287,472) (8,792)
Accounts payable (183,138) (37,081)
Accrued expenses 885,998 (330,607)
------------ -------------
Net cash from (used by) operating 260,696 (504,661)
activities
------------ -------------
Cash flows from investing activities
Capital expenditures (67,565) (158,535)
Other 9,601 (3,905)
--------------- -------------
Net cash used by investing activities (57,964) (162,440)
--------------- -------------
Cash flows from financing activities
Net short-term borrowings (payments) 659,414 (594,159)
Net long-term borrowings (payments) (154,355) (70,900)
Redemption of Series E preferred stock 0 (159,300)
Other 0 (80,389)
--------------- -------------
Net cash from (used) by financing 505,059 (904,748)
activities
--------------- -------------
Foreign currency translation adjustment (7,395) (11,350)
Increase (decrease) in cash and cash equivalents 700,396 (1,583,199)
Cash and cash equivalents - beginning 928,636 2,348,989
--------------- -------------
Cash and cash equivalents - ending $ 1,629,032 $ 765,790
=============== =============
The accompanying notes are an integral part of these financial statements.
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Six Months Ended June 30, 2001 and 2000
(Unaudited)
June 30, June 30
2001 2000
--------------- ---------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 211,960 $ 326,063
Interest 105,434 45,227
Supplemental disclosures of noncash investing and financing activities:
In 2000, the Company issued 95,877 shares of common stock in
exchange for 885 shares of Series E preferred stock.
In 2000, the Company issued 114,000 shares of common stock
as payment for costs in connection with acquisition of Glas-Aire.
In 2000, the Company issued 147,254 shares of common stock
for services.
In 2000, accrued compensation in the amount of $650,000
payable to an officer was converted to debt.
The accompanying notes are an integral part of these financial statements.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Bases of Presentation and Summary of Significant Accounting Policies
A. Basis of Presentation - The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30,
2000 and June 30, 2001 are not necessarily indicative of the results
that may be expected for the years ended December 31, 2000 and
December 31, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Registrant
Company and Subsidiaries' annual report on Form 10-K for the year
ended December 31, 2000.
B. Principals of Consolidation and Nature of Business - The consolidated
financial statements include the accounts of Regency Affiliates, Inc.
(the "Company"), its wholly owned subsidiaries, Rustic Crafts
International, Inc. ("Rustic Crafts"), its 80% owned subsidiaries,
National Resource Development Corporation ("NRDC"), Transcontinental
Drilling Company ("Drilling") and RegTransco, Inc. ("RTI") and its
approximately 50% owned subsidiary, Glas-Aire Industries Group, Ltd.
("Glas-Aire"). All significant intercompany balances and transactions
have been eliminated in consolidation.
C. Earnings Per Share - Basic earnings per share are computed by dividing
net income attributable to common shareholders by the weighted average
number of common shares outstanding during the year. Diluted earnings
per share computations assume the conversion of Series B, and Junior
Series D preferred stock during the period that the preferred stock
issues were outstanding. If the result of these assumed conversions is
dilutive, the dividend requirements and periodic accretion for the
preferred stock issues are reduced. The shares of the Company held by
Glas-Aire were treated as treasury shares for earnings per share
computations.
D. Inventory - Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method. Inventory is comprised of
the following at June 30, 2001:
Raw materials and supplies $ 1,154,120
Work-in-process 229,010
Finished products 1,042,059
---------------
$ 2,425,189
===============
E. Aggregate Inventory - Inventory, which consists of 70+ million short
tons of aggregate rock, is stated at lower of cost or market. The
Company is also subject to a royalty agreement which requires the
payment of certain royalties to a previous owner of the aggregate
inventory upon sale of the aggregate. The Company has made only casual
sales of the inventory during the periods.
F. Income Taxes - The Company utilizes Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and
reporting for income taxes. The difference between the financial
statement and tax basis of assets and liabilities is determined
annually. Deferred income tax assets and liabilities are computed for
those temporary differences that have future tax consequences using
the current enacted tax laws and rates that apply to the periods in
which they are expected to affect taxable income. In 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 8 Regency Affiliates,
Inc. and Subsidiaries Notes to Consolidated Financial Statements
Note 1. Bases of Presentation and Summary of Significant Accounting Policies
(Continued)
if necessary. Income tax expense is the current tax payable or
refundable for the period plus or minus the net exchange in the
deferred tax assets and liabilities.
G. Change in Reporting Period - Prior to December 31, 2000 Glas-Aire had
a fiscal year end of January 31. As a result, the Company's condensed
statement of operations for the six month period ended June 30, 2000
included the financial activity of Glas-Aire for the months of
February through June 2000 only.
Had the financial activity of Glas-Aire for the month of January 2000
been included, the Company's loss from operations would be as follows:
Net Sales $ 6,060,205
Costs and expenses
Costs of goods sold 4,380,632
Selling and administrative 2,407,946
------------
6,788,578
------------
Loss from operations $ (728,373)
============
Note 2. Investment in Partnership
In November 1994, the Company purchased a limited partnership interest
in Security Land and Development Company Limited Partnership
("Security"), which owns and operates an office complex. The Company
has limited voting rights and is entitled to be allocated 95% of the
profit and loss of the Partnership until October 31, 2003 (the lease
termination date of the sole tenant of the office complex) and 50%
thereafter. The Company is entitled to receive operating income in the
form of management fees relating to the partnership.
Security was organized to own and operate two buildings containing
approximately 717,000 net rentable square feet consisting of a
two-story office building and a connected six-story office tower. The
building was purchased by Security in 1986 and is located on
approximately 34.3 acres of land which is also owned by Security. The
building has been occupied by the United States Social Security
Administration's Office of Disability and International Operations for
approximately 24 years under a lease between the United States of
America, acting by and through the General Services Administration
("GSA"). Effective November 1, 1994, Security and the GSA entered into
a nine-year lease (the "Lease") for 100% of the building. Security has
received an opinion of the Assistant General Counsel to the GSA that
lease payments are not subject to annual appropriation by the United
States Congress and the obligations to make such payments are
unconditional general obligations of the United States Government.
Effective November 30 2000 the Company invested $10,000 for a 5%
limited partnership interest in 1500 Wood Lawn Limited Partnership,
the general partner of security.
The Company accounts for the investment in partnerships on the equity
method, whereby the carrying value of the investment is increased or
decreased by the Company's allocable share of income or loss. The
investment in partnerships included in the Consolidated Balance Sheets
at June 30, 2001 is $27,323,987. The income from the Company's equity
investment in the Partnerships for the six months ended June 30, 2001
was $2,748,106.
9Regency 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, 2001 and June 30, 2000, is as follows:
Three Months Ended Six Months Ended
June 30, June 30 June 30 June 30
2001 2000 2001 2000
--------------- --------------- -------------- -------------
Revenues $ 3,460,613 $ 3,316,138 $ 6,813,436 $ 6,630,623
Operating Expenses 648,355 868,975 1,630,806 1,773,856
Depreciation and Amortization 716,067 710,067 1,432,134 1,420,134
Interest Expense, Net 498,290 481,133 862,734 990,652
--------------- --------------- -------------- ------------
Net Income $ 1,597,901 $ 1,255,963 $ 2,887,762 $ 2,445,981
--------------- --------------- ------------- ------------
Note 3. Notes Payable - Banks
On October 24, 2000, a former officer (and Director) and a shareholder
obtained a commitment for a short term loan of $100,050, on behalf of
the company, from a bank bearing interest at the prime rate plus
three-fourths percent, adjusted monthly. As of June 30, 2001 $76,000
remained outstanding; the interest rate was 10.25%. This obligation is
guaranteed by two shareholders, one of whom is a former officer and
director of the Company.
The Company's subsidiary, Rustic Crafts, has established a $1,000,000
line of credit with PNC Bank. The line of credit expires on May 18,
2002 and bears interest at the Bank's prime rate minus one-half
percent (9% at June 30, 2001). 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, 2001, the amount
outstanding under the line of credit was $882,085.
The Company's subsidiary, Glas-Aire, has established a Canadian
$3,000,000 (U.S. $2,040,000) line of credit with a Canadian bank. The
line of credit is collateralized by accounts receivable and inventory
and bears interest at the rate of the Canadian bank's prime rate plus
one-half percent. At June 30, 2001, the amount outstanding under the
line of credit was zero.
Note 4. Notes Payable - Related Parties
The Company has outstanding $406,000 of demand notes bearing interest
at 10% payable to a shareholder. Additionally the Company has
outstanding a $763,503 demand note bearing interest at a rate of prime
minus 1% to its President. These obligations are secured by the shares
of Glas-Aire owned by the Company.
Note 5. Long-Term Debt
KBC Bank Loan - On June 24, 1998, the Company refinanced the long-term
debt previously outstanding with Southern Indiana Properties, Inc.
("SIPI") and entered into a Loan Agreement (the "Loan") with KBC Bank
N.V. ("KBC"). Under the terms of the Loan Agreement, KBC advanced
$9,383,320. The due date of the Loan is November 30, 2003 with
interest at the rate of 7.5% compounded semi-annually on each June 1
and 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.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5. Long-Term Debt (Continued)
As of June 30, 2001, the amount outstanding under the Loan is
$11,667,349, including $427,140 of interest for the six months ended
June 30, 2001.
The Company purchased a residual value insurance policy, which secures
the repayment of the outstanding principal and interest when due with
a maximum liability of $14 million. The costs related to the insurance
along with legal fees and other costs associated with obtaining the
Loan have been capitalized as debt issuance costs and are being
amortized over the life of the loan using the effective interest
method.
Mortgage Loan - On March 25, 1998, Rustic Crafts purchased a building
of 126,000 square feet located in Scranton, Pennsylvania. The purchase
of this facility was funded in part by a first mortgage term loan in
the amount of $960,000. The first mortgage term loan is payable in
consecutive monthly installments over 10 years with a 20 year
amortization.
Equipment Loans - In connection with the purchase of the building, PNC
Bank loaned the Company a total of $767,000 to finance the acquisition
of new equipment and to install such equipment in the facility.
Principal payments on one loan of $604,000 began March 2000 for 120
months in amounts sufficient to amortize the outstanding balance over
twenty years from March 2000. In March 2000 the interest rate was
changed to the average weekly yield on U.S. Treasury Bills, plus 200
basis points. The remaining loan in the original amount of $163,500 is
payable in equal monthly installments of $2,518.
Miscellaneous Loan - In June 1999, Rustic Crafts obtained an
additional loan from PNC Bank for the purpose of funding additional
equipment purchases and working capital in the amount of $156,000. The
loan is payable in equal monthly installments, including principal and
interest, of $3,153.
The interest rates on the mortgage loan, the equipment loan and the
miscellaneous loan range from 7.52% to 8.25% at June 30, 2001. The
outstanding balance on these loans is $1,701,602 at June 30, 2001.
Rustic Craft's real and personal property, equipment, accounts
receivable, inventory and other general intangibles are pledged as
security for the loans. The loans are also guaranteed by the Company.
Lease Obligations - Glas-Aire has two long-term lease obligations to
purchase equipment. These obligations were five year capital leases
and have been recorded as a capital asset and long-term debt. The
equipment is pledged as collateral for the leases. The terms of the
leases required equal monthly installment of $7,484 including
principal and interest over a five year period. Interest rates on the
leases range from 6.5% to 8.6%. The total outstanding balance of these
lease obligations is $104,685 at June 30, 2001.
Note 6. Income Taxes
As referred to in Note 1, the Company utilizes SFAS 109, "Accounting
for Income Taxes." The deferred taxes are the result of long-term
temporary differences between financial reporting and tax reporting
for depreciation, earnings from the Company's partnership investment
in Security Land and Development Company Limited Partnership related
to depreciation and amortization and the recognition of income tax
carryforward items.
For regular federal income tax purposes, the Company has remaining net
operating loss carryforwards of approximately $27,982,000. These
losses can be carried forward to offset future taxable income and, if
noutilized, will expire in varying amounts beginning in the year 2001.
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6. Income Taxes (Continued)
For the three and six months ended June 30, 2001, and 2000, the tax
effect of net operating loss carryforwards reduced the current
provision for regular Federal income taxes by approximately $154,000
and $259,000, $146,000 and $261,000, respectively. The Company
provided $36,396 and $105,319, $(701) and $65,194 for Canadian, state
income and the alternative minimum tax in the three and six months
ended June 30,2001 and 2000, respectively.
On January 31, 2000, the holders of the Series E preferred stock
either converted their preferred shares to the Company's common stock
or received cash equal to the par value of the shares, plus accrued
dividends. The Company issued 95,877 of its common shares in exchange
for 885 shares of preferred stock and paid cash in the amount of
$159,300 for 1,593 shares.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General.
Regency Affiliates, Inc. (the "Company") is the parent company of
several subsidiary business operations. The Company is committed to
develop and/or monetize these business operations for the benefit of
its shareholders and continues to commit both financial and personnel
resources to an active merger and acquisition program in order to
enhance common stockholders' values. The Company's Shareholders'
Equity at June 30, 2001 was $17,314,490 as compared to $14,720,400 at
June 30, 2000, an increase of $2,594,090 for the twelve months ended
June 30, 2001.
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, 2001, the Company's income from its equity
investment in the Partnership (as well as its interest in Security's
General Partner, 1500 WoodLawn L.P.) was $2,748,106. 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 $27,323,987, neither provides liquidity to the Company in
excess of the $100,000 annual management fee. The Company has,
however, been successful in obtaining financing with respect to this
investment.
On March 15, 1998, Rustic Crafts purchased a building of 126,000
square feet located near the current facility in Scranton,
Pennsylvania. The purchase of this facility was funded by new
borrowings from PNC Bank in the form of a first mortgage term loan in
the amount of $960,000. Rustic Crafts also obtained financing of
approximately $923,000 from PNC Bank to equip the facility and
purchase new equipment. The move to the new facility was completed in
1999 and has significantly increased the operating capacity and
enabled Rustic Crafts to more efficiently fill its current orders and
increase its customer base.
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 has had discussions with several companies regarding the
possible sale of its interest in NRDC. To facilitate the discussions
concerning a possible sale, the NRDC zero coupon bonds (secured by the
aggregate inventory), were retired in 1999 by the issuance of 121,000
shares of the Company's common stock. Following the termination of the
1999 NRDC Plan of Merger with Cotton Valley Resources Corporation, the
Company installed limited aggregate crushing and marketing operations
at the Groveland Mine in an informal joint venture with another
company. The Company is also exploring the possibility of establishing
a permanent infrastructure during the year 2001 to commercialize the
inventory of previously quarried and stockpiled aggregate at the
Groveland Mine in cooperation with an experienced aggregate supply
company.
On April 22, 1999, the Company acquired 513,915 shares (35%) of the
outstanding common stock of Glas-Aire ("Glas-Aire ") for the issuance
of a promissory note of $650,000 due January 1, 2000, at an interest
rate of 7.5% per annum, which note was guaranteed by Mr. William
Ponsoldt, Sr., President of the Company and $1,213,000 in cash. As of
September 23, 1999 Regency had acquired 51.3% of the common stock of
Glas-Aire. These common stock acquisitions were effected by open
market purchases, with the funding provided by an affiliate of
Statesman Group, Inc. ("Statesman"), a substantial shareholder of the
Company, on an unsecured basis, by direct purchases from Glas-Aire,
and by a common stock exchange agreement between the Company and
certain shareholders of Glas-Aire. Under the common stock exchange
agreement, the Company issued 1,188,000 shares of its restricted
common stock in exchange for 288,000 Glas-Aire common shares held by
the shareholders.
The Company also sold 2,852,375 shares of its common stock to
Glas-Aire for cash of $1,967,960 and 86,000 shares of Glas-Aire common
stock. The proceeds were used to repay the funding provided by an
affiliate of Statesman and other general corporate requirements.
The Company's Board of Directors and management believe that the
Company's common stock is substantially undervalued, and that the
future growth and success of the Company is dependent upon the
development of a cogent strategic plan upon which the majority of the
Board of Directors and management agree. The Board of Directors and
management are considering various alternatives to enhance and improve
shareholder value, and for the growth and future success of the
Company. The following among others are alternatives that have been
discussed: Share buyback of all or a portion of the Company's shares
in the open market or by private transactions, redemption of all or a
portion of the Company's outstanding common stock from Glas-Aire,
increase or decrease in the Company's ownership in Glas-Aire, or
acquisition of other companies or technologies that complement or
enhance the Company's existing products.
The foregoing constitutes a forward-looking statement, and no
assurance can be given that the Company will pursue any one or more of
these alternatives. Further, pursuit of one of more of these
alternatives may be expected to involve a change in either the
Company's cash, other assets, or equity positions. At this time,
management is unable to state with any degree of certainty which of
the above actions, if any, will occur.
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)
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, 2000 and 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.
2001 Compared to 2000
For the six -month ended June 30,2001:
Net sales increased $1,468,754 over the similar period in 2000 of
which $934,528 is attributable to Glas-Aire's change in fiscal year.
The remaining increase is due to $792,871 of additional sales from
Glas-Aire and $10,843 from NRDC, offset by a decrease in sales at
Rustic Crafts of $269,488. The decrease at Rustic Crafts was due to
smaller backlogs at December 31, 2000 and the decrease in sales of low
margin products.
Gross margin increased $522,791 of which $322,386 is attributable to
Glas-Aire's change in fiscal year. The remaining increase is due to an
increase in gross margins from Glas-Aire of $258,221 and from NRDC of
$10,716, offset by a decrease in gross margin from Rustic Craft of
$68,532.
Selling and administrative expenses increased $419,935 in 2001 as
compared to 2000, of which $216,943 is attributable to Glas-Aire's
change in year end. Of the remainder, $241,927 related to Glas-Aire
(primarily increased warranty costs, public relations consulting fees
and legal fees) offset by a net reduction of selling and
administrative expenses incurred by Regency, Rustic Crafts, and NRDC
amounting to $38,935
Income from equity in partnerships increased $424,424. This increase
is due to a decrease in interest expense resulting from payment of
principal offset by increases in operating expenses for the quarter as
to Security and income resulting from the Company's acquisition of a
5% limited partnership interest in Woodlawn, L.P.
Interest expense increased by $45,434 and is largely attributable to
increased interest expense on the KBC loan, indebtedness to related
parties offset by borrowing costs of Rustic Crafts.
Net income increased $413,232 in 2001 compared to 2000 of which
$398,029 represents increase equity earnings from partnerships.
For the three months ended June 30, 2001:
Net sales increased $238,247 in 2001 over the similar period in 2000,
of which $327,160 and $10,843 is attributable to Glas-Aire and NRDC,
respectively. Sales of Rustic Crafts decreased $99,756 during this
period.
Gross margin increased $328,581 of which $267,443, $50,422 and $10,716
is derived from Glas-Aire, Rustic Crafts and NRDC.
Selling and administrative expenses increase $235, 782 and were
incurred primarily by Glas-Aire ($164,556) and Regency ($71,046). 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)
Income form equity in partnerships increased $329,545. This increase
is due to a decrease in interest expense resulting from payment of
principal offset by increases in operating expenses for the quarter as
to Security and income resulting from the Company's acquisition of a
5% limited partnership interest in Woodlawn, L.P.
Interest expense decreased modestly this quarter.
Net income increased $352,471, of which $252,361 represents increased
equity earnings from partnerships.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q,
including, but not limited to those regarding the Company's financial
position, business strategy, acquisition strategy and other plans and
objectives for future operations and any other statements that are not
historical facts constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual
results, performance or achievements expressed or implied by such
forward-looking statements to differ materially from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Although the Company believes that the
expectations reflected in these forward-looking statements are
reasonable, there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected effect on its
business or operations. These forward-looking statements are made
based on management's expectations and beliefs concerning future
events impacting the Company and are subject to uncertainties and
factors (including, but not limited to, those specified below) which
are difficult to predict and, in many instances, are beyond the
control of the Company. As a result, actual results of the Company may
differ materially from those results contemplated by such
forward-looking statements which include, but are not limited to:
(i) The Company's current operations do not generate sufficient cash
flow to cover corporate operating expenses and thus the Company
must rely on external sources to fund these expenses. The
Company's ability to continue in existence is partly dependent
upon its ability to generate satisfactory levels of operating
cash flow.
(ii) The Company currently lacks the necessary infrastructure at the
site of the Groveland Mine to permit the Company to make more
than casual sales of the aggregate.
(iii)An unsecured default in the Lease or sudden catastrophe to the
Security West Building from uninsured acts of God or war could
have a materially adverse impact upon the Company's investment in
Security Land and Development Company Limited Partnership and
therefore its financial position and results of operations.
(iv) The failure of the Social Security Administration to renew its
lease of the Security West Buildings upon its expiration on
October 31, 2003 could have a materially adverse impact upon the
Company's investment in Security Land and Development Company
Limited Partnership.
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)
(v) The Company has a 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 he 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
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.
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 10, 2001 /s/ Marc H. Baldinger
- --------------------- ----------------------
(Chief Financial Officer and Director)
17