<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000 COMMISSION FILE NO. 1-7949
------------------
REGENCY AFFILIATES, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 72-0888772
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
729 South Federal Hwy., Suite 307, Stuart, FL. 34994
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(Address of principal executive offices) (Zip Code)
10842 Old Mill Road, # 5B, Omaha, NE 68154
------------------------------------ -----
(Address of administrative offices) (Zip Code)
Registrant's Telephone Number (executive office), including
Area Code: (561-220-7662)
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Registrant's Telephone Number (administrative office), including
Area Code: (402-330-7460)
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the Issuer's
classes of common stock, as of the latest practicable date.
$.40 Par Value Common Stock - 17,251,647 shares as of October 30, 2000,
including 4,040,375 shares held by a majority owned subsidiary.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
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
</TABLE>
2
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REGENCY AFFILIATES, INC.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following pages contain the information required by Part I, Item 1.
3
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 709,506 $ 2,348,989
Accounts receivable, net of allowance 2,514,719 2,373,275
Inventory 2,557,403 1,842,992
Other current assets 179,496 238,687
----------- -----------
Total current assets 5,961,124 6,803,943
PROPERTY, PLANT AND EQUIPMENT, NET 4,296,042 4,427,891
INVESTMENT IN PARTNERSHIP 23,356,071 19,959,517
OTHER ASSETS
Aggregate inventory 836,555 838,383
Goodwill, net of amortization 942,391 902,138
Debt issuance costs, net of amortization 591,130 710,493
Other 43,410 15,270
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Total other assets 2,413,486 2,466,284
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$36,026,723 $33,657,635
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 137,416 $ 176,800
Current portion of serial preferred stock
subject to mandatory redemption -- 247,800
Notes payable 1,191,157 1,149,262
Accounts payable 1,032,944 991,587
Bonus payable - officer 650,312 295,907
Accrued expenses 682,967 940,253
------------ ------------
Total current liabilities 3,694,796 3,801,609
LONG-TERM DEBT, net of current portion 12,882,788 12,353,644
DEFERRED INCOME TAXES 446,826 416,695
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 3,694,185 3,449,637
SHAREHOLDERS' EQUITY
Serial preferred stock not subject to mandatory
redemption (maximum liquidation preference
$24,975,312 in 2000 and 1999) 1,052,988 1,052,988
Common stock, par value $.40, authorized
25,000,000 shares; issued 17,251,647 shares in
2000 and 16,894,488 shares in 1999 6,900,659 6,757,806
Additional paid-in capital 2,308,484 2,096,824
Readjustment resulting from quasi-reorganization
at December 31, 1987 (1,670,596) (1,670,596)
Retained earnings 10,178,360 8,760,736
Accumulated other comprehensive income (123,734) (23,675)
Treasury stock, 4,052,825 shares in 2000 and 1999 (3,338,033) (3,338,033)
------------ ------------
Total shareholders' equity 15,308,128 13,636,050
------------ ------------
$ 36,026,723 $ 33,657,635
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------------------------ -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 4,268,915 $ 1,164,941 $ 9,379,262 $ 3,041,117
COSTS AND EXPENSES
Cost of goods sold 3,095,179 626,620 6,863,669 2,150,587
Selling and administrative 1,263,602 822,828 3,455,326 1,835,020
------------ ------------ ------------ ------------
4,358,781 1,449,448 10,318,995 3,985,607
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (89,866) (284,507) (939,733) (944,490)
INCOME FROM EQUITY INVESTMENT
IN PARTNERSHIP 1,179,122 1,044,355 3,502,804 3,156,470
OTHER INCOME, NET 48,052 112,446 80,972 210,139
INTEREST EXPENSE (314,619) (330,504) (891,198) (922,658)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST 822,689 541,790 1,752,845 1,499,461
INCOME TAX EXPENSE (145,741) (36,290) (210,935) (77,598)
MINORITY INTEREST (91,925) (15,395) (124,286) (11,218)
------------ ------------ ------------ ------------
NET INCOME $ 585,023 $ 490,105 $ 1,417,624 $ 1,410,645
============ ============ ============ ============
NET INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS
(after accrued preferred stock
dividends and accretion of $12,837
and $38,613 in 1999) $ 585,023 $ 477,268 $ 1,417,624 $ 1,372,032
============ ============ ============ ============
NET INCOME PER COMMON SHARE
Basic $ 0.04 $ 0.04 $ 0.11 $ 0.11
============ ============ ============ ============
Diluted $ 0.04 $ 0.03 $ 0.10 $ 0.10
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,417,624 $ 1,410,645
Adjustments to reconcile net income to net
cash used by by operating activities:
Depreciation and amortization 367,054 175,139
Change in deferred income taxes 30,131 --
Minority interest 124,286 11,218
Stock issued for services rendered 292,134 45,000
Income from equity investment in partnership (3,502,804) (3,156,470)
Distribution of equity earnings in partnership 106,250 101,326
Undistributed earnings of equity investment -- (114,961)
Interest amortization on long-term debt 708,331 711,371
Gain on disposal of rental properties -- (19,250)
Changes in operating assets and liabilities:
Accounts receivable (141,444) 186,268
Inventory (714,411) (155,396)
Other current assets 59,191 (36,044)
Accounts payable 41,357 (449,927)
Accrued expenses 88,269 399,658
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Net cash used by operating activities (1,124,032) (891,423)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (175,458) (589,290)
Acquisition of business, net of $595,995 of cash acquired -- (736,624)
Proceeds from sale of rental properties -- 126,565
Other 5,089 (57,855)
----------- -----------
Net cash used by investing activities (170,369) (1,257,204)
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings 41,895 110,800
Proceeds from long-term borrowings -- 489,644
Repayment of long-term borrowings (99,208) (27,782)
Issuance of common stock -- 1,967,960
Redemption of Series E preferred stock (159,300) --
Other (23,410) --
Dividends paid (5,000) (24,049)
----------- -----------
Net cash from (used by) financing activities (245,023) 2,516,573
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (100,059) --
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,639,483) 367,946
CASH AND CASH EQUIVALENTS - BEGINNING 2,348,989 2,168,541
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 709,506 $ 2,536,487
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
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<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 399,786 $ 82,075
Interest 197,531 206,969
</TABLE>
Supplemental disclosure of non cash 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 1999, the Company issued 10,828 shares of common stock in exchange
for 88.5 shares of Series E mandatory redeemable preferred stock and
47,736 shares of common stock as compensation for directors.
In 1999, the Company issued 1,580,425 shares of its common stock, a
promissory note in the amount of $650,000 and paid cash of $1,332,619
for 51.3% of the outstanding common stock of Glas-Aire Industries
Group, Ltd. The following is a summary of net cash paid:
[CAPTION]
<TABLE>
<S> <C>
Fair value of assets acquired including goodwill $ 5,061,303
Less:
Liabilities assumed 1,814,344
Promissory note issued 650,000
Common stock issued 1,264,340
Cash acquired 595,995
-----------
Net paid, net of cash of $595,995 acquired $ 736,624
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 9
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS 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-month and nine-month
periods ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. 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, 1999.
B. Principles of Consolidation - The consolidated financial statements include
the accounts of Regency Affiliates, Inc. (the "Company"), its wholly-owned
subsidiary, Rustic Crafts International, Inc. ("Rustic Crafts"), its 80%
owned subsidiaries National Resources Development Corporation ("NRDC"),
Transcontinental Drilling Company ("Drilling") and RegTransco, Inc.
("RTI"), and its majority owned subsidiary Glas-Aire Industries Group, Ltd.
("Glas-Aire"). All significant inter-company 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 (net income less preferred stock
dividend requirements and periodic accretion) by the weighted average
number of common shares outstanding during the relevant period. Diluted
earnings per share computations assume the exercise of common stock options
and the conversion of Series E, Series B, and Junior Series D preferred
stock during the period that the preferred stock issues were outstanding.
If the result of these assumed conversions is dilutive, the dividend
requirements and periodic accretion for the preferred stock issues are
reduced. 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 method ("FIFO"). Inventory is comprised of the
following at September 30, 2000:
<TABLE>
<CAPTION>
<S> <C>
Raw materials and supplies $1,252,955
Work in process 341,804
Finished products 962,644
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$2,557,403
==========
</TABLE>
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E. Aggregate Inventory - Aggregate inventory consists of 70+ million short
tons and is stated at lower of cost or market. The Company is subject to a
royalty agreement which requires the payment of certain royalties to a
previous owner of the aggregate upon sales 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 period 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 on management's
estimate, if necessary. Income tax expense is the current tax payable or
refundable for the period plus or minus the net change in the deferred tax
assets and liabilities.
NOTE 2. INVESTMENT IN PARTNERSHIP
In November 1994, the Company purchased a limited partnership interest
in Security Land and Development Company Limited Partnership ("Security"), which
owns and operates an office complex. The Company has limited voting rights and
is entitled to be allocated 95% of the profit and loss of the partnership until
October 31, 2003 (the lease termination date of the sole tenant of the office
complex) and 50% thereafter. The Company is to receive certain limited cash flow
after debt service, and a contingent equity build-up depending upon the value of
the project upon termination of the lease. The Company is also entitled to
receive certain management fees relating to the partnership. The Company can
force the sale of the property after December 31, 2004.
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 lease between the United States of
America, acting by and through the General Services Administration ("GSA").
Effective November 1, 1994, Security and the GSA entered into a nine-year lease
(the "Lease") for 100% of the building. Security has received an opinion of the
Assistant General Counsel to the GSA that lease payments are not subject to
annual appropriation by the United States Congress and the obligations to make
such payments are unconditional general obligations of the United States
Government.
The Company accounts for the investment in partnership on the equity
method, whereby the carrying value of the investment is increased or decreased
by the Company's
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allocable share of income or loss. The investment in partnership included in the
Consolidated Balance Sheet at September 30, 2000 was $23,356,071 The income from
the Company's equity investment in the partnership for the three months and nine
months ended September 30, 2000 was $1,179,122 and $3,502,804.
Summarized operating data for Security for the three months and nine months
ended September 30, 2000, and September 30, 1999, is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $3,314,136 $3,295,565 $9,944,759 $9,892,679
Operating expenses 866,222 844,892 2,640,078 2,540,448
Depreciation and amortization 710,067 709,123 2,130,201 2,127,369
Interest expense, net 496,666 642,229 1,487,318 1,902,261
---------- ---------- ---------- ----------
Net income $1,241,181 $1,099,321 $3,687,162 $3,322,601
---------- ---------- ---------- ----------
</TABLE>
NOTE 3. NOTES PAYABLE
The Company has established an operating line of credit at a local bank
in the amount of $100,050. The line of credit expires on October 24, 2001 and
bears interest at 10.25%. The loan is personally guaranteed by an officer of the
Company and another shareholder. The amount outstanding under the line of credit
was $20,000 at September 30, 2000.
The Company's subsidiary, Rustic Crafts, has established a $1,000,000
line of credit with PNC Bank. The line of credit expires on November 18, 2000
and bears interest at the Bank's prime rate minus one-half percent (9.0% at
September 30, 2000). The accounts receivable, inventory and other assets, such
as property and equipment, of Rustic Crafts have been pledged as collateral to
secure the line of credit. The line of credit is guaranteed by the Company. At
September 30, 2000, the amount outstanding under the line of credit was
$856,174.
The Company's subsidiary, Glas-Aire, has established a Canadian
$1,000,000 (U.S. $680,000) line of credit with a Canadian bank. The line of
credit expires in April 2001, and is collateralized by accounts receivable and
inventory and bears interest at the rate of the Canadian bank's prime rate plus
one-half percent (8.0% at September 30, 2000). At September 30, 2000, the amount
outstanding under the line of credit was $314,983.
NOTE 4. 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, KBC advanced $9,383,320. The due date of the Loan is November
30, 2003 with
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interest at the rate of 7.5% compounded semi-annually on each June 1 and
December 1, commencing December 1, 1998. The interest may be paid by the Company
in cash on these semi-annual dates or the Company may elect to add the interest
to the principal of the Loan then outstanding. As of September 30, 2000, the
amount outstanding under the Loan is $11,101,685, including interest for the
three months and nine months ended September 30, 2000 of $206,648 and $588,969,
respectively.
The Company purchased a residual value insurance policy which insures
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 $767,500 to finance the acquisition of new
equipment and to install such equipment in the facility. Principal payments on
one loan of $604,000 began in 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 9.0% at September 30, 2000. The
outstanding balance on these loans is $1,773,341 at September 30, 2000.
Rustic Craft's real and personal property, equipment, accounts
receivable, inventory and other general intangibles are pledged as security for
the loans. The loans are also guaranteed by the Company. The security agreement
requires Rustic Crafts to maintain certain financial ratios. Rustic Crafts was
in compliance with such ratios at September 30, 2000.
LEASE OBLIGATIONS - Glas-Aire has two long-term lease obligations to
purchase equipment. These obligations are 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.
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The terms of the leases require 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 $148,179 at September 30, 2000.
NOTE 5. 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 earnings
from the Company's partnership investment in Security Land and Development
Company Limited Partnership related to depreciation and amortization and the
recognition of income tax carryforward items.
At September 30, 2000, the Company's net deferred tax liabilities,
utilizing a 34% effective tax rate, consists of:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Investment partnership earnings $ 2,808,000
Net operating loss carryforwards 9,410,000
Alternative minimum tax credits 484,000
Valuation allowance (12,702,000)
-----------
Subtotal -0-
Deferred tax liabilities:
Depreciation (446,826)
---------------
Net deferred tax liabilities $ (446,826)
---------------
</TABLE>
The valuation allowance was established to reduce the net deferred tax
asset to the amount that will more likely than not be realized. This reduction
is necessary due to uncertainty of the Company's ability to utilize the net
operating loss and tax credit carryforwards before they expire.
For regular federal income tax purposes, the Company has remaining net
operating loss carryforwards of approximately $29,235,000. These losses can be
carried forward to offset future taxable income and, if not utilized, will
expire in varying amounts beginning in the year 2001.
For the three months and nine months ended September 30, 2000, the tax
effect of net operating loss carryforwards reduced the current provision for
federal income taxes by approximately $163,000 and $424,000, respectively. The
Company provided for Canadian, state income and the alternative minimum tax in
the three months and nine months ended September 30, 2000 in the amount of
$210,935 and $145,741, respectively.
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NOTE 6. REDEMPTION OF SERIES E PREFERRED STOCK
On January 31, 2000, the holders of the Series E preferred stock either
converted their preferred shares to the Company's common stock or received cash
equal to the stated 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. 88.5 shares of
preferred stock are being held pending a new series of preferred stock.
NOTE 7. BONUS PAYABLE TO OFFICER
The Company has an Employment Agreement with William R. Ponsoldt, Sr.,
its Chairman and Chief Executive Officer. The Agreement provides for a base
annual salary plus a bonus based on the increase in common stock equity. The
base salary is paid currently and the bonus is calculated quarterly based on the
financial statements included in the Form 10-Q.
As of September 30, 2000, the financial statements include $650,312 of
accrued bonus payable which represents $295,907 of remaining accrued bonus from
the year ended December 31, 1999, and $354,405 for the nine months ended
September 30, 2000.
NOTE 8. PROPOSED ACQUISITIONS
In early 2000, the Company announced that it had executed Letters of
Intent to acquire 55% of Knight Enterprises, Inc., and 100% of Southwest Mill
and Lumber Company and its affiliate Valley Wholesale Supply Corp.
Consummation of the transactions contemplated by the Letters of
Intent were subject to the completion of due diligence by the Company, the
execution of definitive purchase agreements and completion of audits of the
financial statements to determine among other things, the final purchase price.
As of November 10, 2000, definitive purchase agreements have not been executed.
Furthermore, certain terms of the transaction have changed significantly from
those contemplated and set forth in the Letters of Intent, and it is highly
unlikely that either of the transactions will be consummated.
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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 shareholders' values.
The Company's Shareholders' Equity at September 30, 2000 was $15,308,128 as
compared to $12,644,940 at September 30, 1999, an increase of $2,663,187 for the
twelve months ended September 30, 2000.
Liquidity and Capital Resources.
The investment in Security Land and Development Company ("the
Partnership") is estimated to provide the Company with management fees of
approximately $100,000 per annum until 2003. In the nine-month period ending
September 30, 2000, the Company's income from its equity investment in the
Partnership was $3,502,804. These funds, however, are presently committed for
the amortization of the outstanding principal balance on Security's real estate
mortgage (which mortgage is non recourse to the Partners) and, while the
Company's equity investment has increased to $23,356,071, the Partnership does
not provide 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.
For the nine months ended September 30, 2000, the Company had a
negative cash flow from operations of $1,124,032. The Company has liquidated all
of its short-term investments from the proceeds of the KBC Loan to cover its
operating expenses. The Company does have an agreement with Statesman whereby
Statesman's is required to advance up to $300,000 to the Company. Certain
shareholders of the Company, including the Company's Interim CFO, Mr. Horbach,
have secured an operating line of credit up to $100,050 at a local bank for the
Company. The bank has advanced $20,000 as of September 30, 2000.
The Company is currently negotiating with certain lenders to borrow
funds using its Partnership interest in Security as collateral. The funds would
be used for working capital purposes and to provide for acquisitions, which are
currently in various states of negotiation. There can be no assurance that the
Company will be able to close this financing arrangement.
In 1998, Rustic Crafts purchased a building of 126,000 square feet 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
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efficiently fill its current orders and increase its customer base. A tenant is
renting 23,000 square feet of this facility at a base rent of $17,400 per year
plus an allocable share of the real estate taxes. The Company has also rented an
additional 28,000 square feet to another tenant at an annual minimum rent of
$71,680.
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. The Company has 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 to commercialize the inventory of previously quarried
and stockpiled aggregate at the Groveland Mine in cooperation with an
experienced aggregate supply company.
On April 22, 1999, the Company acquired 513,915 shares (35%) of the
outstanding common stock of Glas-Aire for the issuance of a promissory note of
$650,000 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. 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 Group and
other general corporate requirements.
The Company continues to explore opportunities to acquire companies
with operations that will provide additional liquidity and cash flow.
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Results of Operations
In September 1999, the Company acquired a 51% interest in Glas-Aire
which manufactures automotive accessories. The consolidated financial statements
include the operations of Glas-Aire for the entire nine-month period in 2000 and
for only eight days in the nine-month period ended September 30, 1999. The
operations of the Company also include the operations of Rustic Crafts, which is
engaged in the manufacture of decorative fireplaces, heater logs and related
accessories.
Three Months Ended September 30, 2000 compared to 1999
Net sales increased $3,103,974 in 2000 over the similar period in 1999.
The increase is due to the inclusion of $2,929,617 of sales from Glas-Aire and
an increase in sales at Rustic Crafts of $172,071. The increase in sales at
Rustic Crafts was the result of increased sales to a major customer and an
emphasis on customer service. Rustic Crafts has recently focused on its
manufacturing processes to provide more timely delivery to its customers.
Gross margins increased $635,415 due to gross margins from Glas-Aire of
$788,380 offset by a decrease in gross margins at Rustic Crafts of $155,153. The
decrease in gross margins at Rustic Crafts from 1999 is due to several
significant adjustments in the third quarter of 1999 which increased the gross
margin percentage. Gross margins in the third quarter of 2000 are comparable to
year-to-date margins and those expected for calendar year 2000.
Selling and administrative expenses increased $440,774 in 2000 as
compared to 1999. Selling and administrative expenses of Glas-Aire were $581,330
in 2000 as compared to $42,514 in 1999 (See above). Corporate administrative
expense increased slightly primarily due to the expensing of deferred
acquisition and financing costs on projects that were deemed to be unsuccessful.
Administrative expenses at Rustic Crafts decreased due to a reduction in office
personnel and a one time charge in the third quarter in 1999.
Income from the equity investment in the Partnership increased
$134,767. This increase is due to a decrease in interest expense resulting from
payment of principal offset by increases in operating expenses within the
Partnership for the quarter.
Interest expense in 2000 decreased slightly from the prior year.
Increased interest expense on the KBC loan and loans at Rustic Crafts was offset
by the elimination of interest expense on the zero coupon bonds and short-term
financing to acquire an equity interest in Glas-Aire.
Net income increased $94,918 in 2000 compared to 1999. Increased equity
earnings from the Partnership and earnings of Glas-Aire were offset by higher
corporate administrative expenses and a reduction in interest income resulting
from lower short-term cash investments.
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Nine Months Ended September 30, 2000 compared to 1999
Total sales increased $6,338,145 in the first nine months of 2000
compared to 1999. The nine months of 2000 include $7,170,105 of sales of
Glas-Aire compared to $277,324 in 1999. Sales of Rustic Crafts declined by
$538,458 in 2000 due primarily to the reduction in backlog at the beginning of
the year. However, Rustic Crafts has been successful in obtaining higher margin
sales and its focus on reducing delivery time has provided an increase in orders
compared to a year ago.
Total gross margin increased $1,625,063 due to the increase in gross
margins at Glas-Aire of $1,813,282. The gross margin percentage at Rustic Crafts
decreased slightly in 2000 reflecting slightly higher costs for factory
overhead. The amount of gross margin decreased due to a reduction in sales as
discussed in the preceding paragraph.
Selling and administrative expenses increased $1,620,306 in 2000 over
1999. The increase includes selling and administrative expenses of Glas-Aire of
$1,451,317. Corporate administrative expenses increased significantly primarily
due to higher consulting and contract fees in 2000. These expenses include
$162,060 for outside consultants and public relations expense incurred to
increase the Company's shareholder base. Costs associated with financing and
acquisitions not completed were expensed in 2000. Amortization of goodwill in
connection with the Glas-Aire acquisition was $23,198 in 2000.
Income from the Partnership increased $346,334 primarily due to a
reduction in interest expense related to a reduction of long-term financing
offset by an increase in operating expenses within the partnership.
Other income decreased due to lower short-term investment balances in
2000. Short-term investments were liquidated to provide operating funds.
Total interest expense decreased slightly in 2000. The reduction in
interest expense resulting from the retirement of the zero coupon bonds in late
1999 was offset by higher interest expense at Rustic Crafts and on the KBC bank
loan.
Net income increased $6,979 in 2000 compared to 1999. Net income in
2000 includes $90,840 from Glas-Aire and increased earnings from the Partnership
of $346,334. These positive trends were offset, however, by increased corporate
administrative expenses and a reduction in interest income from the liquidation
of short-term investments. Corporate administrative expenses in the fourth
quarter are expected to be approximately equal to the fourth quarter in 1999.
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Year 2000 Issues.
The Company had not anticipated any material difficulties associated
with Year 2000 issues, and none materialized. The Company made no significant
expenditures in connection with Year 2000 issues.
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 had a negative cash flow from operations for the
first nine months in 2000. The Company's current operations do
not generate sufficient cash flow to cover corporate operating
expenses and thus the Company must rely on its cash reserves
and borrowings 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 and to
obtain financing using its assets as collateral.
(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.
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(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.
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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.
Exhibit 27 - Financial Data Schedule.
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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)
November 14, 2000 By /s/ Larry J. Horbach
--------------------------- ------------------------------
Date Larry J. Horbach, Interim Chief Financial
Officer and Director
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