<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, 1998 COMMISSION FILE NO. 1-4766
--------------------- -----------
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 Highway, Ste. 307, Stuart, Florida 34994
---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
10842 Old Mill Road 5B, Omaha, Nebraska 68154
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(Address of administrative offices) (Zip Code)
Registrant's Telephone Number (executive office) including Area Code:
(561) 220-7662
---------------
Registrant's Telephone Number (administrative office) including Area Code:
(402) 330-8750
---------------
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
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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 - 12,627,100 shares as of September 30, 1998.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements..................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings....................................................19
Item 2. Changes in Securities................................................19
Item 3. Defaults Upon Senior Securities......................................19
Item 4. Submission of Matters to a Vote of Security Holders..................19
Item 5. Other Information....................................................19
Item 6. Exhibits and Reports on Form 8-K.....................................19
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following pages contain the information required by Part I, Item 1.
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<TABLE>
<CAPTION>
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 DECEMBER 31,
ASSETS (UNAUDITED) 1997
----------- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 68,600 $ 252,400
Certificate of deposit 2,337,600 --
Accounts receivable, net 770,000 581,600
Inventory 922,500 536,100
Other current assets 182,000 120,900
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Total current assets 4,280,700 1,491,000
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INVESTMENTS
Partnership investment 14,784,200 11,951,800
Rental property 108,800 113,200
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Total investments 14,893,000 12,065,000
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NET PROPERTY AND EQUIPMENT 1,802,800 140,200
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OTHER ASSETS
Aggregate inventory 847,100 848,900
Goodwill and intangibles, net 665,900 677,300
Debt issuance costs and other 939,800 210,100
----------- -----------
Total other assets 2,452,800 1,736,300
----------- -----------
$23,429,300 $15,432,500
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 1997
----------- ----
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 27,800 $ 925,000
Notes payable 619,000 140,000
Accounts payable 268,500 256,500
Accrued expenses 486,100 424,400
------------ ------------
Total current liabilities 1,401,400 1,745,900
------------ ------------
LONG-TERM DEBT, NET OF CURRENT PORTION 11,071,100 4,031,100
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 91,200 94,500
SERIAL PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
(liquidation preference and redemption value $256,200 in 1998 and 1997
232,800 219,300
SHAREHOLDERS' EQUITY
Serial preferred stock not subject to mandatory redemption
(maximum liquidation preference, $24,921,400 in 1998 and 1997) 1,053,000 1,053,000
Common stock, par value $.40, authorized 25,000,000
shares issued and outstanding 12,627,100 shares 5,041,300 4,963,700
Additional paid in capital 274,000 221,600
Readjustment resulting from quasi-reorganization (1,670,600) (1,670,600)
Retained earnings 5,935,100 4,774,000
------------ ------------
Total shareholders' equity 10,632,800 9,341,700
------------ ------------
$ 23,429,300 $ 15,432,500
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
THREE MONTHS NINE MONTHS
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 1,177,300 $ 1,039,800 $ 2,527,700 1 ,835,200
COSTS AND EXPENSES
Cost of goods sold 802,800 719,700 1,678,200 1,217,800
Selling and administrative 559,700 483,200 1,501,900 1,206,400
Other 5,700 5,000 13,100 18,300
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (190,900) (168,100) (665,500) (607,300)
INCOME FROM EQUITY INVESTMENT IN PARTNERSHIP 970,500 851,700 2,934,700 2,777,500
INTEREST INCOME 45,000 4,000 67,300 41,400
INTEREST EXPENSE (270,600) (211,700) (1,079,200) (594,800)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE &
MINORITY INTEREST 554,000 475,900 1,257,300 1,616,800
INCOME TAX EXPENSE 23,400 22,200 49,500 33,300
MINORITY INTEREST 500 (800) 9,100 (3,800)
----------- ----------- ----------- -----------
NET INCOME $ 530,100 $ 454,500 $ 1,198,700 $ 1,587,300
=========== =========== =========== ===========
NET INCOME APPLICABLE TO COMMON STOCK
(after accrued preferred stock dividends of $8,000;
$9,400; $24,100; and $38,400, respectively in 1998
and 1997, and preferred stock accretion of $4,500;
$8,100; $13,500; and $24,500, respectively
in 1998 and 1997.)
$ 517,600 $ 437,000 1,161,100 $ 1,524,400
=========== =========== =========== ===========
NET INCOME PER SHARE
Basic $ .04 $ .04 $ .09 $ .13
=========== =========== =========== ===========
Fully diluted $ .03 $ .03 $ .08 $ .11
=========== =========== =========== ===========
</TABLE>
The accompany notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,198,700 $ 1,587,300
Adjustments to reconcile net income to net cash used by operating
activities:
Minority interest 9,100 (3,800)
Stock issued for services 130,000 233,300
Income from equity investment in partnership (2,934,700) (2,777,500)
Distribution of equity earnings from partnership 102,300 102,800
Interest amortization on long-term debt 788,300 561,500
Depreciation and amortization 68,600 65,600
Changes in operating assets and liabilities:
Accounts receivable (188,400) (463,000)
Inventories (386,300) (34,800)
Other current assets (61,100) (187,700)
Other assets -- (46,600)
Accounts payable 12,000 74,500
Accrued expenses 61,700 (92,500)
------------ ------------
Net cash used by operating activities (1,199,800) (980,900)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of $13,500 cash acquired -- (1,086,500)
Acquisition of property (1,629,200) (114,200)
Purchase of certificate of deposit (2,337,600) --
Other (32,900) --
------------ ------------
Net cash used by investing activities (3,999,700) (1,200,700)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 619,000 345,000
Payment of short-term borrowings (140,000) --
Proceeds from issuance of long-term debt 10,709,700 --
Payment of long-term debt (5,186,800) --
Debt issuance and offering costs (949,700) (28,500)
Dividends paid (36,500) (44,800)
------------ ------------
Net cash provided by financing activities 5,015,700 271,700
------------ ------------
INCREASE (DECREASE) IN CASH (183,800) (1,909,900)
CASH-BEGINNING 252,400 2,303,700
------------ ------------
CASH-ENDING $ 68,600 $ 393,800
============ ============
</TABLE>
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<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 65,500 $60,800
Interest 1,561,000 --
Supplemental disclosure of noncash investing and financing activities:
In 1997, the Company issued 100,000 shares of common stock in
connection with the acquisition of the assets of Rustic Crafts Co.,
Inc.
In 1997, 1,505 shares of Series E preferred stock were converted into
289,300 shares of the Company's common stock.
In 1998, the Company issued 187,000 shares of common stock for payment
of services rendered by the Company's President.
</TABLE>
The accompany notes are an integral part of these financial statements.
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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, 1998 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1998. 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, 1997.
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. ("RCI"),
and its 80% owned subsidiaries National Resource Development
Corporation ("NRDC"), Transcontinental Drilling Company ("Drilling")
and RegTransco, Inc. ("RTI"). 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 (net income less
preferred stock dividend requirements and periodic accretion) by the
weighted average number of common and dilutive equivalent shares
outstanding during the period. Fully diluted earnings per share
computations assume 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.
D. Inventory - Inventories are stated at the lower of cost or market.
Cost is determined using the first-in, first-out method. Inventories
were comprised of the following at September 30, 1998:
<TABLE>
<S> <C>
Raw materials and supplies $337,400
Work in process 141,700
Finished products 443,400
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$922,500
========
</TABLE>
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E. Aggregate Inventory - Aggregate inventory is stated at the lower of
cost or market. Liens have been attached to the aggregate by the
holders of certain zero coupon bonds, having a face value of $542,200
and a carrying valuing of $406,900 at September 30, 1998. The Company
is also subject to a royalty agreement which requires the payment of
certain royalties to a previous owner of the aggregate upon sales of
the aggregate.
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 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.
Security was organized to own and operate a building of approximately
717,000 net 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 22 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 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 Sheet at
September 30, 1998 was $14,784,200. The income from the Company's equity
investment in the
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partnership for the three months and the nine months ended September 30,
1998 was $970,500 and $2,934,700, respectively.
Summarized operating data for Security for the three months and nine months
ended September 30, 1998, and September 30, 1997, is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
------------ -----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $3,290,100 $2,983,200 $9,861,900 $8,507,300
Operating Expenses 811,200 760,700 2,423,600 2,301,800
Depreciation and Amortization 707,600 607,000 2,122,000 1,815,500
Interest Expense, Net 749,700 719,000 2,226,800 1,466,400
---------- ---------- ---------- ----------
Net Income $1,021,600 $ 896,500 $3,089,500 $2,923,600
========== ========== ========== ==========
</TABLE>
NOTE 3. LONG-TERM DEBT
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 June 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 all of the Company's interest in Security, including
the Company's interest in all profits and distributions, other than the
payment of management fees of $100,000 annually, and all of the Company's
rights, powers, and remedies under the Security Land and Development
Company Limited Partnership Agreement as amended and restated. At any time,
the Company may prepay the entire principal balance of the Loan, plus
accrued and unpaid interest, plus a Make-Whole Premium as defined in the
Loan Agreement, if any.
To facilitate the Loan from KBC, the Company purchased a residual value
insurance policy through R.V.I. American Insurance Company (RVI) which
secures the repayment of the outstanding principal and interest when due
with a maximum liability of $14 million. Should RVI pay a claim under this
policy they will be entitled to certain of the Company's rights with
respect to the property of Security, including but not limited to the right
to solicit bona fide, third party offers for the property and to accept
such offers and bind the Partnership in order to recoup the amount paid.
The costs related to this insurance in the amount of $745,000 along with
legal fees and other costs associated with obtaining the Loan in the amount
of $205,000 for a total of $950,000 have been capitalized and are shown as
Debt Issue Costs. These Debt Issue Costs will be amortized over the life of
the Loan using the effective interest rate method.
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As noted above, the KBC Loan proceeds were used to refinance the long-term
debt outstanding under the SIPI Loan Agreement. The SIPI Loan Agreement
provided that prepayment of the outstanding principal and regular and
contingent interest amounting to 20%, prior to June 1999, would result in a
prepayment penalty of 6%. The prepayment of the SIPI Loan also required the
write off of the unamortized balance of debt issuance costs associated with
the loan.
NOTE 4. NOTES PAYABLE
On March 25, 1998, RCI purchased a building of 126,000 square feet located
near the current facility in Scranton, Pennsylvania. The purchase and the
cost of equipping this facility were funded in part by a first mortgage
term loan in the amount of $960,000 and a convertible line of credit in the
amount of $410,000 from PNC Bank. As of September 30, 1998, no amounts were
outstanding on the convertible line of credit. RCI also maintains a
revolving line of credit with PNC Bank in the amount of $1,000,000 of which
$619,000 was outstanding at September 30, 1998.
The first mortgage term loan is payable in consecutive monthly installments
over 10 years with a 20 year amortization. The convertible line of credit
is available for 80% of the cost of construction improvements on the
building for a 2 year period at which time the convertible line of credit
becomes payable in consecutive monthly installments over 10 years with a 20
year amortization. The interest rates on each of the first mortgage term
loan, the convertible line of credit, and the revolving line of credit are
at the PNC Bank prime rate minus one-half percent, which was 8 percent at
September 30, 1998.
RCI'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 Regency Affiliates, Inc., the
parent company. The security agreement requires RCI to maintain certain
financial ratios. RCI was in compliance with such ratios at September 30,
1998.
In April 1998, the Company obtained a $300,000 bridge loan from the Park
Avenue Bank which matured 90 days from issuance and had an interest rate
equal to the bank's prime rate. The bridge loan was collateralized by a
certificate of deposit in the amount of $300,000 from Republic Management
Co., Inc., a company affiliated with the Company's President. The bridge
loan was repaid in full on July 3, 1998 with proceeds from the long-term
borrowing discussed in Note 3.
NOTE 5. INCOME TAXES
As indicated 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.
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At September 30, 1998, the Company's net deferred tax asset, utilizing a
34% effective tax rate, consisted of:
<TABLE>
<S> <C>
Deferred tax assets:
Investment partnership earnings $ 1,921,000
Net operating loss carryforwards 12,197,000
Alternative minimum tax credits 321,000
Total deferred tax assets before valuation ------------
allowance 14,439,000
Valuation allowance (14,439,000)
------------
Net deferred tax asset $ -0-
============
</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 $35,800,000. These losses can
be carried forward to offset future taxable income and, if not utilized,
will expire in varying amounts beginning in the year 2000.
For the three months and nine months ended September 30, 1998, the tax
effect of net operating loss carryforwards reduced the current provision
for federal income taxes by approximately $188,000 and $425,100,
respectively. The Company provided $49,500 for taxes which relates to the
alternative minimum tax.
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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 as described below. 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 future common stockholders' values. The Company's
Common Stockholders' equity at September 30, 1998 was $10,632,800 as
compared to $8,773,800 at September 30, 1997, an increase of
$1,859,000 for the twelve months ending September 30, 1998.
equity.
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
quarter ending September 30, 1998, the Company's income from its equity
investment in the Partnership was $970,500. 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 has increased to $14,784,200, 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 (see Note 3).
On March 25, 1998, Rustic Crafts purchased a building of 126,000 square
feet located near the current facility in Scranton, Pennsylvania.
Management anticipates that the cost of acquiring and equipping this
facility will approach $2 million, which will be funded in part by new
borrowings from PNC Bank in the form of a first mortgage in the amount
of $960,000 and a construction credit line in the amount of $410,000.
This new facility will significantly increase the operating capacity
and enable Rustic Crafts to service its current order backlog and
enhance its customer base. Rustic Crafts has recently employed a new
President who has substantial industry background and plans to increase
its sales and distribution of both manufactured and imported products.
Management anticipates that Rustic Crafts will provide significant cash
distributions for use by the Company.
On the date of acquisition of the new facility, a tenant was renting
23,000 square feet of a separate part of this facility at a base rent
of $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. As of August 15, 1998, the Company rented an additional 28,000
square feet at an annual minimum rent of $71,680 and will occupy the
remainder of this facility by the end of the year.
The Company experimented during 1997 for a one month period by
installing aggregate crushing and marketing operations at the Groveland
Mine in an informal joint venture with another company. The joint
venture processed and marketed approximately 25,000 tons of aggregate
rock. Based on this experiment, the Company is attempting to establish
a permanent
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<PAGE> 15
infrastructure to commercialize the inventory of previously quarried
and stockpiled aggregate at the Groveland Mine in conjunction with an
experienced aggregate supply company. At this time there is no
assurance that such commercialization will occur. The Company is also
exploring opportunities to monetize this asset for the benefit of the
Company's shareholders.
The Company is continuing to explore opportunities for the acquisition
of companies with operations that will provide additional liquidity
and cash flow. The Company anticipates that such acquisitions would be
financed by borrowings secured by the assets acquired and by the
proceeds of its recent Loan Agreement, or other loans. There can be no
assurances that any such acquisitions or transactions will come to
fruition. Although the Company is not obligated to disclose
non-material agreements and/or non-binding Letters of Intent, the
following is presented on the basis of full and adequate disclosure
with the caution so as not to place any undue reliance on these
forward-looking statements.
Chancellor Group
On January 31, 1998, NRDC entered into a non-binding Letter of Intent
with the Chancellor Group, Inc. to transfer the stock of NRDC in
exchange for $7 million face value preferred shares of the Chancellor
Group, Inc. The preferred shares would carry a 7% dividend rate and be
convertible at any time after 24 months from the date of issuance into
the common stock of the Chancellor Group, Inc. The Chancellor Group,
Inc. would have the option to redeem the preferred shares at any time
prior to conversion at the stated face value. Management believes that
it may be appropriate to distribute the stock of NRDC to the Regency
shareholders prior to such an exchange of the NRDC stock for the
preferred shares of the Chancellor Group, Inc. The Company has been
notified by the Chancellor Group that they are continuing to make
efforts toward obtaining the financing necessary to proceed with this
transaction. While the non-binding Letter of Intent outlines the terms
of an exchange of the NRDC stock for the preferred shares of the
Chancellor Group, Inc., there can be no assurance that such an exchange
would come to fruition or that, if a definitive agreement is reached,
it will provide for the same or similar economic terms.
Aggregate Sales Corp.
On September 3, 1998, the Company entered into an agreement with
Aggregate Sales Corp., a Florida corporation, under which Aggregate
Sales Corp. is entitled to a one year period in which to establish an
entity capable of all aspects necessary to commercialize the production
of approximately 75 million tons of aggregate rock owned by the Company
and located at the Groveland Mine near Iron Mountain, Michigan. This
entity would provide the crushing, washing and earth moving equipment
and any investment necessary to crush and process this aggregate rock
to specific gradations for delivery to customers for use as railroad
ballast, concrete and asphalt production, road building and similar
uses. Aggregate Sales Corp. would pay the Company a royalty based on
the amount of aggregate sold.
On-Line Financial Services, Inc.
On August 10, 1998, the Company entered into a non-binding Letter of
Intent to acquire 30% of the outstanding common stock of On-Line
Financial Services, Inc. in exchange for $50,000 and a $250,000 zero
coupon non-recourse note bearing interest at 1% below the prime rate of
Norwest Bank. The note is to be secured by 125,000 tons of aggregate
rock owned by NRDC. The note and accrued and unpaid interest would be
payable in five years unless earlier cancelled as a result of On-Line
Financial Services, Inc. becoming publicly traded. The Company and
On-Line Financial Services, Inc. are in the process of negotiating the
terms of the definitive agreement with respect to this transaction.
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On-Line Financial Services, Inc. is a mortgage broker in the Denver,
Colorado market with a web site on the Internet used to market their
services and to provide loan origination opportunities to third parties
associated with the purchase and sale of residential real estate. The
address of the web site is: www.mortgage-inc.com. The Company has
recently adopted its own web site at: www.regencyaffiliates.com.
Cruttenden Roth
On August 17, 1998, the Company engaged Cruttenden Roth, Inc. to assist
the Company with its acquisition program. The Company has agreed to pay
Cruttenden Roth a fee of $25,000 payable over 12 months and a success
fee if the Company acquires a business within the next two years. The
Company is analyzing the acquisition prospects introduced by
Cruttenden Roth.
YEAR 2000 ISSUES
The Company has determined that there will be no material effect on
the Company's business, results of operations or financial condition
as a consequence of its Year 2000 issues, considering the Company's
efforts to avoid any such consequences.
FORWARD LOOKING STATEMENTS
This Report contains forward-looking statements which are made pursuant
to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Statements as to what the Company "believes," "intends",
"expects" or "anticipates", and other similarly anticipatory
expressions, are generally forward-looking and are made only as of the
date of this Report. Readers of this Report are cautioned not to place
undue reliance on such forward-looking statements, as they are subject
to risks and uncertainties which could cause actual results to differ
materially from those discussed in the forward-looking statements and
from historical results of operations. The Company is subject to
numerous contingencies, risks and uncertainties including, but not
limited to the following, that could have a severe impact on the
Company.
(i) The Company does not generate positive cash flow and,
historically, the Company has had limited operating activities
and substantially all of its efforts have been devoted to
acquiring or developing profitable operations. The Company's
ability to continue in existence is partly dependent upon its
ability to attain satisfactory levels of operating cash flows.
(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) As of September 30, 1998, the Company was dependent upon the
investment in Security Land and Development Company Limited
Partnership, the operations of RCI, and its interest income
for a material portion of its cash flow and for a material
portion of its reportable income.
(iv) The investment activities of the Company do not, in and of
themselves, generate sufficient cash flow to cover its
corporate operating expenses and thus the Company must rely on
its cash reserves to fund these expenses.
(v) An unsecured default in the Lease or sudden catastrophe to the
Security office complex from uninsured acts of God or war
could have a materially adverse impact upon the Company's
investment in Security and therefore its financial position
and results of operations (see Note 2).
(vi) 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.
16
<PAGE> 17
(vii) The Company has significant tax loss and tax 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 has in the past been,
and is expected in the future to be, offset by the Company's
net operating loss carryforwards (see Note 5).
SUBSEQUENT EVENTS
On November 5, 1998, the Company entered into a non-binding Letter of
Intent to acquire the business operations of GuildMaster, Inc. in
exchange for $300,000 of cash and $2,000,000 of convertible preferred
stock with terms and conditions to be designated by the Board of
Directors. GuildMaster, Inc. manufactures innovative and
fashion-forward decorative accessories for the home, accent furniture,
lamps, and wall decor in their facilities located in Springfield,
Missouri. While the Letter of Intent outlines the terms of this
transaction, there can be no assurance that such a transaction will be
completed or that, if a definitive agreement is reached, it will
provide for the same or similar economic terms.
RESULTS OF OPERATIONS.
The operations of Regency Affiliates, Inc. and its subsidiaries during
the three months and nine months ended September 30, 1998, included the
casual sales of aggregate, limited rental income and the sale of wood
and cast marble decorative fireplaces, heater logs, and related
accessories as well as an active merger and acquisition program with a
view to enhance future company operations.
Three Months Ending September 30, 1998 and 1997.
------------------------------------------------
Sales of Rustic Crafts increased $123,000 or 13% in the third quarter
of 1998 compared to the third quarter of 1997 as a result of an
increase in the volume of units shipped. The backlog at September 30,
1998, is $1,139,000 compared to $435,000, at September 30, 1997. Gross
margin increased $54,400 from the previous year as a result of the
increase in sales and a slight improvement in the gross margin
percentage.
Selling and administrative expense increased $76,500 over the preceding
quarter reflecting higher costs associated with the Company's
manufacturing operations.
Income from the Company's equity investment in partnership increased
$118,800 over the preceding quarter. The increase was due to increased
rental income from additional renovated space offset by increased
depreciation and net interest expense.
Interest expense increased $58,900 in the third quarter of 1998
compared to the similar quarter in 1997. The higher interest expense
reflects the cost of the long-term debt incurred to acquire
17
<PAGE> 18
a manufacturing facility, higher short-term borrowings and higher
principal amounts from the refinancing of the SIPI loan. These
increases were offset by significantly lower interest rates associated
with the refinancing of the SIPI loan which is secured by the Company's
investment in a partnership.
Nine Months Ending September 30, 1998 and 1997.
-----------------------------------------------
Sales for Rustic Crafts increased $609,600 in the nine months ended
September 30, 1998, compared to the same period in the prior year. The
increase is due to the acquisition of Rustic Crafts in March 1997 and
an increase in volumes shipped over the comparable period from a year
ago. The gross margin percentage decreased from 33.4% in 1997 to 30.6%
in 1998 primarily reflecting higher costs for direct labor.
Selling and administrative expenses increased $295,500 in 1998 over
1997, primarily as a result of increased expenses at Rustic Crafts for
a nine month period in 1998 as compared to a six month period in 1997.
Income from the Company's equity investment in partnership increased
$157,200 in 1998 over 1997. The increase resulted from increased rental
income from renovated space offset by higher depreciation and net
interest expense.
Interest expense increased $484,400 in 1998 over 1997. This increase in
interest expense is due to i) a prepayment penalty and the write-off
of debt issuance costs incurred in connection with SIPI loan which was
refinanced in the second quarter of 1998; ii) interest cost associated
with the debt financing issued in connection with the acquisition of a
manufacturing facility, and iii) higher long-term debt resulting from
the refinancing of the SIPI loan as discussed above. The effective
interest rate on the new debt is significantly less than the effective
rate of the SIPI loan.
Net income decreased $464,200 in 1998 from the similar period in 1997.
Higher gross margins and income from partnership was offset by
increased selling and administrative expenses and higher interest
expense.
18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no legal proceedings pending against the Company or any of its
subsidiaries which management believes would have a material impact upon the
operations or assets of the Company.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There have been no defaults in the payment of principal or interest with respect
to any senior indebtedness of Regency Affiliates, Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the vote of security holders during the reporting
period ending September 30, 1998.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 Financial Data Schedule
19
<PAGE> 20
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 13, 1998 By: /s/ Douglas F. Long
- --------------------- -------------------------------------------
Date Douglas F. Long, Chief Financial Officer
20
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 68,600
<SECURITIES> 2,337,600
<RECEIVABLES> 770,000
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<INVENTORY> 922,500
<CURRENT-ASSETS> 4,280,700
<PP&E> 1,873,400
<DEPRECIATION> 70,600
<TOTAL-ASSETS> 23,429,300
<CURRENT-LIABILITIES> 1,401,400
<BONDS> 11,071,100
232,800
1,053,000
<COMMON> 5,041,300
<OTHER-SE> 4,538,500
<TOTAL-LIABILITY-AND-EQUITY> 23,429,300
<SALES> 2,527,700
<TOTAL-REVENUES> 2,527,700
<CGS> 1,678,200
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<INCOME-TAX> 49,500
<INCOME-CONTINUING> 1,198,700
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