<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 JUNE 30, 1999 COMMISSION FILE NO. 1-7949
-------------
REGENCY AFFILIATES, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 72-0888772
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
729 South Federal Hwy., Suite 307, Stuart, Fl. 34994
---------------------------------------------- -----
(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)
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 - 12,632,089 shares as of June 30, 1999.
<PAGE> 2
TABLE OF CONTENTS
PAGE
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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 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
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
<PAGE> 4
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
----------- -----------------
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,713,044 $ 2,168,541
Accounts receivable 401,791 752,861
Inventory 862,937 806,006
Other current assets 227,584 130,375
----------- -----------
Total current assets 3,205,356 3,857,783
PROPERTY, PLANT AND EQUIPMENT, NET 2,423,963 1,980,063
INVESTMENTS
Partnership investment 17,810,420 15,799,631
Equity investment 1,893,000 --
Rental property, net -- 108,512
----------- -----------
Total investments 19,703,420 15,908,143
OTHER ASSETS
Aggregate inventory 843,049 843,049
Goodwill, net of amortization 612,846 631,788
Debt issuance costs, net of amortization 790,068 869,643
Other 102,900 36,947
----------- -----------
Total other assets 2,348,863 2,381,427
----------- -----------
$27,681,602 $24,127,416
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt $ 29,430 $ 38,300
Current portion of serial preferred stock
subject to mandatory redemption 163,600 163,600
Notes payable 2,633,000 464,200
Accounts payable 277,436 282,945
Accrued expenses 251,484 276,165
------------ ------------
Total current liabilities 3,354,950 1,225,210
LONG-TERM DEBT, net of current portion 12,044,084 11,519,930
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 85,396 89,576
SERIAL PREFERRED STOCK SUBJECT TO MANDITORY
REDEMPTION (liquidation preference and redemption
value $256,700), net of current portion 83,359 73,650
SHAREHOLDERS' EQUITY
Serial preferred stock not subject to mandatory
redemption (maximum liquidation preference
$24,957,326 in 1999 and 1998) 1,052,988 1,052,988
Common stock, par value $.40, authorized
25,000,000 shares; issued and outstanding
12,632,089 shares in 1999 and 1998 (net of
12,460 treasury shares) 5,047,129 5,047,129
Additional paid-in capital 270,510 270,510
Readjustment resulting from quasi-reorganization
at December 31, 1987 (1,670,596) (1,670,596)
Retained earnings 7,413,782 6,519,019
------------ ------------
Total shareholders' equity 12,113,813 11,219,050
------------ ------------
$ 27,681,602 $ 24,127,416
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
------------------------------------ ------------------------------------
1999 1998 1999 1998
----------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
NET SALES $ 901,022 $ 718,551 $ 1,876,175 $ 1,350,383
COST AND EXPENSES
Cost of goods sold 766,728 450,090 1,523,967 875,352
Selling and administrative 475,190 501,727 1,012,191 953,124
----------- ----------- ----------- -----------
1,241,918 951,817 2,536,158 1,828,476
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (340,896) (233,266) (659,983) (478,093)
INCOME FROM EQUITY INVESTMENT
IN PARTNERSHIP 1,067,115 989,666 2,112,115 1,964,188
OTHER INCOME 71,231 17,497 97,693 25,783
INTEREST EXPENSE (317,528) (594,982) (592,153) (808,604)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX
EXPENSE AND MINORITY INTEREST 479,922 178,915 957,672 703,274
INCOME TAX EXPENSE (17,500) (8,800) (41,310) (26,100)
MINORITY INTEREST 2,646 1,560 4,178 (8,541)
----------- ----------- ----------- -----------
NET INCOME $ 465,068 $ 171,675 $ 920,540 $ 668,633
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NET INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS
(after accrued preferred stock dividends of
$8,033 and $16,066 in 1999 and $8,034
and $16,066 in 1998, and preferred
stock accretion of $4,854 and $9,709 in
<S> <C> <C> <C> <C>
1999 and $4,486 and $8,975 in 1998) $ 452,181 $ 159,155 $ 894,765 $ 643,592
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE
Basic $ 0.04 $ 0.01 $ 0.07 $ 0.05
=========== =========== =========== ===========
Diluted $ 0.03 $ 0.01 $ 0.06 $ 0.05
=========== =========== =========== ===========
</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
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 920,540 $ 668,633
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization 114,704 40,474
Minority interest (4,178) 8,541
Stock issued in lieu of cash compensation -- 129,960
Income from equity invesment in partnership (2,112,115) (1,964,188)
Distribution of equity earnings from partnership 101,326 102,278
Undistributed earnings of equity investment (30,000) --
Interest amortization on long-term debt 468,269 568,361
Gain on disposal of rental properties (19,250) --
Changes in operating assets and liabilities:
Accounts receivable 351,070 160,966
Inventory (56,931) (207,003)
Other current assets (97,213) (107,118)
Accounts payable (5,509) 395,030
Accrued expenses (24,680) (175,851)
------------ ------------
Net cash used by operating activities (393,967) (379,917)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (535,770) (1,332,645)
Purchase of equity investment (1,213,000) --
Other assets (68,647) 2,329
Proceeds from sale of rental properties 126,565 --
------------ ------------
Net cash used by investing activities (1,690,852) (1,330,316)
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings 305,800 508,000
Proceeds from notes payable 1,213,000
Proceeds from long-term borrowings 149,572 10,380,987
Repayment of long-term borrowings (22,982) (5,003,072)
Debt issuance costs -- (955,725)
Other -- (12,400)
Dividends paid (16,068) (16,066)
------------ ------------
Net cash from financing activities 1,629,322 4,901,724
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (455,497) 3,191,491
CASH AND CASH EQUIVALENTS - BEGINNING 2,168,541 252,354
------------ ------------
CASH AND CASH EQUIVALENTS - ENDING $ 1,713,044 $ 3,443,845
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
<TABLE>
<CAPTION>
1999 1998
---- ----
Supplemental disclosures of cash flow information:
Cash paid during the period for:
<S> <C> <C>
Income taxes $ 35,000 $ 25,500
Interest 71,414 220,300
Supplemental disclosure of non cash investing and
financing activities:
</TABLE>
In April 1999, the Company issued a promissory note of $650,000 for the
purchase of an equity investment in Glas-Aire Industries, Ltd.
In 1998 the Company issued 187,000 shares of treasury stock as compensation
for services rendered.
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 six-month
periods ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999. 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, 1998.
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") and its 80%
owned subsidiaries National Resources Development Corporation ("NRDC"),
Transcontinental Drilling Company ("Drilling") and RegTransco, Inc.
("RTI"). 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 conversion of Series E, Series
B, and Junior Series D preferred stock during the period that the preferred
stock issues were outstanding. If the results of these assumed conversion
is dilutive, the dividend requirements and periodic accretion for the
preferred stock issues are reduced.
9
<PAGE> 10
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 June 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
1999 1998
----- ----
<S> <C> <C>
Raw materials and supplies $303,666 $379,672
Work in process 26,125 120,416
Finished products 533,146 305,918
-------- --------
$862,937 $806,006
======== ========
</TABLE>
E. Aggregate Inventory - Aggregate inventory is stated at lower of cost or
market. Liens have been attached to the aggregate inventory by the holders
of the zero coupon bonds, having a face value of $542,200 and a carrying
value of $432,075 at June 30, 1999. NRDC 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 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.
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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
compel 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 allocable share of income or loss. The investment in
partnership included in the Consolidated Balance Sheet at June 30, 1999 was
$17,810,420. The income from the Company's equity investment in the partnership
for the three months and six months ended June 30, 1999 was $1,067,115 and
$2,112,115, respectively.
Summarized operating data for Security for the three months and six months ended
June 30, 1999, and June 30, 1998, is as follows:
<TABLE>
<CAPTION>
Three Months Six Months
------------------------ ------------------------
1999 1998 1999 1998
------------------------ ------------------------
<S> <C> <C> <C> <C>
Revenues $3,303,815 $3,284,600 $6,597,114 $6,569,198
Operating Expenses 847,299 810,340 1,695,556 1,612,338
Depreciation and Amortization 709,123 707,200 1,418,246 1,414,400
Interest Expense, Net 627,938 724,989 1,260,032 1,474,578
---------- ---------- ---------- ----------
Net Income $1,119,455 $1,042,071 $2,223,280 $2,067,882
---------- ---------- ---------- ----------
</TABLE>
11
<PAGE> 12
NOTE 3. NOTES PAYABLE
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, 2000 and
bears interest at the Bank's prime rate minus one-half percent (7.25% at June
30, 1999).
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. Rustic Crafts has agreed to maintain certain net worth, current
ratio and debt service coverage requirements and is in compliance with these
requirements. The line of credit is guaranteed by the Company.
At June 30, 1999 the amount outstanding under the line of credit was
$770,000.
In connection with the purchase of the common shares of Glas-Aire (see
Note 6) the Company issued the following promissory notes:
Promissory note in the amount of $650,000 to the seller of the shares,
7.5% interest, due January 1, 2000, secured by a first priority
interest in 200,000 shares of Glas-Aire.
Promissory note in the amount of $1,213,000 to an affiliate of
Statesman Group, Inc., a significant shareholder of the Company; 7.5%
interest due on demand and unsecured.
NOTE 4. LONG TERM DEBT
KBC Bank Loan. On June 24, 1998, the Company refinanced its previously
outstanding long-term debt with a loan from KBC Bank N.V. ("KBC"). The loan
matures on November 30, 2003, with interest compounded semi-annually on June 1
and December 1 of each year during the term of the loan. The interest may be
paid on these semi-annual dates or the Company may elect to add the interest to
the principal of the loan then outstanding. As of June 30, 1999, the amount
outstanding under the loan was $10,124,542, including $186,043 and $367,845 of
interest reflected in the accompanying Statement of Operations for the three
months and six months ended June 30, 1999, respectively.
The Company incurred debt issuance costs in connection with the above
referenced KBC loan and purchased a residual value insurance policy to secure
the repayment of the outstanding principal and interest when due. These costs
are shown as Debt Issuance Costs and are being amortized over the life of the
loan using the effective interest method. Such amortization of $39,787 and
$79,575 for the three months and six months ended June 30, 1999 is included in
Interest Expense in the accompanying Statement of Operations.
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<PAGE> 13
Rustic Crafts Mortgage. In March 1998, Rustic Crafts purchased a
126,000 square foot building on seven acres of land in Scranton, Pennsylvania
for approximately $1.2 million. PNC Bank provided a first mortgage term loan in
the amount of $960,000 and a convertible line of credit of $410,000, both
carrying an interest rate of PNC's prime rate less one-half percent. PNC has
also provided equipment financing of $400,000, also at PNC's prime rate less
one-half percent. At June 30, 1999, the aggregate principal amount outstanding
on these loans was $1,501,643.
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 June 30, 1999, the Company's net deferred tax asset, utilizing a 34%
effective tax rate, consists of:
<TABLE>
<CAPTION>
Deferred tax assets:
<S> <C>
Investment partnership earnings $ 2,384,000
Net operating loss carryforwards 10,755,000
Alternative minimum tax credits 394,000
---------------
Total deferred tax assets before valuation allowance 13,533,000
Valuation allowance (13,533,000)
---------------
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 $31,600,000. 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 six months ended June 30, 1999, the tax effect
of net operating loss carryforwards reduced the current provision for federal
income taxes by approximately $140,000 and $270,000, respectively. The Company
provided $17,500 and $41,310 for state income and the alternative minimum tax in
the three months and six months ended June 30, 1999, respectively.
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NOTE 6. INVESTMENT IN GLAS-AIRE INDUSTRIES, LTD.
On April 22, 1999, the Company, through its wholly-owned subsdidiary
Speed.com, Inc., acquired 513,915 shares of the common stock of Glas-Aire
Industries, Ltd. ("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 is
guaranteed by Mr. William Ponsoldt, Sr., President of the Company and $1,213,000
in cash. The cash was obtained from an affiliate of Statesman Group, Inc.
through the issuance of an unsecured demand note at 7.5% per annum. The Company
also purchased 3,000 shares of the common stock of Glas-Aire on the open market.
Glas-Aire is a publicly traded Company which manufactures automotive parts and
accessories.
The shares acquired represent approximately 36% of the outstanding
common shares of Glas-Aire. The investment in Glas-Aire is being accounted for
using the equity method of accounting and is included in the accompanying
Balance Sheet as Equity Investment. The Company's share of Glas-Aire's earnings
since the date of acquisition of $30,000 is included in the accompanying
Statement of Operations in Other Income.
As part of this transaction, the Company has appointed two directors to
fill vacancies on the Glas-Aire board and will be allowed to appoint three
additional directors subject to satisfying the applicable shareholder
notification rules.
NOTE 7. SUBSEQUENT EVENT
On August 2, 1999, the Company acquired 41,600 shares of the common
stock of Glas-Aire on the open market for $119,619. The funds were provided by
InterSwiss Trading, Ltd. on an unsecured basis.
On August 4, 1999, the Company sold 2,852,375 shares of the Company's
common stock to Glas-Aire for cash of $1,968,000 and 86,000 shares of Glas-Aire
common stock for an aggregate consideration of $2,281,900. Upon closing of this
transaction the Company owns, either directly or through a wholly owned
subsidiary, 644,515 shares or approximately 42.4% of the outstanding shares of
Glas-Aire. In its filing with the SEC, the Company has stated its intention to
acquire control of Glas-Aire.
14
<PAGE> 15
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 stockholder value. The
Company's Stockholders' Equity at June 30, 1999 was $12,113,813 as compared to
$10,115,300 at June 30, 1998, an increase of $1,998,513 for the twelve months
ending June 30, 1999.
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. For the six
months ended June 30, 1999, the Company's income from its equity investment in
the Partnership was $2,112,115. 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
$17,810,420, 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.
The Company has agreed to sell 2,852,375 shares of its common stock to
Glas-Aire for cash of $1,968,000 and 86,000 shares of Glas-Aire common stock.
The proceeds from this sale may be used to repay debt or provide cash for
working capital or future acquisitions.
On March 15, 1998, Rustic Crafts purchased a building of 126,000 square
feet located near the current facility in Scranton, Pennsylvania. The cost of
acquiring and equipping this facility of approximately $2 million is being
funded by new borrowings from PNC Bank in the form of a first mortgage in the
amount of $960,000, a construction line of credit of $410,000 and equipment
financing of $400,000. This new facility has significantly increased the
operating capacity and enabled Rustic Crafts to more efficiently meet its
current order backlog and increase its customer base.
On the date of acquisition of the new facility, a tenant was renting
23,000 square feet of this facility at a base rent of $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 and has rented an additional 28,000
square feet to another tenant at an annual minimum rent of $71,680.
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
15
<PAGE> 16
venture with another company. Based on this experiment, the Company is
attempting to establish a permanent infrastructure to commercialize the
inventory of previously quarried and stockpiled aggregate at the Groveland Mine
in conjunction with an experienced aggregate supply company. The Company has
also had discussions with several interested companies regarding the possible
sale of its interest in NRDC, the owner of the aggregate. At this time
there is no assurance that any such commercialization or sale will occur.
The Company is continuing to explore opportunities for the acquisition
of companies with operations that will provide additional liquidity and cash.
The Company anticipates that such acquisitions would be financed by borrowings
secured by the assets acquired and by the proceeds of its KBC bank loan, or
other loans. There can be no assurance that any such acquisitions or
transactions will come to fruition. In August 1998, the Company engaged
Cruttenden Roth, Inc. a California based Investment Banking firm, 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.
Results of Operations
Three Months Ended June 30, 1999 Compared to 1998
- -------------------------------------------------
The operations of the Company include the operations of Rustic Crafts,
its subsidiary, which is engaged in the manufacture of decorative fireplaces,
heater logs and related accessories. The Company continues to actively seek
companies in the home furnishings market for merger or acquisition.
Net sales of Rustic Crafts increased $182,471 or 25% in 1999 over the
similar period in 1998. This increase in sales at Rustic Crafts is due to a
significant increase in productive capacity and manufacturing efficiencies due
to a move of its manufacturing operations into a new facility in the fourth
quarter of 1998. This allowed Rustic Craft to manufacture items for inventory
and to decrease average delivery times from about twelve weeks to six weeks.
Rustic Crafts' cost of goods sold as a percent of sales increased from
63.6% in 1998 to 85.1% in 1999. Almost all of the increase in sales was in lower
end, low margin product to a major vendor which resulted in significant
increases in material cost as a percent of sales.
Selling and administrative expenses decreased $26,537 in 1999 from the
similar period in 1998. Bonuses accrued and personnel costs decreased
approximately $110,000 from the prior year due primarily to adjustments made in
the quarter to correct first quarter accruals. This decrease was partially
offset by increases in contract and consulting fees, legal costs and travel
expenses.
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<PAGE> 17
Income from equity in partnership increased $77,449. This increase is
due to a decrease in interest expense resulting from payment of principal by the
partnership offset by increases in operating expenses for the quarter.
Other income increased $53,734 in 1999 over 1998 due to a gain on the
disposition of assets, rental income from the manufacturing facility, income
from equity investment and an increase in interest income.
Interest expense decreased $277,454 in 1999 over the similar period in
1998. Interest in the second quarter of 1998 included approximately $336,000 of
costs associated with the refinancing of the SIPI loan with a new financing
agreement with KBC Bank. Interest expense this quarter includes interest expense
on the notes to finance the new manufacturing facility and the higher principal
amount of KBC loan.
Net income increased $293,392 in 1999 over the same period in 1998. The
increase in the net loss from operations was offset by increased income from
partnership and other income and a decrease in interest expense.
Six Months Ended June 30, 1999 Compared to 1998
- -----------------------------------------------
Total sales increased $525,793 or 39% in the first six months of 1999
compared to the same period in 1998. The increase in sales was primarily due to
improved operating and manufacturing efficiencies at Rustic Crafts resulting
from a move into new manufacturing facilities. This allowed Rustic Crafts to
produce product for inventory, reduce lead times substantially and reduce
backlog.
Gross margins from sales, however, decreased $122,822 in 1999 from the
prior year. Cost of goods sold at Rustic Craft was 81.2% in 1999 compared to
64.8% in 1998. The manufacturing efficiencies did reduce direct labor and
factory overhead as a percent of sales. However, a change in the mix of product
sold to lower end, lower margin products to a major vendor resulted in a
significant increase in the material cost as a percent of sales. The Company is
seeking price increases in these products and plans to reduce its reliance on
this major vendor.
Selling and administrative expenses increased $59,067 in 1999 over the
prior year. The increase was due primarily to increases in consulting and
contract services and travel related expenses.
Income from partnership increased $147,927 in 1999 over 1998.
Partnership interest expense declined as a result of continued reduction of
long-term debt in the partnership, this decline was partially offset by
increased operating and administrative expenses.
Other income increased $71,910 in 1999 over 1998 due to a gain on
disposal of equipment, earnings from equity investment and interest income.
17
<PAGE> 18
Interest expense decreased $216,451 in 1999 from 1998. The period in
1998 includes approximately $336,000 of non recurring costs associated with the
refinancing of the SIPI loan. Interest costs in 1999 include charges on the
financing associated with the new manufacturing facility and charges on the
larger balance of long term debt with KBC Bank. The Company has reduced its
effective cost to about 9% in 1999, compared to about 20% in 1998.
Net income increased $251,907 for the six months in 1999 over 1998. An
increase in the loss from operations due to a change in product mix and higher
expenses was offset by increased earnings from partnership, other income and a
decrease in interest expense.
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 Form 10-Q 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 Form 10-Q. Readers of
the Form 10-Q 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 currently 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 June 30, 1999, the Company was dependent upon its
investment in Security Land and Development Company Limited
Partnership, the operations of Rustic Crafts International,
Inc. and its interest income for a
18
<PAGE> 19
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 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.
(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 Land and Development
Company Limited Partnership.
(vii) 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 affect 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.
19
<PAGE> 20
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.
20
<PAGE> 21
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)
August 16, 1999 By /s/ Douglas F. Long
- --------------------------- ------------------------
Date Douglas F. Long, Chief Financial Officer
21
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,713,044
<SECURITIES> 0
<RECEIVABLES> 401,791
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<INVENTORY> 862,937
<CURRENT-ASSETS> 3,205,356
<PP&E> 2,618,843
<DEPRECIATION> 194,881
<TOTAL-ASSETS> 27,681,602
<CURRENT-LIABILITIES> 3,354,950
<BONDS> 12,044,084
83,359
1,052,988
<COMMON> 5,047,129
<OTHER-SE> 6,013,696
<TOTAL-LIABILITY-AND-EQUITY> 27,681,602
<SALES> 1,876,175
<TOTAL-REVENUES> 1,876,175
<CGS> 1,523,967
<TOTAL-COSTS> 1,523,967
<OTHER-EXPENSES> 1,012,191
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 317,528
<INCOME-PRETAX> 479,922
<INCOME-TAX> 17,500
<INCOME-CONTINUING> 465,068
<DISCONTINUED> 0
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<NET-INCOME> 465,068
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