<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, 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 - Issued 12,743,516 shares with 4,052,825 shares in
Treasury as of September 30, 1999.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<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 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 21
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE> 3
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>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -------------------
(UNAUDITED)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,536,487 $ 2,168,541
Accounts receivable 2,086,853 752,861
Inventory 1,765,167 806,006
Other current assets 399,084 130,375
------------------- ------------------
Total current assets 6,787,591 3,857,783
PROPERTY, PLANT AND EQUIPMENT, NET 4,178,330 1,980,063
INVESTMENTS
Partnership investment 18,854,775 15,799,631
Rental property, net - 108,512
------------------- ------------------
Total investments 18,854,775 15,908,143
OTHER ASSETS
Aggregate inventory 841,319 843,049
Goodwill, net of amortization 769,076 631,788
Debt issuance costs, net of amortization 750,280 869,643
Other 93,434 36,947
------------------- ------------------
Total other assets 2,454,109 2,381,427
------------------- ------------------
$ 32,274,805 $ 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>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------- -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 66,086 $ 38,300
Current portion of serial preferred stock
subject to mandatory redemption 242,964 163,600
Notes payable 1,239,509 464,200
Accounts payable 1,097,462 282,945
Accrued expenses 772,336 276,165
------------------- ------------------
Total current liabilities 3,418,357 1,225,210
LONG-TERM DEBT, net of current portion 12,626,347 11,519,930
DEFERRED INCOME TAXES 358,504 -
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 3,226,657 89,576
SERIAL PREFERRED STOCK SUBJECT TO MANDITORY
REDEMPTION (liquidation preference and redemption
value $247,800), net of current portion - 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 16,743,516 shares in
1999 and 12,644,549 in 1998 6,697,407 5,057,831
Additional paid-in capital 2,012,124 270,510
Readjustment resulting from quasi-reorganization
at December 31, 1987 (1,670,596) (1,670,596)
Treasury stock, 4,052,825 shares in 1999
and 12,460 shares in 1998 (3,338,033) (10,702)
Retained earnings 7,891,050 6,519,019
------------------- ------------------
Total shareholders' equity 12,644,940 11,219,050
------------------- ------------------
$ 32,274,805 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
______Three Months_____ ______Nine Months_____
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
NET SALES $ 1,164,941 $ 1,177,352 $ 3,041,117 $ 2,527,735
COST AND EXPENSES
Cost of goods sold 626,620 802,814 2,150,587 1,678,167
Selling and administrative 822,828 565,412 1,835,020 1,515,059
----------------- ----------------- ----------------- -----------------
1,449,448 1,368,226 3,985,607 3,193,226
----------------- ----------------- ----------------- -----------------
INCOME (LOSS) FROM OPERATIONS (284,507) (190,874) (944,490) (665,491)
INCOME FROM EQUITY INVESTMENT
IN PARTNERSHIP 1,044,355 970,497 3,156,470 2,934,685
OTHER INCOME 112,446 45,008 210,139 67,314
INTEREST EXPENSE (330,504) (270,644) (922,658) (1,079,248)
----------------- ----------------- ----------------- -----------------
INCOME BEFORE INCOME TAX
EXPENSE AND MINORITY INTEREST 541,790 553,987 1,499,461 1,257,260
INCOME TAX EXPENSE (36,290) (23,375) (77,598) (49,475)
MINORITY INTEREST (15,395) (567) (11,218) (9,108)
================= ================= ================= =================
NET INCOME $ 490,105 $ 530,045 $ 1,410,645 $ 1,198,677
================= ================= ================= =================
NET INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS
(after accrued preferred stock dividends of
$7,982 and $24,049 in 1999 and $8,034
and $24,099 in 1998, and preferred
stock accretion of $4,855 and $14,564 in
1999 and $4,487 and $13,462 in 1998) $ 477,268 $ 517,525 $ 1,372,032 $ 1,161,116
================= ================= ================= =================
NET INCOME PER COMMON SHARE
Basic $ 0.04 $ 0.04 $ 0.11 $ 0.09
================= ================= ================= =================
Diluted $ 0.03 $ 0.03 $ 0.10 $ 0.08
================= ================= ================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,410,645 $ 1,198,677
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization 175,139 68,555
Minority interest 11,218 9,108
Stock issued in lieu of cash compensation 45,000 129,960
Income from equity investment in partnership (3,156,470) (2,934,685)
Distribution of equity earnings from partnership 101,326 102,278
Undistributed earnings of equity investment (114,961) -
Interest amortization on long-term debt 711,371 788,336
Gain on disposal of rental properties (19,250) -
Changes in operating assets and liabilities:
Accounts receivable 186,268 (188,363)
Inventory (155,396) (386,356)
Other current assets (36,044) (61,123)
Accounts payable (449,927) 12,015
Accrued expenses 399,658 61,719
------------------ -------------------
Net cash used by operating activities (891,423) (1,199,879)
CASH FLOWS USED FOR INVESTING ACTIVITIES
Capital expenditures (589,290) (1,629,211)
Acquisition of business, net of $595,995 of cash acquired (736,624) -
Other assets (57,855) (45,119)
Proceeds from sale of rental properties 126,565 -
------------------ -------------------
Net cash used for investing activities (1,257,204) (1,674,330)
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings 110,800 479,000
Proceeds from long-term borrowings 489,644 10,709,667
Repayment of long-term borrowings (27,782) (5,186,786)
Issuance of common stock 1,967,960 -
Debt issuance costs - (949,673)
Dividends paid (24,049) (24,099)
------------------ -------------------
Net cash from financing activities 2,516,573 5,028,109
------------------ -------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 367,946 2,153,900
CASH AND CASH EQUIVALENTS - BEGINNING 2,168,541 252,354
------------------ -------------------
CASH AND CASH EQUIVALENTS - ENDING $ 2,536,487 $ 2,406,254
================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
1999 1998
---- -----
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 82,075 $ 65,500
Interest 206,969 561,000
Supplemental disclosure of non cash investing and
financing activities:
In September 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:
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
-------------
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 SIGNIFICIANT 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, 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")
and, since September 23, 1999, its 51.3% owned subsidiary Glas-Aire
Industries Group, Ltd. (See Note 6). 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.
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, 1999 and December 31, 1998.
1999 1998
----- ----
Raw materials and supplies $ 806,751 $379,672
Work in process 206,083 120,416
Finished products 752,333 305,918
------------ --------
$ 1,765,167 $806,006
------------ --------
9
<PAGE> 10
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 $445,975 at September 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.
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.
10
<PAGE> 11
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, 1999 was
$18,854,775. The income from the Company's equity investment in the partnership
for the three months and nine months ended September 30, 1999 was $1,044,355 and
$3,156,470, respectively.
Summarized operating data for Security for the three months and nine
months ended September 30, 1999, and September 30, 1998, is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------------ -----------------------------
1999 1998 1999 1998
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Revenues $ 3,295,565 $ 3,290,147 $ 9,892,679 $ 9,861,932
Operating Expenses 844,892 811,235 2,540,448 2,423,648
Depreciation and Amortization 709,123 707,550 2,127,369 2,122,040
Interest Expense, Net 642,229 749,722 1,902,261 2,226,719
------------- ------------- ------------- --------------
Net Income $ 1,099,321 $ 1,021,640 $ 3,322,601 $ 3,089,525
------------- ------------- ------------- --------------
</TABLE>
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 (7.75% at
September 30, 1999). At September 30, 1999 the amount outstanding under the line
of credit was $581,000.
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.
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. This note was repaid on August
26, 1999 with proceeds from the sale of common shares to Glas-Aire.
11
<PAGE> 12
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 September 30, 1999, the amount
outstanding under the loan was $10,317,431, including $192,888 and $560,733 of
interest reflected in the accompanying Statement of Operations for the three
months and nine months ended September 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
$119,363 for the three months and nine months ended September 30, 1999 is
included in Interest Expense in the accompanying Statement of Operations.
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. In June 1999, Rustic Crafts secured an additional business
loan in the amount of $600,000 at PNC's prime rate less one-half percent. The
principal is due on March 25, 2010, with interest payments due monthly. At
September 30, 1999, the aggregate principal amount outstanding on these loans
was $1,835,325.
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.
12
<PAGE> 13
At September 30, 1999, the Company's net deferred tax asset, utilizing
a 34% effective tax rate, consists of:
Deferred tax assets:
Investment partnership earnings $ 2,384,000
Net operating loss carryforwards 10,588,000
Alternative minimum tax credits 394,000
---------------
Total deferred tax assets before valuation allowance 13,366,000
Valuation allowance (13,366,000)
---------------
Net deferred tax asset $ -0-
---------------
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 nine months ended September 30, 1999, the tax
effect of net operating loss carryforwards reduced the current provision for
federal income taxes by approximately $145,000 and $425,000, respectively. The
Company provided $25,575 and $66,885 for state income and the alternative
minimum tax in the three months and nine months ended September 30, 1999,
respectively.
NOTE 6. INVESTMENT IN GLAS-AIRE INDUSTRIES GROUP, LTD.
On April 22, 1999, the Company acquired 513,915 shares of the common
stock of Glas-Aire Industries Group, 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.
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
an affiliate of Statesman Group, Inc. on an unsecured basis.
On August 14, 1999, the Company sold 2,852,375 shares of the Company's
common stock to Glas-Aire for cash of $1,967,960 and 86,000 shares of Glas-Aire
common stock for an aggregate consideration of $2,281,900.
13
<PAGE> 14
On September 23, 1999 the Company closed a common stock exchange
agreement with certain shareholders of Glas-Aire. Under the agreement, Regency,
in a private transaction, issued 1,188,000 shares of its restricted common stock
to such shareholders in exchange for 288,000 Glas-Aire common shares held by the
shareholders. With the closing of the agreement, the Company owns 51.3% of the
currently outstanding common shares of Glas-Aire.
At the Glas-Aire annual shareholders' meeting on November 4, 1999,
William Ponsoldt, Sr. and Marc Baldinger, directors of the Company were elected
to the Glas-Aire board of directors. The Company also proposed two other
nominees who were elected to the six-member board of Glas-Aire.
Glas-Aire is a leading designer, developer, manufacturer and marketer
of automotive parts and accessories to automobile manufacturers worldwide. The
following unaudited pro forma consolidated results of operations assumes that
the transactions discussed above all occurred at the beginning of 1998.
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------------ ------------------------------
1999 1998 1999 1998
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Net sales $ 3,616,247 $ 2,837,157 $ 9,604,414 $ 7,507,147
Net income 570,215 577,075 1,604,056 1,339,767
Net income applicable to
common stock 557,378 564,555 1,562,542 1,275,388
Net income per common share
Basic .04 .04 .12 .10
Diluted .04 .04 .11 .09
</TABLE>
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 September 30, 1999 was $12,644,940 as compared
to $10,632,800 at September 30, 1998, an increase of $2,012,140 for the twelve
months ending September 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 nine
months ended September 30, 1999, the Company's income from its equity investment
in the Partnership was $3,156,470. 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
$18,854,775, 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 sold 2,459,950 shares of its common stock to Glas-Aire for
cash of $1,967,940 in connection with the acquisition of Glas-Aire common stock.
The proceeds from this sale were used to repay promissory notes and will 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. Rustic Crafts also obtained an additional business loan
in 1999 in the amount of $600,000 with a maturity date of March 2010. 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.
15
<PAGE> 16
For several months during 1999 the Company installed aggregate crushing
and marketing operations at the Groveland Mine in an informal joint venture with
another company. The Company plans to establish a permanent infrastructure in
the year 2000 to commercialize the inventory of previously quarried and
stockpiled aggregate at the Groveland Mine in cooperation with an experienced
aggregate supply company. The Company has also had discussions with several
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. The
Company also recently began efforts to secure the private placement of up to
$10,000,000 through the sale of a new series of preferred stock. There can be
no assurance that any such acquisitions or transactions will come to fruition.
Results of Operations
Three Months Ended September 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. Operations also include the results of
Glas-Aire since September 23, 1999, the date the Company acquired 51.3% of
Glas-Aire's common stock.
Net sales decreased $12,411 from the similar period in 1998. Sales of
$277,324 from Glas-Aire included in the statement of operations, were offset by
decreases of $264,683 at Rustic Crafts. The decrease was due to discontinuing
very low margin products to a major purchaser.
Gross margins increased $163,783 over the similar period in 1998.
Margins were favorably affected by Glas-Aire operations and by a significant
increase in the gross margins at Rustic Crafts. Management at Rustic Crafts
concentrated its efforts on increasing prices and/or reducing reliance on high
volume, low margin customers.
Selling and administrative expense increased $257,416 over the similar
period in 1998. Selling expenses at Rustic Crafts increased significantly
reflecting its efforts to advertise and promote its products more aggressively.
General and administrative expenses in 1999 also reflect higher consulting fees
due to the Glas-Aire acquisition and compensation for the board approved by the
shareholders in the third quarter. Selling, general and administrative expenses
of Glas-Aire of $42,514 are included in the statement of operations.
16
<PAGE> 17
Income from equity in partnership increased $73,858. This increase is
largely 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 $67,438 in 1999 over 1998 due primarily to the
equity earnings of $84,961 related to the Company's interest in Glas-Aire prior
to September 23, 1999, the date the Company acquired 51.3% of Glas-Aire common
stock.
Interest expense increased $59,860 over the similar period in 1998. The
increase reflects interest expense on promissory notes issued in connection with
the acquisition of Glas-Aire common stock, higher principal amounts of the KBC
loan and additional borrowing by Rustic Crafts.
Net income decreased $39,940 in 1999 over the same period in 1998. An
increase in the net loss from operations and increased interest expense was
offset by increased income from partnership and an increase in other income.
Nine Months Ended September 30, 1999 Compared to 1998
- -----------------------------------------------------
Total sales increased $513,382 or 20% compared to the same period in
1998. Sales at Rustic Crafts increased $318,754 or 13% in 1999 over 1998. Rustic
Crafts moved into a new manufacturing facility in early 1999 which increased
manufacturing efficiencies and reduced lead times and backlog. The statement of
operations also includes $277,324 in net sales of Glas-Aire since September 23,
1999, the date the Company acquired 51.3% of the Glas-Aire common stock.
Gross margins from sales increased only $40,962 or 5% in 1999 over the
similar period in 1999, despite the contribution to gross margin of $91,109 from
Glas-Aire. Rustic Crafts gross margins were 28.2% of sales in 1999 compared to
30.6% in 1998. This reduction in gross margin resulted from an increase in sales
to high volume, low margin customers during the second quarter of 1999. Rustic
Crafts has since increased its prices to, and/or reduced its reliance on, these
customers.
Selling and administrative expenses increased $319,961 in 1999 over
1998. Rustic Crafts significantly increased its selling and advertising expense
to promote its products through sales videos and printed materials. Rustic
Crafts believes this additional promotional expense will result in higher sales
in the fourth quarter and in 2000. Consulting fees, contract labor and board
compensation increased for the parent company reflecting the board compensation
package approved in July 1999 and increased merger and acquisition activity
involving the acquisition of Glas-Aire.
Income from equity in partnership increased $221,785 in 1999 over 1998.
Partnership interest expense declined as a result of the continued reduction of
long-term debt in the partnership; this decline was partially offset by
increased operating and administrative expenses.
17
<PAGE> 18
Other income increased $142,825 in 1999 over 1998 due to a gain on
disposal of equipment, interest income and undistributed earnings of $114,961
from Glas-Aire which are included in the Statement of Operations, reflecting the
Company's pro-rata shares of their earnings prior to September 23, 1999.
Interest expense decreased $156,590 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, charges on the larger
balance of long-term debt with KBC Bank and costs of advances to purchase an
interest in Glas-Aire. Rustic Crafts has also increased its long-term debt as it
continues to improve its new manufacturing facility.
Net income increased $211,968 for the nine months in 1999 compared to
1998. An increase in the loss from operations due to higher selling and
administrative 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.
18
<PAGE> 19
(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, 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 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.
a) Annual Meeting held on August 5, 1999.
b) The following directors were elected at the Annual Meeting and comprise
all of the directors of the Company
William R. Ponsoldt, Sr. William R. Ponsoldt, Jr.
Stephanie Carey Frederic R. Lowe
Larry J. Horbach Donald D. Graham
Martin J. Craffey Marc H. Baldinger
Pamlyn Kelly, Phd
c) The following table sets forth the matters voted upon at the meeting.
<TABLE>
<CAPTION>
Votes For Votes Against Abstaining
--------- ------------- ----------
<S> <C> <C> <C>
i) Approve directors' compensation 10,379,636 198,719 379,997
ii) Ratify the appointment of Hausser
+ Taylor LLP as independent
public accountants 10,951,082 2,460 4,270
iii) Elect the following nominated Directors
William R. Ponsoldt, Sr. 10,948,572 31
Stephanie Carey 10,948,553 50
Larry J. Horbach 10,929,228 19,375
Martin J. Craffey 10,948,603 0
Pamlyn Kelly 10,947,053 1,550
William R. Ponsoldt, Jr. 10,919,922 28,681
Fredric R. Lowe 10,948,603 0
Donald D. Graham 10,948,553 50
Marc H. Baldinger 10,948,603 0
</TABLE>
20
<PAGE> 21
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Form 8-K - Item 2. Acquisition or Disposition of Significant
Assets; filed October 5, 1999.
Exhibit 27 - Financial Data Schedule.
21
<PAGE> 22
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 18, 1999 By /s/ Douglas F. Long
- ----------------- ----------------------------------------
Date Douglas F. Long, Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,536,487
<SECURITIES> 0
<RECEIVABLES> 2,086,853
<ALLOWANCES> 0
<INVENTORY> 1,765,167
<CURRENT-ASSETS> 6,787,591
<PP&E> 5,459,873
<DEPRECIATION> 1,281,543
<TOTAL-ASSETS> 32,274,805
<CURRENT-LIABILITIES> 3,418,357
<BONDS> 12,626,347
242,964
1,052,988
<COMMON> 6,697,407
<OTHER-SE> 4,894,545
<TOTAL-LIABILITY-AND-EQUITY> 32,274,805
<SALES> 3,041,117
<TOTAL-REVENUES> 3,041,117
<CGS> 2,150,587
<TOTAL-COSTS> 2,150,587
<OTHER-EXPENSES> 1,835,020
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 922,658
<INCOME-PRETAX> 1,499,461
<INCOME-TAX> 77,598
<INCOME-CONTINUING> 1,410,645
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,410,645
<EPS-BASIC> .11
<EPS-DILUTED> .10
</TABLE>
