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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, 1998 COMMISSION FILE NO. 1-4766
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REGENCY AFFILIATES, INC.
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(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
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(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
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Registrant's Telephone Number (administrative office) including Area Code:
(402) 330-8750
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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 - 12,618,100 shares as of June 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..............................................................................17
Item 2. Changes in Securities..........................................................................17
Item 3. Defaults Upon Senior Securities................................................................17
Item 4. Submission of Matters to a Vote of Security Holders............................................17
Item 5. Other Information..............................................................................17
Item 6. Exhibits and Reports on Form 8-K...............................................................17
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REGENCY AFFILIATES, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following pages contain the information required by Part I, Item 1.
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 DECEMBER 31,
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ASSETS (UNAUDITED) 1997
CURRENT ASSETS
Cash and cash equivalents $ 890,300 $ 252,400
Certificate of deposit 2,553,500 --
Accounts receivable, net 420,600 581,600
Inventory 743,200 536,100
Other current assets 228,000 120,900
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Total current assets 4,835,600 1,491,000
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INVESTMENTS
Partnership investment 13,813,700 11,951,800
Rental property 110,300 113,200
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Total investments 13,924,000 12,065,000
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NET PROPERTY AND EQUIPMENT 1,517,700 140,200
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OTHER ASSETS
Aggregate inventory 849,000 848,900
Goodwill and intangibles, net 669,700 677,300
Debt issuance costs and other 960,400 210,100
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Total other assets 2,479,100 1,736,300
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$22,756,400 $15,432,500
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The accompanying notes are an integral part of these financial statements.
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 DECEMBER 31,
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LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 1997
----
CURRENT LIABILITIES
Current portion of long-term debt $ 27,800 $ 925,000
Notes payable 648,000 140,000
Accounts payable 651,500 256,500
Accrued expenses 248,500 424,400
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Total current liabilities 1,575,800 1,745,900
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LONG-TERM DEBT, NET OF CURRENT PORTION 10,746,300 4,031,100
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 90,700 94,500
SERIAL PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION (liquidation preference and redemption value $256,200
in 1998 and 1997 228,300 219,300
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 $.40, authorized 25,000,000 shares
issued and outstanding 12,618,100 shares 5,041,300 4,963,700
Additional paid in capital 274,000 221,600
Readjustment resulting from quasi-reorganization (1,670,600) (1,670,600)
Retained earnings 5,417,600 4,774,000
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Total shareholders' equity 10,115,300 9,341,700
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$ 22,756,400 $ 15,432,500
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The accompanying notes are an integral part of these financial statements.
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
Three Months Six Months
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1998 1997 1998 1997
---- ---- ---- ----
NET SALES $ 718,600 $ 678,400 $ 1,350,400 $ 795,400
COSTS AND EXPENSES
Cost of goods sold 450,100 432,600 875,400 498,100
Selling and administrative 494,700 575,000 944,700 714,800
Other 7,100 500 8,400 21,700
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (233,300) (329,700) (478,100) (439,200)
INCOME FROM EQUITY INVESTMENT IN
PARTNERSHIP 989,700 1,072,300 1,964,200 1,925,700
INTEREST INCOME 17,500 12,200 25,800 37,500
INTEREST EXPENSE (595,000) (194,100) (808,600) (383,100)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE &
MINORITY INTEREST 178,900 560,700 703,300 1,140,900
INCOME TAX EXPENSE 8,800 -- 26,100 11,100
MINORITY INTEREST 1,600 1,400 (8,600) 3,000
----------- ----------- ----------- -----------
NET INCOME $ 171,700 $ 562,100 $ 668,600 $ 1,132,800
=========== =========== =========== ===========
NET INCOME APPLICABLE TO COMMON
STOCK (after accrued preferred stock
dividends of $8,000; $13,500; $16,100;
and $31,600, respectively in 1998 and
1997, and preferred stock accretion of
$4,500; $8,100; $9,000; and $16,200,
respectively in 1998 and 1997.) $ 159,200 $ 540,500 $ 643,500 $ 1,087,800
=========== =========== =========== ===========
NET INCOME PER SHARE
Basic $ .01 $ .05 $ .05 $ .09
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Fully diluted $ .01 $ .04 $ .05 $ .08
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The accompany notes are an integral part of these financial statements.
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 668,600 $ 1,132,800
Adjustments to reconcile net income to net cash used by
operating activities:
Minority interest 8,600 (3,000)
Stock issued for services 130,000 233,300
Income from equity investment in partnership (1,964,200) (1,925,700)
Distribution of equity earnings from partnership 102,300 102,800
Interest amortization on long-term debt 568,400 367,900
Depreciation and amortization 40,500 40,600
Changes in operating assets and liabilities:
Accounts receivable 161,000 (191,000)
Inventories (207,000) (154,200)
Other current assets (107,100) (283,200)
Other assets 2,200 (49,300)
Accounts payable 395,000 19,400
Accrued expenses (175,900) (253,100)
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Net cash used by operating activities (377,600) (962,700)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of $13,500 cash acquired -- (1,086,500)
Acquisition of property (1,332,700) (89,200)
Purchase of certificate of deposit (2,553,500) --
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Net cash used by investing activities (3,886,200) (1,175,700)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 648,000 335,000
Payment of short-term borrowings (140,000) --
Proceeds from issuance of long-term debt 10,381,000 --
Payment of long-term debt (5,003,100) --
Debt issuance and offering costs (955,700) (28,500)
Other (28,500) (29,300)
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Net cash provided by financing activities 4,901,700 277,200
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INCREASE (DECREASE) IN CASH 637,900 (1,861,200)
CASH-BEGINNING 252,400 2,303,700
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CASH-ENDING $ 890,300 $ 442,500
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1998 1997
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 25,500 $ 30,000
Interest 220,300 --
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.
The balance of this page has been intentionally left blank.
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 six-month
periods ended June 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 June
30, 1998:
Raw materials and supplies $ 175,800
Work in process 122,100
Finished products 445,300
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$ 743,200
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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 $399,100
at June 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
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June 30, 1998 was $13,813,700. The income from the Company's equity
investment in the partnership for the three-months and the six months
ended June 30, 1998 was $989,700 and $1,964,200, respectively.
Summarized operating data for Security for the three months and six
months ended June 30, 1998, and June 30, 1997, is as follows:
Three Months Six Months
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1998 1997 1998 1997
---- ---- ---- ----
Revenues $3,284,600 $2,788,500 $6,569,200 $5,524,100
Operating Expenses 810,300 743,600 1,612,300 1,541,100
Depreciation and
Amortization 707,200 623,000 1,414,400 1,208,600
Interest Expense, Net 725,000 293,000 1,474,600 747,400
---------- ---------- ---------- ----------
Net Income $1,042,100 $1,128,900 $2,067,900 $2,027,000
========== ========== ========== ==========
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). (See
Exhibit 10.1, filed herewith.) 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. (See Exhibits 10.2 and 10.3, filed herewith.) 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
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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 $206,000 for a total of $951,000
have been capitalized and are shown as Debt Issue Costs. These Debt
Issue Costs will be amortized over the life of the Loan.
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 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. The prepayment penalty of $216,700 and the
write off of the debt issuance costs of $119,000 are included in
interest expense in the accompanying statements of operations.
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 June 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 $348,000 was outstanding at June 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 the PNC Bank prime rate
minus one-half percent, which is currently 8 percent.
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
June 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. Such interest rate was
8.5% at June 30, 1998. 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.
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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.
At June 30, 1998, the Company's net deferred tax asset,
utilizing a 34% effective tax rate, consisted of:
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-
=============
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 six months ended June 30, 1998, the tax effect
of net operating loss carryforwards reduced the current provision for
federal income taxes by approximately $52,000 and $213,000,
respectively. The Company provided $26,100 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
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 June 30, 1998, the Company's income from its equity investment in the
Partnership was $989,700. 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
$13,813,700, 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.
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 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.
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. 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.
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Factors Affecting Future Results.
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 June 30, 1998, the Company was dependent upon the
investment in Security, 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 Land and Development Company Limited
Partnership 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.
(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).
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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.
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.
Results of Operations.
The operations of Regency Affiliates, Inc. and its subsidiaries during
the quarter ended June 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 June 30, 1998 and 1997.
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Sales of Rustic Crafts increased $37,700 in the second quarter of 1998
or 5.5%. The increase is due to an increase in volumes shipped. The backlog as
of June 30, 1998, is $881,000 compared to $619,000 at June 30, 1997.
Gross margins improved slightly to 37% from 36% in the prior year.
Selling and administrative expenses decreased by $80,300. The prior
quarter in 1997 included $140,000 of costs associated with the employment of the
Company's President. In the three months ended June 30, 1998, expenses increased
at the Company's subsidiary reflecting anticipated remodeling, construction, and
growth.
Income from equity in partnership decreased $82,600 primarily from
higher net interest expense and higher depreciation and amortization.
Interest expense increased $400,900 due to the prepayment penalty for
the SIPI Loan, the writeoff of unamortized loan issuance costs associated with
the SIPI Loan and interest expense on capitalized interest since June 30, 1997.
Net income decreased $390,400 primarily as the result of higher
interest expense and lower earnings from the equity in partnership offset by
lower general and administrative costs.
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Six Months Ending June 30, 1998 and 1997.
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Sales increased $555,000 in 1998 over 1997 reflecting the purchase of
Rustic Crafts in March 1997. Gross margin percentage decreased slightly in 1998
from 1997.
Selling and administrative expenses increased $229,900 primarily due to
increases at Rustic Crafts because of an additional two months of operations
included in 1998.
Interest expense increased $425,500 in 1998 reflecting higher long-term
debt, prepayment penalty on the payoff of the SIPI Loan and the writeoff of
unamortized loan issuance costs.
Net income decreased $464,200 primarily the result of the increase in
interest expense. Higher gross margins due to increased sales were offset by
higher selling and administrative expenses.
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 June 30, 1998.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Report on Form 8-K dated July 6, 1998
Exhibit 10.1 -- Loan Agreement with KBC Bank N.V. dated June 24, 1998
Exhibit 10.2 -- Pledge and Security Agreement dated June 24, 1998
Exhibit 10.3 -- 7th Amendment to Partnership Agreement of Security Land and
Development Company Limited Partnership dated June 24, 1998
Exhibit 27 -- Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
REGENCY AFFILIATES, INC.
--------------------------------------------------
(Registrant)
August 19, 1998 By: /s/ William R. Ponsoldt, Sr.
- ------------------ ------------------------------------------
Date William R. Ponsoldt, Sr., President
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