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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 March 31, 1997 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)
3340 S.E. Federal Hwy., Ste. 210, Stewart, FL 34497
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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) 398-8448
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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
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Indicate the number of shares outstanding of each of the Issuer's
classes of common stock, as of the latest practicable date.
$.40 Par Value Common Stock- 11,559,800 shares as of March 31, 1997.
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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....................................................................................15
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 SHEET
MARCH 31, 1997
----------- DECEMBER 31,
ASSETS (UNAUDITED) 1996
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CURRENT ASSETS
Cash $ 753,800 $ 2,303,700
Accounts receivable 175,400 - 0 -
Inventories 553,000 - 0 -
Other current assets 86,500 4,400
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Total current assets 1,568,700 2,308,100
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INVESTMENTS
Partnership interest 9,087,100 8,233,700
Rental property 116,400 50,900
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Total investments 9,203,500 8,284,600
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PROPERTY AND EQUIPMENT
Machinery and equipment 27,400 - 0 -
Leasehold improvements 73,200 - 0 -
Other 16,100 - 0 -
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116,700
Less accumulated depreciation 2,500 - 0 -
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Net property and equipment 114,200 - 0 -
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OTHER ASSETS
Aggregate inventory 850,000 850,000
Goodwill and intangibles, net 678,200 - 0 -
Other 148,700 124,000
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Total other assets 1,676,900 974,000
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$12,563,300 $11,566,700
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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 SHEET
MARCH 31,1997 DECEMBER 31,
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LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 1996
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CURRENT LIABILITIES
Accounts payable $ 238,100 $ 79,900
Accrued expenses 98,500 58,200
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Total current liabilities 336,600 138,100
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LONG-TERM DEBT 4,384,700 4,199,900
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 99,500 101,100
SERIAL PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION (liquidation preference and redemption value $477,800
and $504,400 in 1997 and 1996, respectively) 382,700 401,100
SHAREHOLDERS' EQUITY
Serial preferred stock not subject to mandatory redemption (maximum liquidation
preference, $24,921,400 and $24,903,400 in 1997 and
1996, respectively) 1,053,000 1,053,000
Common stock, par value $.40, authorized 25,000,000 shares issued and
outstanding 11,559,800 and 11,399,900 shares in 1997 and 1996,
respectively (net of 22,460 treasury shares) 4,613,600 4,549,600
Additional paid in capital 162,600 140,000
Readjustment resulting from quasi-reorganization at December 31,
1987 (1,670,600) (1,670,600)
Retained earnings 3,201,200 2,654,500
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Total shareholders' equity 7,359,800 6,726,500
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$ 12,563,300 $ 11,566,700
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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 STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
1997 1996
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NET SALES $ 117,000 $ - 0 -
COSTS AND EXPENSES
Cost of goods sold 65,500 - 0 -
Selling and administrative 139,900 171,300
Other 21,200 - 0 -
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INCOME (LOSS) FROM OPERATIONS (109,600) (171,300)
INCOME FROM EQUITY INVESTMENT IN
PARTNERSHIP 853,400 658,400
INTEREST INCOME 25,400 - 0 -
INTEREST EXPENSE (189,000) (7,700)
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INCOME BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST 580,200 479,400
INCOME TAX EXPENSE 11,100 20,000
MINORITY INTEREST 1,600 1,200
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NET INCOME $ 570,700 $ 460,600
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NET INCOME APPLICABLE TO COMMON STOCK
(after accrued preferred stock dividends of $15,800, in
1997 and 1996, and preferred stock accretion of $8,100
in 1997 and $7,000 in 1996.) $ 546,800 $ 437,800
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NET INCOME PER SHARE
Primary $ .05 $ .04
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Fully diluted $ .04 $ .03
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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 STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 570,700 $ 460,600
Adjustments to reconcile net income to net cash used by operating
activities:
Minority interest (1,600) (1,200)
Stock issued in lieu of cash compensation - 0 - 93,300
Income from equity investment in partnership (853,400) (658,400)
Distribution of equity earnings from partnership - 0 - 103,200
Interest amortization on long-term debt 184,700 6,000
Depreciation and amortization 10,100 - 0 -
Changes in operating assets and liabilities:
Accounts receivable 79,000 - 0 -
Inventories (66,000) - 0 -
Other current assets (61,800) (20,700)
Other assets (28,600) 2,100
Accounts payable 8,000 (31,200)
Accrued expenses (223,200) 30,300
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Net cash used by operating activities (382,100) (16,000)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of $13,500 cash acquired (1,086,500) - 0 -
Acquisition of property (65,500) - 0 -
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Net cash used by investing activities (1,152,000) - 0 -
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CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (15,800) (15,800)
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Net cash used by financing activities (15,800) (15,800)
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DECREASE IN CASH (1,549,900) (31,800)
CASH-BEGINNING 2,303,700 39,700
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CASH-ENDING $ 753,800 $ 7,900
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The accompanying notes are an integral part of these financial statements.
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes 30,000 - 0 -
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 26,550 shares of Series E preferred stock were converted into 60,000 shares of
the Company's common stock.
The accompanying 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 period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 1997. 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, 1996.
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")
(see Note 5), 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 - Primary 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 year. 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 March 31, 1997:
Raw materials and supplies $ 136,800
Work in process 64,700
Finished products 351,500
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$ 553,000
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E. Aggregate Inventory - Aggregate inventory is stated at lower of
cost or market. Liens have been attached to the aggregate by the
holders of certain zero coupon bonds havining a face value of
$542,000 and a carrying value of $360,400 at March 31, 1997. 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.
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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.
The balance of this page has been intentionally left blank
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, for investment purposes, a
building of approximately 717,000 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
March 31, 1997 was $9,087,100. The income from the Company's equity
investment in the partnership for the three months ended March 31, 1997
was $853,400.
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized operating data for Security for the three months ended March
31, 1997, and March 31, 1996, is as follows:
1997 1996
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Revenues $ 3,150,400 $ 2,835,400
Operating Expenses 797,500 788,600
Depreciation and Amortization 585,500 462,000
Interest Expense, Net 869,100 891,800
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Net Income $ 898,300 $ 693,000
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NOTE 3. LONG TERM DEBT
The Company entered into a Credit Agreement (the "Agreement") in 1996
with an initial principal amount of $3,500,000. The Agreement provides
that semi-annual Regular Interest at 14% and Contingent Interest at an
additional 6% may be added to the principal outstanding balance. During
the first quarter of 1997, long-term debt was increased by $181,000 as
a result of the accrual of Regular and Contingent Interest.
NOTE 4. 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 March 31, 1997, the Company's net deferred tax asset, utilizing a
34% effective tax rate, consists of:
Deferred tax assets:
Investment partnership earnings $ 1,600,000
Net operating loss carryforwards 13,300,000
Alternative minimum tax credits 260,000
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Total deferred tax assets before valuation
allowance 15,060,000
Valuation allowance (15,060,000)
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Net deferred tax asset $ -0-
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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 $39,200,000. 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 ended March 31, 1997, the tax effect of net
operating loss carryforwards reduced the current provision for federal
income taxes by approximately $200,000. The Company provided $11,100
for taxes which relates to the alternative minimum tax.
NOTE 5. ACQUISITION
In March 1997, the Company, through a newly formed subsidiary, RCI,
acquired all of the operating assets including cash, accounts
receivable, inventory, property and equipment and intangibles of
Rustic Crafts Co., Inc. ("Rustic"). The business of RCI involves the
manufacture of wood and cast marble decorative electric fireplaces and
heater logs and related accessories. The Company paid $1,100,000 in
cash and issued 100,000 shares of the Company's common stock and
assumed Rustic's trade accounts payable, bank debt and certain other
accrued liabilities. Total liabilities assumed were $413,600. The
transaction was accounted for using the purchase method. The
transaction resulted in goodwill and intangibles of $678,000. Such
goodwill is being amortized on a straight-line basis over a fifteen
year period.
The cash purchase price was provided by funds obtained under the
Agreement (see Note 3). The Company advanced $201,000 to retire the
bank debt of Rustic, subsequent to the purchase.
The following unaudited pro forma consolidated results of operations
assume the purchase of Rustic's assets by RCI occurred at the
beginning of 1996:
Three Months Ended
March 31, 1997 March 31, 1996
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Net sales $581,100 $347,000
Net income 590,400 444,600
Net income applicable to common stock 566,500 421,800
Net income per common share
Primary $ .05 $ .04
Fully Diluted $ .04 $ .03
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NOTE 6. MANDATORY PREFERRED STOCK
During the three months ended March 31, 1997, 265.5 shares of Series E
Preferred Stock were converted into 60,000 shares of common stock at a
price equal to 88% of the prior 90-day average bid price of the common
stock on the day of conversion.
NOTE 7. CONTINGENCIES, RISKS AND UNCERTAINTIES
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) Prior to the acquisition by RCI, the Company did not
generate positive cash flow and, historically, the Company
has had limited operating activities and its efforts have
primarily 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 flow.
(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 March 31, 1997, the Company was dependent upon the
investment in Security Land and Development Company Limited
Partnership for a material portion of its cash flow and for a
material portion of its reportable income.
(iv) 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).
(v) The Company has significant tax loss and credit carryforwards
and no assurance can be provided that the Internal Revenue
Service would not attempt to limit or disallow altogether the
Company's use, retroactively and/or prospectively, of such
carryforwards, due to ownership changes or any other reason.
The disallowance of the utilization of the Company's net
operating loss would severely impact the Company's financial
position and results of operations due to the significant
amounts of taxable income (generated by the Company's
investment in Security) that has in the past been, and is
expected in the future to be, offset by the Company's net
operating loss carryforwards (see Note 4).
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company may, from time to time, issue forward looking statements,
including, but not limited to the statements of future economic performance
contained in Item 2 of this Report, or elsewhere herein. Such forward looking
statements, whether contained in this report on Form 10-Q, or elsewhere, are
subject to the following factors that could cause actual results to differ
materially from those contained in the forward looking statements:
(i) The Company currently lacks the necessary infrastructure at
the site of the Groveland Mine to make more than casual sales
of the aggregate.
(ii) As of March 31, 1997, the Company was dependent upon the
investment in Security Land and Development Company Limited
Partnership for a material portion of its cash flow and for a
material portion of its reportable income.
(iii) An unsecured default in the Lease or sudden catastrophe to the
Security West Building from uninsured acts of God or war could
have a materially adverse impact upon the Company's investment
in Security Land and Development Company Limited Partnership.
Liquidity and Capital Resources.
The investment in Security Land and Development Company Limited
Partnership is estimated to provide the Company with management fees of
approximately $100,000 per annum until 2003. In the quarter ending March 31,
1997, the Company's income from its equity investment in the Partnership was
$853,400.
The Company acquired substantially all the assets and assumed certain
liabilities of Rustic Crafts Co., Inc. ("Rustic") in March 1997, through a new
wholly-owned Delaware corporation, Rustic Crafts International, Inc. ("RCI").
The terms of the acquisition have previously been described on Form 8-K,
referenced in Item 6 of this Form 10-Q. RCI is presently generating
approximately $3,000,000 of annual sales. Assuming that sales and expenses of
RCI continue during 1997 at the same rates as are presently being experienced,
the Company projects that RCI will generate positive cash flow of approximately
$350,000 per year, before interest, taxes, and principal payments.
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 existing
Credit Agreement, or other loans. There can be no assurances that any such
acquisitions or transactions will come to fruition.
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Results of Operations.
During the first quarter of 1997, the Company's wholly-owned
subsidiary, RCI, acquired the assets of Rustic. The Company's results for the
quarter, therefore, include the results of operations of RCI for the period
between March 1, 1997, and March 31, 1997.
Net sales increased $117,000 due to the acquisition of in March 1997.
Cost of goods sold relate to sales made by RCI. Selling and administrative
expenses decreased $31,400, primarily the result of a reduction of $93,300 in
compensation expense as compared to the first quarter of 1996, offset by
selling and administrative expenses of RCI totaling $47,000 in the first
quarter of 1997.
Net income from equity investment in partnership increased $195,000,
resulting from an increase of $205,200 in net income of the partnership. The
increase was primarily due to additional interest income of $373,000, and
decreased interest expense of $64,000, offset by lower rental income of
$138,000, and higher depreciation of $134,000.
Interest expense increased $181,300 as a result of the Credit Agreement
entered into in June 1996. The accrued interest is added semi-annually to the
principal amount of the debt.
Net income increased $109,400 over the previous quarter, primarily due
to a reduction of compensation and an increase in income from equity investment,
offset by an increase in interest expense.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Report on Form 8-K dated March 31, 1997.
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)
5/20/97 By: /s/ Pamlyn Kelly, Ph.D.
- ---------------------- ----------------------------------
Date Pamlyn Kelly, Ph.D., President
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