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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 September 30, 1997 COMMISSION FILE NO. 1-4766
---------------------- --------------
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
---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
10842 Old Mill Road 5B, Omaha, Nebraska 68154
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(Address of administrative offices) (Zip Code)
Registrant's Telephone Number (executive office) including
Area Code: (561) 220-7662
Registrant's Telephone Number (administrative office) including
Area Code: (402) 330-8750
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
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- 12,404,800 shares as of October 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 SHEETS
SEPTEMBER 30,
-------------
1997 DECEMBER 31,
---- 1996
ASSETS (UNAUDITED) ----
CURRENT ASSETS
Cash and cash equivalents $ 393,800 $ 2,303,700
Accounts receivable 717,400 - 0 -
Inventories 521,800 - 0 -
Other current assets 212,400 4,400
----------- -----------
Total current assets 1,845,400 2,308,100
----------- -----------
INVESTMENTS
Partnership investment 10,908,300 8,233,700
Rental property 118,900 50,900
----------- -----------
Total investments 11,027,200 8,284,600
----------- -----------
PROPERTY AND EQUIPMENT
Machinery and equipment 46,600 - 0 -
Leasehold improvements 73,200 - 0 -
Other 43,100 - 0 -
----------- -----------
162,900 - 0 -
Less accumulated depreciation 26,200 - 0 -
----------- -----------
Net property and equipment 136,700 - 0 -
----------- -----------
OTHER ASSETS
Aggregate inventory 850,000 850,000
Goodwill and intangibles, net 655,400 - 0 -
Other 185,700 124,000
----------- -----------
Total other assets 1,169,100 974,000
----------- -----------
$14,700,400 $11,566,700
----------- ===========
The accompanying notes are an integral part of these financial statements.
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
-------------
1997 DECEMBER 31,
---- 1996
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) ----
CURRENT LIABILITIES
Notes payable $ 345,000 $ ---
Accounts payable 304,600 79,900
Accrued expenses 222,900 58,200
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Total current liabilities 872,500 138,100
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LONG-TERM DEBT 4,761,400 4,199,900
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 97,300 101,100
SERIAL PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION (liquidation preference and redemption value $350,400
and $504,400 in 1997 and 1996, respectively) 195,400 401,100
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 12,404,800 and 11,399,900 shares in 1997 and 1996,
respectively (net of 22,460 treasury shares) 4,951,600 4,549,600
Additional paid in capital 261,500 140,000
Readjustment resulting from quasi-reorganization at December 31,
1987 (1,670,600) (1,670,600)
Retained earnings 4,178,300 2,654,500
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Total shareholders' equity 8,773,800 6,726,500
------------ ------------
$ 14,700,400 $ 11,566,700
============ ============
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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
Three Months Nine Months
------------ -----------
1997 1996 1997 1996
---- ---- ---- ----
NET SALES $ 1,039,800 $ 1,200 $ 1,835,200 $ 1,200
COSTS AND EXPENSES
Cost of goods sold 719,700 --- 1,217,800 ---
Selling and administrative 483,200 146,700 1,206,400 413,900
Other 5,000 --- 18,300 ---
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (168,100) (145,500) (607,300) (412,700)
INCOME FROM EQUITY INVESTMENT IN
PARTNERSHIP 851,700 1,001,600 2,777,500 2,711,200
INTEREST INCOME 4,000 --- 41,400 ---
INTEREST EXPENSE (211,700) (169,600) (594,800) (199,900)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE &
MINORITY INTEREST 475,900 686,500 1,616,800 2,098,600
INCOME TAX EXPENSE (22,200) (16,900) (33,300) (176,500)
MINORITY INTEREST 800 1,100 3,800 3,500
----------- ----------- ----------- -----------
NET INCOME $ 454,500 $ 670,700 $ 1,587,300 $ 1,925,600
=========== =========== =========== ===========
NET INCOME APPLICABLE TO COMMON
STOCK (after accrued preferred stock dividends of
$9,400; $15,800; $38,400; and $47,400, respectively
in 1997 and 1996, and preferred stock accretion of
$8,100; $10,000; $24,500; and $24,000, respectively $ 437,000 $ 644,900 $ 1,660,400 $ 1,854,200
in 1997 and 1996.) ============ =========== =========== ===========
NET INCOME PER SHARE
Primary $ .04 $ .06 $ .13 $ .16
=========== =========== =========== ===========
Fully diluted $ .03 $ .05 $ .11 $ .13
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,587,300 $ 1,925,600
Adjustments to reconcile net income to net cash used by operating
activities:
Minority interest (3,800) (3,500)
Stock issued for services 233,300 93,300
Income from equity investment in partnership (2,777,500) (2,711,200)
Distribution of equity earnings from partnership 102,800 103,200
Interest amortization on long-term debt 561,500 227,200
Depreciation and amortization 65,600 ---
Changes in operating assets and liabilities:
Accounts receivable (463,000) ---
Inventories (34,800) ---
Other current assets (187,700) (14,100)
Other assets (46,600) 5,400
Accounts payable 74,500 (22,600)
Accrued expenses (92,500) (81,200)
----------- -----------
Net cash used by operating activities (980,900) (477,900)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of $13,500 cash acquired (1,086,500) ---
Acquisition of property (114,200) (51,000)
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Net cash used by investing activities (1,200,700) (51,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 345,000 ---
Proceeds from issuance of long-term debt --- 3,500,000
Debt issuance and offering costs (28,500) (457,900)
Dividends paid (44,800) (31,600)
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Net cash provided by financing activities 271,700 3,010,500
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INCREASE (DECREASE) IN CASH (1,909,900) 2,481,600
CASH-BEGINNING 2,303,700 39,700
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CASH-ENDING $ 393,800 $ 2,521,300
=========== ===========
The accompanying notes are an integral part of these financial statements.
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1997 1996
---- ----
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 60,800 229,700
Interest -0- 8,500
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, 2,301 shares of Series E preferred stock were converted into 438,300
shares of the Company's common stock.
The balance of this page has been intentionally left blank.
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 and nine-month
periods ended September 30, 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 6), 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
September 30, 1997.
Raw materials and supplies $ 154,200
Work in process 73,600
Finished products 294,000
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$ 521,800
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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, having a face
value of $542,200 and a carrying valuing of $375,700 at
September 30, 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.
F. Income Taxes - The Company utilizes Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for
Income Taxes," which requires an asset and liability approach
to financial accounting and reporting for income taxes. The
difference between the financial statement and tax basis of
assets and liabilities is determined annually. Deferred income
tax assets and liabilities are computed for those temporary
differences that have future tax consequences using the
current enacted tax laws and rates that apply to the periods
in which they are expected to affect taxable income. In some
situations SFAS 109 permits the recognition of expected
benefits of utilizing net operating loss and tax credit
carryforwards. Valuation allowances are established based on
management's estimate, if necessary. Income tax expense is the
current tax payable or refundable for the period plus or minus
the net change in the deferred tax assets and liabilities.
NOTE 2. INVESTMENT IN PARTNERSHIP
In November 1994, the Company purchased a limited partnership interest
in Security Land and Development Company Limited Partnership
("Security"), which owns and operates an office complex. The Company
has limited voting rights and is entitled to be allocated 95% of the
profit and loss of the partnership until October 31, 2003 (the lease
termination date of the sole tenant of the office complex) and 50%
thereafter. The Company is to receive certain limited cash flow after
debt service, and a contingent equity build-up depending upon the value
of the project upon termination of the lease. The Company is also
entitled to receive certain management fees relating to the
partnership.
Security was organized to own and operate a building of approximately
717,000 net square feet consisting of a two-story office building and a
connected six-story office tower. The building was purchased by
Security in 1986 and is located on approximately 34.3 acres of land
which is also owned by Security. The building has been occupied by the
United States Social Security Administration's Office of Disability and
International Operations for approximately 22 years under leases
between the United States of America, acting by and through the General
Services Administration ("GSA"). Effective November 1, 1994, Security
and the GSA entered into a nine-year lease (the "Lease") for 100% of
the building. Security has received an opinion of the Assistant General
Counsel to the GSA that lease payments are not subject to annual
appropriation by the United States Congress and the obligations to make
such payments are unconditional general obligations of the United
States Government.
The Company accounts for the investment in partnership on the equity
method, whereby the carrying value of the investment is increased or
decreased by the Company's allocable share of income or loss. The
investment in partnership included in the Consolidated Balance Sheet at
September 30, 1997 was $10,908,300. The income from the Company's
equity investment in
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the partnership for the three-months and the nine months ended
September 30, 1997 was $851,700 and $2,777,500, respectively.
Summarized operating data for Security for the three months and nine
months ended September 30, 1997, and September 30, 1996, is as follows:
Three Months Nine Months
------------ -----------
1997 1996 1997 1996
---- ---- ---- ----
Revenues $ 2,983,200 $ 3,040,600 $ 8,507,300 $ 8,673,100
Operating Expenses 760,700 754,600 2,301,800 2,310,600
Depreciation and
Amortization 607,000 541,100 1,815,500 1,486,300
Interest Expense, Net 719,000 690,500 1,466,400 2,022,300
------------- -------------- ------------- -----------
Net Income $ 896,500 $ 1,054,400 $ 2,923,600 $ 2,853,900
============= ============ ============ ===========
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.
Long-term debt was increased by $190,200 and $538,000 for the three
months and nine months ended September 30, 1997, respectively, as a
result of the accrual of Regular and Contingent Interest.
NOTE 4. SHORT-TERM BORROWINGS.
In May 1997, RCI entered into a Loan Agreement with a bank which
provides for a line of credit with a maximum loan amount of $1,000,000.
Interest is payable monthly, computed at a variable rate of 0.5% over
the bank's prime lending rate; such rate is currently 9%. The principal
balance of the loan is payable at maturity in May 1998.
RCI's accounts receivable, inventory, and other general intangibles are
pledged as security for the loan. The loan is also guaranteed by
Regency Affiliates, Inc., the parent company. The security agreement
requires RCI to maintain certain financial ratios. RCI was in
compliance with such ratios at September 30, 1997. At September 30,
1997 the amount outstanding under the Loan Agreement was $345,000.
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
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Development Company Limited Partnership related to depreciation and
amortization and the recognition of income tax carryforward items.
At September 30, 1997, the Company's net deferred tax asset, utilizing
a 34% effective tax rate, consists of:
Deferred tax assets:
Investment partnership earnings $ 2,075,000
Net operating loss carryforwards 11,846,000
Alternative minimum tax credits 250,000
--------------
Total deferred tax assets before valuation
allowance 14,171,000
Valuation allowance (14,171,000)
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 $38,173,000. These losses
can be carried forward to offset future taxable income and, if not
utilized, will expire in varying amounts beginning in the year 2000.
For the three months and nine months ended September 30, 1997, the tax
effect of net operating loss carryforwards reduced the current
provision for federal income taxes by approximately $200,000 and
$600,000, respectively. The Company provided $33,300 for taxes which
relates to the alternative minimum tax.
NOTE 6. ACQUISITION
In March 1997, the Company, through RCI, a newly formed subsidiary,
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.
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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:
Nine Months Ended
Sept. 30, 1997 Sept. 30, 1996
-------------- --------------
Net sales $ 2,299,300 $ 1,618,200
Net income 1,601,000 1,879,000
Net income applicable to common stock 1,538,100 1,807,600
Net income per common share
Primary $ 0.13 $ 0.16
Fully Diluted $ 0.11 $ 0.13
NOTE 7. MANDATORY PREFERRED STOCK
During the nine months ended September 30, 1997, 2,301 shares of Series
E Preferred Stock were converted into 438,300 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 8. 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 September 30, 1997, the Company was dependent upon the
investment in Security Land and Development Company Limited
Partnership 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).
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(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 5).
NOTE 9. EMPLOYMENT OF CHIEF EXECUTIVE OFFICER.
By agreement dated June 3, 1997 (the "Statesman Agreement"), the
Company issued 466,700 shares of common stock at a value of $233,300
to Statesman Group, Inc. ("Statesman"). Statesman owned 23% of the
Company's outstanding common stock prior to the issuance of these
shares. The shares were issued to Statesman in order to secure the
release of Mr. William Ponsoldt, Sr. to serve as President and Chief
Executive Officer of the Company.
Mr. Ponsoldt's Employment Agreement provides for Base Compensation,
plus certain additional salary based on a formula tied to increases in
the Company's net worth. The additional salary is equal to twenty
percent (20%) of the sum of the Company's increase in quarterly Common
Stock Net Worth, as defined, from June 3, 1997, the date of the
Employment Agreement. Common Stock Net Worth includes common stock,
additional paid-in capital, readjustment from quasi-reorganization and
retained earnings. A provision of $136,000 has been made in the Third
quarter for this increased salary as a result of the increase in
Common Stock Net Worth since January 3, 1997.
Under the Statesman Agreement, the Company agreed to issue common
stock warrants to Statesman which entitle the holders to purchase up
to 6,100,000 shares of the common stock of the Company at $0.69 per
share. The warrants can be exercised through June 3, 1007 and the
Company has agreed to issue its common stock upon exercise of the
warrants in exchange for a note from Statesman.
Statesman and the Company have discussed making clarifications to the
Statesman Agreement with regard to the vesting of Statesman's
warrants. The parties have agreed in principle to these items, but
the agreement remains subject to the drafting of definitive language.
The proposed clarifications would generally limit vesting of the
warrants, based on the Company's attainment of certain performance
standards which would be proposed by the Board of Directors, and
subject to approval by the Company's shareholders. However, all of
the warrants would become immediately vested upon the occurrence of
certain events, such as an attempt by a hostile group to acquire a
significant block of the Company's stock, the merger or consolidation
of the Company, or the commencement of litigation attempting to
interfere with the issuance or exercise of the warrants.
Pending resolution of these items, the Company has determined that
its is not reasonably possible to estimate the fair value of the
warrants and accordingly no cost associated with the warrants has
reduced net earnings nor earnings per share consistent with the
provisions of SFAS No. 123.
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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 September 30, 1997, the Company was dependent upon the
investment in Security Land and Development Company Limited
Partnership 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 nine months ended September
30, 1997, the Company's income from its equity investment in the Partnership was
$2,777,500.
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").
RCI is presently generating approximately $3,300,000 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 $400,000 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.
In March of 1997, the Company's wholly-owned subsidiary, RCI, acquired
the assets of Rustic. Accordingly, the Company's results for the nine months
ending September 30, 1997, include the results of operations of RCI for the
period between March 1, 1997, and September 30, 1997.
Three Months Ended September 30, 1997 Compared to Three Months Ended
--------------------------------------------------------------------
September 30, 1996.
- -------------------
Net sales increased $1,038,600 due to the acquisition of RCI; cost of
goods sold relates to these sales. Selling and administrative expenses increased
$336,500 as a result of $157,200 of costs associated with RCI and an increase of
$179,300 in corporate expenses, which includes additional salary of $136,000
for the period.
Net income from the Company's equity investment in partnership
decreased $149,900. Interest expense increased $42,100 as a result of adding
accrued interest to the principal owing under the Credit Agreement and interest
on working capital loans.
Income tax expense decreased significantly as a result of the provision
in 1996 for under accrual of prior years income taxes.
Net income decreased $216,200 reflecting higher selling and
administrative costs, higher interest expense, and lower net income from
partnership, which offset the net operating income from RCI and the reduced
income taxes.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
------------------------------------------------------------------
September 30, 1996.
- -------------------
Net sales increased $1,834,000 and cost of goods sold increased
$1,217,800 reflecting the acquisition of RCI in March 1997. Selling and
administrative expenses increased $792,500, of which $395,700 was due to the
acquisition of RCI. The remaining increase was due to an increase in corporate
expenses resulting from costs associated with the employment of a chief
executive officer, including $136,000 of additional salary, the start up of an
executive office, higher legal fees, and increased insurance costs.
Net income from the investment in partnership increased $66,300 largely
as a result of a decrease in net interest expense of $555,900 offset by an
increase in depreciation. The partnership is currently renovating and remodeling
office space as required by its lease agreement.
Interest expense increased $394,900 as a result of the Credit Agreement
entered into in June 1996.
Income tax expense decreased $143,200 as a result of provisions for
prior year taxes made in 1996.
Net income decreased $383,300 reflecting net operating income from RCI
and lower income taxes offset by higher corporate administrative costs and
higher interest expense.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no legal proceedings pending against the Company or any of its
subsidiaries which management believes would have a material impact upon the
operations or assets of the Company.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There have been no defaults in the payment of principal or interest with respect
to any senior indebtedness of Regency Affiliates, Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the vote of security holders during the reporting
period ending September 30, 1997.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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)
November 19, 1997 By: /s/ William R. Ponsoldt, Sr.
- --------------------------------- --------------------------------------
Date William R. Ponsoldt, Sr., President
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