<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED March 31, 1998 COMMISSION FILE NO. 1-7949
-------------- -------
REGENCY AFFILIATES, INC.
------------------------
(Exact Name Of Registrant As Specified In Its Charter)
Delaware 72-0888772
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
729 South Federal Hwy., Ste. 307, Stuart, FL 34994
(Address of principal executive offices) (Zip Code)
10842 Old Mill Road #5B, Omaha, Nebraska 68154
(Address of administrative offices) (Zip Code)
Registrant's Telephone Number (executive office) including Area Code:
(561) 220-7662
--------------
Registrant's Telephone Number (administrative office), including Area Code:
(402) 330-8750
--------------
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- 12,440,089 shares as of March 31, 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...........................................16
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings...................................................19
Item 2. Changes in Securities...............................................19
Item 3. Defaults Upon Senior Securities.....................................19
Item 4. Submission of Matters to a Vote of Security Holders.................19
Item 5. Other Information...................................................19
Item 6. Exhibits and Reports on Form 8-K....................................19
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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
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31,
-------------- ------------
ASSETS (UNAUDITED) 1997
----
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 217,502 $ 252,354
Accounts receivable 239,575 581,585
Inventory 591,615 536,150
Other current assets 253,545 120,891
----------- -----------
Total current assets 1,302,237 1,490,980
----------- -----------
INVESTMENTS
Partnership investment 12,926,340 11,951,819
Rental property 111,731 113,217
----------- -----------
Total investments, Net 13,038,071 12,065,036
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, Net 1,418,443 140,182
OTHER ASSETS
Aggregate inventory 848,937 848,937
Goodwill and intangibles, net 673,460 677,248
Other 135,754 210,146
----------- -----------
Total other assets 1,658,151 1,736,331
----------- -----------
$17,416,902 $15,432,529
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,1998 DECEMBER 31,
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 1997
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 985,072 $ 925,040
Note payable 300,000 140,000
Accounts payable 333,152 256,465
Accrued expenses 480,244 424,401
------------ ------------
Total current liabilities 2,098,468 1,745,906
------------ ------------
LONG-TERM DEBT 5,168,249 4,031,060
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 97,453 94,555
SERIAL PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION (liquidation preference and redemption value $256,700
in 1998 and 1997) 223,787 219,300
SHAREHOLDERS' EQUITY
Serial preferred stock not subject to mandatory redemption (maximum liquidation
preference $24,921,400 in 1998 and 1997) 1,052,988 1,052,988
Common stock, par value $.40, authorized 25,000,000 shares issued and
outstanding 12,440,089 and 12,435,089 shares in 1998 and 1997,
respectively (net of 17,460 treasury shares) 4,966,529 4,963,729
Additional paid in capital 221,600 221,600
Readjustment resulting from quasi-reorganization at December 31, 1987 (1,670,596) (1,670,596)
Retained earnings 5,258,424 4,773,987
------------ ------------
Total shareholders' equity 9,828,945 9,341,708
------------ ------------
$ 17,416,902 $ 15,432,529
============ ============
</TABLE>
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, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
NET SALES $ 631,832 $ 117,000
COSTS AND EXPENSES
Cost of goods sold 425,262 65,500
Selling and administrative 451,398 139,900
Other - 0 - 21,200
--------- ---------
INCOME (LOSS) FROM OPERATIONS (244,828) (109,600)
INCOME FROM EQUITY INVESTMENT IN
PARTNERSHIP 974,521 853,400
INTEREST INCOME 8,288 25,400
INTEREST EXPENSE (213,621) (189,000)
--------- ---------
INCOME BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST 524,360 580,200
INCOME TAX EXPENSE (17,300) (11,100)
MINORITY INTEREST (10,101) 1,600
--------- ---------
NET INCOME $ 496,959 $ 570,700
========= =========
NET INCOME APPLICABLE TO COMMON STOCK (after accrued preferred stock dividends
of $8,035 in 1998 and $15,800 in 1997, and preferred stock accretion
of $4,487 in 1998 and $8,100 in 1997.) $ 484,437 $ 546,800
========= =========
NET INCOME PER SHARE
Basic $ .04 $ .05
========= =========
Fully diluted $ .03 $ .04
========= =========
</TABLE>
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, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 496,959 $ 570,700
Adjustments to reconcile net income to net cash used by operating
activities:
Minority interest 10,101 (1,600)
Stock issued in lieu of cash compensation 2,800 - 0 -
Income from equity investment in partnership (974,521) (853,400)
Interest amortization on long-term debt 199,554 184,700
Depreciation and amortization 29,102 10,100
Changes in operating assets and liabilities:
Accounts receivable 342,010 79,000
Inventory (84,442) (66,000)
Other current assets (103,677) (61,800)
Other assets 1,068 (28,600)
Accounts payable 76,687 8,000
Accrued expenses 55,843 (223,200)
----------- -------------
Net cash from (used by) operating activities 51,484 (382,100)
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of $13,500 cash acquired -0- (1,086,500)
Capital expenditures (1,226,043) (65,500)
---------- -------------
Net cash from (used by) investing activities 1,226,043 (1,152,000)
---------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 300,000 - 0 -
Payments of short-term borrowings (140,000) - 0 -
Proceeds from long-term borrowings 997,667 - 0 -
Other (9,925) - 0 -
Dividends paid (8,035) (15,800)
---------- -------------
Net cash from (used by) financing activities 1,139,707 (15,800)
---------- -------------
DECREASE IN CASH (34,852) (1,549,900)
CASH-BEGINNING 252,354 2,303,700
---------- -------------
CASH-ENDING $ 217,502 $ 753,800
========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes 2,500 30,000
Supplemental disclosure of noncash investing and financing
activities:
</TABLE>
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 265.5 shares of Series E preferred stock were converted into 60,000
shares of the Company's common stock.
In 1998 the Company issued 5,000 shares of treasury stock as compensation for
services rendered.
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, 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") (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 - Basic earnings per share are computed by dividing
net income attributable to common shareholders (net income less
preferred stock dividend requirements and periodic accretion) by the
weighted average number of common shares outstanding during the
relevant period. Diluted earnings per share computations assume the
conversion of Series E, Series B, and Junior Series D preferred stock
during the period that the preferred stock issues were outstanding. If
the 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 using
the first-in, first-out method ("FIFO"). Inventory is comprised of the
following at March 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Raw materials and supplies $ 145,586
Work in process 86,370
Finished products 359,659
-----------
$ 591,615
==========
</TABLE>
E. Aggregate Inventory - Aggregate inventory is stated at lower of cost or
market. Liens have been attached to the aggregate inventory by the
holders of the zero coupon bonds, having a face value of $542,200 and a
carrying valuing of $383,500 at March 31, 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.
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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. The Company can force the sale of the property after
December 31, 2004.
Security was organized to own and operate two buildings containing
approximately 717,000 net rentable square feet consisting of a
two-story office building and a connected six-story office tower. The
building was purchased by Security in 1986 and is located on
approximately 34.3 acres of land which is also owned by Security. The
building has been occupied by the United States Social Security
Administration's Office of Disability and International Operations for
approximately 23 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, 1998 was $12,926,340. The income from the Company's equity
investment in the partnership for the three months ended March 31, 1998
was $974,521.
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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,
1998, and March 31, 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
Revenues $ 3,284,600 $ 3,150,400
Operating Expenses 802,000 797,500
Depreciation and Amortization 707,200 585,500
Interest Expense, Net 749,600 869,100
------------- ------------
Net Income $ 1,025,800 $ 898,300
============= ============
</TABLE>
NOTE 3. LONG TERM DEBT
CREDIT AGREEMENT. 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 1998, long-term debt
was increased by $191,754 as a result of the accrual of Regular and
Contingent Interest.
RUSTIC CRAFTS MORTGAGE. On March 25, 1998, Rustic Crafts purchased a
126,000 square foot building on seven acres of land in Scranton,
Pennsylvania for approximately $1.2 million with plans to construct
improvements and begin moving the Rustic Crafts manufacturing operation
to this facility by mid year. PNC Bank provided a first mortgage in the
amount of $960,000 payable in monthly installments over 10 years with a
20 year amortization and interest equal to 200 basis points in excess
of the yield to maturity on five year United States Treasury Notes.
RUSTIC CRAFTS LINE OF CREDIT. PNC Bank also provided a convertible
line of credit in the amount of $410,000 which Rustic Crafts may draw
upon for construction of improvements to the new facility. Until the
earlier of two years or the date when the entire line of credit has
been advanced, interest only shall be payable monthly on the
outstanding balance at the PNC Bank prime rate minus one-half percent;
thereafter principal will be payable in monthly installments over ten
years with a twenty year amortization and interest payable at the
same rate as the outstanding mortgage above.
Both of the loans from PNC Bank are collateralized by a mortgage on the
facility including an assignment of rents, a lien on existing and
future personal property and equipment and inventory of Rustic Crafts
along with a guaranty by Regency.
Regency also provided Rustic Crafts with an advance of $300,000 which
Regency financed from Park Avenue Bank. The Park Avenue Bank loan to
Regency is secured by the stock of Rustic Crafts and a $300,000
certificate of deposit arranged by Statesman.
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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, 1998, the Company's net deferred tax asset, utilizing a
34% effective tax rate, consists of:
<TABLE>
<S> <C>
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-
============
</TABLE>
The valuation allowance was established to reduce the net deferred tax
asset to the amount that will more likely than not be realized. This
reduction is necessary due to uncertainty of the Company's ability to
utilize the net operating loss and tax credit carryforwards before they
expire.
For regular federal income tax purposes, the Company has remaining net
operating loss carryforwards of approximately $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 ended March 31, 1998, and 1997, the tax effect of
net operating loss carryforwards reduced the current provision for
federal income taxes by approximately $180,000 and $200,000,
respectively. The Company provided $17,300 for taxes which relates to
the alternative minimum tax.
NOTE 5. ACQUISITION OF RUSTIC CRAFTS INTERNATIONAL, INC.
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 $413,778. The
transaction was accounted for using the purchase method.
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<PAGE> 14
The transaction resulted in goodwill and intangibles of $715,000. Such
goodwill is being amortized on a straight-line basis over a fifteen
year period.
The following unaudited pro forma consolidated results of operations
assume the purchase of Rustic's assets by RCI occurred at the beginning
of 1997:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997
--------------
<S> <C>
Net sales $ 581,100
Net income 590,400
Net income applicable to common stock 566,500
Net income per common share
Primary $ .05
Fully Diluted $ .04
</TABLE>
In March 1998, Rustic Crafts acquired 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 and Regency (see Note 3).
NOTE 6. 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) 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 March 31, 1998, the Company was dependent upon the
investment in Security Land and Development Company Limited
Partnership and the operations of RCI 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.
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<PAGE> 15
(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 Land and Development
Company Limited Partnership.
(vii) The Company has significant tax loss and credit carryforwards
and no assurance can be provided that the Internal Revenue
Service would not attempt to limit or disallow altogether the
Company's use, retroactively and/or prospectively, of such
carryforwards, due to ownership changes or any other reason.
The disallowance of the utilization of the Company's net
operating loss would severely 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).
(The remainder of this page left intentionally blank.)
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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 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 March 31, 1998, the Company was dependent upon the
investment in Security Land and Development Company Limited
Partnership and the operations of RCI 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.
(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.
(vi) The failure of the Social Security Administration to renew its
lease of the Security West Buildings upon its expiration on
October 31, 2003, could have a materially adverse impact upon
the Company's investment in Security Land and Development
Company Limited Partnership.
(vii) The Company has significant tax loss and credit carryforwards
and no assurance can be provided that the Internal Revenue
Service would not attempt to limit or disallow altogether the
Company's use, retroactively and/or prospectively, of such
carryforwards, due to ownership changes or any other reason.
The disallowance of the utilization of the Company's net
operating loss would severely 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.
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,
1998, the Company's income from its equity investment in the Partnership was
$974,500. These funds, however, are presently committed for the amortization of
the outstanding principal balance on the real estate mortgage of the Security
Land and Development Company Limited Partnership and while the Company's equity
investment has increased to $12,926,300, the partnership does not provide
liquidity to the Company in excess of the $100,000 annual management fee.
On March 17, 1997, the Company, through Rustic Crafts International,
Inc. completed the acquisition of the assets of Rustic Crafts Co., Inc., which
acquisition is performing within management's expectations, but is not
generating sufficient cash flow to fund the consolidated corporate expenses.
Rustic Crafts is currently operating at 100% of capacity.
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 which have
recently been obtained from Park Avenue Bank in the amount of $300,000, and
from PNC Bank in the form of a first mortgage in the amount of $960,000 and a
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.
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<PAGE> 17
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.
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 negotiating with an experienced aggregate supply company to
establish a permanent infrastructure to commercialize the inventory of
previously quarried and stockpiled aggregate at the Groveland Mine. 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 existing
Credit 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 Sales Agreement with World
Vision Entertainment, Inc. to make available five million tons of non-segregated
previously mined and stockpiled aggregate rock for a purchase price of $1.026
per ton or a total purchase price of $5,131,247. World Vision Entertainment,
Inc. agreed to escrow 1,666,666 of their common shares and to pay $29.166 and
seven monthly payments of $14,583 for a total of $131,247. World Vision
Entertainment, Inc. has an option prior to October 24, 1998, within which to
rescind this Sales Agreement, have the escrow shares returned to them, but
forfeit the payments of $131,247, with no additional obligation to the Company.
World Vision has paid $58,332 under the Sales Agreement, but has failed
to pay the amounts due April 12 and May 12, 1998, and has failed to escrow their
common shares as required under the Sales Agreement. Management believes that
World Vision will elect to rescind this Sales Agreement.
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 comes to fruition or that, if a definitive agreement is reached, it
will provide for the same or similar economic terms.
17
<PAGE> 18
The Company is presently negotiating a new financing at favorable rates
which, if consummated, would provide the funds to prepay the SIPI loan and make
future acquisitions. Such a loan would be secured by the guaranty of an
affiliate of a major U.S. insurance company which in turn would be secured by
the Company's interest in the Security Land and Development Company Limited
Partnership. While no closing date has been set for the funding of the loan
transaction, management believes a closing, if it occurs, will take place in the
second quarter of 1998. Management anticipates the proceeds of the loan will be
approximately $9-$10 million, before payment of fees, the cost of the
insurance guaranty and related expenses.
Results of Operations.
The operations of Regency Affiliates, Inc. and its subsidiaries during
the quarter ended March 31, 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.
The quarter ended March 31, 1998, included three months of operations
of Rustic Crafts which reflect net sales of $563,900, cost of sales of $425,300,
and general and administrative expenses of $201,500. There was only one month of
operations of Rustic Crafts included in the first quarter of 1997, which
reflects sales of $117,000, cost of sales of $65,500, and general and
administrative expenses of $47,000.
Income from the Company's equity investment in Security Land and
Development increased $121,100 in the quarter ended March 31, 1998, as compared
to the quarter ended March 31, 1997. This increase was the result of higher
rental income as renovations were completed as planned. Interest expense
decreased as a result of principal payments on long-term debt. Depreciation
increased due to capitalization of building renovations.
Interest expense of the Company increased $24,600 primarily due to
interest on the capitalized interest of the SIPI loan.
Net income attributable to common shareholders decreased $62,400 in the
quarter ended March 31, 1998, compared to the quarter ended March 31, 1997. The
decrease is the result of higher selling and administrative costs and higher
interest costs offset by increased income from the investment in Security Land
and Development.
18
<PAGE> 19
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 - Financial Data Schedule.
19
<PAGE> 20
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)
5/20/98 By: /s/ William R. Ponsoldt, Sr.
- --------------------------- -----------------------------------------
Date William R. Ponsoldt, Sr., President
20
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 217,502
<SECURITIES> 0
<RECEIVABLES> 239,575
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223,787
1,052,988
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