UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NUMBER 1-7949
REGENCY AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-0888772
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(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or organization)
610 N.E. Jensen Beach Blvd., Jensen Beach, Florida 34957
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code (772) 334-8181
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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 |_|
As of May 17, 2004 there were 3,018,912 shares of the $.01 Par Value Common
Stock outstanding.
Transitional Small Business Disclosure Form (check one): Yes |_| No |X|
Regency Affiliates, Inc. and Subsidiaries
Index to the Financial Statements
Page
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.........................3-4
Condensed Consolidated Statements of Operations...............5
Condensed Consolidated Statements of Cash Flows...............6
Notes to Condensed Consolidated Financial Statements..........7-9
Item 2. Management's Discussion and Analysis or Plan of Operation ...10-14
Item 3. Controls and Procedures ......................................14-15
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings .......................................15-16
Item 2. Changes in Securities and Small Business Issuer Purchases
of Equity 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 ..........................................17-18
Item 6. Exhibits and Reports on Form 8-K ............................19-20
Signatures......................................................................21
See notes to the condensed consolidated financial statements.
Regency Affiliates, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
March 31, 2004
Assets
Current Assets
Cash and cash equivalents $ 1,501,378
Restricted cash - in escrow 80,782
Marketable securities 16,995,390
Accrued receivables 265,392
Other current assets 22,104
-----------
Total Current Assets 18,865,046
Property and equipment, net 5,393
Investment in partnerships 649,268
Other Assets
Aggregate inventory 832,427
Deferred costs 250,000
Other 1,300
-----------
Total Other Assets 1,083,727
-----------
Total Assets $20,603,434
===========
See notes to the condensed consolidated financial statements. 3
Regency Affiliates, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
March 31, 2004
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 309,822
Accrued expenses 114,018
------------
Total Current Liabilities 423,840
Deferred credit 1,452,581
------------
Total Liabilities 1,876,421
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Commitments and contingencies
Shareholders' equity
Serial preferred stock not subject to mandatory redemption
(Maximum liquidation preference $24,975,312) 1,052,988
Common stock, par value $.01; authorized 8,000,000 shares;
issued 4,178,645 shares; outstanding 3,018,412 shares 37,734
Additional paid-in capital 8,180,544
Readjustment resulting from quasi-reorganization at December 31, 1987 (1,670,596)
Retained earnings 13,584,586
Note receivable - sale of stock (2,440,000)
Treasury stock, 1,160,233 shares (18,243)
------------
Total Shareholders' Equity 18,727,013
------------
Total Liabilities and Shareholder's Equity $ 20,603,434
============
See notes to the condensed consolidated financial statements. 4
Regency Affiliates, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended March 31,
----------------------------
2004 2003
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Net Sales $ -- $ --
Costs and expenses
Selling, general and administrative expenses 1,860,144 346,913
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1,860,144 346,913
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Loss from operations (1,860,144) (346,913)
Income from equity investment in partnerships 399,466 1,570,555
Rental income 4,599 23,896
Interest and dividend income 40,857 41,212
Other income, net 35,948 1,492
Interest expense -- (385,744)
----------- -----------
Net Income (Loss) (1,379,274) 904,498
=========== ===========
Net income (loss) per common share:
Basic $ (0.46) $ 0.45
=========== ===========
Diluted $ (0.46) $ 0.28
=========== ===========
Weighted average number of common shares outstanding
Basic 3,018,412 1,995,771
=========== ===========
Diluted 3,018,412 3,196,093
=========== ===========
See notes to the condensed consolidated financial statements. 5
Regency Affiliates, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31,
-----------------------------
2004 2003
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Cash Flows from operating activities
Net income (loss) $ (1,379,274) $ 904,498
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 1,164 80,057
Income from equity investment in partnerships (399,466) (1,570,555)
Impairment of notes, accrued interest receivable 1,182,626 --
Distribution of earnings from partnership -- 100,938
Interest accretion on long-term debt -- 279,012
Unrealized gain on marketable securities (35,948) --
Changes in operating assets and liabilities
Accounts receivable 3,077 225
Loan receivable -- 250,000
Accrued receivables (20,986) (47,490)
Income taxes receivable -- 11,149
Other current assets 42,190 (5,598)
Accounts payable (291,128) (55,632)
Accrued expenses 8,095 59,371
------------ ------------
Net cash provided by (used in) operating activities (889,650) 5,975
------------ ------------
Cash flows from investing activities
Payments received on notes receivable 1,563 --
Proceeds from sales of marketable securities 57,000,000 --
Purchases of marketable securities (55,464,416) --
Net proceeds from sale of property and equipment 402,632 --
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Net cash provided by investing activities 1,939,779 --
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Cash flows from financing activities
Net long-term borrowings (payments) -- (117,979)
Net short-term borrowings (payments) -- 69,272
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Net cash used in financing activities $ -- $ (48,707)
============ ============
Increase (decrease) in cash and cash equivalents $ 1,050,129 $ (42,732)
Cash and cash equivalents - beginning 451,249 101,041
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Cash and cash equivalents - ending $ 1,501,378 $ 58,309
============ ============
Three Months Ended March 31,
-----------------------------
2004 2003
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Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ -- $ 49,681
See notes to the condensed consolidated financial statements. 6
Regency Affiliates, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1. 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
Item 310 of Regulation S-B. 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, 2004 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2004. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31,
2003.
Principles of Consolidation - The consolidated financial statements
include the accounts of Regency Affiliates, Inc. (the "Company"), its
wholly owned subsidiary, Rustic Crafts International, Inc. ("Rustic
Crafts") through September 20, 2002 the date that its operating assets
were disposed of, its 75% owned subsidiary, Iron Mountain Resources, Inc.
("IMR"), and its 80% owned subsidiary, National Resource Development
Corporation ("NRDC"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Note 2. 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 if applicable) by the weighted average
number of common shares outstanding during the year. Diluted per share
computations assume conversion of convertible debt and stock options
outstanding that are "in the money".
Note 3. Property and Equipment
On January 12, 2004, the Company sold its rental property located in
Scranton, PA for $531,500, less costs to sell of approximately $48,000. No
gain or loss was recognized on the transaction as the property was written
down to fair value at December 31, 2003. Property and equipment at March
31, 2004 was as follows:
Machinery and equipment $ 43,708
Less: Accumulated depreciation (38,315)
--------
$ 5,393
========
Depreciation expense for the three months ended March 31, 2004 and 2003
was $1,164 and $20,299, respectively.
Note 4. Notes Receivable
At March 31, 2004, the Company held notes receivable totaling $1,127,708,
which were deemed uncollectible due to lack of cash flows generated and
continual default on payment terms by the issuer. Management determined to
record full impairment of the notes and any accrued interest thereon,
resulting in an impairment charge of $1,182,626, which is included in the
Selling, General & Administrative caption of the accompanying Condensed
Consolidated Statements of Operations. Management intends however, to
continue to pursue options available to receive payment on the obligations
from debtor.
7
Regency Affiliates, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 5. Litigation
On January 20, 2004, a purported derivative and class action lawsuit was filed
by two individual shareholders of the Company in the New Castle County Court of
Chancery, Delaware, naming as defendants certain current and former directors of
the Company, Royalty Holdings LLC and certain of its affiliates, Statesman
Group, Inc. and, nominally, the Company. The complaint alleges, among other
things, breaches of fiduciary duties by the former director defendants and
Statesman Group, Inc. in connection with (i) the exercise by Statesman Group,
Inc. in 2001 of an option to acquire shares of common stock of the Company, (ii)
the 2001 sale of rock aggregate by the Company to Iron Mountain Resources, Inc.
and (iii) the October 2002 recapitalization of the Company. The complaint also
alleges breaches of fiduciary duties by the current director defendants in
connection with the payment by the Company in 2003 of accrued compensation owed
to William R. Ponsoldt, Sr. for periods prior to the October 2002
recapitalization of the Company. The complaint also alleges that Royalty
Holdings LLC and its affiliates knowingly participated in the breaches of
fiduciary duties by the former director defendants relating to the October 2002
recapitalization of the Company.
In addition to other damages, plaintiffs seek unspecified compensatory and/or
rescissory damages against all defendants, a declaration that all Company stock
issued to Statesman Group, Inc., William R. Ponsoldt, Sr., Royalty Holdings LLC
and any person affiliated with the foregoing is void, an order rescinding any
payments in any form made by the Company to William R. Ponsoldt, Sr. or any of
his affiliates or family members, an order rescinding the October 2002
recapitalization of the Company, and an order rescinding Statesman Group, Inc.'s
2001 option exercise and rescinding the option itself. The Company, as a nominal
defendant, has not taken any position with respect to the merits of the lawsuit.
However, the Company understands that the other defendants in the lawsuit
believe that the claims raised by the plaintiffs are without merit, and that
such defendants intend to defend the claims vigorously.
The defendants in the lawsuit other than Statesman Group, Inc. are entitled to
be indemnified by the Company for damages, if any, and expenses, including legal
fees, they may incur as a result of the lawsuit, subject to certain
circumstances under which such indemnification is not available. In addition,
other than with respect to the claims against the current director defendants in
their capacities as such, the claims contained in the lawsuit are not covered by
insurance, as the Company's carrier has declined coverage on the basis of the
"insured vs. insured" exclusion since one of the named plaintiffs, Donald D.
Graham, was previously a director of the Company. The Company has submitted a
claim to its carrier with respect to the claims in the lawsuit against the
current director defendants. No assurance can be given as to the position that
the carrier will take with respect to such claims.
Note 6. Subsequent Events
On April 30, 2004, the Company, through a newly-formed, wholly-owned subsidiary
called Regency Power Corporation, a Delaware corporation, acquired a 50%
membership interest in MESC Capital, LLC, a Delaware limited liability company,
from DTE Mobile, LLC, pursuant to an Assignment and Assumption Agreement dated
as of April 30, 2004. The purchase price for the 50% membership interest was
$3,000,000 and was funded from Regency's working capital. The terms of the
Assignment and Assumption Agreement were negotiated on an arms'-length basis
between Regency and DTE Mobile. DTE Mobile, which is owned by an unregulated
subsidiary of a large energy company that has significant experience in owning,
managing and operating electric generation and on-site energy facilities, owns
the other 50% membership interest in MESC Capital.
8
Regency Affiliates, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
MESC Capital was formed to acquire all of the membership interests in Mobile
Energy Services Company, LLC, an Alabama limited liability company. Mobile
Energy owns an on-site energy facility that supplies steam and electricity to a
Kimberly-Clark tissue mill in Mobile, Alabama. The acquisition of Mobile Energy
was also consummated on April 30, 2004 pursuant to a Membership Interest
Purchase Agreement, dated as of January 30, 2004, between MESC Capital and
Mobile Energy Services Holdings, Inc. The purchase price under the Membership
Interest Purchase Agreement, after certain pre-closing adjustments, was
$33,600,000, and is subject to certain post-closing adjustments. The purchase
price and working capital reserves were funded by the issuance of $28,500,000 of
non-recourse debt, a total equity contribution by MESC Capital of $8,600,290,
$4,300,145 of which was funded by Regency Power and $4,300,145 of which was
funded by DTE Mobile, and a credit of $1,000,000 on account of existing and
continuing tax-exempt indebtedness of Mobile Energy. The terms of the Membership
Interest Purchase Agreement were negotiated on an arms'-length basis between
MESC Capital and Mobile Energy Services Holdings, Inc. The Company did not
participate in negotiations with respect to the Membership Interest Purchase
Agreement.
The $28,500,000 acquisition indebtedness was obtained from Allied Irish Banks,
P.L.C., which may assign or participate the loan in accordance with the terms of
the loan agreement. The loan will be fully amortized over the fifteen year term.
In connection with the acquisition of the 50% membership interest in MESC
Capital, Regency Power and DTE Mobile entered into an Operating Agreement, dated
April 30, 2004, which sets forth their respective rights and obligations as
members of MESC Capital as well as the duties and authority of DTE Mobile as the
managing member of MESC Capital. Under the Operating Agreement, Regency Power
will receive 50% of all distributions. Neither Regency Power nor DTE Mobile is
obligated to contribute additional capital, or loan or otherwise advance funds,
to MESC Capital, and neither member can sell or transfer its interest in MESC
Capital without the consent of the other and without first complying with a
right of first offer in favor of the non-selling member.
On May 10, 2004, Gary Nuttal, a former President of the Company, commenced an
arbitration against the Company with respect to certain claims allegedly arising
under his 1995 Employment Agreement with the Company. He is seeking severance
and all other compensation and benefits due him under the 1995 Employment
Agreement in an amount in excess of approximately $1,650,000 ($1,400,000 of
which is a financing bonus), 466,667 unrestricted shares of the Company
(pre-split), options to purchase additional stock of the Company, punitive
damages, interest, fees and costs associated with the arbitration. The Company
believes the claims are without merit and intends to defend them vigorously.
9
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Forward-Looking Statements and Associated Risk
Certain statements contained in this Quarterly Report on Form 10-QSB,
including, but not limited to those regarding the Company's financial
position, business strategy, acquisition strategy and other plans and
objectives for future operations and any other statements that are not
historical facts constitute "forward-looking statements" within the
meaning of federal securities laws and the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause
the actual results, performance or achievements expressed or implied by
such forward-looking statements to differ materially from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Although the Company believes that the
expectations reflected in these forward-looking statements are reasonable,
there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially
realized, that they will have the expected effect on its business or
operations. These forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting
the Company and are subject to uncertainties and factors (including, but
not limited to, those specified below) which are difficult to predict and,
in many instances, are beyond the control of the Company. Such factors
include:
- A 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 our investment in Security Land and therefore our financial
position and results of operations;
- Our subsidiaries currently lack the necessary infrastructure at
the site of the Groveland mine in order to permit them to make more than
casual sales of the Aggregate;
- We have had 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 our use, retroactively and/or
prospectively, of such carryforwards, due to ownership changes or any
other reason. The disallowance of the utilization or our net operating
loss would severely impact or financial position and results of operations
due to the significant amounts of taxable income that has been, and may in
the future be, offset by our net operating loss carryforwards;
- Royalty, an affiliate of the Company's management, beneficially
owns approximately 60% of our common stock. As a result, Royalty has the
ability to control the outcome of all matters requiring shareholder
approval, including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets;
- Regency does not expect to pay dividends in the foreseeable
future; and
10
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. (continued)
The following discussion and analysis of the financial condition and
results of operations of Regency should be read in conjunction with the
accompanying financial statements and related notes included in Item 1 of
this report.
General.
The Company is committed to enhancing the value of the Company's Common
Stock by seeking opportunities to monetize certain existing assets and by
seeking new business opportunities on an opportunistic basis.
Liquidity and Capital Resources.
On March 31, 2004, Regency had current assets of $18,865,046 and
Shareholders' Equity of $18,727,013. On March 31, 2004, Regency had
$18,496,768 in cash and marketable securities, total assets of $20,603,434
and total current liabilities of $423,840.
On April 30, 2004, the Company, through a newly-formed, wholly-owned
subsidiary called Regency Power Corporation, a Delaware corporation,
acquired a 50% membership interest in MESC Capital, LLC, a Delaware
limited liability company for $3,000,000, which was funded from Regency's
working capital. (See "Subsequent Events")
MESC Capital was formed to acquire all of the membership interests in
Mobile Energy Services Company, LLC, an Alabama limited liability company.
Mobile Energy owns an on-site energy facility that supplies steam and
electricity to a Kimberly-Clark tissue mill in Mobile, Alabama. The
acquisition of Mobile Energy was also consummated on April 30, 2004 with a
purchase price, after certain pre-closing adjustments, of $33,600,000,
which is subject to certain post-closing adjustments. The purchase price
and working capital reserves were funded by the issuance of $28,500,000 of
non-recourse debt, a total equity contribution by MESC Capital of
$8,600,290, $4,300,145 of which was funded by Regency Power and $4,300,145
of which was funded by DTE Mobile, and a credit of $1,000,000 on account
of existing and continuing tax-exempt indebtedness of Mobile Energy. The
$28,500,000 acquisition indebtedness will be fully amortized over a
fifteen year term. Neither Regency Power nor DTE Mobile is obligated to
contribute additional capital, or loan or otherwise advance funds, to MESC
Capital.
At March 31, 2004, the Company held notes receivable totaling $1,127,708,
which were deemed uncollectible due to lack of cash flows generated and
continual default on payment terms by the issuer. Management determined to
record full impairment of the notes and any accrued interest thereon,
resulting in an impairment charge of $1,182,626, which is included in the
Selling, General & Administrative caption of the accompanying Statements
of Operations. Management intends however, to continue to pursue options
available to receive payment on the obligations from debtor.
11
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. (continued)
On June 24, 2003, US SSA LLC, a single purpose entity owned by Security,
borrowed $98,500,000 through a public debt issue underwritten by CTL
Capital, LLC. Proceeds of the refinancing were used to repay the
outstanding balance of Security's 1994 indebtedness, to establish reserves
to make capital improvements to the property, to provide reserves required
by the new debt, to pay costs and expenses related to issuing the debt, to
pay fees related to the lease extension with the GSA and the financing,
and to make a distribution to the partners of Security. The debt is for a
term of 15.3 years maturing October 31, 2018 at which time the loan will
have been paid down to a balance of $10,000,000. Security also
successfully obtained residual value insurance for approximately
$10,000,000. The interest cost of the financing is 4.63%. The financing is
non-recourse to the Company. The Company received approximately
$41,000,000 from the Security distribution. In addition, under the terms
of the Security partnership agreement, the Company is entitled to (i) 95%
of Security's distributions of cash flow until it has received $2,000,000
of such distributions, and thereafter 50% of such distributions and (ii)
once it has received $2,000,000 of cash flow distributions, a $180,000
annual management fee from Security. The foregoing percentages are
inclusive of the Company's interest as a limited partner in 1500 Woodlawn,
the general partner of Security. In connection with the Security
refinancing and distribution, the Company was required to repay its KBC
Bank loan. The payoff amount was approximately $14,125,000, which included
a release fee and make-whole premium.
In order to satisfy the Company's working capital needs, in April 2003 the
Company obtained a loan facility from Royalty Holdings LLC ("Royalty"), an
affiliate of Messrs. Levy and Hasson, pursuant to which the Company could
have borrowed up to an aggregate of $300,000 from Royalty. Amounts
borrowed were evidenced by a demand note bearing interest of 8% per annum.
On July 3, 2003, the Company repaid all amounts outstanding under the
$300,000 working capital loan facility from Royalty, and terminated the
facility. The payment amount consisted of $180,000 of principal and $2,910
of accrued and unpaid interest.
On October 16, 2002, the Company redeemed all the shares of Common Stock
owned by Statesman Group, Inc. ("Statesman"), a former shareholder of the
Company. The Company funded the redemption from the proceeds of an
aggregate of $4,750,000 borrowed from Royalty, an affiliate of current
management, in exchange for two notes - a $3,500,000 5% Convertible
Promissory Note due October 16, 2012 and a $1,250,000 9% Promissory Note
due October 16, 2007. Both notes allowed interest to accrue without
current payment. The principal and interest under the Convertible
Promissory Note could be converted into Common Stock at a conversion rate
of $2.00 per shares.
12
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. (continued)
On November 7, 2002, Royalty converted $1,495,902 of the principal amount
of the Convertible Note plus accrued interest into 750,000 shares of
Common Stock and on July 3, 2003, Royalty converted the remaining
$2,004,098 outstanding principal amount of the Convertible Note and the
$71,378 of accrued and unpaid interest thereon into 1,037,738 shares of
the Company's Common Stock. The 9% Promissory Note was required to be
prepaid upon our receipt of sufficient proceeds from the Company's
investment in Security after discharging certain other indebtedness.
Accordingly, on July 3, 2003, the Company repaid the full $1,250,000
principal amount of, and all accrued and unpaid interest under, the 9%
Promissory Note.
On September 30, 2002, our subsidiary, Rustic Crafts International, Inc.
("Rustic Crafts") sold all of its operating assets subject to the
assumption of certain of its liabilities. Prior to the sale, Rustic Crafts
had established a $1,000,000 line of credit with PNC Bank which was
guaranteed by the Company and expired on May 18, 2002. In conjunction with
the Rustic Crafts asset sale, Rustic Crafts' indebtedness under the line
of credit together with its $960,000 mortgage loan from PNC Bank and
certain other indebtedness to PNC Bank was restructured to replace such
indebtedness with five notes totaling $2,432,782 and have a ten year
amortization schedule. The notes bear interest at the blended rate of
10.8% per annum. As part of the PNC Bank debt restructuring, Rustic Crafts
was required to pay down the outstanding loan balance with $200,000 of the
purchase price in the Rustic Crafts asset sale, and was required to make a
$540,000 payment in December 2002. A $40,000 payment was made to PNC Bank
in December 2002, but Rustic Crafts and Regency failed to make the balance
of the December 2002 payment. Accordingly, the PNC Bank debt was
subsequently modified to provide for the payment of the remaining $500,000
payment on or before June 30, 2003. On June 30, 2003, the Company paid all
outstanding principal and interest due to PNC Bank, in satisfaction of the
above described obligations.
Management believes that the Company's cash balance and anticipated cash
flows from operations will be adequate to fund our cash requirements for
at least the next twelve months.
13
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. (continued)
Results of Operations.
2004 Compared to 2003
For the three months ended March 31, 2004:
No revenue was generated by the Company in this period.
Selling and administrative expenses increased by $1,513,231 or 436.1% in
2004 compared to 2003 due primarily the full impairment of the Rustic
Craft notes and any accrued interest thereon, resulting in an impairment
charge of $1,182,626 as well as increased professional fees relating to
continuing litigation defense.
Income from equity investment in partnerships decreased by $1,171,089,
74.5% less than 2003 due to an increase in interest expense relating to
increased debt financing of the partnership.
Interest expense decreased by $385,744 or 100% in 2004 over 2003 as a
result of reduced loan balances.
Net income decreased by $2,283,772 in 2004 over 2003 or 252.5%. The
decrease was primarily due to the increased selling and administrative
expenses as well as decreased income from equity investment offset by
decreased interest expense.
The Company's Shareholders' Equity at March 31, 2004 was $18,727,013 as
compared to $21,245,200 on March 31, 2003, a decrease of $ 2,518,187.
Impact of Inflation.
Although the Company has not attempted to calculate the effect of
inflation, management does not believe inflation has had a material effect
on its results of operations.
ITEM 3. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by
this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, the Company's disclosure controls and procedures are
effective.
14
Regency Affiliates, Inc. and Subsidiaries
In connection with the evaluation of the Company's internal controls
during the Company's last fiscal quarter, the Company's Chief Executive
Officer and Chief Financial Officer have determined that there are no
changes to the Company's internal controls over financial reporting that
has materially affected, or is reasonably likely to materially effect, the
Company's internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 14, 2001, we initiated a proceeding in The Circuit Court of
the Nineteenth Judicial Circuit in and for Martin County, Florida, case
number 01-1087-CA against Larry J. Horbach, individually and L.J. Horbach
& Associates. Larry Horbach was a former interim CFO and Board member. We
claim that Larry Horbach, without appropriate authority, borrowed $100,050
from Mid City Bank in the name of Regency. We further claim that Horbach
converted all or part of the proceeds from the loan for his benefit and
breached his fiduciary duties as an officer and director. Horbach filed a
Motion for the Court to determine whether the claims asserted against him
were properly brought in Florida, or whether they should have been filed
in Nebraska. The matter was fully briefed, and the Florida Court took the
matter under advisement. The Florida Court has not yet rendered its
decision on this jurisdictional issue.
On February 7, 2002, a complaint naming Regency as defendant was filed in
the District Court of Douglas County, Nebraska, case number 1012. The
Plaintiffs are Larry J. Horbach, individually and L.J. Horbach &
Associates and they are demanding payment on a loan they purchased from
Mid City Bank. The plaintiffs are requesting payment of $82,512.57 plus
accrued interest, costs and attorney fees. We are vigorously defending
this litigation.
On May 2, 2002, a lawsuit (the "Federal Action") was filed in the Federal
District Court for the District of Nebraska (the "Nebraska Court") by two
dissident Company shareholders, Edward E. Gatz and Donald D. Graham,
captioned Gatz et al. v. Ponsoldt, Sr., et al, against the former officers
and directors of the Company, Statesman and, as a nominal defendant only,
the Company. In December 2002, plaintiffs filed a seven-count Amended
Complaint to add claims against Royalty and Royalty's control persons. All
Defendants moved to dismiss all claims against them on jurisdictional and
substantive grounds. On July 7, 2003, the Nebraska Court ruled that venue
in the District of Nebraska was improper and granted defendants' motions
to transfer the case to the District of Delaware. In connection with the
transfer of the case to Delaware, the Court denied as moot the other
motions pending before it without prejudice to their reassertion in the
United States District Court for the District of Delaware (the "Delaware
Federal Court").
15
Regency Affiliates, Inc. and Subsidiaries
ITEM 1. LEGAL PROCEEDINGS. (continued)
In September and October 2003, all defendants filed motions to dismiss the
Federal Action with the Delaware Federal Court and plaintiffs filed a
motion for permission to file an amended and supplemental complaint as
well as a preliminary injunction or status quo order seeking, among other
things, to prevent the Company from taking any actions outside the
ordinary course of business. On December 18, 2003, the Delaware Federal
Court issued an opinion and order which, among other things (i) granted
defendants' motions to dismiss the amended complaint with respect to
certain claims, (ii) denied plaintiffs' motion for leave to file a
supplemental and second amended complaint, (iii) denied plaintiffs'
request for a preliminary injunction and a status quo order and (iv)
dismissed the remainder of the amended complaint for lack of subject
matter jurisdiction. As a result of the Delaware Federal Court's opinion
and order, the Federal Action was dismissed in its entirety.
On January 20, 2004, a purported derivative and class action lawsuit
(the "Delaware State Action") was filed by the same two individual
shareholder plaintiffs in the New Castle County Court of Chancery,
Delaware, captioned Gatz et al. v. Ponsoldt, Sr., et al, (C.A. No. 174-N)
naming as defendants certain current and former directors of the Company,
Royalty and certain of its affiliates, Statesman and, nominally, the
Company. The complaint alleges, among other things, breaches of fiduciary
duties by the former director defendants and Statesman in connection with
(i) the exercise by Statesman in 2001 of an option to acquire shares of
our common stock, (ii) the 2001 sale of Aggregate by NRDC to Iron Mountain
and (iii) the October 2002 Restructuring Transactions. The complaint also
alleges breaches of fiduciary duties by the current director defendants in
connection with the payment by the Company in 2003 of accrued compensation
owed to William R. Ponsoldt, Sr. for periods prior to the October 2002
Restructuring Transactions. The complaint also alleges that Royalty and
its affiliates knowingly participated in the breaches of fiduciary duties
by the former director defendants relating to the October 2002
Restructuring Transactions. In addition to other damages, plaintiffs seek
unspecified compensatory and/or rescissory damages against all defendants,
a declaration that all Company stock issued to Statesman, William R.
Ponsoldt, Sr., Royalty and any person affiliated with the foregoing is
void, an order rescinding any payments in any form made by the Company to
William R. Ponsoldt, Sr. or any of his affiliates or family members, an
order rescinding the October 2002 Restructuring Transactions, and an order
rescinding Statesman's 2001 option exercise and rescinding the option
itself. The Company, as a nominal defendant, has not taken any position
with respect to the merits of the Delaware State Action. Each of the other
defendants has moved to dismiss the Delaware State Action and these
motions are pending.
The defendants in the Federal Action and the Delaware State Action,
other than Statesman, are entitled to be indemnified by the Company for
damages, if any, and expenses, including legal fees, they may incur as a
result of the lawsuit, subject to certain circumstances under which such
indemnification is not available. In addition, other than with respect to
the claims against the current director defendants in their capacities as
such, the claims contained in the Delaware State Action are not covered by
insurance, as the Company's carrier has declined coverage on the basis of
the "insured vs. insured" exclusion since one of the named plaintiffs,
Donald D. Graham, was previously a director of the Company. The Company
has submitted a claim to its carrier with respect to the claims in the
Delaware State Action against the current director defendants. No
assurance can be given as to the position that the carrier will take with
respect to such claims.
16
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
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.
Subsequent Events:
On April 30, 2004, the Company through a newly-formed, wholly-owned
subsidiary called Regency Power Corporation, a Delaware corporation,
acquired a 50% membership interest in MESC Capital, LLC, a Delaware
limited liability company, from DTE Mobile, LLC, pursuant to an Assignment
and Assumption Agreement dated as of April 30, 2004. The purchase price
for the 50% membership interest was $3,000,000 and was funded from
Regency's working capital. DTE Mobile, which is owned by an unregulated
subsidiary of a large energy company that has significant experience in
owning, managing and operating electric generation and on-site energy
facilities, owns the other 50% membership interest in MESC Capital.
MESC Capital was formed to acquire all of the membership interests in
Mobile Energy Services Company, LLC, an Alabama limited liability company.
Mobile Energy owns an on-site energy facility that supplies steam and
electricity to a Kimberly-Clark tissue mill in Mobile, Alabama. The
acquisition of Mobile Energy was also consummated on April 30, 2004
pursuant to a Membership Interest Purchase Agreement, dated as of January
30, 2004, between MESC Capital and Mobile Energy Services Holdings, Inc.
The purchase price under the Membership Interest Purchase Agreement, after
certain pre-closing adjustments, was $33,600,000, and is subject to
certain post-closing adjustments. The purchase price and working capital
reserves were funded by the issuance of $28,500,000 of non-recourse debt,
a total equity contribution by MESC Capital of $8,600,290, $4,300,145 of
which was funded by Regency Power and $4,300,145 of which was funded by
DTE Mobile, and a credit of $1,000,000 on account of existing and
continuing tax-exempt indebtedness of Mobile Energy. The terms of the
Membership Interest Purchase Agreement were negotiated on an arms'-length
basis between MESC Capital and Mobile Energy Services Holdings, Inc.
Regency did not participate in negotiations with respect to the Membership
Interest Purchase Agreement.
17
Regency Affiliates, Inc. and Subsidiaries
ITEM 5. OTHER INFORMATION. (continued)
The $28,500,000 acquisition indebtedness was obtained from Allied Irish
Banks, P.L.C., which may assign or participate the loan in accordance with
the terms of the loan agreement. The loan will be fully amortized over the
fifteen year term. In connection with the acquisition of the 50%
membership interest in MESC Capital, Regency Power and DTE Mobile entered
into an Operating Agreement, dated April 30, 2004, which sets forth their
respective rights and obligations as members of MESC Capital as well as
the duties and authority of DTE Mobile as the managing member of MESC
Capital. Under the Operating Agreement, Regency Power will receive 50% of
all distributions, and participate equally in ultimate management
authority through equal representation on the MESC Capital Board of
Control. DTE Mobile, as managing member, is responsible for day-to-day
management of MESC Capital. DTE Mobile will not receive any compensation
for serving as managing member, and is subject to removal by the Board of
Control with or without cause. Neither Regency Power nor DTE Mobile is
obligated to contribute additional capital, or loan or otherwise advance
funds, to MESC Capital, and neither member can sell or transfer its
interest in MESC Capital without the consent of the other and without
first complying with a right of first offer in favor of the non-selling
member.
The energy facility is located on approximately 11 acres of land within
the Kimberly-Clark tissue mill in Mobile, Alabama. The facility supplies
up to 61 megawatts of co-generated steam and electricity for use in the
mill's operations, with a power-house fueled by a combination of coal,
biomass and natural gas. In connection with MESC Capital's acquisition of
Mobile Energy, Kimberly-Clark entered into a 15-year agreement with Mobile
Energy pursuant to which Mobile Energy will be the exclusive steam
supplier to the mill and will provide a substantial portion of the mill's
electricity requirements. Under the agreement, Kimberly-Clark is obligated
to make monthly fixed capacity payments, monthly fixed and variable
operations and maintenance payments, and to reimburse Mobile Energy for
fuel costs. Early termination of the agreement by Kimberly-Clark obligates
Kimberly-Clark to make a termination payment to Mobile Energy in an amount
anticipated to be sufficient to retire the acquisition financing obtained
by MESC Capital and to provide a return on the MESC equity investment. In
addition, in the event of an early termination by Kimberly-Clark and under
certain conditions, DTE Mobile has agreed to make a termination payment to
Regency Power.
Mobile Energy operated under the protection of Chapter 11 of the United
States Bankruptcy Code from January 1999 until late 2003. During such
time, the energy facility was operated by an interim operator. MESC
Capital was selected through an auction process conducted by Mobile Energy
bondholders to be the acquirer of Mobile Energy. In connection with the
acquisition, the interim operator was terminated and DTE Mobile and its
affiliate will provide operations, management and maintenance services and
asset management support for the investment and energy facility pursuant
to agreements with MESC Capital and Mobile Energy.
18
Regency Affiliates, Inc. and Subsidiaries
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBIT AND REPORT INDEX
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
3.1(i)(a) Restated Certificate of Incorporation of the
Company (filed as Exhibit 3.1(i)(a) to the
Company's Quarterly Report on Form 10-Q for
the period ended September 30, 2002, filed
on November 19, 2002, and incorporated
herein by reference).
3.1(i)(b) Corrected Certificate of Amendment
reflecting amendment to Restated Certificate
of Incorporation of the Company (filed as
Exhibit 3.1(i)(b) to the Company's Quarterly
Report on Form 10-Q for the period ended
September 30, 2002, filed on November 19,
2002, and incorporated herein by reference).
3.1(i)(c) Certificate of Amendment of Restated
Certificate of Incorporation of Regency
Affiliates, Inc. (filed as Exhibit A to the
Company's Information Statement on Schedule
14C filed on October 27, 2003 and
incorporated by reference herein).
3.1(i)(d) Certificate of Designation - Series B
Preferred Stock, $10 Stated Value, $.10 par
value (filed as Exhibit to Form 10-K dated
June 7, 1993 and incorporated herein by
reference).
3.1(i)(e) Amended and Restated Certificate of
Designation, Series C Preferred Stock, $100
Stated Value, $.10 par value (filed as
Exhibit 99.4 to the Company's Current Report
on Form 8-K filed on October 18, 2002, and
incorporated herein by reference).
3.1(i)(f) Certificate of Designation - Series D Junior
Preferred Stock, $10 Stated Value, $.10 par
value (filed as Exhibit to Form 10-K dated
June 7, 1993 and incorporated herein by
reference).
3.1(i)(g) Certificate of Designation - Series E
Preferred Stock, $100 Stated Value, $.10 par
value (filed as Exhibit 4.1 to the Company's
Annual Report on Form 10-K for the year
ended December 31, 1995 at page E-1, and
incorporated herein by reference).
3.1(ii)(a) By-laws of the Company (filed as Exhibit 3.4
to the Company's Registration Statement on
Form S-1, Registration Number 2-86906, and
incorporated herein by reference).
3.1(ii)(b) Amendment No. 1 to By-Laws of the Company
(filed as Exhibit 3.1(ii)(b) to the
Company's Quarterly Report on Form 10-Q for
the period ended September 30, 2002, filed
on November 19, 2002, and incorporated
herein by reference).
19
31.1 Chief Executive Officer's Certificate,
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate,
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Report of the Special Committee of the
Company's Board of Directors, dated May 10,
2003, and adopting resolutions (filed as
Exhibit 99.2 to Company's Quarterly Report
on Form 10-Q for the period ended March 31,
2003, and incorporated by reference herein).
(b) Reports on Form 8-K
Date Filed or Furnished Item Reported Financial Statements
----------------------- ------------- --------------------
January 29, 2004 5 None
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)
Date: May 24, 2004 /s/ Laurence S. Levy
------------------ ---------------------------------------
(President and Chief Executive Officer)
Date: May 24, 2004 /s/ Neil N. Hasson
------------------ ---------------------------------------
(Chief Financial Officer)
21
EXHIBIT AND REPORT INDEX
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
3.1(i)(a) Restated Certificate of Incorporation of the
Company (filed as Exhibit 3.1(i)(a) to the
Company's Quarterly Report on Form 10-Q for
the period ended September 30, 2002, filed
on November 19, 2002, and incorporated
herein by reference).
3.1(i)(b) Corrected Certificate of Amendment
reflecting amendment to Restated Certificate
of Incorporation of the Company (filed as
Exhibit 3.1(i)(b) to the Company's Quarterly
Report on Form 10-Q for the period ended
September 30, 2002, filed on November 19,
2002, and incorporated herein by reference).
3.1(i)(c) Certificate of Amendment of Restated
Certificate of Incorporation of Regency
Affiliates, Inc. (filed as Exhibit A to the
Company's Information Statement on Schedule
14C filed on October 27, 2003 and
incorporated by reference herein).
3.1(i)(d) Certificate of Designation - Series B
Preferred Stock, $10 Stated Value, $.10 par
value (filed as Exhibit to Form 10-K dated
June 7, 1993 and incorporated herein by
reference).
3.1(i)(e) Amended and Restated Certificate of
Designation, Series C Preferred Stock, $100
Stated Value, $.10 par value (filed as
Exhibit 99.4 to the Company's Current Report
on Form 8-K filed on October 18, 2002, and
incorporated herein by reference).
3.1(i)(f) Certificate of Designation - Series D Junior
Preferred Stock, $10 Stated Value, $.10 par
value (filed as Exhibit to Form 10-K dated
June 7, 1993 and incorporated herein by
reference).
3.1(i)(g) Certificate of Designation - Series E
Preferred Stock, $100 Stated Value, $.10 par
value (filed as Exhibit 4.1 to the Company's
Annual Report on Form 10-K for the year
ended December 31, 1995 at page E-1, and
incorporated herein by reference).
3.1(ii)(a) By-laws of the Company (filed as Exhibit 3.4
to the Company's Registration Statement on
Form S-1, Registration Number 2-86906, and
incorporated herein by reference).
3.1(ii)(b) Amendment No. 1 to By-Laws of the Company
(filed as Exhibit 3.1(ii)(b) to the
Company's Quarterly Report on Form 10-Q for
the period ended September 30, 2002, filed
on November 19, 2002, and incorporated
herein by reference).
31.1 Chief Executive Officer's Certificate,
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate,
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Report of the Special Committee of the
Company's Board of Directors, dated May 10,
2003, and adopting resolutions (filed as
Exhibit 99.2 to Company's Quarterly Report
on Form 10-Q for the period ended March 31,
2003, and incorporated by reference herein).
(b) Reports on Form 8-K
Date Filed or Furnished Item Reported Financial Statement
----------------------- ------------- -------------------
January 29, 2004 5 None.