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 September 30, 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
-------- ----------
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or organization)
610 N.E. Jensen Beach Blvd., Jensen Beach, Florida 34957
-------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code (772) 334-8181
--------------
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 November 12, 2004 there were 3,020,412 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 Sheet 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis or Plan of Operation 10-14
Item 3. Controls and Procedures 14
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings 14-15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits 16-17
Signatures 18
2
Regency Affiliates, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
September 30, 2004
Assets
Current Assets
Cash and cash equivalents $ 726,921
Marketable securities 8,996,010
Accrued receivables 316,742
Other current assets 86,130
------------
Total Current Assets 10,125,803
Property and equipment, net 3,064
Investment in partnerships 8,519,974
Other Assets
Aggregate inventory 832,027
Deferred costs 250,000
Other 1,300
------------
Total Other Assets 1,083,327
------------
Total Assets $ 19,732,168
============
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 130,841
Accrued expenses 346,673
------------
Total Current Liabilities 477,514
Deferred credit 861,676
------------
Total Liabilities 1,339,190
------------
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 3,066,412 shares; outstanding 3,019,412 shares 30,664
Additional paid-in capital 8,175,721
Readjustment resulting from quasi-reorganization at December 31, 1987 (1,670,596)
Retained earnings 13,539,836
Note receivable - sale of stock (2,440,000)
Treasury stock, 47,000 shares at cost (295,635)
------------
Total Shareholders' Equity 18,392,978
------------
Total Liabilities and Shareholders' Equity $ 19,732,168
============
3
Regency Affiliates, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net Sales $ -- $ -- $ -- $ --
Costs and expenses
Costs of goods sold -- -- -- --
Selling, general and administrative expenses 530,779 1,306,583 3,181,300 2,842,731
----------- ----------- ----------- -----------
530,779 1,306,583 3,181,300 2,842,731
----------- ----------- ----------- -----------
Loss from operations (530,779) (1,306,583) (3,181,300) (2,842,731)
Income from equity investment in partnerships 698,275 765,729 1,560,932 3,776,245
Rental income -- 23,996 4,599 71,988
Interest and dividend income 41,351 56,723 112,069 141,814
Other income, net 21,892 34,877 79,676 36,369
Interest expense -- (1,435) -- (714,150)
----------- ----------- ----------- -----------
Income (loss) from operations before income tax provision 230,739 (426,693) (1,424,024) 469,535
Provision for income taxes -- 869 -- 69,693
----------- ----------- ----------- -----------
Net Income (Loss) 230,739 (427,562) (1,424,024) 399,842
=========== =========== =========== ===========
Net income (loss) per common share:
Basic $ 0.08 $ (0.14) $ (0.47) $ 0.17
=========== =========== =========== ===========
Diluted $ 0.08 $ (0.14) $ (0.47) $ 0.17
=========== =========== =========== ===========
Weighted average number of common shares outstanding:
Basic 3,019,412 3,011,769 3,018,914 2,338,327
=========== =========== =========== ===========
Diluted 3,019,412 3,094,871 3,018,914 2,417,198
=========== =========== =========== ===========
4
Regency Affiliates, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30,
-------------------------------
2004 2003
------------- -------------
Cash Flows from operating activities
Net income (loss) $ (1,424,024) $ 399,842
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization 3,494 473,628
Stock-based compensation 6,350 5,686
Income from equity investment in LLC/partnerships (1,560,932) (3,776,245)
Impairment of notes, accrued interest receivable 1,182,626 --
Distribution of earnings from partnership -- 41,119,881
Interest accretion on long-term debt -- 474,674
Unrealized gain on marketable securities (75,963) (27,802)
Changes in operating assets and liabilities
Accounts receivable 3,077 225
Loan receivable -- 250,000
Accrued receivables (72,336) (129,635)
Income taxes receivable -- 11,149
Other current assets (21,436) (60,356)
Accounts payable (470,109) (241,098)
Accrued expenses 240,750 (197,330)
Taxes payable -- (183,571)
------------- -------------
Net cash provided by (used in) operating activities (2,188,503) 38,119,048
------------- -------------
Cash flows from investing activities
Cash investments in MESC Capital, LLC (7,300,145) --
Payments received on notes receivable 1,563 872
Proceeds from sales of marketable securities 118,500,000 --
Purchases of marketable securities (108,925,022) (17,967,428)
Net proceeds from sale of property and equipment 483,414 --
Other -- 73
------------- -------------
Net cash provided by investing activities 2,759,810 (17,966,483)
------------- -------------
Cash flows from financing activities
Net long-term debt repayments -- (1,174,034)
Net short-term debt repayments -- (16,034,887)
Purchase of treasury stock (295,635) --
------------- -------------
Net cash used in financing activities $ (295,635) $ (17,208,921)
============= =============
Increase in cash and cash equivalents $ 275,672 $ 2,943,644
Cash and cash equivalents - beginning 451,249 101,041
------------- -------------
Cash and cash equivalents - ending $ 726,921 $ 3,044,685
============= =============
Six Months Ended June 30,
-------------------------------
2004 2003
------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ -- $ 4,391,398
Income taxes -- 252,371
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the nine months ended September 30, 2004, the Company has recorded
the retirement of 1,160,233 shares of cancelled treasury stock at a cost
of $18,243 resulting in a reduction of common stock of $7,549 and
additional paid-in capital of $10,694.
5
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 and nine month periods ended September 30, 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, Regency Power Corporation ("Regency Power"), 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
September 30, 2004 was as follows:
Machinery and equipment $ 43,708
Less: Accumulated depreciation (40,644)
----------
$ 3,064
==========
Depreciation expense for the three and nine months ended September 30,
2004 and 2003 was $1,164, $3,493, $20,299 and $60,897, 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 for the nine months ended September
30, 2004.
6
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 alleged, 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 IMR and (iii) the October 2002
recapitalization of the Company. The complaint also alleged 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 alleged 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 sought 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.
On November 5, 2004 the court dismissed all claims alleged in the complaint
(other than the claim relating to the 2001 rock aggregate sales), determining
that all of the dismissed claims were derivative in nature and could therefore
not be maintained. Management believes that the sole surviving claim is without
merit.
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, as they may incur as a result of the lawsuit, subject to certain
circumstances under which such indemnification is not available. In addition,
the Company's insurance carrier has denied the Company's claims for coverage
with regards to the lawsuit.
On May 10, 2004, Gary Nuttall, 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.
7
Regency Affiliates, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 6. Commitments and Contingencies
Pursuant to the Regency Power's acquisition of a 50% membership interest in MESC
Capital, LLC (see Note 7), the Company contracted with an unaffiliated
investment consulting firm to provide advisory services in connection with
negotiation of the acquisition. Under the contract, the Company incurred success
fees of $350,000, of which $150,000 was paid during the nine months ended
September 30, 2004. The balance of these fees of $200,000 are due and payable on
March 31, 2005, provided, however, that such $200,000 installment shall no
longer be due and payable if, on or prior to March 31, 2005, the Energy Services
Agreement between Mobile Energy Services Company, LLC ("Mobile Energy) and
Kimberly-Clark shall have been terminated for any reason. In accordance with
Statement of Financial Accounting Standards No. 5, the amount of the gain, if
any, that may be ultimately realized from reversal of this provision has not
been reflected in the accompanying financial statements.
Note 7. Investment in LLC
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 the Company's working capital. The terms of the
Assignment and Assumption Agreement were negotiated on an arms'-length basis
between the Company and DTE Mobile, LLC. DTE Mobile, LLC, 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, LLC.
MESC Capital, LLC was formed to acquire all of the membership interests in
Mobile Energy, 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, LLC and Mobile
Energy. 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, LLC 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, LLC, 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, LLC and Mobile Energy. 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 amortized over the fifteen year term. In
connection with the acquisition of the 50% membership interest in MESC Capital,
LLC, Regency Power and DTE Mobile. LLC entered into an Operating Agreement,
dated April 30, 2004, which sets forth their respective rights and obligations
as members of MESC Capital, LLC as well as the duties and authority of DTE
Mobile, LLC as the managing member of MESC Capital, LLC. Under the Operating
Agreement, Regency Power will receive 50% of all distributions. Neither Regency
Power nor DTE Mobile, LLC is obligated to contribute additional capital, or loan
or otherwise advance funds, to MESC Capital, LLC, and neither member can sell or
transfer its interest in MESC Capital, LLC without the consent of the other and
without first complying with a right of first offer in favor of the non-selling
member.
8
Regency Affiliates, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 7. Investment in LLC (continued)
Pursuant to APB No. 18, the Company is accounting for this investment under the
equity method of accounting. The accompanying statements of operations include
the equity income from operations of MESC Capital, LLC for the period from April
30, 2004 (date of acquisition) through September 30, 2004.
The following summarized income statement information is presented for MESC
Capital, LLC for the period from April 30, 2004 (date of acquisition) to
September 30, 2004 and its predecessor, Mobile Energy for the period from
January 1, 2004 to April 29, 2004:
Three Months Ended Nine Months Ended
September 30, 2004 September 30, 2004
------------------ ------------------
Sales $ 3,776,801 $13,449,795
Gross profit $ 3,228,745 $ 7,487,471
Income from continuing operations $ 690,842 $ 754,656
Net Income $ 690,842 $ 754,656
Note 8. Stock Options/Stock Option Plans
On August 13, 2004, the Company issued 100,000 non-qualified common stock
options, 50,000 each to Messrs. Levy and Hasson, directors of the Company at a
per share exercise price of $2.01, immediately exercisable through June 10,
2014. These issuances are pursuant to the Company's 2003 Stock Incentive Plan,
as amended.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for options. The Company has elected to treat
these option awards to directors as employee based compensation and therefore
has not recorded the estimated value of these options in the accompanying
statement of operations. The fair value of the Company's stock-based
compensation to directors was estimated using the Black-Scholes option pricing
model. The Black-Scholes model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of highly
subjective assumptions including the expected stock price volatility. The
Company's stock-based compensation has characteristics significantly different
from those traded options and changes in the subjective input can materially
affect the fair value estimate. The fair value of the Company's stock awards was
estimated assuming the following assumptions: no expected dividends, risk free
interest rate of 3.5% expected average life of approximately 9.75 years and
expected stock price volatility of 90% in 2004.
Had compensation cost for the options been determined based on the fair value at
the grant dates for the awards, net income and net income per common share basic
and diluted would have been as follows for the nine months ended September 30,
2004:
As Reported ProForma
----------- --------
Net income $ (1,424,024) $ (1,995,024)
Net income attributable to common shares (1,424,024) (1,995,024)
Net income per common share:
Basic (0.47) (0.66)
Diluted (0.47) (0.66)
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 property owned
by Security Land and Development Company Limited Partnership ("Security")
or the operating facilities owned by Mobile Energy Services Company, LLC
("Mobile Energy") from uninsured acts of God or war could have a
materially adverse impact upon our investment in Security or Mobile
Energy, respectively, 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 rock aggregate located at the Groveland Mine;
- 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 Holdings, LLC ("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; and
- the Company does not expect to pay dividends in the foreseeable
future.
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
accompanying financial statements and related notes included in Item 1 of this
report.
10
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. (continued)
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 September 30, 2004, the Company had current assets of $10,125,803 and
Shareholders' Equity of $18,392,978. On September 30, 2004, the Company had
$9,722,931 in cash and marketable securities, total assets of $19,732,168 and
total current liabilities of $477,514.
On April 30, 2004, the Company through a newly-formed, wholly-owned subsidiary
called Regency Power Corporation, a Delaware corporation ("Regency Power"),
acquired a 50% membership interest in MESC Capital, LLC, a Delaware limited
liability company ("MESC Capital"), from DTE Mobile, LLC ("DTE Mobile"),
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 the Company'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, 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 $28,500,000 acquisition indebtedness will be fully amortized
over the 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, 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.
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
12
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. (continued)
$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 the Company 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.
Results of Operations.
2004 Compared to 2003
For the three months ended September 30, 2004:
No revenue was generated by the Company in this period. Selling and
administrative expenses decreased by $775,804 or 59.4% for the three
months ended September 30, 2004 compared to the three months ended
September 30, 2003 primarily due to decreased professional fees
relating to continuing litigation defense.
Net Income for the three months ended September 30, 2004 increased
by $658,301 or 153.9% over the corresponding period in 2003. The
increase was primarily due to the income from equity investment
offset by decreased interest expense and selling and administrative
expenses.
For the nine months ended September 30, 2004:
No revenue was generated by the Company in this period.
Selling and administrative expenses increased by $338,569 or 10.6%
in 2004 compared to 2003 due primarily to increased professional
fees relating to continuing litigation defense.
13
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. (continued)
Income from equity investment in Security for the nine months ended
September 30, 2004 decreased by $2,215,313 or 58.7% form the corresponding
period in 2003 due to an increase in interest expense relating to
increased debt financing of Security, partially offset by equity income
from MESC Capital.
Interest expense decreased by $714,150 or 100% in for the nine months
ended September 30, 2004 over the corresponding period in 2003 as a result
of elimination of long term loan balances. Net income decreased by
$1,823,866 in the nine months ended September 30 2004 or 456.19% over the
corresponding period in 2003. 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 September 30, 2004 was $18,392,978
as compared to $22,821,705 on September 30, 2003, a decrease of
$4,428,727.
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.
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 affect, the
Company's internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 and certain of its
affiliates, Statesman and, nominally, the Company. The complaint alleged,
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 common stock of the Company,
14
(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 alleged 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 alleged that Royalty 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 sought 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 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.
On November 5, 2004 the court dismissed all claims alleged in the
complaint (other than the claim relating to the 2001 rock aggregate sales,
determining that all of the dismissed claims were derivative in nature and
could therefore not be maintained. Management believes that he sole
surviving claim is without merit.
The defendants in the lawsuit other than Statesman are entitled to be
indemnified by the Company for damages, if any, and expenses, including
legal fees, as they may incur as a result of the lawsuit, subject to
certain circumstances under which such indemnification is not available.
In addition, the Company's insurance carrier has denied the Company's
claims for coverage with regards to the lawsuit.
Please refer to the Company's previous quarterly reports on Form 10-QSB
for the current fiscal year, filed on May 24, 2004 and August 23, 2004,
respectively.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
15
Regency Affiliates, Inc. and Subsidiaries
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
The Company's next annual meeting of stockholders (the "Next Meeting")
will take place at 10:00 a.m. on January 18, 2005, which date is more than
30 calendar days after the corresponding calendar date on which the prior
annual meeting of stockholders was held. Accordingly, the deadline for
submission of a proposal by a stockholder (i) to be included in the
Company's proxy statement for the Next Meeting pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, or (ii) to be brought before
the Next Meeting outside of the processes of Rule 14a-8. shall be the
close of business on December 2, 2004.
ITEM 6. EXHIBITS.
EXHIBIT 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).
16
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.*
17
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: November 22, 2004 /s/ Laurence S. Levy
----------------------- ---------------------------------------
(President and Chief Executive Officer)
Date: November 22, 2004 /s/ Neil N. Hasson
----------------------- ---------------------------------------
(Chief Financial Officer)
18
EXHIBIT INDEX
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).
19
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.*
20