UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-KSB/A
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2004
REGENCY AFFILIATES, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 1-7949 72-0888772
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
610 Jensen Beach Boulevard
Jensen Beach, Florida 34957
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(Address of Principal Executive Offices)
(772) 334-8181
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Issuer's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 share
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 |_|
Mark if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
State issuer's revenues for its most recent fiscal year: $0.00 The number of
shares outstanding of the registrant's $.01 Par Value Common Stock issued as of
May 19, 2005, was 3,021,412 and the aggregate market value of voting stock held
by non-affiliates of the registrant was approximately $9,619,250.
Transitional Small Business Disclosure: Yes |_| No |X|
Documents incorporated by reference: None
TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS...........................................1
ITEM 2. DESCRIPTION OF PROPERTY...........................................6
ITEM 3. LEGAL PROCEEDINGS.................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES........................................................8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.........................................................9
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS................................11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................11
ITEM 8A. CONTROLS AND PROCEDURES..........................................11
ITEM 8b. OTHER INFORMATION................................................11
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.......................................................11
ITEM 10. EXECUTIVE COMPENSATION...........................................12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.......................14
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................16
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K......................................................16
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................21
SIGNATURES
EXHIBIT INDEX
Explanatory Note
This Form 10-KSB/A is being filed in connection with changes to the 2004 fiscal
year audit of Security Land and Development Company Limited Partnership
("Security Land" or the "Partnership") and to correct clerical errors to Regency
Affiliates, Inc's Form 10-KSB for the period ended December 31, 2004. The
changes in this Form 10-KSB/A as a result of Security Land's changes in its 2004
fiscal year audit include the following:
Management's Discussion and Analysis or Plan of Operation - General - Our
Stockholder's Equity at December 31, 2004 and percentage comparison to 2003 have
been amended.
Management's Discussion and Analysis or Plan of Operation - 2004 Compared to
2003 - Our Income from equity investment in the Partnerships and percentage
comparison to 2003, our general and administrative expenses and percentage
comparison to 2003 and our Net loss and percentage comparison to 2003 have been
amended.
Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources - For December 31, 2004, our total assets have been amended.
Consolidated Balance Sheets - For December 31, 2004, our Investment in the
Partnerships, Deferred Credit, Retained earnings and Total Shareholders' Equity
have been amended.
Consolidated Statements of Shareholder's Equity - For December 31, 2004, our Net
loss, Retained earnings, and Total Stockholders' Equity have been amended.
Consolidated Statements of Cash Flows - For December 31, 2004, our Net loss,
Income from equity investment in Security Land and Unrealized gain or marketable
securities have been amended.
Notes to Consolidated Financial Statements - Note 3 - For December 31, 2004, our
income from equity investment in the Partnerships and the total amount of the
distributions made in excess of our partnership basis, Real Estate, net, Total
Assets, Total Partners' deficit, Total Liabilities and Partners' deficit, our
recognized income have been amended.
Notes to Consolidated Financial Statements - Note 19 has been added to discuss
the changes to our Financial Statements due to the changes in Security Land's
2004 audit.
The clerical errors included the following:
Notes to Consolidated Financial Statements - Note 1 - We have corrected the
amount of consolidated net assets at December 31, 2004 and the underlying fair
value of the common shares issued for services in 2004.
Notes to Consolidated Financial Statements - Note 2 - We have corrected the
disclosure to include the amount of the cost and fair value of our investments
in marketable securities as of December 31, 2003.
Notes to Consolidated Financial Statements - Note 9 - We have corrected the date
of the repurchase of stock from an independent third party.
Notes to Consolidated Financial Statements - Note 10 - We have corrected the
dates of the dividends which are included in the liquidation value of Junior
Series D.
Notes to Consolidated Financial Statements - Note 11 - We have corrected the
line item for Net income, Net income attributable to common shares and Net
income per common share.
Notes to Consolidated Financial Statements - Note 12 - We have corrected the
line items for Net operating loss carryforward in 2004 and Valuation allowance
in 2004.
Notes to Consolidated Financial Statements - Note 15 - We have amended
subsection (iii) to reflect the current status.
Notes to Consolidated Financial Statements - Note 17 - We have amended the
disclosure to reflect the current status.
Additionally, we have amended the disclosure in Item 9. Directors and Officers
of the Registrant to include a discussion of an audit committee financial
expert.
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
This filing contains statements which, to the extent they are not
recitations of historical fact, constitute "forward looking statements" under
federal securities laws. All such statements are intended to be subject to the
safe harbor protection provided by applicable securities laws. For discussions
identifying some important factors that could cause actual Regency Affiliates,
Inc. ("Regency" or the "Company" or "we" or the "Registrant") results to differ
materially from those anticipated in the forward looking statements contained in
this filing, see Regency's "Narrative Description of Business," "Management's
Discussion and Analysis," and "Notes to Consolidated Financial Statements."
Readers are cautioned not to place undue reliance on these forward looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the risk factors described in other documents
the Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-QSB to be filed by the Company
subsequent to this Annual Report on Form 10-KSB and any Current Reports on Form
8-K filed by the Company.
GENERAL DEVELOPMENT OF BUSINESS
The Company, formerly TransContinental Energy Corporation, was organized
as a Delaware corporation in 1980 to be the successor to TransContinental Oil
Corporation, which existed since 1947.
In July 1993 we acquired an 80% interest in National Resource Development
Corporation ("NRDC"). At the time, NRDC's principal asset consisted of
previously quarried and stockpiled rock ("Aggregate") inventory located at a
mine site in Michigan. The remaining 20% interest in NRDC is owned by Statesman
Group, Inc. ("Statesman"), a former shareholder of Regency. In December 2001,
the Aggregate inventory was sold to Iron Mountain Resources, Inc. ("Iron
Mountain"), our 75% owned subsidiary, in exchange for an $18,200,000 note. After
defaulting on the note, in February 2005 Iron Mountain reconveyed the Aggregate
to NRDC in lieu of foreclosure and the note was deemed satisfied. See "NARRATIVE
DESCRIPTION OF BUSINESS - National Resource Development Corporation; Iron
Mountain Resources, Inc."
On November 18, 1994, we acquired a limited partnership interest in
Security Land and Development Company Limited Partnership ("Security Land" or
the "Partnership") for an equity investment of $350,000. Security Land owns an
office building complex in Woodlawn, Maryland, which is leased to the United
States Social Security Administration. In June 2003, Security Land refinanced
the existing indebtedness on the property resulting in a distribution of
refinancing proceeds to Regency of approximately $41,000,000, approximately
$14,125,000 of which was used by the Company to repay existing indebtedness to
KBC Bank. See "NARRATIVE DESCRIPTION OF BUSINESS - Security Land and Development
Company Limited Partnership". The remaining net proceeds of the Security Land
distribution were available for general corporate purposes.
On March 17, 1997, Regency, through Rustic Crafts International, Inc.
("Rustic Crafts"), a wholly-owned subsidiary, acquired the assets and assumed
certain liabilities of Rustic Crafts, Co., Inc., a manufacturer of wood and cast
marble decorative electric fireplaces and related accessories. On September 30,
2002, Rustic Crafts sold all of its operating assets to RCI Wood Products Inc.
("RCI"), a third party controlled by the former President of Rustic Crafts, in
exchange for two promissory notes totaling $1,107,000 and $200,000 cash. See
"NARRATIVE DESCRIPTION OF BUSINESS - Rustic Crafts International, Inc."
On October 16, 2002, Regency redeemed all of the shares of our common
stock owned by Statesman pursuant to the terms of a Redemption Agreement, dated
October 16, 2002, between Regency and Statesman. We funded the redemption from
the proceeds of an aggregate of $4,750,000 borrowed from Royalty Holdings LLC
("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 were convertible into shares of our 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 Promissory Note plus accrued interest
into 750,000 shares of our common stock. On July 3, 2003, Royalty converted the
remaining principal amount of the note and the $71,378 of accrued and unpaid
interest thereon into 1,037,738 shares of our common stock. On the same date,
the Company prepaid the full $1,250,000 principal amount of, and all accrued and
unpaid interest under, the 9% Promissory Note in accordance with the mandatory
prepayment provisions of such note. Also on July 3, 2003, the Company repaid all
amounts outstanding under a $300,000 working capital loan facility from Royalty
established in March 2003, and terminated such facility. The payment amount
consisted of $180,000 of principal and $2,910 of accrued and unpaid interest.
In connection with the redemption of our common stock owned by Statesman,
we acquired from Statesman a three year option to purchase the 20% stock
interest in NRDC held by Statesman. To exercise the option, we must deliver to
Statesman for cancellation a $2.44 million note issued to Regency by Statesman
in October 2001. As consideration for the option, we (i) paid Statesman
$250,000, (ii) amended the note and related pledge agreement to limit our
recourse under the note and (iii) transferred to Statesman certain office
furniture and equipment that we owned. As part of the redemption, we also
entered into an agreement with Statesman providing for (i) an amendment to the
Certificate of Designations of the Series C Preferred Stock for Regency and (ii)
certain limitations on the ability of Statesman to issue or transfer shares or
other beneficial interests in Statesman or to sell, transfer, purchase or
acquire any capital stock of Regency, in each case without first receiving our
written confirmation that such issuance or transfer would not adversely affect
our ability to utilize our tax loss carryforwards. We paid Statesman an
aggregate amount of $2,730,000 in consideration of the foregoing agreements.
In connection with the redemption of our common stock owned by Statesman,
effective October 28, 2002, each of our former directors resigned and the four
current directors were appointed to serve as the successor members of the Board
of Directors. In addition, simultaneously with the redemption, all of the
officers of Regency resigned and were replaced by designees of Royalty. At such
time, Regency entered into a Contingent Payment Agreement with William R.
Ponsoldt, Sr., the Company's former President and Chief Executive Officer,
whereby payment of $1,508,000 of accrued compensation owed to Mr. Ponsoldt by
Regency became subject to the satisfaction of certain conditions precedent. On
November 25, 2003, following satisfaction of the relevant conditions, we paid
Mr. Ponsoldt $1,225,234, such amount reflecting a mutually agreed upon discount
from the amount owed. The loans, redemption, and other October 2002 transactions
described above are collectively referred to herein as the "Restructuring
Transactions."
On September 23, 2003, the Company's Board of Directors authorized the
repurchase of our common stock in the aggregate amount not to exceed $1,000,000.
The shares may be repurchased from time to time in open market transactions or
privately negotiated transactions at the Company's discretion, subject to market
conditions and other factors. Under the program, no shares will knowingly be
purchased from the Company's officers or directors or from any such person's
affiliates. On September 15, 2004 the Company purchased 47,000 shares from an
independent, third party at a price per share of $6.25 (the market price). The
total cost, including commission and transfer fees was $295,635.
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 Services Company, LLC, an Alabama limited liability company
("Mobile Energy"). 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. 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. See "NARRATIVE DESCRIPTION FO BUSINESS - Regency Power Corporation".
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NARRATIVE DESCRIPTION OF BUSINESS.
Security Land and Development Company Limited Partnership
On November 18, 1994, we acquired a limited partnership interest in
Security Land for an equity investment of $350,000. We have no obligation to
make any further capital contribution to Security Land. Security Land owns the
34.3-acre Security West complex at 1500 Woodlawn Drive, Woodlawn, MD consisting
of a two-story office building and a connected six-story office tower occupied
by the United States Social Security Administration Office of Disability and
International Operations. The buildings have a net rentable area of
approximately 717,000 square feet. The construction of the Security West
Buildings was completed in 1972 and the Social Security Administration has
occupied the building since 1972.
On November 30, 2000, we invested $10,000 for a 5% Limited Partnership
Interest in 1500 Woodlawn Limited Partnership, the General Partner of Security
Land.
During 1994, Security Land completed the placement of a $56,450,000
non-recourse project note, due November 15, 2003. The placement of the project
note was undertaken by the issuance of 7.90% certificates of participation and
was underwritten by Dillon Read & Co., Inc. The net proceeds received from the
sale of the certificates were used to refinance existing debt of Security Land
related to the project, to finance certain alterations to the project by
Security Land, to fund certain reserves and to pay costs of the project note
issue. The project note was a non-recourse obligation of Security Land, interest
and principal payments were payable solely from the lease payments from the U.S.
Government and the note was self-amortizing.
In March 2003, the General Services Administration agreed to extend the
term of its lease at the building owned by Security Land through October 31,
2018. The significant terms of the lease extension include fixed annual gross
rent of approximately $12,754,000 (or approximately $17.79 per sq. ft.).
Security Land is responsible for all operating expenses of the building.
Security Land is also responsible for upgrading some of the building's common
areas.
On June 24, 2003, US SSA LLC, a single purpose entity owned by Security
Land, 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 Land'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 General Services Administration and the
financing, and to make a distribution to the partners of Security Land. The debt
matures October 31, 2018, at which time the loan will have been paid down to a
balance of $10,000,000. Security Land has obtained residual value insurance for
approximately $10,000,000. The interest cost of the financing is 4.63%.
The Company received approximately $41,000,000 of net refinancing proceeds
from the Security Land distribution. In addition, under the terms of the
Security Land partnership agreement, as amended in April 2003 in contemplation
of the refinancing, the Company is entitled to (i) 95% of Security Land's
distributions of cash flow until the Company has received $2,000,000 of such
distributions, and thereafter 50% of such distributions and (ii) once the
Company has received $2,000,000 of cash flow distributions, a $180,000 annual
management fee from Security Land. 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 Land 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.
Rustic Crafts International, Inc.
Rustic Crafts was until September 30, 2002 a manufacturer of decorative
wood and cast marble fireplaces, mantels, shelves, fireplace accessories and
other home furnishings. On September 30, 2002, Rustic Crafts sold all of its
operating assets to RCI for $1,307,000 comprised of (i) a $707,000 note bearing
interest at 5% per annum requiring monthly payments of principal and interest of
$13,342 and due September 30, 2007, (ii) a $400,000 note which, as restructured
in August 2003; bears interest at 7% per annum and requires monthly payments of
principal and interest of $5,032 with a balloon payment due September 8, 2006;
and (iii) $200,000 cash (the proceeds of which were from a $250,000 loan from
Regency to the buyer which was satisfied in January 2003). Additionally, the
buyer entered into a three-year lease for the land and building in Scranton, PA
owned by Rustic Crafts, with rental payments of $6,500 per month. Payments on
the 5% note are contingent upon the quarterly positive net cash flows of the
buyer, as defined by generally accepted accounting principles. Prior to the sale
of its operating assets, Rustic Crafts had established a $1,000,000 line of
credit with PNC Bank that was guaranteed by Regency 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 mortgage loan from PNC Bank in
respect of the Scranton, PA property and certain other indebtedness to PNC Bank
was restructured to replace such indebtedness with five notes totaling
$2,432,782. Each of the restructured notes of which were initially due in June
2004, and a ten year amortization schedule and bore interest at the rate of
10.8% per annum. On June 27, 2003, a payment was made to PNC Bank in the amount
of $2,257,952 in full satisfaction of the restructured notes. On January 12,
2004, Rustic Crafts sold the Scranton, PA property for $531,500.
3
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.
National Resource Development Corporation; Iron Mountain Resources, Inc.
Until December 2001, our 80%-owned subsidiary, NRDC had as its principal
asset approximately 70 million short tons of Aggregate located at the site of
the Groveland Mine in Dickinson County, Michigan. NRDC never consummated sales
of material amounts of Aggregate. In December 2001, the Aggregate was sold to
Iron Mountain, a 75% owned subsidiary of Regency. The purchase price was
$18,200,000 and is payable, with interest of 2.46%, in ninety-six equal payments
of principal and interest commencing December 2003. The intercompany gain on
this transaction has been eliminated in the consolidation process resulting in
the Aggregate being carried at its historical cost. Iron Mountain was
unsuccessful in its efforts to sell the Aggregate and, in December 2003,
defaulted under the note to NDRC. In February 2005, in lieu of foreclosure, Iron
Mountain reconveyed the Aggregate to NRDC and the note was deemed satisfied.
Aggregate is primarily sold for railroad ballast, road construction,
construction along shorelines and decorative uses. Ownership of the Aggregate is
subject to a Royalty Agreement which requires the payment of certain royalties
to M.A. Hanna Company, an independent third-party, upon sales of Aggregate. The
market for Aggregate stone is highly competitive and, as shipping costs are
high, the majority of any sales are likely to be made in the Great Lakes area.
Other companies that produce rock and aggregate products are located in the same
region as the Groveland Mine and certain of such competitors have greater
financial and personnel resources than the Company.
Regency Power Corporation
On April 30, 2004, we, through our wholly-owned subsidiary Regency Power
acquired a 50% membership interest in MESC Capital from 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
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. MESC Capital was formed to acquire all of the membership
interests in Mobile Energy. 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.
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, 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
4
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.
COMPETITION
Other than as discussed in "ITEM 1. DESCRIPTION OF BUSINESS - NARRATIVE
DESCRIPTION OF BUSINESS - National Resource Development Corporation; Iron
Mountain Resources, Inc.", our business is not materially subject to competitive
forces.
ENVIRONMENTAL REGULATIONS
Federal, state and local provisions that regulate the discharge of
materials into the environment do not currently materially affect our capital
expenditures, earnings or competitive position.
EMPLOYEES
As of December 31, 2004, Regency and its subsidiaries employed three
people.
SPECIAL INVESTMENT CONSIDERATIONS
The Company's business, financial condition and prospects could be
adversely affected by a number of factors that should be considered by
stockholders and persons considering investing in Regency. Some of such factors
include:
- A default in the lease or sudden catastrophe to property owned by
Security Land or the operating facilities owned by Mobile Energy from uninsured
acts of God or war could have a materially adverse impact upon our investment in
Security Land and 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 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;
5
- 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
- There are many public and private companies that are also searching for
operating businesses and other business opportunities as potential acquisition
or merger candidates. The Company will be in direct competition with these other
companies in its search for business opportunities. Many of these entities have
significantly greater financial and personnel resources than the Company.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Our Securities and
Exchange Commission filings are available to the public over the Internet at the
SEC's web site at http://www.sec.gov. You may also read and copy any material we
file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330 for further
information on the public reference rooms.
The Company's Internet address is www.regencyaffiliates.com. We make
available on our web site, free of charge, our Annual Report on Form 10-KSB,
quarterly reports on Form 10-QSB, current reports on Form 8-K, and beneficial
ownership reports on Forms 3, 4, and 5 and amendments to those reports as soon
as reasonably practicable after this material is electronically filed or
furnished to the Securities and Exchange Commission.
ITEM 2. DESCRIPTION OF PROPERTY
Security Land owns the Security West Building at 1500 Woodlawn Drive,
Woodlawn, MD. See "ITEM 1. BUSINESS - NARRATIVE DESCRIPTION OF BUSINESS -
Security Land and Development Company Limited Partnership", which is
incorporated by reference herein, for more information on this property.
ITEM 3. 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"). 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'
6
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 (the "Court"),
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.
In November 2004 the Court dismissed all but one claim alleged in the
complaint. The Company is not a defendant in the sole surviving claim, which
relates to the December 2001 sale of assets from one Regency subsidiary to
another Regency subsidiary. In dismissing the claims, the Court determined that
all of the claims (other than the claim related to the 2001 asset sale) were
derivative in nature and that the claims could therefore not be maintained.
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, none of the claims contained in the Delaware State
Action are 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.
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. Mr.
Nuttall 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to stockholders at the Company's
January 18, 2005 Annual Meeting of Stockholders:
1. To elect four directors of Regency to serve until the next Meeting of
Stockholders. The vote for the respective nominees for election as directors was
as follows:
DIRECTORS FOR AGAINST ABSTAIN
--------- --- ------- -------
Laurence S. Levy 1,813,316 0 380
Neil N. Hasson 1,813,316 0 380
Stanley Fleishman 1,813,316 0 380
Errol Glasser 1,813,316 0 380
2. To ratify the appointment of Rosenberg Rich Baker Berman & Company as
independent public accountants. The results of the vote to ratify the
appointment of Rosenberg Rich Baker Berman & Company as independent public
accountants was:
For: 1,813,531 Against: 57 Abstain: 108
7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS MARKET
INFORMATION AND SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES
Our common stock is traded in the over-the-counter market on the bulletin
board. The symbol for the listing is "RAFI.OB". The following table sets forth
the high and low bid prices for each calendar quarter during the last two fiscal
years of Regency. On April 8, 2005 the closing sale price of our common stock
was $5.25. As of April 8, 2005, there were approximately 2,346 common
stockholders of record.
YEAR ENDED
DECEMBER 31, 2003 HIGH ($) LOW ($)
----------------- -------- -------
First Quarter 4.40 3.35
Second Quarter 8.00 4.20
Third Quarter 6.60 5.80
Fourth Quarter 6.40 5.95
YEAR ENDED
DECEMBER 31, 2004 HIGH ($) LOW ($)
----------------- -------- -------
First Quarter 6.45 6.01
Second Quarter 7.45 6.05
Third Quarter 6.50 6.01
Fourth Quarter 6.02 5.15
----------
DIVIDEND POLICY
We have not paid or declared cash dividends on our common stock during the
last two fiscal years. We have no present intention to pay cash dividends on our
common stock.
TRANSFER AGENT
In January 2001, Transfer On-Line, Inc. was named as transfer agent
replacing Horbach & Associates. Transfer On-Line, Inc. is located at 317 SW
Alder Street, Second Floor, Portland, Oregon 97204. Their telephone number is
(503) 227-2950 and their website is www.transferonline.com.
RECENT SALES OF UNREGISTERED SECURITIES
The Company, awarded 250 restricted shares of common stock to each of
Errol Glasser and Stanley Fleishman on each of January 1, 2004, April 1, 2004,
July 1, 2004 and October 1, 2004 pursuant to the Company's 2003 Stock Incentive
Plan, as amended. Exemption from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act"), for the issuance of such shares
is claimed under Section 4(2) of the Securities Act.
SMALL BUSINESS ISSUER REPURCHASE OF SECURITIES
Maximum
Number of
Total Number of Shares that May
Total Shares Purchased as Yet Be
Number Part of Publicly Purchased Under
of Shares Average Price Announced Plans or the Plans or
Period Purchased Paid per Share Programs Programs
September 1, 2004 - September 30, 2004 47,000 $6.25 47,000 953,000
8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain statements contained in this Annual Report on Form 10-KSB,
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 property owned by
Security Land or the operating facilities owned by Mobile Energy from uninsured
acts of God or war could have a materially adverse impact upon our investment in
Security Land and 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 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, 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
- There are many public and private companies that are also searching for
operating businesses and other business opportunities as potential acquisition
or merger candidates. The Company will be in direct competition with these other
companies in its search for business opportunities. Many of these entities have
significantly greater financial and personnel resources than the Company.
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 7 of this
report.
GENERAL
The Company is committed to enhancing the value of the Company's Common
Stock by seeking opportunities to monetize its existing assets and by seeking
new business opportunities on an opportunistic basis. To date, the Company has
not entered into any binding agreements regarding any such transaction. The
Company does not propose to restrict its search for business opportunities to
any particular geographical area or industry, and may, therefore, acquire any
business, to the extent of its resources. The Company's discretion in the
selection of business opportunities is unrestricted, subject to the availability
of such opportunities, economic conditions, and other factors. No assurance can
be given that the Company will be successful identifying or securing a desirable
business opportunity, and no assurance can be given that any such opportunity
that is identified and secured will produce favorable results for the Company
and its stockholders.
9
Our Stockholders' Equity at December 31, 2004 was $19,691,060 as compared
to $20,106,287 on December 31, 2003, a decrease of 2.1%.
RESULTS OF OPERATIONS
2004 COMPARED TO 2003
Net sales were $0 in both 2004 and 2003.
General and administrative expenses decreased by $1,975,052 or 34.7% in
2004 as compared to 2003, primarily due to a reduction in professional fees
associated with litigation defense and elimination of costs associated with long
term debt.
Income from equity investment in partnerships decreased in 2004 by
$2,267,883 or 65.1% as compared to 2003 due to the increase in interest expenses
on the increased principal balance of debt on the Security Land property and an
increase in administrative expenses for the maintenance of the Security Land
property including significant repairs to the building that were expensed in
2004.
Interest expense decreased by $714,979 in 2004 over 2003 due to the
extinguishment of all long-term debt.
Income tax expense decreased $29,229 in 2004 from $70,724 in 2003 due to
existing credits from overpayments of state income taxes. We do not expect any
Federal tax due as a result of current and previous period operating losses.
Net loss decreased by $53,301 or 2.3% in 2004 over 2003. The decrease was
due to the decrease in general and administrative expenses and the decrease in
income from equity investment in partnerships.
2003 COMPARED TO 2002
Net sales were $0 in both 2003 and 2002.
Selling and administrative expenses increased by $3,806,640 or 302.64% in
2003 as compared to 2002. Increases in professional fees, costs related to
extinguishment of debt, and impairment of the Scranton property were offset by
reduction in executive compensation and related expenses. Sales and
administrative expenses in 2002 of the former operating subsidiaries are
included in discontinued operations.
Income from equity investment in Partnership decreased in 2003 by
$2,871,297 as compared to 2002 due to the increase in interest expenses on the
increased principal balance of debt on the Security Land property and an
increase in administrative expenses of Security Land.
Interest expense decreased by $460,003 in 2003 over 2002 due to the
extinguishment of all long-term debt.
Income tax expense increased $128,789 from 2002 due to an increase in
state income taxes and decrease in Federal tax benefits from 2002.
Net income decreased $5,010,868 or 186.10% in 2003 over 2002. The decrease was
primarily due the increase in selling and administrative expenses and reduction
in income from our equity investment in Security Land, offset by reductions in
interest expense and losses from prior year discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2004, Regency had current assets of $10,850,748 and
Shareholders' Equity of $18,449,882. On December 31, 2004, Regency had
$10,461,610 in cash and marketable securities, total assets of $19,691,060 and
total liabilities of $690,827.
On June 24, 2003, US SSA LLC, a single purpose entity owned by Security
Land, 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 Land'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 Land. The loan matures on October 31,
2018 at which time the loan will have been paid down to a balance of
$10,000,000. Security Land 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 Regency. Regency received approximately $41,000,000 from the
10
Security Land distribution. In addition, under the terms of the Security
partnership agreement, Regency is entitled to (i) 95% of Security Land's
distributions of cash flow until Regency has received $2,000,000 of such
distributions, and thereafter 50% of such distributions and (ii) once Regency
has received $2,000,000 of cash flow distributions, a $180,000 annual management
fee from Security Land. 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 Land 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.
Management believes that the Company's cash balances are adequate to fund
the Company's cash requirements for at least the next twelve months.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Financial Statements required by Item 7 of Part II of Form 10-KSB are
presented on page F1 and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 8A. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company
carried out an evaluation, under the supervision and with the participation of
its Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective, as of the end of the period covered by
this report, to provide reasonable assurance that information required to be
disclosed in the Company's reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
No change occurred in the Company's internal controls concerning financial
reporting during the fourth quarter of the fiscal year ended December 31, 2004
that has materially affected, or is reasonably likely to materially affect, the
Company's internal controls over financial reporting.
ITEM 8B. OTHER INFORMATION
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following directors were elected at the annual meeting of the
stockholders held January 18, 2005 and will serve until the next meeting of
stockholders, upon the election and qualification of their successors. Executive
officers are appointed by, and serve at the pleasure of, the Board of Directors.
The following lists the name, age and principal occupation of each director and
executive officer of the Company.
NAME, AGE POSITIONS AND OFFICES HELD AND PRINCIPAL OCCUPATIONS OR EMPLOYMENT
DURING PAST FIVE YEARS
Laurence S. Levy, 48 Mr. Levy is Chairman of the Board of Directors, President, and Chief Executive
Officer of the Company. Mr. Levy is the co-founder of Hyde Park Holdings, Inc.,
an investment firm specializing in leveraged buyouts. Mr. Levy acts as a
principal investor at Hyde Park Holdings,LLC and is involved in identifying,
financing, acquiring and managing companies operating in real estate,
manufacturing, infrastructure, parking and sub-assembly. Mr. Levy is also the
chairman of the board and chief executive officer of Rand Acquisition
Corporation, an OTC bulletin board listed blank check company formed in June
2004.
11
Neil N. Hasson, 39 Mr. Hasson is a Director and Chief Financial Officer of the Company. In February
2005, Mr. Hasson was appointed as a Director of Citigroup Property Investors
("CPI"). CPI is an international real estate investment manager. Previously,
Mr. Hasson was the head of European Real Estate for DLJ Real Estate Capital
Partners, a $660 million real estate fund managed by Donaldson, Lufkin and
Jenrette ("DLJ"), where he was involved with the acquisition of real estate
throughout the world. Mr. Hasson joined DLJ as a Managing Director in New York
in January 1995. Mr. Hasson currently serves as a non-executive director of
Sterling Centrecorp, a real estate company listed on the Toronto Stock Exchange.
Stanley Fleishman, 53 Mr. Fleishman is a Director of the Company. Since 1992, Mr. Fleishman has been
President and CEO of Jetro Holdings Inc., a wholesale distributor of dry and
perishable retail groceries and food service items.
Errol Glasser, 51 Mr. Glasser is a Director of the Company. Since 1993, Mr. Glasser has been
President of Triangle Capital, LLC, a private investment and advisory company
based in New York City. Previously, Mr. Glasser was a Managing Director at
Kidder, Peabody & Co. with responsibility for its West Coast investment banking
activity.
Carol Zelinski, 41 Ms. Zelinski is the Secretary of the Company. Since 1997, Ms. Zelinski has been
an analyst at Hyde Park Holdings,LLC, a private investment firm. Ms. Zelinski is
not a Director of the Company.
Compliance with Section 16(a) of the Exchange Act
Based solely on a review of reports on Form 3 and 4 and amendments thereto
furnished to the Regency during its most recent fiscal year, reports on Form 5
and amendments thereto furnished to us with respect to our most recent fiscal
year, we believe that no person who, at any time during 2004, was subject to the
reporting requirements of Section 16(a) with respect to Regency failed to meet
such requirements on a timely basis.
Code of Ethics.
We have adopted a Code of Ethics that applies to the Company's chief
executive officer and chief financial officer. A copy of the Code of Ethics will
be provided without charge to any person who requests it by writing to the
address set forth on the cover page to this Form 10-KSB.
Audit Committee Financial Expert
Our Board of Directors has determined that the Audit Committee does not
have an audit committee financial expert as that term is defined by applicable
Securities and Exchange Commission rules. The Board of Directors believes that
obtaining the services of an audit committee financial expert is not
economically rational at this time in light of the costs associated with
identifying and retaining an individual who would qualify as an audit committee
financial expert, the limited scope of our operations and the relative
simplicity of our financial statements and accounting procedures.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation
during the last three years for each of the Company's executive officers.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
-------------------------------------------- -----------------------------------------------
Securities
Other Annual Restricted Underlying All Other
Name and Principal Salary Bonus Compensation Stock Award(s) Options Compensation
Position Year ($) ($) ($) (#) (#) ($)
-------- ---- --- --- --- --- --- ---
Laurence S. Levy 2004 150,000 0 0 0 50,000 0
President/CEO 2003 181,250 0 0 0 75,000 0
2002 31,643 0 0 0 0 0
Neil N. Hasson 2004 50,000 0 0 0 50,000 0
CFO 2003 56,250 0 0 0 75,000 0
2002 10,547 0 0 0 0 0
12
OPTION/SAR GRANTS
The Option/SAR Grants Table below shows the individual grants of stock
options (whether or not in tandem with SARS) and freestanding SARS made during
the last completed fiscal year to any of the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO EXCERCISE PRICE PER MARKET PRICE ON
UNDERLYING EMPLOYEES IN SHARE DATE OF GRANT EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR ($) ($) DATE
Laurence S. Levy 50,000 50% $2.01 $6.45 06/10/2014
Neil N. Hasson 50,000 50% $2.01 $6.45 06/10/2014
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUE
The Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values table shows there were no exercises of stock options (nor
tandem SARS) nor freestanding SARS during the last completed fiscal year by any
of the named executive officers.
OPTION VALUES AT DECEMBER 31, 2004
EXERCISABLE NUMBER OF VALUE OF IN-THE-MONEY
SECURITIES UNDERLYING DECEMBER 31, 2004
UNEXERCISED OPTIONS AT (# 0F SHARES)
DECEMBER 31, 2004
(# OF SHARES)
SHARES
ACQUIRED ON
EXERCISE VALUE
NAME (# SHARES) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Laurence S. Levy 0 0 125,000 0 $445,500 N/A
Neil N. Hasson 0 0 125,000 0 $445,500 N/A
INCENTIVE STOCK OPTION PLANS
Non Qualified Stock Options.
On August 13, 2004, Messrs. Levy and Hasson were each granted options to
purchase 50,000 shares of our common stock at an exercise price of $2.01 per
share under the 2003 Stock Incentive Plan, as amended.
LTIP Awards.
There have been no awards under any long-term Incentive Plan during the
last completed fiscal year.
Defined Benefit Plans.
We have no defined benefit or actuarial plans.
COMPENSATION OF DIRECTORS
Pursuant to our 2003 Stock Incentive Plan adopted in March 2003,
non-management directors receive 250 shares of our common stock for every
quarter of a year of service completed. In this regard, each of Messrs.
Fleishman and Glasser were issued 1,000 shares of our common stock. On August
13
13, 2004, Messrs. Levy and Hasson were each granted options to purchase 50,000
shares of our common stock at an exercise price of $2.01 per share under the
2003 Stock Incentive Plan, as amended.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
In connection with the Restructuring Transactions described in Item 1, we
entered into an Employment Agreement with Laurence S. Levy, our current
President and Chief Executive Officer, and with Neil Hasson, our current Chief
Financial Officer. Under each employment agreement, the executive's employment
commences on the date of the Restructuring Transactions and terminates upon the
date on which the executive attains retirement age, provided that the executive
may terminate his employment upon 30 days notice to Regency and he may be
removed from office upon death or disability or for just cause. The employment
agreements provides for a base annual salary of no less than $150,000 for Mr.
Levy and no less than $50,000 for Mr. Hasson, a discretionary bonus and other
customary benefits. The employment agreements also provide for the issuance to
each of Messrs. Levy and Hasson, of options to purchase 25,000 shares of our
common stock for $1.35 per share. Those options were issued in April 2003
pursuant to the Company's 2003 Stock Incentive Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information.
(a) (b) (c)
Number of securities remaining
Number of Securities to be available for future issuance
issued upon exercise of Weighted-average exercise under equity compensation plans
outstanding options, price of outstanding (excluding securities reflected in
Plan Category warrants and rights options, warrants and rights column (a))
------------- -------------------------- ---------------------------- ----------------------------------
Equity compensation plans 21,000 $5.31 N/A
approved by security holders
Equity compensation plans not 285,000 $1.76 210,000
approved by security holders (1)
Total 306,000 $2.00 210,000
----------
(1) These options were granted under the Company's 2003 Stock Incentive Plan, as
amended. The 2003 Stock Incentive Plan, as amended, is administered by the
Company's Board of Directors or by a committee thereof. No grants may be made
under the 2003 Stock Incentive Plan, as amended, after the 10-year anniversary
of the plan. The 2003 Stock Incentive Plan, as amended, provides for the grant
of non-qualified stock options in the sole discretion of the Board or a
committee thereof. Stock options may be exercised in cash and/or unless
otherwise provided in an applicable stock option agreement, with shares of our
common stock upon the terms set forth in the 2003 Stock Incentive Plan, as
amended. In addition, each non-employee director of the Company is granted 250
shares of our common stock at the end of each calendar quarter for which he or
she has served as a director for such entire calendar quarter. Please see the
full terms of the 2003 Stock Incentive Plan, as amended, for more detailed
information. The 2003 Stock Incentive Plan, as amended, is attached as an
exhibit hereto and is incorporated by reference herein.
Security Ownership of Certain Beneficial Owners.
The following table sets forth information regarding ownership of
outstanding shares of our common stock as of April 8, 2005 by those individuals
or groups who have advised us that they own more than five percent (5%) of such
outstanding shares.
14
Name and Address of
Beneficial Owner Amount Beneficially Owned Percent of Class
---------------- ------------------------- ----------------
Royalty Holdings LLC and Royalty 1,823,738 (1) 60.36%
Management, Inc.
450 Park Avenue
New York, New York 10022
Raffles Associates, L.P. 167,567 (2) 5.55%
450 Seventh Avenue
New York, New York 10123
Laurence S. Levy (1) 1,948,738 (1)(3) 61.94%
c/o Hyde Park Holdings, LLC
450 Park Avenue
New York, New York 10022.
----------
(1) Based on information contained in the Amended Statement on Schedule 13D
filed by such entities on October 18, 2004.
(2) Based on information contained in the amended Statement on Schedule 13G
filed by such entity on January 20, 2005.
(3) Comprised of (i) the 1,823,738 shares that are beneficially owned by
Royalty Management, Inc., of which Mr. Levy is the President, sole
director and sole stockholder and (ii) 125,000 shares underlying currently
exercisable options granted to Mr. Levy under the Company's 2003 Stock
Incentive Plan, as amended.
The following table sets forth certain information as of April 8, 2005 regarding
the ownership of Common Stock by (i) each director and nominee for director,
(ii) each individual named in the Summary Compensation Table contained herein,
and (iii) all current executive officers and directors of the Company as a
group. Except as otherwise indicated, each such stockholder has sole voting and
investment power with respect to the shares beneficially owned by such
stockholder.
Name and Address of
Beneficial Owner Amount Beneficially Owned Percent of Class
---------------- ------------------------- ----------------
Laurence S. Levy (1) 1,948,738 (2) 61.94%
Neil N. Hasson (1) 125,000 (3) 3.97%
Errol Glasser 18,750 (4) Less than 1%
280 Madison Avenue
Suite 600
New York, New York 10016
Stanley Fleishman 14,500 (4) Less than 1%
c/o Jetro
15-24 132rd Street
College Point, New York 10123
Raffles Affiliates, Inc. 167,567 (5) 5.55%
450 Seventh Avenue
Suite 509
New York, New York 10123
All current Directors and
Executive Officers as a group 2,107,238 63.93%
----------
(1) The address of such beneficial owner is c/o Hyde Park Holdings, LLC, 450
Park Avenue, New York, New York 10022.
(2) Comprised of (i) the 1,823,738 shares that are beneficially owned by
Royalty Management, Inc., of which Mr. Levy is the President, sole
director and sole stockholder and (ii) 125,000 shares underlying currently
exercisable options granted to Mr. Levy under the Company's 2003 Stock
Incentive Plan, as amended.
15
(3) Comprised of 125,000 shares of Common Stock underlying options currently
exercisable granted to Mr. Hasson under the Company's 2003 Stock Incentive
Plan, as amended.
(4) Includes 12,500 shares of Common Stock underlying stock options currently
exercisable or exercisable within sixty days issued to such individual
under the Company's 2003 Stock Incentive Plan, as amended.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loan Facility
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.
License Agreement
Pursuant to a License Agreement entered into in March 2003, Royalty
Management, Inc., which is wholly-owned by Laurence S. Levy, the Company's
President, Chief Executive Officer and a director, provides New York City office
space, office supplies and office services to the Company for $100,000 per year.
Note Conversion
On July 3, 2003 Royalty converted the remaining $2,004,098 outstanding principal
amount of its
Convertible Promissory Note plus accrued interest into 1,037,738 shares of
Common Stock. The note had been issued to Royalty as part of the Company's
October 2002 recapitalization transactions.
Note Repayment
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 of the
Company held by Royalty. The note had been issued to Royalty as part of the
Company's October 2002 recapitalization transactions.
Employment Agreements
See "ITEM 10. EXECUTIVE COMPENSATION - EMPLOYMENT CONTRACTS, TERMINATION
OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS" which is incorporated herein
by reference.
Other Arrangements
See "ITEM 1. BUSINESS - NARRATIVE DESCRIPTION OF BUSINESS - "National
Resource Development Corporation; Iron Mountain Resources, Inc.", which is
incorporated by reference herein.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
a. The following documents are filed as part of this report:
1. Financial Statements: Page
-------------------- ----
Independent Accountant's Report F-1
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-29
2. Other Exhibits
Exhibit No. Description of Document
----------- -----------------------
3.1(i)(a) Restated Certificate of Incorporation of the Company
(filed as exhibit 3.1(i)(a) to the Company's Form 10-Q
dated 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 Form 10-Q,
dated November 19, 2002, and incorporated herein by
reference).
3.1(i)(c) Certificate of Amendment to Restated Certificate of
Amendment (filed as Exhibit A to the Company's
Information Statement on Schedule 14C filed on October
27, 2003).
16
Exhibit No. Description of Document
----------- -----------------------
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 Registrant'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 No. 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 Form 10-Q dated
November 19, 2002, and incorporated herein by
reference).
10.1 2003 Stock Incentive Plan of the Company (filed as
Exhibit 10.1 to the Company's Annual Report on Form
10-KSB for the year ended 2002 filed on April 15, 2003
and incorporated herein by reference) *
10.2 Amendment No. 1 to 2003 Stock Incentive Plan (filed as
Exhibit 8 to Amendment No. 3 to Schedule 13D filed by
Royalty Holdings LLC, Royalty Management, Inc., Laurence
Levy and Neil Hasson on October 3, 2003, and
incorporated herein by reference.) *
10.3 Amendment No. 2 to 2003 Stock Incentive Plan (filed as
Exhibit 10.1 to the Company's Quarterly Report on Form
10-QSB on August 23, 2004, and incorporated herein by
reference.) *
10.4 Stock Option Agreement, dated April 1, 2003, between the
Company and Stanley Fleishman (filed as Exhibit 10.2 to
the Company's Annual Report on Form 10-KSB for the year
ended 2002 filed on April 15, 2003, and incorporated
herein by reference). *
10.5 Stock Option Agreement, dated April 1, 2003, between the
Company and Errol Glasser (filed as Exhibit 10.3 to the
Company's Annual Report on Form 10-KSB for the year
ended 2002 filed on April 15, 2003, and incorporated
herein by reference). *
17
Exhibit No. Description of Document
----------- -----------------------
10.6 Stock Option Agreement, dated April 1, 2003, between the
Company and Laurence Levy (filed as Exhibit 10.4 to the
Company's Annual Report on Form 10-KSB for the year
ended 2002 filed on April 15, 2003, and incorporated
herein by reference). *
10.7 Stock Option Agreement, dated April 1, 2003, between the
Company and Neil Hasson (filed as Exhibit 10.5 to the
Company's Annual Report on Form 10-KSB for the year
ended 2002 filed on April 15, 2003, and incorporated
herein by reference). *
10.8 Stock Option Agreement, dated October 1, 2003 between
the Company and Laurence Levy (filed as Exhibit 11 to
Amendment No. 3 to Schedule 13D filed by Royalty
Holdings LLC, Royalty Management, Inc., Laurence Levy
and Neil Hasson on October 3, 2003, and incorporated
herein by reference). *
10.9 Stock Option Agreement, dated October 1, 2003 between
the Company and Neil Hasson (filed as Exhibit 12 to
Amendment No. 3 to Schedule 13D filed by Royalty
Holdings LLC, Royalty Management, Inc., Laurence Levy
and Neil Hasson on October 3, 2003, and incorporated
herein by reference). *
10.10 Stock Option Agreement, dated October 1, 2003 between
the Company and Errol Glasser. *
10.11 Stock Option Agreement, dated October 1, 2003 between
the Company and Stanley Fleishman. *
10.12 Stock Option Agreement, dated as of August 13, 2004
between the Company and Laurence Levy (filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q
filed on August 23, 2004, and incorporated herein by
reference). *
10.13 Stock Option Agreement, dated as of August 13, 2004
between the Company and Neil Hasson (filed as Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q
filed on August 23, 2004, and incorporated herein by
reference). *
10.14 License Agreement, dated March 17, 2003, between the
Company and Royalty Management, Inc. (filed as Exhibit
10.1 to the Company's Annual Report on Form 10-KSB for
the year ended 2002 filed on April 15, 2003, and
incorporated herein by reference).
10.15 Demand Note from the Company in favor of Royalty
Holdings LLC (filed as Exhibit 10.1 to the Company's
Annual Report on Form 10-KSB for the year ended 2002
filed on April 15, 2003, and incorporated herein by
reference).
10.16 Redemption Agreement, dated October 16, 2002, between
the Company and Statesman (filed as exhibit 99.1 to
Company's Current Report on Form 8-K filed October 18,
2002, and incorporated herein by reference).
10.17 Call Option Agreement, dated October 16, 2002, between
the Company and Statesman (filed as exhibit 99.2 to
Company's Current Report on Form 8-K filed October 18,
2002, and incorporated herein by reference).
18
Exhibit No. Description of Document
----------- -----------------------
10.18 Contingent Payment Agreement, dated October 16, 2002,
between the Company and William R. Ponsoldt, Sr. (filed
as exhibit 99.3 to Company's Current Report on Form 8-K
filed October 18, 2002, and incorporated herein by
reference). *
10.19 Amended and Restated Certificate of Designations of the
Series C Preferred Stock (filed as exhibit 99.4 to
Company's Current Report on Form 8-K filed October 18,
2002, and incorporated herein by reference).
10.20 Note Purchase Agreement, dated October 16, 2002, between
the Company Royalty Holdings LLC (filed as exhibit 99.5
to Company's Current Report on Form 8-K filed October
18, 2002, and incorporated herein by reference).
10.21 5% Convertible Promissory Note of the Company (filed as
exhibit 99.6 to Company's Current Report on Form 8-K
filed October 18, 2002, and incorporated herein by
reference).
10.22 9% Promissory Note of the Company (filed as exhibit 99.7
to Company's Current Report on Form 8-K filed October
18, 2002, and incorporated herein by reference).
10.23 Amended and Restated Promissory Note of the Company
(filed as exhibit 99.8 to Company's Current Report on
Form 8-K filed October 18, 2002, and incorporated herein
by reference).
10.24 Amendment No. 1 to Pledge Agreement (filed as exhibit
99.9 to Company's Current Report on Form 8-K filed
October 18, 2002, and incorporated herein by reference).
10.25 Letter Agreement, dated October 16, 2002, between the
Company and Statesman (filed as exhibit 99.10 to
Company's Current Report on Form 8-K filed October 18,
2002, and incorporated herein by reference).
10.26 Employment Agreement, dated October 16, 2002, between
Laurence S. Levy and the Company (filed as exhibit 99.11
to Company's Current Report on Form 8-K filed October
18, 2002, and incorporated herein by reference). *
10.27 Employment Agreement, dated October 16, 2002, between
Neil N. Hasson and the Company (filed as exhibit 99.12
to Company's Current Report on Form 8-K filed October
18, 2002, and incorporated herein by reference). *
19
Exhibit No. Description of Document
----------- -----------------------
10.28 Employment Agreement dated June 3, 1997, between Regency
Affiliates, Inc. and William R. Ponsoldt, Sr., and
Agreement dated June 3, 1997, between Regency
Affiliates, Inc. and Statesman Group, Inc. (filed as
exhibits 10(a) and (b) to the Company's report on Form
8-K dated June 13, 1997, and incorporated herein by
reference). *
10.29 Asset Purchase and Sale Agreement dated February 27,
1997, between Rustic Crafts Co., Inc. and certain
individuals, as Sellers, and Regency Affiliates, Inc.,
as Purchaser, and Assignment and Assumption of Purchase
Agreement dated March 17, 1997, between Regency
Affiliates, Inc., and Rustic Crafts International, Inc.
(filed as exhibit 10.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 at page
E-1, and incorporated herein by reference).
10.30 Amended and Restated Agreement between Regency
Affiliates, Inc. and the Statesman Group, Inc., dated
March 24, 1998 (filed as exhibit 10.2 to the Company's
Annual Report on Form 10-K for the year ended December
31, 1997, at page E-36, and incorporated herein by
reference).
10.31 Loan Agreement and Pledge and Security Agreement with
KBC Bank N.V., dated June 24, 1998 (filed as exhibits
10.1 and 10.2 to the Company's report on Form 10-Q for
the quarter ended June 30, 1998, and incorporated herein
by reference).
10.22 Security Land And Development Company Limited
Partnership Agreement, as amended by Amendment Nos. 1
through 6 (filed as Exhibit 1(a) to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1994, and incorporated herein by reference).
10.33 Seventh Amendment to Partnership Agreement of Security
Land and Development Company Limited Partnership dated
June 24, 1998 (filed as exhibit 10.3 to the Company's
report on Form 10-Q for the quarter ended June 30, 1998,
and incorporated herein by reference).
10.34 Eighth Amendment to Partnership Agreement of Security
Land and Development Company Limited Partnership, dated
April 8, 2003 (filed as Exhibit 10.27 to the Company
report on Form 10-KSB for the year ended December 31,
2002, filed on April 15, 2003, and incorporated herein
by reference).
10.35 Purchase Agreement for a 5% Limited Partnership Interest
in 1500 Woodlawn Limited Partnership, the General
Partner of Security (filed as exhibit 10.2 to the
Company's report on Form 10-K for the year ended
December 31, 2001, and incorporated herein by
reference).
20
Exhibit No. Description of Document
----------- -----------------------
10.36 Glas-Aire Redemption Agreement (incorporated herein by
reference to the Company's Current Report on Form 8-K
filed on October 16, 2001).
10.37 Statesman exercise agreement (incorporated herein by
reference to the Company's Current Report on Form 8-K
filed on October 25, 2001).
10.38 Ninth Amendment to Security Land and Development Company
Limited Partnership Amended and Restated Limited
Partnership Agreement (filed as Exhibit 10.1 to the
Company's Form 8-K filed on June 25, 2003, and
incorporated herein by reference).
10.39 Seventh Amendment to First Amended and Restated Limited
Partnership Agreement of 1500 Woodlawn Limited
Partnership (filed as Exhibit 10.2 to the Company's Form
8-K filed on June 25, 2003, and incorporated herein by
reference).
10.40 Assignment and Assumption Agreement, dated as of April
30, 2004, between DTE Mobile, LLC and Regency Power
Corporation (incorporated by reference from the
Company's Current Report on 8-K filed on May 11, 2004).
10.41 Membership Interest Purchase Agreement, dated as of
January 30, 2004, between MESC Capital, LLC and Mobile
Energy Services Holdings, Inc. (incorporated by
reference from the Company's Current Report on 8-K filed
on May 11, 2004).
21 Schedule of Subsidiaries
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).
----------
* Indicates that exhibit is a management contract or compensatory plan or
arrangement.
b. The following reports on Form 8-K were filed by the Company during the
quarter ended December 31, 2004. No financial statements were filed in any
such reports.
Date Filed Item No.
---------- --------
November 8, 2004 8.01, 9.01
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the fees billed by the Company's
independent auditor, Rosenberg, Rich, Baker, Berman & Company during fiscal
years ended December 31, 2004 and December 31, 2003.
Audit All
Audit Related Tax Other
Fees (a) Fees (b) Fees (c) Fees (d)
For the period ended $32,513 $ -- $18,500 $ --
December 31, 2004
For the period ended $57,736 $ -- $18,267 $ --
December 31, 2003
----------
(a) Audit fees relate to professional services rendered in connection with the
audit of the Company's annual financial statements, quarterly review of
financial statements included in the Company's Forms 10-Q, and audit
services provided in connection with other statutory and regulatory
filings.
(b) Consists of fees billed for assurance and related services that are
reasonably related to the performance of the audit or reviews of financial
statements and are not reported under "Audit Fees". These services include
consultations concerning financial accounting and reporting standards.
(c) Tax fees include professional services related to tax compliance, tax
planning and the preparation of federal and state tax returns.
(d) Consists of fees for products and services other than the services
reported above.
21
SIGNATURES REQUIRED FOR FORM 10-KSB
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
REGENCY AFFILIATES, INC.
May 20, 2005 By: /s/ Laurence S. Levy
Date ------------------------------------
Laurence S. Levy, President and
Chief Executive Officer
May 20, 2005 By: /s/ Neil N. Hasson
Date ------------------------------------
Neil N. Hasson, Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
May 20, 2005 By: /s/ Laurence S. Levy
Date ------------------------------------
Laurence S. Levy, President,
Chief Executive Officer and Director
May 20, 2005 By: /s/ Neil N. Hasson
Date ------------------------------------
Neil N. Hasson, Chief Financial
Officer and Director
May 20, 2005 By: /s/ Errol Glasser
Date ------------------------------------
Errol Glasser, Director
May 20, 2005 By: /s/ Stanley Fleishman
Date ------------------------------------
Stanley Fleishman, Director
22
INDEX TO EXHIBITS
1. Financial Statements: Page
-------------------- ----
Independent Registered Public Accounting Firm's Report F-1
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-28
2. Other Exhibits
Exhibit No. Description of Document
----------- -----------------------
3.1(i)(a) Restated Certificate of Incorporation of the Company
(filed as exhibit 3.1(i)(a) to the Company's Form 10-Q
dated 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 Form 10-Q,
dated November 19, 2002, and incorporated herein by
reference).
3.1(i)(c) Certificate of Amendment to Restated Certificate of
Amendment (filed as Exhibit A to the Company's
Information Statement on Schedule 14C filed on October
27, 2003).
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).
E-1
Exhibit No. Description of Document
----------- -----------------------
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 Registrant'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 No. 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 Form 10-Q dated
November 19, 2002, and incorporated herein by
reference).
10.1 2003 Stock Incentive Plan of the Company (filed as
Exhibit 10.1 to the Company's Annual Report on Form
10-KSB for the year ended 2002 filed on April 15, 2003,
and incorporated herein by reference) *
10.2 Amendment No. 1 to 2003 Stock Incentive Plan (filed as
Exhibit 8 to Amendment No. 3 to Schedule 13D filed by
Royalty Holdings LLC, Royalty Management, Inc., Laurence
Levy and Neil Hasson on October 3, 2003, and
incorporated herein by reference.) *
10.3 Amendment No. 2 to 2003 Stock Incentive Plan (filed as
Exhibit 10.1 to the Company's Quarterly Report on Form
10-QSB on August 23, 2004, and incorporated herein by
reference.) *
10.4 Stock Option Agreement, dated April 1, 2003, between the
Company and Stanley Fleishman (filed as Exhibit 10.2 to
the Company's Annual Report on Form 10-KSB for the year
ended 2002 filed on April 15, 2003, and incorporated
herein by reference). *
10.5 Stock Option Agreement, dated April 1, 2003, between the
Company and Errol Glasser (filed as Exhibit 10.3 to the
Company's Annual Report on Form 10-KSB for the year
ended 2002 filed on April 15, 2003, and incorporated
herein by reference). *
10.6 Stock Option Agreement, dated April 1, 2003, between the
Company and Laurence Levy (filed as Exhibit 10.4 to the
Company's Annual Report on Form 10-KSB for the year
ended 2002 filed on April 15, 2003, and incorporated
herein by reference). *
10.7 Stock Option Agreement, dated April 1, 2003, between the
Company and Neil Hasson (filed as Exhibit 10.5 to the
Company's Annual Report on Form 10-KSB for the year
ended 2002 filed on April 15, 2003, and incorporated
herein by reference). *
E-2
Exhibit No. Description of Document
----------- -----------------------
10.8 Stock Option Agreement, dated October 1, 2003 between
the Company and Laurence Levy (filed as Exhibit 11 to
Amendment No. 3 to Schedule 13D filed by Royalty
Holdings LLC, Royalty Management, Inc., Laurence Levy
and Neil Hasson on October 3, 2003, and incorporated
herein by reference). *
10.9 Stock Option Agreement, dated October 1, 2003 between
the Company and Neil Hasson (filed as Exhibit 12 to
Amendment No. 3 to Schedule 13D filed by Royalty
Holdings LLC, Royalty Management, Inc., Laurence Levy
and Neil Hasson on October 3, 2003, and incorporated
herein by reference). *
10.10 Stock Option Agreement, dated October 1, 2003 between
the Company and Errol Glasser. *
10.11 Stock Option Agreement, dated October 1, 2003 between
the Company and Stanley Fleishman. *
10.12 Stock Option Agreement, dated as of August 13, 2004
between the Company and Laurence Levy (filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q
filed on August 23, 2004, and incorporated herein by
reference). *
10.13 Stock Option Agreement, dated as of August 13, 2004
between the Company and Neil Hasson (filed as Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q
filed on August 23, 2004, and incorporated herein by
reference). *
10.14 License Agreement, dated March 17, 2003, between the
Company and Royalty Management, Inc. (filed as Exhibit
10.1 to the Company's Annual Report on Form 10-KSB for
the year ended 2002 filed on April 15, 2003, and
incorporated herein by reference).
10.15 Demand Note from the Company in favor of Royalty
Holdings LLC (filed as Exhibit 10.1 to the Company's
Annual Report on Form 10-KSB for the year ended 2002
filed on April 15, 2003, and incorporated herein by
reference).
10.16 Redemption Agreement, dated October 16, 2002, between
the Company and Statesman (filed as exhibit 99.1 to
Company's Current Report on Form 8-K filed October 18,
2002, and incorporated herein by reference).
10.17 Call Option Agreement, dated October 16, 2002, between
the Company and Statesman (filed as exhibit 99.2 to
Company's Current Report on Form 8-K filed October 18,
2002, and incorporated herein by reference).
10.18 Contingent Payment Agreement, dated October 16, 2002,
between the Company and William R. Ponsoldt, Sr. (filed
as exhibit 99.3 to Company's Current Report on Form 8-K
filed October 18, 2002, and incorporated herein by
reference). *
10.19 Amended and Restated Certificate of Designations of the
Series C Preferred Stock (filed as exhibit 99.4 to
Company's Current Report on Form 8-K filed October 18,
2002, and incorporated herein by reference).
E-3
Exhibit No. Description of Document
----------- -----------------------
10.20 Note Purchase Agreement, dated October 16, 2002, between
the Company Royalty Holdings LLC (filed as exhibit 99.5
to Company's Current Report on Form 8-K filed October
18, 2002, and incorporated herein by reference).
10.21 5% Convertible Promissory Note of the Company (filed as
exhibit 99.6 to Company's Current Report on Form 8-K
filed October 18, 2002, and incorporated herein by
reference).
10.22 9% Promissory Note of the Company (filed as exhibit 99.7
to Company's Current Report on Form 8-K filed October
18, 2002, and incorporated herein by reference).
10.23 Amended and Restated Promissory Note of the Company
(filed as exhibit 99.8 to Company's Current Report on
Form 8-K filed October 18, 2002, and incorporated herein
by reference).
10.24 Amendment No. 1 to Pledge Agreement (filed as exhibit
99.9 to Company's Current Report on Form 8-K filed
October 18, 2002, and incorporated herein by reference).
10.25 Letter Agreement, dated October 16, 2002, between the
Company and Statesman (filed as exhibit 99.10 to
Company's Current Report on Form 8-K filed October 18,
2002, and incorporated herein by reference).
10.26 Employment Agreement, dated October 16, 2002, between
Laurence S. Levy and the Company (filed as exhibit 99.11
to Company's Current Report on Form 8-K filed October
18, 2002, and incorporated herein by reference). *
10.27 Employment Agreement, dated October 16, 2002, between
Neil N. Hasson and the Company (filed as exhibit 99.12
to Company's Current Report on Form 8-K filed October
18, 2002, and incorporated herein by reference). *
10.28 Employment Agreement dated June 3, 1997, between Regency
Affiliates, Inc. and William R. Ponsoldt, Sr., and
Agreement dated June 3, 1997, between Regency
Affiliates, Inc. and Statesman Group, Inc. (filed as
exhibits 10(a) and (b) to the Company's report on Form
8-K dated June 13, 1997, and incorporated herein by
reference). *
E-4
Exhibit No. Description of Document
----------- -----------------------
10.29 Asset Purchase and Sale Agreement dated February 27,
1997, between Rustic Crafts Co., Inc. and certain
individuals, as Sellers, and Regency Affiliates, Inc.,
as Purchaser, and Assignment and Assumption of Purchase
Agreement dated March 17, 1997, between Regency
Affiliates, Inc., and Rustic Crafts International, Inc.
(filed as exhibit 10.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 at page
E-1, and incorporated herein by reference).
10.30 Amended and Restated Agreement between Regency
Affiliates, Inc. and the Statesman Group, Inc., dated
March 24, 1998 (filed as exhibit 10.2 to the Company's
Annual Report on Form 10-K for the year ended December
31, 1997, at page E-36, and incorporated herein by
reference).
10.31 Loan Agreement and Pledge and Security Agreement with
KBC Bank N.V., dated June 24, 1998 (filed as exhibits
10.1 and 10.2 to the Company's report on Form 10-Q for
the quarter ended June 30, 1998, and incorporated herein
by reference).
10.32 Security Land And Development Company Limited
Partnership Agreement, as amended by Amendment Nos. 1
through 6 (filed as Exhibit 1(a) to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1994, and incorporated herein by reference).
10.33 Seventh Amendment to Partnership Agreement of Security
Land and Development Company Limited Partnership dated
June 24, 1998 (filed as exhibit 10.3 to the Company's
report on Form 10-Q for the quarter ended June 30, 1998,
and incorporated herein by reference).
10.34 Eighth Amendment to Partnership Agreement of Security
Land and Development Company Limited Partnership, dated
April 8, 2003 (filed as Exhibit 10.27 to the Company
report on Form 10-KSB for the year ended December 31,
2002, filed on April 15, 2003, and incorporated herein
by reference).
10.35 Purchase Agreement for a 5% Limited Partnership Interest
in 1500 Woodlawn Limited Partnership, the General
Partner of Security (filed as exhibit 10.2 to the
Company's report on Form 10-K for the year ended
December 31, 2001, and incorporated herein by
reference).
10.36 Glas-Aire Redemption Agreement (incorporated herein by
reference to the Company's Current Report on Form 8-K
filed on October 16, 2001).
10.37 Statesman exercise agreement (incorporated herein by
reference to the Company's Current Report on Form 8-K
filed on October 25, 2001).
E-5
Exhibit No. Description of Document
----------- -----------------------
10.38 Ninth Amendment to Security Land and Development Company
Limited Partnership Amended and Restated Limited
Partnership Agreement (filed as Exhibit 10.1 to the
Company's Form 8-K filed on June 25, 2003, and
incorporated herein by reference).
10.39 Seventh Amendment to First Amended and Restated Limited
Partnership Agreement of 1500 Woodlawn Limited
Partnership (filed as Exhibit 10.2 to the Company's Form
8-K filed on June 25, 2003, and incorporated herein by
reference).
10.40 Assignment and Assumption Agreement, dated as of April
30, 2004, between DTE Mobile, LLC and Regency Power
Corporation (incorporated by reference from the
Company's Current Report on 8-K filed on May 11, 2004).
10.41 Membership Interest Purchase Agreement, dated as of
January 30, 2004, between MESC Capital, LLC and Mobile
Energy Services Holdings, Inc. (incorporated by
reference from the Company's Current Report on 8-K filed
on May 11, 2004).
21 Schedule of Subsidiaries
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).
----------
* Indicates that exhibit is a management contract or compensatory plan or
arrangement.
E-6
Regency Affiliates, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 2004 and 2003
Regency Affiliates, Inc. and Subsidiaries
Index to the Financial Statements
Page
Independent Registered Public Accounting Firm's Report F-1
Financial Statements
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-28
Report of Independent Registered Accounting Firm
To the Board of Directors and Stockholders
of Regency Affiliates, Inc. and Subsidiaries
We have audited the consolidated balance sheets of Regency Affiliates, Inc. and
Subsidiaries as of December 31, 2004 and 2003 and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Regency
Affiliates, Inc. and Subsidiaries as of December 31, 2004 and 2003 and the
results of its consolidated operations, changes in shareholder's equity and cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 19 to the consolidated financial statements, the
accompanying consolidated balance sheet, related consolidated statements of
operations, changes in shareholder's equity, and cash flows for the year ended
December 31, 2004 have been restated.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
April 13, 2005 except for Note 19
dated May 20, 2005
F-1
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
----------------------------
2004
as restated 2003
----------- -----------
Assets
Current Assets
Cash and cash equivalents $ 1,469,354 $ 451,249
Marketable securities 8,992,256 18,495,025
Accounts receivable, net of allowance -- 3,077
Accrued interest receivable 347,242 299,324
Notes receivable - current -- 327,936
Other current assets 41,896 64,294
----------- -----------
Total Current Assets 10,850,748 19,640,905
Notes receivable, net of current portion -- 801,335
Property, plant and equipment, net 1,899 489,972
Investment in partnerships 7,754,686 599,268
Other Assets
Aggregate inventory 832,427 832,427
Deferred costs 250,000 250,000
Other 1,300 1,300
----------- -----------
Total Other Assets 1,083,727 1,083,727
----------- -----------
Total Assets $19,691,060 $22,615,207
=========== ===========
See notes to the consolidated financial statements. F-2
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
December 31,
-----------------------------
2004
as restated 2003
------------ ------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued expenses $ 690,827 $ 706,873
------------ ------------
Total Current Liabilities 690,827 706,873
Deferred credit 1,441,820 1,802,047
Shareholders' equity
Serial preferred stock not subject to mandatory redemption
(Maximum liquidation preference $24,975,312) 1,052,988 1,052,988
Common stock, par value $.01; 8,000,000 shares authorized and
3,020,412 and 3,018,412 shares issued and outstanding in 2004
and 2003, respectively 30,204 37,733
Additional paid-in capital 8,182,631 8,180,545
Readjustment resulting from quasi-reorganization at December 1987 (1,670,596) (1,670,596)
Retained earnings 12,698,821 14,963,860
Note receivable - sale of stock (2,440,000) (2,440,000)
Treasury stock, 47,000 and 1,160,233 shares in 2004 and 2003,
respectively (295,635) (18,243)
------------ ------------
Total Shareholders' Equity 17,558,413 20,106,287
------------ ------------
$ 19,691,060 $ 22,615,207
============ ============
See notes to the consolidated financial statements. F-3
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Operations
December 31,
---------------------------
2004
as restated 2003
----------- -----------
Net Sales $ -- $ --
----------- -----------
Costs and expenses
General and Administrative expenses 3,710,057 5,685,109
----------- -----------
Loss from operations (3,710,057) (5,685,109)
----------- -----------
Other income (expense)
Income from equity investment in partnerships 1,215,498 3,483,381
Rental income 4,599 95,984
Interest and dividend income 261,948 185,844
Other income, net 4,468 387,263
Interest expense -- (714,979)
----------- -----------
Net loss before income taxes (2,223,544) (2,247,616)
Income tax (expense) benefit (41,495) (70,724)
----------- -----------
Net Loss $(2,265,039) $(2,318,340)
=========== ===========
Net loss per common share:
Basic and diluted $ (0.75) $ (0.93)
----------- -----------
Weighted average number of shares 3,019,317 2,502,657
----------- -----------
See notes to the consolidated financial statements. F-4
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2004 and 2003
Readjustment
Preferred Stock Common Stock Additional Resulting
-------------------------- --------------------------- Paid in from Quasi-
Shares Amount Shares Amount Capital Reorganization
----------- ------------ ------------ ------------ ------------ --------------
Balance - January 1, 2003 605,291 $ 1,052,988 2,024,382 $ 27,341 $ 6,106,560 $ (1,670,596)
Shares cancelled, returned to treasury (45,208) 452
Common stock issued upon conversion of
note payable/accrued interest -- -- 1,037,738 10,377 2,065,098 --
Common stock issued for services -- -- 1,500 15 8,435 --
Net loss -- -- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------
Balance - December 31, 2003 605,291 1,052,988 3,018,412 37,733 8,180,545 (1,670,596)
=========== ============ ============ ============ ============ ============
Retirement of treasury shares (7,549) (10,694)
Purchase treasury shares
Common stock issued for services -- -- 2,000 20 12,780 --
Net loss -- -- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------
Balance - December 31, 2004 605,291 $ 1,052,988 3,020,412 $ 30,204 $ 8,182,631 $ (1,670,596)
=========== ============ ============ ============ ============ ============
Note Treasury Stock Total
Retained Receivable ---------------------------- Stockholders'
Earnings Sale of Stock Shares Amount Equity
------------ ------------- ------------ ------------ -------------
Balance - January 1, 2003 $ 17,282,200 $ (2,440,000) 1,115,025 $ (17,791) $ 20,340,702
Shares cancelled, returned to treasury 45,208 (452) --
Common stock issued upon conversion of
note payable/accrued interest -- -- -- -- 2,075,475
Common stock issued for services -- -- -- -- 8,450
Net loss (2,318,340) -- -- -- (2,318,340)
------------ ------------ ------------ ------------ ------------
Balance - December 31, 2003 14,963,860 (2,440,000) 1,160,233 (18,243) 20,106,287
============ ============ ============ ============ ============
Retirement of treasury shares (1,160,233) 18,243 0
Purchase treasury shares 47,000 (295,635) (295,635)
Common stock issued for services -- -- -- -- 12,800
Net loss (2,265,039) -- -- -- (2,265,039)
------------ ------------ ------------ ------------ ------------
Balance - December 31, 2004, as restated $ 12,698,821 $ (2,440,000) 47,000 $ (295,635) $ 17,558,413
============ ============ ============ ============ ============
See notes to the consolidated financial statements. F-5
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
-------------------------------
2004
as restated 2003
------------- -------------
Cash flows from operating activities
Net loss $ (2,265,039) $ (2,318,340)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities
Income from equity investment in partnerships (1,215,498) (3,483,381)
Impairment of notes receivable 1,127,708 --
Interest accretion on long-term debt -- 474,674
Depreciation and amortization 4,658 493,927
Issuance of common stock in lieu of cash 12,800 8,450
Unrealized gain on marketable securities (104,244) (65,380)
Impairment of property and equipment -- 1,466,109
Increase (Decrease) in assets and liabilities
Decrease (increase) in accounts receivable 3,077 (2,852)
Loan receivable -- 250,000
Decrease (increase) in accrued receivables (47,918) (158,884)
Decrease (increase) in income taxes receivable -- 11,149
Decrease (increase) in other current assets 22,399 (49,584)
Decrease (increase) in other assets -- 73
Increase (decrease) in accounts payable and accrued expenses (16,047) (1,668,731)
------------- -------------
Net cash (used) by operating activities (2,478,104) (5,042,770)
------------- -------------
Cash flows from investing activities
Cash investments in MESC Capital, LLC (7,300,145) --
Payments received on notes receivable 1,563 1,663
Distribution of earnings from partnership 1,000,000 41,119,881
Purchases of marketable securities (129,892,989) (18,429,645)
Proceeds from sales of marketable securities 139,500,000 --
Net proceeds from the sale of property and equipment 483,415 --
------------- -------------
Net cash provided by investing activities 3,791,844 22,691,899
------------- -------------
Cash flows from financing activities
Payment of long-term debt -- (16,369,947)
Repayment of notes payable - bank -- (798,938)
Repayment of notes payable - other -- (130,036)
Purchase of treasury stock (295,635) --
------------- -------------
Net cash used in financing activities (295,635) (17,298,921)
------------- -------------
Net increase in cash and cash equivalents $ 1,018,105 $ 350,208
Cash and cash equivalents - beginning 451,249 101,041
------------- -------------
Cash and cash equivalents - ending $ 1,469,354 $ 451,249
============= =============
See notes to the consolidated financial statements. F-6
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31,
----------------------------
2004
as restated 2003
----------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ -- $4,393,983
--------- ----------
Income taxes $ 41,495 $ 252,371
--------- ----------
Supplemental disclosures of noncash investing and financing activities:
During the year ended December 31, 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.
In 2003, $2,004,098 in convertible notes payable and $71,377 in accrued
interest thereupon were converted into 1,037,738 shares of common stock.
In 2003, the Company reached an agreement to restructure a note
receivable, whereby accrued interest receivable of $23,934 was converted
into part of the principal on the new note receivable.
See notes to the consolidated financial statements. F-7
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
A. Principles of Consolidation and Nature of Business - The consolidated
financial statements include the accounts of Regency Affiliates, Inc. (the
"Company"), its wholly owned subsidiary Speed.com, Inc. through March 1,
2003, the date of dissolution, its 75% owned subsidiary, Iron Mountain
Resources, Inc. ("IMR") since December 13, 2001, and its 80% owned
subsidiaries, National Resource Development Corporation ("NRDC"),
RegTransco, Inc. ("RTI") through March 1, 2003, the date of dissolution
and Transcontinental Drilling Company ("Drilling") through June 3, 2003,
the date of dissolution. All significant intercompany balances and
transactions have been eliminated in consolidation.
Regency Affiliates, Inc.'s share of consolidated net assets at December
31, 2004 and 2003 consists principally of cash and cash equivalents of
approximately $1,456,000 and $436,000 respectively, marketable securities
of approximately $8,992,000 and $18,500,000 respectively, investment in
partnerships of approximately $7,760,000 and $599,000, respectively,
property, plant and equipment of approximately $1,900 and $6,600,
respectively, and liabilities of approximately $691,000 and $707,000,
respectively.
B. Revenue Recognition - The Company's subsidiaries recognize revenue from
the sale of goods upon shipment to their respective customers.
C. Earnings Per Share - Basic earnings per share are computed by dividing
net income attributable to common shareholders by the weighted average
number of common shares outstanding during the year. Diluted earnings per
share computations assume the conversion of the Series B and Junior Series
D preferred stock during the period that the preferred stock issues were
outstanding. If the result of these assumed conversions is dilutive, the
dividend requirements and periodic accretion for the preferred stock
issues are reduced (See Note 10). In addition, diluted per share
computations assume conversion of convertible debt and stock options
outstanding that are "in the money". The effect of any conversion has not
been included as it would be anti-dilutive.
D. Securities Issued for Services - The Company accounts for stock issued
for services under the intrinsic value method. For stock issued for
services, the fair market value of the Company's stock on the date of
stock issuance is used. The Company has adopted Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation". The statement generally suggests, but does not require,
stock-based compensation transactions to be accounted for based on the
fair value of the services rendered or the fair value of the equity
instruments issued, whichever is more reliably measurable. Securities
issued for services amounted to $12,800 in 2004 and $8,450 in 2003. The
underlying fair value of the common shares amounted to $6.40 and $5.63 per
share, respectively.
F-8
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies (Continued)
E. Fair Value of Financial Instruments - The fair values of cash, accounts
receivable, accounts payable and other short-term obligations approximate
their carrying values because of the short maturity of these financial
instruments. The carrying values of the Company's long-term obligations
approximate their fair value. In accordance with Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments," rates available at balance sheet dates to the Company are
used to estimate the fair value of existing debt.
F. Cash and Cash Equivalents - Cash and cash equivalents represent cash
and short-term highly liquid investments with original maturities of three
months or less. The Company places its cash and cash equivalents with high
credit quality financial institutions which may exceed federally insured
amounts at times.
G. Property, Plant and Equipment - Property, plant and equipment are
carried at cost. Depreciation is provided over the estimated useful lives
of the assets by the use of the straight-line and declining balance
methods. These items consist of the following at December 31, 2004 and
2003:
2004 2003
-------- --------
Land $ -- $ 24,797
Building -- 548,967
Leasehold improvements -- 4,516
Machinery and equipment 43,708 43,708
-------- --------
43,708 621,988
Accumulated depreciation 41,809 132,016
-------- --------
$ 1,899 $489,972
======== ========
Depreciation expense for the years ended December 31, 2004 and 2003 was
$4,658 and $81,196, respectively.
At December 31, 2003, the Company owned rental property in Scranton, PA
consisting of land, building and related leasehold improvements that was
being held for sale. The Company assessed the fair value of this property
based on the selling price less costs to sell resulting from an offer
which was in negotiation at year-end. Based on this assessment, it was
determined that the carrying costs of this property were impaired by
$1,466,109. This impairment was recognized in the General and
Administrative expenses caption of the Consolidated Statements of
Operations and reduced the value of the land, building and leasehold
improvements to a net carrying cost of $483,415 after accumulated
depreciation of $531,500 less costs to sell of 48,085. No gain or loss was
recognized on the transaction as the property was previously written down
to fair market value. The property was sold in January 2004.
F-9
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies (Continued)
H. Aggregate Inventory - Inventory, which consists of 70+ million short
tons of previously quarried and stockpiled aggregate rock located at the
site of the Groveland Mine in Dickinson County, Michigan, is stated at
lower of cost or market. The Company is also subject to a royalty
agreement which requires the payment of certain royalties to a previous
owner of the aggregate inventory upon sale of the aggregate.
In December, 2001 the aggregate inventory was sold to Iron Mountain
Resources, Inc., a 75% owned subsidiary of the company in exchange for an
$18,200,000 note. After defaulting on the note, on February 9, 2005, Iron
Mountain Resources reconveyed the aggregate inventory to NRDC in lieu of
foreclosure and the note was deemed satisfied.
I. Debt Issuance Costs - Debt issuance costs are recorded at cost and were
being amortized over 60-66 months, the life of the related loans using the
effective interest method. The balance of these costs was written off due
to the settlement of the related debts in the year ended December 31,
2003.
J. Income Taxes - The Company utilizes Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and
reporting for income taxes. The difference between the financial statement
and tax basis of assets and liabilities is determined annually. Deferred
income tax assets and liabilities are computed for those temporary
differences that have future tax consequences using the current enacted
tax laws and rates that apply to the periods in which they are expected to
affect taxable income. In some situations SFAS 109 permits the recognition
of expected benefits of utilizing net operating loss and tax credit
carryforwards. Valuation allowances are established based upon
management's estimate, if necessary. Income tax expense is the current tax
payable or refundable for the period plus or minus the net exchange in the
deferred tax assets and liabilities.
K. Evaluation of Long Lived Assets - Long-lived assets are assessed for
recoverability on an ongoing basis. In evaluating the fair value and
future benefits of long-lived assets, their carrying value would be
reduced by the excess, if any of the long-lived asset over management's
estimate of the anticipated undiscounted future net cash flows of the
related long-lived asset.
L. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-10
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Marketable Securities
The cost and fair value of the Company's investments in marketable
securities are as follows:
Gross Gross Fair
Trading securities: Amortized Cost Unrealized Gains Unrealized Losses Value
-------------- ---------------- ----------------- ------------
As of December 31,2004
9,000,000 US Treasury bills $ 8,987,788 $ 4,468 $ -- $ 8,992,256
As of December 31,2003
18,500,000 US Treasury bills $ 18,429,645 $ 65,380 $ -- $ 18,495,025
Note 3. Investment in Partnerships
In November 1994, the Company purchased, for $350,000, a limited
partnership interest in Security Land and Development Company Limited
Partnership ("Security"), which owns and operates an office complex. The
Company has limited voting rights and is entitled to allocations of the
profit and loss of Security and operating cash flow distributions, as
amended (see below).
Security was organized to own and operate two buildings containing
approximately 717,000 net rentable square feet consisting of a two-story
office building and a connected six-story office tower. The buildings were
purchased by Security in 1986 and are located on approximately 34.3 acres
of land which is also owned by Security. The buildings have been occupied
by the United States Social Security Administration's Office of Disability
and International Operations for approximately 30 years under leases
between the United States of America, acting by and through the General
Services Administration ("GSA"). Effective November 1, 1994, Security and
the GSA entered into a nine-year lease for 100% of the building. In March
2003, the General Services Administration agreed to extend the terms of
the lease through October 31, 2018. Security has received an opinion of
the Assistant General Counsel to the GSA that lease payments are not
subject to annual appropriation by the United States Congress and the
obligations to make such payments are unconditional general obligations of
the United States Government.
In April 2003, the Company entered into an amendment to the Security
partnership agreement. The amendment provides for the distribution of the
net proceeds of a loan to Security to the Company and the non-Company
partners on a 50/50 basis, provided that such allocation would result in a
minimum distribution to the Company of $39,000,000 (a "qualified
financing"). This qualified financing was obtained in June 2003 (see
below). The amendment also provides that, following the qualified
financing, the Company will be 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, it will receive
$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.
F-11
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment in Partnerships (Continued)
The refinancing of Security's property at 1500 Woodlawn Drive, Woodlawn,
Maryland closed 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 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
$41,018,943 from the Security distribution. In connection with the
Security refinancing and distribution, the Company was required to repay
its KBC Bank loan. The payoff amount was $14,145,410, which included a
release fee and make-whole premium.
For the years ended December 31, 2004 and 2003 the Company's income from
its equity investment in Security was $360,255 and $3,283,381,
respectively. These funds, however, are principally committed to the
amortization of the outstanding principal balance on Security's real
estate mortgage. Security does not currently provide liquidity to the
Company. For the year ended December 31, 2003, the Company earned $100,938
for management services provided to Security prior to the debt
refinancing.
The Company accounts for the Investment in Partnerships using the equity
method, whereby the carrying value of these investments are increased or
decreased by the Company's allocable share of book income or loss. The
total amount of distributions made in excess of the Company's partnership
basis as of December 31, 2004 was $1,441,820, which is recorded as a
deferred credit on the accompanying financial statements.
Summarized financial information for Security is as follows:
2004 2003
------------ ------------
Balance Sheet Data
Cash and receivables $ 1,227,837 $ 1,292,836
Restricted cash 2,744,101 3,591,631
Real estate, net 37,612,439 39,298,935
Deferred charges, net 9,472,752 10,174,438
Other assets 414,136 619,081
------------ ------------
Total Assets 51,471,265 54,976,921
============ ============
Accounts payable and accrued expenses 650,690 407,182
Project note payable 91,904,929 95,970,491
Other liabilities 177,453 240,271
------------ ------------
Total Liabilities 92,733,072 96,617,944
Partners' deficit:
Total Partners' deficit (41,261,807) (41,641,023)
------------ ------------
Total Liabilities and Partner's deficit 51,471,265 54,976,921
============ ============
2004 2003
------------ ------------
Statement of Operations Data
Revenues $ 12,943,455 $ 13,506,428
Expenses 9,282,554 7,246,630
------------ ------------
Net operating income 3,660,901 6,259,798
Other expenses (3,281,685) (2,803,607)
------------ ------------
Net income $ 379,216 $ 3,456,191
============ ============
See Note 15 regarding Contingencies, Risks and Uncertainties related to
the Company's investment in Security.
F-12
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment in Partnerships (Continued)
Effective November 30, 2000 the Company invested $10,000 for a 5% limited
partnership interest in 1500 Wood Lawn Limited Partnership, the general
partner of Security. The Company recognized income of $948 in 2004 and
$200,000 in 2003 from this investment.
Note 4. Investment in MESC Capital 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
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.
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 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.
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 for the
period from April 30, 2004 (date of acquisition) through December 31,
2004.
F-13
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Investment in MESC Capital LLC (Continued)
The following summarized income statement information is presented for
MESC Capital, LLC for the period from April 30, 2004 (date of acquisition)
to December 31, 2004 and its predecessor:
Eight Months Ended
December 31, 2004
------------------
Sales $ 9,231,830
Net operating income $ 2,297,719
Net Income $ 1,708,649
Note 5. Loan Receivable
On November 4, 2002, the Company paid $200,000 to PNC Bank in settlement
of closing costs that were the obligation of RCI Wood Products, Inc.
("RCI") as the buyer in connection with the sale of the operating assets
of Rustic Crafts. In addition, fees and reimbursable expenses were added
to the amount advanced, bringing the total amount receivable to $250,000
at December 31, 2002. The loan was paid in full during 2003.
Note 6. Notes Receivable
Pursuant to the sale of the net operating assets of the Company's
subsidiary, Rustic Crafts, on September 30, 2002, Rustic Crafts obtained
F-14
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6. Notes Receivable (continued)
notes receivable. At December 31, 2003, these notes consisted of the
following:
2003
----------
Note receivable, 5% per annum, with monthly payments
of principal and interest of $13,342, due 9/30/07 $ 707,000
Note receivable, 7.5% per annum, with monthly
payments of principal and interest of $5,032, with a
balloon payment due 9/8/06 422,271
----------
Total $1,129,271
==========
Payments on the 5% note are contingent upon the quarterly positive net
cash flows of the buyer, as defined by generally accepted accounting
principles. No payments have been made on this note as of December 31,
2003.
In March, 2004, these notes were deemed to be uncollectible due to the
lack of cash flows generated and the continual default on payment terms by
the issuer. Management determined to record full impairment of the notes
which totaled $1,182,626. This impairment is included in the General and
Administrative caption of the accompanying Consolidated Statement of
Operations.
Note 7. Notes Payable - Other
To finance the redemption under the Redemption Agreement of October 16,
2002 whereby all shares owned by Statesman Group, Inc. ("Statesman") were
redeemed, the Company issued two notes to Royalty Holdings, LLC
("Royalty"), an affiliate of current management, consisting of the
following:
5% Convertible Promissory Note, due 10/16/12,
accruing interest compounded annually $3,500,000
9% Promissory Note, due 10/16/07, accruing
interest compounded annually 1,250,000
----------
Total $4,750,000
==========
On July 3, 2003, the remaining principal and accrued interest of
$2,075,475 on the 5% Convertible Promissory Note was converted for
1,037,738 shares of common stock at $2 per share. The 9% Promissory Note
was repaid during 2003. At December 31, 2003, the balances of these notes
payable are $0.
At December 31, 2002, the Company had outstanding $130,036 of demand notes
bearing interest at 7%, with interest payable every 120 days and at date
of full repayment of principal. On July 23, 2003 the Company repaid the
full $130,036 balance plus accrued interest of $8,337 thereon.
F-15
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8. Long-Term Debt
KBC Bank Loan - On June 24, 1998, the Company refinanced the long-term
debt previously outstanding with Southern Indiana Properties, Inc.
("SIPI") and entered into a Loan Agreement (the "Loan") with KBC Bank N.V.
("KBC"). Under the terms of the Loan Agreement, KBC advanced $9,383,320.
The due date of the Loan was November 30, 2003 with interest at the rate
of 7.5% compounded semi-annually on each June 1 and December 1, commencing
December 1, 1998. The interest could be paid by the Company in cash on
these semi-annual dates or the Company could elect to add the interest to
the principal of the Loan then outstanding. In June 2003, the Company
repaid its long-term debt with KBC. The payoff amount was $14,145,410,
which included a release fee and make-whole premium. As of December 31,
2003, the amount outstanding under the Loan was $0.
To facilitate the loan from KBC, the Company purchased a residual value
insurance policy through R.V.I. American Insurance Company ("RVI") which
secured the repayment of the outstanding principal and interest when due
with a maximum liability of $14 million. The costs related to the
insurance ($745,000) along with legal fees and other costs associated with
obtaining the Loan ($205,000) were capitalized as debt issuance costs and
were amortized over the life of the Loan using the effective interest
method.
KBC Bank Loan - On June 24, 1998, the Company refinanced the long-term
debt previously outstanding with Southern Indiana Properties, Inc.
("SIPI") and entered into a Loan Agreement (the "Loan") with KBC Bank N.V.
("KBC"). Under the terms of the Loan Agreement, KBC advanced $9,383,320.
The due date of the Loan was November 30, 2003 with interest at the rate
of 7.5% compounded semi-annually on each June 1 and December 1, commencing
December 1, 1998. The interest could be paid by the Company in cash on
these semi-annual dates or the Company could elect to add the interest to
the principal of the Loan then outstanding. In June 2003, the Company
repaid its long-term debt with KBC. The payoff amount was $14,145,410,
which included a release fee and make-whole premium.
To facilitate the loan from KBC, the Company purchased a residual value
insurance policy through R.V.I. American Insurance Company ("RVI") which
secured the repayment of the outstanding principal and interest when due
with a maximum liability of $14 million. The costs related to the
insurance ($745,000) along with legal fees and other costs associated with
obtaining the Loan ($205,000) were capitalized as debt issuance costs and
were amortized over the life of the Loan using the effective interest
method.
Note 9. Modification of Authorized Shares and Repurchase of Stock
On October 22, 2003 the Company's Board of Directors approved an amendment
to the Company's Restated Certificate of Incorporation, as amended, to
decrease the number of shares of authorized stock from 30,000,000 to
10,000,000 shares (consisting of 8,000,000 shares of common stock and
2,000,000 shares of preferred stock) and submitted such proposed amendment
to the Company's stockholders. On October 22, 2003, Royalty Holdings LLC,
the majority shareholder of the issued and outstanding shares of the
Company, executed a written consent in favor of the amendment and the
reduction in the number of authorized shares was enacted.
F-16
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9. Modification of Authorized Shares and Repurchase of Stock (continued)
In September 2003, the Company's Board of Directors authorized the
repurchase of the Company's common stock in the aggregate amount not to
exceed $1,000,000. The shares will be repurchased from time to time in
open market transactions or privately negotiated transactions at the
Company's discretion, subject to market conditions and other factors.
Under the program, no shares will knowingly be purchased from the
Company's officers or directors or from any such person's affiliates. On
September 15, 2004, the Company Purchased 47,000 shares from an
independent, third party at a price per share of $6.25 (the market price).
The total cost, including commission and transfer fees was $295,635.
Note 10. Serial Preferred Stock
At December 31, 2004 and 2003, the Company had 2,000,000 of authorized
shares of $.10 par value serial preferred stock. Serial preferred stock at
December 31, 2004 and 2003, all of which is convertible (other than Series
C) and cumulative, consists of:
Mandatory Redeemable Shares - Series E, $100 stated value, 12.5%
cumulative, 566,400 designated, none issued or outstanding at December 31,
2004 and 2003
Redeemable Shares at Company's Option
Shares Value
------------------------- -----------------------------------------
2004 2003
----------- -----------
Designated Outstanding Carrying Liquidation Liquidation
---------- ----------- ----------- ----------- -----------
Series C, $100 stated
value, cumulative 210,000 208,850 $ 229,136 $20,885,000 $20,885,000 (a)
Series B, $10 stated
value, 6% cumulative 370,747 370,747 566,912 3,707,470 3,707,470
Junior Series, D, $10
Stated value, 7%
cumulative 26,000 25,694 256,940 382,842 382,842 (b)
------- ------- ----------- ----------- -----------
606,747 605,291 $ 1,052,988 $24,975,312 $24,975,312
======= ======= =========== =========== ===========
(a) This represents the estimated maximum possible liquidation value
of the Series C preferred shares, which is defined as the lesser of:
1) net proceeds of the assets of NRDC or 2) the redemption value
(defined below). In the event of liquidation, the Series C shares
are senior to all other shares of the Company's stock, with the
exception of the Series E shares.
(b) The liquidation value of the Junior Series D shares includes
accrued and unpaid dividends of $0 at December 31, 2004 and 2003.
Series C - The Series C shares were issued on July 7, 1993 as part of the
transaction to acquire an 80% interest in NRDC. The cumulative dividend
right is equal to 20% (not to exceed $500,000) of annual after tax
earnings of NRDC. At the Company's option, the Series C may be redeemed at
the lesser of (a) the stated value plus accrued and unpaid dividends or
(b) the fair market value of the common stock interest acquired by the
Company in NRDC. At the Company's option, the redemption price may be
satisfied by the delivery of the shares in NRDC owned by the Company.
Also, on October 16, 2002, the Company entered into agreements with
Statesman providing for the amendment to the Company's Series C Preferred
Stock and certain restrictions relating to Statesman's future ownership of
an interest in the Company and Statesman's ability to issue or transfer
beneficial interests in Statesman, in exchange for a payment to Statesman
of $2,730,000. The payment is recorded as a reduction in paid-in capital
in the accompanying financial statements.
F-17
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 10. Serial Preferred Stock (continued)
Series B - The Series B shares were issued in 1991 as part of a
restructuring plan limited to senior lenders and was issued in exchange
for all obligations and any claims or causes of action relating to the
Company's obligations and guarantees. Such preferred stock includes, among
other provisions and preferences, the following:
(a) A 6% cumulative dividend right commencing on the 24th month from
the consummation of a defined "initial business combination
transaction" (which occurred with the acquisition of Rustic Crafts
in 1997 (see Note 6)) and if the Company has reached a defined ratio
of earnings to fixed charges. In addition, dividends accrue for a
period of 35 additional months without cash payment.
(b) At the Company's option, the shares may be redeemed, subject to
certain limitations, by cash payment or by exchanging shares of its
common stock at 77% of its stated value divided by the quoted market
value of its common stock.
(c) A contingent conversion provision which conversion right, and
the Company common shares to be issued in connection with the
conversion, would be based on the stated value divided by the
average bid and asked price for the 90 days preceding the conversion
date of the Company's common shares. In addition, the number of the
Company's common shares to be received upon conversion is subject to
certain limitations.
Junior Series D - The junior preferred stock was issued in 1992 in
exchange for the Company's Restructuring Serial Promissory Notes. This
preferred stock is redeemable, at the Company's option, at the stated
value plus accrued and unpaid dividends and is contingently convertible
into common at the fair market value of the common as determined by the
average of the bid and asked price for the thirty (30) day period
preceding the conversion date.
Generally, no dividends can be paid on the Company's common stock until
all cumulative dividends on the serial preferred stock have been paid.
Additionally, no dividends on the Company's common shares can be paid if
the Company is in default or in arrears with respect to any sinking or
analogous fund or any call or tenders or other agreement for the purchase,
redemption or other retirement of shares of preferred stock. No provision
for dividends has been made for the Company's Series B and C "increasing
rate preferred stock," as defined in Staff Accounting Bulletin Topic 5Q,
due to the contingent nature of dividends on such shares.
Generally the preferred shares have limited voting rights. However, in the
event dividends payable on the Series C and E shares, respectively, are
accumulated and unpaid for seven quarterly dividends (whether or not
declared and whether or not consecutive), the holders of record of the
Series C shares, shall thereafter have the right to elect two directors
(each) until all arrears in required cash dividends (whether or not
declared) on such shares have been paid.
F-18
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11. Stock Options/Stock Option Plans
Effective June 3, 1997, the Company issued options to purchase 6.1 million
(pre-2002 10-1 reverse split) shares of common stock to Statesman Group,
Inc. The options were issued to Statesman in order to secure the release
of Mr. William R. Ponsoldt, Sr. to serve as President and Chief Executive
Officer of the Company and to recognize in part, the amendment to the
Series C preferred shares under which Statesman forfeited certain common
stock conversion rights with respect thereto. Statesman also agreed to
provide loan guarantees not to exceed the sum of $300,000 upon the request
of the Company and a showing of reasonable need. Statesman and/or its
affiliated interests have provided loan guarantees and/or unsecured prime
interest rate direct loans to the Company exceeding $2,000,000 since June
1997.
On October 15, 2001 the Statesman Group, Inc. (Statesman) exercised in
full its option, which had been granted in 1997, to acquire 610,000
post-reverse-split shares of the Company's common stock. The exercise was
made pursuant to an agreement which provided for (1) a purchase price at
$0.40 per share (par value) rather than the formula price in the option,
which would have yielded 25% less to the Company, (2) the execution of a
note from Statesman to the Company in the principal amount of $2,440,000
payable in five years with interest to accrue at the prevailing prime rate
and (3) the obligation to be collateralized by the 610,000
post-reverse-split common shares of the Company purchased upon exercise of
the option as well as the 20% remaining interest in the Company's 80%
owned subsidiary, NRDC.
On October 16, 2002, the Company redeemed the 754,950 shares of common
stock of the Company owned by Statesman for $1,020,000. As a result of
such transaction, Statesman is no longer a related party. The excess over
par value of these shares was treated as a charge against additional
paid-in capital in the accompanying financial statements. The number of
shares above that were cancelled and returned to treasury stock were 0 and
45,208 in 2004 and 2003, respectively.
Also, the Company acquired from Statesman a three-year option to acquire
Statesman's 20% interest in NRDC exercisable by delivery to Statesman of
the aforementioned $2,440,000 note. The Company acquired the option by
paying Statesman $250,000, amending the note (and underlying pledge
agreement) to limit recourse and transferring to Statesman certain office
furniture and equipment. The payment has been recorded as a deferred cost
in the accompanying financial statements.
In 2003, the Company issued 190,000 non-qualified common stock options, as
follows: 30,000 at a per share exercise price of $2.40, one-third of which
become exercisable on December 31, 2003, 2004 and 2005, respectively,
through March 31, 2013; 50,000 at a per share exercise price of $1.35, as
amended, exercisable through April 3, 2013; 110,000 at a per share
exercise price of $1.53, exercisable through October 1, 2013. All
issuances are pursuant to the Company's 2003 Stock Incentive Plan, as
amended.
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.
In 2002, the Company issued 5,000 non-qualified common stock options at a
per share exercise price of $1.60 (2002 options), in accordance with a
Director's Compensation Program approved by the shareholders in 1999. The
2002 options are fully vested, and are exercisable until August 5, 2007.
F-19
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11. Stock Options/Stock Option Plans (continued)
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 0.5 to 9.75
years and expected stock price volatility of 90% in 2004 and 90% in 2003.
The weighted average fair value of options granted was $5.57 during 2003
and $1.14 during 2002.
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 2004:
As Reported ProForma
----------- --------
Net income (2,265,039) (2,836,039)
Net income attributable to common shares (2,265,039) (2,836,039)
Net income per common share:
Basic and diluted (.75) (.94)
The following is a summary of the status of the Company's options for
2004:
Average
Exercise
Options Price
------- --------
Outstanding at beginning of year 220,000 $ 2.29
Issued 100,000 2.01
Cancelled -- --
------- --------
Outstanding at end of year 320,000 2.20
======= ========
The following table summarizes information about options outstanding at
December 31, 2004:
Number of outstanding and exercisable 320,000 shares
Average remaining contractual life 7.66 years
Exercise price 2.20 per share
F-20
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11. Stock Options/Stock Option Plans (continued)
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 2003:
As Reported ProForma
----------- --------
Net income $ (2,318,340) $ (3,459,240)
Net income attributable to common shares (2,318,340) (3,459,240)
Net income per common share:
Basic and diluted (0.93) (1.38)
The following is a summary of the status of the Company's options for
2003:
Average
Exercise
Options Price
------- --------
Outstanding at beginning of year 30,000 $6.51
Issued 190,000 1.62
Cancelled -- --
------- -----
Outstanding at end of year 220,000 2.29
======= =====
The following table summarizes information about options outstanding at
December 31, 2003:
Number of outstanding and exercisable 200,000 shares
Average remaining contractual life 7.66 years
Exercise price 2.29 per share
Note 12. Income Taxes
As referred to in Note 1, the Company accounts for income taxes under SFAS
109, "Accounting for Income Taxes." The deferred taxes are the result of
long-term temporary differences between financial reporting and tax
reporting for depreciation, earnings from the Company's partnership
investment in Security Land and Development Company Limited Partnership
related to depreciation and amortization and the recognition of income tax
carryforward items.
At December 31, 2004 and 2003, the Company's net deferred tax asset,
utilizing a 34% effective tax rate, respectively, consists of:
2004 2003
----------- -----------
Deferred tax assets:
Investment partnership earnings $ 1,461,000
Net operating loss carry forward $ 1,485,900 942,500
Alternative minimum tax credits 493,000
Unrealized appreciation of marketable securities (22,000)
Valuation allowance (1,485,900) (2,874,500)
----------- -----------
Subtotal $ -- $ --
=========== ===========
F-21
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12. Income Taxes (continued)
The valuation allowance was established to reduce the net deferred tax
asset to the amount that will more likely than not be realized. This
reduction is necessary due to uncertainty of the Company's ability to
utilize the net operating loss and tax credit carry forwards before they
expire.
For regular federal income tax purposes, the Company has remaining net
operating loss carryforwards of approximately ($4,370,000). These losses
can be carried forward to offset future taxable income and, if not
utilized, will expire in varying amounts beginning in the year 2004. The
Company's tax returns have not recently been examined by the Internal
Revenue Service ("Service") and there is no assurance that the Service
would not attempt to limit the Company's use of its net operating loss and
tax credit carryforwards.
For the years ended December 31, 2004 and 2003, the tax effect of net
operating loss carryforwards reduced the current provision for regular
Federal income taxes by approximately $1,388,616 and $942,500,
respectively. At December 31, 2004 and 2003, the Company has provided
$41,945 and $70,724, respectively, for taxes, which relate to state income
taxes.
The provision (benefit) for income taxes is as follows
2004 2003
------------ -------------
Current $ 41,945 $ 70,724
Deferred -- --
------------ -------------
$ 41,945 $ 70,724
============ =============
Note 13. Employment Agreements
On June 3, 1997, the Company entered into an Employment Agreement with
William R. Ponsoldt, Sr., which provided for a base salary in annual
installments, in advance, of $250,000 each, which salary was adjusted on
January 1 of every year by any increase since the previous January 1 in
the Consumer Price Index ("CPI") for All Urban Consumers, U.S. city
average, as published by the U. S. Department of Labor Bureau of Labor
Statistics. As additional salary, Mr. Ponsoldt was entitled to receive an
amount equal to 20% of the Company's increase in quarterly common stock
net worth, which is defined to be the difference between (i) total
shareholders' equity and (ii) any shareholders' equity accounts relating
to preferred stock. During 2003, the Company settled the amount due Mr.
Ponsoldt by payment through payroll of accrued wages of $1,225,234, which
included a reduction of $250,000 from the amount offered under the
Contingent Payment Agreement (see Note 15.). The Agreement provides that
Mr. Ponsoldt will not compete with the Company for a two-year period
following the termination of his employment and provides for
indemnification under certain circumstances. On October 16, 2002, Mr.
Ponsoldt resigned his position as director of the Company, and thereby
terminated the Employment Agreement. Any disputes between the Company and
Mr. Ponsoldt under the Agreement are to be resolved through arbitration.
In connection with the redemption of Statesman's interest, each of the
Company's directors resigned effective October 28, 2002 with successors
appointed by Royalty, the holder of certain notes payable (Note 7).
Simultaneously, all officers of the Company resigned and were replaced by
Laurence S. Levy (an affiliate of Royalty) as CEO and Neil Hasson (an
affiliate of Royalty) as CFO and Secretary. On October 16, 2002, the
Company entered into Employment Agreements with Mr. Levy and Mr. Hasson,
with terms as follows:
F-22
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13. Employment Agreements (continued)
Laurence S. Levy - base annual salary of no less than $150,000 per annum,
discretionary annual bonus, options to purchase 25,000 shares of common
stock at an exercise price of $1.35 per share, benefits, expense
reimbursement and insurance (including, but not limited to, life, travel
accident, health).
Neil Hasson - base annual salary of no less than $50,000 per annum,
discretionary annual bonus, options to purchase 25,000 shares of common
stock at an exercise price of $1.35 per share, benefits, expense
reimbursement and insurance (including, but not limited to, life, travel
accident, health).
On November 22, 2002, Mr. Hasson resigned as Secretary of the Corporation
and the position was filled by Carol Zelinski.
Note 14. Related Party Transactions
On July 3, 2003, Royalty, the holder of a $2,004,098 5% Convertible
Promissory Note of the Company due October 16, 2012 (the "Note"), elected
to convert the principal amount of the Note and the $71,377 of accrued and
unpaid interest thereon into 1,037,738 shares of the Company's Common
Stock. Royalty is an affiliate of Laurence S. Levy and Neil N. Hasson,
directors and executive officers of the Company. Also on July 3, 2003, the
Company prepaid the full $1,250,000 principal amount of, and all accrued
and unpaid interest under, the 9% Promissory Note held by Royalty in
accordance with the mandatory prepayment provisions of such note. The
Company also repaid all amounts outstanding under the $300,000 working
capital loan facility from Royalty which was established in April 2003,
and terminated the facility. This amount consisted of $180,000 of
principal and $2,910 of accrued and unpaid interest.
In September 2003, Royalty advanced $90,000 to the Company under an
existing credit facility. The Company repaid this advance and the accrued
interest thereon of $2,584. At December 31, 2004, there are no advances
due to Royalty from the Company.
Pursuant to a License Agreement entered into in March 2003, Royalty
Management, Inc., which is wholly-owned by Laurence Levy, the Company's
President and a director, provides New York City office space, office
supplies and services to the Company for $100,000 per year.
Beginning with the fiscal quarter ended March 31, 2003, each non-employee
director is granted 250 shares of Common Stock at the end of each full
calendar quarter for which such individual has served as a director of the
Company. Compensation expense of $6,350 has been recognized for issuances
for the year ended December 31, 2004.
F-23
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14. Related Party Transactions (Continued)
On October 16, 2002, the Company redeemed all the shares of common stock
of the Company owned by Statesman pursuant to the terms of a Redemption
Agreement, dated October 16, 2002, between the Company and Statesman.
The Company funded the redemption from the proceeds of an aggregate of
$4,750,000 borrowed from Royalty Holdings, LLC (the "Lender"), an
affiliate of Messrs. Levy and Hasson, 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 were convertible into Common Stock
at a conversion rate of $2.00 per share. On November 7, 2002, the Lender
converted $1,495,902 of the principal amount of the Convertible Promissory
Note plus accrued interest into 750,000 shares of Common Stock. During
2003, the remaining principal and accrued interest were converted (see
first paragraph of this Note). At December 31, 2003, the balances of these
notes payable are $0.
In connection with the redemption, effective October 28, 2002, each of the
former directors of the Company resigned and the four current directors
were appointed to serve as the successor members of the Board of
Directors. In addition, simultaneously with the redemption, all of the
officers of the Company resigned and were replaced by designees of the
Lender.
In connection with the redemption, the Company acquired from Statesman a
three-year option to purchase the 20% stock interest in NRDC held by
Statesman. To exercise the option, the Company must deliver to Statesman
for cancellation the $2.44 million note issued to the Company by Statesman
in October 2001. As consideration for the option, the Company (i) paid
Statesman $250,000, (ii) amended the note and related pledge agreement to
limit the Company's recourse under the note and (iii) transferred to
Statesman certain office furniture and equipment owned by the Company.
In connection with the redemption, the Company entered into a Contingent
Payment Agreement with William R. Ponsoldt, Sr., the former President and
Chief Executive Officer of the Company, whereby payment of $1,508,000 of
accrued compensation owed to Mr. Ponsoldt by the Company became subject to
the satisfaction of certain conditions precedent. The Company also entered
into an agreement with Statesman providing for (i) an amendment to the
Certificate of Designations of the Series C Preferred Stock for the
Company and (ii) certain limitations on the ability of Statesman to issue
or transfer shares or other beneficial interests in Statesman or to sell,
transfer, purchase or acquire any capital stock of the Company, in each
case without first receiving written confirmation from the Company that
such issuance or transfer would not adversely affect the Company's ability
to utilize its net operating loss carryforwards. The Company paid
Statesman an aggregate amount of $2,730,000 in consideration of the
foregoing agreements.
See Note 13 for a description of Employment Agreements entered into with
certain current and past members of the Company's management and Note 11
for a description of certain option grants and related transactions.
F-24
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15. Contingencies, Risks and Uncertainties
The Company is subject to numerous contingencies, risks and uncertainties
including, but not limited to, the following that could have a severe
impact on the Company:
(i) The Company currently lacks the necessary infrastructure at the
site of the Groveland Mine in order to permit the Company to make
more than casual sales of the aggregate (See Note 1.H).
(ii) 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 the Company's investment in Security
Land and Development Company Limited Partnership and, therefore, its
financial position and results of operations (See Note 4).
(iii)On January 20, 2004, a purported derivative and class action
lawsuit (the "Delaware State Action") was filed by two dissident
Company shareholders, Edward E. Gatz and Donald D. Graham, in the
New Castle County Court of Chancery, Delaware (the "Court"),
captioned Gatz et al. v. Ponsoldt, Sr., et al, 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 the Company's common stock, (ii) the 2001 sale of rock
aggregate by the Company to Iron Mountain and (iii) the October 2002
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
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 transactions, and an order rescinding Statesman's 2001
option exercise and rescinding the option itself.
In November 2004 the Court dismissed all but one claim alleged in
the complaint. The Company is not a defendant in the sole surviving
claim, which relates to the December 2001 sale of assets from one
Regency subsidiary to another Regency subsidiary. In dismissing the
claims, the Court determined that all of the claims (other than the
claim related to the 2001 asset sale) were derivative in nature and
that the claims could therefore not be maintained.
The defendants in 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, none of the claims
contained in the Delaware State Action are 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.
F-25
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15. Contingencies, Risks and Uncertainties (Continued)
(iv) The Company has significant tax loss and credit carryforwards
and no assurance can be provided that the Internal Revenue Service
would not attempt to limit or disallow altogether the Company's use,
retroactively and/or prospectively, of such carryforwards, due to
ownership changes or any other reason. The disallowance of the
utilization of the Company's net operating loss would severely
impact the Company's financial position and results of operations
due to the significant amounts of taxable income (generated by the
Company's investment in Security) that has in the past been, and may
in the future be, offset by the Company's net operating loss
carryforwards (See Note 12).
(v) Royalty, an affiliate of the company's management, beneficially
owns approximately 60% of the Company's 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 the Company's assets.
(vi) The Company does not expect to pay dividends in the foreseeable
future.
(vii) There are many public and private companies that are also
searching for operating businesses and other business opportunities
as potential acquisition or merger candidates. The Company will be
in direct competition with these other companies in its search for
business opportunities. Many of these entities have significantly
greater financial and personnel resources than the Company.
Note 16. Lease Commitments
Regency leases office space and is committed to minimum lease payments
through June 30, 2007 under an operating lease for premises, as follows:
2005 17,630
2006 18,511
2007 9,481
------
Total 45,622
======
Rent expense was $16,790 and $14,691 for the years ended December 31, 2004
and 2003, respectively.
F-26
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17. Litigation
On January 20, 2004, a purported derivative and class action lawsuit (the
"Delaware Action") was filed by two individual shareholders of the Company
in the New Castle County Court of Chancery, Delaware (the "Court"), 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 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 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 transactions, and an order rescinding
Statesman Group, Inc.'s 2001 option exercise and rescinding the option
itself.
In November 2004 the Court dismissed all but one claim alleged in the
complaint. The Company is not a defendant in the sole surviving claim,
which relates to the December 2001 sale of assets from one Regency
subsidiary to another Regency subsidiary. In dismissing the claims, the
Court determined that all of the claims (other than the claim related to
the 2001 asset sale) were derivative in nature and that the claims could
therefore not be maintained.
F-27
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17. Litigation (Continued)
The defendants in the Delaware State Action, 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, none of the claims contained in the
Delaware State Action are 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.
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. Mr. Nuttall 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.
Note 18. Commitments and Contingencies
Pursuant to the Regency Power's acquisition of a 50% membership interest
in MESC Capital, LLC (see Note 4), 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 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 19. Restatement
We have restated the Consolidated Financial Statements for the fiscal year
ended December 31, 2004 as a result of changes made to the financial
statements of Security Land and Development Company Limited Partnership
("Security" Note 3).
$988,390 of repairs made during 2004 that were previously capitalized by
Security were reclassified to expense for the year ended December 31,
2004. The net income of Security was reduced from $1,367,606 to $379,216.
The impact of this adjustment on the consolidated financial statements as
originally reported is summarized below:
December 31, 2004
-----------------------------
As Reported As Restated
------------ ------------
Investment in partnerships $ 7,757,157 $ 7,754,686
Total assets 19,693,531 19,691,060
Deferred credit 502,822 1,441,820
Retained earnings 13,640,290 12,698,821
Net sales -0- -0-
Income from equity investment in partnerships 2,156,967 1,215,498
Net loss (1,323,570) (2,265, 039)
Net loss per share, basic and diluted (0.44) (0.75)
F-28